REWARDS AND AWARDS FOR INFORMATION RELATING TO VILATIONS OF INTERNAL REVENUE LAWS

Heather C. Maloy Deputy Commissioner for Enforcement Internal Revenue Service Dear Mrs. Maloy: My name is Michael Walsh, and I write today in response to the Service’s proposed rule on rewards and awards for informing. Federal Register Docket No. IRS-2011-0003. The amount of levity which your office should generate from this proposal is colossal. Before your office undertakes to write regulations of a technical nature, perhaps it should firmly fix on a policy regarding whistleblowers. One single unified public policy on whether whistleblowers are to be welcomed or punished would be far more helpful to your office than the proposed rule. Consider the case of Mr. Bradley C. Birkenfeld, one of the most prominent whistleblowers in the financial industry in recent years. Certainly in an era of economic depression, bank bailouts, and record tax evasion the public appreciated the tale of Mr. Birkenfeld, a former UBS bank executive who ratted out his colleagues and was jailed for his trouble. See “Why Is the UBS Whistle-Blower Headed to Prison?” Time Magazine- 10/2009 http://www.time.com/time/business/article/0,8599,1928897,00.html Mr. Birkenfeld is certainly no angel. Indeed, there was a large amount of personal greed in his decision to become a stool pigeon. It was reported in another news outlet that he personally reported the fraud and tax evasion which UBS was enabling not because of virtuous motives, but because he wanted a portion of the reward. Exactly the type of reward which the technical regulations here address. Mr. Birkenfeld could have reported the fraud anonymously, but he would have lost out on any possible whistleblower reward, and also have lost the potential benefit of immunity from prosecution. As it happens he lost out on both anyway-despite explicit government assurances to the contrary. Mr. Birkenfeld should be heralded by the IRS and the Justice Department where his information led to UBS to pay a $780 Million fine, and to thousands of potential cases. The only benefit he got was that the Justice Department recommended a 10-month deduction in his sentence for cooperation, which the federal judge ignored anyway. Mr. Birkenfeld brought the US Government a large portion of the Swiss Banking Industry on a silver platter. What is a regular middle-class whistleblower to expect, if someone who can actually deliver the goods (and a lot of them) is imprisoned? See “Rewards and Dangers of Federal Whistleblowing” By Robert Langley- http://usgovinfo.about.com/b/2010/11/30/rewards-and- dangers-of-federal-whistleblowing.htm From the case law we know that the regular police are allowed to use deception, deceit, and dishonesty to induce a suspect to confess or incriminate himself. However the IRS is in a special position, because of its different objective-to collect inland revenue. The IRS is obviously, and appropriately, not interest in jailing peopling unnecessarily-one of the wealthy individuals Mr. Birkenfeld reported on settled all claims with the IRS for a $53 Million fine. Whistleblower rewards, and protections, are designed to encourage individuals to come forward about wrong-doing. The IRS must remember that the people who will have information on illegalities tend to be underground players-people on the inside of illegal schemes-and thus whistleblowers don’t generally come forward with clean hands. In fact it might be argued that the money reward is required to induce such unsavory characters to come forward. If the Justice Department, independently or in coordination with the Service, is waiting with handcuffs for whoever comes forward, then the money reward isn’t worth it. Prosecutors and police on the state level can “flip” people and cultivate snitches because they are vested with the police power and can actually deliver on promises to protect. Mr. Birkenfeld stands as a public relations disaster for the Whistleblower Office of the IRS. Moreover the fact that the Service cannot, or did not, protect him from prosecution emasculates the Service’s ability to make similar promises in the future. Or least the possibility that such promises will be taken seriously. Rather than worrying about such technical regulations, the Service should generate real public confidence in their promises. It was true, at one point in the past, that the Service NEVER cooperated with the state or federal police in giving information, or tax returns. This meant that if someone profited from illegal gambling, they could report the income and pay taxes on it without fear of prosecution. Greater cooperation and information sharing works well for prosecutors, police, the Bureau, and other counter-terrorism agencies-including the Treasury’s office of foreign asset control. However, in the context of the plain old IRS and the taxpayers such information undermines the Service’s objective to collect tax revenue. Many states, such as Massachusetts, make tax returns privileged except in obvious cases like tax fraud. The federal government does not. Indeed, television shows about police agencies (such as Castle, NCIS, or Without a Trace) regularly show police agencies getting access to financial and tax information on a whim, without even a search warrant. If the enforcement arm of the Service is truly serious about collecting taxes, and encouraging whistleblowing, it should develop a very public over-arching scheme to promote in the detection of illegal tax evasion. A return to the 1950’s policy of not forwarding reports of illegal income might serve the Service very well. Finally, I suggest that the Service hold a public hearing on these regulations. I, for one, would be particularly interest in hearing Mr. Birkenfeld testify at such a hearing. Sincerely, Mike Walsh