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.