By Patrick Thornton
Dolan Media Newswires
The IRS paid out a whopping $104 million to a whistleblower last month for his help in exposing a $20 billion dollar tax evasion scheme by UBS bank.
Lawyers who work on whistleblower cases say the payment will certainly jump start the IRS’ efforts to uncover tax fraud. They also say it will lead to more whistleblowers coming forward.
Many of the first claims that arose out of the whistleblower provision authorized under the Tax Relief and Heath Care Act of 2006 are just starting to work their way through the system, said Richard Zabel, a forensic accountant for a Minneapolis law firm.
The UBS whistleblower, for example, became a government informant in 2005.
“I expect to see a lot more of these payments; you might not see too many hundred million dollar ones, but I would expect to see some seven or even eight figure payments,” Zabel said. “These often take three or four years to work through the process.”
Under the program for information on unpaid taxes under $2 million, a whistleblower can collect up to 15 percent of what the IRS collects. For claims over $2 million against a taxpayer that had at least $200 million in income, the whistleblower can collect 15 to 30 percent. There is no statute of limitations for the tax fraud reported.
Bradley Birkenfeld, the UBS informant, was a former employee at the bank. The information he provided to the IRS was called a “Rosetta stone” by government officials. He provided prosecutors with detailed descriptions of the bank’s efforts to promote tax evasion by referring clients to illegal offshore accounts to hide money from the IRS. Government officials say his information lead to the UBS bank paying $780 million in fines to the U.S. Treasury and the collection of $5 billion in back taxes, plus about 35,000 taxpayers agreeing to amnesty programs to rectify their illegal offshore accounts.
Despite the specificity and usefulness of the information provided to the government, Birkenfeld was no saint. He was convicted of fraud and served prison time.
“The key is how specific the information is. The more useful the information the whistleblower has the better it will allow the IRS to identify individuals or companies and say, ‘What about this foreign account that wasn’t on your tax return?’” Zabel said.
The payment sends a message that the government is serious about using the program, said Minneapolis tax lawyer Alan Wilensky.
“One of the biggest problems in ferreting out financial crime is the time lag. By the time the government figures out from a securities or tax standpoint what is going on, it is often too late in the process,” he said. “The earlier they find out, the quicker the response times — especially in some of the really complicated transactions that are so hard to piece together for enforcement.”
One worry is that this payment will set off a flurry of frivolous whistleblower claims from people looking to cash in.
The line between a legitimate tax shelter and one that crosses the line can be fine, said Wilensky, who served as the deputy acting secretary for tax policy at the U.S Treasury under President George H.W. Bush in the early 1990s.
“I’m sure firms will be concerned that legitimate, cutting edge financial planning practices will be impeded by an increase in whistleblower claims that are not legitimate,” he said. “Could this impede creativity and development in the industry? That’s a legitimate question — the latest competitive advantage must be weighed against deterring criminal conduct.”
Zabel said that the whistleblower bounty payment could entice some people to go to the government first, rather than reporting tax violations internally, but often whistleblowers’ have reported information to the proper internal channels and nothing was done to correct the problem.
“In many of these cases, the self regulation was not enough,” he said. If a company is engaged in activity that is opposed to the IRS or Dodd Frank then they should be worried. If you are following the law then this shouldn’t be an issue.”
For plaintiffs’ attorneys the payment is welcome news, said Minneapolis attorney John Klassen. He said a common complaint for whistleblower attorneys, whether it be under the False Claims Act or the Tax Relief and Health Care Act, is that the government has these statutes, but no one is getting paid. The provisions lack teeth.
“This certainly grabbed a lot of plaintiff lawyers’ attention,” Klassen said. “Just the size of this payment ranks up there with some of the largest false claim acts for pharmaceutical cases. This is encouraging.
“People will take a harder look at some of these cases. This one recovery from UBS alone will dwarf all of what was collected last year under this program.”