IRS Adds Income Section to Business Consultant Audit Techniques Guide

The IRS has updated its Business Consultant Audit Techniques Guide (“ATG”) to include an income section addressing issues that may arise during examinations. The new section discusses Income Assignment and Substance Over Form issues as well as related audit techniques.

Income Assignment

Income assignment involves the shifting or assigning of income earned by one entity to another entity to reduce the earning entitys income and taxes. Income assignment can be addressed under IRC § 61 or IRC § 482, but courts have ruled that IRC § 482 more readily applies than IRC § 61. The question to be raised under IRC § 482 is whether parties would have entered into their financial relationships had they been unrelated parties dealing at arms-length. See, e.g., Keller v. Commissioner, 77 T.C. 1014 (1981).

According to the ATG, closely held or one-man personal services corporations, including business consultants, have assigned income to another entity in order to reduce their income and evade self-employment taxes. After this illegal shifting, the taxpayer may take a small salary from the assignee entity in proportion to the amount of income shifted. The IRS emphasizes that particular scrutiny is necessary when an individual incorporates an existing service profession and the corporation’s only business activity is effected solely through the individual as an employee of the corporation.

Substance over Form

The ATG income section also discusses the doctrine of “Substance Over Form,” which states that a transactions substance dictates how the transaction is taxed. This rule follows the notion that “taxation is concerned with actual command over the property taxed and the actual benefit for which the tax is paid.” Gregory v. Helvering, 293 U.S. 465 (1935). A transaction is viewed as a whole from the beginning of negotiations to completion. The true nature of a transaction cannot be hidden by an outward appearance that exists to alter tax liabilities.Commr v. Court Holding Co., 324 U.S. 331 (1945).

In applying the doctrine of Substance Over Form, courts look to the objective economic realities of a transaction rather than to the particular form the parties used. Gregory v. Helvering, 293 U.S. 465 (1935). When a step in a transaction is a mere “ritualistic incantation” in order to meet the words of the statute, that step will be ignored and the final result achieved will govern the tax consequences. Ericsson Screw Machine Products Co., 14 T.C. 757 (1950). The effect is to tax true taxable income regardless of how a taxpayer disguises it.

Audit Techniques

Pre-Audit

During the pre-audit phase of an examination, examiners determine whether the taxpayer reported all of the income required to be reported and that the income was reported in the proper period by the proper entity. The examiner looks for the following:

  • A lack of internal controls;
  • The types of books and records the taxpayer maintains;
  • The taxpayers use of bartering;
  • The shifting or assignment of income by a taxpayer to a related entity;
  • The taxpayers use of the Internet;
  • The taxpayers use of a fiscal year end in order to defer income.

Audit

During an audit, an examiner reviews the taxpayers consulting agreements or contracts for the following to determine whether income was assigned:

  • To whom the client/customer is contracting the services;
  • Whether the consulting fees per the contract are traceable to the Taxpayers books and records;
  • For significant shareholders or partners (greater than 20% direct or indirect ownership), an examiner evaluates tax returns for:
  • Examination potential;
  • Proper treatment of related transactions with the corporation or partnership; and
  • The likelihood of diverted funds.

The ATG stresses that a careful examination of the financial arrangements entered into will be required in order to ascertain whether an adjustment is necessary, either to reflect actual income or to prevent tax avoidance.

Read the full Business Consultant Audit Techniques Guide here.

The attorneys at Fuerst Ittleman have the knowledge and experience to guide you safely through any IRS encounter. You can reach an attorney at contact@fidjlaw.com.

Congress Seeks to Clarify FDA’s Conflict of Interest Rules for Clinical Investigators

Last week, the comment period closed for the U.S. Food and Drug Administration’s (FDA) guidance document, “Guidance for Clinical Investigators, Industry, and FDA Staff: Financial Disclosure by Clinical Investigators.” This draft guidance was developed to address the FDA’s conflict of interest policy for clinical investigators who sit on advisory panels that approve drugs. If finalized, this guidance document will replace a previous version released in 2001.

This push for change is a departure from the attitude about conflicts of interest from four years ago. In 2007, the FDA tightened its conflict of interest policies to minimize industry ties that might sway or garner a panelist’s favor. At the time, the FDA determined that 10 of 32 panelists advising the FDA on a drug, Vioxx, consulted for drugmakers. Nine of those 10 panelists recommended re-introducing Vioxx into the market after the drug was pulled for concerns about heart risk. In response, the FDA strengthened their policies to prevent bias by drug reviewers.

Members of Congress have expressed interest in relaxing the FDA’s rules regarding conflicts of interest. Under the current framework, an expert may not serve on an advisory panel if the expert has any direct or indirect ties to the industry. Some members of Congress view this rule as unnecessarily restrictive and that it stymies the FDA’s approval process.

Critics of the new guidance, however, believe the FDA should try harder to find qualified experts who do not have ties to the industry. Advocates of stronger rules maintain that an investigator’s ties to the industry affect a person’s decision to approve a drug for the market.

A change in the FDA’s conflict of interest policies may impact how advisory panels are assembled and medical drugs are reviewed. Although the FDA is not bound to accept recommendations made by advisory panels, the FDA often follows their advice. This new guidance document and Congress’ pressure to relax conflict of interest policies raise interesting questions about the transparency and objectivity of the drug review process.

Fuerst Ittleman will continue to monitor the progress and status of the FDA’s conflict of interest policies. For more information, please contact us at contact@fidjlaw.com

Main Street Fairness Act Draws Divided Reaction

Senate Majority Whip Richard Durbin (D-Ill.) introduced legislation on July 29 that would require online retailers to collect the same sales tax as local stores, prompting deeply polarized reactions to the bill.  The Main Street Fairness Act, dubbed the “Amazon law” by critics, is welcomed by big box and bricks-and-mortar operations, but fervently opposed by tech groups and small online retailers.

The bill would certify the Streamlined Sales and Use Tax Agreement across the country, although 24 states have already written the agreement into law.  States that choose to use it would have clear authority to require retailers to collect the sales taxes they are already owed.  It would also require the Streamlined Sales and Use Tax Agreement to meet a lengthy list of simplification requirements to ease administrative burdens for sellers.  Additionally, the bill would compensate retailers for the startup administrative costs associated with collecting sales taxes.  Most notably, the bill exempts small businesses, as defined by the governing board of the agreement, from the duty to collect sales taxes.

Currently, only retailers which have a physical presence in a state are required to collect sales tax for that state.  Otherwise, consumers are responsible for keeping track of their online purchases and paying tax directly to the state, although few actually do.  Rep. Peter Welch (D-Vt.), who co-sponsored the bill in the House, noted that bricks-and-mortar shops are being used as display cases for products later bought online.  He explained, “When a consumer can walk into a store, try out a product and then go home and buy it online without paying sales tax, Main Street businesses and downtowns lose.”  Consequently, in 2012, states are expected to lose $24 billion in uncollected tax revenue from online and catalogue purchases.  If the bill passes, the recaptured revenue would provide a desperately needed boost for states struggling with budget problems and layoffs.

The Main Street Fairness Act received ardent support from the Retail Industry Leaders Association, whose members are primarily big box retailers like Best Buy, Apple, and Old Navy that maintain a physical and online presence throughout the states. According to Senator Durbin, the bill is also supported by the National Retail Federation, International Council of Shopping Centers, National Association of Real Estate Investment Trusts, and National Association of College Stores, and the Governing Board of the Streamlined Sales and Use Tax Agreement, among others.  Also, despite online mammoth Amazon’s recent battles over state tax policies, the company maintains that it fully supports this simplified federal approach.

eBay leads the opposition against the Main Street Fairness Act, joined by the Electronic Retailing Association, Computer and Communications Industry Association, National Taxpayers Union, other tech trade groups and countless small businesses.  Calling the bill a “job killer,” one executive of e-commerce group NetChoice argues that “small businesses would be subject to costly collection obligations includ[ing] staff training, dealing with returns and exchanges, and dealing with sales tax audits.”  However, Sen. Durbin contends that small businesses would be exempt from the collection obligation, subject to the Governing Board of the Agreement.

Critics also argue that citizens will feel that their out-of-pocket expenses are higher.  The end result, according to some, will be that taxpayers will blame Congress for a perceived tax increase, and businesses will blame Congress for their complicated collection burden.  Proponents counter these statements by pointing out that consumers are well-acquainted with their duty to pay sales tax; further, the Main Street Fairness Act doesn’t raise taxes by a single penny.  Moreover, Sen. Durbin answers, “Main Street retailers collect sales taxes on behalf of consumers, why shouldn’t online retailers?”

At Fuerst Ittleman, we stay current on pressing legal and administrative issues to offer you the most comprehensive business representation available.  For more information, contact an attorney at contact@fidjlaw.com.

USDA Proposes Rule to Establish Common Name for Raw Meat or Poultry with Added Solutions

On July 21, 2011, the U.S. Department of Agricultures (USDA) Food Safety and Inspection Service (FSIS) announced its proposal to establish a common or usual name for raw meat and poultry products that include added solutions that may not be visible to the consumer. The Agency proposes that the common or usual name for such products should include “an accurate description of the raw meat or poultry component, the percentage of added solution incorporated into the raw meat or poultry product, and the individual ingredients.” (For the full text of the proposal, click here.)

This proposal is part of the USDAs ongoing effort to develop truthful, easy-to-read labeling information intended to keep consumers better informed about food products on the market. Under the current guidelines, raw meat products that do contain added solutions may have the same name on their labels as products that do not contain added solutions. As a result, these raw meat and poultry labels pose a serious risk of misleading consumers about a packages content.

For example, a package of raw meat that contains 100 percent chicken breast and a package that contains 60 percent chicken breast and 40 percent added solution can both be labeled as “chicken breast.” Even though product labels must currently indicate when a package contains added solution, the USDAs new proposal would require raw meat and poultry labels to clearly indicate, using common names, what percentage of a particular solution has been added to the product. For example, a label under the new rule would require a package to say “chicken breast “ 40% added solution of water and barbecue marinade.”

FSIS is also proposing that the print for all words in the common or usual name appear in a single font size, color, and style of print and that the name appear on a single-color contrasting background. The FSIS believes the change in labeling style will help consumers differentiate between single-ingredient raw meat and poultry products and raw meat and poultry products that have added solution. Through these proposed rules, the Agency “seeks to ensure that the common or usual name consistently conveys to consumers that these products contain added solutions.”

In addition to the changes in labeling, the Agency proposes to remove 9 C.F.R. § 381.169 for ˜˜ready-to-cook poultry products to which solutions are added.” This rule requires product labels to indicate when substances, such as flavor enhancers, are added to the raw meat. The Agency suggests removing this provision because the proposed rule, if finalized, would already require all raw meat and poultry products containing added solutions to comply with specific labeling requirements.

If the USDAs proposed rule is finalized, these labeling requirements would apply to all meat and poultry products containing added solutions, including meat that has been sliced or cut up and re-packaged at a retailer or other official establishment.

Fuerst Ittleman will continue to monitor the development of the USDA FSISs new proposed rule. For more information, please contact us at contact@fidjlaw.com.

FDA Issues Warning Letter to Makers of Muscle Milk for Mislabeling

Last week, the U.S. Food and Drug Administration (FDA) issued an official warning letter to CytoSport, Inc., the makers of the popular fortified sports drink, Muscle Milk, for mislabeling their product as “milk.” The FDA has regulatory authority to issue a warning letter, an official notice that one of the establishments products, practices, or processes has violated the Food, Drug, and Cosmetics Act (FDCA). CytoSport continues to defend the name Muscle Milk and is “proactively and openly addressing the FDAs labeling concerns.”      

Federal regulations define milk as “the lacteal secretion, practically free from colostrum, obtained by the complete milking of one or more healthy cows,” see 21 C.F.R. § 131.110. A product is mislabeled if it markets itself as “milk” but fails to conform to the standards set forth in the Code of Federal Regulations. According to the FDA, Muscle Milk does not meet this definition of “milk” because it is not derived from a dairy cow and contains ingredients that are not permitted by the standard.

For this reason, the FDA issued a warning letter claiming that the products use of the word “milk” is misleading to consumers. Even though the product label indicates that Muscle Milk “contains no milk,” the product does contain ingredients derived from milk, such as calcium, milk protein isolate, and whey. An allergen warning appears on the products label, but may still be misleading because it is written in smaller, less prominent writing than the word “milk.” In addition, the product poses risks to consumers who may mistakenly believe that the drink is actually free of milk-derived ingredients.

The FDA observed that the products statements of identity, the common or usual name of a food or dietary supplement, were not easily identifiable on the products label. The words “Protein Nutrition Shake” and “Nutritional Shake” appeared in much smaller and in much less prominent type than the word “milk” or the rest of the product label. In its warning letter, the FDA also pointed out that CytoSport, Inc. failed to comport with the requirements for use of the claims “healthy,” “low fat” and “low saturated fat.”

CytoSport, Inc. has 15 days to address the numerous mislabeling issues contained in the warning letter and to develop specific corrective actions. Failure to do so may put CytoSport, Inc. in jeopardy of facing product seizures or formal legal action by the FDA.

Fuerst Ittleman will continue to monitor the developments in the FDAs regulation of food and dietary supplement products. For more information, please contact us at contact@fidjlaw.com.

Proposed Legislation for Dietary Supplement Labeling

On June 30, 2011, United States Senator Richard Durbin (D-IL) introduced the Dietary Supplement Labeling Act of 2011(the “Bill”).  The Bill proposes to amend the Federal Food, Drug, and Cosmetic Act (“FDC Act”) to improve the safety of dietary supplements. Critics argue that the Bill expands the FDA’s power to regulate dietary supplement manufacturers without clear guidelines and provides requirements that duplicate what is already accomplished under current law. The Washington Times published an article highlighting that the Bill would harm consumers through increased cost and decreased variety of dietary supplements.

The Bill proposes regulations requiring dietary supplement manufacturers to register their products with the U.S. Food and Drug Administration (FDA). In order to register products, manufacturers would be required to provide the FDA with a list of ingredients and copies of the label and labeling. Failure to register a dietary supplement or keep the information up to date would cause dietary supplements to be misbranded. Current law requires that all food facilities, including dietary supplement manufacturers, register with the FDA pursuant to the Bioterrorism Act. Dietary supplement manufacturers do not currently have to list their products with the FDA.

Additionally, the Bill mandates the FDA and the Institute of Medicine (IOM) to identify dietary supplement ingredients that could potentially cause serious adverse events, drug interactions, contraindications, or potential risks to subgroups such as children and pregnant women, and establish warning statements for dietary supplements containing these potentially unsafe ingredients. The Bill would require that if a potentially unsafe ingredient is part of a proprietary blend, the label must disclose the amount of that ingredient per serving. Currently, dietary supplements must be manufactured under Good Manufacturing Practices in order to ensure the ingredients are safe. Furthermore, before a substance may be added to a food, a Food Additive Petition must be submitted to the FDA and must include data demonstrating safety, unless the ingredient and the amount are Generally Recognized as Safe (GRAS). Accurate disclosure of the contents in the dietary supplement package is already required under the Fair Packaging and Labeling Act. Additionally, by definition, the amount of each ingredient in a proprietary blend is proprietary information.

Lastly, the Bill requires the FDA to establish a definition for “conventional foods” in order to differentiate conventional foods from dietary supplements.  In 2009, the FDA issued draft guidance distinguishing conventional foods from dietary supplements. Under the current regulatory scheme, the FDA has the authority “ and has used that authority “ to take enforcement action against dietary supplements that are marketed as conventional foods. See Warning Letters issued by the FDA here and here to dietary supplement manufacturers marketing their products as conventional foods.

Fuerst Ittleman will continue to monitor the Bill as it is up for vote in the Senate. For more information about dietary supplement labeling or FDA regulatory compliance, please contact us at contact@fidjlaw.com.

FDA Sued Over Approval of Antibiotics in Animal Feed

On May 25, 2011, the Natural Resource Defense Council (NRDC), a coalition of health and consumer organizations, filed suit against the U.S. Food and Drug Administration (FDA) regarding its regulation of antibiotics used in animal feed. The complaint alleges that the FDA has failed to withdraw the approval of antibiotics in animal feed for nontherapeutic uses that are not shown to be safe. The complaint comes as the FDAs regulation of antibiotics in food animals has been under increased scrutiny. Please see our previous report for more information regarding FDA regulation of animal antibiotics.

According to the complaint, the FDA concluded in 1977 that the nontherapeutic use of penicillin and tetracyclines in animal feed was not shown to be safe and the drugs were contributing to the development of antibiotic-resistant bacteria that could be transferred to humans. Additionally, two of the plaintiffs submitted citizen petitions, in 1999 and 2005, requesting the FDA withdraw approval. However, the agency has not issued a final response to either petition. Pursuant to the Federal Food, Drug, and Cosmetic Act (FD&C Act), the FDA is required to withdraw approval for animal drugs if the drugs are not shown to be safe for the uses for which they were approved. 21 U.S.C. 360b(e)(1).

The NRDC seeks to compel the FDA to take action on the agencys own safety findings, withdraw approval for most nontherapeutic uses of penicillin and tetracyclines in animal feed, and respond to the citizen petitions filed by several of the plaintiffs.

Fuerst Ittleman will continue to monitor the progress of this lawsuit and the FDAs regulation of antibiotics in animal feed. For more information, please contact us at contact@fidjlaw.com.

D.C. District Court Rules Against Challenger of Embryonic Stem-Cell Funding

On July 27, 2011, the case of Sherley v Sebelius drew to a close as U.S. District Judge Royce Lambeth of the United States District Court for the District of Columbia granted the United Statess Motion for Summary Judgment. As we have previously reported, Sherley v Sebelius challenged the legality of government funding of human embryonic stem cell research. As a result of this decision, the Department of Health and Human Services (“HHS”) and the National Institutes of Health (“NIH”) may continue to provide federal funds for the study of embryonic stem cells. A copy of the District Courts Order can be read here.

The origins of Sherley v. Sebelius can be traced back to Executive Order 13,505 issued by President Obama which removed previous limitations on NIHs ability to fund human embryonic stem cell research and directed the NIH to publish new guidelines to govern federal funding of embryonic stem cell research projects. Upon issuance of the Guidelines by the NIH, the plaintiffs, Drs. Sherley and Deisher, brought suit to prohibit the NIH from funding research using human embryonic stem cells and alleged that the NIH Guidelines violated the 1996 Dickey-Wicker Amendment, which prohibits funding for research “in which a human embryo or embryos are destroyed.” The plaintiffs also alleged that the promulgation of the Guidelines violated the APA by failing to address several comments in opposition to the proposed guidelines.

On October 27, 2009, the D.C. District Court dismissed the plaintiffs case for lack of standing. However, in June of 2010, the United States Circuit Court of Appeals for the District of Columbia Circuit reversed, because an “actual, here-and-now injury” was present, and that both plaintiffs met the requirements for standing under Article III of the Constitution. As such, the D.C. Circuit Court of Appeals remanded the case back to the District Court.

On August 23, 2010, the District Court granted the plaintiffs motion for preliminary injunction, stopping the NIH from funding embryonic stem cell research. However, as we previously reported, on April 29, 2011, the Court of Appeals for the D.C. Circuit vacated the preliminary injunction finding that plaintiffs would not likely prevail on the merits of their claims. In reaching its conclusion, the D.C. Circuit engaged in a Chevron analysis and found that the term “research” was ambiguous in the Dickey-Wicker Amendment as it could describe either a discrete project or an extended process. As a result, the Court found that the NIH reasonably concluded that “although Dickey-Wicker bars funding for the destructive act of deriving an [embryonic stem cell] from an embryo, it does not prohibit funding a research project in which an [embryonic stem cell] will be used.” These findings would serve as the bases for the District Court ultimately dismissing the case. The Court of Appeals then remanded the case to the D.C. District Court to be decided on its merits.

In granting the governments Motion for Summary Judgment and dismissing the plaintiffs case Judge Lamberth first found that the NIH Guidelines, which provide for spending federal funds on research involving human embryonic stem-cells, do not violate the Dickey-Wicker Amendment for several reasons. First, Judge Lambeth found that the determination that the term “research” in the Dickey-Wicker Amendment is ambiguous by the Circuit Court of Appeals is binding upon the District Court. As a result, the Judge Lamberth stated “this Court, following the D.C. Circuits reasoning and conclusions must find that defendants reasonably interpreted the Dickey-Wicker Amendment to permit funding for human embryonic stem cell research because such research is not Ëœresearch in which a human embryo or embryos are destroyed. . . .” Second, because Dickey-Wicker is ambiguous as to whether embryonic stem cell research is research in which a human embryo or embryos are knowingly subjected to risk, “[t]he NIH reasonably concluded that the Dickey-Wicker Amendment . . . did not prohibit research projects, such as embryonic stem cell research, that do not involve embryos and so cannot knowingly subject them to risk Ëœin the research.”

The District Court also found that the promulgation of the NIH Guidelines did not violate the APA. The plaintiffs argued that the NIH Guidelines violated the notice and comment requirements of the APA by: 1) “failing to respond to relevant and significant public comment;” and 2) entering rulemaking with an “unalterably closed mind.” However, the Court rejected these arguments. First, President Obamas Executive Order directed the NIH to develop standards for funding embryonic stem cell research, not to determine whether embryonic stem cell research should be federally funded. As a result, “the NIH wasnt obligated to respond to comments [such as the plaintiffs] on the topic of whether to fund human embryonic stem cell research.” Additionally, because the NIH was tasked solely with developing standards for embryonic stem cell research and not with the question of whether to federally fund embryonic stem cell research, NIHs failure to consider comments regarding whether to fund such research reasonable and the NIH did not act with an “unalterable closed mind.”

Fuerst Ittleman will continue to closely monitor the progress of issues regarding funding for stem cell research. If you have any questions pertaining to new NIH guidelines, or the application process for receiving NIH grants, contact Fuerst Ittleman PL at contact@fidjlaw.com.

IRS Consolidates Transfer Pricing Programs and Bolsters International Coordination

On July 27, IRS officials announced restructuring changes aimed at improving its international operations.  First, the Advance Pricing Agreement (“APA”) Program and Mutual Agreement Program (“MAP”), will consolidate under a single executive in the Large Business and International Division.  Second, the IRS is creating a new position, the Assistant Deputy Commissioner (International), to facilitate agency coordination with treaty partners amid an increasingly global environment.

The New “Advance Pricing and Mutual Agreement Program”

The APA Program is concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing.  However, the lengthy APA process can exceed 40 months for a small business, which deters many candidates from using the service.  Until now, the MAP was separately concerned with the bilateral resolution of transfer pricing disputes with U.S. treaty partners.  Now, the APA Program will shift from the Office of Chief Counsel to consolidate with the MAP in the Large Business and International Divisions international operation.  The combination, which aims to reduce processing times, was recently announced at a transfer pricing conference where practitioners and IRS officials discussed solutions to the problematic APA delays.  Read our coverage of APAs and the transfer pricing conference here. 

The new “Advance Pricing and Mutual Agreement Program” will have increased staffing available and should allow the IRS to more efficiently handle APA agreements and transfer pricing disputes with treaty partners.  Although the combined program will be headed by a single executive, the Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues.

Assistant Deputy Commissioner for International Coordination

Next, the IRS plans to adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International).  The new commissioner will be responsible for coordinating international activities, exchanges of information, and participation in the Joint International Tax Shelter Information Center (JITSIC). The Assistant Deputy Commissioner (International) will also pursue competent authority agreements with treaty partners on issues other than transfer pricing and support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements.  With respect to non-governmental organizations, the commissioner will coordinate participation at the Organisation for Economic Cooperation and Development (OECD) and other programs.

Ideally, these two organizational changes will effect more cohesive transfer pricing operations and successful coordination with treaty partners.  IRS Commissioner Don Shulman announced, “These latest changes move forward to fulfilling one of my top priorities”meeting the challenge of tax administration in a global economy.”

At Fuerst Ittleman, we stay current on pressing legal and administrative issues to ensure your peace of mind.  For more information, email an attorney at contact@fidjlaw.com.

IOM Report Suggests Overhaul of 510(k) Program; FDA Responds with Request for Public Comment

The Institute of Medicine (IOM) recently released a report, Medical Devices in the Publics Health: The FDA 510(k) Clearance Process at 35 Years, which summarizes the IOMs findings regarding the U.S. Food and Drug Administrations (FDA) 510(k) premarket notification program.

The FDA is responsible for ensuring that medical devices on the market are safe and effective for the publics use. In order to market a medical device in compliance with the FDAs regulations, device manufacturers must obtain either FDA approval of a premarket application (PMA) or FDA clearance of a 510(k) premarket notification. Under the 510(k) process, the FDA may “clear” a medical device if it finds that the device is as safe and effective as a predicate medical device. This 510(k) process is the pathway by which most lower-risk devices reach the market.

The FDA commissioned the IOM to review the current 510(k) program after receiving complaints from industry and consumers about the viability of the program. While reviewing the 510(k) program, the IOM was asked to consider the following two questions:

  • Does the current 510(k) process protect patients optimally and promote innovation in support of public health?
  • If not, what legislative, regulatory, or administrative changes are recommended to achieve the goals of the 510(k) process optimally?

The IOM committee assessed the overarching structure of the 510(k) process and its ability to sufficiently monitor and oversee the safety and efficacy of medical devices on the market. “Premarket review, including the 510(k) process, and post-market oversight”from product labeling regulations to the reporting of adverse events associated with use of a device”make up a comprehensive medical device regulatory system.”

The committee identified substantial problems with the FDAs current post-marketing surveillance of devices. Because the FDA lacks a robust post-marketing surveillance system, the IOM recommended that the FDA “develop and implement a comprehensive strategy to collect, analyze, and act on medical device aftermarket performance information.”

Overall, the IOM committee determined that the FDAs current 510(k) process is flawed on its legislative foundation and suggested that the FDA completely overhaul its 510(k) process. “Rather than continuing to modify the 35-year-old 510(k) process,” the committee concluded that “the FDA’s finite resources would be better invested in developing an integrated premarket and post-market regulatory framework that provides a reasonable assurance of safety and effectiveness throughout the device life cycle.” In an effort to protect patients, healthcare providers, industry, and the FDA, the committee suggested that the new regulatory framework should:

  • be based on sound science;
  • be clear, predictable, straightforward, and fair;
  • be self-sustaining and self-improving;
  • facilitate innovation that improves public health by making medical devices available in a time manner and ensuring their safety and effectiveness throughout their lifecycle;
  • use relevant and appropriate regulatory authorities and standards throughout the life cycle of devices to ensure safety and effectiveness; and
  • be risk-based.

(For the full text of the IOMs Report Brief, click here.)

In response, the U.S. Food and Drug Administration (FDA) announced that it will request public comments on the IOMs report about the current 510(k) premarket notification process, see announcement here. Despite the IOM committees determination the current 510(k) premarket notification process is highly flawed and fails to adequately monitor the quality of medical devices on the market, the FDA maintains that “medical devices in the U.S. have a strong track record of safety and effectiveness” and, therefore, “the 510(k) process should not be eliminated.”

Jeffrey Shuren, Director of the FDAs Center for Devices and Radiological Health (CDRH), stated that “many of the IOM findings parallel changes already underway at the FDA to improve how [the FDA] regulate[s] devices.” This new plan, the CDRH Plan of Action for 510(k) and Science, is designed to improve the FDAs predictability, consistency, and transparency in reviewing medical device submissions.

For example, the FDA recently issued draft guidance clarifying when a manufacturers changes to a 510(k)-cleared device already on the market necessitate a new 510(k) clearance, as we previously reported here. In addition, the FDA intends to issue a draft guidance of the “510(k) Paradigm,” which will aim to clarify the FDAs 510(k) substantial equivalence review, and a draft guidance that strengthens and streamlines the “de novo classification” path to market for medical devices that are not substantially equivalent to an existing predicate device.

Although the FDA disagrees with the IOM committees recommendation to abandon the current 510(k) program, the Agency recognizes that certain areas are in need of improvement. For this reason, the FDA has invited the public to comment on the results of the IOMs report. In doing so, the FDA aims to find alternative proposals and approaches to help improve its device review programs.

Fuerst Ittleman will continue to monitor the developments and changes to 510(k) premarket notification process. For more information, please contact us at contact@fidjlaw.com.