As the IRS continues its increasing focus on international tax issues, a new IRS offshore disclosure program announced in December continues to take shape. While the IRS has not made public a full description of the program, details have emerged in comments of IRS officials over the past weeks.

Using the 2009 IRS voluntary disclosure program as a template, the IRS is apparently tweaking the approach that generated approximately 15,000 disclosures in the 2009 effort.

The IRS Criminal Investigative Division (“CI”)–already quite busy with UBS account holders identified through the Swiss bank’s Deferred Prosecution Agreement with the U.S.–was the “entry point” for the 2009 disclosure program. CI reportedly will retain that role, but will centralize the process in its Philadelphia office.

We have written previously about Senator Grassley’s pointed criticisms of aspects of the IRS whistleblower rules proposed in June 2010. The IRS’s delay in finalizing those rules is a principal reason why the IRS has not yet paid whistleblowers who have come forward since the December 2006 creation of the new IRS Whistleblower Program.

Today, the IRS took a large step to correct one major flaw that Grassley urged be corrected: re-writing a bizarre rule that would deny rewards to valuable whistleblowers who prevent improper refunds, or reduce a credit balance by a taxpayer. From what we can tell, that nonsensical rule was not the creation of the IRS Whistleblower Office, but of others within the IRS.

The IRS today announced a new IRS whistleblower rule to correct that anomaly, to be published for comment in the Federal Register.

Specifically, in a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley challenged the IRS to write a sensible rule to correct this result:


In addition to the IRS posting the new [Internal Revenue Manual] provisions without public comment, there are many substantive concerns within the IRM. For example, the new definition of “collected proceeds” is particularly troubling because it seems to limit the payment of awards to whistleblowers only in those instances where the IRS receives cash payment from a taxpayer. . . . The denial of a whistleblower award where the whistleblower’s information leads to the denial of a claim for refund seems to create a perverse incentive for the whistleblower to wait until the IRS has paid an improper refund. In addition, the IRM says that satisfaction of a taxpayer’s liabilities by reducing a credit balance is not within the scope of collected proceeds so the whistleblower would receive no award.

The new proposed rule attempts at least a partial fix. It provides that rewards may now be paid on “amounts collected prior to receipt of the information if the information provided results in the denial of a claim for refund that otherwise would have been paid; and a reduction of an overpayment credit balance used to satisfy a tax liability incurred because of the information provided.”

Today’s proposed rule does nothing to address Grassley’s other criticisms of the June 2010 proposed rules.
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Citing many developments in the IRS Large Business and International Division in 2010, Tax Analysts this week named IRS LB&I Commissioner Heather Maloy as its “Tax Person of the Year.”

Among those developments that we have followed previously are the international focus of the restructured LB&I division (formerly known as the Large and Mid-Size Business Division (LMSB)), and the creation of the new Global High Wealth Industry Group within LB&I. That group within LB&I is already is working some very significant IRS Whistleblower cases.

Also mentioned by Tax Notes was one of my favorite IRS professionals who assisted the new IRS Whistleblower Program in its infancy, Stuart Mann:
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The SEC has just announced that current senior advisor to SEC Chairman Mary Schapiro, Stephen L. Cohen, has been named an Associate Director of the Division of Enforcement.

We hope this is good news for the nascent SEC Whistleblower Program. The SEC recently announced that its delaying creation of an SEC Whistleblower Office for budget reasons.

Steve Cohen has advised Chairman Schapiro on a number of issues including the SEC Whistleblower program, which I have discussed with him briefly earlier this year.

Coincidentally, the announcement came on yesterday’s deadline for comments on the SEC’s proposed rules for SEC whistleblowers, which must be substantially revamped so as not to defeat Congress’ purpose by discouraging meaningful whistleblowers from coming forward. We have submitted our own comments to the SEC on its proposed whistleblower rules, and will discuss later others’ comments here. See our comments

The SEC’s press release is reprinted below:
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Tax whistleblowers using the new IRS Whistleblower Program have reported many instances of tax evasion involving domestic and foreign corporations, partnerships, and trusts, in addition to abusive offshore transactions about which we have written previously. These tax whistleblowers will allow the IRS to reduce the more than $300 billion “tax gap”–the difference between what tax cheats owe, but refuse to pay.

Tax evasion generally entails taxpayers understating taxes in the returns they file. In many cases evasion also entails taxpayers failing to file returns, especially information returns (as opposed to tax returns).

For example, partnership returns (Form 1065) are information returns and as such do not report tax payable. Cases of partnership tax evasion sometimes arise where filing Form 1065 is “overlooked.” In many of these cases, the partners continue to file their own income tax returns, which typically understate taxable income and tax payable, as there are no K-1’s to report.

Another partnership information return frequently overlooked is Form 8275. This form should generally be filed where partners have made partnership contributions, and received partnership distributions, within a two year period. Failing to file 8275’s typically results in an underpayment of tax where the disguised sale rules operate to treat the contribution and distribution as a sale.

Cancellation Of Debt (“COD”) is another area where non-filing of information returns (generally Form 1099-C) often results in an underpayment of tax, particularly in relation to non-institutional debt.

The problem of overlooked returns is not limited to income tax. Another return that is frequently overlooked is Form 709. This form should be filed by individuals who gift property that does not qualify for exclusion from gift tax.

On the international side, taxpayer interests in foreign companies should often be information reported on Form 5471. Where taxpayers have interests in foreign companies that hold interests in other foreign companies, multiple 5471’s may need to be filed to reflect second tier or higher tier interests. Failing to file 5471’s typically results in an underpayment of tax where foreign company income is required to be included in US income, for example under the Subpart F rules.
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This is Part 1 of an updated explanation of the major qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. This Part 1 provides an introduction to the False Claims Act.

In 2010, more than ever, it is essential for lawyers to understand their clients’ potential liabilities under the federal False Claims Act (“FCA”). The health care industry increasingly has become the major focus of the federal government’s enforcement efforts, and usually pays at least two-thirds of the money recovered each year under this anti-fraud statute.

Adding to the health care lawyer’s challenges, since 2009 Congress has amended the False Claims Act three times, primarily to overturn judicial decisions that once created obstacles to FCA actions. Those amendments also have created an important new basis of FCA liability – retention of overpayments – which has great significance to health care providers. These 2009-2010 amendments make the FCA a far more effective enforcement tool for the government, and thus a much greater problem for defendants accused of health care fraud.

Further, a wave of new “whistleblower” statutes continues, inspired by the successes of the False Claims Act. These new laws include (1) an increasing number of state versions of the federal False Claims Act; (2) the new IRS Whistleblower Rewards Program; and (3) new “SEC Whistleblower” and “CFTC Whistleblower” programs, authorized in July 2010 as part of the Dodd-Frank Financial Reform Act. By encouraging employees, contractors, and others to report allegations of fraud, these new whistleblower provisions create substantial concerns for health care organizations and other defendants alleged to be liable.

This article provides an overview of what health care lawyers should know about the federal False Claims Act and the new state False Claims Acts. As discussed below, the state Acts mirror the federal False Claims Act in important respects, but can differ in some significant ways.
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This is Part 2 of an explanation the federal False Claims Act and the new state False Claims Acts with qui tam whistleblower provisions. This Part 2 discusses the sound policy reasons underlying the False Claims Act.

I. Why Have A “False Claims Act”?

Fraud is perhaps so pervasive and, therefore, costly to the Government due to a lack of deterrence. GAO concluded in its 1981 study that most fraud goes undetected due to the failure of Governmental agencies to effectively ensure accountability on the part of program recipients and Government contractors. The study states:

For those who are caught committing fraud, the chances of being prosecuted and eventually going to jail are slim. . . . The sad truth is that crime against the Government often does pay.(Quoted from legislative history of 1986 amendments to False Claims Act).

Fraud – and allegations of fraud – plagues government spending at every level. Today, as the federal government struggles to fund the hundreds of billions of dollars spent annually on health care through Medicare, Medicaid, and other programs; the Iraq and Afghanistan wars; the financial “bailout” measures enacted after the 2008 financial collapse; disaster relief efforts; and government grants and programs of every description, there is no shortage of opportunities for fraud against the public fisc.

The federal False Claims Act has been the federal government’s “primary” weapon to recover losses from those who defraud it. The Act not only authorizes the government to pursue actions for treble damages and penalties, but also empowers and provides incentives to private citizens to file suit on the government’s behalf as “qui tam relators.” Over the past two decades, recoveries for the federal government have grown dramatically since Congress amended the Act in 1986 to encourage greater use of the qui tam provisions, as part of a “coordinated effort of both the [g]overnment and the citizenry [to] decrease this wave of defrauding public funds.”

The federal False Claims Act since 1986 has been successful in recovering more than $27 billion, increasingly through qui tam lawsuits brought by private citizens. In light of the federal Act’s successes, Congress in the Deficit Reduction Act of 2005 created a large financial “carrot” for states that adopt state versions of the False Claims Act. Any state that passes its own “False Claims” statute with qui tam or whistleblower provisions that are at least as effective as those of the federal Act becomes eligible for a 10% increase in its share of Medicaid fraud recoveries.
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This is Part 3 of an updated explanation of the major qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. This Part 3 explains the history of the False Claims Act and why effective whistleblower laws are important.

II. Background of the Federal False Claims Act

Although the False Claims Act may be the best known qui tam statute, it is far from being the first. Qui tam actions date back to English law in the 13th and 14th Centuries. This tradition took root in the American colonies and, by 1789, states and the new federal government had authorized qui tam actions in various contexts.

According to one writer:

In the early years of the Nation, the qui tam mechanism served a need at a time when federal and state governments were fairly small and unable to devote significant resources to law enforcement. As the role of the Government expanded, the utility of private assistance in law enforcement did not diminish. If anything, changes in the role and size of Government created a greater role for this method of law enforcement.

A. Birth of the False Claims Act:

The Civil War prompted Congress to enact the original False Claims Act in 1863. As government spending on war materials increased, dishonest government contractors took advantage of opportunities to defraud the United States government. “Through haste, carelessness, or criminal collusion, the state and federal officers accepted almost every offer and paid almost any price for the commodities, regardless of character, quality, or quantity.”

One senator explained how the qui tam provisions of the Act were intended to work:
The effect of the [qui tam provisions] is simply to hold out to a confederate a strong temptation to betray his co-conspirator, and bring him to justice. The bill offers, in short, a reward to the informer who comes into court and betrays his co-conspirator, if he be such; but it is not confined to that class. . . . In short, sir, I have based the [qui tam provision] upon the old fashioned idea of holding out a temptation and setting a rogue to catch a rogue, which is the safest and most expeditious way I have ever discovered of bringing rogues to justice.

The original Act provided for double damages, plus a $2,000 forfeiture for each claim submitted. If a private citizen or “relator” used the qui tam provision to file suit, the government had no right to intervene or control the litigation. A successful “relator” was entitled to one-half of the government’s recovery.

The Act survived in substantially its original form until World War II. In a classic and oft-quoted 1885 passage, one court rejected the argument that courts should limit the statute’s reach on the grounds that qui tam actions were poor public policy:

The statute is a remedial one. It is intended to protect the treasury against the hungry and unscrupulous host that encompasses it on every side, and should be construed accordingly. It was passed upon the theory, based on experience as old as modern civilization that one of the least expensive and most effective means of preventing frauds on the treasury is to make the perpetrators of them liable to actions by private persons acting, if you please, under the strong stimulus of personal ill will or the hope of gain. Prosecutions conducted by such means compare with the ordinary methods as the enterprising privateer does to the slow-going public vessel.
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This Part 4 of a six part summary explains how the federal False Claims Act works, after Congress amended it three times in 2009-2010. It also discusses similar provisions of some state False Claims Acts.

This is an update from a previously published article by whistleblower lawyer blog author Michael A. Sullivan.

III. Overview of How the Modern False Claims Act Works (with Comparisons to Some State False Claims Acts)

A. Conduct Prohibited

The federal False Claims Act imposes civil liability under several different theories, only four of which were generally used before FERA. FERA has added an additional theory of liability for retention of overpayments, which now will likely be used quite often in health care cases:

First, the Act makes liable any person who knowingly presents, or causes to be presented, a “false or fraudulent claim for payment or approval.”

Second, the Act creates liability for using a “false record or statement.” It imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”

“Claim” is broadly defined, and is not limited to submissions made directly to the federal government:
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