IRS Disagrees with TIGTA Report That Finds IRS Control Procedures and Employees To Be Ineffective

Following its audits of the Internal Revenue Services (IRS) Large and Mid-Size Business (LMSB) and Small Business/Self Employed(SB/SE) Divisions, the Treasury Inspector General for Tax Administration (TIGTA) recently released its findings regarding the “the effectiveness of controls and procedures” utilized by the two Divisions. Among other reasons, these audits were conducted “to ensure tax returns with Abusive Tax Avoidance Transaction (ATAT) issues are properly examined for abusive tax avoidance.” The full report is available here.

ATAT is defined by the IRS as “a specific tax transaction/promotion that reduces a tax liability by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law.” The IRS seeks to stop the marketing and promotion of ATATs by completing investigations of the individuals or businesses that promote these schemes, as well as the promoter clients who participate in the schemes. As the taxpayers falling under the LMSB and SB/SE divisions are the primary targets of those individuals or entities promoting ATATs, both divisions have established offices dedicated to the ATAT Program.

TIGTA expressed numerous concerns regarding the effectiveness of these offices, specifically pointing out conflicts between the procedures utilized by the officers with the taxpayers rights. TIGTA found that IRS employees made decisions to survey tax returns without proper approval or adequate justification, often while “jeopardizing taxpayers rights.”

Specific findings from a statistical sample of 311 surveyed returns included:

  • TIGTA determined 246 of the 311 returns were subject to guidelines requiring approval from the Planning and Special Programs function to survey the tax return. Of these 246 returns, 238 (97 percent) were surveyed by group managers without the requisite approval.
  • 88 of the 311 surveyed tax returns did not include any justification in the case files as to why the tax return was surveyed.
  • For 278 (89 percent) of the 311 surveyed tax returns, TIGTA found that IRS employees did not follow procedures when surveying tax returns with ATAT issues.

In the IRSs response, Commissioner of the SB/SE Division, Christopher Wagner acknowledged that the applicable procedures were not always followed, but indicated that deviation from procedure did not mean that the IRS was not effective in its decisions to survey tax returns.

While our cases did not always conform to the prescribed documentation procedures, we found no cases where the decision to survey was improper. Many of the cases reviewed during this audit involved highly complex transactions. As noted above, in these cases, the IMT and the ATTI staff worked closely with the area managers, examiners, and PSP staffs to ensure survey decisions were consistent and appropriate.

TIGTAs report also emphasized a direct conflict with taxpayers rights, specifically in numerous instances when the IRS surveyed tax returns after contacting taxpayers. With regard to this concern, TIGTA recommended:

The Director, Examination, SB/SE Division, should strengthen existing controls to protect the rights of taxpayers by ensuring examinations of ATAT cases are completed once taxpayers, or their representatives, have been contacted by IRS employees.

The IRS disagreed with this recommendation, indicating that surveying tax returns after taxpayer or representative contact was permissible according to the Internal Revenue Manual. Relying on IRM §4.10.2.5.1(3), the IRS found no issue with the procedure utilized by its employees.

Included in TIGTAs report, however, is TIGTAs Office of Audit Comment, which points out that the cited provision, IRM §4.10.2.5.1(3), was not effective until April 2, 2010, and the tax returns in TIGTAs sample were all surveyed during 2006 through 2008. Thus, TIGTA projected that the IRS employees violated the rights of as many as 196 taxpayers.

We previously reported recent actions of the IRS that reveal its disregard for taxpayer rights and privacy in our discussion of the newly enacted regulations requiring Uncertain Tax Position (UTP) disclosures. Here, the IRSs response to TIGTAs report reinforces this lack of concern, and portrays its growing approval of IRS employees intentionally violating procedures designed to protect the rights of taxpayers.

If you have any questions regarding TIGTAs report, IRS procedures and examinations, or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.

Federal Prosecutors Focus On Payment Processors In Latest Effort To Prevent Online Poker Sites From Operating

As the new year begins, federal prosecutors continue their efforts at cracking down on online poker in the US. The latest has not focused on the numerous online poker sites or the 2.5 million Americans that regularly play. Rather, the Department of Justice has focused its efforts on payment processors, the financial outfits that move money between online poker sites, their players, and the banks. Online pay for play poker sites generate over $30 billion annually.

Though there is no federal law directly addressing the regulation of online poker sites, the Department of Justice has consistently maintained the position that the operation of pay for play online poker sites violates federal law. Traditionally, the prosecution of individual bettors and intra-state gambling crimes has been largely left to the individual states, however, there are numerous federal gambling statutes that the Department of Justice has employed against large-scale gambling businesses and payment processors that operate interstate or internationally. These statutes include the Wire Act, RICO, the Bank Secrecy Act, civil forfeiture proceedings, as well as 18 U.S.C. § 1955 which makes it a crime, to conduct, finance, manage, supervise, direct, or own all or part of a gambling business, so long as it is illegal to operate such a business under state law.

The State of Washington provides a textbook example of federal prosecutorial action and the relationship between federal prosecutors and state law and law enforcement. Since October of 2010, the Department of Justice in conjunction with Washington State Gambling Commission have filed four civil forfeiture complaints against more than $20 million in cash in Bank of America, JPMorgan Chase, and Wells Fargo, belonging to various payment processing firms. The joint investigations began in 2009 shortly after the Washington Supreme Court upheld a state law prohibiting online poker for money in the state.

The largest of these forfeitures, involving $5.1 million, began after the government was notified that a player had received a payout check from Arrow Checks, a payment processor for online poker sites such as Pokerstars.net. During its investigation, the government was able to establish a series of wire transfers from other states, such as Texas, and from Canada to accounts in Washington. Payouts were then sent to players around the state. As a result of these investigations, the payment processors, which held the accounts, were charged with operating unlicensed money transmitting businesses and violating the federal wire act because online poker for money is illegal in Washington.

The Washington investigations come in the wake of the May 2010 guilty plea of Canadian payment processor Douglas Rennick for violations of the Wire act. Authorities alleged that Rennick processed over $350 million in payouts for internet poker companies. As part of the plea agreement, Rennick agreed to forfeit $583 million which included millions of dollars in payouts and funds belonging to various poker sites and players. However, the affected poker sites refunded any lost money to their players after federal authorities froze the assets of Rennick.

If you have questions pertaining to the BSA, anti-money laundering compliance, and how to ensure that your business maintains regulatory compliance at both the state and federal levels, or for information about Fuerst Ittlemans experience litigating white collar criminal cases, please contact us at contact@fidjlaw.com.

Venue Defense is Waived if Not Raised in Initial Rule 12 Motion in Response to Complaint

The Eleventh Circuit Court of Appeals in Atlanta on December 28, 2010 rendered a decision in an unpublished opinion finding that a failure to raise a forum selection clause in a Rule 12, Federal Rules of Civil Procedure motion in response to a complaint waives the defense of improper venue of the lawsuit.

In Aero Technologies LLC v. Lockton Companies International Ltd., the trial court had dismissed the claims of Aero Technologies LLC (“Aero Tech”) based on a forum selection clause contained in insurance policies to which neither party to the lawsuit were signatories. Lockton Companies International Ltd., (“Lockton”) had not raised venue as a defense in its initial Rule 12 motion. The Court of Appeals reversed the decision of the trial court finding that Rule 12 (h)(1) of the Federal Rules of Civil Procedure requires venue to be raised in the initial Rule 12 motion or be waived. The Court of Appeals found the trial court erred when dismissing the claim on venue grounds when the defense was not raised by Lockton. A copy of the opinion may be found here.

The lesson of this case is that litigators must be wary to raise venue as a defense when appropriate, whether due to the existence of a forum selection clause or for convenience of the parties at the earliest possible moment or face the consequences of waiver. At Fuerst Ittleman, our experienced litigators are familiar with the law applicable to venue and can ensure a clients case proceeds in the proper venue where appropriate.

FDA Clears Aldagen to Test Stem Cell Treatment for Strokes

Aldagen, Inc. announced yesterday that the FDA has cleared its investigational new drug (IND) application, allowing the biopharmaceutical company to proceed with phase II clinical trials. The focus of the clinical trials will be on the development of a stem cell therapy for treatment of stroke patients.

Currently, treatments for stroke sufferers are limited and largely restricted to the use of anti-coagulants. While these anti-coagulants must be administered within hours of a stroke, the stem cell therapy that Aldagen is developing is administered approximately two weeks after the patient has suffered a stroke. Because the therapy will lengthen the time for which treatment options are available to patients, the stem cell therapy may provide care to a greater patient population than traditional drug products could serve.

Earlier this week, we reported the FDAs clearance of another stem cell trial. With this newest IND clearance, it appears that stem cell treatment options are finally making headway with the FDA.
For more information on the FDA regulatory framework regarding stem cells or the Investigational New Drug process, please contact us at contact@fidjlaw.com.

Florida Attorney General centralizes anti-pill mill initiative in West Palm Beach

Florida has become infamous for clinics, known as “Pill Mills,” that dole out tremendous amounts of pain medications. And within the state of Florida, no county has seen more Pill Mill activity than Palm Beach County.

Thus, after Pam Bondi, the newly elected Attorney General for the State of Florida, named former State Senator David Aronberg to head the States anti-pill mill initiative, it came as no surprise when Mr. Aronberg chose to centralize the Attorney Generals war against pill mills in West Palm Beach as opposed to Tallahassee, Floridas capital city. According to Mr. Aronberg, West Palm Beach is “ground zero,” but promised that Palm Beach County would continue to be a leader in eradicating pill mills.

This law firm has considerable experience representing pain clinics and other medical practices in a variety of capacities. If you have any questions about Floridas anti-pill mill initiative, please feel free to contact us at contact@fidjlaw.com.

FDA Clears the Way for New Embryonic Stem Cell Trial

In what may be a sign that the FDA is loosening its grip on human embryonic stem cell (hESC) research, Advanced Cell Technology (ACT) announced that it has been cleared by the FDA to begin a new round of human clinical trials. The clinical trial will focus on developing a method to treat dry age-related macular degeneration, a condition that largely afflicts people over the age of sixty. According to ACT, previous trials using the therapy on animals have proven promising, showing “. . . a remarkable improvement in visual performance over untreated animals, without any adverse effects.”

With this recent FDA clearance, ACT is now the only company to have multiple hESC trials cleared by the FDA. As we previously reported, the FDA cleared the companys Investigational New Drug (IND) application in November, allowing ACT to begin a related clinical trial to treat a type of juvenile vision loss. In addition to these recently-cleared INDs, the FDA has cleared just one other hESC trial to date. In January 2009, Geron announced that the FDA had given initial clearance to allow the Company to proceed with clinical trials to treat patients with acute spinal cord injuries. While there are currently only three approved hESC clinical trials, these recent clearances may be an indication that the FDA is opening the door for further human embryonic stem cell research.

For more information on the FDA regulatory framework regarding stem cells or the Investigational New Drug process, please contact us at contact@fidjlaw.com.

Investments to Medical Device Firms Hindered by FDA

Good news for U.S. companies, venture capitalists are optimistic about 2011. A national survey (found here) released by the National Venture Capital Association and Dow Jones VentureSource involving more than 330 venture capitalists showed a growing enthusiasm for investments, but not necessarily in medical device firms. According to the survey, the top three areas of growth were consumer Internet and digital media, cloud computing, and health care information technology. Biofuels and bioenergy are also expected to gain in investments this year. In contrast, medical device firms are not seeing as much money because, first, these other companies can be spun out for less venture capital than medical devices, and second, investors are cautious about investing in medical device firms because the inordinate delays associated with FDAs review of devices. The FDAs protracted timeline for review has created an uncertainty for when devices will reach the market. This uncertainty for an exit strategy may mean less venture capital for medical devices.

The FDAs review of medical devices through the 510(k) or PMA process is complex. Fuerst Ittleman has extensive experience successfully navigating medical devices through FDA review. For more information on FDAs review of medical devices, please contact us at contact@fidjlaw.com.

New British Bribery law will mean trouble for American pharmaceutical firms

A new British anti-bribery law taking effect in April, in certain ways more stringent than the Foreign Corrupt Practices Act (“FCPA”) in the United States, is worrying American drug companies enough begin  strengthening existing compliance programs in anticipation of the new law.

In recent years, the U.S. Department of Justice has exacted severe monetary penalties against pharmaceutical companies for violating the FCPA, which prohibits U.S. companies from engaging in bribery of foreign government officials. A recent Wall Street Journal article found here reported that, not surprisingly, British officials may specifically target pharmaceutical companies for enforcement of this new law once it is in effect. The new law is known simply as “The Bribery Act”.  

The Bribery Act prohibits any company operating in the United Kingdom, whether foreign or domestic, from making any illicit payments to foreign government officials. However, unlike the U.S. FCPA, The Bribery Act also prohibits illicit payments to private citizens or businesses, and even applies if the person making the payment does not even realize he or she is paying a bribe.

Notably, the Bribery Act does not include a crucial exemption included in the FCPA: Facilitation payments, or “grease” payments, permissible under the FCPA under certain circumstances, are not allowed under The Bribery Act.  As such, conduct which may be perfectly legal for an American pharmaceutical company based in Britain under the FCPA, may be illegal under The Bribery Act.

A stringent compliance regime, along with an understanding of both the FCPA and The Bribery Act is necessary for a company engaged in international business to avoid the traps and pitfalls both these laws can erect to harm its business. Our firm is experienced in conducting internal investigations to ferret out potential problems and to suggest policies and procedures to steer clear of violations.

FinCEN Proposed Rule On Cross-Border Electronic Transmittal Of Funds Reporting Requirements Draws Criticism From Banking Community

In September 2010, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking that would increase the reporting requirements associated with cross-border electronic transmittals of funds (“CBETF”) for banks and money transmitters. In the months that have followed, numerous organizations have voiced their criticism of the proposed rule stating that the additional reporting requirements are excessive, costly, and will not have the intended effect on money laundering that FinCEN hopes.

The current rule, which is part of a larger regulatory framework that enforces the Intelligence Reform and Terrorism Prevention Act of 2004 and the Bank Secrecy Act, requires that financial institutions retain records for transfers of $3000 or more and only to report wire transfers if the transfers are deemed suspicious. However, under the Proposed Rule, banks and depository institutions which exchange international wire transfers directly with foreign financial institutions would be required to submit copies of the money transmittal order for each CBETF. Additionally, banks would be required to report the tax identification numbers on all accounts used to send or receive a CBETF. The proposed rule applies the same taxpayer identification number reporting requirement on money services businesses for all CBETF of $1000 or more. FinCEN believes the new reporting requirements will help combat money laundering and tax evasion by allowing the agency to collect information on CBETF in a centralized database which can then be linked with data from other financial intelligence sources.

The proposed taxpayer identification number reporting requirement has drawn the furor of financial institutions nationwide. On December 28, 2010, the Independent Community Bankers of America (“ICBA”) sent a letter to FinCEN calling for the suspension of the proposed rule, along with a list of criticisms and proposals for change. The ICBA believes the proposed rule creates an excessive burden on community banks because many community banks do not have the infrastructure in place to distinguish between incoming domestic and international wire transfers. The ICBA also believes the proposed rule ignores the reality that many community banks use intermediaries to process CBETF, therefore community banks would not be able to comply with the reporting requirements until their intermediaries supply the required information. Additionally, the ICBA believes the scope of the proposed rule is unclear as the rule does not directly address whether banks must report accountholders tax identification numbers for cancelled, rejected, or amended transfers.

The ICBA proposed several changes to the FinCEN proposed rule including permitting banks to transfer reporting requirements to third-party carriers and an 18 month window period for compliance with the reporting rules once a final rule is issued. If you have questions pertaining to the Bank Secrecy Act, FinCEN regulations, anti-money laundering compliance or how to ensure that your business maintains regulatory compliance at both the state and federal levels, contact Fuerst Ittleman PL at contact@fidjlaw.com.

IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

IRS Finalizes Regulations Requiring Corporations to file Uncertain Tax Position Statements

On December 15, 2010, the Internal Revenue Service (IRS) issued final regulations requiring certain corporations with both uncertain tax positions and assets equal to or exceeding $10 million to fill out a Schedule Uncertain Tax Position (UTP).  Requirement of a Statement Disclosing Uncertain Tax Positions, 75 Fed. Reg. 240, 78,160 (December 15, 2010) (to be codified at Treas. Reg. §1.6012-2).  The schedule UTP is currently available on the IRS’s website.

These uncertain tax positions are identified by corporations during the process of preparing financial statements under applicable accounting standards. Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010).  Consequently, this regulation only affects taxpayers that are required to issue audited financial statements and does not affect smaller entities that rarely prepare audited financial statements. 75 Fed. Reg. 240 at 78,160.

For the 2010 tax year, this requirement is only applicable to those corporations meeting the above mentioned requirements that will be filling out one of the following tax returns:

– Form 1120, U.S. Corporation Income Tax Return;
– Form 1120L, U.S. Life Insurance Company Income Tax Return;
– Form 1120PC, U.S. Property and Casualty Insurance Company Income Tax Return; and
– Form 1120F, U.S. Income Tax Return of a Foreign Corporation.

An issue raised by one commentator during the comment period was whether Schedule UTP required the disclosure of privileged information.  The IRS addressed this comment by stating:  

Provisions relating to the assertion of privilege are not included in this regulation, since it does not affect the existence of any applicable privileges taxpayers may have concerning information requested by a return or how they may assert those privileges.  

Id.

In this reply, the IRS seems to imply that the information required on Schedule UTP is not information protected by any privileges. 

Note, however, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS indicated that it would “forgo seeking particular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

These “particular documents” likely include those at issue in U.S. v. Deloitte, 610 F.3d 129 (D.C. Cir. 2010) and Textron v. U.S., 577 F.3d 21 (1st Cir. 2009).  Both cases dealt with documents prepared by taxpayer corporations as part of an audit process which the taxpayer corporations argued were protected as work product. We previously discussed these cases at length here.

In both cases, in addition to arguing that the documents at issue were not prepared “in anticipation of litigation,” the IRS also argued that when the taxpayer corporations showed the documents to the independent auditors that were reviewing their financial statements, the taxpayer corporation had waived the protection of these documents as work product. 

Significantly, in Announcement 2010-76 of Internal Revenue Bulletin 2010-41, the IRS agreed “not to assert that privilege has been waived by such disclosure” but listed numerous exceptions to their “policy of restraint.” Requests for Documents Provided to Independent Auditors, Policy of Restraint and Uncertain Tax Positions. Internal Revenue Bulletin 2010-41. Announcement 2010-76.  (October 12, 2010). 

The IRS has provided itself with a means to obtain additional information with the regulations requiring the Schedule UTP.  The IRS has not, however, provided an answer to the question regarding the impact of these regulations on protections, such as privileges and work product, which are afforded to parties in litigation to ensure maintenance of an adversary system.  We previously reported IRS Chief Counsel William Wilkins’s reassurances regarding the IRS’s intention to comply with the attorney client privilege.  Notably, however, the IRS does not seem to express the same intention in the published final regulation.  The IRS avoided the question of “privilege” when it published its final rule with the blanket assertion that the information disclosed on the Schedule UTP will not consist of privileged information. The IRS provides no means by which taxpayers subject to the Schedule UTP can assert applicable privileges. 

Additionally, the UTP itself is likely a “required disclosure” under the Financial Accounting Standards Board’s (FASB) proposed standards on loss contingency disclosures.  Previously in our blog, Mitchell Fuerst commented on the proposed FASB standards, which standing alone are likely to result in a violation of the attorney client privilege.  The disclosure requirements imposed by the Schedule UTP reflect an additional attempt by a government agency to violate the traditional rules of litigation. 

If you have any questions regarding Schedule UTP or any other tax provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.