The Strange Odyssey of Bradley Birkenfeld FATCA, Voluntary Disclosure and the IRS Whistle-Blower Program
By Stanley I. Foodman
Bradley Birkenfeld, a former banker at UBS, probably contributed more to the ongoing obliteration of international banking haven secrecy than any other instrument. He was a whistle-blower who was rewarded by the U.S. government with $104 million, while receiving a slap in the face (a couple of years in prison).
Under the IRS program, a whistle-blower can be paid from 15 percent up to 30 percent of taxes recovered by IRS resulting from the information provided to the agency. It is safe to presume that the information provided by Mr. Birkenfeld resulted in the IRS collecting at least $346 million from UBS.
Who is eligible to receive an IRS whistle-blower reward? The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. Individuals are eligible for awards based on additions to tax, penalties, interest, and other amounts collected as a result of any administrative or judicial action resulting from the information provided. The IRS is looking for solid information, not an “educated guess” or unsupported speculation. It is looking for a significant federal tax issue.
The IRS whistle-blower program is not designed to resolve personal problems or disputes about a business relationship. And once an award is authorized, the IRS will research the whistle-blower’s own accounts to confirm that he or she has filed required returns and satisfied all tax liabilities for the previous three years. If the whistle-blower has not filed returns or has outstanding tax liabilities, then the IRS will determine why he/she has not filed the returns or paid the tax liabilities, in which case the matter will be referred to the appropriate enforcement function. Award payments will first be used to offset any unpaid tax liabilities owed by the whistle-blower.
The IRS Code section under which whistle-blower awards are permitted provides for two types of awards.
1. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistle-blower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. (Internal Revenue Code IRC Section 7623(b) - Whistleblower Rules).
2. For cases that do not meet the dollar thresholds of $2 million in a dispute or cases involving individual taxpayers with gross income of less than $200,000, the awards are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court. (Internal Revenue Code IRC Section 7623(a) - Informant Claims Program).
How does this IRS program affect foreign financial institutions (FFIs) covered under the Foreign Account Tax Compliance Act (FATCA) and taxpayers who are considering entering the U.S. Offshore Voluntary Disclosure Program (OVDP)?
1. FFIs worldwide ought to be aware of their vulnerability. UBS paid a heavy price ($780 million) to avoid U.S. prosecution.
2. In certain offshore jurisdictions, FFIs are family businesses or legacy businesses.
a. They are privately held and pass from generation to generation, or
b. They are eventually sold to other legacy FFIs
c. Many of the shareholders/owners of legacy FFIs are also U.S. taxpayers.
3. Many individuals with undisclosed foreign financial accounts have them in legacy FFIs. With FFI reporting under the FATCA regime and the added incentives of the U.S. whistle-blower program there really is no place to hide.
Up until now, Mr. Birkenfeld has been the ultimate IRS whistle-blower. After all, the U.S. government kept its end of the IRS commitment despite Mr. Birkenfeld’ s prosecution and prison term for his reticence on his own involvement. Disgruntled employees of FFIs (of which there are many due to their economic circumstances) as well as ill meaning avaricious business associates could well follow in the footsteps of Mr. Birkenfeld.
What is also interesting to note is that Mr. Birkenfeld is still blowing the whistle, after a period of more than two years in prison. The IRS is going to make sure to squeeze every last bit of information from him and from future whistleblowers. The IRS is not only after the taxpayers who may be avoiding their fiscal obligations, or the banks that may be assisting them. They also want to know the individual bank officers and/or tax advisors that may be aiding them and/or other clients in other banks in the same manner.
The same “information squeeze” is occurring during the Individual Offshore Voluntary Disclosure process. All voluntary disclosers, as is the case with whistle-blowers, are expected to come forth with an open book and assist the IRS investigators with any information they may have, whether it is directly related to their particular cases or not.
So, you may not be a U.S. taxpayer or a bank, but if you have advised or assisted any tax evasion, or given incorrect advice that has resulted in evasion, beware. The U.S. government has not only proved that it is willing to prosecute foreign nationals, as shown by the Wegelin Bank case, but it has now also reinforced its zero tolerance on tax evasion crimes by placing them in the “financial crimes” category side by side with money laundering and terrorist financing. This is not a good place to be in.
Stanley I. Foodman is CEO of Foodman CPAs & Advisors and a recognized forensic accountant and litigation support practitioner. Specializing in complex domestic and international tax matters, Foodman has served as an expert witness and forensic accountant for some of the nation’s most challenging, high-profile economic crime cases. Foodman and his team of accountants also assist clients with a full range of accounting matters including compliance, voluntary disclosure, corporate and individual taxation, family law litigation, estate and trust tax and wealth planning. Consistently ranked as one of the top accounting firms in South Florida, Foodman CPAs & Advisors assists clients locally, nationally and internationally.
South Florida Legal Guide 2012 Financial Edition
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