So, the idea would be for each user to have a "millimerit" balance (either hidden from view, or maybe visible next to the existing report accuracy numbers). Moderators could then award members with say 25 millimerits for any good report and -100 for any bad report.

The balance can (maybe, not sure) go negative, so you would have to "work off" each of your bad reports to get back above zero and each time you accumulate 1000 millimerits (40 good reports) the balance gets reset and you're awarded one real merit.