US citizens who generate income from overseas entities must report that income and pay US taxes on it. Tax treaties between the US and foreign countries may reduce tax liability, but failure to fully report foreign income to the US government is fraud.
The IRS Whistleblower Reward program not only rewards those who report criminal tax activity; it also pays whistleblowers who report underpayment. For example, a US citizen who gains income from a business in Liechtenstein must report that income on his or her tax return and pay the proper amount of taxes. Even though the money came from another country, US citizens must still pay taxes on it. A whistleblower can report the taxpayer for failing to report the income from Liechtenstein without having to ascertain whether or not the taxpayer had criminal intent to hide the income. Underpayment reports of a particular minimum size qualify for a possible whistleblower program reward.
Those with foreign bank or investment accounts must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Service in addition to reporting worldwide income. Failure to issue a correct FBAR can result in serious consequences.
The IRS defines "US citizen" as any of the following: a citizen or resident of the United States, a partnership created in or organized in the United States or under the law of the United States or of any state, a corporation created in or organized in the United States or under the law of the United States or of any state, any estate or trust other than a foreign estate or trust, or any other person that is not a foreign person.
Tax treaties may reduce federal tax liablity on certain kinds of income generated overseas. States may or may not honor US tax treaties with foreign countries, so residency in a particular state may mean that full state taxes are owed for a particular overseas income stream. Taxpayers who want to claim a reduction in tax liability must check the tax treaty for the particular country involved to see if it allows for a reduction.
The IRS encourages whistleblowers to report those who either hide foreign income or fail to report foreign investment accounts. Tax underpayments, providing the amount in dispute exceeds $2 million, can result in a reward for a successful whistleblower.
Tuesday, July 14, 2009
Monday, July 13, 2009
Government Contracts, Bid Rigging, and Whistleblower Rewards
Earlier this month, the Department of Justice announced that it was intervening in a False Claims Act lawsuit filed against SAIC, Science Applications International Corp. The whistleblower suit alleges that SAIC and three government officials colluded to award a $3.2 billion contract to SAIC to form the National Center for Critical Information Processing and Storage. Former computer scientist David Magee filed the whistleblower suit on behalf of the United States and himself.
The United States only intervenes in one out of every 3.5 False Claims Actions filed. If the action succeeds, the US Treasury will recoup lost payments and treble damages. The whistleblower could win up to 25% of what the United States recovers.
The suit alleges that David Galloway, among others, worked with government officials to narrowly construct Requests for Proposals so that only SAIC could meet the bidding requirements. The narrow construction of the RFPs made it impossible for other organizations to compete for the lucrative defense contracts.
POGO, the Project on Government Oversight, follows SAIC activity and reports that the government conducted a five year investigation of SAIC for similar activity before. Though the 2006 report found that SAIC engaged in questionable activities designed to give SAIC an unfair advantage in supposedly competitive bidding processes, no action was taken against SAIC. POGO states that the only punishment meted out by SAIC was the administrative punishment of a program manager.
SAIC responded to a Washington Post inquiry on the allegations by saying that SAIC looked into the complaints and found them without merit. The corporation says it will defend itself vigorously in court.
The government elects against pursuit of defrauders for several reasons - inability to pay, little yield when compared against investigatory expense, politics, etc. Sometimes, an FCA suit can prod the government to prioritize a fraud investigation when it would otherwise allow the complaint to gather dust on a credenza somewhere. If nothing else, the SAIC situation seems to be on its way to some much needed scrutiny.
The United States only intervenes in one out of every 3.5 False Claims Actions filed. If the action succeeds, the US Treasury will recoup lost payments and treble damages. The whistleblower could win up to 25% of what the United States recovers.
The suit alleges that David Galloway, among others, worked with government officials to narrowly construct Requests for Proposals so that only SAIC could meet the bidding requirements. The narrow construction of the RFPs made it impossible for other organizations to compete for the lucrative defense contracts.
POGO, the Project on Government Oversight, follows SAIC activity and reports that the government conducted a five year investigation of SAIC for similar activity before. Though the 2006 report found that SAIC engaged in questionable activities designed to give SAIC an unfair advantage in supposedly competitive bidding processes, no action was taken against SAIC. POGO states that the only punishment meted out by SAIC was the administrative punishment of a program manager.
SAIC responded to a Washington Post inquiry on the allegations by saying that SAIC looked into the complaints and found them without merit. The corporation says it will defend itself vigorously in court.
The government elects against pursuit of defrauders for several reasons - inability to pay, little yield when compared against investigatory expense, politics, etc. Sometimes, an FCA suit can prod the government to prioritize a fraud investigation when it would otherwise allow the complaint to gather dust on a credenza somewhere. If nothing else, the SAIC situation seems to be on its way to some much needed scrutiny.
Wednesday, July 1, 2009
IRS Modifies Anti Inversion Rules
After complaints of over-reaching in response to the anti inversion provisions of the American Jobs Creation Act of 2004, the IRS has been tweaking its approach to addressing the problem of those corporations that seek to reduce their US tax liability by inverting into a foreign corporation. The Service issued its latest set of rules under IRC Section 7874 on June 9, 2009.
What's an Inversion?
Corporate inversions occur when the US corporation decides to avoid US taxes by shifting the corporate structure to an offshore jurisdiction. First, the US corporation forms an offshore corporation; past favorite locales included Bermuda, for example. Next, the Bermuda corporation forms a domestic merger subsidiary. The domestic merger subsidiary merges with the US corporation, with the US corporation surviving. The Bermuda corporation becomes the parent corporation, and the US corporation becomes the Bermuda corporation's subsidiary. The US corporation's shareholders exchange their shares in the US corporation for shares in the Bermuda corporation. Effectively, the US corporation has swapped its parent corporation status with an offshore shell corporation to avoid US tax consequences.
Why does the Internal Revenue Service care?
The IRS cares because Congress cares. Congress has been concerned about various off shore abusive tax shelter schemes and believes that inversion transactions involving foreign "shell" or "dummy" corporations needed to be addressed. Congress is seeking ways of adjusting the US tax system so that it can keep up with US-based global companies. It's aware of the need to restructure the US tax code so that the IRS can work to overcome internally existing jurisdictional problems, and, hopefully, the path will be cleared to deal with the collection problems inherent in dealing with other countries.
What are the New Rules?
Basically, Section 7874 outlines criteria the Service would use to determine if a foreign corporation should be treated as a "surrogate foreign corporation," meaning the foreign corporation status would be ignored for tax purposes. Among other indicators, if the foreign corporation does not, post-acquisition, conduct substantial business activity in the foreign country, the parent corporation could labeled a surrogate. The Service makes its determination via a facts and circumstance test, and formerly, Section 7874 included a safe harbor to reduce some of the uncertainty surrounding that test. In the latest revision, the Treasury explicitly states that taxpayers can no longer rely on that former safe harbor provision.
Why does KEMY care?
KEMY clients blow the whistle on all types of tax fraud, including inversion schemes. With tax revenue down, the government's interest in fraud detection increases. Anyone who believes he or she has knowledge of an improper inversion scheme should contact KEMY today.
What's an Inversion?
Corporate inversions occur when the US corporation decides to avoid US taxes by shifting the corporate structure to an offshore jurisdiction. First, the US corporation forms an offshore corporation; past favorite locales included Bermuda, for example. Next, the Bermuda corporation forms a domestic merger subsidiary. The domestic merger subsidiary merges with the US corporation, with the US corporation surviving. The Bermuda corporation becomes the parent corporation, and the US corporation becomes the Bermuda corporation's subsidiary. The US corporation's shareholders exchange their shares in the US corporation for shares in the Bermuda corporation. Effectively, the US corporation has swapped its parent corporation status with an offshore shell corporation to avoid US tax consequences.
Why does the Internal Revenue Service care?
The IRS cares because Congress cares. Congress has been concerned about various off shore abusive tax shelter schemes and believes that inversion transactions involving foreign "shell" or "dummy" corporations needed to be addressed. Congress is seeking ways of adjusting the US tax system so that it can keep up with US-based global companies. It's aware of the need to restructure the US tax code so that the IRS can work to overcome internally existing jurisdictional problems, and, hopefully, the path will be cleared to deal with the collection problems inherent in dealing with other countries.
What are the New Rules?
Basically, Section 7874 outlines criteria the Service would use to determine if a foreign corporation should be treated as a "surrogate foreign corporation," meaning the foreign corporation status would be ignored for tax purposes. Among other indicators, if the foreign corporation does not, post-acquisition, conduct substantial business activity in the foreign country, the parent corporation could labeled a surrogate. The Service makes its determination via a facts and circumstance test, and formerly, Section 7874 included a safe harbor to reduce some of the uncertainty surrounding that test. In the latest revision, the Treasury explicitly states that taxpayers can no longer rely on that former safe harbor provision.
Why does KEMY care?
KEMY clients blow the whistle on all types of tax fraud, including inversion schemes. With tax revenue down, the government's interest in fraud detection increases. Anyone who believes he or she has knowledge of an improper inversion scheme should contact KEMY today.
Monday, June 22, 2009
Criminal Charges for Off Label Marketing
A New Jersey sales manager pled guilty to a one count information charging her with distribution of a misbranded drug, Bextra. Mary Holloway faces up to six months in prison and up to $100,000 in fines or twice the amount of the gross gain or gross loss.
The FDA approved Bextra for osteoarthritis, adult rheumatoid arthritis, and primary dysmennorhea. Holloway's pharmaceutical company asked the FDA to approve Bextra for acute pain, including that associated with surgery. The FDA explicitly denied this use because it knew of a study in which patients who had undergone coronary artery bypass graft surgery experienced excess cardiovascular events. Eventually, Bextra was taken off the market.
Holloway knew about the FDA's concerns and that it had denied approval for use with acute pain. She told her sales force of 100 people to sell Bextra for those denied uses. Holloway directed her sales force to sell Bextra for acute pain associated with surgery, and she told them to sell it for unapproved dosages. Holloway also encouraged her sales staff to make false safety claims about the drug.
Pharmaceutical sales representatives struggling with unethical and illegal misconduct like Holloway's can assist the federal government in uncovering fraud by filing a False Claims Act complaint. Meritorious FCA claims can result in simultaneous civil and criminal actions, depending on the circumstances.
The FDA approved Bextra for osteoarthritis, adult rheumatoid arthritis, and primary dysmennorhea. Holloway's pharmaceutical company asked the FDA to approve Bextra for acute pain, including that associated with surgery. The FDA explicitly denied this use because it knew of a study in which patients who had undergone coronary artery bypass graft surgery experienced excess cardiovascular events. Eventually, Bextra was taken off the market.
Holloway knew about the FDA's concerns and that it had denied approval for use with acute pain. She told her sales force of 100 people to sell Bextra for those denied uses. Holloway directed her sales force to sell Bextra for acute pain associated with surgery, and she told them to sell it for unapproved dosages. Holloway also encouraged her sales staff to make false safety claims about the drug.
Pharmaceutical sales representatives struggling with unethical and illegal misconduct like Holloway's can assist the federal government in uncovering fraud by filing a False Claims Act complaint. Meritorious FCA claims can result in simultaneous civil and criminal actions, depending on the circumstances.
Tuesday, June 16, 2009
Billion Dollar Tax Fraud and the Isle of Man
Federal prosecutors recently indicted two lawyers and an investment firm executive in one of the "largest tax fraud schemes ever uncovered in this country," according to US Attorney Jeffrey Sullivan of Seattle. Matthew G. Krane, Jeffrey Greenstein, and Charles Wilk face tax evasion, money laundering, and conspiracy charges. The scheme involved a shell company on the Isle of Man.
The Los Angeles Times reported in early June that Wilk and Greenstein allegedly set up a tax shelter scheme that created more than $1.3 billion in fraudulent losses for clients. Krane, according to prosecutors, accepted a $36 million kickback for enticing one of his clients into engaging in the scheme. The client had assurances from at least one noted tax attorney that the tax shelter was legitimate. According to the LA Times, prosecutors found that Wilk and Greenstein created a paper portfolio showing $9.6 billion in losses from technology stocks. The stocks, however, did not exist.
The scheme involved a complex series of transactions set up through a shell company on the Isle of Man. The Isle of Man lies in the Irish Sea at the geographic center of the British Isles. It's not part of the United Kingdom, though the UK has some responsibility for the island's external affairs and defense. The Isle of Man is not part of the European Union nor is it part of the Commonwealth of Nations.
Key to the Isle's economy is its offshore banking industry. The Isle of Man features a low tax economy - no capital gains tax, wealth tax, or inheritance tax. The highest income tax rate is 18%, and the corporate tax rate is 0%.
The complexity of tax schemes involving foreign governments makes the investigation tough for prosecutors. Kenneth Hines, special agent in charge of the IRS in Seattle said to the LA Times, "You're dealing with foreign governments, foreign jurisdictions, all the records that the two agents have to pile through...it could take years, because everything has to come through official channels."
For more information, see $1.3-billion tax-shelter scam alleged. Los Angeles Times. June 5, 2009.
The Los Angeles Times reported in early June that Wilk and Greenstein allegedly set up a tax shelter scheme that created more than $1.3 billion in fraudulent losses for clients. Krane, according to prosecutors, accepted a $36 million kickback for enticing one of his clients into engaging in the scheme. The client had assurances from at least one noted tax attorney that the tax shelter was legitimate. According to the LA Times, prosecutors found that Wilk and Greenstein created a paper portfolio showing $9.6 billion in losses from technology stocks. The stocks, however, did not exist.
The scheme involved a complex series of transactions set up through a shell company on the Isle of Man. The Isle of Man lies in the Irish Sea at the geographic center of the British Isles. It's not part of the United Kingdom, though the UK has some responsibility for the island's external affairs and defense. The Isle of Man is not part of the European Union nor is it part of the Commonwealth of Nations.
Key to the Isle's economy is its offshore banking industry. The Isle of Man features a low tax economy - no capital gains tax, wealth tax, or inheritance tax. The highest income tax rate is 18%, and the corporate tax rate is 0%.
The complexity of tax schemes involving foreign governments makes the investigation tough for prosecutors. Kenneth Hines, special agent in charge of the IRS in Seattle said to the LA Times, "You're dealing with foreign governments, foreign jurisdictions, all the records that the two agents have to pile through...it could take years, because everything has to come through official channels."
For more information, see $1.3-billion tax-shelter scam alleged. Los Angeles Times. June 5, 2009.
Thursday, June 11, 2009
Judicial Fraud - Exponential Victims
The ABA Journal has been closely following a Pay for Jail scheme perpetrated by judges and at least one attorney in Luzerne County, Pennsylvania. Two county judges pled guilty to accepting $2.6 million in kickbacks for sending teenagers to a juvenile detention facility partially owned by attorney Robert J. Powell.
Powell helped judges Ciavarella and Conahan hide the income they received, and he admitted to paying cash to Conahan. Despite earlier insistence that he was a victim in the judges' scheme, Powell pled guilty this week to two felony charges and forfeited his interest in a jet and a yacht.
The conduct of the two judges casts doubt on their juvenile convictions issued from 2003 to 2008. The Pennsylvania State Supreme Court reversed those of former president judge Ciavarella in a ruling handed down in late March. The court appointed a special master to review the situation. The exact number of reversals is not known. AP estimates convictions at issue in the hundreds, while the Philadelphia Inquirer puts the figure at 1200.
More details can be found at the ABA Journal's website.
Powell helped judges Ciavarella and Conahan hide the income they received, and he admitted to paying cash to Conahan. Despite earlier insistence that he was a victim in the judges' scheme, Powell pled guilty this week to two felony charges and forfeited his interest in a jet and a yacht.
The conduct of the two judges casts doubt on their juvenile convictions issued from 2003 to 2008. The Pennsylvania State Supreme Court reversed those of former president judge Ciavarella in a ruling handed down in late March. The court appointed a special master to review the situation. The exact number of reversals is not known. AP estimates convictions at issue in the hundreds, while the Philadelphia Inquirer puts the figure at 1200.
More details can be found at the ABA Journal's website.
Monday, June 1, 2009
Don't Believe Guarantees of Confidentiality
Other firms offer a guarantee of confidentiality in tax fraud whistleblower claims. Don't believe them; read the details carefully. You'll find that the "guarantee" is the firm will give up its fee if your name gets out. That's all. The firm won't cover your damages. Whistleblowers should understand that this means the law firm is taking a bit of a risk, but that's all.
The truth is that there is a slim, slim chance that the IRS will have to call you as a witness against the fraudster. If that happens, then your name will be released. It's the same situation for all IRS Reward claimants. One firm doesn't have any better ability to protect your identity than any other. The likelihood of this occurring is small, and perhaps that is what the firms guaranteeing confidentiality are relying upon.
At KEMY, we're straightforward. Yes, there is a tiny risk your name will get out. It's unlikely, but it could happen. The decision about whether your name comes out depends on many, many factors, all revolving around the unique circumstance of the fraud and the evidence required to prove it. If KEMY decides to take your case, you can rest assured that we will represent you from the beginning through to the resolution of your claim. All along the way, we'll be honest about your risks and your possibilities for recovery.
The truth is that there is a slim, slim chance that the IRS will have to call you as a witness against the fraudster. If that happens, then your name will be released. It's the same situation for all IRS Reward claimants. One firm doesn't have any better ability to protect your identity than any other. The likelihood of this occurring is small, and perhaps that is what the firms guaranteeing confidentiality are relying upon.
At KEMY, we're straightforward. Yes, there is a tiny risk your name will get out. It's unlikely, but it could happen. The decision about whether your name comes out depends on many, many factors, all revolving around the unique circumstance of the fraud and the evidence required to prove it. If KEMY decides to take your case, you can rest assured that we will represent you from the beginning through to the resolution of your claim. All along the way, we'll be honest about your risks and your possibilities for recovery.
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