In what reportedly is the largest federal payout in U.S. history under any legal framework, the Internal Revenue Service has confirmed that it has paid a $104 million whistleblower award to a former investment bank employee.  The award came four years after the employee cooperated with IRS investigators who were investigating tax evasion by the employee and his investment bank employer over a period spanning 2000 to 2007 through Swiss bank accounts.  The now-former employee spent three years in prison after he pleaded guilty in 2008 to helping one of his clients evade taxes.  He remains under house arrest for another several months.

The employee’s 2008 disclosures led to a deferred prosecution agreement between his employer and the IRS.  The employer agreed to pay $780 million in back taxes, penalties and interest to the IRS and turn over information concerning a total of 4,700 Swiss accounts valued at several billion dollars.  One of the employee’s disclosures involved an admission that he purchased diamonds for a client and hid them in a toothpaste tube to evade customs inspection. 

The former employee’s lawyers, who initially announced the award, stated, “[T]he IRS today sent 104 million messages to whistleblowers around the world – and that there is now a safe and secure way to report tax fraud ….”  The employee’s lawyers are purportedly seeking a presidential pardon for his conviction. 

The IRS’s award to the former employee comes through its Whistleblower Office, which the agency established through the Tax Relief and Health Care Act of 2006.  Internal Revenue Code Section 7623(b) provides for awards between 15 percent and 30 percent of the total proceeds that the IRS recovers if it acts on information from tips received by individuals.  To qualify for an award, the statute provided that the IRS must recover more than $2 million in back taxes, penalties and interest and, if the taxpayer is an individual, he or she must have at least $200,000 in gross income. 

Although it appears inconsistent that a whistleblower could both serve prison time and earn a reward, U.S. Senator Charles Grassley, a chief sponsor of the IRS’s whistleblower program, has previously criticized the program for not recovering enough revenue.  Last year, the program collected only $48 million, in contrast to the $464 million collected in 2010.  The first IRS whistleblower award occurred in 2011.  According to Senator Grassley, “If the IRS is serious about encouraging future whistleblowers, it needs to continue to honor the spirit and intent of the law and issue awards in a timely manner.”  In its September 11, 2012, announcement confirming the award, the IRS stated that it “believes that the whistleblower statute provides a valuable tool to combat tax non-compliance, and this award reflects our commitment to the law.”

The IRS’s award comes on the heels of other recent awards to whistleblowers under federal statutes such as the False Claims Act and the Dodd-Frank Act.  (See our article, S.E.C. Makes First Bounty Award to Dodd-Frank Act Whistleblower.) Organizations with effective internal reporting and investigative mechanisms, and credibility with employees about their willingness to protect informants from employment retaliation, may be in a better position to encourage employees to bring complaints to their attention rather than directing their reports to a federal agency. Nevertheless, with its substantial award provisions, federally whistleblower programs, such as the IRS program and the Securities and Exchange Commission’s Dodd-Frank Act so-called “bounty” program, will be a challenge to all organizations.