The UBS Birkenfeld Whistleblower Case

The UBS Birkenfeld Whistleblower Case

by Sheryl Phipps  *

Birkenfeld Case

On September 11, 2012, the Internal Revenue Service (IRS) paid former Union Bank of Switzerland (UBS) banker Bradley Birkenfeld $104 million in awards for assisting them in collecting more than $5 billion in unpaid taxes. Birkenfeld received the funds pursuant to whistleblower statute IRC Section 7623(b).

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Brad Birkenfeld... was sent by UBS to lure U.S. investors from various wealth havens to invest their money into UBS bank accounts. While networking in haven Newport Beach, Birkenfeld met Igor Olenicoff, a billionaire real estate developer. [Olenicoff was a member of Forbes 400 list of America's most wealthy.] Olenicoff became one of his clients and he subsequently helped Olenicoff move $200 million to UBS, thus "saving" Olenicoff $7.3 million in U.S. taxes.

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Birkenfeld resigned... from UBS in October 2005, when "he learned that UBS' secret dealings with U.S. customers violated an agreement the bank had reached with the IRS." Perhaps the additional fact that UBS refused to pay him a bonus for extra work he had done assisted Birkenfeld in making the ultimate decision to report UBS' tax practices of hiding billions of dollars from the IRS. It is estimated that UBS had $20 billion in deposits from U.S. citizens aka UBS' clients! [Stuart Pfeifer, Banking, Los Angeles Times, Oct 26, 2009, at Business (online), available at http://articles.latimes.com/2009/oct/26/business/fi-swiss26...

... Birkenfeld received the award for "providing comprehensive information that was 'exceptional in both breadth and depth'," and the "basis for pursuing 'unprecedented actions against UBS AG, with collateral impact on other enforcement activities'." ["IRS Pays Birkenfeld $104 Million Whistleblower Award,"  taxanalysts® Tax Notes Today, Sept. 12, 2012.]...

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Planning and Initiating Exclusion of IRC Section 7623(b)

Although the government is happy with the effectiveness of the whistleblower program in busting UBS, and surely Birkenfeld (and Birkenfeld's attorneys) are happy with the result of the final agreement, the question remains how Birkenfeld, who spent two years in prison for his part in the UBS scheme, was able to overcome the provision in IRC Section 7623(b)(3) that clearly disallows an award by someone who "planned and initiated the actions that led to the underpayment of tax." ...

Apparently, the IRS conveniently considered Birkenfeld a "low-level" employee at UBS and that higher managers were the ones that "planned and initiated" the scheme...

Questions remain as to whether this action will benefit or burden accounting firms with their employees and clients and whether it will encourage or hinder openness and compliance within investment and banking firms...

* Sheryl Phipps received her law degree and LL.M. in Taxation from Golden Gate University School of Law in San Francisco. She is a tax practitioner in Oakland, California

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Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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RELATED LINKS: For further background on the Whistleblower Protection Program and the Birkenfeld case, see:

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