Bradley Birkenfeld is now a very wealthy man, having just received $104 million from the IRS as a whistleblower award. He provided key information about tax fraud by the Swiss bank UBS AG. The IRS expects to recover billions in back taxes, penalties, and interest from the bank.
The whistleblower award is taxable as ordinary income. In one recent case a person recovered a $27 million whistleblower award for reporting Medicare fraud in the hospital he worked for. He argued that the recovery should be taxed as capital gains because the value of his information increased with time. The court rejected his argument, saying that this information is not a capital asset, so capital gain treatment does not apply. Also, there was no “sale” of information. (Because of the court’s decision, the whistleblower never got to the point of having to argue whether there was any basis in the so-called asset.)
Future whistleblowers take note: If the IRS uses information provided by a whistleblower, it can award up to 30% of the additional tax, penalty, and other amounts it collects. Details about becoming a whistleblower can be found at the IRS Whistleblower Office.
Source: Alderson, CA-9, 8/15/12
A portion of earnings withheld by an employer or put into a retirement plan for distribution to the employee at a later date. If certain legal requirements are met, the deferred amount is not taxable until actually paid, for example, after retirement.