* Birkenfeld in home confinement after time in prison
* His information ripped away Swiss bank secrecy
* Expected to encourage other to come forward
By Patrick Temple-West and Lynnley Browning
Sept 11 (Reuters) - The whistleblower in a breakthrough tax fraud case against Swiss bank UBS AG has won a record-setting $104 million reward from the U.S. Internal Revenue Service, a handsome payout that could entice more informants to come forward.
Bradley Birkenfeld, who once confessed to smuggling diamonds in a toothpaste tube, was not present at the news conference on Tuesday where his award was announced by his lawyers.
He was released from prison just last month and is living in New Hampshire under home confinement at a friend's estate where he is gardening and assisting with other jobs involving manual labor on the property, the lawyers said.
Based on netting roughly $44 million after paying federal taxes and legal fees, which tax lawyers not involved in the case called a reasonable estimate, Birkenfeld realized about $46,000 for each day he spent in prison.
In a case that shook Swiss banking to its core, UBS in 2009 entered into a deferred prosecution agreement and paid $780 million in fines, penalties, interest and restitution to settle charges that it helped thousands of wealthy Americans hide billions of dollars in secret Swiss accounts.
U.S. authorities are still investigating other Swiss banks.
Birkenfeld knew the inner workings of UBS and spilled many secrets about his former employer's dealings with U.S. clients. But he was jailed after the government said that he withheld other information and he spent 30 months in prison.
He is scheduled to be freed from home confinement in late November and he is continuing to help government tax authorities with their investigations, said his lawyers, Stephen Kohn and Dean Zerbe, who would not discuss their cut of the award.
The sum paid by the IRS to Birkenfeld is "the largest whistleblower reward issued to a single individual," Kohn said.
In October 2010, a GlaxoSmithKline Plc quality manager won $96 million for exposing manufacturing defects at a plant in Puerto Rico. The drug company paid $750 million to settle the charges.
Bryan Skarlatos, a tax lawyer with law firm Kostelanetz & Fink LLP, said the IRS whistleblower program is likely to become a bigger deal now, "people will come out of the woodwork."
Solomon Wisenberg, a partner at law firm Barnes & Thornburg, said the award would draw attention to the IRS whistleblower program.
"Certainly there are a number of tax scams out there still, and this sends a message: if I know something about that, even if I am involved, I can get something for me out of that," Wisenberg said.
Confirmed by the IRS, the award comes as U.S. and European authorities are investigating a wide range of tax evasion cases involving people with accounts in Switzerland, a long-standing bastion of banking secrecy that is being forced to change.
In 2010, UBS agreed to disclose 4,450 American client names to U.S. authorities. Eleven Swiss banks are known still to be under U.S. scrutiny. The Swiss have been seeking a legal deal to remove the taint from their financial industry.
The crackdown comes at a time of massive budget deficits for the U.S. government and pressure on the IRS to collect more tax.
The information provided by Birkenfeld has brought in $5 billion in taxes from "big banks and wealthy individuals who tried to evade paying their fair share," Zerbe said.
The IRS whistleblower program gathers information from people who want to alert the tax-collecting agency to misconduct. Last year, the program collected only $48 million in tax revenues, down from $464 million in fiscal 2010. New whistleblower cases were down as well.
Those results drew criticism earlier this year from Republican Senator Charles Grassley, who wrote legislation overhauling the program in 2006. But Grassley said on Tuesday the Birkenfeld case showed the whistleblower program can work.
Wisenberg said friends of big business in Congress might argue that it was an outrage for someone involved to get so large an award.
"But if ever there was anyone who deserved a big reward it was this guy," he said. "He's done something no one's ever done before, essentially brought the Swiss banks to their knees."