Scandal-scarred health care provider HealthSouth scored $440 million in a tax recovery from the Internal Revenue Service despite the company's acknowledgment of financial fraud.

The tax recovery came from overstatements of taxable income attributable to the financial fraud perpetrated by members of the company's former senior management under former CEO Richard Scrushy. The recovery includes a $296 million tax refund for tax years 1996 through 1999, along with $144 million of associated interest income.

HealthSouth plans to use the proceeds of the tax recovery to reduce its debt. The company hired forensic tax accounting specialists to analyze its journal entries, isolate entries showing specific financial fraud schemes and compute the amount of taxable income that was overstated between 1996 and 1999.

Such forensic systems are typically used to investigate white collar crime. In this case, they identified large portions of the financial fraud, which HealthSouth was then able to claim as overstatements of taxable income. The refund claims reduced the taxable income reported to the IRS by HealthSouth, entitling HealthSouth to $144 million of interest income on tax reductions. The reductions of taxable income in 1997 also entitled HealthSouth to use carrybacks from that year to recover an additional $21 million in taxes for 1994 and 1995.

HealthSouth has just made its final payment on a $100 million settlement with the SEC from 2005, and intends to make its last payment on a $325 million global settlement from 2004 with the Department of Justice's Civil Division, the Office of Inspector General of the Department of Health and Human Services, and the Centers for Medicare and Medicaid Services. Earlier this year, the company paid down more than $1 billion in debt from proceeds related to the divestiture of three divisions and related assets.

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