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The Whistleblower with a Prison Sentence

“Pardon Me” The first show of their 2009 Monuments & Melodies Tour in Chula Vista, CA.

In 2007, the Internal Revenue Service increased the size of the awards it gives to people who provide tips that lead to the collection of unpaid personal and corporate taxes. The bigger awards – between 15 and 30 percent of the total collected – opened the floodgates for whistle-blowers. What had been just a trickle of calls annually to the IRS grew to doz ens per month.

Bradley Birkenfeld knew he had the mother of all tips. A Swiss banker, Birkenfeld thought he could lead investigators inside the secretive world of Swiss banking and expose thousands of Americans who had hidden up to billion overseas, all while earning himself tens of millions for spilling what he knew.

But Birkenfeld, 45, was part of the international fraud himself, having helped clients dodge their own taxes. So his attorneys offered the U.S. Department of Justice a deal: grant Birkenfeld immunity from prosecution in return for telling all he knew. Negotiations with the DOJ languished, but Birkenfeld cooperated with the IRS anyway, providing names, documents, e-mails, cell phone numbers and bank account numbers.

Thanks to Birkenfeld, the Swiss government pressured the banks into divulging their secrets. The names of nearly 5,000 U.S. clients were revealed, and Switzerland’s largest bank, USB, admitted that it had helped American clients hide their money. USB avoided prosecution by agreeing to pay the U.S. government 0 million.

But Birkenfeld didn’t receive the reward he expected. Instead, he was arrested and later pleaded guilty to helping a client evade taxes. Sentenced to 40 months in prison, Birkenfeld’s attorneys cried foul and are seeking a pardon from President Barack Obama as well as Birkenfeld’s payout from the government’s take.

The Birkenfeld saga created a dilemma for the whistle-blower program. Should people who participated in the very fraud they eventually blow the whistle on be allowed to profit from their prior misdeeds? And if not, would Birkenfeld’s arrest and imprisonment discourage others from coming forward in similar situations?

While Birkenfeld’s arrest has had a chilling effect on the whistle-blower program, government agencies have been clear in their response. The DOJ says that it is not part of the program, while the IRS says the program was designed to reward insiders with knowledge of crimes, not those who participate in them.

Bradley Birkenfeld’s cooperation regarding the international fraud could eventually net the government billions, but he most likely won’t see a dime.

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