Whistle Blower laws allow private individuals and companies with inside knowledge of fraud against the government to sue the offender on the government’s behalf, as authorized by False Claim Acts (FCAs), with qui tam provisions. Although first implemented at the federal level, a growing number of states have followed suit and added FCAs to their statutes.
Unlike the federal FCA, several states, including New York, do not exclude tax claims from qui tam actions. Why does this matter? In states that do not bar qui tam tax actions for FCAs, there has been an increase in tax litigation in gray areas of tax law. This has allowed significant monetary recovery for plaintiffs who alleged that taxpayers fraudulently fail to collect tax.
Recently, Bristol-Myers Squibb Co. paid $6.2 million to settle a qui tam tax case alleging that a former medical imaging subsidiary knowingly evaded New York state and New York City corporate income taxes.
But some practitioners question the appropriateness of these actions in cases involving state tax compliance issues.
“Qui tam tax actions are being used for unintended purposes,” said Eric Tresh, a partner with Sutherland Asbill & Brennan LLP’s State and Local Tax Practice, who represents several New York and Illinois taxpayers that are targets of qui tam tax suits.
“They are not being used to combat fraud, but are being used against well-intentioned taxpayers by plaintiff’s lawyers and others motivated by greed or power,” said Tresh.
What might be in it for the plaintiff? It’s hard to ignore that FCA cases allow treble damage awards, civil penalties of $5,000 to $10,000 for each false claim, as well as attorney’s fees. The private individual or company that first alleges fraud is entitled to anywhere from 15 to 30 percent of the state’s recovery.
In a FCA action currently pending in New York, Sprint Nextel Corporation is defending a $300 million qui tam lawsuit in which the plaintiff alleges that Sprint Nextel deliberately did not collect state or local sales taxes on access charges for wireless calling plans. Sprint Nextel has unsuccessfully tried to dismiss the lawsuit, most recently in the New York Appellate Court, arguing that it did not knowingly violate the tax law at issue.
One of the most difficult issues with qui tam tax actions is proving that a taxpayer had willful intent to defraud the government, especially in light of the complexity of state tax laws. This may be why the federal government has chosen to include a “tax bar” in its FCA, and why proponents of the tax bar believe it should be implemented at the state level.
“The IRS and U.S. Department of Treasury have robust enforcement powers and expertise needed to audit taxpayers and assess gray areas in tax law,” said Tresh. “State and Local Tax Authorities have the same enforcement powers and expertise.”
Whether states will listen and add a “tax bar” to their statutes is still up in the air. But what we do know is that qui tam lawsuits are on the rise, and even well-intentioned taxpayers have been targeted in qui tam suits.
By Ean Hamilton
Continue the discussion on Bloomberg BNA’s State Tax group on LinkedIn: Do you think states should bar tax-related qui tam actions?
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