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

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.