Illinois Considers Reforms to Whistle-Blower Process

By Michael J. Bologna

Illinois lawmakers are considering legislation seeking to manage a torrent of whistle-blower lawsuits in state courts alleging sale and use tax frauds, though insiders concede similar legislative campaigns have failed in the past.

At least three bills are pending before the General Assembly that seek to overhaul the Illinois’ False Claims Act, particularly as the law applies to qui tam claims involving purported tax frauds. The issue has attracted national attention in recent years due in part to a single Chicago law firm that has filed hundreds of lawsuits alleging minor violations of Illinois’ sales and use tax—actions many in the business community characterize as nuisance claims.

“I hope there will be some bipartisan support for closing this loophole, and I will work with anybody willing to find a way that makes sense,” Rep. Keith Wheeler (R), sponsor of one of the bills, told Bloomberg BNA.

The three bills feature two different legislative approaches.

Limiting Profit Motive

S.B. 9, an omnibus tax overhaul bill, simply amends the the FCA by barring qui tam actions linked to “any taxes imposed, collected, or administered by the State of Illinois.”

H.B. 1814, sponsored by Wheeler, and S.B. 1250, an identical measure sponsored by Sen. Pamela Althoff (R), suggest more complicated but less restrictive modifications to the FCA. The legislation would grant the Illinois Department of Revenue broad authority to initially review and intervene in FCA actions and limit whistle-blowers’ ability to profit from such litigation.

H.B. 1814 and S.B. 1250 mirror changes proposed in 2013 under H.B. 74, which never passed the Legislature. The bill had the support of the revenue department, retailers and taxpayer groups, but was opposed by trial lawyers.

Retailers and taxpayer organizations said they would be pleased with any of the bills before the General Assembly.

“S.B. 9 is better because it’s cleaner. It doesn’t raise any questions, and there won’t be any fights about it,” said Carol Portman, president of the Taxpayers Federation of Illinois. “But this other process (H.B. 1814 and S.B. 1250) is fine with all of us. I mean, who’s against whistle-blowers?”

Under the FCA, any citizen can bring an action in circuit court to remedy a fraud perpetrated against the state. Illinois’s law permits actions targeting tax fraud, but the statute specifically bars claims under the state’s income tax. The FCA provides incentives to these plaintiffs, referred to as “relators,” permitting them to share in any proceeds resulting from their lawsuits.

Prolific Chicago Whistle-Blower

Illinois’ law has been criticized due to the actions of prolific Chicago tax whistle-blower Stephen B. Diamond and his law firm Stephen B. Diamond P.C. According to the Illinois Attorney General’s Office, Diamond has served as relator in at least 911 qui tam actions in Cook County Circuit Court over the last 15 years. A recent investigation by Bloomberg BNA revealed Diamond has collected almost $12 million thought this pattern of litigation.

Unlike S.B. 9, H.B. 1814 and S.B. 1250 would permit tax whistle-blowers to continue to file claims to address legitimate instances of fraud. The legislation, however, would give the revenue department authority to direct the litigation and restrict circuit court actions deemed meritless by the department.

Specifically, H.B. 1814 and S.B. 1250 would:

• require whistle-blowers with tax cases to initially disclose their claims to the DOR and grant it the authority to evaluate the merit of such claims,• grant the department authority to resolve the tax issue through an audit rather than false claims litigation,• grant the department authority to recommend intervention and litigation by the Attorney General’s office in certain circumstances,• preserve whistle-blowers’ right to share in proceeds realized when viable claims are resolved through the false claims process and• bar whistle-blowers from proceeding to circuit court with tax claims deemed by the state to lack merit.

Wheeler said he understands this approach has failed in the past, but stressed its benefits for the state, taxpayers and legitimate whistle-blowers. Wheeler said the attorney general may have concerns about the bill, but expressed optimism any difference of perspective could be remedied.

“If the Attorney General’s office is interested in another approach that makes it more palatable, I’m happy to listen,” he said.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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