With Schertler's help, Birkenfeld's next stops were the Senate and the Securities and Exchange Commission. In October he testified before the Homeland Security and Government Affairs Committee on Swiss bank practices.
But in May 2008, Birkenfeld was arrested at Boston's Logan International Airport on a charge that he had helped Olenicoff evade reporting $200 million in assets. According to prosecutors, Birkenfeld had not been up-front about his own involvement in helping Olenicoff hide money. A month later he pled guilty to a single fraud conspiracy count. He was sentenced in August.
By September, Birkenfeld had fired his lawyers at Schertler & Onorato and was at his brother's home in Boston awaiting incarceration when Kohn flew up for an initial meeting. Kohn wasn't overly optimistic about Birkenfeld's chances. Despite the enormous recoveries the IRS had made from his information earlier that year, the IRS hadn't given out any awards under the program. And no convicted felon had collected an award under any other whistle-blower statute.
Kohn wasn't a tax expert, so he contacted Dean Zerbe, a tax lawyer whom he knew from Senator Charles Grassley's office. Grassley, the former Finance Committee chair and a longtime whistle-blower champion, had been the chief author of the IRS's 2006 whistle-blower law, as well as a driving force in subsequent amendments to the False Claims Act. And Zerbe, who had been Grassley's senior counsel, had helped draft the law.
The IRS's existing whistle-blower program had badly needed fixing. Tips were literally being put in a shoebox, recalls Zerbe, who left for private practice in 2008. "They were getting the kind of whistle-blowers we didn't want to get—the 'Oh, my aunt didn't pay her taxes' tips. Not the big, serious stuff."
Grassley's IRS law draws heavily on the False Claims Act. But unlike FCA whistle-blowers, IRS informants can't file a case on their own; it is up to the IRS to take action on tips. And the award—15–30 percent of any tax recovery—is determined by the IRS only after the related tax proceeds are collected. The award is nonnegotiable.
Kohn and Zerbe filed a new IRS whistle-blower submission that fall. According to Kohn, Birkenfeld's earlier claim had not been docketed. (The IRS declined to comment on any issues pertaining to the agency raised in this story.)
At the time, the office was experiencing its own difficulties. There was resistance to the new law internally, especially in the office of the chief counsel. (In 2010 former chief counsel Donald Korb, after his move to Sullivan & Cromwell, told the publication Tax Notes that the whistle-blower provision was a "real disaster" for the tax system. "The IRS didn't ask for these rules," he said. "They were forced on it by the Congress.")
Over the next 18 months, Zerbe, Kohn, and Kohn's colleague David Colapinto submitted reams of evidence to show that Birkenfeld had been responsible for all the money that the IRS had collected from UBS and thousands of U.S. taxpayers under its amnesty program. In parallel, they offered the IRS team the legal foundations the office needed to make a case for Birkenfeld's eligibility. Zerbe "was able to explain to the IRS the lawmakers' intentions in drafting the law," Kohn says.
The facts—Birkenfeld's own long, voluntary, and well-documented efforts to expose Swiss banking practices in spite of his criminal vulnerability—convinced the whistle-blower office's director, Steven Whitlock, and his staff that, far from being a bounty hunter, Birkenfeld had the potential to be their star whistle-blower, say Kohn and Zerbe. However, they add, Whitlock also knew that his recommendation would need to be iron-clad. The culture of the IRS is that "they're going to create a policy, and apply the policy to everyone," says Kohn. "It all had to be weighed and adjudicated within the agency."
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