IRS Awards Whistleblower Birkenfeld in UBS IRS Fraud Case

The IRS awarded former banker at UBS, whistleblower Bradley Birkenfeld, an award of $104 million for the inside information he provided related to UBS’s illegal offshore banking tax fraud case.

UBS AG, a corporation organized under the laws of Switzerland, operates a global financial services business. Beginning in 2000 and continuing until 2007, UBS, through private bankers and managers in the United States cross border business, participated in a scheme to defraud the United States and its agency, the IRS, by actively assisting or otherwise facilitating a number of US individual taxpayers in establishing accounts at UBS in a manner designed to conceal the US taxpayers’ ownership of beneficial interest in said accounts. In this regard, the private bankers and managers facilitated the creation for such accounts in the names of offshore companies, allowing such US taxpayers to evade reporting requirements and to trade in securities as well as other financial transactions.

Whistleblower Birkenfeld blew the whistle on UBS’s tax fraud, and the IRS paid the whistleblower with $104 million in whistleblower awards. The whistleblower provided inside information to the IRS that they themselves had been unable to detect. The IRS stated,

“The comprehensive information provided by the whistleblower was exceptional in both its breadth and depth. While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS.”

As a result of the information provided by Birkenfeld, UBS was forced to admit it helped 17,000 clients evade their taxes through offshore accounts. In February 2009, UBS entered into a deferred prosecution agreement with the government and paid $780 million in fines. In September 2012, the IRS issued the whistleblower an award amounting to $104 million. This is a big win for IRS tax fraud lawyers and whistleblowers unraveling tax fraud against the government.

Overview of the IRS Whistleblower Act (26 U.S.C. § 7623)

The Internal Revenue Service (“IRS”) has had a reward program for whistleblowers in the past, but before 2006 the program lacked standardized procedures and managerial oversight. Under prior 26 U.S.C. §7623 (“IRS Whistleblower Statute”), the IRS had discretionary authority to provide whistleblower rewards, which were generally 1%, 10% or 15% of the taxes, fines, and penalties up to a maximum award of $10 million. [1]

In 2006, Sec. 7623 was amended to provide increased rewards to whistleblowers who provide information to the IRS regarding underpayments of tax and/or violations of the internal revenue laws. [2] The original Sec. 7623 became Sec. 7623(a), and the IRS continues to have discretionary authority to pay a reward that it deems necessary for the whistleblower’s assistance in detecting an underpayment. The rewards will be paid out of the proceeds the IRS collects from the violating taxpayer. A new subsection (Sec. 7623(b)) was added, codifying reward percentages for claims meeting specific requirements as detailed below.

In addition, the amendments form a Whistleblower Office that operates at the direction of the Commissioner of Internal Revenue. It coordinates and consults with other divisions of the IRS as directed by the Commissioner, analyzes information submitted, and makes award determinations. Since the amendment’s effective date, the IRS has issued various notices, “guidance” and regulations on issues that arise in whistleblower claims. [3] Below is a concise overview of the IRS whistleblower statute, including a review of requirements and evidence needed for filing a claim, the amount a whistleblower is entitled to if the claim is successful, review of the applicable statute of limitations for bringing such a claim, the process for evaluating a whistleblower claim and confidentiality protections provided by the statute.

How to File IRS Whistleblower Claims With a Lawyer

Whistleblowers submitting claims under Sec. 7623(a) or (b) must complete IRS Form 211, Application for Award for Original Information, in order to qualify for the IRS whistleblower reward.  The Form 211 must be completed in its entirety.

Applicable Statute of Limitations Under the IRS Whistleblower Statute

If a whistleblower informant possesses information concerning false or fraudulent tax returns filed with the intent to evade taxes, 26 U.S.C. § 6501(c)(1) [4] provides for no statute of limitations. The same is true in the case of a failure to file a return. If the taxpayer fails to file a return and has earned income on which taxes are owed, once again, these provisions provide for no specific statute of limitations. Practically, of course, the information possessed by the whistleblower informant must be recent enough to allow the IRS to effectively investigate the information that the whistleblower brings forward. Even if a whistleblower has information that is more than 6 years old, the simple fact remains that, while legally the IRS may be able assess taxes for such conduct, it may be difficult to prove the violation if the information is “stale.” As a general proposition, without evidence of willful or fraudulent intent, other provisions provide for a statute of limitations of 3 years. 26 U.S.C. § 6501(a). [5]

IRS Awards to Whistleblowers

The amended IRS whistleblower statute provides for two types of awards: those disputes over/under $2 million dollars.

Process for Evaluating Whistleblower’s Claims

A threshold requirement for any award under 7623 is that the information must lead to judicial or administrative action, meaning an audit or investigation resulting in the collection of proceeds.  An analyst in the Whistleblower Office will consider the information provided by the whistleblower. The IRS has to decide that the case is worth pursuing.

Confidentiality of Whistleblower Identity

Confidentiality of the whistleblower’s identity is addressed in section 3.06, the interim “guidance”. Many whistleblowers are encouraged by the language that “[t]he Service will protect the identity of the claimant to the fullest extent permitted by law. Under some circumstances, such as when the claimant is needed as a witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the claimant’s identity. The Service will make every effort to inform the claimant before proceeding in such a case.” [6]

All of that information about the taxpayer is covered by privacy laws which impose strict limits on what the IRS can disclose. Once a claim is submitted, the informant may be told only the status and disposition of the claim – not the action taken in the taxpayer case. The IRS can disclose whether the claim is still open or has been closed. If closed, the IRS can disclose that a claim is payable (and the amount) or that the claim is denied. A claim can be denied if: the IRS already had the information from another source, an audit or investigation is conducted but leads to no finding of taxpayer liability, a finding or liability is made but the taxpayer is successful in an administrative or judicial appeal or a finding of liability is made and sustained but there is no collection because the taxpayer has no known assets that can be collected against.

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