Revision to Illinois False Claims Act Remains Doubtful

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

By Michael J. Bologna

Oct. 18 — Frustration with Chicago attorney Stephen B. Diamond’s flood of qui tam lawsuits in Cook County Circuit Court has renewed calls for revisions to the Illinois False Claims Act from several sources, including the Illinois Department of Revenue, the Illinois Taxpayers’ Federation and the Illinois Retail Merchants Association.

Ongoing resistance, however, from trial lawyers and ambivalence by the Office of the Illinois Attorney General make false claims overhaul a long shot for the moment.

Mark Dyckman, general counsel for the DOR, said the department supports changes to the FCA that would give it greater authority to review and investigate complaints alleging tax code violations. Currently, the department provides tax policy advice to the attorney general but has no power to intervene in cases.

Dyckman said formal authority for the department to intervene at the front end of the false claims process would boost enforcement and ensure tax policy integrity.

“We do not want to cut off all whistle-blower opportunities, but we believe the department should be the primary dispute resolution and enforcement mechanism for it,” Dyckman said.

The ITF and IRMA would prefer that tax matters be stripped from the FCA. Illinois is one of just 11 states that operate a false claims statute permitting actions alleging tax fraud.

Both organizations, however, would support FCA revisions granting the department greater authority to adjudicate claims. The ITF and IRMA see the department’s processes as more equitable to taxpayers than the resolution process on display in Cook County Circuit Court.

A spokesperson for Illinois Attorney General Lisa Madigan said modifications to the FCA aren’t seen as a priority (see related story, this issue).

Revenue Department Intervention?

Rep. Michael J. Zalewski (D) took a stab in that direction in 2013 with H.B. 74. The legislation would have given the DOR broad authorities to initially review and intervene in FCA actions involving tax matters and would have controlled the migration of such actions to circuit court.

Specifically, H.B. 74 would have:

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

No Legislative Traction

Zalewski said H.B. 74 had the support of the DOR, the attorney general, the ITF and IRMA, but it got no traction in the General Assembly. He said the measure was opposed by trial lawyers, who rejected any effort to curb the false claims process. In addition, Zalewski said he couldn’t convince colleagues to support a measure that might shave down revenue coming into the state.

“There was this question: Is this going to cost the state money at a time it was running debts? Quite frankly, I took one pass at it, I considered it a difficult bill to pass, and I moved on to other policy areas,” he said.

Dennis Ventry, a professor of tax policy at the University of California Davis School of Law who has written extensively on whistle-blower statutes, said Illinois might consider a simpler solution: establishing a monetary threshold before any tax-related false claims action could proceed to court.

Under this principle, Ventry said the whistle-blower would have to demonstrate that the defendant’s conduct resulted in a tax deficiency to the state in excess of the threshold. A sufficiently high threshold would “eliminate the nuisance quality” currently seen in Cook County.

New York Model

New York took this path in 2010 when it amended its false claims statute. The revised statute opened the door for claims relating to state and local taxes, but specified actions can only be brought when the annual income or sales of the defendant is $1 million or more and the pleaded damages exceed $350,000. In addition, the New York attorney general is required to consult with the Department of Taxation and Finance on the best strategy for resolving the case.

Randall M. Fox, a partner with Kirby McInerney LLP in New York City and the first chief of the New York attorney general’s Taxpayer Protection Bureau, said this structure has directed New York’s law enforcement and tax agencies to work together to tackle big-impact tax frauds affecting the state.

“I think a dollar threshold is a very smart feature,” Fox said. “Not only does it preserve the government’s resources—both the attorney general’s and the court’s resources—but it also avoids the question of whether low-dollar cases are intended just to get a quick settlement, regardless of the merits.”

Diamond expressed doubts about the wisdom of such strategies.

“The New York model is unlikely to provide the revenue benefits that the Illinois False Claims Act provides,” Diamond said in a letter provided to Bloomberg BNA.

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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