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IRS Awards Whistleblower $104 Million for Exposing Swiss Bank Tax Dodge

Bradley Birkenfeld

Uncle Sam to corporate insiders: You could make a lot more money exposing fraud than participating in it.

The Internal Revenue Service has issued a $104 million reward to Bradley Birkenfeld, the former UBS banker who blew the whistle on the Swiss bank’s far-reaching efforts to help Americans hide money from the tax collector, Birkenfeld’s lawyers said Tuesday.

Stephen Kohn, one of Birkenfeld’s lawyers, said the IRS has sent a message to every American taxpayer who still has an illegal offshore account:

“Turn yourself in before your banker does.”

Kohn said the IRS also sent “104 million messages” to employees around the world: “There is an effective way to blow the whistle...and we are paying awards.”

Birkenfeld’s bounty is likely to give would-be tax dodgers pause before they place their faith in offshore bankers. It also calls attention to the fact that whistleblowers can profit from alerting federal authorities to a wide variety of frauds, from Wall Street to defense contracting. The Securities and Exchange Commission recently announced that it paid its first whistleblower reward under a law enacted in response to the financial crisis -- a bounty of almost $50,000, or 30 percent of the money the SEC collected in an enforcement action based on the tip.

But while Birkenfeld’s legal team celebrated with a Washington news conference, they noted that the government had also punished him.

In 2009, Birkenfeld was sentenced to 40 months in prison for helping one of his wealthy American clients evade taxes of $7.2 million. With credit for good behavior, he was recently released from prison but remains under restrictions and was unable to attend the news conference.

Instead, his brother, Douglas Birkenfeld, spoke for him, explaining that he wasn’t quoting Bradley directly but rather was expressing what he knew to be Bradley’s sentiments.

“I single-handedly transformed centuries of illicit Swiss banking practices, but I paid a huge price for being the only person to have the courage to come forward,” Douglas Birkenfeld said in the statement. “I knew that blowing the whistle would end my career in Switzerland, but I did not expect that I would be risking my very freedom in my home country.”

Birkenfeld had to wait years for his reward; it had been unclear whether he would even receive any award for blowing the whistle given his participation in the tax scheme. It required a cultural shift for the IRS to get comfortable with rewarding a participant, said Dean Zerbe, a former U.S. Senate staffer who worked on the IRS whistleblower law and served on Birkenfeld’s legal team.

“The IRS, to their credit, recognized that if they want to get good insider information…you can’t be cutting back someone’s award” because they participated in the fraud, Zerbe said.

“You don’t have Mother Teresa and the Boy Scouts” carrying out such schemes, Zerbe added.

Even though Birkenfeld received his award, Zerbe said that whistleblowing is still not “a walk in the park” but rather “a step into the void.”

The IRS can award whistleblowers between 15 and 30 percent of what the government collects from tax frauds.

It isn’t clear how much money the IRS credits Birkenfeld with helping it collect or what percentage of that the agency awarded him. Those numbers were blacked out in an IRS document released by his lawyers.

Birkenfeld’s award was connected to a $780 million settlement that UBS reached with the U.S. government in 2009, but $200 million of that was related to charges by the SEC, not the IRS.

Birkenfeld’s lawyers say his disclosures also helped the IRS collect more than $5 billion in back taxes, fines and penalties, and forced UBS to release the names of nearly 5,000 U.S. taxpayers who held illegal offshore accounts with the bank.

Birkenfeld provided “exceptional cooperation” and “comprehensive information” that was “exceptional in both its breadth and depth,” according to an IRS report made public by Birkenfeld’s lawyers.

“The IRS believes that the whistleblower statute provides a valuable tool to combat tax non-compliance, and this award reflects our commitment to the law,” said IRS spokesperson Michelle Eldridge.

A spokesperson for UBS was not immediately available for comment. A spokesperson for the Justice Department referred Project On Government Oversight to the IRS.

The IRS has been criticized for its handling of whistleblower tips and award claims. “Unfortunately it has taken the IRS nearly four years to settle this whistleblower case,” said Sen. Charles E. Grassley (R-Iowa), ranking member of the Senate Judiciary Committee and author of the IRS whistleblower law. 

“If the IRS is serious about encouraging future whistleblowers, it needs to continue to honor the spirit and intent of the law and issue awards in a timely manner,” he added.

The IRS has committed to handling whistleblower submissions in a more timely fashion, according to a June memorandum by a top agency official.

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

Topics: Financial Sector

Authors: Michael Smallberg

Submitted by FCA Aficionado at: May 11, 2014
Dean Zerbe gets it with his "into the void" and "don't disincentivize" comments, but anybody thinking the IRS Whistleblower program is operating as intended will be sadly mistaken. The Keystone Kops of the WBO can't fulfill their mission and the IRS' bureaucracy doesn't want them to. Part 1) The IRS Whistleblower program is moribund. It would almost be more productive to submit a WB tip into a black hole. The IRS complains about a shortage of personnel resources but instead of leveraging WB's tips, it instead handicaps this potential source through sluggishness, incompetence and disincentivising policies. If good enforcement is efficient enforcement, then why does the IRS systematically disincentivize one of the largest potential sources of information that will help them target large scale tax cheats? Doing the right thing is essential to the orderly operation of a free and law-abiding society. Studies repeatedly show most white collar fraud investigations start with a WB's tip. However, WB's can be forgiven for not martyring themselves and risking their family's well-being in an attempt to help law-enforcement, especially when there are so many WB's broken via fraudster retaliation and few properly functioning retaliation remedies, recoveries, or rewards nowadays through law (excepting for FCA qui tam relators) or tax enforcement bodies. No potential WB who's seen what has happened to those who blew the whistle before can be blamed for deciding it is better to hang one's head and move on than to try and right a wrong. There are just too many disincentives, enforcement-fails, or corrupted initiatives (like the IRS WB program, which with every annual report to Congress, increasingly reveals itself as a pernicious pretentious charade.) I am probably the poster child of what Sen. Grassley has feared coming to pass: The IRS WB initiative dying the death of a thousand disincentivising cuts by driving off that which it was established to leverage. Potential WB’s, like myself, who have taken an analytical wait and see approach to the development of the IRS’ WB program, can not be encouraged by the WBO’s 2013 Report (which itself runs less than 30 pages, a vast portion of which is copy/paste from last year’s report, is still wonderfully opaque and took 6 months to produce – talk about a prime indicator of the lack of vigor, attention and priority given to this program.) Suffering retaliation from my employer, damage to my career and professional relationships, and my family’s well-being, by trying to prevent my management from perpetrating fraud, with no subsequent remedy available (as under FCA), has made me loath (translation: afraid) to approach the WB office given their track-record and that the IRS Chief Counsel’s proposed reward regulations seem to codify a game rigged against an expansive view of calculating WB rewards (and to add insult to injury, the IRS claws back massive portions of any long-delayed and scrupulously minimized rewards by deducting a Sequester Surcharge of 7.2% and then taxes the remainder at ~30%). Anybody who has ever had a conversation with the WBO like I had, would be forgiven for thinking they had called into an ADD-affected college surf or pizza shop for the lack of professionalism and knowledge displayed by the folks that I spoke to. (This in severe contrast to my previous calls into competent helpful folks at the IRS’ general 800-number.) (Continued) Part 2) Despite the departures of former Chief Counsel Korb (who famously said “The IRS didn’t ask for these rules; they were forced on it by the Congress”), former Commissioner Schulman and former Director of Enforcement and disgraced Commissioner Miller, it is hard to see any kind of sea change in the institutional resistance or the bureaucrats' apparent viewpoint that, sans whistleblowers, they already possess all the tools necessary (and given infinite time) to find all non-compliances. Despite the ascension of self-avowed "whistleblower fan" Koskinen to the Commissioner's chair, is difficult to detect new institutional enthusiasm for, or a desire to cooperate with, a resource that solely benefits the public fisc. Rather, it feels as if slow-walking and deliberate barriers are intended to discourage that resource from embarrassing the Service by reminding the public that some frauds are not possible to discover, contour or prosecute without the help of a WB. Even that grand old man, the congressional patron of WB’s everywhere, Sen. Grassley, released a very mild statement on the WBO's lackluster 2013 report. It seems as if the Service (in a strategy of frustration, fatigue and waiting-out biological inevitability, or maybe just plain bungling and dumb luck) has finally bested this old warhorse and he is giving up. Much rhetoric is devoted to the importance of the WB programs, but over the last 4 years, there are so few successes and no real actions to optimize legislation to improve protections and incentives and to remove barriers. Sure, Sen. G. has coerced commitments from IRS honchos by putting holds on nominees, but such tactual action is non-sustainable opportunism and can't replace strong strategic legislation. (Nor does it obviate the growing impression that the Service is engaged in a form of malicious compliance while the Congress has run out of gas.) Suggestions for Improvement: 1. Anti-retaliation remedy for any WB making a new submission to the WBO. As under FCA allow WB to be made whole if WB acted in good faith to prevent fraud and suffered as a result of this (regardless of whether there are collected proceeds). Don’t subject this provision to a shorter statute of limitations than the crime it is related to. 2. Force the Service to utilize an expansive reward compensation and Related Proceeds calculation scheme, rather than the stingy and disincentivizing scheme that seems sure to drop any day now; 3. Communications outreach plan? From the organization that seems so adept at hiding its lamp under a bushel? (Go to the IRS’ homepage, where is the link to the WBO?). Best communications outreach are strong protections and incentives for potential WB’s as well as delivering on these in a very generous and timely way. Good would be for Mr. Whitlock to start by hanging out his shingle on the IRS’s homepage (as per SEC’s example) and 1040′s, and to robustly declare the WBO as “Open For Business”; 4. Fix the code to: a) index all penalties for inflation (effective back to the date the penalty was enacted); b) increase the penalty for tax fraud from 75%, to parallel the civil treble damage fines used under the FCA; c) require the Service to amend WBO submission Form 211 to incorporate by reference the responsibility for each WB (and counsel) to be bound by the obligations of the Service’s 6103(n) non-disclosure agreement. Revise the “infrequent and unusual” language from the JCT to authorize “frequent and normal”, to eliminate this as a justification by the IRS for avoiding using 6103(n) NDA’s, and promote “frequent, normal and expected” as the IRS’ new rules for WB engagement; d) make deep engagement and utilization of the WB in investigations a part of each IRS employee’s compensation package. e) revise the tax code to name and shame those brought to justice as a result of a WB’s input. Such action should not be reserved to only those tax scofflaws who have been brought to justice under criminal statutes. Downstream benefits: 1) tax-fraudster deterrence, 2) WB encouragement, and 3) Improved WBO annual report due to less aggregation of data); f) building on e) above, require the WBO to write a synopsis of each recovery due to a WB tip and release these as a press release, then include these in a case-study manual for potential WB’s, such that individuals can be made aware of how schemes are perpetrated be in the lookout for such activity; g) limit the Service’s discretion for reducing or eliminating fines, fees, penalties and interest for tax scofflaws brought to justice due to a WB’s input; h) revise the Victims of Crime statutes to allow WB’s a share of all fines, recoveries, restitution ordered due to a criminal prosecution in conjunction with a WB’s input; i) revise IRC to eliminate taxation of WB rewards (if we want to encourage a universal ethic that whistleblowing is socially beneficial, eliminating this 30% hit should apply to all government-sanctioned WB rewards.); j) enact legislation exempting WB rewards from the 7.2% Sequester Surcharge. (Continued) Part 3/3) The WB system as it is is being abused and frustrated by the IRS culture from top to bottom and from input thru output. What kind of committed and competent enterprise fails to pick low-hanging fruit (or does) but just leaves it to rot? This is the result when the IRS closes WB files because of "lack of resources" or "too short statute of limitations" (despite having policies to extend the SOL with the TP's consent. What should be a closed-loop virtuous cycle resulting in more and better WB submissions and less tax scofflawism, begins and ends with strong anti-retaliation remedies, fat incentives, seamless communication and expeditiously competent processing of WB’s tips, not the polar-opposite approach in use today. Whether the current situation is mostly due to bureaucratic sluggishness, institutional enmity, leadership malfeasance, incompetence, overwork, or congressional neglect is hard to say, but each of these disincentives are in play and being placed before WB’s by both the IRS AND the Congress. Unless real reforms and further optimizations of the protections, rewards and procedures relating to the Service’s WB program are (again) forced upon it by Congress, nothing will change in terms of IRS commitment and involvement or in terms of recovery and deterrence. Until something drastically changes, nothing can change for citizens such as myself that see the personal risks as too great to come forward. I am very disappointed in my government's administrative and legislative branches for practicing bait-and-switch and demolition via neglect respectively. The failure of the WBO program (and this points directly to the dolts, where found and as appropriate, in the Commissioner’s Office, the Chief Counsel’s Office, the WB Office and the rest of the IRS’ bureaucracy in general) well reflects my mashed-up adage of: “He who knows the price of everything but the value of nothing, Is destined to be both penny-wise and pound foolish” This is the ethic that has killed the IRS WB Program. p.s. For kicks, please read the following article from 2006 and see how little has changed: Thanks and regards, the erstwhile hopeful IRS whistleblower, FCA Aficionado

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