What does a whistleblower look like?

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

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

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?

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?

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

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:

1. the submission of a false claim to the United States,
   
2. the falsity of the claim, and
   
3. 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

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

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

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

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?

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

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

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

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

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

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

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

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.