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Tax whistleblowers get millions

By Kay Bell · Bankrate.com
Tuesday, October 9, 2012
Posted: 4 pm ET

It's been a great year for tax tattlers.

Last week a tax whistleblower was awarded $2 million by the Internal Revenue Service for his role in uncovering an alleged multimillion-dollar tax-avoidance scheme attempted by an Illinois manufacturing company.

That payment from the IRS Whistleblower Office comes on the heels of a record $104 million award to Bradley Birkenfeld, who helped bring down Swiss national bank UBS' alleged schemes to help clients avoid U.S. taxes.

Why was the UBS-related reward so much larger?

The main reason is that the Illinois case was older. The alleged tax transgression occurred in 1995 and the whistleblower filed for a reward in 2001. Back then, rewards maxed out at 15 percent of the money that the IRS recovered based on an informant's tip.

The whistleblower reward rules were changed in 2006. Now, when whistleblower info leads to IRS collection of unpaid taxes of more than $2 million, the whistleblower can pocket up to 30 percent of the recovered money.

Birkenfeld's tips led to a UBS settlement with the United States in 2009. The bank paid $780 million in fines, penalties, interest and restitution.

The tax whistleblower law change and Birkenfeld's reward have prompted many more informants to come forward. Whether they'll help uncover such widespread tax cheating or reap as big a payout for their info remains to be seen.

But the IRS is happy to take any and all tips.

And speaking of any and all tips, that includes from folks involved in illegal tax schemes.

That, however, raises another issue. Should Uncle Sam be paying folks who are complicit in illegal tax activity?

That's the case with Birkenfeld, a former UBS employee. After he alerted U.S. investigators about UBS accounts, he was charged with withholding information about his own questionable tax help to a wealthy bank client. He pleaded guilty to one count of conspiracy, was sentenced to 40 months in federal prison and was recently released to a halfway house to finish his term.

Should Birkenfeld, a convicted felon (who's now seeking a presidential pardon) be so handsomely rewarded by the IRS?

I say yes. Prosecutors at all levels and across the country cut deals every day with lower-level crooks to catch their bigger bosses and associates. Without Birkenfeld's help, thousands of U.S. taxpayers still would be hiding millions in Swiss accounts, cheating the U.S. Treasury as well as all of us who have to make up that lost money with our taxes.

So good for Birkenfeld, the IRS, the Treasury and us. When crooks rat out their tax-cheating confederates and it pays off for all of us, then keep paying them.

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