Zerbe says progress was initially impeded by the narrow focus of lawyers in the chief counsel's office. "These guys live and breathe the tax code," says Zerbe. "They were looking for answers to legal questions there. But the answers were in the FCA. The FCA's provision defining who 'planned and initiated' had already been litigated. So one of the things we did was to move their hand down a few shelves from the tax laws to the whistle-blower law."
There were also bureaucratic obstacles that could have derailed Birkenfeld's claim. In contrast to the language of the new IRS law, the Internal Revenue Manual, the guide that case managers relied on for evaluating whistle-blower claims, instructed officials to consider disqualifying anyone who knew or should have known that a reported action would lead to noncompliance with the tax code. That appeared likely to exclude almost any participant. In a letter in June to IRS Commissioner Douglas Shulman, the National Whistleblower Center demanded that the manual be revised, arguing that the guidelines flew in the face of the drafters' intentions as well as settled case law.
Meanwhile, Kohn and Zerbe met with Deputy Commissioner Steven Miller. "I told him, 'We will sue you if you do not follow [the law]. This is what the law says,' " Kohn says.
The time was ripe for such a stance. Political pressure on the IRS was growing. After five years in place, the office had granted only two small awards under the new law. Grassley had repeatedly excoriated the whistle-blower office for the delays, and a critical report had just been issued by the Treasury Department's inspector general. On June 21, citing the whistle-blower office's mishandling of claims, Grassley held up two Treasury nominees.
Critically, the whistle-blower program had gained an internal advocate in the IRS deputy commissioner. Miller had begun pushing internally for the program; and on June 20 he wrote a memo to top IRS executives noting the program's importance and setting a deadline for whistle-blowers to be notified of an award decision.
The internal and external pressures appeared to tip the balance. On August 6 the IRS called Zerbe to inform him that a determination letter was available for pickup: Birkenfeld was offered a take-it-or-leave-it $104 million. Zerbe and Kohn flew to New Hampshire to deliver the letter to Birkenfeld, who had recently been moved to a halfway house.
Kohn and Zerbe say they still don't know how the IRS came up with the number. Under the IRS's rules, if they had asked to see the documents upon which the award was determined, the preliminary award would have been withdrawn. "We didn't open that Pandora's box," says Kohn, "but we had seen that they had a system."
Birkenfeld, who was released in August, is a rich man. His lawyers stand to gain too—though which ones remains unclear. Kohn won't disclose the terms of his retainer, but whistle-blower counsel typically get a third or more of any award. Meanwhile, Birkenfeld's previous firm, Schertler & Onorato, asserts that it is owed 12.5 percent of the award under an October 2007 retainer agreement, arguing that its lawyers advised Birkenfeld in bringing the critical information forward. The judge overseeing the dispute has put $13 million of the award in escrow pending its resolution.
But the record-breaking award wasn't solely about Birkenfeld. "When the lottery goes up above $100 million, that's really to get millions of people to buy tickets," says Kohn. "Likewise, it's the big awards that get your whistle-blowers marching through the door."
This article originally appeared in The American Lawyer.
This article originally appeared in The American Lawyer under the headline “Whistling for Dollars.”
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