Whistleblower News May 2011
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Whistleblower News, May 2011

Whistleblower News, May 2011

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Whistleblower News May 2011 Document Transcript

  • 1. May 2011Inside this Edition: Focus On The IRS Informant Reward Program  IRS Informant Reward Program - Overview  IRS Proposes Amendments To Its Informant Reward Program  IRS Whistleblower Paid $4.5 Million: First Award Under IRS Whistleblower Program  Treasury Department Inspector General Calls For Audit Of IRS Handling of Whistleblower Claims  IRS Statistics On Underpayments of Federal Taxes False Claims Act Whistleblower News  U.S. Supreme Court Rules that FOIA Requests Trigger Public Disclosure Bar SEC Adopts Final Regulations For Whistleblower Program Recent Whistleblower Events IRS Informant Reward Program - Overview In 2006, the Congress enacted a new whistleblower law that enables private individuals toreport: (1) underpayments of tax; and (2) persons otherwise guilty of violating the internal revenuelaws. The passage of the IRS Whistleblower Law was significant because the False Claims Actdoes not apply to claims made under the Internal Revenue Code. The IRS Whistleblower Law, like the False Claims Act, rewards whistleblowers who report
  • 2. allegations of fraud on the government. In general, a whistleblower can receive an award ofbetween 15% to 30% of the collected proceeds (including penalties, interest, additions to tax andadditional amounts). The IRS Whistleblower Law is, however, very different from the False Claims Act. The processand procedure for reporting fraud under the IRS Whistleblower Law are substantially different fromthe qui tam whistleblower provisions of the False Claims Act. For example, whistleblower reportsunder the IRS Whistleblower Law are not, as in False Claims Act cases, raised in a lawsuit filed infederal court and served on the Attorney General and Local United States Attorney. Instead,whistleblower reports are handled by the IRS Whistleblower Office and disputes may be appealedto the Tax Court. There are also many substantive differences between the IRS Whistleblower Law and the FalseClaims Act. For example, the IRS Whistleblower Law applies, in the case of individual taxpayers,only to those individuals: (1) with a gross income above $200,000 for the relevant taxable year; and(2) when the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2Million. The False Claim Act, by contrast, contains no such monetary thresholds. IRS Proposes Amendments to Its Informant Reward Program In 2006, Congress passed the Tax Relief and Health Care Act, which created the IRSWhistleblower office and made rewards to whistleblowers less discretionary than in the past. UnderInternal Revenue Code 7623(a), the IRS shall pay awards to people who provide "specific andcredible information" to the IRS if the information results in the collection of taxes, penalties, interestor other amounts from a noncompliant taxpayer. The IRS wants specific information aboutsignificant tax issues. "Significant" is defined by the IRS as taxes, penalties, and interest owed inexcess of $2 million. This is not the venue to report speculative concerns, air personal disputes,drop a dime on a former spouse, or to report isolated events such as a waiter failing to declare histips as income. There are two basic tracks currently in place for whistleblower complaints that are filed with theIRS. On the first track, whistleblowers submit information concerning amounts in dispute (backtaxes, interest, and penalties) in excess of $2 million. In these cases, the IRS is looking for non-compliant taxpayers with annual gross income of more than $200,000. If the IRS successfullyobtains a recovery from a non-compliant taxpayer, the IRS is required to pay the whistleblowerbetween 15 and 30% of the recovery. Whistleblowers on this track who are not satisfied with thereward may appeal to the United States Tax Court located in Washington, D.C. The second track applies to cases involving less than $2 million in dispute. If the IRS obtains arecovery in these cases, payment of a reward to the whistleblower is discretionary, with a maximumof 15% of the recovery up to a maximum of $10 million. Whistleblowers on this track cannot appealto the United States Tax Court. On January 18, 2011, the IRS published notice of proposed rulemaking that will redefine howwhistleblowers may be compensated by the government. The proposed amendments allow forrewards to be paid to whistleblowers if the information they provide results in the denial of a claimfor a refund that the IRS would have otherwise paid or reduces an overpayment credit balance. Inother words, if the whistleblowers tip prevents the IRS from paying an improper refund to theputative defendant, the amount of that refund will be included in the calculation of the recovery by
  • 3. the government. This represents a significant change from the law as it currently stands. It seeksto monetize prospective violations as opposed to recovering amounts that previously were paid.Similarly, if the whistleblower provides the IRS with information that a putative defendant tried toclaim a fraudulent loss as an offset to tax liability, the resulting amount of taxes owed will beincluded when calculating the whistleblowers reward. These proposed changes, if adopted, will open the whistleblower program up to a whole newpopulation of citizens with credible information. Claims for rewards that would have previously beendenied may now be granted. For more information on the IRS Whistleblower Program, visithttp://www.falseclaimsact.com/irs_whistleblowers_law_overview.php IRS Whistleblower Paid $4.5 Million: First Award Under IRS Whistleblower Program An accountant who reported to the IRS that his employer was underpaying its taxes wasrecently awarded $4.5 Million by the IRS. This represents the first award paid to a tax whistleblowerunder the IRS Whistleblower Program. The $4.5 Million award represented a 22% share of thetaxes recovered (as discussed above, the IRS Whistleblower Program entitles the Whistleblower toreceive between 15% and 30% of the amount recovered). The payment of this award is anencouraging sign for the many other whistleblowers who have been stepping forward to reportunder the IRS Whistleblower Program, as well as for those who are contemplating blowing thewhistle. Treasury Department Inspector General Calls for Audit of IRS Handling of Whistleblower Claims In its 2011 Annual Audit Plan, the Treasury Departments Inspector General for TaxAdministration recently stated that one objective of the Inspector Generals Audit was: At the suggestion of the Congress, determine whether the IRS has taken effective corrective actions to address previously identified weaknesses in processing claims from whistleblowers. Specifically, determine if the Whistleblower Offices new procedures are contrary to Congress intent and will deter whistleblowers The announcement of this Audit Objective is an encouraging sign that Congress repeatedcalls for more effective procedures in handling whistleblower claims have had an impact within theIRS. This follows on the heels of the recent amendments to the IRS Whistleblower Programdiscussed above. IRS Statistics on Underpayments of Federal Taxes The IRS periodically releases estimates of the tax gap - the difference between taxes owed andtaxes paid in a timely manner. The latest IRS estimates show a tax gap of about $350 billion for tax
  • 4. year 2001. The tax gap consists of three components - non-filing (taxes not paid by those with afiling requirement who fail to file), underreporting (taxes underpaid by those who file but underreportwhat they owe), and underpayment (taxes not paid by those who fail to remit reported amountsowed when due). IRS reports the tax gap for separate tax sources, including individual incometaxes, corporate income taxes, employment taxes, and estate taxes. At a meeting held in June 2010, the IRS Tax Gap Subgroup, for example, concluded that thenon-filing gap for estate taxes in tax year 2004 (at the midpoint of a confidence interval) was $2.5billion, or about 9.2 percent of tax liability. The estimate is similar in magnitude to estimates forearlier years using a different methodology. The latest estimate of the underreporting gap was $1.9 billion in 2004, (with a confidenceinterval ranging from $0.7 billion to $3.0 billion). Based on the statistical confidence intervals, IRSstaff concluded that the results were not significantly different from the estimates previouslyreleased for tax year 2001. These results demonstrate a tremendous level of underreporting and underpayment of federaltaxes. The IRS Whistleblower Program was designed to assist in the collection of suchunderreporting and underpayment of taxes by incentivizing whistleblowers to assist the governmentin the collection of the underpayment of taxes. FALSE CLAIMS ACT WHISTLEBLOWER NEWS U.S. Supreme Court Rules that FOIA Requests Trigger Public Disclosure Bar On May 16, 2011, the United States Supreme Court ruled, in Schindler Elevator v. UnitedStates ex rel. Kirk , Case No. 10-188, that a federal agencys written response to a Freedom ofInformation Act (FOIA) request for records constitutes a "report" within the meaning of the FalseClaims Acts public disclosure bar. The public disclosure bar of the FCA generally foreclosesprivate parties from bringing qui tam suits to recover falsely or fraudulently obtained federalpayments where those suits are "based upon the public disclosure of allegations or transactions in acriminal, civil, or administrative hearing, in a congressional, administrative, or GovernmentAccounting Office report, hearing, audit, or investigation, or from the news media." 31 U.S.C. §3730(e)(4)(A). The Court looked to the dictionary definition for "report", because the FCA does not define theterm. Dictionaries define "report" as, for example, something that gives information. According tothe Court, using this broad definition is consistent with the drafting history of the public disclosurebar, which the Court stated was intended to discourage "opportunistic" litigation. The Court did not decide whether the Relators allegations were "based upon ... allegations ortransactions" disclosed in the reports at issue. Additionally, it bears noting that the FCAs public
  • 5. disclosure bar was amended in 2010, and that the Supreme Courts decision addressed the pre-amendment version of the public disclosure bar. To read a copy of the Supreme Courts Opinion, visitwww.supremecourt.gov/opinions/10pdf/10-188.pdf SEC Adopts Final Regulations For Whistleblower Program With great anticipation, the SEC adopted its final regulations governing the new whistleblowerprogram under the Dodd-Frank financial reform legislation. Most significantly, the SEC did awaywith a proposed requirement that whistleblowers first report wrongdoing internally before reportingto the SEC, despite strong opposition from corporate lobbyists. The SEC did provide enhancedremedies for whistleblowers that decide to first report internally by reaffirming that suchwhistleblowers will still be eligible for an award, and by giving the whistleblower 120 days to reportto the SEC if the company fails to do so. The employee would receive whistleblower status fromthe date of internal reporting so as to maintain their place in line in case of successive reporting ofthe same conduct. The SEC also provided that cooperation with a companys internal complianceprogram would be a factor in determining whether to increase a whistleblowers award. The SEC broadened the type of information that may qualify for an award by making awhistleblower eligible for an award if the information provided reopens a closed investigation oropens a new line of inquiry in an existing investigation. The SEC clarified those individuals whowould not be eligible to participate in an award, including:  Individuals with a pre-existing legal or contractual duty to report their information to the SEC  Attorneys who attempt to use information obtained from client engagements to make whistleblower claims for themselves  Individuals who obtain information that a court deems in violation of law  Foreign government officials  Officers, directors or partners of an entity who learn about securities violations through third-persons or who learn the information in connection with the entitys process for Identifying and reporting potential violations  Compliance and internal audit personnel  Public accountants working on SEC engagementsThe SEC also announced that it has completed initial staffing of the Office of the Whistleblower andthat the Investor protection Fund from which awards will be paid, is fully funded. RECENT WHISTLEBLOWER EVENTS  On June 27, 2011, Marc Raspanti will speak at the American Health Lawyers Association Annual Meeting in Boston, Massachusetts, on the topic of "Everything You Need to Know
  • 6. About Handling a Whistleblower"  On June 8, 2011, Michael Morse will speak at the Pennsylvania Institute of Certified Public Accountants Health Care Conference on the topic of "Health Care Fraud and the False Claims Act"  On April 14, 2011, Marc Raspanti spoke at the American Bar Association 2011 Spring Meeting- Joint Criminal Justice / Litigation Section CLE Program, on the topic of "A New Day has Dawned: Federal and State False Claims Acts at the Forefront of Litigation"  On April 9, 2011, Michael Morse spoke at the Health Care Compliance Associations Compliance Institute in Orlando, Florida on the topic of "False Claims Act Developments"  On April 5, 2011, Marc Raspanti spoke at the Offshore Alert Conference in Miami, Florida of the topic of "Avoiding the Mistakes of the UBS/Birkenfeld Case: Protecting Whistleblowers from Criminal and Civil Liability" For more information about whistleblower lawsuits, visit: www.falseclaimsact.com or www.fraudwhistleblowersblog.com Federal and State Qui Tam Litigation Pietragallo Gordon Alfano Bosick & Raspanti, LLP has one of the most successful, skilled and respected practices in the United States representing qui tam whistleblowers under federal and state false claims acts and the IRS Whistleblower Program. For nearly 20 years ourattorneys have fought on behalf of qui tam whistleblowers across the United States, in many of themost complex and sophisticated cases in the history of the federal False Claims Act. Our attorneys have served as lead counsel for whistleblowers that have resulted in more than $1 Billion in recoveries for Federal and State taxpayers. The IRS Whistleblower Team of Pietragallo Gordon Alfano Bosick & Raspanti includes former federal and state prosecutors, a Certified Public Accountant, a Certified Fraud Examiner, and attorneys experienced in criminal tax matters. Michael A. Morse, Esquire Marc S. Raspanti, Esquire Phone: (215) 988-1427 Phone: (215) 988-1433 Fax: (215) 981-0082 Fax: (215) 981-0082 E-Mail: E-Mail: MAM@PIETRAGALLO.com MSR@PIETRAGALLO.com Bio Bio
  • 7. Blog Home | Website Home | Our Practice | State False Claims Acts | Common Types of Fraud | Contact Us 215-320-6200 © 2011 False Claims Act. All rights reserved. Attorney AdvertisingThe information on this site is not, nor is it intended to be, legal advice. Prior results do not guarantee a similar outcome.