51:3 A Race to the IRS: Are Snitches and Criminals the New Business Model?

Abstract

In the world of tax whistleblowers, crime pays. Bradley Birkenfeld, a former UBS banker, served thirty months in federal prison for conspiring to evade income taxes. Birkenfeld provided information to the IRS about UBS’s tax evasion schemes, and in return, the IRS awarded Birkenfeld $104 million. The IRS whistleblower program provides a mandatory bounty award of up to 30% of the collected proceeds if: (1) the whistleblower provides specific information on a tax non-compliance matter in excess of $2 million; (2) the information substantially contributes to a decision to take administrative or judicial action; and (3) the IRS collects proceeds from administrative or judicial action or from any settlement in response to the action. Under the IRS whistleblower program, only a whistleblower who has been convicted for the role of planning and initiating the tax fraud is barred from receiving a bounty award.

Although the IRS whistleblower program was amended to help close the “tax gap,” there are deficiencies in the amended program. This Comment analyzes the deficiencies and the practical and ethical implications of excessive mandatory awards. In addition to ethical issues with awarding snitches, the potential for large awards will cause a rush of whistleblower claims, thereby burdening the IRS with greater administrative costs. A recent study illustrates that there are stronger incentives than a financial award, such as a duty to report internally and retaliation protection, that motivate whistleblowers to report illegal activity. Therefore, legislators should consider factors other than financial awards in creating the optimal bounty program. In order to improve the whistleblower program, the IRS should consider: (1) requiring tax whistleblowers to report internally before filing a claim with the IRS; (2) allowing a qui tam action; (3) including a nominal cap and reducing or barring awards for criminals; and (4) adding statutory retaliation protections.