8.	Income Taxes

The Company’s effective tax rate increased to

47.7%

for the

six

months ended

June 30, 2018

from

42.6%

for the

six

months ended

June 30, 2017.

The effective rate for

six

months ended

June 30, 2018

includes the discrete tax impact related to the settlement of the litigation described in Note

13,

Commitments and Contingencies, interest on uncertain tax benefits and net stock compensation in addition to a net federal tax reform benefit comprised of a federal tax rate decrease, net of state impact, offset by tax increases for officer compensation deduction limits and loss of the domestic manufacturing deduction. For the

six

months ended

June 30, 2018,

the differences between the federal statutory rate and our effective tax rate are discrete tax expense related to the settlement of the litigation described in Note

13,

Commitments and Contingencies, state taxes, equity compensation impacts, unrecognized tax benefits, including interest, officer compensation deduction limits, research and development tax credits, and other permanent differences.

The effective tax rate for the

six

months ended

June 30, 2018

represents the Company’s best estimate using information available to the Company as of

August 6, 2018.

The Company anticipates U.S. regulatory agencies will issue further regulations over the next

nine

months which

may

alter this estimate. The Company is still evaluating, among other things, the application of limitations for executive compensation related to contracts existing prior to

November 2, 2017.

The Company will refine its estimates to incorporate new or better information as it becomes available through the filing date of its

2017

U.S. income tax returns in the

fourth

quarter of

2018.

Included in Other Liabilities on the Consolidated Balance Sheets, are the total amount of unrecognized tax benefits of approximately

$8.7

million and

$8.2

million, as of

June 30, 2018

and

December 31, 2017,

respectively, (net of the federal benefit for state issues) that, if recognized, would favorably affect the Company’s future effective tax rate. Also included in Other Liabilities on the Consolidated Balance Sheets, are accrued liabilities for interest expense and penalties related to unrecognized tax benefits of

$0.9

million and

$0.6

million as of

June 30, 2018

and

December 31, 2017,

respectively. HMS includes interest expense and penalties in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the

six

months ended

June 30, 2018

and

2017

was

$0.3

million and an immaterial amount, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits

may

decrease by

$1.9

million over the next

twelve

months, due to the expiration of the statute of limitations in federal and various state jurisdictions.

HMS files income tax returns with the U.S. Federal government and various state and local jurisdictions. HMS is

longer subject to U.S. Federal income tax examinations for years before

2012.

The Company is currently under audit by the Internal Revenue Service for years

2013

and

2014

and

assessments have been received. HMS operates in a number of state and local jurisdictions. Accordingly, HMS is subject to state and local income tax examinations based on the various statutes of limitations in each jurisdiction. Previously recognized Texas refund claims are currently being examined by the state.