What the $104 Million IRS Whistleblower Award to Former UBS Banker Means for Tax Whistleblowers

With the current debate over raising tax rates becoming increasingly heated, a bipartisan, common-sense effort to recover more of the several hundred billion dollars that tax cheats already owe deserves far greater emphasis.

The IRS in September sent a smart and principled message that it is willing to encourage those with the best information about massive tax evasion to come forward. The IRS agreed that the billions in taxpayer funds it has begun to recover based on information from UBS whistleblower Bradley Biirkenfeld should warrant the first $100 million tax whistleblower award ever announced.

Michael A. Sullivan
From: Michael Sullivan
Sent: Tuesday, September 18, 2012 5:44 PM To: ‘sullivannytimes@gmail.com’
Subject: Comments on $104 million award to Birkenfeld

Very good speaking with you today. Here are a few thoughts on the award to Birkenfeld from my perspective. Feel free to call with questions on cell at 404-275-0559.

This was a principled, but difficult, decision by the IRS Whistleblower Office Director Steve Whitlock to award $104 million to someone who provided immensely valuable information to the IRS, but whose misdeeds led to his own felony conviction and incarceration. IRS criminal agents who worked on the UBS case will protest, because they believe Birkenfeld’s withholding information cost the government dearly in its investigation of a former Birkenfeld/UBS client.

Based on our review of available Birkenfeld court filings and transcripts, Birkenfeld apparently violated the cardinal rule that a whistleblower cannot “hold back” information about his own alleged wrongdoing in his “cooperation” with the government. Birkenfeld’s sentencing transcript shows that he failed to dispute then the essential facts relied on by the government.

But now that Birkenfeld has served his sentence, the IRS Whistleblower Office was obliged to follow the law as written, in judging Birkenfeld’s entitlement to a reward.

Over the next weeks, I suspect that the $104 million award will now provoke a backlash-both within and outside the IRS–from those who hate the notion of rewarding whistleblowers and have tried to undermine Sen. Grassley’s efforts to make this tax whistleblower program meaningful. Opponents of rewarding whistleblowers for helping recover taxpayer dollars from those who cheat include former senior IRS officials such as Donald Korb, former Chief Counsel, a vocal critic of the program who has returned to private law practice.

Birkenfeld’s case has already spawned overheated, off-the-mark arguments on both sides, which likely will recur. I have spoken with IRS agents who worked the UBS case, and they were adamant that Birkenfeld should not receive a dime-even if he turned out to be the single most valuable IRS informant ever, and even if he met the requirements of the whistleblower law. Opponents of compensating any whistleblower-and especially a convicted felon-will use this award to attack Grassley’s arguments that compensating whistleblowers is an effective law enforcement tool.

On the other hand, Birkenfeld’s defenders (including his attorneys) tried to portray Birkenfeld’s prosecution as an ominous sign that should make future whistleblowers think twice, lest they be indicted also. That argument may have been good PR for Birkenfeld, but mischaracterized Birkenfeld’s mistakes in a way that risked scaring off future whistleblowers-especially the vast majority who, unlike Birkenfeld, have not committed felonies, much less concealed them from the government.

Many whistleblower advocates missed this fundamental point, and joined in condemning Birkenfeld’s incarceration. That view made no sense to me, since the facts of Birkenfeld’s botched “cooperation” are unique. Birkenfeld had to be prosecuted for his misdeeds, a point that future whistleblowers and their advocates should appreciate. At sentencing, Birkenfeld did not dispute that he withheld from prosecutors certain information about his own wrongdoing at UBS, including information about a Birkenfeld client then under investigation. Birkenfeld’s delay in “telling all” apparently allowed his client to escape more serious consequences.

Given that Birkenfeld misled prosecutors, his misconduct cannot be ignored. Otherwise, we invite government officials to make arbitrary, ad hoc decisions, rather than simply follow the law. Had Birkenfeld “told all” up front, prosecutors said he would likely not have been prosecuted at all.

Nor should arbitrariness infect a decision to compensate a whistleblower. The law does not allow any whistleblower to be rewarded for his role in a tax law violation that results in his criminal conviction. Nonetheless, since Birkenfeld apparently gave the IRS immensely valuable information about tax violations in which he was not involved, he is legally entitled to an award-and the public is much better off for his efforts. To his credit, IRS Whistleblower Office Director Steve Whitlock stood up to immense pressure to invent some “exception” that would allow him to deny a reward to Birkenfeld.

Whitlock’s refusal to take an “arbitrary” approach to the law is refreshing. He operates in an IRS in which some who oppose compensating whistleblowers have arbitrarily stalled the IRS Whistleblower program, and thwarted Congress’ clear direction in creating this new program. Maybe Whitlock’s adherence to the law is a sign that Deputy IRS Commissioner Steve Miller’s recent efforts to strengthen the Whistleblower Office’s effectiveness are bearing fruit.

Let’s hope that the IRS continues to follow the law, rather than the personal preferences of government employees who believe they–not Sen. Grassley and Congress-know best whether compensating whistleblowers is a good idea.

Best regards.

Michael A. Sullivan msullivan@finchmccranie.com
229 Peachtree St NE #2500 Atlanta, Georgia 30303 (404) 658-9070 (404) 688-0649 (fax)

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