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The Billion Dollar Whistleblower?

This post was written by Josh

A huge storm is brewing around a man who may end up being one of the highest-paid whistleblowers ever. Bradley C. Birkenfeld is an ex-UBS banker who divulged the huge investment bank's  tax-evasion strategies and whose testimony led to UBS handing over the names and account information of thousands of wealthy investors to the IRS. Birkenfeld's case is very important because it will test the limits of the 2006 whistleblower law that provides compensation--up to 30%--to individuals who bring tax cheats to the IRS's attention.

Birkenfeld was once a high-profile banker at UBS. He had an apartment in Geneva, Switzerland, and a million-dollar home in Zermatt, Switzerland at the foot of the Matterhorn. He worked with a team of bankers who marketed Swiss accounts to wealthy Americans, then figured out how to disguise ownership of the accounts through the use of off-shore shell corporations. Birkenfeld lived a life with a certain amount of intrigue--one court document stated that he smuggled diamonds in a tube of toothpaste onto a trans-Atlantic flight for a client.

According to court documents, in 2005 Birkenfeld became disturbed by an internal UBS document that misrepresented the manner in which the company was conducting its cross-border business. Birkenfeld contacted the legal compliance officer but got no response, so he resigned in late 2005.

Birkenfeld then sent a confidential letter to a UBS executive in 2006 stating that he wanted to invoke his rights under UBS's whistleblowing policy. UBS had denied Birkenfeld a bonus, and he perceived this as retaliation for his raising concerns about UBS's business practices. In 2007, Birkenfeld contacted the Securities and Exchange Commission and a Senate investigative panel, both of which began investigations.

Birkenfeld tried to negotiate immunity from prosecution in 2007, but was unsuccessful. A Justice Department filing states that he refused to discuss his participation in UBS's tax evasion schemes, denying his misconduct, and that he hoped to collect a reward. Birkenfeld was arrested in 2008, and eventually pled guilty to conspiring to defraud the U.S. government. He was sentenced to 40 months in prison and is due to start serving his sentence in January 2010. Prosecutors argued for leniency in Birkenfeld's sentencing based on the fact that he was a whistleblower, but the federal district judge ignored their requests. Birkenfeld was also hit with a $30,000 fine and three years probation.

Birkenfeld is challenging his sentence based on the fact that he helped the government uncover thousands of UBS tax cheats. He is also claiming his compensation under the IRS law, which could add up to billions, and this is where the controversy gets most heated.

Since Congress changed the IRS law regarding whistleblower rewards in 2006, the number of tips about tax evaders owing $2 million or more have jumped more than ten times. Award amounts and amounts collected under the whistleblower program have also increased significantly from pre-2006 amounts.  In order to qualify for an award, the whistleblower must meet several criteria. The information the whistleblower provides must:

• relate to a tax noncompliance matter in which the tax, penalties, interest, additions to tax and additional amounts in dispute exceed $2,000,000;
• relate to a taxpayer, and in the case of an individual taxpayer, one whose gross income exceeds $200,000 for at least one of the tax years in question; and
• substantially contribute to a decision to take administrative or judicial action that results in the collection of tax, penalties, interest, additions to tax and additional amounts.

If a whistleblower meets these conditions, he or she will receive between 15 and 30 percent of the proceeds resulting from an administrative or judicial action or a settlement in response to an administrative or judicial action.

Thousands of tax dodgers are now seeking amnesty under an IRS program that allows them to avoid jail time as long as they pay back taxes and various penalties. Tax dodgers have hidden their money in 70 countries on every continent except Antarctica, and as of October 2009, hidden accounts ranged from $10,000 to $100 million. In August, UBS agreed in a settlement to turn over information regarding 4,450 accounts suspected of being used by American customers to hide assets. These UBS clients will pay billions in back taxes, penalties, and interest. Billions more are expected to roll in as a result of the amnesty program, and a large number of those seeking amnesty are also expected to be UBS clients.

Whether Birkenfeld is entitled to billions of dollars in reward money for helping the IRS bring in billions in unpaid taxes could turn out to be, in the words of Birkenfeld's attorney, "a gigantic fight." The Justice Department acknowledges Birkenfeld's contribution; the prosecutor who handled the UBS investigation stated, "Without Mr. Birkenfeld walking into the door of the Department of Justice in summer of 2007, I doubt this massive fraud scheme would have been discovered by the United States government." At the same time, the Justice Department contends that Birkenfeld is not a formal whistleblower because he didn't provide many details on specific UBS clients when he came forward. Birkenfeld's lawyers will argue on appeal to Attorney General Eric Holder that Birkenfeld did in fact provide information about specific clients.

Despite Birkenfeld's misconduct, his information about UBS's practices clearly helped the government recover billions of dollars in taxes and penalties that it wouldn't have received otherwise. It would set a bad example for the IRS to deny Birkenfeld his reward in this case, mainly because it could have a chilling effect on future whistleblowers who have been involved in some type of misconduct themselves, but have useful information. The federal government needs all the tax revenue it can get right now, so it seems unwise to snub potential billion-dollar whistleblowers.