Tuesday, September 11, 2012

Birkenfeld Gets $104 Million Whistleblower Award (9/11/12)

Bradley Birkenfeld the Whistleblower who whistleblowing brought UBS to its knees and set in motion the IRS offensive against Swiss and other foreign banks has been awarded $104 million as a whistleblower award under Section 7623(b), here.  Birkenfeld was also convicted and sentenced for crimes related to his alleged reticence in coming fully clean.  Still, he was the man.  He was formerly named Tax Analysts "Person of the Year" for 2009.

This is a stunning development.  I am sure there will be a lot of buzz and hype.  But I do think this signals some significant movement in the Whistle Blower office.

Also, since the Swiss would say that his whistleblowing violated its law, we now know that the IRS admits having used the information in violation of other country law to collect revenue (which is what is required to grant an award).  So for all who thought that our Government might not used illegally obtained information, think again.  See also Payner v. United States, 447 U.S. 727 (1980), here, Government can use against a depositor information from a "flagrantly illegal search."


Ex-Banker Birkenfeld Gets $104M for UBS Case Cooperation; May Be Biggest US Whistleblower Award (ABA Law News Now 9/11/12), here.

IRS Awards $104 Million to UBS Tax Whistleblower Bradley Birkenfeld (Tax Prof Blog 9/11/12), here, with further links.

Jeremiah Coder, IRS Pays Birkenfeld $104 Million Whistleblower Award, 2012 TNT 177-1 (9/12/12).  Key excerpts related to section 7623(b)(3)'s exclusion on awards to planners and initiators of the scam:
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."
Lee A. Sheppard, Swiss Banking Derobed: International Implications of Birkenfeld, 2012 TNT 177-2 (9/12/12).  Ms. Sheppard in his usual acerbic style, discusses the reaction of the Swiss to whistleblowers of information from Swiss Banks, activity that it deems illegal (a key component of protecting its tax evasion franchise).  Excerpts I found interesting are:
Failure to compensate Birkenfeld would have principally benefited Switzerland and other bank secrecy jurisdictions. Switzerland depends on criminal penalties, including jail, to dissuade bank employees from selling valuable information. But the old ways are breaking down as banks feel the pressure from the United States.  
The United States may get more information about Swiss accounts from whistleblowers than it will get from Switzerland under treaty-based information requests. The possibility that insiders and informants will be well rewarded for information about secret accounts does not go down well with the Swiss. 
* * * * 
Switzerland has signed OECD model information sharing clauses in its treaties. It has even agreed to permit pattern-based information requests from the United States. The 2009 protocol to the U.S. treaty still has not come into force because of the opposition of Sen. Rand Paul, R-Ky.  
Switzerland has not, however, responded to requests for information under the current treaty. Indeed, the U.S. Justice Department believes that business as usual included other Swiss banks picking up old UBS accounts.  
Switzerland refuses to assist in prosecutions based on stolen bank data. Criminal prosecution is the principal use of treaty-based information requests. But most offshore evasion cases are civil cases, and the taxpayers' governments want to process and settle them quickly. 


  1. So, I guess the prison sentence was worth it then. Not a bad return on your LCUs (Life Credit Units) invested in some short term U.S. incarceration. However, Americans abroad now live with the over-the-top extra territorial response by the IRS with its various forms of ‘Bait and Switch’ Voluntary Disclosure programs, disproportionate penalties on non U.S resident and new immigrant Minnows, and the Congressional pile on with FATCA effecting EVERY country in the Universe.

    You have to wonder if we would be dealing with all this FATCA fallout, if Bradley hadn’t walked in the front door and handed the IRS and Justice Department the information that they had failed to obtain from their own investigative work. The UNINTENDED consequences of the chain of events he started leads up to a very uncertain FATCA future, which unfortunately gets little or no reporting in the U.S. media, as you know. Is this type of result really good for America?

    So now Bradley gets $104 M, and I get more tax complexity, as I fill out duplicate FBAR and FATCA forms as required under serious penalty threat! Then there are the many Canadian/U.S dual citizens who now line up at Consulates to renounce their citizenship to get out from the IRS “offshore jihad”.

    Let’s also not over look the FATCA Compliance Complex (FCC) that is born to make BIG money off this latest World Wide regulation. They are now are invested in its continued rollout and success. We only read about it on specialized tax and Accounting blogs, but not in the MSM. Who would have thought that Bradley’s whistle blowing would lead to this?

    So it goes. It all started because of a simple desire by Congress and the IRS to stop U.S. "Residents" living in the Homeland from evading taxes offshore, but they created a FATCA MONSTER instead. Because of the unique nature of U.S. Citizenship taxation, many Americans abroad now ponder their fate.

    They are being shut out of banking in the counties of their residence or they are forced to join an onerous “voluntary” program with all its unknown complications and penalties before their data is handed over to the IRS by foreign financial institutions.

    Congress doesn’t even know what they voted for, and what the FATCANATICs in Treasury have created as a result. The world doesn't need another complicated, expensive ~388 page regulation to heap complexity onto an already struggling economy and weak financial industry. Surely there was another way to deal with homeland tax evasion without world wide bounties and FATCA.

    It will be many years before a serious Journalist begins to wonder “how was we ended up with a global GATCA and its paralyzing economic and systemic impacts?” Although the OECD has long been on a mission to end tax competition between nations, and FATCA certainly is much applauded and supported by them as the stepping stone towards their total asset transparency dream world, I think the real story telling can start right here with Bradley as the catalyst that made it happen. IMHO Amazing story and stunning outcome. Thanks Bradley.

  2. Jack,

    Thank you for posting this. This is indeed a strong indication that the IRS program is on the right course finally and finally I think it is clear to everyone that Swiss banking secrecy is dead at least as far as U.S. taxpayers are concerned.
    With Jack's indulgence, I would like to refer readers to my scribbles in other forum on the topic of the IRS Whistleblower Program:http://whistlewatch.org/

    On the other hand, I must say this over-hyped emphasis on illegal Swiss bank accounts strikes me as perhaps somewhat misdirected. At today's bank interest rates, how much U.S. tax revenue is really in issue? To that point, I cannot get to the bottom of the DOJ claim of $5 Billion of collections from its offshore account initiative, and I suspect this is an exaggerated number that may aggregate the combined value of all newly disclosed accounts and not just the tax revenue from those accounts. If so, it may be time for DOJ to focus on real big-time tax cheats and stop gaming the public--many no longer believe its exaggerated claims and that number continues to increase, judging from the tone of mainstream media reports discussing the DOJ.

    Seriously, at today's interest rates, how much revenue can those offshore accounts generate? And revenue is what we need not PR engagements! For God's sake, we read that JP Morgan's 2011 tax reserve (generally, the amount set aside for positions taken on its tax return for which it cannot obtain a tax opinion that it is likely to succeed if the positions are challenged by the IRS or other taxing authority) is a staggering $7.2 Billion on reported profits of $19 Billion! To be clear, the $7.2 Billion is real cash set aside on its balance, not taxes paid, while JP Morgan waits for the statute of limitations to run out. And there are hundreds of other major US "taxpayers" similarly gaming the system. Why is the IRS and DOJ not all over this?

    My point is not that illegal offshore bank accounts should be tolerated--they shouldn't but neither should ordinary people be persecuted for what may have been in many cases honest oversight. Punish the banks and the major malefactors severely but give a one-time bye by paying taxes and interest to the smaller fish. Its time to go whale-fishing and the IRS whistleblower program is an ideal mechanism to do so.

    Best of luck to all who are struggling with the DOJ offshore account initiative. I hope that somebody in a position of authority at the DOJ can see the shortcomings of the administration of that program and deploy DOJ resourses to more meaningful pursuits.


  3. I am waiting for a US citizen to be a whistleblower on secret banks accounts of Latin Americans at US banks. Let's see what the US government and US press have to say about the violation of US law in order to enforce foreign laws.

  4. Excellent comments Pat. The IRS definitely needs to focus on Whales, but does get distracted on the minnows who flop up on deck and easily scooped up. I have also noted your comments over at Forbes here..


    My only worry/concern about the Whistle Blower program at the IRS, is the incentive's it creates for getting Citizen on Citizen reporting and the general "fear" state it sets up. How far down this road is our society willing to go? How are our Masters at the IRS going to administer this going forward? So far, they have been dragging their feet, but that Forbes story indicates that the author thinks a "corner" is turned. Do I really want that corner to be turned? Do I trust their administration of the program in the future? I have mixed feeling about it. Are we getting to the place, that we have to constantly look over our shoulders at our neighbors and wonder if they are dobbing us in for profit? How much spying on each other is our society willing to tolerate? Does this action add to or subtract from individual liberty? And what is the balance that society wants or will tolerate? Questions to ponder, I think.

  5. Thank you.

    Actually I find myself conflicted and lean to your position against my professional interests. Ultimately, however, I believe the thresholds that must be attained before a WB gets himself or herself into the IRS whistleblower program (minimum $2 Million of taxes owed and the practical threshold is much, much higher in my experience) means it really is confined to "high-end" tax cheats. I also think that the IRS was wise in not awarding Mr. Birkenfeld any money for the claimed offshore bank accounts resulting from his UBS disclosures, and I believe that policy will continue as it should for individual bank accounts.

    The banks themselves are entirely different animals, and fair game, in my opinion. In fact, I would say officers who authorize illicit behavior should be held accountable, and amounts collected from such persons should also be fair game. If implemented, the net result would be the officers would not be covered by D&O coverage, and I can assure you, they would think long and hard before engaging in the illicit activity.
    The IRS needs to focus and concentrate its efforts on big-time cheats, not spread them out over many individual cases each with its unique set of facts. It would be shocking to me if the IRS were to continue to hound small offshore account-holders with the pressure it is now under from a broader perspective to rein in wide-spread tax avoidance and evasion. On the other hand, large-scale tax cheats and tax schemes have become so sophisticated (often through compartmentalizing the scheme's key elements so that few know the real story--the parts look ok, but the whole is rotten) that WB input is essential to leveling the playing field, for all our benefit, regardless of what you think of WBs generally.
    For all these reasons I believe your valid fears will ultimately prove unfounded, or at least that is what I hope for you and others like you.

  6. Pat,

    Thanks for your comment. I hope you are right. I do agree, UBS was very illicit activity. Who could, with a straight face, justify it. When I first heard of it, I too cheered the action, until I realized early on, that this effort would extend all the way down the food chain to someone like me.

    It is the unintended collateral damage off all this, with FATCA now spread world wide, that the rest of us have to suffer as a result that makes me sort of resent that $104M. I want my share of the compensation for the inconvenience of their misplace efforts! LOL As Jack as reported the IRS quote regarding Whales, "We have smaller fish to fry", which is a sarcastic reference how they often get misdirected and waste limited resources on minnows as that seems the easy route.

    Never mind if they spend 2 years of time trying to wrap up a simple 906 for a minnow in the OVDP. (for me, it was 851 days total.) Go figure. It is what it is, I suppose. Large Bureaucracies are NEVER efficient, and rarely do the right thing unless forced to. Maybe this action of paying out a reward to Mr Birkenfeld was the "right" thing. I will defer to your professional judgement. I guess I really don't know enough of the facts to have a real informed opinion. Just something about it makes me uncomfortable. Maybe that is because I have had my trust broken in the IRS leadership and have been forever impacted by their approach to this entire offshore jihad. My view of our government has been irreparably altered as a result.

    So it goes.


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