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Wikileaks Receives Tax Evasion Information from Rudolf Elmer

Earlier this week, former Swiss banker Rudolf Elmer gave Wikileaks documents that allegedly detail tax evasion by 2,000 high net worth individuals and corporations.  Mr. Elmer has been a tax evasion whistleblower for years and has previously leaked other bank account information.  Although this event was staged to occur before Mr. Elmer’s trial begins in Zurich for coercion and violating Swiss banking secrecy laws, it is another example of the rise of whistleblowers in identifying offshore bank account holders to tax authorities.

Mr. Elmer was the chief operating officer for the Julius Baer Swiss bank office located on Grand Cayman Island until he was terminated by the bank in December, 2002.  He claims to have taken all back-up data held on the bank’s computer system when he was terminated.  He had been involved in a long dispute with the bank that lead to his termination.  After he left the bank he became a whistleblower against illegal tax evasion.

In 2005 Swiss authorities held Elmer in custody for 30 days and have since charged him with coercion and violating Swiss banking secrecy laws.  His trial begins today.  The initiation of Swiss legal action against him caught the attention of the U.S. Internal Revenue Service.  Shortly after Mr. Elmer began cooperating with the IRS and giving them account holder information.

Other Swiss banks including UBS as well as the Lichtenstein bank LGT have had their account holder information leaked to tax authorities by whistleblowers who were former employees.  The IRS rewards whistleblowers who provided detailed information that leads to the collection of tax, interest and penalties from noncompliant taxpayers.  Depending on the amount of disputed tax at issue and the quality of the information provided, the current award program pays between 15% and 30% of the amount collected.

The large rewards offered by IRS to whistleblowers combined with the ease of copying large amounts of information electronically are providing the IRS with large amounts of information on offshore account holders they previously never had or could obtain.  As a result, the IRS is pursing both criminal and civil penalties against such account holders like never before.

In August, 2010 the IRS changed the name of one of its major divisions from LMSB (Large and Mid-Sized Business) to LB&I (Large Business & International).  In 2009 in response to account information it was negotiating to receive from UBS, the IRS launched an Offshore Voluntary Disclosure Program that offered reduced penalties and no criminal referrals to the Department of Justice for taxpayers who came forward by October 15, 2009.  The IRS is still working with the taxpayers in this program and has indicated it will be pursuing taxpayers who choose not to come forward shortly.

Whistleblowers have opened up an area for tax law enforcement that was long closed off to IRS.  In actuality, many of the people who are identified may have been intentionally involved in tax evasion and this may have been a primary motivation for the creation of their offshore accounts.  However, we have seen other taxpayers identified who maintained accounts for legitimate reasons and who were unfamiliar with U.S. foreign account reporting requirements.  Recently, it seems that IRS assumes almost all people identified as foreign account holders by whistleblowers and those who were accepted into the Offshore Voluntary Disclosure Program were willfully attempting to evade U.S. tax law.

The reduced penalties offered by the Offshore Voluntary Disclosure Program for the most part made a determination of whether a taxpayer willfully violated foreign bank accounting reporting laws irrelevant.  However, for taxpayers the IRS pursues outside of the program, this distinction could mean a large difference in the amount of penalties assessed.