Lawyers for Bradley Birkenfeld announced September 11 that the IRS has paid the former UBS banker an award of $104 million for helping the Service collect more than $5 billion in unpaid taxes from banks and individuals.
Birkenfeld’s whistleblower claim under section 7623(b) sought an award based on the compensation from the fine that UBS paid under its deferred prosecution agreement, collections from the data turned over under both that agreement and the subsequent John Doe summons settlement, and collections from the nearly 15,000 individuals who came forward under the IRS voluntary disclosure initiative.
Under section 7623(b), whistleblowers are entitled to awards of between 15 percent and 30 percent of the total collection, with no maximum dollar amount.
According to a redacted IRS summary award report, Birkenfeld received an award for providing comprehensive information that was “exceptional in both its breadth and depth.” His submission was the basis for pursuing “unprecedented actions against UBS AG, with collateral impact on other enforcement activities,” the IRS said. (For the IRS report, see Doc 2012-18941. For related analysis, see Doc 2012-19016.)
One of Birkenfeld’s attorneys, Stephen M. Kohn of Kohn, Kohn & Colapinto LLP, explained at a press briefing announcing the award that the $104 million payout was calculated only on the monies the IRS received directly from UBS as a result of entering into a deferred prosecution agreement with the Justice Department. Part of the settlement — $400 million — represented restitution for unpaid taxes, backup withholding on the undisclosed accounts, interest, and penalties.
Although Birkenfeld might be entitled to additional awards under section 7623 for other collected proceeds that have arisen from the information he provided, Kohn said that his client decided to accept the IRS offer and forego any appeal of the recommended award to the U.S. Tax Court.
The IRS award sends a message to banks to “stop enabling tax cheats and money laundering,” Kohn said.
Another attorney representing Birkenfeld, Dean Zerbe of Alliantgroup LP and Zerbe, Fingeret, Frank & Jadav P.C., called Birkenfeld the “most important tax whistleblower in history.” Zerbe said the tax revenue the IRS has collected as a result of Birkenfeld’s whistleblower submission is one of the “greatest returns of investment” ever for the government, yielding a dollar of tax paid for every two cents paid out in the award. The success of the IRS whistleblower program in making the award represents a bipartisan victory for Congress when it enacted the enhanced tax whistleblower statute, he said. “While the path getting to this announcement was long and frustrating, it is a groundbreaking case for all future whistleblowers.”
Birkenfeld served two and a half years in prison after being convicted of helping a U.S. billionaire evade taxes and is currently serving probation in home confinement, which prevented him from attending the press conference. Kohn said Birkenfeld’s legal team is seeking a full presidential pardon.
Award Enhances Program’s Attractiveness
Senate Finance Committee member Chuck Grassley, R-Iowa — the main author of the 2006 changes to section 7623 — praised the IRS award. “This case provides evidence about how the whistleblower program can be effective because the IRS is saying its work against this kind of tax fraud would not have been possible without the whistleblower,” he said. “The potential for this program is tremendous, and it’s up to the IRS to continue paying rewards and demonstrating to whistleblowers that the process will work and that they will be heard and protected.” (For a Grassley release, see Doc 2012-18971.)
Grassley said it is unfortunate that it took the IRS nearly four years to settle Birkenfeld’s case. “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 said.
Barbara T. Kaplan of Greenberg Traurig LLP told Tax Analysts that news of the award creates more certainty and “puts teeth in the statute for people who want to proceed.” However, the Birkenfeld case makes clear that a whistleblower must provide information that leads to a credible case and ultimate recovery, she said. “Most practitioners believe he was entitled to a substantial recovery, so this is good confirmation on how the statute works and certainly will give a lot of incentive to other potential whistleblowers to provide information and make claims.”
Kaplan said that many potential informants have been discouraged upon hearing that the process involves a long wait from the time a claim is submitted to a potential award being made. “This substantial award will give whistleblowers encouragement to stay the course until a recovery is made,” she said.
David Blair of Crowell & Moring LLP said that the Birkenfeld award highlights how increasing numbers of tax whistleblower claims will affect the relationships between corporate taxpayers and the IRS. “For taxpayers that are the subject of a whistleblower claim, there is a third party on the sidelines with a strong interest in the outcome of the audit,” he said. Although whistleblowers do not have direct involvement in the audit, “their representatives are often very vocal about the need for the IRS to take action.”
Whistleblower submissions to the IRS raise difficult issues regarding the relationship between corporate tax departments and employees who choose to become whistleblowers, Blair said. “We have already seen these issues arise in a few cases, and with the increase in whistleblower claims we can expect to see more challenging cases in the future,” he said. He added that because whistleblowers may have statutory and common law protections, companies must be careful and should consult with their general counsel and human resources departments before taking any recourse against employees who make submissions.
Blair said that the publicity surrounding Birkenfeld’s award will help attorneys specializing in representing tax whistleblowers to attract additional potential informants. “Whistleblower representatives have been aggressively pushing the IRS to move forward with awards under the new statute so that they can demonstrate success to their existing and potential clients,” he said. On the other hand, the sizeable award may raise fears among the corporate community that “employees will make a rash of meritless claims” thinking they can cash in, he said.
Bryan C. Skarlatos of Kostelanetz & Fink LLP said that although the IRS whistleblower program still has many shortcomings, “this award by the IRS is likely to encourage other whistleblowers to rely on the IRS whistleblower program and come forward to report tax noncompliance.”
Gregory S. Lynam of the Ferraro Law Firm said that the award announcement confirms that “tax whistleblowers can and do make significant contributions to the enforcement of the internal revenue laws — the process works.” The significant size of the award will likely “change the perception that the IRS is anti-whistleblower,” he said.
Kaplan said it is unclear how the IRS might treat whistleblower claims covering participants in one of the Service’s voluntary offshore disclosure programs, as the whistleblower statute bases awards on the actual taxes recovered as a result of the information provided. “It is difficult to determine an award based on voluntary acts” of disclosure program participants, she said. “Although there might be cause and effect, it is tenuous to trace the information to collected proceeds.”
“Undisclosed offshore account cases are not good whistleblower cases in and of themselves, and we look for associated wrongdoing such as someone taking improper business deductions,” Lynam said.
No Awards Denials for Mere Participation
Under section 7623(b)(3), the Whistleblower Office may reduce awards when it determines that the individual “planned and initiated the actions that led to the underpayment of tax” and is required to deny awards when the individual has been convicted for that role.
Given all of the public information available about Birkenfeld’s role in helping UBS hide U.S. taxpayers evading the IRS, Lynam said that the award indicates that the IRS has taken a practical approach toward the “planning and initiating” exclusion. “If Bradley Birkenfeld is award-eligible, your average tax director will have no problem overcoming the planned-and-initiated hurdle,” he said, noting that Birkenfeld was found to be a criminal participant in UBS’s wrongdoing yet did not suffer a reduction in his award amount for planning and initiating the tax underpayments of the bank’s clients. “The IRS needs knowledgeable insiders to come forward,” he said. Because of the unique circumstances of the Birkenfeld award, Kaplan said whistleblower representatives don’t necessarily have clear direction on how the IRS might differentiate in future cases between informants who participated in a tax evasion scheme but are still entitled to an award and those who are excluded from a payout because of their role in planning or initiating the scheme. The IRS considered Birkenfeld a low-level employee of the bank, intimating that those higher up planned or initiated the scheme, Kaplan added.
“It is difficult to infer from the IRS award to Birkenfeld how the IRS is evaluating a whistleblower’s role in ‘planning or initiating the actions that led to the underpayment,'” Skarlatos said. The Internal Revenue Manual’s list of factors that the IRS will consider in determining whether a whistleblower was a planner or initiator indicates a broad reading of the phrase “planning or initiating” to include things such as knowledge of and participation in the actions at issue, he said. “Such a broad reading is at odds with the law governing qui tam matters, which limits awards only for the principal wrongdoer or ringleader,” he said. “Going forward, I think it will be important to determine whether a whistleblower came up with the tax avoidance plan or personally benefited from the taxes saved.” The Birkenfeld award allows whistleblowers who were somewhat involved in a tax avoidance plan to argue for an award as long as they did not create the plan or directly benefit from the taxes saved, he said.
Zerbe said that the IRS was diligent in its internal discussions over the planning-and-initiating exclusion and got the law right in allowing an award for Birkenfeld despite his criminal conviction. “The law recognizes that the IRS needs insiders to come forward; it’s not a choir practice when dealing with tax fraud,” he said. As contemplated in the False Claims Act, which section 7623(b) is based on, planning and initiating refers to a “chief architect” of the scheme, he said. Kohn added that despite the confusion at the beginning of Birkenfeld’s case, the IRS award confirms that “if you are a participant, you are still eligible, because the law won’t work otherwise.”
The National Whistleblower Center recently submitted a lengthy comment letter to the IRS with suggestions for how the Service should interpret the provision in section 7623 that limits the award provided to a whistleblower who has planned and initiated the action that led to the underpayment of tax for which the whistleblower seeks an award. (For the letter, see Doc 2012-18712 or 2012 TNT 174-7.)
Kohn said that the National Whistleblower Center is “embarking on an international campaign to educate employees in the financial services sectors about the U.S. whistleblower rewards programs, and how they can safely and effectively come forward and serve the public interest.”