I wanted to pass along that Michelle M. Kwon, Assistant Professor of Law at Texas Tech Law School, has written a law review article about this subject. It discusses recommendations for allowing information to be shared more with whistleblowers by "relaxing" the restrictions of section 6103, "Confidentiality and disclosure of returns and return information."
As Professor Kwon writes:
There is a tension between protecting taxpayer privacy and effectively administering the enhanced IRS whistleblower program. Section 6103 generally would prohibit the IRS from disclosing to the whistleblower the status of the whistleblower’s claim, including whether the taxpayer is, has been, or will be under audit as a result of the whistleblower’s information, why a claim is rejected or denied, or the basis of any eventual award. Furthermore, when Congress enhanced the whistleblower law in 2006, it contemplated that the IRS may seek additional assistance from the whistleblower, presumably to help build a case against the delinquent taxpayer. The ability of the whistleblower to assist the IRS may be hampered, however, to the extent that Section 6103 prohibits the IRS from sharing confidential tax information with the whistleblower. Finally, the new law gives whistleblowers the right to appeal IRS award determinations to the Tax Court. But there are questions about how meaningful that appeal right can be given the restrictions imposed by Section 6103.
Issues concerning how section 6103 will impact IRS whistleblowers are among those to be addressed at the 2010 IRS Whistleblower Boot Camp, which will build on the successes of last year's inaugural IRS Whistleblower Boot Camp.
]]>Planning for the 2010 IRS Whistleblower Boot Camp on April 27, 2010 in Washington is underway, and it should be at least as successful and informative as last year's.
Based on our experience in representing whistleblowers, the new IRS Whistleblower Program is off to a great start since Congress authorized the creation of the IRS Whistleblower Office in December 2006. As we have written about continuously in following the progress of the new program, the Whistleblower Office staff has been working diligently not only to set up procedures for handling claims, but also in processing the hundreds of submissions it has received.
Once the agenda is set for the 2010 IRS Whistleblower Boot Camp, we will say more about the details. At a time when deficits are exploding, the need to catch tax cheats is greater than ever.
]]>DOJ cited the threat to patients of "imminent and serious threat of harm to their lives, health and safety."
The seven hospitals include East Central Regional Hospital, Georgia Regional Hospital at Savannah, Georgia Regional Hospital at Atlanta, Southwestern State Hospital, Central State Hospital, West Central Georgia Regional Hospital, and Northwest Georgia Regional Hospital.
The announcement is repinted below:
IRS Whistleblower Office Director Stephen Whitlock has just announced that the IRS Whistleblower Office is preparing to make award determinations on whistleblower claims submitted under the "new" rewards program.
The IRS Whistleblower Office (and no doubt the IRS Chief Counsel's Office) have been working on "guidance" for determining the amount of awards within the range authorized by law.
We have written extensively on many of the issues that have arisen and will arise in handling IRS Whistleblower claims. Recent multi-million dollar payments apparently relate to claims under the "old" program. Those payments are encouraging signs of the success of the new program, which authorizes a higher range of awards of 15-30% of the recovery by the IRS.
Tax Analysts reported on Director Whitlock's comments at the recent ABA meeting.
We are encouraged that the steady progress of the IRS Whistleblower Office continues, as this promises to be an extremely successful program to discourage tax cheats. Only meaningful rewards to whistleblowers will accomplish that goal.
]]> Ever since the beginning of the new IRS Whistleblower Program, our whistleblower lawyers at Finch McCranie, LLP have represented whistleblowers in the new program. We have represented persons with IRS Whistleblower claims in the hedge fund industry, other financial services industries, real estate, manufacturing, and many other businesses, as tax fraud, tax evasion, and other tax noncompliance are not limited to one area.Since the late 1980s, our attorneys also have worked with the nation's other major whistleblower law, the False Claims Act. We have represented whistleblowers who reported fraud and false claims in many government programs, including contractor fraud in Iraq reconstruction, other military contracts, NASA programs, Hurricane Katrina and other disaster relief, and of course Medicare/Medicaid fraud.
For a free consultation about a possible whistleblower claim, please call us at 800-228-9159, or email us HERE.
The Tax Court this week addressed that question. It held that awards to whistleblowers or "relators" are part of "gross income" and thus are taxable, but that the whistleblower nonetheless may deduct the attorney's fees paid as a miscellaneous itemized deduction.
Thus, no income taxes were owed on that portion of the whistleblower's award that was paid as attorney's fees to the whistleblower's attorney.
This result not only makes sense, but also is consistent with precedent. Since the whistleblower would have had no recovery but for the attorney's efforts, it would be unfair to conclude otherwise.
The case is ALBERT D. CAMPBELL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, decided January 21, 2010. It is reprinted below:
]]> ALBERT D. CAMPBELL,UNITED STATES TAX COURT
Filed January 21, 2010
P included on his return as "Other income" $5.25 million of an $8.75 million "qui tam" payment P was awarded pursuant to a Federal False Claims Act action. He did not report the remaining $3.5 million, which was subtracted from the recovery by P's attorneys as attorney's fees. P then omitted the $5.25 million net proceeds of the qui tam payment from the taxable income of $793 he reported on his return. P disclosed the $3.5 million attorney's fee payment on Form 8275, Disclosure Statement, attached to his return. P contends that none of the $8.75 million qui tam payment is includable in his gross income because it was a nontaxable share of the U.S. Government's recovery. R contends that the entire qui tam payment, including the portion paid to P's attorneys as their fee, is includable in P's gross income.
Held, the entire $8.75 million qui tam payment awarded to P is includable in P's gross income. Roco v. Commissioner, 121 T.C. 160 (2003), followed.
Held, further, P substantiated the payment of the attorney's fees in issue.
Held, further, P is entitled to deduct the attorney's fees as a miscellaneous itemized deduction.
Held, further, P is subject to an accuracy-related penalty pursuant to sec. 6662, I.R.C., because P's exclusion of the $8.75 million qui tam payment from his gross income resulted in a substantial understatement of income tax.
Held, further, so much of P's understatement as relates to his failure to include in gross income the $3.5 million attorney's fee payment is reduced for purposes of the accuracy-related penalty, pursuant to sec. 6662(d)(2)(B), I.R.C., since P adequately disclosed his position on Form 8275 and had a reasonable basis for that position.
Held, further, P is not entitled to further reduction of the accuracy-related penalty, as relates to the $5.25 million net proceeds of the qui tam payment, since, pursuant to sec. 6662(d)(2)(B), I.R.C., P did not have substantial authority or make an adequate disclosure or have a reasonable basis for his position, and pursuant to sec. 6664(c), I.R.C., P did not have reasonable cause for his position or act in good faith.
Bradley J. Davis and Loan B. Kennedy, for petitioner.
Miriam C. Dillard, for respondent.
WELLS, Judge: Respondent determined a deficiency in petitioner's Federal income tax for taxable year 2003 of $3,044,000, an accuracy-related penalty pursuant to section 6662(a) of $608,800, and a delinquency addition to tax pursuant to section 6651(a)(1) of $151,955.50.1 We must decide the following issues: (1) Whether a "qui tam" settlement payment is taxable income to petitioner; (2) whether petitioner has substantiated that he paid contingent attorney's fees from the qui tam settlement; (3) if so, whether the attorney's fee payment is includable in petitioner's gross income and deductible by him as a miscellaneous itemized deduction; and (4) whether petitioner is liable for a section 6662(a) accuracy-related penalty.2
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated. The stipulations of fact are incorporated in this Opinion by reference and are so found.
At the time he filed the petition, petitioner resided in Florida.
Petitioner earned a bachelor's degree in business administration and accounting. From 1981 through July 1995, petitioner worked for Lockheed Martin. He was employed as a financial analyst until 1989, when he was promoted to chief of cost control for a $3.5 billion contract Lockheed Martin held with the U.S. Government. Petitioner remained in that position until July 1995.
During May and December 1995, petitioner filed two lawsuits against Lockheed Martin under the False Claims Act (FCA), 31 U.S.C. secs. 3729-3733 (2006), alleging that Lockheed Martin had defrauded the United States. The United States intervened in the first suit, but not the second.
During September 2003, the United States, Lockheed Martin, and petitioner settled both suits. Lockheed Martin agreed to pay the United States $37.9 million. As part of the settlement, petitioner received a qui tam payment3 of $8.75 million ($8.75 million qui tam payment) for his role as "relator". The U.S. Department of Justice filed and sent petitioner a Form 1099-MISC, Miscellaneous Income, reporting the $8.75 million qui tam payment in 2003. The $8.75 million qui tam payment was wired to petitioner's attorneys. Petitioner's attorneys subtracted from the $8.75 million qui tam payment a fee of 40 percent of the proceeds, or $3.5 million ($3.5 million attorney's fee payment) and then sent petitioner a check for the remaining $5.25 million ($5.25 million net proceeds of the qui tam payment).
On October 26, 2004, petitioner filed a Form 1040, U.S. Individual Income Tax Return, for his 2003 taxable year (return). Petitioner prepared the return without consulting a tax professional. Petitioner included the $5.25 million net proceeds of the qui tam payment on line 21 of his return as other income. However, the return omitted the $5.25 million net proceeds of the qui tam payment from the calculation of taxable income on line 40. The return showed a resulting taxable income of $793. Petitioner attached to the return Form 8275, Disclosure Statement, in which he argued that the $3.5 million attorney's fee payment had been held not to be taxable income by the U.S. Court of Appeals for the Eleventh Circuit. On the Form 8275, petitioner failed to include a citation of an opinion of the Eleventh Circuit, or of any Court of Appeals, standing for that proposition. Additionally, petitioner failed to identify on the Form 8275 any authority for excluding from his taxable income the $5.25 million net proceeds of the qui tam payment. At the time petitioner submitted the return, he was aware of the case of Roco v. Commissioner, 121 T.C. 160 (2003), which holds that qui tam payments are includable in gross income of the recipient.
On October 24, 2004, petitioner sent respondent a letter detailing why he believed the $8.75 million qui tam payment was not taxable. Included as attachments to his letter were a copy of his return, a copy of the settlement agreement, a copy of Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000), and a two-page letter from Andrew Grosso, one of petitioner's attorneys in the FCA case, stating that, in his opinion, the $8.75 million qui tam payment was from Lockheed Martin and not the United States.
On December 6, 2004, respondent determined that a math error was made on petitioner's return and sent him a notice of assessment of a tax deficiency of $1,846,108.63.
On April 4, 2005, respondent sent petitioner a letter stating that the $8.75 million qui tam payment was taxable income and that any further consideration would require the filing of a Form 1040X, Amended U.S. Individual Income Tax Return.
On April 27, 2005, petitioner submitted a Form 1040X (amended return) that he prepared. The amended return excluded from gross income the entire $8.75 million qui tam payment, resulting in taxable income of $793.
On June 14, 2007, respondent sent petitioner a notice of deficiency.4 Respondent included the entire $8.75 million qui tam payment as gross income and determined an income tax deficiency of $3,044,000, an accuracy-related penalty pursuant to section 6662 of $608,800, and a delinquency addition to tax pursuant to section 6651(a)(1) of $151,955.50.
OPINION
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a).5 Pursuant to section 7491(c), the Commissioner generally bears the burden of production for any penalty, but the taxpayer bears the ultimate burden of proof. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
The FCA, enacted during the U.S. Civil War, allows a private citizen (the relator) to bring a qui tam action on behalf of the United States. 31 U.S.C. secs. 3729-3733. The FCA imposes civil liability upon any person who, among other things, "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" to the United States. 31 U.S.C. sec. 3729(a). The relator may bring the claim on his own; however, the Government has the right to intervene in the case. 31 U.S.C. sec. 3730. The relator receives a share of the proceeds ranging from 15 to 25 percent if the Government intervenes, and 25 to 30 percent if the Government declines to intervene. 31 U.S.C. sec. 3730(d)(1) and (2). The relator may also be awarded attorney's fees. Id.
We must first decide whether the qui tam payment is includable in petitioner's gross income. Petitioner contends that the qui tam payment is a portion of a nontaxable reimbursement Lockheed Martin paid to the United States. Petitioner relies on Roco v. Commissioner, supra at 165 n.2, a case decided by this Court that held that qui tam payments were taxable as the equivalent of a reward but expressly reserved deciding whether a qui tam payment was a nontaxable share in the recovery of a reimbursement. Petitioner also relies on Vt. Agency of Natural Res. v. United States ex rel. Stevens, supra, for the proposition that a qui tam claim is the assignment of the United States' reimbursement claim to the relator and that, because the payment would not be taxable to the United States Government, it should not be taxable to him as an assignee of the nontaxable claim, since as an assignee of the claim he stands in the shoes of the U.S. Government in pursuing the claim. Finally, petitioner contends that the qui tam payment is not taxable income because it is not proceeds from labor or capital.
Respondent contends that the qui tam payment is a taxable reward and should be included in petitioner's gross income.
Gross income is "all income from whatever source derived". Sec. 61(a). Courts have given a broad construction to the definition of gross income. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955). The effect of such a broad view of gross income is that exclusions from gross income are narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
As noted above, this Court has considered the issue of whether a qui tam payment is taxable income. In Roco v. Commissioner, 121 T.C. 160 (2003), the taxpayer received a qui tam payment from the United States for his role as relator in an action pursuant to the FCA. The Court ruled that rewards are included in gross income pursuant to section 1.61-2(a), Income Tax Regs., and that the qui tam payment was the equivalent of a reward and, therefore, includable in the taxpayer's gross income. Roco v. Commissioner, supra at 164.
Petitioner's reliance on note 2 of Roco is misplaced. In Roco v. Commissioner, supra at 165 n.2, the Court stated that it was not deciding whether a qui tam payment is a nontaxable share in the recovery of a reimbursement. Contrary to petitioner's argument, the footnote does not suggest that the Court would have held that a qui tam payment is a nontaxable share in the recovery of a reimbursement had the issue been properly before it. As the issue is before us now, we will address it.
In support of his position that a qui tam payment is a nontaxable share of the recovery, petitioner relies on Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765 (2000). Petitioner contends that he is the assignee of the United States' claim against Lockheed and, therefore, stands in the shoes of the Government in receipt of a nontaxable recovery. In Vt. Agency of Natural Res., the Supreme Court considered whether a private individual has standing to bring a qui tam suit in Federal court against a State agency. On that issue, the Court held that the relator had standing because the FCA effected a partial assignment of the Government's claim to the relator and, as the assignee of such a claim, a relator has standing to assert the injury in fact suffered by the Government. Id. at 773. Petitioner's reliance on Vt. Agency of Natural Res. is misplaced. Although the FCA effects a partial assignment of the claim for the purposes of standing, the assignment of the claim does not change the character of the proceeds to petitioner. The qui tam payment is the equivalent of a reward as we held in Roco v. Commissioner, supra at 164. In Vt. Agency of Natural Res., the Supreme Court made no ruling regarding the taxability of the qui tam payment to the relator or the character of the payment for Federal income tax purposes.
Petitioner also relies on Lucas v. Earl, 281 U.S. 111 (1930), contending that the qui tam payment was non-taxable income as an assignment to him by the Government of a portion of a non-taxable recovery. In Lucas v. Earl, supra, the taxpayer assigned a portion of his earned income to his wife. The Supreme Court held that a taxpayer cannot exclude his earnings from his gross income by an anticipatory assignment of them to another party. Id. Lucas v. Earl, supra, is inapposite. The payment from Lockheed Martin to the United States was not earned income; it was a reimbursement to the Government for fraudulent billing practices. Additionally, the $8.75 million qui tam payment was a reward to petitioner for bringing Lockheed's wrongdoing to light; it was not an assignment of a right to income. See Roco v. Commissioner, supra. Accordingly, Lucas v. Earl, supra does not stand for the proposition that the claim assigned to the relator in an action pursuant to the FCA is a transfer of a portion of a nontaxable recovery that is non-taxable to the relator.
Petitioner also cites Eisner v. Macomber, 252 U.S. 189 (1920), for the definition of income. Macomber held that income was the "'gain derived from capital, from labor, or from both combined'". Id. at 207 (quoting Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 415 (1913), and Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918)). However, the Supreme Court later observed that the Macomber definition of income did not take precedence over the inclusive statutory definition of gross income. Commissioner v. Glenshaw Glass Co., supra at 431.
On the basis of the foregoing, we conclude that the qui tam payment is includable in petitioner's gross income for 2003 because it is the equivalent of a reward. None of petitioner's arguments persuade us that our holding in Roco v. Commissioner, supra, does not apply. Because the qui tam payment is includable in petitioner's gross income, we next decide whether petitioner must include the entire $8.75 million qui tam payment in gross income or is entitled to exclude the $3.5 million attorney's fee payment and thus include only the $5.25 million qui tam payment in gross income.
Petitioner contends that only $5.25 million of the qui tam payment must be included in gross income because he never received the $3.5 million attorney's fee payment. The $8.75 million qui tam payment was wired from the United States to petitioner's attorneys, who subtracted a 40-percent contingency fee and paid the $5.25 million net proceeds of the qui tam payment to petitioner by check.
Respondent contends that the $3.5 million attorney's fee payment is includable in petitioner's gross income and thus petitioner must include the entire $8.75 million qui tam payment in gross income.
Petitioner relies on Cotnam v. Commissioner, 263 F.2d 119, (5th Cir. 1959), affg. in part and revg. in part 28 T.C. 947 (1957),6 Davis v. Commissioner, 210 F.3d 1346 (11th Cir. 2000), affg. T.C. Memo. 1998-248, and Foster v. United States, 249 F.3d 1275 (11th Cir. 2001), contending that they control the treatment of contingent attorney's fees. However, after those cases were decided, the Supreme Court held, in Commissioner v. Banks, 543 U.S. 426 (2005), that, when a litigant's recovery constitutes taxable income, that income includes the portion paid to attorneys as a contingent fee. Accordingly, we hold that the $3.5 million attorney's fee payment is includable in petitioner's gross income and, therefore, petitioner must include the entire $8.75 million qui tam payment in gross income.
We next address whether petitioner may deduct the $3.5 million attorney's fee payment as a miscellaneous itemized deduction. Both parties concede that, if petitioner has substantiated the attorney's fees, he may deduct them as a miscellaneous itemized deduction.7 Accordingly, we address the issue of whether petitioner has properly substantiated his deduction.
Petitioner contends that his testimony and the attorney's fee agreement provide sufficient evidence to substantiate the deduction of attorney's fees. Respondent contends that the offered proof and testimony are insufficient and that petitioner should have called his attorneys to testify to the receipt of the funds.
Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving that he is entitled to the deductions claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976). The taxpayer is required to maintain records that will enable the Commissioner to determine the correct liability. Sec. 6001.
Petitioner offered as proof of payment his testimony and a corroborating document that contained his contingency fee arrangement with his attorneys. On the basis of that evidence, we are persuaded that petitioner paid the attorney's fees and, therefore, hold that petitioner has substantiated the payment of the fees.
Finally, we consider whether petitioner is liable for the accuracy-related penalty pursuant to section 6662(a). Taxpayers are subject to a 20-percent penalty for any underpayment which is attributable to, among other things, (1) negligence or disregard of rules or regulations or (2) any substantial understatement of income tax. Sec. 6662(a) and (b); New Phoenix Sunrise Corp. v. Commissioner, 132 T.C. __, __ (2009) (slip op. at 45-47). Negligence includes any failure to make a reasonable attempt to comply with the Code. Sec. 6662(c); see Neely v. Commissioner, 85 T.C. 934, 947 (1985) (negligence is lack of due care or failure to do what a reasonably prudent person would do under the circumstances). Disregard of rules or regulations includes any careless, reckless, or intentional disregard. Sec. 6662(c). A substantial understatement of income tax occurs in any year where the amount of the understatement exceeds the greater of 10 percent of the amount required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). An understatement is the excess of the amount of tax required to be shown on the return over the amount of tax actually shown on the return less any rebates. Sec. 6662(d)(2)(A). The potential understatement will be reduced by the portion attributable to the tax treatment of an item if there was substantial authority for such treatment or if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in an attached statement and there is a reasonable basis for such treatment. Sec. 6662(d)(2)(B). An exception to the accuracy-related penalty exists if the taxpayer can show there was reasonable cause for such portion and the taxpayer acted in good faith in regard to such portion. Sec. 6664(c).
Respondent contends that petitioner is liable for the accuracy-related penalty because he substantially understated his income tax as a result of failing to include the $8.75 million qui tam payment in his gross income. See sec. 6662(b)(2). Alternatively, respondent contends that the underpayment is attributable to negligence or disregard of rules and regulations. See sec. 6662(b)(1).
Petitioner contends that, pursuant to sections 6662(d)(2)(B) and 6664(c), he should not be liable for the accuracy-related penalty because he disclosed the full settlement payment on his return, there was reasonable cause for the omission from income, and he acted in good faith with respect to the omission of the settlement payment. Specifically, petitioner contends that, because he disclosed the $5.25 million net proceeds of the qui tam payment on the face of his return, excluded it from his calculation of taxable income, and filed Form 8275 disclosing the $3.5 million attorney's fee payment, he should not be liable for the accuracy-related penalty.
Generally, the Commissioner bears the burden of production with respect to any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446. To meet that burden, the Commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty. Higbee v. Commissioner, supra at 446. The Commissioner has the burden of production only; the ultimate burden of proving that the penalty is not applicable remains on the taxpayer. Id.
Respondent offers petitioner's original return as evidence that petitioner understated his income tax and that the imposition of the accuracy-related penalty is appropriate. The original return does exclude the $8.75 million qui tam payment from the calculation of taxable income. We have held above that the $8.75 million qui tam payment is includable in petitioner's gross income. Accordingly, we conclude that respondent has met his burden of production to show that his determination of the accuracy-related penalty is appropriate.8
Petitioner is liable for the accuracy-related penalty if his underpayment is a result of negligence or disregard of rules and regulations or if there is a substantial understatement of income tax. Sec. 6662(b); New Phoenix Sunrise Corp. v. Commissioner, supra at (slip op. at 45-47). As discussed above, petitioner should have included the $8.75 million qui tam settlement payment in his gross income for his 2003 taxable year. Had he done so, a total tax liability of $3,044,110 would have resulted. Petitioner's deficiency of $3,044,000 exceeds the greater of $5,000 or 10 percent of the amount of tax required to be shown on the return (10 percent of $3,044,110 is $304,411). See sec. 6662(d)(1)(A). Consequently, petitioner will be liable for the accuracy-related penalty unless the penalty can be reduced pursuant to section 6662(d)(2)(B) or avoided pursuant to section 6664(c).9
An underpayment may be reduced where the taxpayer has substantial authority for the tax treatment or, alternatively, the position is adequately disclosed and the taxpayer has a reasonable basis for such treatment. Sec. 6662(d)(2)(B); W. Covina Motors, Inc. v. Commissioner, T.C. Memo. 2008-237. Substantial authority is an objective standard based on an analysis of the law and its application to the relevant facts. Myers v. Commissioner, T.C. Memo. 1994-529; sec. 1.6662-4(d)(2), Income Tax Regs. Taking into account all authorities, substantial authority exists only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. Sec. 1.6662-4(d)(3), Income Tax Regs. Substantial authority is not so stringent that a tax treatment must be upheld in litigation or have a greater than 50-percent likelihood of being sustained. O'Malley v. Commissioner, T.C. Memo. 2007-79; sec. 1.66624(d)(2), Income Tax Regs.
Petitioner argues that substantial authority to exclude the qui tam payment from his gross income exists because of Roco v. Commissioner, 121 T.C. at 165 n.2. However, Roco's holding is directly adverse to his position. As explained above, Roco is not substantial authority for his position, nor is any case petitioner cites. Petitioner has failed to show that the authorities in support of his treatment are substantial in relation to those supporting contrary treatment.
Petitioner further argues that the underpayment should be reduced because of adequate disclosure and a showing of reasonable basis. Sec. 6662(d)(2)(B)(ii). Adequate disclosure may be made either in a statement attached to the return or on the return. Sec. 1.6662-4(f), Income Tax Regs. Disclosure generally must be made on Form 8275 unless otherwise permitted by applicable revenue procedure -- in this case, Rev. Proc. 2003-77, 2003-2 C.B. 964. Sec. 1.6662-4(f)(2), Income Tax Regs.
Petitioner included the $5.25 million net proceeds of the qui tam payment as other income on page 1 of his return. Qui tam payments are not addressed in Rev. Proc. 2003-77, supra. Consequently, the method for adequately disclosing the taxability of a qui tam payment was by the filing of a Form 8275. Petitioner's Form 8275 did not disclose the $5.25 million net proceeds of the qui tam payment. Instead, the Form 8275 disclosed the $3.5 million attorney's fee payment. Accordingly, we conclude that petitioner did not adequately disclose the $5.25 million net proceeds of the qui tam payment.
Additionally, we conclude that petitioner did not have a reasonable basis for his position with regard to the exclusion of the $5.25 million net proceeds of the qui tam payment from his gross income. Reasonable basis is a relatively high standard of reporting. Sec. 1.6662-3(b)(3), Income Tax Regs. Taxpayers must have a position that is more than merely arguable. Halby v. Commissioner, T.C. Memo. 2009-204; sec. 1.6662-3(b)(3), Income Tax Regs. As noted above, petitioner's position is based on a footnote from a case that holds in direct opposition to his position. See Roco v. Commissioner, 121 T.C. 160 (2003). Petitioner's arguments in support of his contention that Roco is distinguishable were at best merely colorable. Consequently, we hold that petitioner has not shown that he had a reasonable basis for his return position regarding the $5.25 million net proceeds of the qui tam payment.
We next consider whether the accuracy-related penalty should be reduced because petitioner adequately disclosed the exclusion of the $3.5 million attorney's fee payment from gross income and had a reasonable basis for that exclusion. Disclosure of petitioner's position regarding the $3.5 million attorney's fee payment on the Form 8275 attached to his return constitutes adequate disclosure. See sec. 1.6662-4(f)(1), Income Tax Regs. Petitioner relies on Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), Davis v. Commissioner, 210 F.3d 1346 (11th Cir. 2000), and Foster v. United States, 249 F.3d 1275 (11th Cir. 2001), for the proposition that, at the time he filed his original return,10 contingency fee payments made directly to attorneys were not includable in gross income. At that time, Foster v. United States, supra, had held that attorney's fees covered by a contingency fee arrangement should be excluded from gross income because of the Alabama attorney's lien law governing the recovery of such fees. Because petitioner was a resident of Florida, a State with similar lien laws, his reliance on Foster was a reasonable basis for the exclusion of the attorney's fee payment from his income.11 At the time petitioner filed his original return, the Supreme Court had not yet decided Commissioner v. Banks, 543 U.S. 426 (2005), which overruled Foster.12 Consequently, we hold that petitioner's underpayment for the purpose of the section 6662(b) penalty must be reduced by the portion of the penalty attributable to the $3.5 million attorney's fee payment.
Finally, we consider petitioner's contention that the accuracy-related penalty should not apply to the $5.25 million net proceeds of the qui tam payment he failed to include in his income because there was reasonable cause for his position and he acted in good faith. See sec. 6664(c); New Phoenix Sunrise Corp. v. Commissioner, supra at (slip op. at 50). Taxpayers demonstrate reasonable cause when they exercise ordinary business care and prudence. Richardson v. Commissioner, 125 F.3d 551, 558 (7th Cir. 1997), affg. T.C. Memo. 1995-554. The most important factor in determining reasonable cause and good faith is the taxpayer's efforts to assess the proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs. A taxpayer's experience, knowledge, and education may also be taken into account. Bachmann v. Commissioner, T.C. Memo. 2009-51; sec. 1.66644(b)(1), Income Tax Regs.
Petitioner did not have reasonable cause for his position or act in good faith. Petitioner is a sophisticated taxpayer, having earned a bachelor's degree in accounting and business administration and served as chief of cost control for Lockheed Martin for a $3.5 billion project. Petitioner failed to seek professional advice when preparing his 2003 tax return. See also Bachmann v. Commissioner, supra (taxpayer was a sophisticated banker who should have sought advice on tax treatment of receipt of large arbitration award). Moreover, petitioner's claimed authority for his position was a footnote from a case that reached a holding directly adverse to his position. See Roco v. Commissioner, supra. Petitioner's position was neither persuasive nor reasonable. Given his experience, knowledge, and education, petitioner has failed to meet his burden of proving the reasonable cause exception to the accuracy-related penalty. Consequently, we hold that petitioner is liable for the accuracy-related penalty with respect to the $5.25 million net proceeds of the qui tam payment.
The Court has considered all other arguments made by the parties and, to the extent we have not addressed them herein, we consider them moot, irrelevant, or without merit.
On the basis of the foregoing,
Decision will be entered under Rule 155.
FOOTNOTES
1 Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code (Code), as amended.
2 Respondent has conceded that petitioner is not liable for the sec. 6651(a) delinquency addition to tax.
3 "Qui tam" is an abbreviation of the Latin phrase "qui tam pro domino rege quam pro se ipso in hac parte sequitor", which means "who pursues this action on our Lord the King's behalf as well as his own." Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 768 n.1 (2000). The individual who brings the qui tam suit on behalf of the Government is known as the relator. Vt. Agency of Natural Res. v. United States ex rel. Stevens, supra at 769; 31 U.S.C. sec. 3730(b) (2006). For a discussion of the history of qui tam actions, see Vt. Agency of Natural Res. v. United States ex rel. Stevens, supra at 774-777.
4 The record is unclear whether the Dec. 6, 2004, assessment was abated before the notice of deficiency was sent on June 14, 2007.
5 Petitioner does not contend that sec. 7491(a) should apply to shift the burden of proof to respondent, nor did he establish that it should apply to the instant case.
6 The Court of Appeals for the Eleventh Circuit has adopted as binding precedent the caselaw of the former Court of Appeals for the Fifth Circuit, as of Sept. 30, 1981. Bonner v. City of Pritchard, 661 F.2d 1206 (11th Cir. 1981). Absent stipulation to the contrary, any appeal of the instant case would be to the Court of Appeals for the Eleventh Circuit Court. The Tax Court follows the law of the circuit in which an appeal would lie if that law is on point. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
7 The American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 703, 118 Stat. 1546, amended sec. 62(a) to allow an adjustment from gross income for attorney's fees paid by, or on behalf of a taxpayer in connection with a claim under the FCA. However, the adjustment is applicable only to fees and costs paid after Oct. 22, 2004, with respect to any judgment or settlement occurring after that date. Id. The settlement in the instant case was entered into during September 2003. Accordingly, the adjustment is not applicable to the instant case.
8 Respondent has met his burden of production for both the negligence grounds of the accuracy-related penalty pursuant to sec. 6662(b)(1) and the substantial understatement grounds of the accuracy-related penalty pursuant to sec. 6662(b)(2).
9 We note that the accuracy-related penalty was imposed on the taxpayer in Roco v. Commissioner, 121 T.C. 160 (2003).
10 Petitioner filed an amended return on Apr. 26, 2005. Respondent has not raised any issue regarding when liability for the penalty must be determined; i.e., as of the time of the original return or the amended return. We therefore need not address the issue. In another context, however, the Supreme Court has held that liability for the penalty is determined as of the time of the original return and not an amended return. See Badaracco v. Commissioner, 464 U.S. 386 (1984).
11 The attorney's lien laws of Florida and Alabama are not exactly the same but are not sufficiently dissimilar as to persuade us that Foster v. United States, 249 F.3d 1275 (11th Cir. 2001), is not a reasonable basis for the exclusion. Foster was decided by the Court of Appeals for the Eleventh Circuit, the same Court of Appeals having venue, absent stipulation to the contrary, of appeals by Florida residents.
12 Commissioner v. Banks, 543 U.S. 426 (2005), was decided on Jan. 24, 2005.
I am pleased to be on the panel discussing "False Claims Act Developments," moderated by Jack Boese of Fried Frank. This will be a particularly interesting year for this annual meeting, as Congress enacted major changes to the False Claims Act that took effect on May 20, 2009.
In addition, the "Health Care Fraud Enforcement Act" pending in the Senate would enhance further the government's tools used to investigate and remedy Medicare and Medicaid fraud. This bill would remove any question that all payments made pursuant to illegal kickbacks are "false" for purposes of the False Claims Act.
Among the significant 2009 changes to the False Claims Act made by the Fraud Enforcement and Recovery Act are the following:
1. The amendments expanded the definition of "claim," and fraud directed against government contractors, grantees, and other recipients is now plainly covered by the False Claims Act.
2. Funds administered by the United States government (e.g., in Iraq) are now protected.
3. Retaining overpayments of money from the government is now a stated basis of liability, which is a source of concern for health care providers, among others.
4. Liability for "conspiracy" to violate the Act is now broader.
5. Protection of whistleblowers and others against "retaliation" now extends not only to "employees," but also to "contractors" and "agents"; and persons other than "employers" potentially may be liable for retaliation.
6. In investigations, the government now has authority to use "Civil Investigative Demands" more broadly, and to share information more with state and local authorities and with whistleblowers/relators.
7. A standard definition of what is "material" now applies in False Claims Act cases.
8. The statute of limitations has been clarified for when the government asserts its own claims, after the whistleblower (or "relator") has filed a qui tam case under the False Claims Act.
The full agenda for tomorrow's "SOUTHEASTERN HEALTH CARE FRAUD INSTITUTE" is below:
]]> SOUTHEASTERN HEALTH CARE FRAUD INSTITUTE
State Bar of Georgia Headquarters
104 Marietta St. NW
Atlanta, GA
Co-Sponsors:
Health Law Section, State Bar of Georiga
Presiding:
Joe D. Whitley, Program Chair, Greenberg Traurig LLP, Atlanta & Washington, DC
Paul B. Murphy, Program Co-Chair, King & Spalding LLP, Atlanta
7:45 REGISTRATION AND CONTINENTAL BREAKFAST
(All attendees must check in upon arrival. A removable jacket or sweater is recommended.)
8:20 WELCOME AND PROGRAM OVERVIEW
Joe D. Whitley
Paul B. Murphy
8:30 FEDERAL AND STATE--HEALTH CARE FRAUD INITIATIVES
Moderator:
Paul B. Murphy
Panelists:
Randy S. Chartash, Assistant United States Attorney, U.S. Attorney’s Office for the Northern District of Georgia, Atlanta
Charles M. Richards, Director, State Health Care Fraud Control Unit, Tucker
Kirk Ogrosky, Deputy Chief for Health Care Fraud, U.S. Department of Justice, Fraud Section, Criminal Division, Washington, DC
Paul J. Fike, Supervisory Special Agent, Federal Bureau of Investigation, Atlanta
9:30 BREAK
9:45 FEDERAL AND STATE—FALSE CLAIMS ACT DEVELOPMENTS
Moderator:
John T. Boese, Fried Frank, Washington, DC
Panelists:
Christopher J. Huber, Assistant U.S. Attorney, U.S. Attorney’s Office for the Northern District of Georgia, Atlanta
Michael A. Sullivan, Finch McCranie, LLP, Atlanta
Marlan B. Wilbanks, Wilbanks & Bridges, Atlanta
Paul N. Monnin, DLA Piper US LLP, Atlanta
10:45 ANTI-KICKBACK STATUTES and STARK ENFORCEMENT
Moderator:
Gabriel Imperato, Broad & Cassel, Ft. Lauderdale, FL
Panelists:
Robert M. Keenan III, King & Spalding LLP, Atlanta
Charlene L. McGinty, McKenna Long & Aldridge LLP, Atlanta
Jacqueline C. Baratian, Alston & Bird LLP, Washingtion, DC
11:45 LUNCHEON (Included in registration fee)
“Looking Forward: Professionalism in 2010”
Amy Levine Weil, The Weil Firm, Atlanta; Former Chief, Appellate Section, U.S. Attorney’s Office, Northern District of Georgia, Atlanta
12:45 Health Care providers: general counsel ROUNDTABLE
Moderator:
Joe D. Whitley
Panelists:
Jay D. Mitchell, Executive Vice President and General Counsel, Piedmont Healthcare, Inc., Atlanta
Jane E. Jordan, Deputy General Counsel/Chief Health Counsel, Office of the General Counsel, Emory University, Atlanta
Paul Justice, Vice President and General Counsel, Saint Joseph’s Hospital, Atlanta
1:45
before the government knocks: internal investigations and voluntary disclosure
Moderator:
R. Joseph Burby, IV, Bryan Cave LLP, Atlanta
Panelists:
Christopher C. Burris, King & Spalding LLP, Atlanta
Mark P. Schnapp, Greenberg Traurig LLP, Miami, FL
Don J. DeGabrielle, Fulbright & Jaworski LLP, Houston, TX
2:35 after the government knocks: handling a health care fraud case (emphasis on parallel proceedings)
Moderator:
Anthony L. Cochran, Chilivis, Cochran, Larkins & Bever, LLP, Atlanta
Panelists:
Glenn D. Baker, Assistant U.S. Attorney, U.S. Attorney’s Office for the Northern District of Georgia, Atlanta
Richard H. Deane, Jones Day, Atlanta
Michael L. Brown, Alston & Bird LLP, Atlanta
3:25 BREAK
3:40 Office of inspector general initiatives
Moderator:
Nancy E. Taylor, Greenberg Traurig LLP, Washington, DC
Panelists:
Kenneth E. Hooper, Hooper Cornell PLLC, Boise, ID
Julie L. Nielsen, Health Care Litigation & Investigations Consultant, Tampa, FL
Jonathan Diesenhaus, Hogan & Hartson LLP, Washington, DC
4:30 ADJOURN
To attorneys with prosecution experience who represent whistleblowers, it is shocking that Birkenfeld apparently missed a clear opportunity to avoid prosecution altogether by simply "coming clean" and telling the whole truth about his own actions at the outset.
We have a much different take on Birkenfeld's case than those who suggest it should scare away potential IRS whistleblowers. Whistleblowers who are willing to tell the truth from the start can easily avoid Birkenfeld's fate, so long as they listen to advice from experienced counsel. At the same time, we take issue with critics who say Birkenfeld should not even be considered for an IRS Whistleblower reward, since the "rule of law" should determine the answer to that question.
First, Birkenfeld's case should make other potential IRS whistleblowers careful about pursuing IRS whistleblower claims, but not fearful. Most IRS whistleblowers face no realistic chance of prosecution, especially since the government often must depend on whistleblower information to make cases.
Even those relatively few whistleblowers with possible exposure such as Birkenfeld (who admitted to engaging in a tax fraud scheme) can often negotiate protection from prosecution, but only if they tell the whole truth from the start, and follow the rules for obtaining protection. This was a topic in the "IRS Whistleblower Boot Camp" panel discussion that I led this past March, with panelists including IRS Whistleblower Office Director Steve Whitlock--how to protect the whistleblower who has potential exposure.
Why Birkenfeld apparently thought he could get away with withholding information from the government about his own wrongdoing--a foolish move to us--remains a mystery, even after we reviewed his sentencing transcript. That horrendous judgment call distinguishes Birkenfeld's case from all other whistleblower cases we have seen.
At Birkenfeld's sentencing, prosecutor Kevin Downing explained that Birkenfeld's information was extremely valuable to the IRS, and that Birkenfeld probably would not have been prosecuted had he simply been forthcoming by disclosing his own misconduct in assisting tax evasion:
"BUT FOR MR. BIRKENFELD FAILING TO DISCLOSE HIS INVOLVEMENT WITH THE FRAUD AND THE U.S. CLIENTS THAT HE AIDED AND ASSISTED IN TAX EVASION, I BELIEVE WE WELL WOULD HAVE NONPROSECUTED MR. BIRKENFELD. BUT GIVEN THE FACT THAT HE REFUSED TO PROVIDE THAT INFORMATION AND LED US DOWN A COURSE WHERE WE HAD TO START [TO] INVESTIGATE MR. BIRKENFELD AND HIS ACTIVITIES, THAT IS WHY WE ARE HERE TODAY, THAT IS WHY HE WAS INDICTED, AND THAT'S WHY HE PLED." (Birkenfeld Sentencing Tr. 12-13)(emphasis supplied).
As former prosecutors, we fully expect someone who fails to be truthful with the government about his own crimes to be prosecuted, since complete truthfulness is required. Birkenfeld apparently "blew" the opportunity to escape prosecution by disclosing all. Even so, the government made a motion to reduce his sentence, and informed the court that depending on his continued cooperation, the government may seek to reduce his sentence further.
So Lesson No. 1 for potential whistleblowers is to follow the rules, including by "telling all" truthfully when your counsel is evaluating and negotiating with the government any protection needed. Whistleblowers willing to tell the full truth can usually obtain any protection needed. We have previously discussed how this can be a delicate "dance" even for experienced counsel, but is done all of the time.
Birkenfeld's self-inflicted prosecution is unique to him, and does not mean that the "sky is falling" for IRS whistleblowers generally. Other IRS whistleblowers in banking and other segments of the financial services industry may still come forward and receive protection, if they are willing to be truthful about their own conduct.
More broadly, by trying to portray Birkenfeld as a "victim" of something other than his own apparent bad judgment, those working to help this one whistleblower risk damaging the cause of whistleblowers generally. The promising new IRS Whistleblower Program offers tremendous opportunities to whistleblowers who are willing to be truthful, even if those whistleblowers had some role in the violations in question.
Ignoring Birkenfeld's wrongdoing and his failure to disclose it as the reasons for Birkenfeld's prosecution sends the wrong message to other would-be whistleblowers who are willing to tell all and follow the advice of counsel. Allowing Birkenfeld to escape without prosecution also would undermine the "rule of law."
Even though Birkenfeld squandered a golden opportunity to avoid prosecution and perhaps also to enjoy the anonymity and confidentiality that the IRS Whistleblower Program endeavors to provide whistleblowers, other IRS whistleblowers willing to tell the truth may still come forward and receive protection. We do not understand why whistleblower advocates would claim the contrary, such as in the recent request for Attorney General Eric Holder to review the case as reported by the Miami Herald.
A second lesson for potential IRS whistleblowers is that, under the IRS whistleblower rewards statute, the "rule of law" applies to protect all IRS Whistleblowers' claims to rewards, even those claims of Mr. Birkenfeld. As this past week's New York Times piece by Lynnley Browning (who has written often on the UBS case, offshore accounts, and the IRS "voluntary disclosure" program) correctly notes, to many it may seem "outlandish" that Birkenfeld would seek any reward, since he pleaded guilty to conspiracy to defraud the United States.
Nonetheless, by all accounts Birkenfeld's information has been extremely valuable to the IRS in piercing the veil of secrecy that has allowed offshore account holders to evade tax liability. Birkenfeld is fortunate that IRS Whistleblower Office Director Steve Whitlock seems to be an extremely straight shooter, based on his past comments about the IRS Whistleblower program. If Director Whitlock determines that Birkenfeld's information meets the statutory criteria for a reward, Birkenfeld will be rewarded appropriately under the statute.
For the first time, this statute contains objective criteria that must be met to reduce or deny an award because of the whistleblower's misconduct:
(3) Reduction in or denial of award.--If the Whistleblower Office determines that the claim for an award under paragraph (1) or (2) is brought by an individual who planned and initiated the actions that led to the underpayment of tax or actions described in subsection (a)(2), then the Whistleblower Office may appropriately reduce such award. If such individual is convicted of criminal conduct arising from the role described in the preceding sentence, the Whistleblower Office shall deny any award.
Birkenfeld may very well be punished by the criminal justice system, and yet still be rewarded under the IRS Whistleblower Program if he meets the criteria for a reward. There seems no question that he has made an extremely valuable contribution to tax enforcement efforts involving abuse of offshore accounts.
If the information Birkenfeld furnished allows the IRS to collect additional billions from tax cheats, the decision whether to reward him for his contributions to that effort should be made according to the rule of law--not according to political pressure or public opinion. And if Birkenfeld disagrees with the reward decision, he (like other whistleblowers) has a right to appeal the decision to U.S. Tax Court, where the rule of law again will apply.
Our friends at the IRS Whistleblower Office have their work cut out for them on this one.
]]>IRS Commissioner Doug Shulman announced that the IRS Voluntary Disclosure Program was flooded with submissions by more than 14,000 taxpayers, according to the Wall Street Journal.
IRS Whistleblower cases have been impacted--and in some cases probably pre-empted--by the submissions of recalcitrant taxpayers to the IRS Voluntary Disclosure Program. The IRS Criminal Investigative Division in certain areas has been inundated.
It will be fascinating to see the progress of IRS recoveries as a result of these voluntary disclosures by taxpayers.
]]>Perhaps Harry Markopolis' voice is finally being heard, albeit faintly. Last week, the House Financial Services Committee approved legislation that would expand both whistleblower rewards and whistleblower protections, among other things.
Still, past experience with the False Claims Act and the IRS Whistleblower statute shows that the proposed rewards need to be beefed up to be effective.
The “Investor Protection Act of 2009” (excerpted below) also would increase the SEC’s budget and make other changes designed to strengthen enforcement.
The new rewards to whistleblowers would be up to 30% of monetary sanctions of more than $1 million:
"In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action."
The proposed new whistleblower rewards are reminiscent of those under the new IRS Whistleblower Program, but need at least two corrections to be effective.
First, the current SEC bill creates no enforceable "right" to a reward--a defect that made the old IRS Whistleblower statute ineffective before it was amended in December 2006.
Second, there should be a minimum percentage of perhaps 15% for the SEC rewards; it should not be left at 0-30%, as the bill now reads. Who would risk a 1% (or even lower) reward? The False Claims Act only became effective after 1986 amendments increased rewards to at least 15% in most cases. The new IRS Whistleblower law is attracting whistleblowers left and right because it provides for a minimum of 15% in most instances.
The proposed SEC law has one advantage over the IRS version: The IRS law unfortunately omits protection of whistleblowers from retaliation, but the proposed SEC whistleblower provisions would provide a remedy similar to that furnished whistleblowers under the False Claims Act. Here is what the proposed bill states (in part):
"An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys' fees."
The bill's proposed SEC whistleblower language is below; the entire bill may be found here:
]]> 202. WHISTLEBLOWER PROTECTION.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by adding after section 21E the following new section:
`SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTECTION.
`(a) In General- In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action. Any amount payable under the preceding sentence shall be paid from the fund described in subsection (f).
`(b) Determination of Amount of Award; Denial of Award-
`(1) DETERMINATION OF AMOUNT OF AWARD- The determination of the amount of an award, within the limit specified in subsection (a), shall be in the sole discretion of the Commission. The Commission may take into account the significance of the whistleblower's information to the success of the judicial or administrative action described in subsection (a), the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in such action, the Commission's programmatic interest in deterring violations of the securities laws by making awards to whistleblowers who provide information that leads to the successful enforcement of such laws, and such additional factors as the Commission may establish by rules or regulations.
`(2) DENIAL OF AWARD- No award under subsection (a) shall be made--
`(A) to any whistleblower who is, or was at the time he or she acquired the original information submitted to the Commission, a member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization;
`(B) to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section; or
`(C) to any whistleblower who fails to submit information to the Commission in such form as the Commission may, by rule, require.
`(c) Representation-
`(1) PERMITTED REPRESENTATION- Any whistleblower who makes a claim for an award under subsection (a) may be represented by counsel.
`(2) REQUIRED REPRESENTATION- Any whistleblower who makes a claim for an award under subsection (a) must be represented by counsel if the whistleblower submits the information upon which the claim is based anonymously. Prior to the payment of an award, the whistleblower must disclose his or her identity and provide such other information as the Commission may require.
`(d) No Contract Necessary- No contract with the Commission is necessary for any whistleblower to receive an award under subsection (a), unless the Commission, by rule or regulation, so requires.
`(e) Appeals- Any determinations under this section, including whether, to whom, or in what amounts to make awards, shall be in the sole discretion of the Commission, and any such determinations shall be final and not subject to judicial review.
`(f) Investor Protection Fund-
`(1) FUND ESTABLISHED- There is established in the Treasury of the United States a fund to be known as the `Securities and Exchange Commission Investor Protection Fund' (referred to in this section as the `Fund').
`(2) USE OF FUND- The Fund shall be available to the Commission, without further appropriation or fiscal year limitation, for the following purposes:
`(A) Paying awards to whistleblowers as provided in subsection (a).
`(B) Funding investor education initiatives designed to help investors protect themselves against securities fraud or other violations of the securities laws, or the rules and regulations thereunder.
`(3) DEPOSITS AND CREDITS- There shall be deposited into or credited to the Fund--
`(A) any monetary sanction collected by the Commission in any judicial or administrative action brought by the Commission under the securities laws that is not added to a disgorgement fund pursuant to section 308 of the Sarbanes-Oxley Act of 2002 or other fund or otherwise distributed to victims of a violation of the securities laws, or the rules and regulations thereunder, underlying such action, unless the balance of the Fund at the time the monetary sanction is collected exceeds $100,000,000;
`(B) any monetary sanction added to a disgorgement fund pursuant to section 308 of the Sarbanes-Oxley Act of 2002 or other fund that is not distributed to the victims for whom the disgorgement fund was established, unless the balance of the Fund at the time the determination is made not to distribute the monetary sanction to such victims exceeds $100,000,000; and
`(C) all income from investments made under paragraph (4).
`(4) INVESTMENTS-
`(A) AMOUNTS IN FUND MAY BE INVESTED- The Commission may request the Secretary of the Treasury to invest the portion of the Fund that is not, in the Commission's judgment, required to meet the current needs of the Fund.
`(B) ELIGIBLE INVESTMENTS- Investments shall be made by the Secretary of the Treasury in obligations of the United States or obligations that are guaranteed as to principal and interest by the United States, with maturities suitable to the needs of the Fund as determined by the Commission.
`(C) INTEREST AND PROCEEDS CREDITED- The interest on, and the proceeds from the sale or redemption of, any obligations held in the Fund shall be credited to, and form a part of, the Fund.
`(5) REPORTS TO CONGRESS- Not later than October 30 of each year, the Commission shall transmit to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives a report on--
`(A) the Commission's whistleblower award program under this section, including a description of the number of awards granted and the types of cases in which awards granted during the preceding fiscal year;
`(B) investor education initiatives described in paragraph (2)(B) that were funded by the Fund during the preceding fiscal year;
`(C) the balance of the Fund at the beginning of the preceding fiscal year;
`(D) the amounts deposited into or credited to the Fund during the preceding fiscal year;
`(E) the amount of earnings on investments of amounts in the Fund during the preceding fiscal year;
`(F) the amount paid from the Fund during the preceding fiscal year to whistleblowers pursuant to subsection (a);
`(G) the amount paid from the Fund during the preceding fiscal year for investor education initiatives described in paragraph (1)(B);
`(H) the balance of the Fund at the end of the preceding fiscal year; and
`(I) a complete set of audited financial statements, including a balance sheet, income statement, and cash flow analysis.
`(g) Protection of Whistleblowers-
`(1) PROHIBITION AGAINST RETALIATION-
`(A) IN GENERAL- No employer may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee, contractor, or agent in the terms and conditions of employment because of any lawful act done by the employee, contractor, or agent in providing information to the Commission in accordance with subsection (a), or in assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information.
`(B) ENFORCEMENT-
`(i) CAUSE OF ACTION- An individual who alleges discharge or other discrimination in violation of subparagraph (A) may bring an action under this subsection in the appropriate district court of the United States for the relief provided in subparagraph (C).
`(i) SUBPOENAS- A subpoena requiring the attendance of a witness at a trial or hearing conducted under this section may be served at any place in the United States.
`(ii) STATUTE OF LIMITATIONS- An action under this subsection may not be brought more than 6 years after the date on which the violation of subparagraph (A) occurred, or more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation of subparagraph (A), but in no event after 10 years after the date on which the violation occurs.
`(C) RELIEF- An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys' fees.
`(2) CONFIDENTIALITY-
`(A) IN GENERAL- Except as provided in subparagraph (B), all information provided to the Commission by a whistleblower shall be confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery or other legal process) in any proceeding in any Federal or State court or administrative agency, and shall be exempt from disclosure, in the hands of an agency or establishment of the Federal Government, under the Freedom of Information Act (5 U.S.C. 552), or otherwise, unless and until required to be disclosed to a defendant or respondent in connection with a public proceeding instituted by the Commission or any entity described in subparagraph (B). For purposes of section 552 of title 5, United States Code, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section 552. Nothing herein is intended to limit the Attorney General's ability to present such evidence to a grand jury or to share such evidence with potential witnesses or defendants in the course of an ongoing criminal investigation.
`(B) AVAILABILITY TO GOVERNMENT AGENCIES- Without the loss of its status as confidential and privileged in the hands of the Commission, all information referred to in subparagraph (A) may, in the discretion of the Commission, when determined by the Commission to be necessary to accomplish the purposes of this Act and protect investors, be made available to--
`(i) the Attorney General of the United States,
`(ii) an appropriate regulatory authority,
`(iii) a self-regulatory organization,
`(iv) State attorneys general in connection with any criminal investigation, and
`(v) any appropriate State regulatory authority,
each of which shall maintain such information as confidential and privileged, in accordance with the requirements in subparagraph (A).
`(3) RIGHTS RETAINED- Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement.
`(h) Rulemaking Authority- The Commission shall have the authority to issue such rules and regulations as may be necessary or appropriate to implement the provisions of this section.
`(i) Definitions- For purposes of this section, the following terms have the following meanings:
`(1) ORIGINAL INFORMATION- The term `original information' means information that--
`(A) is based on the direct and independent knowledge or analysis of a whistleblower;
`(B) is not known to the Commission from any other source; and
`(C) is not based on allegations in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is the initial source of the information that resulted in the judicial or administrative hearing, governmental report, hearing, audit, or investigation, or the news media's report on the allegations.
`(2) MONETARY SANCTIONS- The term `monetary sanctions,' when used with respect to any judicial or administrative action, means any monies, including but not limited to penalties, disgorgement, and interest, ordered to be paid, and any monies deposited into a disgorgement fund pursuant to section 308(b) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7246(b)), as a result of such action or any settlement of such action.
`(3) RELATED ACTION- The term `related action,' when used with respect to any judicial or administrative action brought by the Commission under the securities laws, means any judicial or administrative action brought by an entity described in subsection (g)(2)(B) that is based upon the same original information provided by a whistleblower pursuant to subsection (a) that led to the successful enforcement of the Commission action.
`(4) WHISTLEBLOWER- The term `whistleblower' means an individual, or two or more individuals acting jointly, who submit information to the Commission as provided in this section.'.
SEC. 203. CONFORMING AMENDMENTS FOR WHISTLEBLOWER PROTECTION.
(a) In General- Each of the following provisions is amended by inserting `and section 21F of the Securities Exchange Act of 1934' after `the Sarbanes-Oxley Act of 2002':
(1) Section 20(d)(3)(A) of the Securities Act of 1933 (15 U.S.C. 77t(d)(3)(A)).
(2) Section 42(e)(3)(A) of the Investment Company Act of 1940 (15 U.S.C. 80a-41(e)(3)(A)).
(3) Section 209(e)(3)(A) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-9(e)(3)(A)).
(b) Securities Exchange Act- The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended--
(1) in section 21(d)(3)(C)(i) (15 U.S.C. 78u(d)(3)(C)(i)), by inserting `and section 21F of this title' after `the Sarbanes-Oxley Act of 2002';
(2) in section 21A(d)(1) (15 U.S.C. 78u-1(d)(1))--
(A) by striking `(subject to subsection (e))'; and
(B) by inserting `and section 21F of this title' after `the Sarbanes-Oxley Act of 2002'; and
(3) in section 21A, by striking subsection (e) and redesignating subsections (f) and (g) as subsection (e) and (f), respectively.
SEC. 204. IMPLEMENTATION AND TRANSITION PROVISIONS FOR WHISTLEBLOWER PROTECTIONS.
(a) Implementing Rules- The Securities and Exchange Commission shall issue final regulations implementing the provisions of section 21F of the Securities Exchange Act of 1934, as added by this title, no later than 270 days after the date of enactment of this Act.
(b) Original Information- Information submitted to the Commission by a whistleblower in accordance with regulations implementing the provisions of section 21F of the Securities Exchange Act of 1934, as added by this title, shall not lose its status as original information, as defined in subsection (i)(1) of such section, solely because the whistleblower submitted such information prior to the effective date of such regulations, provided such information was submitted after the date of enactment of this Act, or related to insider trading violations for which a bounty could have been paid at the time such information was submitted.
(c) Awards- A whistleblower may receive an award pursuant to section 21F of the Securities Exchange Act of 1934, as added by this title, regardless of whether any violation of a provision of the securities laws, or a rule or regulation thereunder, underlying the judicial or administrative action upon which the award is based occurred prior to the date of enactment of this Act.
]]>After a Senate Judiciary Committee hearing Wednesday on “Effective Strategies for Preventing Health Care Fraud,” Senators Leahy, Kaufman, Specter, Kohl, Schumer, and Klobuchar sponsored the new anti-fraud measure.
Excerpts of the Senate announcement follow:
The bill makes straightforward but critical improvements to the federal sentencing guidelines, to health care fraud statutes, and to forfeiture, money laundering, and obstruction statutes, all of which would strengthen prosecutors’ ability to combat this particularly destructive form of fraud. These improvements include:
o Sentencing increases: The bill directs the Sentencing Commission to increase the guidelines range for health care fraud offenses and clarifies that the full potential scope of the fraud should be considered at sentencing.
o Redefining “health care fraud offense”: The bill includes all health care crimes within the definition of “health care fraud offense,” regardless of where they are codified. (ERISA, drug marketing, and kickback crimes are currently not included) This change will make available to law enforcement the full range of antifraud tools, including criminal forfeiture and obstruction penalties, to combat these offenses.
o Improving whistleblower claims: Kickbacks lead to unnecessary and risky medical care and pervert the doctor-patient relationship. This bill clarifies that all payments made pursuant to illegal kickbacks are false for purposes of the False Claims Act.
o Creating a common-sense mental state requirement for health care fraud offenses: Some courts have held that defendants must be aware that their conduct violates a specific provision of criminal law in order to be held accountable. This bill restores the original intent of Congress that a person is guilty of a health care offense if he knowingly does what the law forbids.
o Increasing funding: Money spent on health care fraud prevention and enforcement is returned manifold through costs savings and civil and criminal recoveries. This bill authorizes a modest, yet significant, increase in federal antifraud spending of $20,000,000 per year through 2016.
The new bill would add to legislation earlier this year to strengthen law enforcement statutes aimed at fraud, the Fraud Enforcement and Recovery Act.
Of particular importance to qui tam whistleblower cases under the False Claims Act, the nation's major whistleblower law, the new bill removes any ambiguity that "kickbacks" violate the False Claims Act. The official summary discusses kickbacks in section 2(c):
Section 2(c). Kickbacks
All too often, health care providers secure business by paying illegal kickbacks, which needlessly increase health care risks and costs. When a doctor’s independent judgment is compromised by a kickback, the patient faces the risk that the doctor is making decisions that are not in the patient’s best interest. In addition, excessive payments to doctors increase health care costs, may result in unfair competition, and may compromise medical research independence and the standards of scientific integrity.
The Department of Justice has had success both prosecuting illegal kickbacks and pursuing False Claims Act (FCA) matters predicated on underlying violations of the Anti-Kickback Statute (AKS). Nevertheless, defendants in such FCA cases continue to mount legal challenges. A court recently held that, even though a device company may have paid a kickback to a doctor to use a particular medical device, the bill for the procedure to implant the device was not false because the claim was submitted by the innocent hospital, and not by the doctor. United States ex rel. Thomas v. Bailey, 2008 WL 4853630 (E.D. Ark.) (Nov. 6, 2008). In other words, a claim that results from a kickback and that is false when submitted by a wrongdoer is laundered into a "clean" claim when an innocent third party finally submits the claim to the government for payment. This has the effect of insulating both the payor and the recipient of the kickback from FCA liability. This obstacle to a successful FCA action particularly limits Department’s ability to recover from pharmaceutical and device manufacturers, because in such instances the claims arising from the illegal kickbacks typically are not submitted by the physicians that received the kickbacks, but by pharmacies and hospitals that had no knowledge of the underlying unlawful conduct.
This section remedies the problem by amending the AKS to ensure that all claims resulting from illegal kickbacks are false, even when the claims are not submitted directly by the wrongdoers themselves. (Notably, in such circumstances, neither AKS nor FCA liability will lie against an innocent third party that submitted the claim but lacked the requisite intent required under those statutes.)
The full text of the bill is below:
Building on past enforcement efforts, in May 2009 the government announced its Health Care Fraud Prevention and Enforcement Action Team (HEAT), as part of what is now a Cabinet-level battle against Medicare fraud. To date in FY 2009, the Department of Justice has recovered close to one billion dollars in health care fraud cases, and has obtained 300 convictions.
Last week, the government announced that its Medicare Fraud Strike Force has charged twenty California defendants with $26 million in Medicare fraud from the sale of durable medical equipment (DME). That same week, the government charged six Houston area residents with participating in a scheme to submit claims to Medicare for medically unnecessary DME.
DME fraud and abuse are frequently reported in the calls we receive in representing "whistleblowers" under the qui tam provisions of the False Claims Act. The nation's major whistleblower law, the False Claims Act allows private citizens who report fraud or false claims to share in the government's recovery of damages.
Significant changes to the False Claims Act made earlier this year will improve its effectiveness in stopping fraud against taxpayer funds.
Important changes to the nation's primary anti-fraud statute, the False Claims Act, took effect on May 20, 2009, when the Fraud Enforcement and Recovery Act of 2009 became law.
Among the most significant changes, Congress clarified and corrected the False Claims Act by legislatively overruling certain court decisions that sought to limit the scope of the Act, including Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005); and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev'd, 562 F.3d 295 (4th Cir. 2009).
These important 2009 changes to the False Claims Act include the following:
1. The amendments expand the definition of "claim," and fraud directed against government contractors, grantees and other recipients is now plainly covered by the law.
2. Funds administered by the United States government (such as in Iraq) are now protected.
3. Retaining overpayments of money from the government is now an explicit basis of liability, which will be a source of concern for health care providers, among others.
4. Liability for "conspiracy" to violate the Act is broader than before.
5. Protection of whistleblowers and others against "retaliation" now extends not only to "employees," but also to "contractors" and "agents"; and persons other than "employers" potentially may be liable for retaliation.
6. In investigating, the government now has authority to use "Civil Investigative Demands" more broadly, and to share information more with state and local authorities and with whistleblowers/relators.
7. A standard definition of what is "material" now applies in False Claims Act cases.
8. The statute of limitations has been clarified to allow the government to assert its own claims, after the whistleblower (or "relator") has filed a qui tam case under the False Claims Act.
The amended False Claims Act is reprinted below, in its entirety:
]]> 31 U.S.C. § 37293729. False claims
(a) Liability for certain acts.--
(1) In general.--Subject to paragraph (2), any person who--
(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;
(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;
(C) conspires to commit a violation of subparagraph (A), (B), (D), (E), (F), or (G);
(D) has possession, custody, or control of property or money used, or to be used, by the Government and knowingly delivers, or causes to be delivered, less than all of that money or property;
(E) is authorized to make or deliver a document certifying receipt of property used, or to be used, by the Government and, intending to defraud the Government, makes or delivers the receipt without completely knowing that the information on the receipt is true;
(F) knowingly buys, or receives as a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge property; or
(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,
is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 note; Public Law 104-410), plus 3 times the amount of damages which the Government sustains because of the act of that person.
(2) Reduced damages.--If the court finds that--
(A) the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information;
(B) such person fully cooperated with any Government investigation of such violation; and
(C) at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation,
the court may assess not less than 2 times the amount of damages which the Government sustains because of the act of that person.
(3) Costs of civil actions.--A person violating this subsection shall also be liable to the United States Government for the costs of a civil action brought to recover any such penalty or damages.
(b) Definitions.--For purposes of this section--
(1) the terms “knowing” and “knowingly” --
(A) mean that a person, with respect to information--
(i) has actual knowledge of the information;
(ii) acts in deliberate ignorance of the truth or falsity of the information; or
(iii) acts in reckless disregard of the truth or falsity of the information; and
(B) require no proof of specific intent to defraud;
(2) the term “claim”--
(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that--
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government's behalf or to advance a Government program or interest, and if the United States Government--
(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; and
(B) does not include requests or demands for money or property that the Government has paid to an individual as compensation for Federal employment or as an income subsidy with no restrictions on that individual's use of the money or property;
(3) the term “obligation” means an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment; and
(4) the term “material” means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.
(c) Exemption from disclosure.--Any information furnished pursuant to subsection (a)(2) shall be exempt from disclosure under section 552 of title 5.
(d) Exclusion.--This section does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.
[(e) Redesignated (d)]
31 U.S.C. § 3730
3730. Civil actions for false claims
(a) Responsibilities of the Attorney General.--The Attorney General diligently shall investigate a violation under section 3729. If the Attorney General finds that a person has violated or is violating section 3729, the Attorney General may bring a civil action under this section against the person.
(b) Actions by private persons.--(1) A person may bring a civil action for a violation of section 3729 for the person and for the United States Government. The action shall be brought in the name of the Government. The action may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting.
(2) A copy of the complaint and written disclosure of substantially all material evidence and information the person possesses shall be served on the Government pursuant to Rule 4(d)(4) of the Federal Rules of Civil Procedure. The complaint shall be filed in camera, shall remain under seal for at least 60 days, and shall not be served on the defendant until the court so orders. The Government may elect to intervene and proceed with the action within 60 days after it receives both the complaint and the material evidence and information.
(3) The Government may, for good cause shown, move the court for extensions of the time during which the complaint remains under seal under paragraph (2). Any such motions may be supported by affidavits or other submissions in camera. The defendant shall not be required to respond to any complaint filed under this section until 20 days after the complaint is unsealed and served upon the defendant pursuant to Rule 4 of the Federal Rules of Civil Procedure.
(4) Before the expiration of the 60-day period or any extensions obtained under paragraph (3), the Government shall--
(A) proceed with the action, in which case the action shall be conducted by the Government; or
(B) notify the court that it declines to take over the action, in which case the person bringing the action shall have the right to conduct the action.
(5) When a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.
(c) Rights of the parties to qui tam actions.--(1) If the Government proceeds with the action, it shall have the primary responsibility for prosecuting the action, and shall not be bound by an act of the person bringing the action. Such person shall have the right to continue as a party to the action, subject to the limitations set forth in paragraph (2).
(2)(A) The Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.
(B) The Government may settle the action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances. Upon a showing of good cause, such hearing may be held in camera.
(C) Upon a showing by the Government that unrestricted participation during the course of the litigation by the person initiating the action would interfere with or unduly delay the Government's prosecution of the case, or would be repetitious, irrelevant, or for purposes of harassment, the court may, in its discretion, impose limitations on the person's participation, such as--
(i) limiting the number of witnesses the person may call;
(ii) limiting the length of the testimony of such witnesses;
(iii) limiting the person's cross-examination of witnesses; or
(iv) otherwise limiting the participation by the person in the litigation.
(D) Upon a showing by the defendant that unrestricted participation during the course of the litigation by the person initiating the action would be for purposes of harassment or would cause the defendant undue burden or unnecessary expense, the court may limit the participation by the person in the litigation.
(3) If the Government elects not to proceed with the action, the person who initiated the action shall have the right to conduct the action. If the Government so requests, it shall be served with copies of all pleadings filed in the action and shall be supplied with copies of all deposition transcripts (at the Government's expense). When a person proceeds with the action, the court, without limiting the status and rights of the person initiating the action, may nevertheless permit the Government to intervene at a later date upon a showing of good cause.
(4) Whether or not the Government proceeds with the action, upon a showing by the Government that certain actions of discovery by the person initiating the action would interfere with the Government's investigation or prosecution of a criminal or civil matter arising out of the same facts, the court may stay such discovery for a period of not more than 60 days. Such a showing shall be conducted in camera. The court may extend the 60-day period upon a further showing in camera that the Government has pursued the criminal or civil investigation or proceedings with reasonable diligence and any proposed discovery in the civil action will interfere with the ongoing criminal or civil investigation or proceedings.
(5) Notwithstanding subsection (b), the Government may elect to pursue its claim through any alternate remedy available to the Government, including any administrative proceeding to determine a civil money penalty. If any such alternate remedy is pursued in another proceeding, the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section. Any finding of fact or conclusion of law made in such other proceeding that has become final shall be conclusive on all parties to an action under this section. For purposes of the preceding sentence, a finding or conclusion is final if it has been finally determined on appeal to the appropriate court of the United States, if all time for filing such an appeal with respect to the finding or conclusion has expired, or if the finding or conclusion is not subject to judicial review.
(d) Award to qui tam plaintiff.--(1) If the Government proceeds with an action brought by a person under subsection (b), such person shall, subject to the second sentence of this paragraph, receive at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the claim, depending upon the extent to which the person substantially contributed to the prosecution of the action. Where the action is one which the court finds to be based primarily on disclosures of specific information (other than information provided by the person bringing the action) relating to allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government [FN2] Accounting Office report, hearing, audit, or investigation, or from the news media, the court may award such sums as it considers appropriate, but in no case more than 10 percent of the proceeds, taking into account the significance of the information and the role of the person bringing the action in advancing the case to litigation. Any payment to a person under the first or second sentence of this paragraph shall be made from the proceeds. Any such person shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys' fees and costs. All such expenses, fees, and costs shall be awarded against the defendant.
(2) If the Government does not proceed with an action under this section, the person bringing the action or settling the claim shall receive an amount which the court decides is reasonable for collecting the civil penalty and damages. The amount shall be not less than 25 percent and not more than 30 percent of the proceeds of the action or settlement and shall be paid out of such proceeds. Such person shall also receive an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys' fees and costs. All such expenses, fees, and costs shall be awarded against the defendant.
(3) Whether or not the Government proceeds with the action, if the court finds that the action was brought by a person who planned and initiated the violation of section 3729 upon which the action was brought, then the court may, to the extent the court considers appropriate, reduce the share of the proceeds of the action which the person would otherwise receive under paragraph (1) or (2) of this subsection, taking into account the role of that person in advancing the case to litigation and any relevant circumstances pertaining to the violation. If the person bringing the action is convicted of criminal conduct arising from his or her role in the violation of section 3729, that person shall be dismissed from the civil action and shall not receive any share of the proceeds of the action. Such dismissal shall not prejudice the right of the United States to continue the action, represented by the Department of Justice.
(4) If the Government does not proceed with the action and the person bringing the action conducts the action, the court may award to the defendant its reasonable attorneys' fees and expenses if the defendant prevails in the action and the court finds that the claim of the person bringing the action was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.
(e) Certain actions barred.--(1) No court shall have jurisdiction over an action brought by a former or present member of the armed forces under subsection (b) of this section against a member of the armed forces arising out of such person's service in the armed forces.
(2)(A) No court shall have jurisdiction over an action brought under subsection (b) against a Member of Congress, a member of the judiciary, or a senior executive branch official if the action is based on evidence or information known to the Government when the action was brought.
(B) For purposes of this paragraph, “senior executive branch official” means any officer or employee listed in paragraphs (1) through (8) of section 101(f) of the Ethics in Government Act of 1978 (5 U.S.C. App.).
(3) In no event may a person bring an action under subsection (b) which is based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party.
(4)(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.
(B) For purposes of this paragraph, “original source” means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.
(f) Government not liable for certain expenses.--The Government is not liable for expenses which a person incurs in bringing an action under this section.
(g) Fees and expenses to prevailing defendant.--In civil actions brought under this section by the United States, the provisions of section 2412(d) of title 28 shall apply.
(h) Relief from retaliatory actions.--
(1) In general.--Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, or agent on behalf of the employee, contractor, or agent or associated others in furtherance of other efforts to stop 1 or more violations of this subchapter.
(2) Relief.--Relief under paragraph (1) shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay, and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys' fees. An action under this subsection may be brought in the appropriate district court of the United States for the relief provided in this subsection.
31 U.S.C. § 3731
3731. False claims procedure
(a) A subpena requiring the attendance of a witness at a trial or hearing conducted under section 3730 of this title may be served at any place in the United States.
(b) A civil action under section 3730 may not be brought--
(1) more than 6 years after the date on which the violation of section 3729 is committed, or
(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed,
whichever occurs last.
(c) If the Government elects to intervene and proceed with an action brought under 3730(b), the Government may file its own complaint or amend the complaint of a person who has brought an action under section 3730(b) to clarify or add detail to the claims in which the Government is intervening and to add any additional claims with respect to which the Government contends it is entitled to relief. For statute of limitations purposes, any such Government pleading shall relate back to the filing date of the complaint of the person who originally brought the action, to the extent that the claim of the Government arises out of the conduct, transactions, or occurrences set forth, or attempted to be set forth, in the prior complaint of that person.
(d) In any action brought under section 3730, the United States shall be required to prove all essential elements of the cause of action, including damages, by a preponderance of the evidence.
(e) Notwithstanding any other provision of law, the Federal Rules of Criminal Procedure, or the Federal Rules of Evidence, a final judgment rendered in favor of the United States in any criminal proceeding charging fraud or false statements, whether upon a verdict after trial or upon a plea of guilty or nolo contendere, shall estop the defendant from denying the essential elements of the offense in any action which involves the same transaction as in the criminal proceeding and which is brought under subsection (a) or (b) of section 3730.
31 U.S.C. § 3732
3732. False claims jurisdiction
(a) Actions under section 3730.--Any action under section 3730 may be brought in any judicial district in which the defendant or, in the case of multiple defendants, any one defendant can be found, resides, transacts business, or in which any act proscribed by section 3729 occurred. A summons as required by the Federal Rules of Civil Procedure shall be issued by the appropriate district court and served at any place within or outside the United States.
(b) Claims under state law.--The district courts shall have jurisdiction over any action brought under the laws of any State for the recovery of funds paid by a State or local government if the action arises from the same transaction or occurrence as an action brought under section 3730.
(c) Service on State or local authorities.--With respect to any State or local government that is named as a co-plaintiff with the United States in an action brought under subsection (b), a seal on the action ordered by the court under section 3730(b) shall not preclude the Government or the person bringing the action from serving the complaint, any other pleadings, or the written disclosure of substantially all material evidence and information possessed by the person bringing the action on the law enforcement authorities that are authorized under the law of that State or local government to investigate and prosecute such actions on behalf of such governments, except that such seal applies to the law enforcement authorities so served to the same extent as the seal applies to other parties in the action.
Some history is essential to evaluate how far the handling of whistleblower (or "informant") claims has progressed since the newly created IRS Whistleblower Office was formed in early 2007, and what is still needed.
Although information provided by whistleblowers is extremely effective in exposing fraud, before 2006 Congress had not authorized an effective IRS whistleblower rewards program--and some in Congress affirmatively opposed one.
Some of this history is described in a 2006 report by TIGTA, which helped prompt Congress to create the new IRS Whistleblower Rewards Program. That 2006 report described the value of informant claims--and also the absence of any centralized process within the IRS for coordinating those claims. It described what the new IRS Whistleblower Office Director and still-to-be-hired staff would inherit in February 2007.
First, the 2006 IG Report leaves no doubt about how valuable "informant" information has been to the IRS--even when there was no coordination of informant claims:
The Informants’ Rewards Program has significantly contributed to the IRS’ efforts to enforce tax laws, but additional management focus could enhance the effectiveness of the Program as an enforcement tool and make the process more accommodating to informants. Our analysis of IRS data indicated that examinations initiated based on informant information were often more effective and efficient than returns initiated using the IRS’ primary method for selecting returns for examination.
Nonetheless, perhaps based in part on the past hostility toward the IRS's making effective use of whistleblowers before 2006, the old "informant" program was no program at all. This was the "mess" that the new Whistleblower Office Director and tiny staff of four inherited and had to start revamping in 2007, as described by TIGTA's 2006 report:
]]> However, we found that a lack of standardized procedures and limited managerial oversight resulted in control weaknesses over the Program. We reviewed a judgmental sample of 22 paid claims for reward and 69 rejected claims for reward processed at 3 of the 5 Informants’ Claims Examiner (ICE) units in operation during FY 2005. We noted that each ICE unit maintained its own records because a nationwide database of informant claims does not exist. For the paid informant claims in our sample, we found that 45 percent of the case files reviewed had problems with basic control issues (missing copies of key forms, no record of letters to informants, etc.), and we were unable to determine the justification for the reward percentage awarded to the informant in 32 percent of the cases. For the rejected informant claims in our sample, we were unable to determine the rationale for the reviewer’s decision to reject the claim in 76 percent of the cases reviewed.We also found that an average of over 7 ½ years passed between the filing of the initial claim by the informant and the payment of the reward. We observed lapses in the monitoring of taxpayers’ accounts for payment activity, which may have contributed to delays. For the rejected claims in our sample, an average of over 6 ½ months elapsed between the date of the claim and the letter to the informant rejecting the claim. We observed instances of lengthy delays in the processing of rejected claims, such as unexplained delays between the receipt of the claim and the initial or subsequent review of the claim by ICE unit personnel.
The lack of centralized and active management oversight of the Program increases the risk of errors such as improper payment of rewards or incorrect rejection of valid claims. Additional management focus could also assist in reducing the processing time for paid claims, which would make the Program more attractive to future informants wishing to report violations of tax laws.
Only against this background may the progress of the new IRS Whistleblower Program be evaluated fairly. It should be no surprise that the IRS had been using more than one system to track informant claims before 2007, and that the Whistleblower Office thus inherited those "systems." A staff that grew to four persons that next year had the task of bringing order to disorder.
Obviously, most of us reading TIGTA's latest report were not there to see first hand how this tiny Whistleblower Office staff went about its work. I do know, however, that my calls to Whistleblower Office staff members about our firm's cases over the past 2 1/2 years have been returned, sometimes even on federal holidays, before business hours, and at night--which is remarkable.
Through programs such as the IRS Whistleblower "Boot Camp," we have been fortunate to get to know members of the staff, who without exception have struck me as dedicated and extremely qualified professionals.
The "rest of the story" here is that Congress would be wise to recognize the value of such dedication--and increase the resources available to the IRS--so that the Whistleblower Program can realize more fully its great potential in recovering from tax cheats.
Past history shows that there is a huge return on investment in funding such efforts. That will lessen the burden on honest taxpayers in this time of record deficits.
The Report's title, "Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims," is misleading to this writer, who has followed the progress of the new Program since its inception. Before Congress created the new IRS Whistleblower program in December 2006, the Inspector General had observed that the IRS had no centralized approach to dealing with "informant" claims under the "old" program." The new legislation was designed to create a "Whistleblower Office" for the first time ever--with brand new staff hired to "invent" the various procedures and systems needed to fulfill Congress' intent.
To illustrate, when we submitted a substantial IRS whistleblower claim in early January 2007 through the IRS Criminal Investigative Division, the new IRS Whistleblower Office had no Director or staff. Director Steve Whitlock was not appointed until several weeks later, and he promptly set out to hire highly qualified professionals within the IRS to help establish the new Whistleblower Program. The same professionals simultaneously had to keep up with submissions of new claims from all over the country, as well as capture older submissions to the IRS.
Perhaps the IG means that the Whistleblower Office still has not worked out all of the kinks in this new program. Director Whitlock agreed with the recommendations for continuing to improve the claims process.
The most significant part of the Report may be its strong recommendation that Congress authorize protecting IRS whistleblowers from retaliation, as whistleblowers who file qui tam cases under the False Claims Act are protected:
The False Claims Act covers false claims by government contractors but specifically excludes tax fraud. The Whistleblower provisions in the Tax Relief and Health Care Act of 2006 cover actions in the area of tax compliance and provide a structure that is similar in certain respects to the False Claims Act. However, unlike the False Claims Act, Whistleblower law related to tax fraud does not include specific provisions for employee protection against retaliation by an employer. Our discussions with representatives within the operating divisions who work with whistleblowers identified that whistleblowers are concerned regarding possible retaliation from employers and that their confidentiality is their utmost concern.
* * * *
Legislative Recommendation
Legislation is needed to ensure that informants are protected against retaliation by their employers and to provide specific relief to informants who are retaliated against.
One note of caution: the Report refers to $65 billion in "alleged income unreported" in 2008. There is no way to verify this number now, given that informants may be wrong in their estimates.
The full Report is here.
]]>First, the IRS Whistleblower Program has experienced explosive growth since Congress authorized these new IRS Whistleblower rewards in December 2006.
According to this Report, "the initial results suggest that whistleblowers with significant knowledge are coming forward as a result of the changes to the award program. We received claims that appear to meet the section 7623(b) criteria on 46 taxpayers in the first three months of FY 2008. By the end of the fiscal year, that number grew to 1,246. Of the 994 claims in which the individual made a specific allegation about the amount of the underpayment, 228 alleged the underpayment of $10 million or more, and 64 alleged the underpayment of $100 million or more. Many of the individuals submitting this information claim to have inside knowledge of the transactions they are reporting, and often provide extensive documentation to support their claims. It is too early to tell how many of the 1,246 cases will result in collected proceeds, and whether the whistleblowers' estimates of the amounts in dispute are accurate."
In our experience from submitting early claims even before the new Whistleblower Office had hired any staff, because the IRS Whistleblower Office's first Director Steve Whitlock immediately assembled a team of extremely able professionals from elsewhere in the IRS, the Whistleblower Office hit the ground running. "During this fiscal year, the Whistleblower Office staff grew from 4 to 14. The current staff includes ten analysts with decades of experience in a broad array of IRS
compliance programs."
As claims poured in, the Director and staff essentially had to "invent" the new Whistleblower Program with all that entails, in addition to keeping up with submissions of more and more claims.
Integrating the Whistleblower Program with the various divisions of the IRS also was a predictable challenge.
"Working with the IRS Operating Divisions, the Criminal Investigation Division, and the Office of Chief Counsel, the Whistleblower Office designed an intake process that includes initial review by Whistleblower Office staff and an evaluation by Operating Division subject matter experts. The Operating Division subject matter experts determine whether the information the whistleblower submitted warrants initiation of an examination of the reported issues. Each IRS Operating Division also has a Division Counsel. Division Counsel attorneys provide advice on technical tax issues as well as any legal issues that could limit the IRS's ability to use some or all of the information the whistleblower provided. For example, information a whistleblower provided may be subject to an evidentiary limitation such as the "attorney-client privilege" or the "federally authorized tax practitioner" privilege under section 7525 of the Code. A Division Counsel attorney assists the subject matter expert in reviewing the information provided to determine if any of the information is subject to an evidentiary limitation and whether an exception to that limitation may apply. In addition, as part of the subject matter expert's analysis, the whistleblower may be asked to meet to discuss the submission, to ensure that the IRS fully understands the issues and that the individual has submitted all relevant information.
From our observations in dealing with the Whistleblower Office, the staff has been very capable and diligent in creating and running the new program, and in coordinating with the other divisions of the IRS. "The IRS established a working group led by the Whistleblower Office, with representatives from the Operating Divisions, Criminal Investigation Division, and the Office of Chief Counsel. The working group addresses the detailed steps needed to
implement the changes in the relevant law, including updates, revisions or replacements for regulations, policies, operating procedures, and forms for whistleblower awards.
This year, the IRS completed a comprehensive review of Internal Revenue Manual
(IRM) provisions of section 7623, and published revisions on December 30,2008. In
addition, the IRS published a Privacy Impact Assessment and a Privacy Act System of Records Notice for the whistleblower program. Publication of both the Privacy Impact
Assessment and the Privacy Act System of Records Notice are essential steps in
establishing program controls as required by the law and regulation.
As to money collected and paid out through the IRS Whistleblower Program, the Report provides information on claims submitted before the law changed in December 2006, and doubled the range of payments authorized to whistleblowers. Given that the claims submitted under the new program are now maturing, we look forward to future reports that show the success of the new IRS Whistleblower Rewards.
From the size of the claims we have seen from our firm's clients, the IRS Whistleblower Program should be a source of significant recoveries that will benefit all honest taxpayers, as well as the IRS Whistleblowers who come forward.
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