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IRS Addresses Deductibility of Payments by Defendants to Settle False Claims Act Cases

In our former life as lawyers defending False Claims Act cases, our defendant clients had to consider whether the payments made to settle qui tam cases under the False Claims Act were deductible for tax purposes, and to what extent.

The IRS recently issued a paper on the subject: whether a defendant’s payment to the Department of Justice to resolve False Claims Act allegations is “deductible in its entirety as a section 162(a) ordinary and necessary business expense, or includes non-deductible penalty amounts under section 162(f).”

This paper, LMSB-4-0908-045, is reproduced below:
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With Wall Street Bailout, Whistleblowers to Reveal Fraud and Abuses Through IRS Whistleblower Claims and Qui Tam False Claims Act Cases?

Will the IRS Whistleblower Program and the False Claims Act be powerful weapons in redressing the fraud and abuse that led to the current financial crisis–and to the future fraud and abuse that is certain to target the “bailout” billions of taxpayer funds?

Fraud and abuse have never been in short supply. The ongoing financial crisis points to staggering amounts of past financial abuses that now threaten to wipe out Americans’ savings, if not undermine the world economy.

Now, the federal government’s stated
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1st Annual Report on New IRS Whistleblower Program Issued by Secretary of the Treasury

When Congress authorized the new IRS Whistleblower Program in December 2006, it required annual reporting to Congress about how the new whistleblower provisions have been used, what results were obtained, and what recommendations to improve the program should be considered.

The Secretary of the Treasury has recently issued the first such Report, which summarizes the first 12 months of the new IRS Whistleblower Office.

For those who follow the IRS Whistleblower Program, the Report provides a look into the substantial progress made in a short time by this very small group within the IRS. These developments have been followed on this whistleblower lawyer blog since the infancy of the IRS Whistleblower Office.

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IRS Whistleblower Office Director and Tax Court Judge Gather with Whistleblower Attorneys

For the second time since the new IRS Whistleblower office was created in early 2007, IRS Whistleblower Office Director Stephen A. Whitlock addressed questions from whistleblower attorneys at the Taxpayers Against Fraud annual conference yesterday in Washington. Joining him as panelists were U.S. Tax Court Special Trial Judge Lewis R. Carluzzo; Professor Dennis J. Ventry, Jr. of American University’s Washington College of Law; Erika Kelton of Phillips & Cohen LLP; and as moderator Paul D. Scott of the Law Offices of Paul D. Scott.
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Dismissal of Fraudulent Tax Shelter Charges Against Former KPMG Partners Is Upheld by Appellate Court

As this whistleblower lawyer blog has discussed before, accounting firms that promote fraudulent tax shelters are prime targets of IRS enforcement efforts (often assisted by IRS tax whistleblowers).

In a decision last week, the prosecution of 13 former KPMG partners and other executives for their alleged involvement in fraudulent tax shelters was thwarted–again. A panel of judges from the Second Circuit Court of Appeals affirmed the trial judge’s dismissal of the charges against these KPMG defendants.

The court did not find the
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Attorney Assisting Offshore Tax Evasion Is Rewarded With Prison Sentence and Judgment to PAy of $2.7 Million

As this whistleblower lawyer blog has written about often, abuses of offshore transactions have increasingly become a target of IRS enforcement efforts. A Utah attorney learned this lesson last week when he was sentenced to ten years in prison, and was ordered to pay $2.7 million, for his role in an offshore tax evasion scheme that deprived the government of more than $20 million in taxes.

Attorney Dennis B. Evanson of Sandy, Utah, was convicted of conspiracy to commit mail and wire fraud,
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New Jersey Medicare Contractor Settles Health Care Fraud Case under False Claims Act

The Medicare program depends on the integrity of “trusted contractors” to process and pay Medicare claims. This past week, one of those “trusted contractors” operating in New Jersey, BlueCross BlueShield of Tennessee, agreed to pay the federal government $2.1 million to resolve allegations that it violated the False Claims Act.

BlueCross BlueShield of Tennessee operated as the primary Medicare Part A Fiscal Intermediary for New Jersey, under the name “Riverbend Government Benefit Administrators.”

The government had alleged that BlueCross BlueShield of Tennessee “failed to
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OIG Approves False Claims Acts of California, Georgia, Indiana, and Rhode Island, But Disapproves False Claims Acts of Florida, Louisiana, Michigan, New Hampshire, New Mexico, and Oklahoma

The wave of new State False Claims Acts has generated a flurry of letters from the Office of Inspector General of HHS this past week. OIG has now “approved” the new State False Claims Acts of California, Georgia, Indiana, and Rhode Island, but has “disapproved” those of six other states: Florida, Louisiana, Michigan, New Hampshire, New Mexico, and Oklahoma.

As this whistleblower lawyer blog has written about extensively, Congress has created financial incentives for states to enact their own versions of the highly
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New Whistleblower Law Promotes Consumer Product Safety

On July 31, Congress enacted a new Whistleblower Law designed to promote consumer product safety. The new federal legislation specifically was enacted to protect public and private sector employees who disclose to their employers, a regulatory agency or a state Attorney General any perceived violation of the Consumer Product Safety Commission. The law also provides protection for employees who refuse to participate in violations of the Consumer Product Safety Commission Act. Obviously, the purpose of this legislation was to protect employees who, in good faith,
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IRS Announces Process for Review of Whistleblower Claims by IRS Large and Midsize Business Division (LMSB)

As another step toward the further development of the new IRS Whistleblower Program, our friends at the IRS Large and Midsize Business Division (LMSB) in Lower Manhattan have announced a three-step process for IRS Whistleblower claims that are eligible for the new “rewards” authorized by Congress in December 2006.

IRS Commisioner Frank Ng describes it as a “process for analyzing informant information and disseminating it to the field” for claims with at least $2 million in question, which is the threshold amount for whistleblowers
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Part 5: The Trend of Recoveries Under the False Claims Act

This is Part 5 of 6 of a recently updated article about the qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. This is an updated version of a previously published article by whistleblower lawyer blog author Michael A. Sulliva.

This Part 5 discusses the striking success of the False Claims Act since its 1986 Amendments, as it has recovered more than $27 billion in taxpayers’ money wrongfully obtained by fraud and false claims.

IV. The Trend of Recent Recoveries Under the False Claims Act

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Part 6: States’ Experiences With Their Own False Claims Acts

This Part 6 is the final installment of an article explaining why the major qui tam whistleblower statute, the federal False Claims Act, has led to a wave of new state False Claims Acts. It is an updated version of part of a previously published article by whistleblower lawyer blog author Michael A. Sullivan.

V. States’ Experiences With Their Own False Claims Acts

As noted, at least twenty-eight states now have a False Claims statute, and many other states are considering similar laws. The financial incentives of the Deficit Reduction Act of 2005 have not only prompted states that lacked False Claims statutes to enact them, but also have caused many states wishing to qualify for the additional funds to amend their existing False Claims statutes.

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Insider Trading Probe Reinforces Immediate Need for Strongest SEC Whistleblower Program

Yesterday’s Wall Street Journal reports a “sweeping” insider trading investigation, with civil and criminal charges soon to follow, involving “consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation.”

While the details remain to be seen, the unending series of fraud cases that continue–despite Sarbanes-Oxley–proves why Wall Street must not be allowed to neuter the first potentially meaningful SEC whistleblower program, mandated by the Dodd-Frank financial reform law.

How is it that the hallowed “compliance programs” born from Sarbanes-Oxley have utterly failed to stop the breathtaking frauds of Madoff, Stanford, and other recent post-SOX scandals?

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With New SEC Whistleblower Program Proposed Rules Announced, Will the SEC Allow Potential Defendants to Gut Them?

We have been awaiting the SEC’s proposed rules for its new SEC Whistleblower Program, released yesterday. Even before the announcement, however, those who oppose this first potentially meaningful SEC Whistleblower Program have begun efforts to undermine it.

The SEC’s website already includes some firms’ suggestions to impose extreme restrictions on SEC whistleblowers–contrary to how other successful whistleblower programs operate.

Designing any new whistleblower program should begin with studying more than two decades of successes of the nation’s major whistleblower law, the False Claims Act. The False Claims Act has been so effective in uncovering and penalizing fraud against the government since 1986 that it has inspired Congress and the states to enact a wave of new whistleblower statutes–including the Dodd-Frank whistleblower mandate in section 922.

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Links to SEC Whistleblower and CFTC Whistleblower Lawyer Information

Our whistleblower lawyer blog has followed closely the development of the first potentially meaningful SEC Whistleblower and Commodities Whistleblower Programs. That link provides regular updates.

Based on our firm’s long experience in representing whistleblowers, we were asked by the Senate Banking Committee staff for input in how the new SEC and CFTC whistleblower provisions of the July 2010 Dodd-Frank Financial Reform Act should work. We urged that the Senate change the tepid House version, which provided no meaningful rewards to whistleblowers,
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SEC Recovers $39 Million under Foreign Corrupt Practices Act for Bribery and Kickbacks in Mexico and Iraq

One of the most interesting twists to the new SEC Whistleblower Program will be how many commercial bribes and kickbacks paid to foreign government officials will now come to light. As we have written about previously, the SEC shares jurisdiction with the Justice Department over such cases that violate the Foreign Corrupt Practices Act (FCPA).

An example of why whistleblowers will come forward is this afternoon’s announcement of the SEC’s $39 million settlement with ABB Ltd (“ABB”), a Swiss company that provides power and automation products and services.

The SEC alleged that ABB made more than $2.7 million in bribes and kickbacks to obtain more than $100 million in contracts. The payments allegedly were made to “government officials in Mexico to obtain business with government owned power companies,” and to the “former regime in Iraq to obtain contracts under the United Nations Oil for Food Program.”

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Health Care Fraud Cases and 2009-2010 Amendments to False Claims Act Discussed at National Fraud and Compliance Forum

At the annual Fraud and Compliance Forum in Baltimore that runs through Tuesday, the nation’s top health care lawyers will be paying close attention to recent changes to the nation’s primary whistleblower law, the False Claims Act. The “qui tam” provisions of the False Claims Act allow private citizen whistleblowers (“relators”) to share in the government’s recovery of damages.

As a former defense attorney who now represents whistleblowers, I have been asked to present a program at this conference with Rick Shackelford of King & Spalding, to discuss these major amendments to the False Claims Act–the first since 1986. Congress acted decisively in three recent major bills to restore the False Claims Act to its intended strength, in the face of court decisions that created obstacles to its use.

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Indiana Attorney General Invites Qui Tam Whistleblower Cases by Health Care & Pharmaceutical Employees To Stop Health Care Fraud

Smart and effective state Attorneys General have fought fraud against their citizens through encouraging greater use of the country’s major whistleblower law, the False Claims Act, and state versions of that law.

Texas AG Greg Abbott, for example, has a staff that has long distinguished itself for recovering millions of stolen taxpayer funds in health care fraud cases, under the leadership of Pat O’Connell and, more recently, Ray Winter.

Following this tradition, Indiana AG Greg Zoeller is urging employees of pharmaceutical companies and heath care entities to help stop health care fraud, and possibly share in the recovery as qui tam whistleblowers under the state and federal False Claims Acts.

While we have discussed in detail how the False Claims Act operates, AG Zoeller’s announcement gives a succinct summary. We have reprinted it below, and applaud his efforts.
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Shouldn’t the IRS Pay Tax Whistleblowers Who Help Prevent Fraudulent Refunds?

When IRS whistleblowers save U.S taxpayers money, they deserve the rewards that lawmakers such as Sen. Chuck Grassley fought to establish. In 2006 his efforts resulted in the first meaningful IRS Whistleblower program ever, which is attracting many tax whistleblowers with significant evidence.

We have discussed previously the many positive aspects of the long-awaited IRS Whistleblower procedures published in June–and one illogical, self-defeating feature. Some in the IRS–and apparently not the IRS Whistleblower Office–thought whistleblowers should not be rewarded when they report tax
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Merck and Other Pharma Companies Probed by DOJ and SEC in Foreign Corrupt Practices Act (FCPA) Investigation

When Pharma manufacturers are targeted by the Department of Justice, qui tam whistleblower cases under the False Claims Act are often the reason.

Now, whistleblowers may also receive rewards for reporting violations of the Foreign Corrupt Practices Act (FCPA), thanks to the new whistleblower provisions of the Wall Street financial reform law. Announcements like Merck’s recent SEC filing that it is now the subject an FCPA investigation involving other Pharma companies should become common, as corruption will now be increasingly exposed in a new wave of SEC Whistleblower cases.

The recent 10-Q filing of Merck & Co., Inc. stated in part:

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