Back in January of 2010, I posted a blog entry on the US Whistleblower program, highlighting how the American government is willing to pay big rewards for information that could help catch people who are not paying their taxes. (see link) Since then, there has been a substantial development; Bradley Birkenfeld, arguably the most famous whistleblower in the private banking industry, has finally received his award; US$104 million (to start) with regard to his disclosures involving UBS’ efforts to assist wealthy US taxpayers to evade tax.
To fill in the background, In December 2006, the Internal Revenue Service (IRS) introduced the Whistleblower Program. The Program provides, by statute, a legal right for individuals who report substantial tax violations (at least $2 million in tax owed) to be awarded 15-30% of the amount of tax collected. This is not a “reward program” per se; rather it creates the legal right to a tax refund from taxes, interest and penalties paid by other taxpayers under certain circumstances.
The US Whistleblower Program therefore incentivizes individuals who become aware of tax evasion by US Persons to report the fraud to the IRS. The relevant laws also give whistleblowers legal protection from reprisals from their employers and/or the person whom they are informing against. Provided that a whistleblower did not personally plan or initiate the tax evasion, they are not barred from collecting an award. However, the IRS is very interested in obtaining information about criminal conduct from “insiders”, and it is possible to negotiate an agreement that protects the whistleblower from prosecution.
Brad Birkenfeld was a former UBS AG banker who approached the IRS with information that led to a $790 million dollar settlement by UBS in 2009. Subsequently, he was put in prison for failing to provide complete disclosure with regard to one of his clients, and after spending 30 months behind bars, was released in August 2012. Birkenfeld provided the IRS with information describing UBS’s efforts to promote tax evasion and confessed to running errands for rich clients. Birkenfeld would use UBS to purchase art or jewellery for clients. One such errand even involved smuggling of diamonds into the US in a toothpaste tube. Birkenfeld’s information on his former employer directly led to the collection of $400 million of UBS’s unpaid taxes. Birkenfeld’s award works out to 26% of the $400 million in tax paid. Birkenfeld’s lawyer has said that his client has other whistleblower claims outstanding.
Until now, the US Whistleblower Program has been more of a theoretical construct than practical way to fight tax evasion or get paid for doing the “right thing”. This was because Brad had been languishing in jail rather than enjoying the fruits of his …. treachery. Granted, Brad made his own bed because although he came clean about a lot of things, he just forgot to mention a couple of fairly obvious and illegal acts, and consequently paid the price. To be fair, there had also been a lot of political jockeying involved as Brad had originally offered to come clean to the US Department of Justice, but they turned him down by refusing to give him full and absolute immunity in exchange for his testimony against UBS. So he “went Hollywood” and instead spoke out at US Senate hearings, grabbing the headlines and limelight for himself. Of course, this ticked the DOJ off, and so they went after him, and got him.
However, all of the uncertainty that had haunted the US tax Whistleblower program has now been cleared. Brad is out of jail, and has reportedly claimed his initial $104 million. This is believed to be the largest “reward” ever paid to an individual for anything, anywhere, by any government. Thus, I was probably a little premature in announcing the start of what I called the “Age of Tax Privateering” in my blog. Back in 2010, the age was only on the horizon. With the big money now actually flowing now, you can expect a rush of people trying to sell out their employers, business colleagues, clients etc. Of course, lawyers are precluded from using the program to rat on their clients, both ethically, and by the fact that the US IRS will not accept disclosures by lawyers as they are concerned that it may be unconstitutional to do so.
However, as I noted in my previous blog, I have been informed by insiders that the IRS is really only willing to work with Whistleblowers who are represented by competent US counsel with experience in such matters. There are a lot of people out there with axes to grind, and the IRS is reportedly only really accepting “prospects” who are represented. The law firms are doing a lot of the work in terms of working up the case, organizing the documents and making sure that the case is coherent and organized before taking it to them. Although there are still significant risks involved, a Whistleblower who is willing to be patient, work effectively with their lawyers, and cooperate with the IRS by providing full disclosure, has a massive incentive to spill their information.
US tax evaders beware!