Whistleblower Lawyer Blog

Question about the new IRS Whistleblower Rewards Program: if you go to the Internal Revenue Service’s website, the IRS notifies persons that, if they have evidence of suspected tax violations, they should use a Form 3949 and send it to an Internal Revenue Service Office in Fresno, California. While this blog is not legal advice, we have not seen a basis for individuals seeking a reward under the new IRS Whistleblower Program for blowing the whistle to utilize this form. The reason is because this form is not necessarily connected to the new IRS Whistleblower Program which came into being in December of 2006.

The Information Referral Form 3949A utilized by the IRS is a form that generically describes suspected tax fraud, but does not include within its provisions an application for a reward under the new IRS Whistleblower Program. The same is true for the old Form 211. While the IRS Form 211 arguably still applies to claims less that $2 million, because the new program pertains specifically to those seeking rewards concerning information for the payment of back taxes in excess of $2 million, we have not seen requirements that individuals applying for rewards use the Form 3949-A or send it blindly to the IRS in Fresno. While the information contained within the Form 3949A can be included in an application for a reward under the new Whistleblower program, simply sending in the Form 3949A may not be the equivalent of applying for the reward under the new Whistleblower Program as described in 26 U.S.C. § 7623.

Regulations on the new Whistleblower Program this fall may shed light on these questions. And again, since the facts vary from case to case and a blog cannot provide legal advice, please contact an attorney with experience with the IRS Whistleblower Program for guidance--either our firm or someone else with this experience.

Another False Claims Act Recovery by Government Lawyers Is Part of $42.65 Million Heath Care Fraud Settlement

A qui tam whistleblower case alleging Medicaid fraud by Maximus, Inc. of Reston, Virginia led to a $30.5 million settlement under the False Claims Act this week.

According to the Justice Department, the whistleblower case settlement accompanied a deferred prosecution agreement and corporate integrity agreement by Maximus to end the government's investigation of Maximus’ contract with the District of Columbia’s Child and Family Services Agency (CFSA). Maximus had contracted to assist CFSA in submiting claims to Medicaid for services that the District allegedly provided to children in its foster care program. The services were known as "target case management "(TCM) services, which were intended to help foster children with their medical, social and educational needs.

Maximus’s employees, including a former vice president, allegedly planned to cause CFSA to submit false claims to the Medicaid program for these TCM services for each child in its care, regardless whether the services had in fact been provided to those children.

The recovery totalled $42.65 million because the government had already recovered $12.15 million from CFSA. A review by the Department of Health and Human Services’ (HHS) Centers for Medicaid and Medicare Services had shown that CFSA could not support 35 percent of the "targeted" case management claims that it had submitted.

The American public should be grateful for persons of conscience who decide to become whistleblowers to stop such fraud. Many Americans who need health care could have been served by the Medicaid funds that were wrongfully obtained, and it is unconscionable to let heath care fraud continue to take money from deserving Americans.

When the Tax Relief and Healthcare Act of 2006 was signed into law on December 20, 2006, Congress hoped to encourage businessmen and women to come forward with information concerning tax cheats. The new IRS Whistleblower Program (found at 26 U.S.C. § 7623) purposely focuses on large claims. To qualify for whistleblower rewards, a minimum of $2 million in taxes, penalties and interest must be involved. Given this amount of money, the primary targets of the new legislation are businesses whose employees and/or former employees are willing to report them for tax violations.

Under the old IRS Whistleblower Program, the typical whistleblower tipster was an ex-boyfriend, girlfriend, and/or ex-spouse. In spite of information from these sources, over the years the IRS was unable to collect very much by way of back taxes. Indeed, between the fiscal years 2001 and 2005, nationwide the IRS collected a grand total of $27.3 million based on such tips. With the new law now in place, the profile of the tipster has changed. Those coming forward now typically are former Controllers, Chief Financial Officers, and other high ranking executives.

Here at our firm, our experience has been exactly that which Congress attempted to encourage. We have received calls from former CFOs and controllers of companies, accountants and other high ranking executives who are turning in their present or former employers for alleged tax violations. Thus, the kinds of cases that we see now reflect a new profile of the average whistleblower. Unlike the old days where the typical tipster was the ex-boyfriend, girlfriend or spouse, the new whistleblower informant is typically a businessman or woman with significant and verifiable insider information concerning the under reporting of significant amounts of income. This is exactly what Congress intended when it enacted into law the new Tax Whistleblower provisions.

Under the old “Form 211" Program run by the IRS, the rewards to a whistleblower were small. Under the new program, the rewards are high. The informant is now entitled to as much as 30% of the recovery of back taxes, penalty and interest. Because the minimum amount of money involved in these cases must exceed $2 million, simple math indicates that very large rewards are forthcoming for those individuals who are willing to step forward and report income tax evasion. Moreover, if a reward from the IRS fails to recognize the whistleblower’s contribution to the collection of such back taxes, under the new law, the whistleblower/informant may even appeal the reward amount to the U.S. Tax Court.

In virtually every case that we have filed thus far with the Internal Revenue Service under the new program, we have dealt with executives as clients. We are no longer receiving calls from ex-spouses or girlfriends but rather from high ranking company executives. While the forms of fraud are always different depending on the case, the objective of the schemes reported to us are always the same: to cheat the United States out of lawfully owed tax dollars. As former federal prosecutors, we are proud to represent those willing to come forward to expose those who would attempt to evade their lawful tax obligations. We pay our fair share of taxes just as our whistleblower/clients do, others should do the same - and, if they don’t, they should be penalized. This is exactly what Congress envisioned when the new law was passed.

IRS Seeks Documents from Citigroup and Lehman Brothers Holdings on Derivatives

Now that Congress has created a meaningful IRS Whistleblower Rewards Program, tax whistleblower attorneys took note of yesterday's report that the IRS is looking into whether derivatives trades for hedge funds and other investors are being used to avoid tax withholding obligations, according to the Wall Street Journal yesterday. The IRS reportedly has issued "Information Document Requests" to Citigroup and Lehman Brothers Holdings to find out.

As Reuters reports, the derivatives trades in question are when securities firms buy stocks from offshore hedge-fund clients; the banks then pay their clients any principal return and dividends that these stocks generate. Because the fund technically does not hold the stock, the funds escape paying up to 30 percent in taxes on the dividend, according to sources discussed by Reuters.

Schemes to avoid paying taxes place greater burdens on the millions of honest Americans who satisfy their own tax obligations. We applaud the IRS's efforts to stop unlawful schemes.

The new IRS Whistleblower Rewards Program should make the IRS's efforts all the more effective. The enthusiasm of the three IRS agents we met with this week remind us how important the new IRS Whistleblower program should be!

Alleged Overcharging for Prescription Drugs Leads to $13 Million Settlement in Boston

Pharmaceutical fraud harms the Medicare and Medicaid programs--and the citizens who pay for them. Drug companies' alleged overcharging for prescription drugs has led to fraud investigations and lawsuits by whistleblower attorneys in the past. This week, shortly before trial, pharmaceutical manufacturer Bristol-Myers Squibb Co. reportedly agreed to pay $13 million to resolve allegations that it overcharged for its Taxol cancer medicine and other drugs.

The settlement follows a ruling last month ordering Bristol Myers-Squibb, AstraZeneca Plc and Schering-Plough Corp. to pay damages for allegedly overcharging on drugs by inflating the "average wholesale price" (AWP).

The lawsuit alleged that consumers' insurance co-payments were inflated under Medicare Part B, through use of average wholesale prices for prescription drugs, including Taxol, that were substantially greater than what the drug manufacturer actually charged doctors and hospitals.

The upcoming trial was to have addressed co-payments for Bristol's drugs. According to Bloomberg, the drug Taxol produced $1.6 billion in sales in 2000 alone before Bristol lost the patent protection for this drug.

The lawsuit is In Re: Pharmaceutical Industry Average Wholesale Price Litigation, MDL No. 1456, U.S. District Court, District of Massachusetts.

Cheating the public out of scarce health care dollars should be stopped--and whistleblowers are crucial to that effort.

Most Defendants in KPMG Case Escape Prosecution--At Least For Now

As we have written about previously, abusive and fraudulent tax shelters promoted by accounting firms are high on the list of conduct that the IRS (and IRS tax whistleblowers) seek to stop. Today, the government's prosecution of 13 former KPMG partners and other executives was derailed--at least for now--when the trial judge dismissed charges against them, while allowing the charges to remain against other defendants.

Judge Lewis Kaplan had already ruled that these defendants' constitutional rights had been violated when the government pressured KPMG not to advance the legal fees and expenses of the defendants.

With that prior ruling, the government agreed that the Court should dismiss the charges against these 13 defendants. The government now may attempt to upset the judge's ruling on appeal, or perhaps try to bring other charges against these defendants.

As former prosecutors, we have followed the separate indictment of four Ernst & Young partners for tax fraud conspiracy and other federal criminal charges relating to tax shelters.

We believe that tax fraud, tax evasion, and other violations of IRS laws, rules and regulations can be battled effectively--in criminal cases or civil ones, whether or not whistleblowers are involved-- within our Constitution's protections. It will be interesting to see if the ruling in the case of the former KPMG executives, is appealed and stands.

The case is pending in the United States District Court for the Southern District of New York, UNITED STATES v. JEFFREY STEIN, et al., S1 05 Crim. 0888 (LAK)..

IRS Tax Whistleblowers with Knowledge of Stock Option Backdating Should Take Note

Now that the IRS has an effective IRS Whistleblower Rewards Program for whistleblowers who report tax fraud, tax evasion, or other violations of the Internal Revenue laws, the IRS' recent announcement of focusing on back-dating of stock options should be interesting. In continuing our past discussions of claims under the IRS Whistleblower Rewards Program, we point out the tax fraud that the IRS has decided to target involving back-dated stock options.

The IRS recently announced that backdating of stock options is a "Tier I Compliance Issue and therefore is a mandatory examination item for taxpayers with backdated stock option grant and/or exercise prices."

This unlawful practice can produce adverse tax consequences for the corporation issuing the option. As the IRS announcement explains, corporations are subject to a $1 million annual limit on the deduction for compensation to the CEO and four other highest compensated officers in a publicly traded corporation.

Under Treasury Regulations section 1.162-27(e)(2)(vi), there is a “qualified performance based compensation” exception to the $1 million deduction limit for compensation attributable to option exercises if the option exercise price equals or exceeds the per share value on the grant date and certain other requirements are met. A failure to satisfy this requirement may cause compensation attributable to the option exercise to be subject to the $1 million deduction limit.

Continue reading "IRS Declares That Tax Fraud and Evasion from Back-Dating of Stock Options Is a Top Priority" »

Fraud and False Claims by Government Contractor in Dallas Leads to $2.6 Million Settlement with Justice Department

The statute most used by whistleblowers and whistleblower attorneys has resulted in yet another recovery of money for false claims. The Justice Department has announced that Affiliated Computer Services, Inc. (ACS) has agreed to pay more than $2.6 million to settle a False Claims Act case.

The government alleged that ACS, from 2002-2005, inflated its claims for payment of government funds for recruiting and enrolling individuals in various government programs funded by the U.S. Department of Agriculture (USDA), the U.S. Department of Labor (DOL), and the Administration for Children and Families of the U.S. Department of Health and Human Services (ACF).

According to the government, ACS "self-reported" its violations of the False Claims Act to the government. Based on our experience as federal prosecutors before we began representing whistleblowers, this type of perceived "cooperation" by a defendant sometimes can reduce what it ultimately pays.

A company that discloses its wrongdoing and offers to pay back funds that it wrongfully obtained is to be commended. Of course, most wrongdoers do not--and this is why whistleblowers perform such a valuable service in bringing corruption to light.

AARP Applauds State Law to Combat Medicaid Fraud with Qui Tam Whistleblower Approach

We were pleased to see that Florida has joined New York, Georgia, Oklahoma and more than a dozen other states in creating a State False Claims Act with qui tam whistleblower provisions similar to the federal False Claims Act. As we have discussed at length on this whistleblower lawyer blog, Congress has created financial incentives for states to pass whistleblower laws with qui tam provisions to protect Medicaid funds.

Florida's Governor signed the Florida False Claims Act into law on June 28, 2007.

AARP supported the legislation to "preserve scarce resources for Florida's most vulnerable citizens."

The wave of new False Claims Acts is a responsible and cost-effective approach to protecting taxpayer dollars. We congratulate Florida on its new law.

Durable Medical Equipment Company Received Kickbacks from Pharmacy Owners in Health Care Fraud Case

In a Medicare fraud case of interest to whistleblowers and whistleblower attorneys, a Miami a federal jury convicted a home health care operator of conspiracy to defraud and submit false claims and receive kickbacks, conspiracy to commit health care fraud, and three counts of receiving kickbacks. Gisela Valladares, owner of PRN Home Health Care, Inc., faces up to 30 years in prison.

According to the Justice Department, two pharmacy owners billed Medicare for more than $20 million in connection with the referral of false prescriptions for “compounded” aerosol medications furnished by Valladares and other co-conspirator owners of durable medical equipment (DME) companies. The pharmacy owners paid kickbacks of approximately half of the money paid by Medicare.

The pharmacy owners testified that Valladares played a key role--acquiring the patients’ information. The medication charged to Medicare was unlawfully manufactured in shell pharmacies that contained almost no actual pharmaceutical products. One pharmacy owner testified that his business had no foot traffic, no patients, no sundries and no real medicine, but was simply a "mill" used to defraud Medicare.

Sham billing by health care providers bleeds essential dollars from our Medicare system. Whistleblowers who bring qui tam cases under the False Claims Act can help fight this fraud against all of us.