Bradley Birkenfeld Has Had His Ups and Downs: The Government Threw Him in Jail, and then Gave Him a Hundred Million Bucks

As April 15th approaches each year, most Americans turn to the serious work of preparing their tax returns. Some of us have at least briefly entertained the idea of fudging a number, hoping that the IRS would never find out. Our tax system is, in part, an honor system that relies on taxpayers to tell the truth and adequately keep track of their finances. And yet, to paraphrase Madison, if people were angels, government (not to mention taxes) would be unnecessary. The reality is that people and corporations lie about their finances, and often expend a great deal of effort to avoid paying taxes. Not only is this behavior illegal, but it offends the average citizen’s sense of fairness. The recent debate about the presidential candidates’ tax returns is simply a by-product of the average honest taxpayer’s interest in making sure a contender for the Oval Office plays (and pays) fairly.

Of course, the IRS is not equipped to discover every instance where someone has not played fair, and so it has dangled increasingly attractive carrots in front of would-be whistleblowers, to encourage the reporting of tax fraud. Congress recently passed the IRS Whistleblower Statute, which rewards individuals who report Tax Fraud with a percentage of the monies and penalties recovered. And based on the experience of Bradley Birkenfeld, the IRS intends to be incredibly forgiving of whistleblowers that knew about tax fraud because they were perpetrating it themselves.

Birkenfeld was a banking executive at UBS Warburg, a Swiss Bank. In 2007, he voluntarily approached the IRS with information about UBS’s illegal tax shelters. But Birkenfeld himself continued to advise his own clients to do illegal things with their money, most notably Russian billionaire Igor Olenikov. Because of Birkenfeld’s illegal actions as banker, he was imprisoned. Later, Olenikov tried to sue both UBS and Birkenfeld for giving him fraudulent tax advice, but the suit was dismissed against Birkenfeld. See Olenikov v. UBS AG, 2012 WL 1192911 (C.D. Cal. 2012).

Initially, Birkenfeld was not treated as a hero by the IRS, as indicated by his time in “Club Fed.” It was unclear whether the IRS would consider him a whistleblower or just a mere “tipster.” There was some question about whether his part in UBS’s illegal activity precluded his receipt of a whistleblower award.

Finally, on September 11, 2012, legal counsel for Birkenfeld announced that the IRS would award Birkenfeld $104 Million, under 26 USC § 7623(b). They also released him from prison, presumably to avoid sending a “mixed message.” The award that Birkenfeld is set to receive is the largest-ever tax fraud whistleblower award. The practical reasons for such a giant award are clear: the government needs help to catch tax evaders. And when there is somebody out there like Birkenfeld, privy to illegal practices, perhaps needing incentive to come forward, the IRS knows that the prospect of a huge reward might offset the negative consequences of coming forward. Those 104 Million dollars are, as one of Birkenfeld’s attorneys suggests, “104 million reasons” to report tax fraud. The IRS and the United States continue to litigate against UBS.

If you’re aware of significant tax fraud and attracted to the potential rewards for being helpful to the government, the IRS provides a fairly straightforward form that you may use to submit your knowledge of the fraud. The entire process is not straightforward, however, and experienced tax attorneys and whistleblower, or “qui tam” lawyers are essential companions along the way.

Amanda Narvaes

Amanda P. Narvaes, a Partner, joined Drew Cooper & Anding in 2011. Ms. Narvaes is a civil litigator in the areas of complex commercial litigation, lender liability, copyright litigation, and consumer protection. She graduated cum laude from Carleton College with a bachelor’s degree in history. She earned her law degree at WMU-Thomas M. Cooley Law School, graduating magna cum laude, and received Cooley’s Distinguished Student Award. Ms. Narvaes represents clients before Michigan trial courts across the state and in the Michigan Court of Appeals, and before the United States District Courts for the Western and Eastern District of Michigan. Ms. Narvaes has been a guest speaker in Ron Foster’s “Litigation for Paralegals” class. Ms. Narvaes discusses differences between Federal civil discovery rules and Michigan civil discovery rules.