Key Whistleblower Changes in Bipartisan Budget Act


The Bipartisan Budget Act of 2018, passed overnight and signed this morning by President Trump to end the second federal government shutdown of this year, includes two key provisions for whistleblowers previously introduced by Senator Charles Grassley but removed from the January budget deal.

For IRS whistleblowers, the law clarifies the term collected proceeds to include criminal fines and civil forfeitures as well as violations of reporting requirements. The IRS has previously taken the position that tax whistleblowers are only eligible for rewards based on fines pursuant to Title 26. This interpretation was rejected by the U.S. Tax Court last year and the Government appealed to the D.C. Circuit to reverse the decision. This section essentially resolves that appeal and affirms the U.S. Tax Court decision giving a broad definition to the term.

The legislation will also unify the tax treatment of whistleblower awards for the major laws. For some time, whistleblowers awarded money under the Federal False Claims Act and IRS whistleblower program were entitled to an above-the-line tax deduction for their attorney fees. The tax deduction did not clearly extend to CFTC and SEC whistleblowers, or rewards under the State False Claims Acts. These awards were subject to taxation of the entire amount received by the individual and then again for the amount paid by the client to the law firm.

In other words, IRC sections 62(a)(20) and 62(a)(21) allowed False Claims Act relators and IRS whistleblowers to only pay taxes for the amount received after paying their attorney fees. The law firm is responsible for paying tax on the amount of attorney fees that they are paid by their client. The legislation extends the above-the-line deduction to Dodd Frank Act whistleblowers and relators paid under the state False Claims Acts. Notably, it does not mention the Motor Vehicle Safety Whistleblower Act, which was

We have discussed these issues several times on this blog since the Grassley Amendments were initially introduced into the Senate’s Tax Cuts and Jobs Act in November 2017. If you have questions about these or other aspects of the whistleblower laws, please call 1-800-590-4116 to speak to a McEldrew Young whistleblower attorney.

Collected Proceeds Clarification for IRS Whistleblowers Dropped from Tax Bill


The Wall Street Journal reported yesterday that the reconciliation of the tax legislation has dropped the definition of collected proceeds for the IRS whistleblower program introduced into the Senate version that passed. The amendment was added by Senator Chuck Grassley, an advocate for whistleblowers and responsible for introducing the legislative provision in 2007 that created the IRS whistleblower program.

The reconciliation process is used to achieve a final bill when there are differences in the bills passed by the House and Senate. The original version of the tax bill passed by the U.S. House of Representatives did not include Senator Grassley’s amendments.

The definition of collected proceeds for the IRS whistleblower law is currently under review by the U.S. Court of Appeals for the D.C. Circuit. The proposed measure would have codified an interpretation of the term collected proceeds to provide whistleblowers a percentage of both criminal fines and civil forfeitures. The IRS argued in U.S. Tax Court last year that these funds were not included in the term. The U.S. Tax Court decided a broad interpretation of the term was warranted in a decision that favored the whistleblowers. The ruling is now on appeal.

The reconciled bill also appears to have eliminated Senator Grassley’s other proposed amendment, to clarify that SEC and CFTC whistleblower awards are exempt from double taxation under the Civil Rights Tax Relief Act (adopted as part of the American Jobs Creation Act of 2004).

The potential for double taxation is created when successful whistleblowers must pay tax on the entire amount of their award and then the whistleblower’s attorney pays tax on the portion they receive from the contingency fee. The Relief Act allows for an exemption for the contingent fee portion so that only one tax payment is made. As always, consult a tax lawyer for specific legal advice with regard to tax issues.

The reconciliation was passed by the U.S. House, 227-203, and the U.S. Senate, 51-48. It will now be sent to President Trump’s desk for signature.

Collected Proceeds Debate Continues in IRS Whistleblower Cases and Congress


The Justice Department has appealed a decision by the U.S. Tax Court last year to provide an IRS whistleblower reward based upon a criminal fine and civil forfeitures. The Government’s appeal to the D.C. Circuit attempts to reverse a favorable decision for whistleblowers on the definition of collected proceeds used in the terms of the IRS whistleblower program.

The case involves the proceeds of a $74 settlement where portions were allocated to a tax resolution, a criminal fine, a civil forfeiture of fees received for its services, and the relinquishment of claims to money previously forfeited. IRS rewards are required to be paid on collected proceeds. The IRS took the position in Tax Court that only fines received pursuant to Title 26 are collected proceeds according to the law. The Tax Court sided with the whistleblowers, refusing to limit the scope of the term collected proceeds.

It appears based on the Government’s appeal that the United States will continue to oppose a broad interpretation of the term.  According to the United States, money recovered from a civil forfeiture or criminal fine are not eligible to be counted as collected proceeds and thus the tax whistleblower is not entitled to a portion of that money.

The appeal might largely be irrelevant in the future.  Senator Grassley’s amendment to the Senate’s tax legislation to define the term collected proceeds in the IRS Whistleblower program was adopted and is currently part of the legislation under consideration. If the bill is adopted without changes by the Senate and the provision survives reconciliation, it would define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements.

The Senate is expected to vote on the tax bill today with Senator Grassley’s amendment.  It would then face reconciliation with the terms of the tax bill passed by the U.S. House of Representatives.

Senate Considering Antitrust Whistleblower Protections Again


The bipartisan bill promoting whistleblower protections for individuals reporting antitrust violations, the Criminal Antitrust Anti-Retaliation Act (“CAARA”), is back in the Senate.

The law is co-sponsored by Senators Charles Grassley (R-Iowa) and Patrick Leahy (D-Vermont). On November 2nd, S. 807 advanced out of the Senate Judiciary Committee and the next step would be a vote by the Senate. Two years ago, the bill was adopted by the Senate unanimously but did not receive a vote in the U.S. House of Representatives.

The law amends the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 to provide covered individuals compensatory damages (reinstatement, backpay and special damages including litigation costs, expert witness fees and reasonable attorney’s fees) through a lawsuit.

The bill requires an individual who is discharged or otherwise discriminated against in violation of the law to file a complaint with the Secretary of Labor within 180 days of the date on which the violation occurs. If the Secretary of Labor has not issued a final decision within 180 days, and other conditions are met, the claimant can bring an action in the appropriate district court of the United States. This procedure mimics the procedure of some other employment law statutes.

The law protects reports of what a covered individual reasonable believes to be criminal antitrust conduct in violation of Section 1 or Section 3 of the Sherman Act made to a member of Congress or a federal regulatory or law enforcement agency. The law also covers various acts related to assisting a Federal Government investigation or proceeding, including testifying in it or otherwise assisting.

The law does not provide protections to individuals that planned and initiated a violation of the antitrust laws, another criminal law in conjunction with the violation of the antitrust law, or an obstruction or attempted obstruction of an investigation by the Department of Justice.

One thing that the law does not do is offer rewards to antitrust whistleblowers. In the past, whistleblower protections have in some instances been a precursor to subsequent adoption of a whistleblower reward program. Most recently, the Motor Vehicle Safety Whistleblower Act, adopted as part of the FAST Act, was preceded by the Moving Ahead for Progress in the 21st Century Act (MAP-21).

We’ll continue to post updates to the progress on CAARA as we find them.

Grassley Proposes Whistleblower Amendments to Senate’s Tax Cuts and Jobs Act


Senator Grassley has proposed 15 amendments to the Senate bill for the Tax Cuts and Jobs Act. Two of those amendments are important to whistleblowers, so we are going to examine them in more detail here.

Amendment #1 from Grassley is intended to unify the tax treatment of whistleblower awards. The amendment seeks to extend the current above-the-line deduction available to successful whistleblowers under the Federal False Claims Act and IRS whistleblower program for attorney fees and court costs to other whistleblower programs.

What is an above-the-line deduction? It means that the US does not require the whistleblower to pay tax on the entire award (before subtracting out the portion paid under the False Claims Act or Internal Revenue Code Section 7623 (IRS Whistleblower program). This is provided for in IRC section 62(a)(20) and 62(a)(21).

If there is no above-the-line deduction, then the whistleblower pays tax on the entire amount of the reward as income and then the attorney would separately claim and pay taxes on the portion they are paid for fees as income.

The amendment would eliminate double taxation for the rewards under the State False Claims Acts, the SEC Whistleblower program, and the CFTC Whistleblower program.

Interestingly, the summary of the amendment does not mention the Motor Vehicle Safety Whistleblower Act, which was enacted in December 2015 as part of the FAST Act. This auto whistleblower law created a program at the Department of Transportation, likely to be handled by the NHTSA. As far as we have seen, the Department of Transportation has yet to issue the implementing regulations for it through. However, the NHTSA is accepting whistleblower tips according to its terms, which provide for submissions before the adoption of the final rules. We’ll be keeping a close eye when the precise language of the amendment is avaiable

Since the firm’s engagement letters do not cover tax advice on rewards and this is a complicated area of the law, we are unable to answer questions about specific situations. However, we do wholeheartedly support this amendment to avoid double taxing whistleblower award payments.

Amendment #2 by Grassley would clarify an important area of the IRS whistleblower program that has resulted in litigation in the U.S. Tax Court over the past few years. The amendment would define the term “proceeds” in IRC section 7623.

The proposed definition is: “(A) taxes, penalties, interest additions to tax, and additional amounts provided under the internal revenue laws, and (b) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate including (i) criminal fines and civil forfeitures, and, (ii) violations of reporting requirements.”

This word has been a point of contention because the U.S. is only required to pay out awards as a percentage of collected proceeds. The IRS interpretation has defined this term broadly, to exclude certain money collected by the IRS in enforcement actions. In a U.S. Tax Court lawsuit decided last year, the IRS took the position that only fines pursuant to Title 26 were collected proceeds. However, the Tax Court sided in favor of an expansive definition for whistleblowers.

Senator Grassley clearly wants to make sure that there is no more confusion over the desired scope of the whistleblower program, and has given it a broader definition than provided for in last year’s opinion. The adoption of this change would be in the interest of tax whistleblowers and we support it as well.

We’ll be closely following these amendments as their full text is published and they are debated.  Stay tuned!

No to CHOICE Act on SEC whistleblower culpability


The U.S. House of Representatives on Thursday approved banking reforms in the Financial CHOICE Act of 2017 that would, if adopted, “gut many of the key banking reforms implemented after the financial crisis” according to a CNBC article. Apart from the overall impact on the Dodd-Frank Act, the law makes an important change to the SEC whistleblower program which would impact employees reporting violations of the federal securities laws.

The CHOICE Act would require the SEC to deny awards to culpable whistleblowers despite the fact that they have not been convicted of a crime and made the decision to report the behavior to the Securities and Exchange Commission. The SEC program already denies award to “any whistleblower who is convicted of a criminal violation related to the judicial or administrative action[.]”

The new law, if passed in its present form, specifically defines the denied as a person who:

(A) procures, induces, or causes another person to commit the offense;
(B) aids or abets another person in committing the offense; or
(C) having a duty to prevent the violation, fails to make an effort the person is required to make.

The change will, in all likelihood, weaken a program that has helped recover more than $500 million for the U.S. Government since 2010.

Senator Jacob Howard, the chief sponsor of the False Claims Act in 1863, described what has become the nation’s leading law fighting fraud as “setting a rogue to catch a rogue[.]” In rejecting this position, the U.S. House reaches beyond convicted criminals (already barred by the present law) to relatively innocent people required to make difficult decisions with their career and income on the line.

With the proposed change, the U.S. Government will make a strong statement that it does not want the help of anyone that has had any involvement in the violation of the federal securities law. However, in some cases these are the people who are most likely to have the evidence necessary to put a stop to the financial fraud.

The complete denial of a reward for this behavior would be the first of its kind. The IRS whistleblower program currently provides for the reduction of an award if the whistleblower “planned and initiated” the actions.

In reality, the devil is probably in the details. If the SEC takes a broad reading of the “aids or abets” section and the failure to act section, then it could have a chilling effect which ultimately results in fewer people reporting wrongdoing. The real problem is that it inserts a substantial amount of uncertainty it what was supposed to be a mandatory award.

Let’s not reverse course now.  The SEC has worked hard to establish a successful program and protect the whistleblower. This would impact people who are mostly innocent (i.e., ordered to do so by their employer under threat of termination or simply trained by their employer to do such tasks without any discussion of the legality) and are trying to do the right thing.  The current standard (criminal conviction) is the best one.

Remove Medical Malpractice Reform from Trump Budget


The Trump Administration’s budget proposal for 2018 includes another attempt to pass tort reform for medical malpractice lawsuits. We strongly oppose this effort to weaken compensation for injury victims and urge you to inform your elected representatives that you do not support it.

The proposal includes a $250,000 cap on noneconomic damages. This means that if are injured as a result of your doctor’s malpractice, your maximum compensation for pain and suffering because of permanent disability, disfigurement, blindness, loss of a limb, paralysis and other injuries is limited. Non-economic damages like these are typically not easily quantified by a damage amount.

The $250,000 amount is extremely low. California capped its non-economic damages at $250,000 in 1975. Adjusted for inflation, the amount would now be more than $1.1 million.

The Trump Administration is unlikely to see the $55 billion in savings it estimates because of its tort reforms. A 2017 study on medical malpractice reform in the Journal of Health Economics found that states that pass damage caps see a 4% increase in Medicare Part B spending and that caps could increase total Medicare spending by 2-3%. If patients are unable to recover for their injuries from doctors and medical facilities, their only option is to rely more on government programs such as Medicare, Medicaid and Social Security Disability Insurance.

Medical errors are the third leading cause of death claiming more than 251,000 lives a year according to research by Johns Hopkins. Medical malpractice reform in some states, such as Wisconsin, have made lawsuits from medical errors nearly impossible to win.

The net effect of the proposed reform is that individuals injured by medical malpractice will have a tougher time finding an attorney willing to advance the costs of their litigation to recover for their injuries. The potential budget savings are simply not worth the cost to the families of victims suffering medical errors.

IRS Whistleblower Retaliation Protections Proposed in Senate


Senators Chuck Grassley and Ron Wyden have proposed the IRS Whistleblower Improvements Act of 2017 in the U.S. Senate today.  If adopted, the law will provide for (1) enhanced communications between the Internal Revenue Service and whistleblowers, and (2) anti-retaliation protections for tax whistleblowers.  Both would be significant improvements to the IRS whistleblower program created a decade ago.

Communications between the IRS and whistleblowers have been more difficult to date than other programs because of concerns regarding the protection of taxpayer privacy.  Although the law currently provides for confidentiality agreements with whistleblowers, they are not extensively used.  The new bill would specifically authorize the IRS to exchange information with whistleblowers where doing so would benefit the investigation.  The bill also requires status updates for whistleblowers at critical junctures in the process.  It is hoped that these two measures will foster more cooperation between the two parties as they jointly fight tax evasion.

Anti-retaliation protections have been a missing piece in the IRS whistleblower program for some time.  Without it, tax whistleblowers who do not fall within an applicable state law or the Sarbanes-Oxley Act (SOX) may find themselves without a legal remedy if they are fired for whistleblowing.  Congress has already offered this measure to individuals reporting fraud under both the False Claims Act and the Dodd-Frank Act.  It is a simple addition to the law that is long overdue.

Senator Grassley is an experienced participant in the fight for additional protections.  He has been a driving force behind whistleblower rewards and protections for some time.  The measures described above were previously added by amendment to the Taxpayer Protection Act of 2016.  However, that bill was not considered by the U.S. Senate after it passed through the Senate Finance Committee.

We look forward to reading the legislation and supporting it throughout its journey in Congress.  It is definitely needed.

Federal Medical Malpractice Reform Hurts Health Care Patients


Congress is considering a bill to reform medical malpractice lawsuits called the Protecting Access to Care Act. Despite its well-intentioned name, the legislation would gut patient’s rights here in Pennsylvania and around the country.

The bill is a misguided effort to blame the high costs of health insurance and health care on the attorneys who fight daily for victims of medical errors. It does so by reducing the amount of time a patient has to sue, limiting pain and suffering to $250,000, reducing joint liability among tortfeasors, and decreasing contingency fees for attorneys.

The reality of the situation is that this solution tackles the wrong side of the problem. It would be best to stop this cost from escalating by ensuring that medical malpractice never happens at all. A study conducted at Johns Hopkins Medicine found medical errors were the third leading cause of death and called for the Centers for Disease Control and Prevention to add it to its annual list of the top causes of death. The study estimated that more than 250,000 Americans die from medical errors each year. If Congress wanted to limit the costs of medical malpractice, it should start by limiting the number of mistakes made by doctors and hospitals.

Instead, the changes imposed by the Protecting Access to Care Act make us wonder if the whole country is headed toward a Wisconsin-like system. A few years ago, the Milwaukee Journal Sentinel did an article about how tort reform there had made it nearly impossible to find an attorney willing to take on a medical malpractice lawsuit. Because of the constraints imposed on plaintiffs, defendants are willing to take cases to trial without early settlement. There is little downside for them since their maximum loss is $1 million.

For those that manage to win, Congress has proposed that non-economic damages should be capped at an amount set in 1975!! The law is modeled on California’s tort reform, which placed a $250,000 cap on such damages in medical malpractice lawsuits in 1975. If that amount was adjusted for inflation, it would be just north of $1.1 million in 2017.
If there is going to be a cap for non-economic damages, it needs to be far higher.

The law also requires drastic cuts to attorney fees for trial lawyers in medical malpractice cases. Instead of allowing an attorney and their potential client to negotiate the contingency fee in a free market, the law imposes a sliding scale based on the amount of the recovery. For a settlement or verdict of $1 million, the amount is set at a maximum of $215,000. While this might sound like a large amount of money compared to the average salary in America, it would be a difficult amount to garner interest from among talented attorneys to represent patients on a contingency fee basis. This is particularly true if every case required a jury verdict and appeal.

On the opposite side, the law does nothing to prevent the party committing malpractice from unlimited spending to win. Malpractice insurers, doctors and hospitals will have access to the best lawyers and the best experts because they already have the most resources. And they will have no caps on the amount that they can spend in hiring their lawyers.

The law supposedly takes aim at frivolous lawsuits. However, those will not be the people that are impacted if the Protecting Access to Care Act is passed. It will be the patients who suffered from true medical errors and are unable to find a lawyer because of the system implemented by Congress.

If you agree, please call or write your representatives in the House and Senate and tell them.  Find their contact information here.

Congress Considers Co-Conspirator Eligibility for SEC Whistleblower Rewards


A memo circulated in early February regarding the Financial Choice Act produced by House Financial Services Chairman Jeb Hensarling (R-Texas) has proposed the elimination of SEC whistleblower rewards for co-conspirators.

The SEC whistleblower program established by the Dodd-Frank Act currently prohibits the SEC from taking into account any monetary sanctions “based on conduct that the whistleblower directed, planned, or initiated.” If a whistleblower is nevertheless eligible for a reward, there is no reward percentage based on monetary sanctions paid for such conduct.  There is also no reward if a whistleblower is convicted of a criminal violation related to the judicial or administrative action.

This is a fairly common standard in the U.S. whistleblower laws. The IRS whistleblower program allows the reduction of awards if the whistleblower planned and initiated the tax underpayment. It also forbids awards to whistleblowers that are criminally convicted for their role in planning and initiating the action.

The False Claims Act, the nation’s leading law against fraud, bars the pursuit of a False Claims Act lawsuit by a person convicted of criminal conduct arising from his or her role. Awards can be reduced if the relator planned and initiated the fraud. In the legislative history of the False Claims Act, the theory behind this was espoused that sometimes the best way to stop fraud is by “setting a rogue to catch a rogue.”

Ultimately, the scope of the change to the SEC whistleblower program if the law passes will depend on the definition of co-conspirator. A broad definition of the term could put rewards for people who were not entirely innocent in jeopardy. For example, if an individual was ordered to engage in misconduct by their boss and they complied, they could potentially be ineligible for a reward under the proposed law.

The emergence of an employee that has participated in the fraud as a whistleblower has been a cornerstone of many False Claims Act cases. An individual that is a true insider to a fraudulent scheme often has great evidence of the fraud and a comprehensive understanding of the players and scheme.

This is not to say that they would necessarily fall into every meaning of the term co-conspirator. Often, they are employees who were instructed to perform certain tasks by their employer and followed those instructions because they did not fully appreciate the consequences. If these so-called participants were covered by the term co-conspirator it would eliminate a large segment of potential whistleblowers.

Commentary has already suggested that the proposed bill is unlikely to make it through the Senate in its current form. It would likely run squarely up against the advocacy of Senator Grassley if it were to go there and truly weaken the provisions. We will nevertheless keep an eye on the upcoming bill for these and other changes to the Dodd-Frank Act.

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