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UBS paid the price for ignoring a whistleblower |
US taxpayers need to take a fresh look at their internal compliance processes if they want to deal with a likely surge in tax whistleblowers, following a highly publicised $104 million IRS payout to ex-UBS employee Bradley Birkenfeld.
Birkenfeld disclosed information to the IRS that Swiss bank UBS was helping wealthy US citizens to evade tax.
The information provided helped the IRS to force a $780 million settlement from UBS in early 2009.
Under its whistleblower programme, the IRS can pay an informant 15-30% of any tax recovered as a result of information they provided.
The US whistleblower law was significantly amended in 2006, defining a fixed range for the award and essentially making the award mandatory, unless certain conditions were present that made the whistleblower ineligible.
However, Diana Wollman, of Sullivan and Cromwell, said the programme has come under criticism, which has discouraged tax whistleblowers from coming forward.
"There has been a lot of chatter and press recently about the IRS whistleblower office taking too long to process claims and resolve cases and that this would, or already had, discouraged whistleblowers," said Wollman.
"So, the whistleblower office was getting negative press and being accused of dragging its feet and people were saying this would mean the 2006 amendments to the whistleblower law would be a failure," she added.
Further criticism of the scheme is that it is opaque. Once information has been submitted, whistleblowers will often wait months, or even years, to hear how their case is progressing, and may not even be told why a case is dropped.
Also, the IRS law does not permit the whistleblower to file a lawsuit in court and proceed on their own in cases where the IRS decides not to act. There has been some discussion about trying to amend the IRS law to permit a whistleblower to file a case in federal court and proceed if the IRS does not act on the whistleblower's information.
David Koenigsberg, of Menz, Bonner, Komar & Koenigsberg, said Birkenfeld's $104 million payout will encourage more people to come forward and take the risks associated with being a whistleblower, and should breed more trust in the authorities.
The case has been heavily publicised because of the UBS investigation, the vast amount recovered, and Birkenfeld's subsequent prison sentence as a result of his own involvement in part of UBS's tax evasion practices.
There is a broad consensus that Birkenfeld's reward will now create a surge of tax whistleblowers coming forward to make new disclosures to the IRS.
However, Wollman said what is uncertain is whether the overall impact will be counterproductive for the IRS whistleblower office, because it will encourage people who do not have any information that is useful and accurate to come forward.
Knock-on effect
The knock-on effect will be that taxpayers have to tighten up their internal compliance procedures regardless of whether they have been involved in tax evasion or not.
"I think corporations will be concerned about disgruntled employees or former employees going to the tax authorities with claims that have no merits. A corporation that is taking unsupported tax positions will already be worried about having those positions detected by tax authorities and this adds one more way in which the detection could occur," said Wollman.
"So, for those corporations, it's an additional disincentive to do something inappropriate. But for corporations that are not trying to hide things from the tax authorities, I think they are looking at whether they may face increased scrutiny, and the costs of more extensive audits, simply because a disgruntled employee is looking for a way to make some money and perhaps also retaliate against the corporation," she added.
Before Birkenfeld made disclosures to the IRS, he claimed that he made his position known to UBS compliance but received no response.
Koenigsberg said other taxpayers must learn an important lesson from this.
"A company should develop a programme to handle internal complaints and not shoot the messenger. If the company [UBS] had taken his [Birkenfeld's] internal complaints seriously and decided to self-report, it could have probably gotten a better deal from the government and avoided many of its travails, but unfortunately, sometimes the wrongful activity is the source of great profit for a company so the higher level managers may not choose to do the right thing," said Koenigsberg.
