Whistleblower Lawyer Blog

Bogus tax shelters and other tax fraud and evasion are among the common reports by tax whistleblowers to whistleblower attorneys. Today, the government launched a new, coordinated federal effort by the IRS, the Justice Department's Tax Division, and U.S. Attorneys to stop fraudulent tax claims, frivolous tax returns, and bogus tax schemes.

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.

Today saw a major development that could affect every whistleblower, whistleblower attorney, and whistleblower case involving the False Claims Act, the nation's primary whistleblower law. The U.S. Senate Judiciary Committee today approved new legislation to restore the False Claims Act to its originally intended strength, by eliminating a series of "loopholes" that dishonest government contractors had used to avoid liability.

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.

The new IRS Whistleblower Program authorized by Congress in December 2006 continued its progress this week, with the IRS's announcement yesterday approving the use of contingent fee arrangements in retaining tax whistleblower attorneys.

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.

The IRS this week announced another interesting development in its new IRS Whistleblower Program, which this whistleblower lawyer blog has followed closely. This announcement addressed new regulations permitting the IRS to share tax return information with whistleblowers and their lawyers under written contracts with the IRS, and also to advise those whistleblowers and their attorneys about the status of their whistleblower claims.

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 Justice Department has announced that Besler & Company, Inc., a New Jersey health care consulting firm, and its principal Philip Besler, have agreed to settle allegations of fraud against the federal Medicare program, which were initiated by two qui tam whistleblower cases. The settlement is for $2.875 million, plus interest, paid to the federal government.

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!

Tomorrow, the Senate Judiciary Committee will hold a hearing on a much-needed bill that will restore to its intended effectiveness the government's primary law for combating fraud.

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 trend of new state False Claims Acts with qui tam whistleblower provisions continues, as Louisiana considers whether to adopt its own version of the federal False Claims Act.

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!

Whistleblowers and their attorneys filing suit under the False Claims Act helped federal authorities recover $2.2 billion in Medicare and Medicaid fraud cases in fiscal year 2006, according to a government report just released. The whistleblowers or "relators" received $140 million of the proceeds for their efforts, under the qui tam provisions of the 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).

Pharmaceutical fraud recoveries included $704 million from drug manufacturer Serono, and $435 million from Schering-Plough.

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.

Two days ago on 1/28/08 President Bush signed into law the National Defense Authorization Act for the fiscal year 2008. This legislation includes a provision protecting defense contractor employees who blow the whistle on contracting fraud. 10 U.S.C. § 2409 has specifically been amended via Section 846 to protect employees for disclosing “information that the employee reasonably believes is evidence of gross mismanagement of a Department of Defense contract or grant, a gross waste of Department of Defense funds, a substantial and specific danger to public health or safety, or a violation of law related to a Department of Defense contract (including the competition for or negotiation of a contract) or grant.” Obviously, this new whistleblower protection encourages defense contractor employees to come forward if they have knowledge of such misconduct.

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.

Our whistleblower lawyer blog has followed closely investigations of hedge funds and other offshore investors for tax fraud and other IRS violations. After investigating a tax fraud conspiracy involving offshore companies and offshore bank accounts, the Justice Department and the IRS have announced that an attorney and two certified public accountants have pleaded guilty to tax fraud and aiding the preparation of a false tax return.

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.

Continue reading "Tax Fraud Prosecution Over Abuse of Offshore Transactions Leads to Convictions of CPAs and Attorney by IRS and Justice Department (from Whistleblower Lawyer Blog)" »

The "Big Dig" collapse has led to a $458 million settlement by contractors responsible for the Boston Central Artery/Tunnel highway project. Whistleblowers using the federal and state False Claims Acts helped bring about that result.

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.

Both the IRS Financial Services group (part of its LMSB Division) and the IRS Whistleblower Office have emphasized to me--as recently as yesterday--their strong interest in hedge fund abuses that violate the tax laws.

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.

This whistleblower lawyer blog reported earlier that the New Jersey Assembly had passed the New Jersey False Claims Act, which provides incentives to whistleblowers ("relators") to expose fraud affecting state funds--much like the federal False Claims Act does.

Governor Jon Corzine signed the new bill into law yesterday, which makes New Jersey the 20th state to enact a state False Claims Act with qui tam whistleblower provisions similar to those of the federal False Claims Act. (Click here for a detailed explanation of the False Claims Act and why states are passing their own False Claims Acts.)

New Jersey's citizens should be proud that their taxpayer dollars have the additional protection of the new statute. Congratulations to all who accomplished this result!

The new IRS Whistleblower Office's Rewards Program that we have followed closely on this whistleblower lawyer blog made further progress this week. The IRS gave notice on January 9 that it intends to create a proposed new system of records--"Whistleblower Office Records."

The purpose is to allow the new IRS Whistleblower Office to administer the IRS Whistleblower program more effectively, in contrast to the "old," decentralized procedures that the IRS used before Congress authorized the new IRS Whistleblower Rewards in December 2006.

The new Whistleblower Office Records will contain records pertaining to whistleblower award applications that were filed before or after the new Whistleblower Office was created in early 2007. Based on my earliest discussions with IRS Whistleblower Office Director Stephen Whitlock, it is an essential step to bring all whistleblower submissions to the same place so that the Whistleblower Office can administer the program effectively.

We congratulate Mr. Whitlock and the Whistleblower Office on their continued efforts and progress to make the Whistleblower Program as effective as it can be.

The Notice is "Whistleblower Office Records -- Treasury/IRS 42.005," 73 F.R. 1667-1669. It is reprinted below:

Continue reading "IRS Tax Whistleblower Procedures Continue to Take Shape" »