Normally I am “silver lining” type of person. You know…the whole, “The sun will come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun,” mentality…
But when it comes to North Carolina Medicaid audits conducted by Public Consulting Group (PCG) or HMS, I have failed to find the silver linings. You, as a health care provider, receive a Tentative Notice of Overpayment (TNO) for $1 million and go through various stages of acceptance: surprise, horror, anger, befuddlement, and fear. In order to defend yourself, you have to shell out tens of thousands of dollars for an attorney (hopefully one that understands Medicaid audits). Then spend countless hours compiling all the documents for the attorney to review and use at the reconsideration review. Then take off a day to attend the reconsideration review, losing even more clinical hours, only to disagree with the Department of Health and Human Services (DHHS) Hearing Officer’s decision. Spend more money in legal fees to appeal the DHHS decision to the Office of Administrative Hearings (OAH). Possibly hire an extrapolation expert at even more expense. Only to prove, finally, that the PCG and/or HMS audit was erroneous and you owe nothing. Or $100. Or $1000.
Where is the silver lining in that process?
That you owe nothing in the end? But you paid exhorbent amounts to the attorney.
Well, there could be a silver lining… (maybe even two)…
Recently, the IRS released a couple private letter rulings as to whether paid overpayments could be tax-deductible.
OK, what the heck is a private letter ruling?
According to Wikipedia, private letter rulings “(PLRs), in the United States, are written decisions by the Internal Revenue Service (IRS) in response to taxpayer requests for guidance. A private letter ruling binds only the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon as precedent.”
The most important part of the above-referenced definition of a PLR is that the PLR is binding only on the IRS and the requesting taxpayer. Obviously, this means that if the IRS wrote 2500 PLRs saying that paid overpayments in Medicaid audits are tax-deductible, those 2500 PLRs are not binding as to you (unless you were one of the 2500 taxpayers asking for a PLR).
Regardless, PLRs are demonstrative as to how the IRS determines [whatever is determines in the PLR]. Because, despite the fact that PLRs are not binding on all taxpayers, I would find it odd if the IRS issued 2500 PLRs stating that the paid overpayments are tax-deductible, then the IRS turn around and refuse to allow you to treat the overpayment as a tax deduction. Although, I am sure stranger things have happened.
In the first PLR, which, BTW, is not fun to read. Who uses all this legalese??? Taxpayer B asks whether (1) the money he paid to the insurance company could be deducted as a loss incurred in a trade or business; and (2) the money paid to a Government Entity E and Government Entity F in the tax years in which the installment payments are made under the settlement agreement can be deducted. (I made Taxpayer B a male because the PLR makes him a male. I have no idea as to the gender of Taxpayer B).
In Year 1, the Insurance Company sued … Taxpayer B for insurance fraud, demanding both compensatory and punitive damages. In the second year, the state of New Jersey indicted Taxpayer B… for insurance fraud. Taxpayer B agreed to pay $X in restitution to Government Entity E and Government Entity F.
Taxpayer B has represented (a) that he previously included in his gross income in prior tax years the amounts he now seeks to deduct and (b) that he and all other defendants in [both] lawsuits are jointly and severally liable for the amounts due under the settlement agreement because the language of the settlement agreement imposes joint liability upon the defendants and New Jersey law imposes joint and several liability upon members of a limited liability company.
So…can Taxpayer B deduct the money paid to the insurance company and the government as a business loss????
Or, in other words, could you (a health care provider who accepts Medicaid) deduct any money paid to PCG or HMS arising our of a regulatory audit as a business loss?
According to the PLR:
We conclude that Taxpayer B may deduct the payments he made to the Insurance Company and to Government Entity E and Government Entity F in the years the payments were made or will be made, provided that he received or will receive no contribution from any other party and included the amounts he paid or will pay in his gross income in prior tax years.
The second PLR is basically identical to the first, except that Taxpayer A is at issue. For the PLR, click here.
So what does this mean? Why should North Carolina Medicaid providers care that 2 taxpayers were able to deduct the monies paid to the government/insurance companies as a business loss?
Because, these PLRs are demonstrative that, perhaps, the IRS would view regulatory audit paybacks to PCG or HMS as an allowable tax deduction as a business loss.
So, you receive a TNO in the amount of $1 million. You spend $20,000 litigating the $1 million to $1000. I know, it sucks, right?? (Not that the amount was decreased by $999,000, but that it cost $20,000 to reduce the amount $999,000).
The silver lining? Maybe you can deduct the $1000 paid as a business loss.
But what about the $20,000 attorneys’ fees???
Let me preface this with:
I am no tax expert. I know Medicaid, not tax. If you want real tax advice, go to a real tax attorney. But, I did find…Publication 529, which states the following:
You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.
You can also deduct legal expenses that are:
- Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business,
- For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or
- To collect taxable alimony.
A definitive answer?
But…a possible two silver linings! The sun will come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun!!!!