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.