Let's Rein in Tax Cheats

The government's treatment of UBS banking whistleblower Brad Birkenfeld, who is credited with shattering Swiss bank secrecy and revealing massive tax evasion by Americans, has alarmed government accountability advocates nationwide.

Birkenfeld is the only person in the scandal (which resulted in the Treasury's recouping $780 million) to be sentenced to prison. Not a single one of the 52,000 American tax cheats who had UBS accounts faces jail time. Other countries, meanwhile, are taking the opposite view with financial whistleblowers--European nations realize that the information is so valuable that they are willing to pay for it.

An IRS whistleblower award law went into effect in 2006. It theoretically provides monetary awards to financial whistleblowers. Although an award has never been given, the IRS Whistleblower Office is supposed to pay people who expose tax cheats--possibly awarding whistleblowers up to 30 percent of collected amounts. Whistleblowers are eligible even if they participated in the wrongdoing, as long as they weren't involved in planning or initiating the scheme.

Some people disagree with this approach, feeling that informants shouldn't "profit" from their own wrongdoing. Birkenfeld, after all, pleaded guilty to conspiring to defraud the U.S. government and is currently serving a 40-month sentence at a federal prison in Pennsylvania.

But deals with these types of financial workers--who have inside knowledge and dirty hands--are exactly what's needed when governments strive to reform murky industries. And guess what? Other countries realize this. Germany has signaled that it will purchase such information from Swiss bank whistleblowers.

The circumstances of the German case are far more opaque than Birkenfeld's. Questions remain over the legality of how a Swiss bank informant secured the "smoking gun" documents that Germany wants to buy. The whistleblower then simply offered to sell bank records containing the identity of approximately 1,500 German tax evaders for millions of euros. After some debate, Germany decided to go for it. Why? Because they understand what it takes to root out ingrained corruption.

Switzerland, predictably, has protested the potential purchase on the hollow argument that stealing data is a crime. This is akin to a cigarette company threatening its own scientist who revealed that smoking causes cancer while the company tried to hide it.

If Germany is willing to purchase such information and use it to prosecute tax dodgers, then the United States should be more than willing to obey its own whistleblower award law. Similar U.S. laws encouraging people to report fraud against the government have been wildly successful--recouping billions of dollars in contract overcharges and false invoices. Congress expanded the False Claims Act last year, making it easier for whistleblowers to pursue claims for fraud that costs the government money. The Securities and Exchange Commission wants to implement a similar program.

As for the "unclean hands" issue, remember that the government regularly uses undercover informants who skirt the law to gather evidence in exchange for reduced sentences. Furthermore, a Swiss court rejected the settled agreement between the U.S. and UBS, which would have allowed the bank to avoid civil liability and turn over the names of American tax cheats. The Swiss aren't exactly playing fair.

It remains unclear if the IRS is going to provide Birkenfeld with a percentage of recouped funds. But the laws and incentives were put in place for a reason. Solely jailing the whistleblower, coupled with IRS inaction, sends a chilling message to would-be financial whistleblowers that will continue for decades to the detriment of our economy.