Written by Daniel Crespo

The U.S. Department of Justice and Federal Trade Commission’s released a joint statement announcing a step-up in their antitrust enforcement efforts and heightened scrutiny of the healthcare sector to identify and prosecute providers, entities and associations that may be exploiting the circumstances created by the COVID-19 pandemic, particularly in the health care labor market.[1]

Healthcare providers should be aware that similar efforts and enforcement actions began years prior to the 1996 issuance of the Agencies’ Enforcement Policy in Health Care, and Statement 6 regarding Enforcement Policy on Provider Participation in Exchanges of Price and Cost Information.[2]  These renewed enforcement actions cover the conduct of compensation and other surveys, and provide an Antitrust Safety Zone for the conduct of surveys.  On an annual basis since 1994, Lawrence Associates has administered one of the few major surveys in the U.S. seeking guidance under the FTC and DOJ’s business review, or advisory opinion request on the conduct of a survey.

In relevant part, the Joint Statement on Antitrust Enforcement states that: [3]

The [FTC and DOJ] are on alert for employers, staffing companies (including medical travel and locum agencies), and recruiters, among others, who engage in collusion or other anticompetitive conduct in labor markets, such as agreements to lower wages or to reduce salaries or hours worked. For years, the Agencies have challenged unlawful wage-fixing and no-poach agreements, anticompetitive non-compete agreements, and the unlawful exchange of competitively sensitive employee information, including salary, wages, benefits, and compensation data. Moreover, the Division may criminally prosecute companies and individuals who enter into naked wage-fixing and no-poach agreements. Even absent a collusive agreement, the Bureau may pursue a civil enforcement action against companies and individuals that invite others to collude. The Agencies may also use their civil enforcement authority to challenge unilateral anticompetitive conduct by employers that harms competition in a labor market (monopsony power). Companies and individuals involved in the hiring, recruiting, retention, or placement of workers should be aware that anticompetitive conduct runs the risk of civil and/or criminal liability.

Although some in the industry have shrugged off these concerns, enforcement actions can (and will) arise whenever there is a possibility of collusion, regardless of an intent to promote compassion and flexibility. Historically, the DOJ has rigorously enforced antitrust laws in the healthcare sector, with notable enforcement actions in the industry dating back to a 1994 lawsuit against the Utah Society for Healthcare Human Resources Administration (settlement requiring the Society to appoint an Antitrust officer to monitor compliance going forward, coupled with stiff criminal penalties for further violations),[4] and a 2007 action against the Arizona Hospital and Healthcare Association ($22.4 million settlement).[5] Indeed, the footprint of the DOJ’s antitrust enforcement actions spans more than 51 judgments entered and estimated damages, fees and settlement payments exceeding $100 million in the healthcare sector alone.[6]

As highlighted in a recent Bloomberg Law article, “History has shown that severe recessions are followed by increased antitrust cartel enforcement. And given the current economic climate, the incentives to engage in potentially unlawful antitrust conduct may be higher than ever”.[7]  These violations carry with them stiff fines, penalties and potentially prison sentences in some situations.

[1] Federal Trade Commission, Press Release, “Federal Trade Commission and Justice Department Issue Joint Statement Announcing They are on Alert for Collusion in U.S. Labor Markets”, April 13, 2020, available at: https://www.ftc.gov/news-events/press-releases/2020/04/federal-trade-commission-justice-department-issue-joint-statement

[2] https://www.lawrenceassociates.com/pdfs/DOJ%20and%20FTC%20Survey%20hlth3s.pdf

[3] U.S. FTC & DOJ, Joint Statement, “Joint Statement Regarding COVID-19 and Competition in the Labor Markets”, April 13, 2020, available at: https://www.ftc.gov/system/files/documents/advocacy_documents/joint-statement-bureau-competition-federal-trade-commission-antitrust-division-department-justice/statement_on_coronavirus_and_labor_competition_04132020_final.pdf

[4] U.S. Dept. of Justice, Press Release, “Justice Department Files Antitrust Case Against Utah Hospitals”, Mar. 14, 1994, available at: https://www.justice.gov/archive/atr/public/press_releases/1994/211784.htm

[5] U.S. Dept. of Justice, Press Release, “ Justice Department Reaches Settlement with Arizona Hospital and Healthcare Association”, May 22, 2007, available at: https://www.justice.gov/archive/atr/public/press_releases/2007/223470.htm

[6] U.S. Dept. of Justice, Case Summary Archive, “Summary of Antitrust Division Health Care Cases”, available at: https://www.justice.gov/atr/file/783756/download

[7] Stephan Meisner & Lisa P. Rumin, Bloomberg Law Insights, If Past is Prologue, Ramped Up Antitrust Compliance is Critical”, Jun. 16, 2020, available at: https://news.bloomberglaw.com/health-law-and-business/insight-if-past-is-prologue-ramped-up-antitrust-compliance-is-critical?utm_campaign=COVID-19%20Daily%20Digest%206-16-20&utm_medium=email&utm_source=Eloqua

Written by Daniel Crespo

The Government Accountability Office (GAO) recently released its report on the IRS’s Form 990 Series (including EZ and PF) analysis and non-compliance identification models.  The GAO assessed (1) the IRS’s use of data to select returns for examination and, (2) the process IRS has established for selecting returns. In its assessment, the GAO analyzed (1) examination data from fiscal years 2016 through 2019, including results from the largest Form 990 model, and (2) model documentation for a generalizable sample.

Interestingly, the Tax Exempt and Government Entities (TE/GE) division within IRS identifies exempt organization returns for examination from many sources and categorizes examinations into three groups, known as portfolios: (1) Data Driven Approaches, (2) Referrals and Other Casework, and (3) Compliance Strategies. All three rely on data, to some extent, to make decisions on selecting returns for examination.

Comment:  Given the extent and critical nature of the GAO’s report, Lawrence Associates expects that the IRS will enhance its review and audit processes of nonprofit Forms 990 in the coming years in order to demonstrate effective remediation of the issues identified by the GAO. Indeed, the GAO has already issued a list of 13 recommendations focused on enhancing the examination selection and risk scoring functionality of the IRS Form 990 model.[1]

In turn, nonprofits should expect to see a targeted increase in scrutiny by the IRS, and penalty assessments as the agency recalibrates and validates its Form 990 models in a manner that results in higher rates of discrepancy detection going forward.

Of course, none of this specifically indicates what the IRS is looking at.  Stay tuned.  Perhaps we will speculate on that in a future blog.

The GAO found that the IRS used the data to select 70% of its examinations in fiscal year 2019, and nearly 50% of those data-based examination selections were driven by IRS models determinations.[2] Of the returns examined that were selected using the model, 87% resulted in a change to the return, indicating that IRS had effectively identified noncompliance.[3]

Nevertheless, the GAO report was largely critical of the IRS’s Form 990 model, particularly with respect to its noncompliance risk scoring and examination selection functionality. Specifically, the GAO found that the IRS model did not improve change rates compared to prior selection methods and also found that a higher model score is not necessarily associated with a higher change rate.[4] In fact, examinations of “pick-up” returns and substitutes for returns (SFRs) accounted for most closed examinations and produced a higher change rate than examinations of primary returns scored by the model, with 61% of changed returns the IRS had credited to its Form 990 model actually having been a pick-up or SFR return, rather than one that one that the model had identified for examination in the first instance.[5]

The GAO found several additional shortcomings in the IRS’s evaluation processes as well, including:[6]

The IRS has not fully implemented or documented internal controls in its established processes for analyzing data for examination selection.

The IRS has not defined measurable objectives for using data to select returns for examination.

The IRS’s models have deficiencies affecting the validity and reliability of return scoring and selection. In particular, the IRS has incomplete definitions and procedures and does not always follow its definitions when assigning point values for identifying potential noncompliance for examination.

The IRS did not consistently document the processing and use of data in decision-making on examination selection.

The IRS does not regularly evaluate examination selection. Examination data was inconsistent across years and the IRS only tracked one prior year of data.

The IRS did not save data on all returns that its Form 990 model scored. As a result, the IRS could not assure that its models are selecting returns as intended and that deficiencies are being identified and corrected.

[1] See Id. at pp. 37-38.

[2] U.S. Government Accountability Office, Tax Exempt Organizations: IRS Increasingly Uses Data in Examination Selection, but Could Further Improve Selection Processes, GAO-20-454, Jun. 2020, at p. 1, available at: https://www.gao.gov/assets/710/707607.pdf

[3] Id.

[4] Id. at pp. 13-16.

[5] Id. at p. 13.

[6] Id. at p. 1.

Written by Daniel Crespo

On June 5, 2020 the IRS issued a 177-page proposal intended to provide comprehensive guidance on I.R.C. § 4960 which currently imposes an excise tax of 21 percent on certain tax-exempt organizations on remuneration paid to a “Covered Employee” that either exceeds $1 million in a year, or amounts to an excess parachute payment.[1]

The proposal is largely based on IRS Notice 2019-09[2] and is intended to clarify and codify certain defined terms, in addition to providing rules to guide determinations of:

The amount of remuneration paid for a tax year, including for purposes of identifying Covered Employees.[3]

Whether and in what amount excess remuneration was paid by the organization.[4]

Whether and in what amount excess parachute payment(s) were made.[5]

How liability for payment of the excise tax shall be allocated among any related organizations.[6]

The proposed regulation is expected to codify and clarify certain issues which some have questioned. For example, whether volunteers who are employees of a related taxable organization can trigger the excise tax.[7]

The new regulation is proposed to apply to tax years beginning after the Federal Register publication date (expected June 11, 2020).

With the notice and comment period expected to remain open until mid-August 2020, Lawrence Associates will be following these developments closely and reporting on any notable changes or comments being considered. A full update will be issued once the final rule is adopted.

[1]  Dept. of Treas., Internal Revenue Service, Tax on Excess Tax-Exempt Executive Compensation, 26 C.F.R. Parts 15 and 26 (2020), Treas. Reg. 122345-18, available at: federalregister.gov/d/2020-11859

[2] Internal Revenue Service, Interim Guidance Under Section 4960, IRS Notice 2019-09, Dec. 31, 2018, available at: https://www.irs.gov/pub/irs-drop/n-19-09.pdf

[3] See, Treas. Reg. 122355-18 (2020), Fed. Reg. Doc. No. 2020-11859, at pp. 10-13, available at: federalregister.gov/d/2020-11859

[4] Id. at pp. 39-56.

[5] Id. at pp. 56-69.

[6] Id. at pp. 69-76.

[7] See e.g., Client Alert, May 15 Deadline Approaching for New Excise Tax Triggered Even When Tax-Exempt Organizations Pay No Compensation, Pepper Hamilton, Apr. 30, 2019, available at: https://www.pepperlaw.com/publications/may-15-deadline-approaching-for-new-excise-tax-triggered-even-when-tax-exempt-organizations-pay-no-compensation-2019-04-30/