Because our whistleblower lawyer blog (http://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/) has followed closely the development of the new IRS Whistleblower Program since Congress authorized it in December 2006, I will summarize here some of the key points about the IRS Whistleblower Program, which is still taking shape. By experimenting and using this "blog" as an old-fashioned seminar paper--with the interactive features of the web--NELA lawyers (and others) may be able to "link to" other pertinent topics on the web, such as the various IRS materials discussed here.
Overview
Until December 2006, the Internal Revenue Service had no effective program to encourage whistleblowers to report tax fraud and tax violations. Rewards to "IRS Whistleblowers" were rare, slow, discretionary, and small--and could not exceed 15 percent of the amount recovered by the IRS. As a result, the "old" program was ineffective--even though the IRS historically has made good use of information from informants.
The new IRS Whistleblower Program provides the first meaningful rewards to whistleblowers who report substantial tax violations when at least $2 million is owed to the IRS. The amended IRS Whistleblower statute, 26 U.S.C. § 7623, doubles the rewards available to 15-30% of the government's recovery, and for the first time creates an enforceable right for the whistleblower to receive a reward. Not only taxes, but also interest and penalties, count in calculating the whistleblower’s reward.
Many challenges nonetheless remain in representing IRS Whistleblowers. Perhaps the greatest is convincing an overburdened IRS that your client's case is worth the investment of its limited resources. The IRS already has many other cases awaiting investigation, and would-be whistleblowers continually add to that "pile" by submitting hundreds of other potential cases.
Background--Why Now?
The new IRS Whistleblower rewards were inspired by another whistleblower statute, the federal False Claims Act. The successes of the False Claims Act over the past two decades convinced Senator Chuck Grassley (R-Iowa) and others in Congress that meaningful whistleblower rewards are an effective tool for the government to recover public dollars obtained by fraud. Since the False Claims Act was amended in 1986 to increase the size of rewards and otherwise encourage "qui tam" lawsuits that expose fraud against the government, the federal government's fraud recoveries have grown dramatically--from less than $100 million in 1987, to more than $3 billion in 2006.
Tax violations, however, fall outside the False Claims Act, which expressly “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S.C. § 3729(e). As a result, there was no meaningful incentive for tax whistleblowers to come forward to the IRS before December 2006.
With a "tax gap" of more than $200 billion in estimated unpaid taxes each year, the old IRS program brought in less than $100 million annually--even though information from "insiders" historically has been quite productive for the IRS. In fact, the June 2006 Report of the Treasury Inspector General for Tax Administration (TIGTA) noted that, based on past experience,"examinations initiated based on informant information were often more efficient and effective." (See June 2006 Report of Treasury Inspector General for Tax Administration--which predated Congress' creation of the new IRS Whistleblower Rewards Program, entitled "The Informants Rewards Program Needs More Centralized Management Oversight," No. 2006-30-092. (
http://www.treas.gov/tigta/auditreports/2006reports/200630092fr.pdf).
Further, there was no "Director" or even any "Whistleblower Office" under the old program--no one person or centralized place to keep track of informant submissions, or to decide on rewards. There was a risk that claims would simply fall through the cracks and be lost. In addition, claims took an average of seven and one-half years to be resolved.
Because the taxpayer privacy provisions of 26 U.S.C. § 6103 limit what IRS officials can say about their investigations, over seven years whistleblowers might wonder if their claims had been forgotten.
Moreover, many potential IRS Whistleblowers never knew that rewards were possible, as the rewards were not well-publicized. All of these facts made the "old" program ineffective, when compared with how successful the False Claims Act has been since meaningful rewards became available through its 1986 amendments.
The New IRS Whistleblower Program Is Born
With the 2006 Report of the Treasury Inspector General for Tax Administration in hand to document the need for an improved IRS Whistleblower program, Congress amended 26 U.S.C. § 7623, effective December 20, 2006. The current version of this IRS Whistleblower statute is linked here and attached. (http://www.whistleblowerlawyerblog.com/2007/01/new_irs_whistleblower_reward_s_2.html).
The new IRS Whistleblower statute's major provisions include the following:
1. Whistleblowers who report tax liability of at least $2 million (including penalties, interest, additions to tax, and any additional amounts) now have an enforceable "right" to part of the government's recovery;
2. The reward range has doubled to 15 to 30% of the government's recovery;
3. For the first time, the IRS has a "Whistleblower Office" and a Director, Stephen Whitlock, to coordinate whistleblower claims and make determinations about rewards;
4. The whistleblower may appeal the IRS's reward determination to the U.S. Tax Court;
5. If the taxpayer is an individual, the new rewards apply only if the individual's gross income exceeds $200,000, and there is at least $2 million in tax liability (including penalties, interest, additions to tax, and any additional amounts);
6. Even persons who participated in the tax violations may qualify for the increased rewards so long as they did not "plan" and "initiate" the actions in question;
7. If the tax liability does not meet the $2 million threshold, the IRS may still make a "discretionary" reward to the whistleblower.
There are certain exceptions and alternative reward provisions in the statute, some of which are similar to those of the False Claims Act.
The New IRS Whistleblower Program Continues to Develop
As claims under the new version of the IRS Whistleblower statute began to arrive, the IRS in February 2007 announced the first-ever Director of the new Whistleblower Office, Stephen Whitlock.
On December 19, 2007, the eve of the first anniversary of the new IRS Whistleblower Program, the IRS issued its interim "guidance" on filing tax whistleblower claims, which is linked here and attached. (See http://www.whistleblowerlawyerblog.com/2007/12/irs_whistleblower_instructions.html.) These interim procedures have addressed many questions that lawyers were asking informally of the IRS in pursuing claims during the new program's first year. The IRS also issued a revised Form 211, which much be submitted under oath with each claim (also attached and linked here). (http://www.irs.gov/pub/irs-pdf/f211.pdf).
Since then, the IRS has issued various notices and temporary regulations on issues that arise in whistleblower claims. These include temporary regulations addressing how the IRS can share information with whistleblowers and their attorneys under written contracts with the IRS (also attached here and published at 26 C.F.R. § 301.6103(n)-2T), and advice from the IRS Chief Counsel on contacts with informants (also attached and linked here). A more complete "running" account of these IRS announcements can be found at http://www.whistleblowerlawyerblog.com/irs_rewards_program_tax/.
Practical Observations for "Screening" and Pursuing IRS Whistleblower Claims
Although I have promised not to quote IRS officials, the following practical observations can be made based on time spent in discussions (and panel discussions) with senior IRS officials:
Screening Cases: Counsel can help perform a valuable "screening" function for the IRS by selecting only those claims that are likely to be worth the IRS's time in investigating and pursuing. Although the IRS seeks a "presence" in essentially all industries and income levels, obviously claims of greater dollar amounts (well above the $2 million threshold for the new rewards) should attract more attention. Currently, some examples of particular interest to the IRS apparently include high net worth taxpayers and abuses in tax shelters, hedge funds, and offshore schemes.
"Willful" tax violations also appear to be a priority, and willful conduct may extend the statute of limitations and allow the IRS to recover greater amounts. In our experience, the IRS Criminal Investigative Division is not hesitant about pursuing tax fraud and tax evasion.
Nonetheless, the Whistleblower Office also is interested in cases that do not necessarily involve fraud (which has a high standard of mens rea or intent), but concern tax "noncompliance," especially when substantial amounts of money are involved.
"Industry-wide" practices are also of interest to the IRS. It may be possible to support a greater reward if the IRS recovers from more than one entity in a given industry.
Evidence required: As to what information and evidence the whistleblower must present, "stories" are not enough. The IRS needs claims with specific documents to prove the violation. Although the whistleblower does not necessarily have to be an "insider," it is preferable for the whistleblower to have direct knowledge of the violation.
In our view, submissions should include not only the verified Form 211, but also a detailed summary of the facts and supporting evidence from the informant (through counsel), supporting documents, and a list of witnesses or people involved, including their contact information.
If the whistleblower lacks certain documents that will prove the violation, it is important to describe with specificity those documents to the IRS, and as much as possible provide a "road map" for the IRS to follow in its investigation. Counsel and experts who analyze the legal elements of the violation and are prepared to discuss with the IRS how the violations may be proved are extremely helpful in this process--and may make the difference in whether the IRS pursues the matter.
For whistleblowers who participated in the violations, the threshold question for counsel is whether they "planned and initiated" the actions involved. If so, the statute places them in a lower reward category of no more than 10% (although they receive nothing if they are convicted of criminal conduct arising from this role), as described in 26 U.S.C. § 7623(b)(3). Nonetheless, based on our experience, the IRS is very interested in obtaining information about criminal conduct from "insiders" who may have played a role in the violation, and it may be possible to negotiate an agreement that protects the whistleblower from certain repercussions from the government.
Confidentiality: "Confidentiality" of the whistleblower's identity is addressed in section 3.06 the interim "guidance" attached and linked here. (http://www.whistleblowerlawyerblog.com/2007/12/irs_whistleblower_instructions.html#more.) Many whistleblowers are encouraged by the language that "[t]he Service will protect the identity of the claimant to the fullest extent permitted by law. Under some circumstances, such as when the claimant is needed as a witness in a judicial proceeding, it may not be possible to pursue the investigation or examination without revealing the claimant’s identity. The Service will make every effort to inform the claimant before proceeding in such a case."
Thus, unlike qui tam cases under the False Claims Act, claims under the IRS Whistleblower Program do not necessarily lead to anyone else's discovering that there has been a report by a whistleblower. Nonetheless, consistent with the caveats of that section, we believe it is important to recognize that the identity may become known, especially if a criminal prosecution of the taxpayer results and proceeds toward trial.
Process: Successful IRS Whistleblower claims must first pass a "screening" by the Whistleblower Office staff, whom we have found to be extremely capable and professional. The matter then is assigned to be investigated by the appropriate persons within the IRS. The Whistleblower Office will track all claims and will ultimately make a determination of any reward to the whistleblower, subject to the whistleblower's right of appeal to the U.S. Tax Court.
Although the new IRS Whistleblower Program promises to be dramatically more effective that the "old" program, IRS Whistleblower claims still will usually take several years to be resolved.
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Quoting former Supreme Court Justice Oliver Wendell Holmes’ famous observation that “[t]axes are what we pay for a civilized society,” Nathan J. Hochman, the Tax Division’s Assistant Attorney General, announced the "National Tax Defier Initiative," or "TAXDEF." Its purpose is to "investigate, pursue and, where appropriate, prosecute those who take concrete action to defy and deny the fundamental validity of the tax laws."
According to the Tax Division, this TAXDEF initiative will:
--"Strengthen and expand coordination" among the Tax Division, the IRS, and U.S. Attorneys’ offices "to ensure that both criminal and civil enforcement tools are fully considered and utilized."
--"Leverage expertise and resources" so that agents and attorneys across the country may "efficiently detect, investigate and where appropriate, prosecute tax defiers," from a national perspective.
--Expand the government's use of injunctions to stop "tax defier activity. Since 2001 the Tax Division has obtained over 300 civil injunctions against tax promoters and preparers, over a third of which directly involved tax defier activity." The government views injunctions as a "powerful method of stopping the promotion of tax defier activity at the earliest possible moment," and estimates its collections at more than $600 million from these efforts.
--Maximize the government's use of technology to "detect, develop and prosecute cases." According to the Tax Division, the Internet in the last decade has "greatly facilitated tax defier activity and turned what was once a paper–based local or regional enterprise into a click and download national operation."
--"Alert and educate the public to the falsity of tax defier claims and publicize the consequences of tax defier conduct." The government says it wants "to pull back the curtain and show the public that the promoters of these schemes are not wizards imparting the secrets of a 'tax-free universe' but are nothing more than garden variety hucksters and modern day snake oil salesmen peddling tax evasion schemes."
Our whistleblower lawyer blog agrees with the government's theme today that tax cheats place a greater burden on the vast majority of honest Americans who pay their taxes. For this reason, those who expose tax cheating should be thanked for their efforts.
The government's announcement is at http://www.usdoj.gov/opa/pr/2008/April/08_tax_275.html.
Our whistleblower lawyer blog has written extensively about the False Claims Act, the qui tam statute that allows private citizens to report fraud as whistleblowers or "relators," and to share in the government's recovery of damages. We have followed the development of the new whistleblower law amendments, the False Claims Act Correction Act (S. 2041), since it was introduced last September by a bipartisan group of Senators (Grassley, Durbin, Leahy, and Specter).
The advocacy group Taxpayers Against Fraud (with which I am proud to be associated) describes the new law as "A Better Rat Trap" designed to put more "snap" into the False Claims Act, and summarizes its key provisions as follows:
--to clarify that False Claims Act liability protects all federal funds;
--to solely vest the Government with the power to dismiss whistleblower- filed False Claims Act lawsuits that are based on public allegations;
--to remove confusion over the statute of limitations period;
--to explicitly clarify that the False Claims Act applies to those who discover an overpayment and decide to pocket the funds; and
--to provide strengthened employment protection for whistleblowers.
According to Jeb White, President of Taxpayers Against Fraud, "[t]his is common sense legislation that we expect to sail through the House and Senate. . . . It's hard to be opposed to building a better rat trap to catch corporate cheats, chiselers, and con artists."
The bill passed the Judiciary Committee overwhelmingly, and moves forward in the legislative process.
We congratulate everyone who had a part in moving the new law forward, so that these loopholes for dishonest contractors may finally be closed.
Our whistleblower lawyer blog has followed the development of the new IRS Whistleblower Program since its infancy. The new tax whistleblower provisions are extremely important in the fight to protect taxpayer funds from fraud and other violations of the law.
In this March 27, 2008 announcement, Notice 2008-43, the IRS announced interim rules that would apply until it amends section 10.27(b) of Circular 230.
Citing the revised IRS Whistleblower statute, the interim rules state that "[a] practitioner may charge a contingent fee for services rendered in
connection with a claim under section 7623 of the Internal Revenue Code."
This is the second IRS announcement just this week about the new IRS Whistleblower Program. On March 25, 2008, the IRS announced temporary regulations concerning disclosing information to whistleblowers under contracts among the IRS, whistleblowers, and their attorneys.
We congratulate the IRS on moving forward with the new Whistleblower Program's development.
]]>On March 25, 2008, the IRS announced new, temporary regulations permitting "disclosure of [tax] return information . . . to a whistleblower and, if applicable, the legal representative of the whistleblower, to the extent necessary in connection with a written contract among the IRS, the whistleblower and, if applicable, the legal representative of the whistleblower, for services relating to the detection of violations of the internal revenue laws or related statutes."
If return information is disclosed to the whistleblower and the whistleblower's attorney under such an agreement, the information must be kept confidential. It "may not be disclosed or otherwise used by the whistleblower or a legal representative of a whistleblower, except as expressly authorized by the IRS."
How much the IRS may communicate with whistleblowers, and still fulfill legal requirements about privacy of taxpayers' returns, has been an interesting topic of discussion since the new IRS Whistleblower Program was created in December 2006. We look forward to discussing the new provisions with the very capable IRS officials who administer the new Whistleblower Program.
The new temporary regulations may be found at 26 C.F.R. § 301.6103(n)-2T(b)(1).
]]>The settlement concludes that the Besler firm counseled hospital clients to improperly increase charges to Medicare patients, so that they would obtain enhanced reimbursement from Medicare.
Medicare pays supplemental reimbursements or "outlier payments" to hospitals when the cost of care is unusually high. Congress enacted the supplemental outlier payment system to ensure that hospitals possess the incentive to treat inpatients whose care requires unusually high costs.
The Justice Department's announcement alleged that, "between January 2001 and August 2003, Besler & Company advised hospitals to purposefully inflate charges for inpatient and outpatient care to make these cases appear more costly than they actually were, and thereby augment their outlier reimbursements."
We congratulate those involved for bringing about this result!
]]>The new IRS Whistleblower Program for tax whistleblowers is an exciting development. It has brought together a team of extremely qualified professionals at the IRS, and has provided them the legal means to create an effective whistleblower program.
This Notice (CC-2008-011) addresses what contacts IRS employees may have with (1) informants with information about their current employer; and (2) informants who act as a taxpayer's representative in an IRS examination or other IRS matter.
The IRS's dealings with whistleblower or informants can present sensitive issues of privilege and confidentiality of information, as our whistleblower lawyer blog has discussed previously (and as I have discussed in a panel discussion last Fall with IRS Whistleblower Office Director Stephen Whitlock.)
This Notice from the IRS Chief Counsel's Office recognizes the need to protect "privilege issues that may be present when an informant is a current employee and/or the taxpayer's representative. It should be assumed that a current employee or a taxpayer's representative has access to information that may be privileged and there has been no affirmative waiver by the taxpayer of applicable privileges. The use of potentially privileged information by the Service can also have the same effect of tainting an issue or an entire case."
The IRS Notice reiterates the "one-bite" rule that permits the government to use information from a private party, "even if the private party obtained the information in an illicit or illegal manner as long as the government is a passive recipient of the information and did not encourage or acquiesce in the private party's conduct." This "one-bite" rule is derived from a 1921 Supreme Court decision, Burdeau v. McDowell, 256 U.S. 465 (1921).
]]> In the same Notice, the IRS Chief Counsel also has emphasized that the IRS will not allow the taxpayer's representative in an IRS proceeding to provide information as an informant, for obvious reasons:
"Any information provided by the taxpayer's representative in connection with an overture to become an informant cannot be used by Service or Counsel employees in any matter concerning the taxpayer (or related taxpayers). It will be the responsibility of the informant to attempt to explain the reason for being excluded from the matter as the taxpayer's representative under these circumstances. In addition, Service and Counsel employees should have no further dealings or contact with, or receive any further information from, the informant as an informant."
We congratulate the IRS on its continued success in refining the new tax whistleblower program! You may read the Notice at http://www.irs.gov/pub/irs-ccdm/cc-2008-011.pdf.
]]>Our whistleblower lawyer blog has written previously about the "False Claims Act Correction Act." The Act is one of the most significant developments in whistleblower law since the 1986 amendments that created the modern False Claims Act.
This is a bipartisan bill designed to restore the government's "primary" tool for fighting fraud against taxpayers, the False Claims Act, to its intended usefulness. Several court decisions have weakened the False Claims Act and inhibited its effectiveness in fighting fraud.
The publication Legal Times contacted me last week to discuss the bill's importance. In its February 25, 2008 issue, Legal Times (http://www.law.com/jsp/dc/PubArticleDC.jsp?id=1203508156014&hub=TopStories) includes only one comment from a "whistleblower" lawyer, my comment that:
"'This would remove a series of technicalities for those who get away with stealing taxpayer funds,” says Michael Sullivan, a plaintiffs lawyer at Atlanta’s Finch McCranie."
What was edited out is that those who have succeeded in defrauding the public now often take advantage of a series of "technical" defenses that allow them to escape accountability--defenses that were never intended by Congress in enacting the current version of the False Claims Act.
No contractor who has not committed fraud will have any concerns about the new bill.
We will continue to report on the bill's progress!
The growing number of state False Claims Acts has been a frequent topic of this whistleblower lawyer blog. In 2007, New York, Georgia, and Oklahoma joined the 16 other states that have enacted versions of the federal False Claims Act, the government's primary weapon for fighting fraud against taxpayers.
New Jersey enacted its new False Claims Act in January 2008. It became the 20th state with such a qui tam whistleblower law.
We applaud Louisiana's progress with its new False Claims Act!
As this whistleblower lawyer blog has written about extensively, the federal False Claims Act is the government's "primary" weapon for combating fraud. As health care expenditures have grown as a share of the federal budget, health care fraud now accounts for more than 70% of the government's annual fraud recoveries.
It was encouraging to see the new "Health Care Fraud and Abuse Control Program Annual Report For FY 2006." This report by the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS), and the Department of Justice, summarizes both organization's FY 2006 results in battling Medicare and Medicaid fraud and recovering money improperly obtained from these programs.
In 2006, DOJ and OIG surpassed their 2005 recoveries totalling $1.47 billion in cases involving health care fraud and abuse.
This report cited 836 new investigations begun during 2006, for a total of 1,677 active investigations. 547 defendants in heath care fraud cases were convicted in criminal prosecutions in 2006.
In civil cases, DOJ took on 915 new health care fraud cases, which raised the total to more than 2000 in 2006.
The largest single recovery was a $900 million settlement Tenet Healthcare Corp. Whistleblowers came forward to report that Tenet was abusing Medicare and paying kickbacks to physicians to send patients to Tenet hospitals.
Other notable recoveries from hospital systems in FY 2006 included St. Barnabas Health Care System in New Jersey ($265 million), Beth Israel Medical Center in New York ($73 million), the Chattanooga-Hamilton County Hospital Authority in Tennessee ($37 million), University Hospitals Health System in Ohio ($13.8 million), Our Lady of Lourdes Regional Medical Center in Louisiana ($3.8 million) and the Milton S. Hershey Medical Center in Pennsylvania ($2.9 million).
Durable medical equipment (DME) fraud also resulted in significant recoveries.
For those wishing to review the complete report, it is at http://oig.hhs.gov/publications/docs/hcfac/hcfacreport2006.pdf.
We congratulate OIG and DOJ on their successful efforts in recovering more than $2 billion of money fraudulently obtained from health care programs in FY 2006.
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The Cato Institute oftentimes blogs about government fraud, abuse and waste. There are many entries in that firm’s website about federal give-away programs and “unnecessary” or wasteful subsidies. Many federal subsidies are doled out without any follow-up accounting and/or audit of whether the entity or person applying for the subsidy is entitled to receive it and/or is entitled to receive a subsidy in as great an amount as is involved. This lack of administrative oversight, therefore, opens up virtually every federal subsidy program to fraud, waste and abuse.
Any person with knowledge of such fraud could qualify for a reward under the Federal False Claims Act if they blow the whistle on fraud in connection with federal subsidy programs. Since there is little federal oversight in many of the federal subsidy programs, it is apparent that fraud occurs in these federal programs, as in any other, and that whistleblowers would be doing all taxpayers a service if they came forward exposing it.
The new whistleblower law is intended to protect all defense contract employees to come forward in good faith so that they need not fear reprisal if they do so. If the employee who blows the whistle on contractor fraud is retaliated against, the affected employee may file a complaint with the Inspector General of the Agency and unless the complaint is determined to be frivolous, the Inspector General will conduct an investigation. If the employee is not satisfied with the Inspector General’s handling of the complaint, the employee may bring an action in federal court and is entitled to a jury trial. If the complainant is retaliated against for bringing legitimate good faith complaints of government contract fraud out in the open, then his or her remedies would include reinstatement, back pay, compensatory damages, attorneys fees and costs.
This new law is a giant step forward when it comes to protecting whistleblowers who are brave enough to come forward and expose defense contractor misconduct. By protecting such employees from retaliation, the law is intended to encourage their coming forward to expose waste, fraud and mismanagement. If the employee who does come forward is retaliated against as a result of blowing the whistle, this law is intended to make sure that they will be fully compensated for any damages sustained as a result of such retaliation including reinstatement of the job taken from them or reimbursement for wages and benefits lost as a result of any retaliation. As stated, the employee is also entitled to have his or her attorneys fees and costs paid should they be retaliated against for blowing the whistle.
This is an excellent piece of legislation which is good for the country and hopefully will help to reduce defense contractor fraud and abuse.
Attorney Graham R. Taylor of Tiburon, Calif., pleaded guilty last week, shortly before a trial scheduled in Salt Lake City before U.S. District Court Judge Tena Campbell. Certified Public Accountants Stephen F. Petersen of Coalville, Utah, and Reed H. Barker of Littleton, Colo., pleaded guilty to the tax fraud a week earlier, and Petersen also entered a guilty plea to aiding in the preparation of a client's false tax return.
The alleged $20 million fraud scheme included using phony documentation for fictitious currency transaction losses, false insurance expense deductions, and "bogus" capital losses for the purpose of fraudulently offsetting taxable income for clients, according to the government. The defendants used offshore companies, offshore bank accounts, the services of offshore nominees, and opinion letters that allegedly gave legal authority for the fraudulent transactions.
CPA Petersen of Coalville also admitted that he and an attorney who still faces charges would typically receive a fee of up to 30 percent of the tax evaded by the clients.
Attorney Taylor admitted that he devised, marketed and implemented a tax shelter known as "The Hybrid" to assist others in evading income taxes. Taylor also admitted that he prepared tax opinion letters with fraudulent misrepresentations; that he used persons in the Cayman Islands as nominees for his clients; and that he falsely disguised client funds through fraudulent transfers.
The three defendants who pleaded guilty, together with alleged co-conspirators attorney Dennis B. Evanson of Sandy, Utah, accountant Brent H. Metcalf of Cottonwood, Utah, and investment broker Wayne F. DeMeester of Sammamish, Wash., had been indicted in late 2005 for conspiracy to defraud the United States, conspiracy to commit mail fraud, and wire fraud. Five of these defendants also were charged with tax evasion and assisting in the filing of false tax returns.
The case was investigated by the IRS Criminal Investigation division. It is being prosecuted by the Department of Justice's Tax Division and the U.S. Attorney's Office for the District of Utah. Jury selection for the remaining defendants began yesterday.
]]> According to the government's Trial Brief, "Defendant DeMeester was an Account Executive with Wachovia Securities and numerous predecessor firms. Through brokerage accounts under his supervision, DeMeester participated and assisted in the schemes by moving money between the accounts of the various companies used in the tax evasion schemes. DeMeester also assisted in moving fictitious shares of stock into clients’ Individual Retirement Accounts (I.R.A.s), thereby making I.R.A. funds available to clients without payment of taxes or penalties as described more fully below." Various Wachovia employees were prepared to testify for the government, according to the government's filings.The statutes charged in the case include the following:
A. CONSPIRACY
Title 18, United States Code, Section 371 provides, in pertinent part:
"If two or more persons conspire . . . to defraud the United States, or
any agency thereof in any manner or for any purpose, and one or
more of such persons do any act to effect the object of the
conspiracy, each [shall be guilty of an offense against the United
States]."
B. ATTEMPTED TAX EVASION
Title 26, United States Code, Section 7201 provides, in pertinent part:
"Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereof shall [be
guilty of an offense against the United States]."
C. AID AND ASSIST IN THE FILING OF FALSE TAX RETURN
Title 26, United States Code, Section 7206(2) provides in pertinent part:
"Any person who willfully aids or assists in or procures, counsels or
advises the preparation...under, or in connection with any matter
arising under, the internal revenue laws, of a return, affidavit,
claim, or other document, which is fraudulent or false as to any material
matter [is guilty of an offense against the United States]."
We congratulate the IRS and Tax Division of DOJ for uncovering this $20 million tax scam and obtaining these convictions.
Of the $458 million settlement, $23 million is being paid to the United States under the federal False Claims Act, and $40 million will go to Massachusetts under its state False Claims Act, as a result of qui tam whistleblower litigation. (As we have written about extensively on this whistleblower lawyer blog, more and more states are enacting state versions of the federal False Claims Act to recover damages for fraud against the government. Private citizen whistleblowers or "relators" can receive up to 25 or 30% of the recovery.)
Congratulations to Massachusetts and the Justice Department for concluding this settlement.
]]>The tax whistleblower section of our whistleblower lawyer blog has followed the expanding probes and increased scrutiny of hedge funds, including our segments on "IRS to Scrutinize Derivatives--Do They Allow Offshore Investors to Avoid Withholding Taxes on U.S. Stock Dividends?" in July 2007, and on "IRS Whistleblower Program: Hedge Funds and Private Equity Firms Under Increasing IRS Scrutiny for Tax Abuses" in November 2007.
Subpoenas from the U.S. Senate Permanent Subcommittee on Investigations reportedly have been issued to Citigroup Inc., Lehman Brothers Holdings Inc., Morgan Stanley, and Swiss bank UBS AG, according to this week's Wall Street Journal reports, relating to use of derivatives by hedge funds and other offshore investors. (January 15, 2008 WSJ).
Clients in the hedge fund industry who have contacted our firm often occupy sensitive positions that require them to exercise great care in not subjecting themselves to legal sanctions, as they witness apparent improprieties that trouble them.
We appreciate the predicaments that persons in high positions of responsibility can face. As former federal prosecutors who have litigated (and defended) criminal tax cases, we know that they need counseling first on avoiding exposing themselves to criminal or civil liability, as they weigh whether to report these improprieties through the IRS Whistleblower Program.
Since most people who contact us are honest persons who are troubled by abuses of the tax laws, we applaud their integrity--and congratulate those who are reporting these improprieties that defraud other taxpayers.
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