Whistleblower deal curbs tax evasion
The United States Internal Revenue Service (IRS) recently made international tax headlines by awarding US$104 million (NZ$125m) to Bradley Birkenfeld for his role in exposing a widespread tax evasion scheme by his former employer, Swiss bank UBS.
Birkenfeld assisted the IRS to recover over US$5 billion in taxes with US$780m in fines, interest and penalties being imposed.
The IRS has a long history of awarding bounty payments for tax informants using the authority it was given in 1867. The payment to Birkenfeld has made headlines due to its size and because it is amongst the first of such payments to be made since changes were made to the IRS whistleblower programme in 2006.
Previously awards were made at the discretion of the IRS and were limited to 15 per cent of the recovered proceeds. The maximum payment was capped at US$10m.
The 2006 changes codified the practice so that whistleblower payments are no longer discretionary but are now based on a rate of 15 to 30 per cent of the tax recovered. The payment is reduced where the informant has been involved in the planning and initiation of the evasion.
The amendments established the Office of the Whistleblower to administer the regime and informants are now required to fill out a prescribed IRS form to claim their reward.
The number of cases reported to the office steadily increased after the introduction of the new rules in 2006 before plateauing in 2011. The recent slowing of reported cases of dodgy tax practices and drop in takings may indicate that the whistleblower programme has been successful in deterring US taxpayers from cheating on their taxes.
On the other hand reports of Birkenfeld's windfall may encourage more witnesses of dodgy tax practices to come forward.
The practice of rewards for leads is both an effective deterrent to would be tax cheats and an incentive to prospective prattlers.
In New Zealand, Inland Revenue does not have a policy of rewarding whistleblowers. It does however operate a hotline for people who wish to report tax avoidance and fraud.
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte.