Archive for February, 2011
Friday, February 25th, 2011
The Internal Revenue Service (IRS) estimates that in any given year there is a tax gap of between $300 and $350 billion a year of uncollected taxes. The tax gap is the difference between the amount of taxes the IRS should have collected and the taxes the IRS actually collected. Therefore, based on the IRS’s own estimate over $300 billion of taxes go uncollected every year. These are taxes are that would be paid if every taxpayer filed returns and those returns accurately reflected correct income and deductions.
The Tax Gap consists of three main categories:
Category I Those who do not file returns and taxes are owed on these returns.
Category II Those who do file returns yet fail to report all of their taxable income or overstate their deductions.
Category III Those who file and owe tax but do not pay the tax with the filing of the return.
In Category I, individuals and companies that do not file tax returns could owe as much as $30 billion per the IRS. In Category II, those who file but fail to report accurately their correct income and/or deductions could owe as much as $ 292 billion. Remember, this is on an annual basis.
To address this situation, the IRS has focused its enforcement efforts, specifically audits and criminal investigations, in the following areas:
1. Unreported Income
2. Abusive Schemes
3. High Income – high risk taxpayers
4. High Income non-filers
5. Employment taxes
The IRS’s is focused on detecting unreported income for any business that generates a large amount of cash as part of their total gross income. These are typically small businesses with 5 or fewer owners that have the ability to control the amount of cash that is deposited into the business’ bank accounts. The business entity could be a sole proprietorship, partnership or corporation. The important element is that the business is of a type that falls within a typical cash industry.
These are schemes that generally are devised by promoters who have found the ultimate tax shelter that they promote will result in a taxpayer paying little or no tax to the government. These schemes generally sound too good to be true and are too good to be true. They are not valid tax shelter vehicles. They can range from setting up offshore trusts to hide personal assets to setting up a corporation to pay personal expenses under the guise they are business expenses.
High Income – high risk taxpayers
Many taxpayers who make substantial amount of income – over $ 250,000 a year – are usually involved in partnerships, trusts and corporations that are “pass-through” entities. By layering their financial dealing with these entities it is difficult for the IRS to trace income being earned by a taxpayer or to verify a loss generated by one of these entities and claimed on a taxpayer’s return. Generally, a pass through entities generate a Form K-1 in the name of the taxpayer who is the investor or partner of the entity; however, the IRS has traditionally had problems matching these Form K-1s with the individual’s personal income tax return. In effect, taxpayers who claim large losses from an entity that they have an interest in have not been subject to close scrutiny by the IRS in the past. The IRS is determined to bring these taxpayers under closer scrutiny.
High Income Non-Filers
The IRS estimates that some High Income taxpayers – those who making more than $ 250,000 a year – simply don’t file returns. They are known by the IRS as High Income Non-Filers. The IRS is determined to identify and possibly prosecute these individuals. These taxpayers typically have escaped detection as they are part of the underground cash economy and there is no traditional paper trail.
When a company withholds employment taxes, income and social security taxes from an employee’s pay, these tax withholdings are called trust funds. These trust fund taxes along with the employer obligation are to be sent to the IRS on a regular and timely basis depending on the amount of money withheld.
It is not uncommon for a company to fail to pay these funds to the IRS by their due date. Instead a company facing a cash crunch will use the money on current operating costs, with the intent to submit these funds to the IRS – after the mandatory deadline – when and if financial conditions improve.
The IRS is very aggressive in pursuing any officer, shareholder of a company or any “responsible person” for the payment of these trust fund taxes. As noted above, this remains a top priority of the IRS enforcement program.
The IRS Whistleblower Program
Recent changes in the law requires the IRS to pay a reward on information provided to the IRS that results in collected proceeds (additional taxes, penalties and interest). The reward can range from 15% to 30% of the collected proceeds. The information provided needs to present the details of the noncompliance in a clear and organized manner. It has to be relevant and the person submitting the information should have firsthand knowledge.
As a result of these recent changes, if you happened to provide the IRS specific information that resulted in the collection of one year’s estimated tax gap or $ 300,000,000,000, your reward could range between $45,000,000,000 to $90,000,000,000.
Keeping in mind that the IRS is concentrating on the areas of non-compliance listed above, a potential whistleblower should be aware that the IRS is looking for these schemes arising in abusive and egregious situations. The IRS is not looking for one spouse reporting another, or the next door neighbor who heard someone down the block is not paying their taxes. The IRS prefers substantive, specific violations of the tax code. As noted, the failure to report substantial taxable income or deducting personal expenses under the guise of a corporate business expense are prime areas that should be reported to the IRS under the whistleblower program. Also, promoter schemes that are advertised as legitimate tax savings vehicles that, following some due diligence, are exposed as patently fraudulent would constitute a solid IRS whistleblower claim.
If you are in a position where these types of scenarios are evident and you have information that would result in a tax recovery of more than $2,000,000, then you are a prime candidate to benefit from the revised IRS Whistleblower law.
The Court of Appeals for the Seventh Circuit Issues Public Disclosure Ruling Favorable to Whistleblowers.
Friday, February 25th, 2011
On February 18, 2011, the United States Court of Appeals for the Seventh Circuit issued an important ruling on the False Claims Act’s public disclosure bar in the case U.S. ex rel. Baltazar v. Advanced Healhcare Associates, et al, N.D.Ill. CA No. 07-cv-4107.
In Baltzaar, the plaintiff relator Kelly Baltazar filed a whistleblower lawsuit alleging that her former employer, a chiropractic firm, and its owner (“defendants”), submitted false and fraudulent claims to the Medicare and Medicaid programs. The fraudulent billing practices included the submission of reimbursement claims for services that were not rendered and the upcoding of claims submissions, i.e., the submission of claims containing intentionally inaccurate billing codes for the purpose of increasing reimbursement
After the case was unsealed and the government declined to intervene, the defendants moved to dismiss the lawsuit on the ground that the complaint was barred under the False Claims Act’s public disclosure bar, set forth at 31 U.S.C. §3730(e)(4).
The False Claims Act’s public disclosure bar is a jurisdictional. In July 2010, the Act’s public disclosure provision was amended as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As amended, the public disclosure bar is far more limited, and in turn, the language is much more favorable to whistleblowers. To date, the case law leans towards the finding that the amendment to the public disclosure bar is not retroactive. Accordingly, for all cases filed prior to the 2010 amendment, courts apply a three part test in ruling upon a public disclosure challenge: (1) Have allegations brought by the relator been “publicly disclosed” before the qui tam lawsuit was brought? (2) If so, is the qui tam lawsuit “based upon” the public disclosure and (3) if so, is the relator an “original source” of the information upon which the allegations are based.
In Baltazar, the defendants argued that several general government reports published prior to the filing of the Baltazar lawsuit constituted public disclosures and that the Baltazar suit was based upon those public disclosures. The district court agreed. In dismissing the complaint, the district court found that one of the government reports authored by the Department of Health and Human Services Office of Inspector General (“OIG”) titled Chiropractic Services in the Medicare Program: Payment Vulnerability Analysis identified such pervasive fraud in Medicare billings in the chiropractic industry that the first two prongs of the public disclosure test were met. The district court so concluded despite the fact that the defendants in the Baltazar case were not identified in the OIG report.
The Seventh Circuit reversed the district court, adopting the well reasoned rulings of other court of appeals which concluded that “reports documenting a significant rate of false claims by an industry as whole – without attributing the fraud to particular firms – do not prevent a qui tam suit against any particular member of the industry.” The Seventh Circuit also noted that Baltazar’s allegations are those specifically contemplated by the False Claims Act:
The allegation is not based on public reports; it is based on Baltazar’s knowledge about defendants’ practices. By placing defendants among the perpetrators of the fraud [identified in the 2005 OIG report], Baltazar performed the service for which the False Claims Act extends the prospect of reward (if the allegations are correct).
The Seventh Circuit’s holding in Baltazar is significant to whistleblower cases because the government, and in particular the OIG, routinely issues public reports detailing pervasive fraud within particular industries, such as ambulance fraud, home health care fraud, hospice fraud, among others.
For more information about qui tam law and health care fraud, contact Kenney & McCafferty, PC.
Wednesday, February 23rd, 2011
New York Attorney General Eric Schneiderman recently announced the creation of a taxpayer-protection unit to target tax cheats, pension plan frauds, and corrupt government contractors. Schneiderman is hopeful the unit, with the help of whistleblowers, will recover hundreds of millions of dollars to help close the state’s budget gap.
In 2007, New York passed its False Claims Act [FCA]. The Act allows the state’s Attorney General, local governments and whistleblowers to bring actions against anyone that defrauds the government. If found liable, defendants must pay the government triple damages and civil penalties.
Recently, New York lawmakers enhanced the State’s FCA by adding the power to crack down on large-scale, multi-state corporate tax fraud schemes, expanding whistleblower protections and making it easier to prosecute corrupt subcontractors. The enhancement, titled Fraud Enforcement and Recovery Act (FERA), was authored by Schneiderman himself. The revised FCA allows the State to bring false claims actions against those who commit tax fraud, including offshore cases.
Working with whistleblowers, the newly-formed Taxpayer Protection Unit will target multi-state corporate tax fraud schemes, corrupt contractors who over-bill taxpayers, and firms that rip off pension funds. The unit will be comprised of lawyers and investigators who will conduct civil investigations and criminal prosecutions against those who defraud the government.
“We cannot afford to lose any more money to companies and individuals who seek to defraud the State,” Schneiderman said. “Today’s announcement is a signal to anyone thinking of ripping off New York taxpayers: We will go after you with every tool we have, and you will pay the price for these crimes.”
Wednesday, February 23rd, 2011
Proponents of the IRS Whistleblower Program can encourage the IRS to adopt a change in an award calculation rule that could increase payments to whistleblowers who report corporate tax underpayments. On January 18, 2011, the Service published a revision to IRC Section 301.7623 that would expand the scope of “collected proceeds” to include “amounts collected prior to receipt of the information if the information provided results in a denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.” Those interested in encouraging folks to report corporate tax fraud should write to the Service and ask that the definition be specified to include offsets against NOLs.
So…why the change?
The IRS issued its whistleblower manual in June 2010. The Service adopted a definition of “collected proceeds” that disallowed payments to whistleblowers when the defendant taxpayer satisfied the tax debt by reducing a previous tax credit balance. The new definition expands the term “collected proceeds” to include offsets against credit balances.
Here’s the problem. In the case of large corporations, the reference to “credit balance” is not generally used. Corporations either have a taxable balance, or they are in a Net Operating Loss (NOL) position in which case they don’t pay tax in the current tax period. Instead, the corporations apply a portion or all of the NOL balance to current period taxable income. In addition, corporate credit balances (NOLs) result from many reasons other than tax “overpayment.” For example, a corporation can achieve an NOL balance through the acquisition of another company – and not pay tax for that period.
To boil it down, a whistleblower reports that MegaCorp underpaid $ 100M in taxes for the year 2008. The IRS confirms that MegaCorp underpaid $ 100M in taxes for the year 2008. However, MegaCorp bought MiniCorp and incurred a NOL of $ 100M. MegaCorp says to the IRS, “Okay, just take the $ 100M from the NOL, and we’ll call it even.” The IRS says okay, and the whistleblower gets nothing. That is, nothing under the June 2010 Whistleblower Manual. And, unless NOL offsets are explicitly addressed in the new expanded definition of “collected proceeds,” whistleblowers could be denied rewards for NOL offsets because they are not technically “credit balances.”
Changing the definition of “collected proceeds” to specify inclusion of NOL offsets would incentivize whistleblowers to report tax fraud being committed by large corporations. The IRS is asking for public comment on the rule change. Those who want to comment on the change should send written comments to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
The IRS will consider timely submissions of written comments that include the original letter and eight copies. Submit your comments by April 1, 2011.
Tags: corporate fraud, fraud reward, internal revenue service, IRS, IRS whistleblower, tax claims, tax evasion, Tax Fraud, tax underpayment, tax whistleblower, whistle blowing, whistleblower award, whistleblowing, whistlebower reward
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Friday, February 18th, 2011
As the April 2011 date approaches for finalizing the rules to implement the SEC whistleblower program outlined by the Dodd-Frank Act, major U.S. corporations and whistleblower lawyers alike have been meeting with SEC staff and officials in an effort to address concerns relating to the proposed rules in general and, more specifically, a proposal to mandate to first report alleged wrongdoing to internal compliance officers in order to be eligible for any reward.
Among the corporations lobbying the SEC for mandated internal reporting are pharmaceutical giants Johnson & Johnson and Pfizer, both of which sustained substantial monetary damages as a result of cases brought by whistleblowers under the False Claims Act. In addition, now Google, Best Buy and General Electric Co., among others, have submitted letters to the SEC suggesting that not requiring mandatory internal reporting could undercut companies’ efforts to fix potential violations by leaving corporate officials in the dark.
Such arguments proffered by these corporations would, in reality, serve only to discourage individuals to come forward with evidence of fraud. In fact, if potential whistleblowers were forced to first report misconduct to internal compliance programs, many would remain silent, especially if they work for a company that has a history of failing to protect the identities of those who complain internally. Frankly, precedent suggests that it is far too common that whistleblowers who try to utilize company compliance programs are penalized, rather than rewarded, for doing so, and they are consequently forced to pursue remedies under whistleblower protection provisions. See, e.g., U.S. ex rel. Blair Collins v. Pfizer, Inc., Civ. No. 04-11780 (D. Mass); U.S. ex rel. Eckard v. GlaxoSmithKline, Civ. No. 4-10375 (D. Mass); U.S. ex rel. DeKort v. Integrated Coast Guard Systems, Civ. No. 6-1792 (N.D. Tex).
Given our concern about the potential effect the proposed rules will have on SEC whistleblowers, Kenney & McCafferty, along with two other firms, participated in a meeting with SEC senior counsel and staff on December 10, 2010 to advocate on behalf of whistleblowers and against the imposition of internal reporting. A formal comment letter outlining our position was subsequently submitted to the SEC for consideration.
Wednesday, February 16th, 2011
Reacting to criticism that it has not done enough to assist international tax authorities in combating tax fraud, the Swiss Finance Ministry said on Tuesday that it will provide information on bank account holders if foreign tax authorities provide a bank account number, social security number, or other information. Prior to the announcement, Switzerland had required the bank account details, as well as the name and address of the individual, often halting investigations in their initial stages.
Switzerland made the change because it concluded that it would not pass an ongoing review by a tax forum organized under the umbrella of the Organization for Economic Cooperation and Development (OECD). If it didn’t pass the current peer review, it risked sanctions by the Group of 20 countries.
Tax agencies often have bank account information because they see movements of money, but do not have the account holder’s name. In some cases, the Swiss demanded the name of the so-called beneficial owner, or the individual behind a trust or an offshore entity that were the titular account holders. Now, the Swiss will help if a foreign country provides a reasonable amount of information to track down an account.
Switzerland’s actions come as the international community seeks to crack down on tax evaders to fill depleted public coffers. “This sends a strong signal that Switzerland is no longer in the business of facilitating offshore tax evasion,” said Jeffrey Owens, director of the Centre for Tax Policy and Administration at the OECD.
Wednesday, February 16th, 2011
Contrary to a common misconception, often times, whistleblowers have no financial motive when they seek legal advice or counsel relating to questions involving company wrongdoing or corporate fraud. Rather, both experience and studies demonstrate that whistleblowers are incentivized by more altruistic factors such as religion, morals, and the simple desire to right a wrong.
Kenney McCafferty often sees this type of motive with its own clients. In a recent case, for example, which brought in a $26 million settlement with CareSource, Robin Herzog of West Carrollton, Ohio, one of the two nurse Relators, said she didn’t know until after she quit her job that people who reported fraud could be financially compensated; her motivation for seeking legal counsel, she said, was fear of losing her nursing license and feeling bad for the children who were not getting the services. This is a very common scenario — the whistleblower does not find out until after she seeks legal counsel that a financial reward may be available for filing a claim against the corporation.
Moreover, a recent CNBC study reported that whistleblowers generally share the similar characteristic of being religious, or having a deep faith. Whistleblowers often report that their religion or faith carried them through the process.
Whistleblowers can be generally categorized into several groups: an employee (current or former); a competitor; or an industry expert. In the case of an employee, this is usually someone who has attempted to bring the complaint about the fraud to the attention of management, to no avail. When the fraud is not remedied internally, the whistleblower typically seeks outside counsel, and then realizes that there are financial incentives available as a reward for blowing the whistle.
Tuesday, February 15th, 2011
February 15, Galileo’s birthday, is a fitting time to reflect upon Galileo’s experience with blowing the whistle on the Ptolemaic theory, the long held belief that the Earth was the center of the universe and that the sun and the planets orbited the Earth. Galileo today is called “the father of modern observational astronomy” and “the father of modern physics.” Stephen Hawking stated, “Galileo, perhaps more than any other single person, was responsible for the birth of modern science.” Most people don’t realize that Galileo was tried by the Inquisition for his advocacy of Copernicanism, found guilty of heresy, and spent the rest of his life under house arrest.
As brilliant he was, Galileo did not understand the environment in which he was operating, and he failed to adhere to rules and constraints placed on those attempting to advance scientific theories in the 1600s. His support of heliocentrism offended the Catholic church. The church admonished Galileo, who thought he would be clever and work around the constraints that had been placed on him. After being chastised, Galileo waited years to publish Dialogue Concerning Two Chief World Systems, but he didn’t follow the rules. To publish, he needed papal permission and formal authorization from the Inquisition. He didn’t get them. Had he followed the rules, Galileo probably could have avoided trial and arrest. Instead, Galileo was:
* Found “vehemently suspect” of heresy.
* Sentenced to formal imprisonment, which was later commuted to house arrest.
* Had his publication, Dialogue, banned.
* Forbidden to ever publish again.
After his death, the world eventually lauded his contributions, but Galileo died without acclaim and in isolation.
Whistleblowers should learn from Galileo’s mistakes. No matter how brilliant a whistleblower may be, it is impossible for everyone to know everything. There is no substitute for experienced legal advice when one decides to blow the whistle. Galileo originally had many supporters who could have guided him the intricacies of the papacy’s rules for publication. He didn’t ask, and he thought he had the situation well in hand. He was wrong.
If Galileo could not figure out how to maneuver through the intricacies of successfully blowing the whistle, who can? Fortunately, whistleblowers today have Kenney & McCafferty to call for expert advice. Whistleblowers should educate themselves on the pros and cons before blowing the whistle. If you want to report fraud against the government, save yourself some headaches. Get a free consultation by calling Kenney & McCafferty today.
Tags: abuse, corporate fraud, corruption, ecurities violations, False Claims Act, FCA, fraud, fraud reward, government fraud, health care fraud, pharmaceutical fraud, Qui Tam, retaliate, retaliation, SEC whistleblower, tax claims, tax evasion, Tax Fraud, tax whistleblower, waste, whistle blower, whistle blowing, whistleblower, whistleblowing, wrongful termination
Posted in Abusive Tax Shelters, Corporate Tax Fraud, Employment Tax Fraud, False Claims Act, IRS Whistleblower Office, Money Laundering Tax Fraud, Offshore Accouts Fraud, retaliation, SEC Whistleblower Program, Tax Fraud, Uncategorized | Comments Off
Friday, February 11th, 2011
In May 2009, President Obama signed the Fraud Enforcement and Recovery Act (“FERA”), which strengthened and expanded the scope of conduct subject to the False Claims Act as well as fortified the government’s ability to investigate a prosecute whistleblower claims.
Among FERA’s many refinements to the False Claims Act is the expansion of the government’s Civil Investigative Demand (“CID”) authority. The CID authority was added to the False Claims Act in 1986. In principal, the inclusion of a CID authority in 1986 created a significant weapon in the government’s arsenal to fight fraud and investigate whistleblower cases, as it empowered the government to request documents, submit interrogatories and depose witnesses. However, as a practical matter, prior to FERA the government seldom availed itself of the CID authority because the statute required the CID to be issued and signed by the Attorney general.
The False Claims Act as amended by FERA permits CIDs to be issued by the Attorney General or his or her designee. Another significant change to the CID authority for whistleblowers and their counsel is that FERA has facilitated the sharing of information gathered by the government pursuant to a CID. Now, information gathered pursuant to a CID can be shared with a relator and relator’s counsel if “it is necessary as part of any false claims act investigation.”
Since FERA, Kenney & McCafferty has seen a notable uptick in the government’s use of the CID authority. The new and expanded CID authority has undoubtedly enhanced both the ability of the government to prosecute fraud successfully as well as accentuated the opportunity for relators and their counsel to play an instrumental role in the investigatory process.
Wednesday, February 9th, 2011
The Internal Revenue Service [IRS] recently issued a new regulation aimed at encouraging more whistleblowers to report tax fraud by allowing them to collect rewards on a broader range of claims.
In December 2006, Congress established the IRS Whistleblower Office and updated its procedures for collecting rewards that led to the collection of additional taxes. The new procedures were modeled after the successful federal False Claims Act [FCA].
However, archaic IRS regulations prevented the program from being as successful as the federal FCA. Under its old regulations, the IRS denied reward claims to whistleblowers who provided information that led to either preventing improper refunds or reducing the credit balance of a taxpayer.
In January 2011, the IRS issued a new regulation designed to fix the flaw in its regulations. The new rule provides that rewards may now be paid on “amounts collected prior to the receipt of information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.” In short, whereas the old rule permitted rewards only for information that led to the collection of additional taxes, the new rule allows rewards for reducing refunds or credit balances.
In a statement, Senator Charles Grassley (R-Iowa) proclaimed that the “regulations are good news for whistleblowers.” Senator Grassley, the Senate Finance Committee ranking member and architect of the federal FCA and the IRS whistleblower statute, added that “the Commissioner made the common-sense decision of ensuring that individuals who blow the whistle on improper refund claims will be rewarded, as I intended when I wrote the law.”
Kenney & McCafferty would like to help you assess whether you have a viable whistleblower claim. If you have knowledge of tax fraud, call K&M for a free consultation.