Fighting Fraud: A blog for whistleblowers and their allies

Transfer Pricing - The corporate equivalent of secret individual offshore accounts

2010-05-14T07:41:00.000-07:00

Jesse Drucker, writing for Bloomberg, reported a complicated transfer pricing scheme involving Forest Lab's Lexapro. The strategy shifts dollars from American sales of the blockbuster drug to other countries where tax rates are lower than in the US. Drucker estimates that corporate transfer pricing strategies, like this one involving Lexapro, enable thousands of companies to avoid paying $60 billion per year in US tax revenue.

Transfer pricing schemes involve the overpricing of imports and/or the underpricing of exports between related companies in different countries for the purpose of transferring profits or revenue out of the United States in order to evade taxes. The profits and revenue end up in a country that has a lower corporate tax rate than the US.

US Senator Carl Levin of Michigan has been a long time foe of transfer pricing schemes and has been quoted as saying they are "the corporate equivalent of the secret offshore accounts of individual tax dodgers." Levin introduced the Stop Tax Haven Abuse Act in March 2009. The bill allows US tax and securities agencies to treat non-publicly traded offshore entities as being controlled by the US taxpayer who formed them, sent or received assets to them, or benefited from them, unless the taxpayer proves otherwise. Despite strong support from the Obama administration, the bill has yet to pass. Critics of the bill say transfer pricing requires a mult-lateral fix, and the bill's US-centric focus will likely not be successful in remedying the problem.

In the meantime, reports Drucker, Forest Laboratories is employing a "Double Irish" corporate structure to transfer some of the revenue from Lexapro to Ireland, Amsterdam, and Bermuda to show profit from Lexapro in those countries as opposed to the United States, the country where the product is being purchased. Tax savings for Forest are significant. If the profit from Lexapro is reported as US income, the profit could be subject to the US corporate tax rate of 35 percent. In Ireland, the corporate tax rate is between 10% and 12.5%.

To read Jesse Drucker's article, click here.

K&M Represents Whistleblower in $520 Million AstraZeneca Settlement

2010-04-28T09:21:00.001-07:00

AstraZeneca has agreed to pay $520 million in civil fines, penalties, and damages to settle allegations that the company defrauded Medicare, Medicaid, and other government-funded health care programs in connection with its marketing and promotional practices for the blockbuster atypical antipsychotic Seroquel. This is the largest settlement of off-label marketing claims brought under the False Claims Act to date that involved civil-only fines. The $520 million settlement resolves a qui tam lawsuit filed by whistleblower Dr. Stefan Kruszewski, one of two relators to file a case. Dr. Kruszewski was represented by Brian Kenney and Tavy Deming of Kenney & McCafferty, along with William Leonard of Obermayer, Rebmann, Maxwell & Hippel. For more information about the settlement, click here.

Not Fundamentally Designed to be Successful

2010-04-09T11:35:00.000-07:00

"Not fundamentally designed to be successful." That's what the Inspector General's Office had to say in its March 2010 Assessment of the SEC's Bounty Program. OIG identified problems with the program when it released its August Report on the "Investigation of Failure of the SEC to Uncover Bernie Madoff's Ponzi Scheme." The latest report details the follow up investigation of the SEC's whistleblower program.

According to the OIG report, the SEC has had its bounty program in place for more than 20 years. The program provides for rewards to whistleblowers for reporting insider trading. The OIG found that the program was not recognized inside or outside of the SEC and that few applications had ever been received by the program.

Many of the recommendations that followed the OIG's findings appeared to basic, common sense management practices. For example, one recommendation is to keep some kind of file, whether it be hard copy or electronic, for each bounty application. The file, according to the OIG report, should contain, at minimum:

The bounty application
Any correspondence with the whistleblower
Documentation of how the whistleblower's information was utilized
Documentation regarding any significant decisions made with regard to the claim

A bit of a concern is the recommendation that the SEC Bounty Program should incorporate "best practices" from the IRS Whistleblower Rewards Program. One hopes that that new SEC program would incorporate ideas from the latest incarnation of the tax fraud program under Director Stephen Whitlock and eschew past versions. Prior to Whitlock's leadership, the tax reward program showed similar problems to those currently capturing the attention of SEC watchers. While much improved in the last few years, the Service is still struggling to find lost complaints and improve communication with whistleblowers.

The SEC is charged with providing OIG with a written corrective action plan designed to address the recommendations. The plan should appear in late May.

SEC Whistleblower Program Proposals – Another dismal failure or real opportunity?

2010-04-05T07:52:00.000-07:00

Senate Banking Committee Chairman Christopher Dodd of Connecticut introduced a financial reform bill on March 15, 2010. The proposal includes a new whistleblower program to reward those who assist the Securities and Exchange Commission (SEC) in its enforcement of securities violations, like violations of the Foreign Corrupt Practices Act.

The SEC already has a program in place to reward whistleblowers in insider trading programs. The existing program is widely regarded as a dismal failure, having paid only four rewards totaling only $67,570. In the last year, at least three proposals have been discussed to establish a new SEC whistleblower program, including the most recent Dodd proposal.

Dodd's bill proposes that whistleblowers who provide original information that leads to monetary sanctions would be paid between 10and 30 percent of any money the government collects that results from the information provided by the whistleblower. Whistleblowers would also receive rewards if their information leads to other successful "related actions," i.e. actions brought by other federal and state regulatory agencies, including the DOJ and foreign law enforcement agencies.

Most commentators watching the process feel that the final version of the new SEC program will be very similar to the IRS whistleblower rewards program. They expect the SEC program will include the IRS's one bite rule, for example, though the IRS itself appears to be moving away from full implementation of the civil investigation prohibition against talking to tax whistleblowers more than once. The Service's criminal division never adhered to the one bite rule, and now, the IRS civil division is embracing whistleblowers to a greater degree as well. It would be unfortunate if any new SEC whistleblower program blindly adopted IRS rules, like the one bite rule, without learning from the IRS's mistakes. The SEC has a dismal record with whistleblower incentive and protection programs. It would be best for the American people if any new SEC provision learned from, rather than repeated, the mistakes of other whistleblower programs.

IRS Makes Good: $5.5 Million Partial Payment to K&M Client

2010-01-11T07:14:00.000-08:00

Philadelphia, PA/January 11, 2010. The IRS Whistleblower Office facilitated a partial payment of $5.5 million to a Kenney & McCafferty, P.C. whistleblower who reported tax fraud seven years ago. The payment is the first substantial payment to be made under the auspices of the IRS Whistleblower Office.

“We feel good about the positive changes that we’ve seen in the Whistleblowers Office in the last two years,” said lead partner Brian Kenney of Kenney & McCafferty. “Things are getting easier for tax whistleblowers who want to help the IRS recover money for the Treasury. We’re getting answers and results that three years ago would have been impossible to obtain. We expect that an additional payment will be made in this case within the next few months.”

The K&M tax whistleblower first contacted Brian Kenney eight years ago about a complex, international a stock and tax fraud scheme orchestrated by a overseas-based corporate conglomerate. As a result of the whistleblower coming forward the United States has recovered over $60 million in taxes, fines, and penalties. The K&M whistleblower’s identity remains confidential, consistent with provisions of the new IRS Rewards Program. In 2006, Senator Chuck Grassley championed legislation to incentivize tax whistleblowers to come forward with information to assist the Service in recovering tax dollars improperly withheld by taxpayers. The new IRS Rewards Program guarantees a percentage of the Service’s recovery to those who make meritorious claims. To improve the way the Service works with whistleblowers, the IRS formed a Whistleblowers Office to track whistleblower reports. Steven Whitlock became Director of the new Office three years ago.

Linda Stengle, K&M’s attorney assigned to the case, credits the Whistleblower Office for facilitating the reward. “Director Steven Whitlock has evolved the WO into a responsive, knowledgeable unit in just a short time. Dawn Applebaum, the Analyst assigned to the case, made the system work for our client here. Things happened quickly, after years and years of waiting.”

Kenney notes that the recent TIGTA report presented a dismal picture for would-be tax whistleblowers. The TIGTA report noted the Whistleblower Office lost claims, long delays, and duplicative record keeping systems resulted in a poor record for the fledgling Rewards Program. Under the old system, the lack of uniform oversight meant that whistleblowers had to wait as long as ten years to learn if they would receive any reward at all. Whistleblowers grew frustrated by bureaucratic snafus.

“A lot of the things noted in the TIGTA report are old news,” said Kenney. “We’ve been monitoring the situation very closely, and we’re impressed with the changes we’ve seen in the program. It’s much more efficient and effective than it was just a year ago. We’re optimistic.”
Brian Kenney’s optimism about whistleblower programs has led him to become one of the leading tax whistleblower attorneys in the country. Kenney & McCafferty, P.C. focuses on qui tam and tax whistleblower litigation. Its attorneys have recovered more than $4 billion for the government in False Claims Act and tax whistleblower cases. For more information, contact Linda Stengle at 610-940-0327.

2009 - The Year of the Ponzi Scheme Collapse

2009-12-29T08:47:00.000-08:00

2009 was a bad year for Bernie Madoff, Allen Stanford, and Scott Rothstein. The government targeted all three as perpetrators of massive Ponzi schemes -a form of pyramid fraud that targets investors looking for a fast turnaround on their dollar. Unfortunately, thousands of investors also lost billions in 2009 as the pyramid schemes unraveled.

Ponzi schemes promise abnormally high or abnormally consistent returns that they cannot deliver. Returns do not come from any actual profit. Earlier investors are paid high returns generated from investments of later investors. If left to run indefinitely, the system inevitably collapses under its own weight because it never earns more than it is obligated to pay. It relies on a constant infusion of new investors to pay returns to the older investors.

As the Ponzi scheme collapses, one of four things will usually happen:

1. The fraudster will disappear and take all available investment dollars with him or her.
2. The fraudster will have difficulty paying the promised returns; investors will begin to panic, and the scheme will start to collapse under its own weight as revenue dries up.
3. The scheme is exposed by legal authorities.
4. External market forces cause investors to withdraw their funds, decreasing the revenue stream to the pyramid.

Ponzi schemes are named after Charles Ponzi, an Italian immigrant, who took in $15 million in fraudulent investments between 1919 and 1920. Charles Ponzi modernized an old fraud scam, previously referred to as "Robbing Peter to pay Paul" schemes.

"My business is simple," said Ponzi in his last interview. "It was the old game of robbing Peter to pay Paul. You would give me one hundred dollars and I would give you a note to pay you one-hundred-and-fifty dollars in three months. Usually I would redeem my note in 45 days. My notes became more valuable than American money... Then came trouble. The whole thing was broken."

In his 1857 novel, Little Dorrit, Charles Dickens described the "rob Peter to pay Paul" scheme. Commentators note an eery resemblance between Dickens's Mr. Merdle, the fraudster in Little Dorrit, and Bernie Madoff, whose Ponzi scheme resulted in his incarceration in 2009. Both were hailed as financial geniuses before being unmasked as thieves; both had wives who displayed their wealth openly and ostentatiously; both had legions of investors who wanted to entrust them with their dollars.

The Associated Press reports that Ponzi collapses in 2009 nearly quadrupled over those in 2008, deriving its numbers from counting criminal prosecutions and administrative actions taken at state and federal levels. AP states that 150 Ponzi schemes collapsed in 2009, compared with only about 40 in 2008.

The Madoff Ponzi scheme collapse has generated increased vigilance at the federal level, but the 2009 recession was more likely the driving force behind the collapse of these old style pyramid schemes. As dollars got tighter, investors withdrew their funds and wanted to put them into more conservative and safe investment options. Sources of new investors, and revenue, dry up, resulting in less money becoming available to pay off old investors. The pyramid collapses.

Most new federal cases have not yet resolved, and investigations are ongoing. The FBI opened 2100 securities fraud investigations in 2009, about 350 cases more than were opened in 2008. The SEC opened about 6% more investigations in 2009 than in 2008.

Kenney & McCafferty Assists Government in $112 million Omnicare Settlement

2009-11-13T10:23:00.000-08:00

Kenney & McCafferty, P.C., co-represented one of the whistleblowers in the nation’s largest nursing home pharmacy and pharmaceutical False Claims Act settlement. The Department of Justice announced on November 3, 2009, that Defendants Omnicare and IVAX Pharmaceuticals would pay a total of $112 million to settle litigation initiated by whistleblowers.

The Department of Justice alleged that Omnicare solicited and/or paid four different types of kickbacks:

* First, DOJ alleged that Omnicare solicited and received kickbacks for recommending that physicians prescribe Risperdal to nursing home patients.

* Second, DOJ alleged that Omnicare paid kickbacks to nursing homes by providing them with consultant pharmacist services at below cost rates.

* Third, DOJ alleged that Omincare solicited an $8 million kickback for purchasing $50 million in drugs from IVAX.

* Fourth, DOJ alleged that Omnicare conspired with nursing home for Omnicare to pay the nursing home chains $50 million in exchange for the nursing homes to continue using Omnicare for pharmacy services.

Kickbacks, such as these, are illegal because they subvert the medical judgment of health professionals and result in unnecessary and often, dangerous, changes in medications for the patient. Whistleblowers in the pharmaceutical industry recognized the illegal activity and filed False Claims actions. False Claims Acts allow whistleblowers to report false claims by filing a sealed complaint in court. If the whistleblower prevails, he or she gets a percentage of the recovery, and the remainder returns to the government.

Kenney & McCafferty, P.C. specializes in qui tam and tax whistleblower litigation, and its attorneys have recovered more than $2 billion for the government in False Claims Act and tax whistleblower cases. For more information, visit K&M’s website, www.quitam-lawyer.com

Estate Tax Fraud - Prime Area for Whistleblowers

2009-10-21T07:33:00.000-07:00

Some commentators are noting that the recent prosecution of an individual for filing a false federal estate tax return may signal the Service's new "get tough" policy on estate and gift tax fraud. Prior to the Whistleblower Rewards Act of 2006, prosecutions in the area have been lean.

The recent criminal case involved a woman who was the executrix of her mother's estate. She admitted that she intentionally omitted assets worth $400,000 from the Form 706, the federal estate tax return. The executrix faces possible imprisonment, supervised release, and large fines and penalties.

Previously it was thought that the Service might be trying to adhere to the Bush administration's wishes that estate taxes simply disappear. While Bush supported the elimination of the estate tax entirely, administrative proposals met with little support. Some feel that the administration then decided to gut the ranks of IRS employees to de facto eliminate enforcement of estate tax collection. In March 2008, outraged IRS employees sounded off about the Agency's decision to terminate 157 of its 345 estate tax lawyers. The IRS itself had noted that 85 percent of the large taxable gifts it audited were fraudulent and intended to cheat the public. For every hour that the Service's estate tax lawyers work, they uncover an average of $2,200 in taxes that Americans worth $1 million or more illegally withheld from the government. The Service's estate tax attorneys uncover about $1.4 billion in lost tax revenues per year. While the Service appears to be recruiting again, it's unclear whether those lost, and profitable, estate attorneys will be restored to the IRS rolls.

Estate and gift tax claims present an area of opportunity for whistleblowers. With a decrease in IRS estate tax attorneys, the Service will need to increase its reliance on informants to point out fraudulently reported Form 706 claims. Old tax returns and appraisals can help. The more credible the claim, the more likely it will be that the Service will decide to devote resources to the claim's investigation.

If you believe you have a viable estate or gift tax evasion claim, call KEMY for a free assessment today.

TIGTA Cites Deficiencies in Resolution of Whistleblower Claims

2009-10-16T06:44:00.000-07:00

The Treasury Inspector General For Tax Administration (TIGTA) issued a report entitled, "Deficiencies Exist in the Control and Timely Resolution of Whistleblower Claims." TIGTA assessed the IRS's implementation of the Whistleblower Office and the controls monitoring whistleblower claims. The report identified three general areas of problems:

1. Multiple inventory systems and inadequate procedures and processes result in ineffective control over Whistleblower claims;

2. Whistleblower claims are not resolved in a timely manner; and

3. The law's lack of employee protection against retaliation places whistleblowers at risk for reporting tax fraud.

The life of a whistleblower claim can be extraordinarily long when compared to most any other kind of agency action. TIGTA noted that the Whistleblower Office recently paid an award on a claim 15 years after the claim was received. Generally, the Whistleblower Office will tell claimants that payments could take 10 years, assuming the claim is successful at all.

TIGTA identified improper delays in notifying claimants when their claims were rejected. The most common reason for rejecting a whistleblower claims was that the targeted taxpayer was already under investigation by the Service. TIGTA estimated that once the IRS made a decision to deny a claim, it took 6.5 months to notify a claimant that his or her request for reward had been rejected. Twelve claimants had not been notified by the time of the TIGTA review, though the Service had rejected the claim 290 days before.

A significant obstacle to timely resolution has been the Service's multiple inventory systems for tracking claims. The Whistleblower Office uses three inventory systems to track rewards claims currently. The systems did not accurately track information about claims, and it was frequently inconsistent in its reports of claims. One problem has been incorrect claim receipt dates. The Service has been working on a single inventory system, called E-TRAK, and hopes that it can capture claim information accurately from the multiple systems currently in place and transfer them to one inventory mechanism for all 7623(b) claims. The Whistleblower Office expects this single inventory system to be fully in place sometime in 2010.

TIGTA made a number of recommendations, including one to add retaliation protection to the statute. Several IRS analysts had reported that whistleblowers requested protection from the targeted taxpayers but the IRS had no way to respond. TIGTA recommends that the legislation be amended to provide specific relief to whistleblowers who become victims of retaliation.

Whistleblower Office Reports $22 Million Paid in 2008

2009-09-28T11:49:00.000-07:00

The IRS has yet to pay on any claims under the 2006 IRC 7623(b) mandatory reward program enacted in December 2006, according to its annual report to Congress issued earlier this week. Claims paid in 2008 for the discretionary rewards program (IRC 7623(a)) exceeded $22 million.

The Whistleblower Office has seen an increase in amounts collected and awards paid since FY 2004. That year, the Service paid out more than $4.5 million in awards. In FY 2005, the Service paid whistleblowers $7.6 million. Award payouts spiked in 2006 at just over $24 million. In 2007, the amount paid dropped to $13.6 million, with in increase in 2008 to more than $22 million.

The Whistleblower Office reminded Congress that the 7623(b) program represented a significant change for the Service, requiring the Whistleblower Office to "tool up." For example, during 2008, the Office staff grew from 4 to 14. Currently, ten analysts examine and shepherd meritorious whistleblower claims through the Service's criminal and civil investigation divisions.

Interesting was the Service's report on month by month submissions to the program. In October 2007, the Whistleblower Office received 16 submissions. In September 2008, the Office received 136 submissions. Submissions peaked in July of 2008 with a record 204 claims submitted, identifying 243 alleged fraudsters.

The Whistleblower Office laid out FY 2009 priorities in the report. The four areas of emphasis are 1) revise and update published guidance; 2) develop baseline information; 3) enhance communications; and 4) build program stability.

KEMY maintains regular contact with the IRS Whistleblower Office and monitors changes in whistleblower reward program policy. If you believe you have a potential IRS reward claim, contact KEMY for a free consult today.

Waiving the Privilege - Tax Accrual Work Papers

2009-09-28T07:46:00.000-07:00

Have you shared tax accrual work papers with an independent outside auditor? If so, you've waived your privilege to keep those papers from the Internal Revenue Service.

Many tax practitioners have been following the tumultuous progression of the Textron case, in which the First Circuit decided, en banc, to side with the IRS. Textron fought an IRS summons on four grounds - 1) the summons lacked a legitimate purpose; 2) the tax accrual work papers were protected by attorney-client privilege; 3) the papers were protected by tax practitioner privilege; and 4) the papers were protected by the work product doctrine.

The district court found that though the papers were prepared by attorneys, Textron waived its attorney-client privilege when it presented those documents to its independent auditor. Waiver of attorney client privilege occurs when the client opts to share the information with a third party. When shared with an independent third party, such as an independent auditor, the court views the information as no longer protected by the narrow confines of the attorney-client privilege doctrine. The waiver of attorney client privilege by Textron suffered no further scrutiny, but other aspects of Textron's argument temporarily gained some ground within the First Circuit.

The lower court agreed with Textron that the tax accrual work papers were protected by the work product doctrine, a privilege intended to prevent premature disclosure of legal strategy. Concluding the papers were protected by the work product doctrine, the lower court ruled that Textron did not have to provide the papers to the IRS. The IRS disagreed.

Appeals ensued. The First Circuit's Appellate Panel agreed with the lower court, and then the First Circuit, en banc, vacated both lower court decisions. The en banc appeal focused on the narrow question of whether the documents were protected by the work product doctrine and concluded they were not. The First Circuit reasoned that the papers were written in accord with ordinary business practices, and though they described the hotly litigated issue of SILOs, they were not written "in anticipation of litigation." As such, Textron's documents were not protected by the work product doctrine, and Textron had to provide them to the IRS.

Only two Circuits, the First and the Fifth, have addressed work product protection for tax audit work papers; Textron is the most recent. It reflects a change in the Service's long standing history of restraint on requesting tax accrual work papers. Large scale fraud activity has captured the attention of the courts and resulted in an erosion of legal privileges generally. The courts are requiring documents to be provided to fraud investigation entities and protecting only very narrow types of information from judicial and opponent review.

KEMY is up to date on the changing law and its impact on tax work papers. If you have access to legal tax papers and do not know whether or not they can be provided to the IRS in pursuit of uncovering fraud, call KEMY for a free consult today.

UBS Tells Clients to Get an Attorney

2009-09-18T12:08:00.000-07:00

Swiss bank UBS sent a letter on September 10, 2009, to several of its US clients warning that their undisclosed income in Switzerland may be reported to the United States Internal Revenue Service. UBS told US clients to appoint a Swiss attorney to represent them or the Swiss government would appoint one for them.

As part of the recent settlement between the United States and UBS, UBS will reveal the identities of 4,450 US account holders that UBS believes have failed to pay US taxes by hiding assets in the Swiss banking system. The settlement resulted from a lawsuit filed by the United States seeking disclosure of all 52,000 account holders. The Swiss government became involved to protect its banking industry and assisted in negotiating the compromise. The international lawsuit against UBS is the second case this year involving undisclosed foreign assets. In February, UBS pled guilty to criminal tax evasion and disclosed 250 names. The two cases will only yield 4,700 US account holders out of 52,000, but those revealed are anticipated to be the largest UBS violators of the IRS tax laws.

Under the settlement agreement, the Swiss have 360 days to process the 4,450 accounts before the names will be released to the United States. UBS account holders who have been targeted for disclosure may appeal the disclosure decision to the Swiss Federal Administrative Court before the information is submitted to the United States. The Swiss govenment has appointed 5 temporary judges to handle approximately 500 anticipated appeals of the bank's disclosure decision. The decision of the Swiss Federal Administrative Court will be final.

In the meantime, record numbers of offshore account holders are taking advantage of a time limited IRS voluntary disclosure period, hoping to reduce their exposure to back taxes and a reduced fine with no criminal penalty. The IRS now averages an unprecedented 500 voluntary disclosures per week. The deadline for voluntary disclosure is September 23, 2009.

Sadly, there are still thousands and thousands of offshore account holders who will not be reported to the Internal Revenue Service, either voluntarily or through the UBS settlement. Those with information about tax evasion and/or tax underpayment can contact KEMY to learn if that information could qualify for a reward from the IRS.

UBS Tax Evasion Cases To Get Special Scrutiny by Elite IRS Auditors

2009-09-10T07:13:00.000-07:00

The IRS posted internal job listings recently for a newly created office within its Large and Mid-Size Business division. The Service is looking for auditors experienced in working with international tax treaties and complex cross-border corporate structures. The focus? Wealthy Americans who hid their assets in UBS accounts.

The Service is gearing up for an anticipated 10,000 new tax evasion cases that should result from the UBS settlement and the current off shore income tax amnesty program, set to end on September 23. Wealthy Americans with off shore holdings are scrambling for last minute tax advice, and hundreds are taking part in the IRS's amnesty program.

As part of a settlement, UBS, the United Bank of Switzerland, agreed on August 19, to turn over 4,450 names of its wealthiest US account holders who are the most likely to be engaging in tax evasion. UBS has 52,000 American account holders, and the agreement arose from litigation filed by the United States government to get access to the secret Swiss bank account information. UBS will give information about the 4,450 accounts to the Swiss government, which will screen the information and decide what should be forwarded to the United States.

The new IRS global high-wealth industry group will be one of six industry-specific sectors within the IRS's Large and Mid-Size Business division. IRS spokesman Frank Keith remarked that the establishment of the global high-wealth industry group was the first step in the IRS's long term enforcement strategy. Those selected will be the most experienced IRS auditors in dealing with global entities.

Record Pfizer Settlement for $2.3 Billion - Tip of the Iceberg?

2009-09-04T05:33:00.000-07:00

The morning of the announcement of the $2.3 billion Pfizer settlement, a few hours before the seal was lifted, we received an emailed NY Times article about a pharmaceutical company's plans for off label marketing of a major anti depressant.

The seal was lifted, and the Department of Justice issued its press release at 10:30 AM. Congratulations poored in; reporters called; interviews were given. At about 4:00 PM, commentators began to point out that pharmaceutical manufacturers view settlements like Pfizer's as merely a "cost of doing business," and the financial penalty akin to "hitting a mule with a 2x4." KEMY agrees that the recoveries to date for off label marketing are probably the tip of the iceberg. Off label marketing of drugs is big business, and big pharma reaps immense profits from off label prescriptions.

KEMY is well aware that pharmaceutical manufacturers continue to engage in off label marketing of drugs, with serious ramifications. In addition to the misspent public dollars for Medicaid and Medicare reimbursements, off label prescriptions raise grave safety concerns. For example, sales reps targeted kids for prescriptions of Geodon, and many parents blindly followed their doctors' recommendations to put their children on the drug. Sadly, the situation is not unusual. We know of people who have died and kids who are suffering because they were the unfortunate victims of an off label marketing campaign.

The Pfizer settlement is particularly gratifying because it raises awareness about the often overlooked mental health population. The public continues to stigmatize those with mental health issues, and one of the by products of this stigmatization is poor health care. Pills are pushed on very vulnerable people who are often desperate to feel better. Many of these same folks receive Medicare or Medicaid, so public dollars and personal safety are at considerable risk. KEMY is very proud to have worked with the government to address this important aspect of health care.

KEMY Represents Whistleblower in $2.3 Billion Settlement

2009-09-02T07:39:00.000-07:00

Dr. Stefan Kruszewski, M.D., came to KEMY with grave concerns about off label marketing of Geodon, an anti-psychotic, targeting children. Geodon is approved to treat only patients ages 18-65 diagnosed with schizophrenia or acute manic or mixed episodes associated with bipolar disorder. The Harrisburg psychiatrist had noticed that Geodon was being systematically marketed for unapproved uses and to children. KEMY attorneys Brian Kenney and Tavy Deming agreed to work to correct the problem.

Today, as part of a record settlement involving Geodon and other drugs, Pfizer agreed to plead guilty to criminal conduct and to pay more than $2 billion in criminal and civil fines, penalties, and damages. To read KEMY's press release, click here.

Geodon is FDA-approved to treat only patients ages 18-65 diagnosed with schizophrenia or acute manic or mixed episodes associated with bipolar disorder. According to KEMY’s lead partner, Brian Kenney, “Pfizer targeted pediatrics and adolescents to expand off-label use and maintained on its payroll an army of more than 250 child psychiatrists nationwide.” Kenney continued, "The purpose and intent of paying so many child psychiatrists is clear – to gain a foothold within the fastest growing market for antipsychotics – children. The practice of expansive off-label use is dangerous, particularly in children because the drug has not been evaluated for its safety for the unique physiological make up of children."

KEMY’s whistleblower complaint led to a national investigation into Geodon. The federal investigation into Pfizer’s Geodon marketing practices was conducted by the U.S. Attorney’s Office for the Eastern District of Pennsylvania under the direction of U.S. Attorney Michael Levy, Assistant U.S. Attorney Marilyn May and Assistant U.S. Attorney Charlene Keller Fullmer. Massachusetts Assistant Attorney General Bob Patten led the investigation on behalf of the states and the National Association of Medicaid Fraud Control Units (“NAMFCU”).

According to Kenney, Pfizer’s switching campaign “endangered patients by ignoring or materially understating Geodon’s serious, and even life threatening, side effects.”

Sadly, industry watchers say that large settlements are seen by the drug companies as merely a cost of doing business. Off label marketing of anti-psychotics, anti depressants, anti convulsants, and stimulants to children continues to reap big financial rewards for pharmaceutical companies, despite the safety risks. Children today are being highly medicated with drugs that have only been tested on adults. These drugs have serious side effects and can harm children. If you know of off label marketing targeting children, call KEMY today.

Mortgage Fraud Trends

2009-08-27T08:18:00.000-07:00

The Financial Crimes Enforcement Network (FinCEN) reports mortgage fraud trends based upon Suspicious Activity Reports (SARs) filed by money service businesses, like banks. Money Service Businesses must file a SAR when it knows or suspects that funds came from illegal activity, a particular transaction is structured in such a way to evade reporting requirements or appears to serve no lawful purpose, or the money service business is being used to facilitate criminal activity. FinCEN analyzes SARs data and uses it to identify vulnerabilities in financial systems, like the mortgage industry.

Currently, FinCEN targets the following trends in mortgage fraud:

1. Mortgage brokers initiating fraudulent loan practices.
2. Fraudulent appraisals being used as a basis for flipping.
3. Licensed appraiser identity theft.
4. Cashing out of refinance loans.
5. Fraudulent statements of income, including low or no document loans.
6. Home equity lines of credit.

The specific types of activities that "red flagged" and prompted the SAR filing included:

1. Misrepresentation of income/assets/debts.
2. Forged/fraudulent documents.
3. Occupancy fraud.
4. Appraisal fraud.
5. ID fraud.
6. Straw buyers.
7. ID theft.
8. Flipping.

Participants in the suspected fraud included appraisers, borrowers, builders, correspondent lenders, inside loan officers, investors, mortgage brokers, realtors, sellers, and those who provide settlement services, including attorneys and notaries.

While money service businesses file thousands of SARs a year, federal investigator follow up is minimal. One SARs filer reported that in all his years of filing SARs, he's only seen the government follow up on SARs five to ten times. He suggests that prosecutions resulting from SARs are minimal when compared to the large numbers of suspicious activities being reported every year.

The poor follow up on SARs filings demonstrates another reason why those with direct knowledge of fraud should report that information via a whistleblower claim. The government, even when it receives a report of suspicious activity, is unlikely to ensure the fraud is stopped.

IRS Will Get 4450 Names From UBS

2009-08-20T11:00:00.000-07:00

Swiss newspapers report that the IRS will get up to 4,450 names of UBS clients as a result of the settlement of the legal battle between the United States, Switzerland, and UBS, the Swiss banking company. At stake were the secret identities of 52,000 US citizens who held deposits in UBS. Some commentators are pronouncing the deal as "the beginning of the end" of the famous Swiss secret accounting system.

More than 47,000 American citizens will remain undisclosed and could continue to hold deposits in UBS. Some predict that wealthy clients will move their Swiss accounts to new tax havens, like Singapore, because of the breach in the secret Swiss banking system.

Earlier this year, UBS faced criminal charges in the United States for assisting in tax evasion and disclosed 250 client identities as part of a settlement. The additional 4,450 names to be disclosed are linked to accounts in which Americans are believed to have hidden as much as $18 billion in income from the IRS. Swiss newspapers report that US clients face up to $3.7 billion in back taxes and penalties.

Switzerland today sold its investment in UBS and earned 1.2 billion Swiss francs for its citizenry. Switzerland said yesterday that UBS's recent gains and the US tax deal have helped stabilize the bank enough for the Swiss government to withdraw. Switzerland, like several other European nations, was forced to take partial ownership in the bank during Europe's recent financial crisis. The Swiss government reported it earned a return of 30% annually on the UBS investment.

47,000 Potential Claims? Only 5000 UBS Names to be Released

2009-08-17T08:34:00.000-07:00

Two Swiss newspapers are reporting that UBS has agreed to release 4500 to 5000 names of its US clients in the recent settlement agreement between the United States and the Swiss bank. The United States had gone to federal court seeking to force UBS to identify its 52,000 United States citizens, many of whom are thought to be committing tax fraud by hiding assets in secret accounts.

NZZ am Sonntag, one of the weekly newspapers, reports that the agreement was grounded on a 1996 US/Swiss tax agreement, allowing the Swiss cabinet to sign off on the deal without having to seek approval through the Swiss parliament. The 1996 agreement obliges Switzerland to provide the US with assistance in criminal prosecutions for tax evasion. NZZ says small accounts would not be reported, and account holders threatened with disclosure would have the right to challenge disclosure in Swiss courts.

Under another agreement earlier this year, UBS paid $780 million to settle criminal charges in the US, and it disclosed information on 250 United States clients. The fourth prosecution of a UBS client ended with a guilty plea on Friday, August 14. Malibu businessman John McCarthy admitted that he transferred at least one million dollars into secret UBS accounts over a five year period to avoid paying US taxes.

Earlier reports stated that the IRS would consider the UBS litigation a failure if UBS did not disclose at least 10,000 names; unofficially, now, all parties are describing the agreement as a success.

Approximately 47,000 United States citizens will continue to enjoy secret Swiss accounts. Whistleblowers should work to identify which of these account holders are hiding their assets to reduce their tax obligations. If you know of a United States citizen who is hiding assets in UBS, or elsewhere, call for a free tax fraud consultation today.

UBS Tax Evasion Case Nears Settlement

2009-07-31T09:00:00.000-07:00

US Justice Department tax attorney Stuart Gibson told a federal judge that the parties have reached an agreement on the major issues in the US litigation against Swiss banking corporation, UBS. The Swiss Justice Ministry and UBS also issued statements confirming the deal. All sides are keeping the details confidential until the settlement is finalized, which is expected to occur by August 7.

In a criminal prosecution in February, UBS admitted that it helped US citizens avoid paying taxes. As part of a deferred prosecution agreement, UBS said it would pay a $780 million penalty and disclose the identities of 250-300 US clients. Since then, 3 of those UBS clients have pled guilty to tax charges regarding secret bank accounts.

The US government filed the current litigation to force UBS to disclose 52,000 additional client names. How many names UBS will actually disclose as a result of the settlement agreement is not yet known.

Dodging the UBS Bullet?

2009-07-30T13:21:00.000-07:00

The IRS received 400 applications last week from United States citizens seeking to voluntarily disclose that they have money in offshore bank accounts. Four hundred applicants in one week is four times the amount of applicants who disclosed off shore account for all of last year.

The unprecedented increase in voluntary disclosure activity comes just a few weeks before a federal judge's hearing on the lawsuit filed by the United States against UBS, a Swiss company, to force UBS to reveal the identities of 52,000 Americans suspected of tax fraud. The hearing is set for August 3rd; the two governments requested a delay to allow time for settlement negotiations.

Secretary of State Hillary Clinton will meet with Swiss foreign minister Micheline Calmy-Rey tomorrow. Predictions are that UBS will agree to reveal a significant number of taxpayers, but the numbers range from 2,500 to 10,000 of UBS's targeted clients. Why so low? The United States government is likely only focused on those owing the greatest amount of taxes. Former US federal prosecutor Peter Hardy is quoted as saying that the IRS will see the effort as a failure if it receives less than 10,000 taxpayers' names. No one predicts all 52,000 taxpayers' identities will be revealed.

Switzerland has threatened to take control of the UBS client data if necessary to avert a breach in the country's bank secrecy laws. The Swiss government views the lawsuit as a challenge to Switzerland's sovereignty. Calmy-Rey states that the solution to the UBS matter must fall within Swiss law. She believes the US should respect the two governments' common interest in maintaining UBS's role as an employer within both countries.

The IRS, in the meantime, is making it as easy as possible for taxpayers with undeclared off shore assets to disclose them to the Service. The IRS has streamlined forms for application and extended the deadline for the leniency program until September 23rd. Most important, those who voluntarily disclose may qualify for a lower assessment.

Whistleblowers who know of taxpayers with undisclosed off shore accounts should contact KEMY to determine if they could qualify for a reward by reporting the undisclosed assets. Taxpayers who have been found to have hidden their assets can be forced to pay back taxes, penalties, and interest for up to six years.

$13 Trillion Untaxed in Offshore Accounts

2009-07-28T13:04:00.000-07:00

Corporations, federal contractors, and well to do individuals keep approximately $13 trillion in offshore accounts according to the US Government Accountability Office. Uncle Sam wants to collect taxes on those accounts.

The federal government found that 83 of the United States's top 100 publicly traded corporations held subsidiaries in tax havens, as did 63 of the top 100 federal contractors. Recipients of federal bail out money, like Bank of America, Morgan Stanley, and Citigroup, have several offshore subsidiaries too.

Rep. Lloyd Doggett introduced the Stop Tax Haven Abuse Act in May 2009. At Doggett's side, President Obama stated that companies are taking advantage of legal loopholes by shifting profits to tax havens. The president continued, "[T]hese tax havens make our system less fair and harm the U.S. economy."

The bill targets specific countries, including Switzerland, Panama, Samoa, the Isle of Man, and the Cayman Islands, among others. The Cayman Islands Stock Exchange chairman Anthony Travers takes issue with the President's terminology. Travers states that most of the rhetoric is not about "tax loopholes" but "perfectly clear provisions of U.S. tax law."

The Cayman Islands is a British territory of about 100 square miles. Claiming the territory as home are 80,000 companies, 7,000 mutual funds, 270 banks, and 1,000 insurance companies.

Travers describes the Cayman's residents' response to the President's comments as "outrage tinged with concern" but predicts that proposed tax law changes will have "marginal to no effect" on the Islands.

The IRS Can't Keep Track - Another Reason We Need Whistleblowers

2009-07-21T07:46:00.000-07:00

The Treasury Inspector of Tax Administration recently released a report that stated the Internal Revenue Service had difficulty keeping track of tax preparers and their compliance with tax laws. The Inspector recommended new, unique identification numbers for tax preparers to use when filing their clients' returns.

The problem highlights the Service's difficulties in managing its own management systems. Information about tax preparers is stored on 22 different computer systems, and those computer systems don't integrate with each other. The IRS can't even determine the number of tax preparers, let alone assure that they are adhering to professional standards or comply with their own federal tax filing requirements.

Whistleblowers with personal knowledge of tax fraud greatly assist the Service in situations like this. The government cannot rely on its own internal systems to ensure compliance with tax laws; whistleblowers who see tax preparers engaging in fraud need to step forward. Depending on the circumstances, the whistleblower could qualify for a percentage of the government's recovery.

The Tax Inspector sampled records for 139 tax preparers and found that 67% used multiple identifying numbers. 45% of the time, their names were inconsistent. Only ten of the 139 were attorneys; two of those were members of their state bar associations. Seven of the 139 listed themselves as both CPAs and lawyers, but the Inspector could only verify that one of the 139 held both designations.

Tax preparers have been the focus of tax fraud investigations over the last several years. In the last three years, the IRS launched more than 600 investigations of tax preparers for fraud. From 2006 through 2008, 356 tax preparers were criminally convicted.

Whistleblowers who have information about tax prepares engaging in tax fraud should call KEMY for a free consultation today.

Foreign Income Must Be Reported

2009-07-14T06:07:00.000-07:00

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.

Government Contracts, Bid Rigging, and Whistleblower Rewards

2009-07-13T07:03:00.000-07:00

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.

IRS Modifies Anti Inversion Rules

2009-07-01T06:57:00.000-07:00

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.

Criminal Charges for Off Label Marketing

2009-06-22T08:23:00.000-07:00

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.

Billion Dollar Tax Fraud and the Isle of Man

2009-06-16T06:42:00.000-07:00

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.

Judicial Fraud - Exponential Victims

2009-06-11T10:15:00.000-07:00

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.

Don't Believe Guarantees of Confidentiality

2009-06-01T06:52:00.000-07:00

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.

Bulllish on Fraud...and Whistleblowing

2009-05-28T06:43:00.000-07:00

Time.com recently reported on "The Reasons Fraud Spikes in a Recession." Fraud related calls to a compliance and corporate-governance hotline this year increased by 14% over the same period in 2007. A poll of members of the Association of Certified Fraud Examiners showed that the number of company fraud cases grew over the previous twelve months.

Time.com opines that one reason for the increase in interest in fraud reporting during hard times is because corporate management cuts back on its middle tier to save money. The job of controlling fraud - rechecking for accuracy, for example - typically falls to the middle manager. When middle managers are forced out, the remaining middle managers feel the pinch. They can't keep up with the demand to do more with fewer resources, and fraud mechanisms fall by the wayside.

Those inclined to commit fraud sense new opportunities in recession as well. Last fall, Senator Chuck Grassley loudly complained about the lack of oversight accompanying the distribution of bailout monies, for example. Fraudsters are nimbly trying to determine where they can make money from the bailout and stimulus programs. Today, the new administration is scrambling to put proper controls in place, but bailout dollars have been misspent in the interim.

Along with the new opportunities for fraud comes new interest in whistleblowing. A good many people are frustrated by the economic downturn, and they aren't as willing to tolerate fraud schemes as they were a few years ago. People want to report fraud and are tired of seeing scam artists take advantage of the tax paying public. Thanks to the newly updated False Claims Act and the IRS Rewards Program, whistleblowers are having an easier time reporting fraud and finding it more lucrative than it used to be.

Congress Updates False Claims Act

2009-05-19T11:05:00.000-07:00

Last night, Congress updated the False Claims Act through its passage of FERA.

Jeb White, President of Taxpayers Against Fraud (TAF) had this to say:

"In 1986, with fraudsters draining the U.S. Treasury with impunity, Congress acted by revitalizing the False Claims Act. Once again, Congress strengthened the False Claims Act, when it passed the Fraud Enforcement & Recovery Act of 2009. President Obama has promised to quickly sign this bipartisan legislation, which seeks to remove many of the judicially created limitations and qualifications to the False Claims Act.

This much-needed legislation will modernize the Act, allowing the False Claims Act to reach modern-day fraud schemes. It will also remove many of the impediments to the Government's investigative powers, strengthen anti-retaliation protections, and clarify many of the procedural questions that have derailed qui tam actions in recent years.

This is a giant first step forward for our country's fraud-fighting efforts. The bipartisan support for this legislation demonstrates, once again, that when it comes to fighting fraud, politics takes a back seat to doing the right thing. Now that Congress has plugged the False Claims Act liability loopholes, we look forward to Congress addressing the rest of the problems identified in the False Claims Act Corrections Act of 2009."

Stay tuned. We'll provide ongoing discussion of the changes in the FCA and how they affect whistleblowers.

Got Fraud? What Kind?

2009-05-18T08:35:00.000-07:00

Fraud comes in different types. To figure out how you should hold someone legally accountable for fraud, you need to figure out what kind of fraud is being committed.

Is the government paying the bill? Then you might have a False Claims Act case. The next question asks which government. If the feds are paying, either directly or ultimately, you may have a viable FCA case because there is a federal law that allows individuals to bring a claim on behalf of the federal government. If the state government is paying, without the involvement of the feds, we need to ask which state. Almost half of the states have some form of state False Claims Act, allowing whistleblowers to bring fraud claims on behalf of the state. Some of those state Acts are limited to Medicaid claims; others focus on kickbacks; lots of states have none at all.

If the fraud consists of lying to the IRS about taxes, then you may have a tax fraud claim under the IRS Rewards Program. If the fraud consists of lying about sales or franchise taxes or some other state tax, then you may be able to file a whistleblower claim depending on the particular state.

If the lies take advantage of the general public, meaning average citizens are being bilked out of their dollars, you can make a complaint to the Attorney General in your state because they usually handle "consumer fraud."

If the fraud targets an individual or small group of folks, you may be able to file locally alleging a "common law fraud claim." Common law means the laws of the state will determine what needs to be proven.

KEMY focuses on whistleblower claims in the tax and government payer arenas, but we are more than happy to hear your stories of fraud and help you figure out where and how to get the fraud resolved. Call and ask. We know fraud is complicated and would like to help.

E&Y Employees Found Guilty for Tax Shelters

2009-05-12T07:10:00.000-07:00

Former and current employees of one of the Big Four accounting firms, Ernst & Young, were found guilty in federal court on May 7 for selling illegal tax shelters to their clients.

Prosecutors issued indictments against E&Y employees in 2007. The group called themselves "VIPER." VIPER included accounting executives, a former IRS lawyer, and a financial consultant. The former IRS lawyer, Peter Cinquegrani, pled guilty in September 2008. Prosecutors said Cinquegrani drafted legal opinion letters vouching for the legality of the tax shelter. The VIPER group used clients' letters and other documents to obscure the fact that the sole purpose of the tax shelter was to create tax losses.

The shelter was referred to as a Contingent Deferred Swap, or CDS. The CDS shelter targeted wealthy investors with more than $10 million in taxable income. VIPER sold the shelters from 1998 through 2004. Each count of conspiracy, tax evasion, and false statements carries a minimum sentence of five years in prison.

"Tax shelter" usually means a product or strategy that brings together different elements of the tax code for a useful purpose, and many are acceptable. The IRS refers to improper tax shelters as "abusive." Abusive tax shelters are those in which a significant purpose is the avoidance or evasion of federal, state, or local tax in a manner not intended by the law.

Low Hanging Fruit: Psychiatry ripe for fraud

2009-05-04T06:55:00.000-07:00

Last week, the New York Times reported on subpoenas naming psychiatrists, one of whom is Dr. Joseph Biederman, the so called father of the childhood bipoloar movement. Biederman's financial ties to drug manufacturers have caught the attention of long time whistleblower champion, Senator Charles Grassley. The Times noted that psychiatrists make less in base salary than other medical specialists, and many supplement their income with speaking engagements and consulting gigs. Biederman receives large amounts of funding from drug manufacturers and simultaneously conducts research on bipolar medications. Also last week, Grassley requested that the American Psychiatric Association give an accounting of its finances.

Grassley, like most people, seems to have been previously unaware of the relationship between pharma dollars and everyday psychiatric decisions. In his letter to the APA last week, Grassley said, "I have come to understand that money from the pharmaceutical industry can shape the practices of nonprofit organizations that purport to be independent in their viewpoints and actions." He's talking about the role the APA plays in influencing its members about the effectiveness of certain drugs. People assume that the APA and its counterparts are neutral, but they often have a financial stake in what they recommend.

Hopefully, Grassley's timing will derail Biederman's push to medicate and label very, very young children with bipolar disorder.

Watching that effort reminds one of the ADD movement in the 1990s. Pharma manufacturers funded parent support groups for ADD; those groups organized to lobby the APA hard for less stringent diagnostic criteria in the DSM (Diagnostic and Statistical Manual of Mental Disorders). The result - tons of kids qualified under the less stringent guidelines and were labeled with ADD. Another result - lots of new customers and mega sales for ADD drugs.

Prediction - Despite this current flurry of interest, people with mental health issues will continue to be ripe fruit for fraudsters. Docs want dollars; pharma wants customers. People with disabilities don't have the resources or the political clout to demand the kind of scrutiny required to keep the APA and its counterparts vigilant. Grassley makes a good start here, but a few subpoenas are not going to make enough of a lasting change to keep people with disabilities safe.

NY Recovers $263 in Medicaid Fraud

2009-04-30T07:19:00.000-07:00

The NY Attorney General announced that it recovered more than $263 million in Medicaid fraud cases in 2008. Whistleblowers helped.

This latest success adds to the already extraordinary track record of whistleblower legislation around the country.

Both the NY Office for the Medicaid Inspector General and the federal OIG talk about working with whistleblowers in their most recent work plans. Some of the targeted investigations common to both OIGs include nursing homes, home health agencies, durable medical equipment, pharmacies, and personal care aides.

Early intervention makes the NY list, an interesting new litigation arena for a potential whistleblower claim because not much has happened in the world of special education fraud under the FCA. Early intervention services are those provided to babies and toddlers with disabilities.

Compliance problems may range from false certifications of qualifications to lying about the provision of a service to over charging to running around and "cleaning up" agency records just before a state or federal audit.

Whistleblowers with inside information about compliance issues in those and several other human service fields can take advantage of the times by coming forward and reporting misuse of government funds. Because of the economy, the Inspectors General are keenly interested in hearing what whistleblowers have to say.

Fraud Schemes: The Basic 4

2009-04-27T09:43:00.000-07:00

While fraud can be complicated, everyone has a basic understanding of what fraud looks like. Did taxpayers get what they paid for, or not?

Under the federal False Claims Act, whistleblowers report defense and other contractors, health providers, nursing homes, school districts - anyone who submits fraudulent claims or causes someone else to submit false bills for federal dollars.

Several states have similar legislation designed to assist in recovering fraudulently obtained dollars for state treasuries.

Examples of the four basic categories of fraud claims include:

False Certifications - The agency, school, contractor, etc. falsely assures that it meets regulatory or statutory conditions to qualify for government money.

Fraud in the inducement or False Negotiation - Kickbacks or bid rigging fall into the category of inducements. The inducements can range from lunch and golf to several thousands of dollars for consulting fees.

Substandard Product or Service - The service or product provided for government funding is an inferior substitute to the one for which the government contracted.

Mischarges - A claim for service or product is not provided, or someone is overcharging the government for a service or product.

Also deserving of mention are schemes that fall under the description of reverse false claims.

KEMY represents whistleblowers who report fraud against the federal government. If KEMY decides to take the case, the firm represents the whistleblower on a contingency basis. If the whistleblower's complaint results in a recovery for the government, the whistleblower can qualify for 25% to 30%. If KEMY takes the case and no recovery occurs, the whistleblower pays nothing for attorney fees.

Rewards for All Kinds of Tax Fraud Reports

2009-04-23T06:11:00.000-07:00

You pay your taxes, right? But you happen to know that someone at work or down the street isn't paying his fair share, right? Annoying, right? Especially during the bailout, right?

Maybe you know about some corporate highjinks...or Potentially Abusive Tax Shelter use...or a company that is saying people are independent contractors when they're not.

The IRS runs several options for people who want to report tax fraud. First, you can call your local IRS office, report what you think is going on, and be done with it. Second, you can put your reasons in writing and file a claim for a reward.

The IRS has two rewards programs. The first deals with large scale fraud and mandates recovery, meaning that the Service must pay certain whistleblowers a percentage of the recovery in a tax fraud case under certain conditions. The second program gives the Service full discretion over what, if any, reward is given.

To qualify for the mandatory Rewards program, you must report an individual who grosses more than 200 thousand per year in income, and the amount in dispute must be more than two million dollars. The amount in dispute includes taxes owed, penalties, interest, and whatever else the Service can collect.

Wading through the IRS's rewards programs can be difficult and confusing. If you want to discuss reporting tax fraud, even if it's to get the phone number of your local IRS office, give us a call at 610-940-9099. KEMY can help.

WSJ Criticizes PA Governor for State Lawsuit Racket

2009-04-20T06:26:00.000-07:00

The Wall Street Journal ran editorials on April 8th and 16th alleging that Governor Rendell granted a huge no-bid, no-compete contract to Bailey, Perrin & Bailey of Houston in return for approximately $90,000 in campaign contributions. Rendell's spokesperson acknowledges the contributions but says the money had nothing to do with the decision to hire the Texas law firm.

Rendell appointed the private law firm to represent PA in a fraud case against Janssen Pharmaceuticals, the manufacturer of Risperdal. The WSJ asks why PA would hire a firm on contingency when firms could competitively bid their services to be paid on an hourly basis. A glaring problem for PA is that the Texas firm demands monetary compensation for its services, or PA is barred from settlement under the contract, ruling out many other kinds of relief from which taxpayers may benefit.

Even more curious is these alleged "pay to play" legal dealings when juxtaposed with PA's ongoing failure to pass state FCA legislation. PA could tool up its own legal apparatus under a state FCA and qualify for a share of any federal proceeds from these kinds of Medicaid fraud prosecutions at the same time. There wouldn't be the same level of need to hire Texas lawyers,...and PA taxpayers would get the full benefit of the litigation.

Besides marring public trust in fraud prosecution, the relationship between Rendell and the Houston law firm is impeding the PA Risperdal litigation as well. Janssen has filed a motion in the PA Supreme Court to invalidate the agreement between PA and the Houston firm, laying out in detail the timing of payments by the firm to Rendell's campaign, just before and after the award of the contract.

WSJ calls for reform in the way contracts are awarded to outside firms by state governments. Better yet, Rendell and PA should correct the problem and lessen the need for outside counsel by passing a state FCA.

Protect Taxpayers' Dollars; Get Busy, and Pass a PA FCA

2009-04-16T06:56:00.000-07:00

Why do PA taxpayers have to tighten their belts to bail out large corporations when we could let a state False Claims Act share some of the load? Honestly, why aren't PA's key politicos like Corbett, Rendell, Richmond, and Greenleaf making this happen? Everyone agrees we need the money. Forget poker machines, a PA FCA would bring some big dollars.

A state False Claims Act enables fraud dollars to be recovered for government coffers. 23 states already have them. New York, for example, passed a state FCA in 2007 and recovered 551 million in misspent Medicaid dollars the very next year. The federal False Claims Act has enabled the US treasury to recover more than 200 BILLION since 1986.

Several multi-million and even billion dollar settlements have resulted in tremendous increases in revenue for those states that have been smart enough to cash in. Pennsylvania, because it has no FCA, lost those opportunities.

Rep. Gerber of Montgomery County has repeatedly championed state FCA legislation, and a few versions have passed the PA House. Mysteriously, the Senate lets them die.

In other states, governors and Attorneys General have actively campaigned for passage of state FCAs. Not so in PA. While Governor Rendell gives lukewarm nods in support, a search of his website shows no activity or agenda item mentioning passage of a PA FCA. Same goes for Tom Corbett, except Corbett does not even give a nod.

Hopefully, no one is allowing special interests lobbying against a state FCA to victimize PA taxpayers. We really can't afford it.

IRS Recovery Rewards

2009-04-13T08:20:00.001-07:00

About a month ago, the IRS and the tax fraud bar engaged in a sort of summit meeting. The day long event was multipurpose, but overall, the tax fraud attorneys wanted to see if getting the two groups together could lessen bureaucratic hurdles for those who wanted to report tax fraud and claim a reward within a reasonable amount of time.

One IRS representative noted that the new mandatory reward program allows for recovery claims. In other words, the IRS often faces difficulty finding assets when a tax cheat has already been prosecuted. Others in the community will know about the second or third house purchased under a sham name, assets being held by a family member, etc. If the IRS is trying to collect, and you know where assets have been hidden, you may qualify for the IRS rewards program.

Remember that if you do qualify, you should expect a long, long wait before you get answers from the IRS about your claim. At the meeting, the Service reported that it will not pay until the investigation ends, the funds are paid, and the taxpayer has exhausted all possible appeals. That means years - several years.

Surprisingly, a lot of folks don't care much about the wait or the reward. They just want to do the right thing and see that ill gotten fund are returned to the government. If we can help you navigate through an IRS reward claim, please give us a call.

Fraud Enforcement and Recovery Act

2009-03-06T10:41:00.000-08:00

On March 5, 2009, the Senate Judiciary Committee decided to attach the False Claims Act amendments to FERA, the Fraud Enforcement and Recovery Act of 2009. FERA proposes to make it easier for the federal government to prosecute mortgage industry fraud.

FERA works to make sure that private mortgage companies are liable for fraud under federal law. Some argue that private companies can be reached under current laws and that FERA is redundant; others point to increased ease and greater sentences as being just two benefits of a more narrowly focused piece of legislation.

FERA addresses concerns about fraud associated with TARP, the Troubled Asset Relief Program, as well. A prime sponsor of FERA, Senator Chuck Grassley of Iowa has been voicing concerns about loose oversight of TARP funds since fall of 2008. Fraud associated with TARP funds can result in up to a million dollars in fines and sentences of up to 30 years.

Attaching the False Claims Act amendments to FERA provides a much needed boost to the effort to update the highly successful 20 year old legislation. Amendments to the FCA can only help return much needed dollars to the United States Treasury.

To learn more about FERA, see Fraud Enforcement and Recovery Act, S.386, 111th Cong. Sec. 2(d)-(e)(2009).

What does a whistleblower look like?

2008-12-09T10:15:00.000-08:00

A whistleblower can be almost anyone. Carolyn Ferrara, on the left, worked as an office manager for a dermatologist in Florida. Ellen Murray, on the right, went to the dermatologist about a suspicious mole. Murray discovered that the dermatologist falsely diagnosed the benign spot as cancer. She talked with Ferrara, and the two filed a whistleblower suit. Just this week, the two have been awarded a million dollars of the restitution that the federal government has recovered from the dermatologist under the whistleblower suit. The doc went to jail.

Those with direct knowledge of fraud can file a claim. In this case reported on by Susan Taylor Martin on tampabay.com, the doctor operated on Murray seven times for skin spots that experts later found were not malignant. She reported the misdiagnoses to the federal Medicaid fraud unit and to the state's Department of Health. Neither responded. When she talked to Ferrara, Ferrara knew of several other patients who had been diagnosed multiple times. The doc operated on 13 patients 20 or more times. One patient was operated on 122 times.

Murray and Ferrara decided to file in federal court. The litigation took 4 1/2 years. Ferrara suffered financially because other doctors did not want to hire a whistleblower.

Ultimately, the two prevailed, and Ferrara's financial worries are over for now. She plans to help the food banks because they helped her. Murray plans to donate some of her settlement to an organization that provides guide dogs for the blind.

Obama, Holder, and the FCA

2008-12-01T07:00:00.000-08:00

President-elect Obama's background and his administrative picks show great promise for those fighting fraud through the False Claims Act. Before his public service career began, Obama did research and participated in writing briefs for Dr. Janet Chandler, a whistleblower who suffered retaliation for exposing fraud. Dr. Chandler reported corruption and waste in a research project involving the Hektoen Institute for Medical Research and Cook County Hospital.

Obama's firm negotiated a settlement agreement through which the county returned $5,000,000 to the federal government. Dr. Chandler received a share of the recovery.

Obama's pick for Attorney General, Eric Holder, is also familiar with the FCA. Holder faces mixed reviews from whistleblowers and their advocates.

Holder served as the second highest official in the DOJ under President Clinton. Some worry about Holder's lukewarm support of Clinton's 2001 pardon of tax fugitive Marc Fritz. Others bemoan Holder's occasional refusal to acknowledge the contribution of whistleblowers in key cases.

Many, however, look forward to the new regime. No one denies that Holder has a keen grasp of the complexities of the False Claims Act. Recently, Holder showed great skill in helping to negotiate a major pharmaceutical fraud case. In the process, he demonstrated high regard for the whistleblowers and their counsel.

Federal support of the False Claims Act should be a no-brainer. The Act punishes those who steal from the public fisc and has resulted in billions of tax dollars being returned to the taxpayers. Obama's pro-whistleblower background and his choice of Holder should result in even greater and more efficient prosecution of fraud under the FCA during the next presidential term.

Drawing the line at bailouts

2008-11-26T07:59:00.000-08:00

Even those folks who recognize that the $700 billion bailout and its progeny are probably necessary evils are unlikely to sit still if the federal government also provides “tacit bailouts” by cooling prosecution of fraud.

For example, a lot of people understand that government agencies shift their priorities and agendas as particular problems catch the public’s attention. Should taxpayers be concerned that federal agencies, in the midst of the bailout headlines, could take it upon themselves to opt against vigorous prosecution of banks for unrelated tax fraud schemes?

In other words, if a bank is engaging in tax fraud, and the bank is also a bailout beneficiary, is it likely that the Service will aggressively prosecute the bank for the tax fraud?

Will investigators be reluctant to be perceived as “piling on” the bank’s other troubles?

Will this reluctance mean that tax fraud will go unpunished?

If yes, banks and other financial entities will enjoy a "tacit bailout" in addition to the $700 billion dollar "official" bailout campaign. Their ill gotten tax fraud gains may go unpunished. The money they got from their fraud will stay in their pockets.

Senator Chuck Grassley echoes similar worries with regard to False Claims Act enforcement. He wrote a letter to the treasury secretary and the Attorney General last week urging them to issue messages that allegations of fraud against bailout beneficiaries would be treated seriously.

Grassley expressed concern that the bailout programs have been in place for seven weeks and still lack effective oversight. Ineffective oversight means that bailout participants could defraud taxpayers by improperly qualifying for federal funds that they should not receive.

Grassley advocated for whistleblowers and the FCA in particular. Hopefully, the Service will heed this viewpoint and adhere to rigorous tax fraud investigation without regard for whether or not the bank is part of the bailout program. Taxpayers are already investing billions into bailing out financial entities. The feds should be clear that taxpayers will draw the line when asked to invest any more money in financial entities that steal from the government. Enough is enough.

Virtual Income but Real Tax Liability?

2008-11-06T06:41:00.000-08:00

You discover Linden Lab's Second Life virtual world web site, create your avatar, give him a full head of hair, and pump up his physique. You wander around Second Life for a while and then open up a virtual shop, selling creative and entertaining gizmos. Other avatars pay you in Linden Dollars (L$s), and you begin to turn those L$s into US dollars through a PayPal account. Business is great, and the Linden Dollars are rolling in. Good times.

Second Life's virtual transactions average between $1.2 million and $2 million per day. Approximately 70,000 people access the site daily. Some folks, through their avatars, have made enough money through their Second Life occupations to quit their real jobs and work all day online.

Congress and the IRS have noticed. They're trying to figure out what's going on and whether or not there's enough money involved to be concerned about possible tax fraud. Given Second Life's steady growth rate and its increasing virtual economy, Second Life and other virtual worlds will probably become the subject of new tax rules in the near future.

The current rule of thumb is that L$ income becomes taxable income when it turns into liquid US$. In other words, if you sell five hundred gizmos for L$25,600, you can turn the L$ into US$100. When that $100 hits your PayPal account, it is taxable income.

The IRS wants its share. Prudent real life beneficiaries of these enterprising avatars will make sure the income is reported to the Service.

Can I Report My Ex-Boyfriend?

2008-10-31T07:30:00.000-07:00

While you may want to claim a reward for reporting an ex-boyfriend's tax fraud to the IRS, realize that he might not make enough money to qualify you for the IRS reward program.

IRC Section 7623(b) sets out the criteria for claiming a reward. If reporting an individual, that individual must earn more than $200,000 per year in gross income. Regardless of whether one is reporting an individual or an entity, the amount in dispute must exceed $2,000,000. The amount in dispute includes taxes owed, penalties, and interest.

Anyone, with very few exceptions, can file a claim. Anyone.

If your ex-boyfriend's tax fraud meets the criteria, you can have your claim reviewed, and it is highly unlikely that the ex would ever learned who reported him. To top it all off, if the IRS recovers, the contributing whistleblower is eligible for a percentage.

While frivolous and perhaps improperly-motivated, claims should not be made, people should report IRS fraud when they learn of it, reward or not. We have to pay for the bail out somehow.

The Versatility of the FCA

2008-10-23T09:31:00.000-07:00

One of the most exciting aspects of the False Claims Act is its versatility. Because fraud can take several different forms, and because the government is involved in so many different ventures, the FCA's architects may the FCA adaptable to meet almost any situation involving government funds.

The three core liability provisions of the FCA impose liability for making a false claim, submitting one, or conspiring to get a false claim paid. Those liability provisions require proof three elements:

the submission of a false claim to the United States,
the falsity of the claim, and
knowledge of the falsity of the claim.

Claims have been broadly defined to include "any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States provided any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded."

Given Congress's broad definition of the term "claim," the government has brought successful civil actions against a whole host of fraudsters, including:

ambulance companies

defense contractors

acute care hospitals

clinical laboratories

psychiatric hospitals

dentists and doctors

billing consultants

durable equipment manufacturers

research and other universities

home health agencies

nursing home providers

schools

local education agencies

mental retardation agencies

mental health agencies

county governments

and on and on and on.....

Probably, the FCA's versatility is one reason why the Act has been able return more than 200 billion dollars to the federal treasury since its reinvigoration in 1986.

Potential whistleblowers should focus on whether or not public money is involved with the fraud, rather than whether the possible defendant is included in the above list. Even easier, contact a qui tam attorney for a free assessment.

S Corporation Listed Tax Shelters

2008-10-13T07:06:00.000-07:00

The IRS lists tax shelters it identifies as abusive and requires promoters of and participants in those tax shelters to follow special procedures so that the IRS can monitor their use.

Several listed shelters include S corporations. An S corporation allows for many of the benefits of partnership taxation but gives owners limited liability protection from creditors. S status combines the legal environment of C corporations with taxation similar to that of partnerships.

Two Potentially Abusive Tax Shelters involve S Corporation – Tax Exempt Entity transactions and ESOP-owned S Corporation abuses.

Transactions between S Corporations and tax exempt entities sometimes are structured to shift taxation away from the taxable S Corp shareholders to the exempt entity, solely for the purpose of avoiding or deferring the taxes.

ESOP stands for an Employee Stock Ownership Plan. Congress permits an ESOP to own an S Corp but only if the ESOP gives current employees a meaningful stake in the S Corp. The profits that the S Corp makes are not usually taxed until the ESOP makes distributions to the company’s employees upon retirement or when they leave the company. Sometimes, however, former owners or key employees may set up a subsidiary to drain value out of the ESOP via stock options. To prohibit circumvention of the intended purpose of the ESOP tax break, Congress has imposed a 50% excise tax on option holders in cases where the rank and file ESOP participants are deprived of S Corp profits.

Participants must register their participation in listed tax shelters, often described as Potentially Abusive Tax Shelters. The two described are on the list. Promoters must maintain lists of participants and provide them to the IRS upon request.

Dr. King Faces Trial for Health Care Fraud

2008-10-06T09:52:00.000-07:00

Jury selection began this morning in the trial of Dr. William King, a Pennsylvania gynecologist charged with defrauding health care insurer Blue Cross.

The criminal indictment against Dr. King lists upcoding, false documentation, and ghost visits as the means and manner of the fraud. According to the Department of Justice, King enlisted his wife to improperly represent on bills that he had performed expensive services when he had not, a practice known as upcoding. The indictment states that patients would regularly come in to the medical office for routine birth control injections, but King would bill for complex consultations in order to obtain a higher reimbursement from the insurance carrier.

Also described in the indictment are "ghost visits." DOJ's indictment charges King with billing for patient visits that never occurred. The indictment states that the insurance carrier paid King approximately $1,020,494 for false claims. The criminal indictment alleges 72 counts of health care and mail fraud.

Whistleblower Wins Big

2008-09-29T10:40:00.000-07:00

Congratulations to whistleblower sales representative Lucia Paccione on the $425 million settlement with Cephalon announced today. KEMY's lead partner, Brian Kenney, filed the suit in 2003. Click here to read the press release.

Religious Group Openly Challenges IRS

2008-09-29T07:38:00.000-07:00

According to the Sept. 21, 2008, National Catholic Register, an Arizona-based Christian legal activist group declared "Pulpit Freedom Sunday," an IRS protest scheduled for September 28. The group encouraged pastors to defy the IRS's prohibition on political candidate endorsement by issuing political endorsements during Sunday services.

The group appears to be provoking the IRS to litigate the issue and insists that the Service's 54 year old prohibition on political campaign intervention will not survive a constitutional challenge.

The IRS states that to enjoy tax exempt status, the organization ". . . may not participate in any campaign activity for or against political candidates." The campaign restriction is absolute. The IRS permits non-partisan voter education activities, but once a specific candidate is endorsed, the endorsing entity can lose its tax exempt status.

Not all religious organizations will be participating in the protest, of course. For example, a group of Catholic bishops described Pulpit Freedom Sunday as "pastorally inappropriate, theologically unsound, and politically unwise."

One might add "financially risky" to the description as well. Should the law be changed to permit religious folks to use their pulpits to campaign for elected officials, then religious organizations can engage in the activity. Until then, religious leaders who endorse candidates from the pulpit and continue to assert that they are exempt from taxes are committing fraud.

Does Long Claim Life = Chill Proof?

2008-09-25T07:37:00.001-07:00

Though it is hard to come up with good things to say about the long life of whistleblower claims, especially if you are the anxious whistleblower, their longevity may shield them against some of the more tumultuous swings of public mood and focus.

For example, some muse about the possible chilling impact of the AIG buyout on the government's investigations into domestic fraud schemes. Hopefully, everyone realizes that government tends to go about setting priorities as if it had ADD. Today, domestic tax shelters may be at the top of everyone's target list; tomorrow it may be pharmaceutical companies; the next, it might be offshore schemes. Given how long it takes to bring a whistleblower case to fruition, day to day news seems unlikely to have an impact on how the case will eventually resolve.

People may not realize how long it takes to resolve a whistleblower claim. On July 2, 2008, the Washington Post reported that the Department of Justice had a backlog of more than 900 whistleblower cases alleging fraud against the government. One critic stated that if the DOJ got no new cases from this point on, it would still take 10 years to clear its desk of the cases it already has. The typical FCA case takes about 6 years from our experience.

Similarly, tax whistleblower reward cases average 7 years before they resolve.

Potential whistleblowers may worry about a chill on the government's enthusiasm for investigating domestic schemes against large financial organizations and decide not to report fraud when they see it. Perhaps, in the short term, a chilling effect may be discernible, but it seems unlikely that crises of the moment would have any long term impact on the government's desire to recoup funds for the public fisc. Frankly, the more the government can re-acquire from fraudsters, the better off we all are, no matter what the current economic climate.

So, don't read too much into the financial news of the day, and don't let it deter you from reporting fraud against the government. Who knows what we'll be facing six years from now when your claim resolves? Report the fraud no matter what is going on in the news. Fraud is fraud, and the U. S., and the taxpayers, deserve that money back.

PSI's Red Flags

2008-09-23T12:59:00.000-07:00

Recently, the U.S. Senate Permanent Subcommittee on Investigations held a hearing on dividend tax abuse. In keeping with the PSI's past work, the hearing focused on offshore entities and how they dodge taxes on U.S. stock dividends.

The staff's report to the Subcommittee identified several "red flags" that signal the likelihood of tax abuse. The red flags include:

U.S. stockholders received dividend distribution through a short term transaction.
The client and the financial institution agree to an explicit dividend payment exceeding the 70% rate available after applying the 30% dividend withholding tax rate.
Stock or swap loan fees link to the tax savings amount.
Shares were sold before the distribution and then re-acquired afterwards.
The client and the financial institution agree to sell or repurchase stock through a third party.
The client and the financial institution insert an offshore shell corporation into the middle of a deal, solely for the purpose of using the offshore corporation to avoid dividend withholding.
The financial institution regards nonpayment of dividend taxes as a risk and then sets a tax risk limit on the aggregate amount of tax withholding that can be incurred by the institution.

Given the recent concerns about the economy, off shore tax schemes will likely receive full attention of the IRS, which may, perhaps, lessen scrutiny of domestic institutions. The PSI's staff report that the U.S. loses about $100 billion per year through offshore tax abuses. To read more about the U.S. Senate's Permanent Subcommittee's efforts, check out the hearing postings on the Senate's Homeland Security and Governmental Affairs web page.

Pro Se Relators, Beware

2008-09-18T10:19:00.000-07:00

Courts tend to dismiss the complaints of whistleblowers that file under the False Claims Act without an attorney. The legal system uses the Latin term “pro se,” meaning “for self,” to describe when one attempts to represent him or herself in a legal proceeding. Usually, courts will not tolerate pro se whistleblowers and will dismiss their complaints. The reasoning behind this can be traced to the unusual nature of a qui tam action and the dual role of the relator/whistleblower.

Whistleblowers under the False Claims Act bring the claim on their own behalf and on behalf of the United States government. Most courts recognize these dual interests even if the United States declines to intervene in the action, leaving the whistleblower on his own to pursue it. The federal district court in the District of Columbia explained the rationale in its decision in U.S. ex rel. Rockefeller v. Westinghouse Elec. Co.:

“Because the United States is the real party in interest, a judgment obtained by a relator may adversely affect the United States' right to ‘bring future actions on the same claims asserted here, even if [the United States] obtained new evidence.’ Considering what is at stake for the United States when a relator brings a qui tam action, representation by a lay person is inadequate to protect the interest of the United States. . . . Therefore, this Court concludes that a pro se plaintiff, absent explicit statutory authorization, is unable to represent the interests of the United States in a qui tam action.” 274 F. Supp. 2d 10 (D.D.C. 2003).

Pro se whistleblowers can easily lose their claims entirely after investing significant resources over years. For example, KEMY has seen instances in which whistleblowers file their claims under seal, only to wait years for the Department of Justice to decide that it does not want to intervene. The whistleblower then attempts to pursue the claim on his own, and the court then dismisses it because the whistleblower doesn’t have an attorney. These circumstances frustrate the ability to get important fraud issues addressed. Re-filing with counsel can be an option and should always be pursued, but precious time will have been lost as well as evidence, first to file status, and cash. Whistleblowers need to get counsel up front if they want to file under the False Claims Act. Don’t fall into the all too common pro se trap.

Employee or Independent Contractor - Misclassification and tax fraud

2008-09-15T06:46:00.000-07:00

You're an employee, and the company decides it needs to cut back. Shazaam! You're suddenly an independent contractor. For the company, it's a win win. It doesn't bother with withholding taxes anymore, plus it's easier to get rid of an independent contractor than it is an employee. The company simply doesn't renew the contract. For the worker, it's often lose lose.

At first, the newly deemed "independent contractor" might like the idea, thinking she gets to be her own boss. Gradually, reality sets in. The company is still telling her what to do, what to wear, how to do the job, when to work, what assignments she can take, and which ones she can't. There isn't really much change in the worker's autonomy, plus the worker gets to pay all of her expenses and all of the employment taxes. Great deal for the company, terrible for the worker.

Some companies think that they can simply call someone an independent contractor, and the IRS will follow along, as if the words "independent contractor" magically transform the worker into cheaper labor. Not so. The IRS looks at the substance of the employer-worker relationship. If it decides that the worker's day to day activity meets certain behavioral, financial, and relational characteristics, then the worker is an employee in the eyes of the IRS. It doesn't matter what the company calls her.

So, how does that translate into tax fraud? The IRS states, "If you classify an employee as an independent contractor, and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker." FedEx got caught in a mis-classification scheme a few years ago. The shipping company ended up paying millions. Of course, knowledgeable whistleblowers can get a piece of a successful mis-classification recovery under the IRS Rewards Program if they qualify.

Why should we care about mis-classification schemes? Unfortunately, the experience of being misclassified is not unique to FedEx workers. Lots of companies are doing it or have already done it. Suren Moodlier, coordinator of the North American Alliance for Fair Employment stated, "It makes [workers] responsible for a whole range of things that normally an employer should provide. In effect, [independent contractors] are responsible for their own exploitation." (Source: The New Standard, July 18, 2006).

Like most things the IRS does, the rules for determining a worker's status are complicated. Interested folks can check out IRS Publication 1976, Section 530 Employment Tax Relief Requirements. Whatever you do, remember that your employment status is not simply a matter of "magic words."

FCAs Can Cover States as well as the Federal Government

2008-09-11T10:29:00.000-07:00

Texas Attorney General Greg Abbott announced on September 9, 2008, that his office had reached a $28 million dollar settlement with Abbott Laboratories. The relator-whistleblower in the case, Ven-a-Care, provided insider information resulting in the successful recovery of fraudulently obtained funds for the government.

Texas Attorney General Abbott is one of several progressive state officials who is aggressively working to protect the public fisc from fraudsters. Texas passed its version of the federal false claims act years ahead of most states, and the Texas law adopts many provisions of the federal FCA. Passage of state false claims acts are important to those interested in protecting state tax dollars; the state FCAs allow a state to intervene in an action, to have its interest recognized, to recover funds, and to reward deserving whistleblowers.

AG Abbott dramatically expanded both the state's Civil Medicaid Fraud Section and the Medicaid Fraud Control Unit. Texas, as a result of these efforts, has recovered more than $200 million since Abbott took office.

Hopefully, more states will follow Texas's example and pass a state level FCA. Only 22 states have enacted some form of the FCA as of today. Why more states do not enact a state level FCA is a mystery. What state and which taxpayers, in today's economy, can't benefit from a recovery of $200 million?

Tax Advisors Sentenced To Prison for Assisting in Tax Reduction

2008-09-08T06:23:00.000-07:00

Lawfuel.com reported on Sept. 5, 2008, that three tax advisors were convicted of tax fraud and sentenced to prison for their part in a $20 million offshore tax fraud scheme. The advisors admitted to assisting clients in concealing portions of their clients' income from the IRS for the purpose of reducing their clients' taxes. One of the advisors, Stephen F. Petersen of Coalville, Utah, admitted that he had been paid a fee that was typically equal to 30% of the tax evaded by the client.

The judge ordered prison time for each of the three, and Petersen had to forfeit more than one million dollars in ill gotten fees.

According to the article, a representative for the IRS stated, "Most tax advisors are honest and knowledgeable, but these individuals took creative tax planning to another level. This sentencing shows two things: no one is above the law; and the authorities and the courts will find the promoters, expose their illegal schemes and hold them accountable for their actions.

U.S. Attorney Brett L. Tolman stated, "These sentences send a firm message to tax professionals, especially accountants and CPAs, that if you assist your clients in defrauding the Internal Revenue Service, you will be punished to the fullest extent of the law, including extended jail time."

Federally authorized tax practitioners ("FATP") may mistakenly feel that such communications with clients are cloaked under IRC Section 7525, the FATP client privilege. Nothing could be further from the truth. The relatively new privilege specifically exempts communications involving tax shelters and requires FATPs to keep a list of clients who purchase potentially abusive tax shelters ("PATS") to be furnished to the IRS on request. Section 7525, like most variants of accountant client privilege, is riddled with exceptions. Prudent accountants will not rely on it without first seeking knowledgeable legal advice.

Complex Schemes - Why we need whistleblowers

2008-09-05T09:18:00.000-07:00

In a September 2, 2008, posting on Bloomberg.com, Joe Mysak describes a municipal market bond scheme and a whistleblower's effort to educate the IRS about how the scheme works. Mysak includes the following quote in his article. "The thing about whistleblowers is that they speak in a language few people can understand, until you come across someone who knows exactly what they're talking about and says, 'Uh-oh.'"

The whistleblower's efforts to disclose the fraud reads more like those of a gentle teacher educating an interested student than it does the old stereotypical notions of how "informants" share information. No dark alleys here, no weasely snitching, no questionable motives. Just a very knowledgeable person working to keep the Service abreast of how complicated fraud schemes are playing out today.

The sheer size of those schemes, like the municipal market scheme described in Mysak's article, may give a potential whistleblower pause. How can so many people be violating the law? Unfortunately, tax fraud schemes, Medicare schemes, and patterns of false claims to the government are often large scale and everyday activity in some places. The schemes are so complicated, and the regulations change so quickly, the government can't keep up. Insiders, knowledgeable outsiders, and the simply observant should step up when they see possible instances of fraud. Otherwise, those engaged in the fraud will just keep diverting government money improperly. None of us can afford that.

Would-be whistleblowers should take note. Blowing the whistle is going to be frustrating. Be prepared to take on the role of educator. Most people, including government officials, don't know the details of complicated fraud schemes until a whistleblower explains the problem. KEMY sees a lot of whistleblowers who are justifiably frustrated by the enormity and pervasiveness of a particular fraud scheme and works to support them in their efforts to stand up to huge systems and relate complicated information to people who simply don't get it at first. Whistleblowing takes persistence, courage, and fortitude. Be prepared.

Exposing fraud against the government is important work. Persist even if eyes glaze over, and people yawn and look at their watches. Eventually, you'll find someone who knows exactly what you are talking about. And people need to know.

If we can help, gather your information, and give us a call.

Senate Pushes IRS to Focus on the Cayman Islands

2008-08-26T10:22:00.000-07:00

On July 24, 2008, the GAO testified before U.S. Senate Committee on Finance about how the Cayman Islands attact those seeking “tax minimization.” GAO focused on Ugland House, a five story building located on Grand Cayman Island and owned by the international law firm of Maples and Calder. Almost 19,000 businesses entities use Ugland House as their registered office to take advantage of the Caymans tax-free status.

Senator Kent Conrad criticized the IRS for not taking the problem seriously. The Senate had previously investigated Ugland House in 2004, when more than 12,000 companies listed it as their business address. Senator Max Baucus, committee chair, commented, “Remarkably, in the last four years, the Ugland House has found room for 6,000 new tenants, without even adding a new floor.

Frank Ng of the IRS responded that the Service has dedicated 1500 employees to the international tax enforcement problem. Ng said that offshore havens, like the Caymans, cost U.S. tax payers billions of dollars in lost tax revenue.

GAO’s report cited several enforcement challenges faced by the U.S. Government. Primarily, there is no third party reporting of transactions, so the government relies on tax payers to self report.

The Cayman Island situation represents an ideal situation for the right whistleblower to come forward. The Senate wants the tax loss addressed, and other than whistleblowers, the Service doesn’t have a lot of mechanisms through which it can identify tax fraud. New IRS personnel are being assigned specifically to overseas tax enforcement. Some knowledgeable whistleblowers have already provided information, but clearly, the IRS needs more help.