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.
Monday, January 11, 2010
Tuesday, December 29, 2009
2009 - The Year of the Ponzi Scheme Collapse
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.
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.
Friday, November 13, 2009
Kenney & McCafferty Assists Government in $112 million Omnicare Settlement
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
Wednesday, October 21, 2009
Estate Tax Fraud - Prime Area for Whistleblowers
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.
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.
Friday, October 16, 2009
TIGTA Cites Deficiencies in Resolution of Whistleblower Claims
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.
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.
Monday, September 28, 2009
Whistleblower Office Reports $22 Million Paid in 2008
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.
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
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.
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.
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