DC handed the Qui Tam Legislation on Tax Fraud

Wednesday February 3, 2021

On January 13, 2021, Washington, DC Mayor Muriel Bowser signed the 2020 False Claims Amendment Act. Unless a joint Congress opposes what is not expected during the 30-day review period, it will take effect soon.

The amendment, passed by a 12-1 majority by the members of the DC Council, contains four major amendments to the existing DC False Claims Act that collectively authorize qui-tam lawsuits from whistleblowers aware of certain tax violations and promote.

  • It removes the previous prohibition on the ability of a whistleblower to file claims related to tax fraud. When whistleblowers become aware of tax fraud committed by a company or individual with income, sales, or profits in excess of $ 1 million per year and at least $ 350,000 in damages at stake, they can file a complaint under the law.

  • The change will increase the potential whistleblower price from 10% to up to 30% of the amount that the whistleblower receives back on behalf of the DC government.

  • The change makes “knowingly” the standard for tax fraud violations under DC law. This is in line with other provisions of the DC False Claims Statute.

  • The change allows for tax fraud recovery that goes back up to ten years and is retroactive. This enables whistleblowers to come forward now and make immediate claims, even if the illegal behavior occurred many years in the past.

In addition to the changes listed above, DC’s Qui-Tam Tax Fraud Act continues the tradition of triple damages and penalties that are recoverable in Qui-Tam cases. It also includes protecting confidential tax information by restricting parties’ disclosure and disclosure of that sensitive information.

DC’s recent changes to its False Claims Act are certainly a departure from the Federal False Claims Act, which specifically excludes tax claims from its scope (although whistleblowers with information about underpayment of federal taxes can file a specific type of claim with the IRS Whistleblower Office) . . The DC amendment, however, aligns with a handful of states creating a route for tax fraud qui-tam claims. Delaware, Florida, and Nevada have no explicit restrictions on tax measures. Additionally, Illinois, Indiana, and Rhode Island only prohibit income tax qui-tam measures. New York and Illinois have perhaps the two broadest and most widely used tax laws.

New York’s tax law is the gold standard. It went into effect in 2010 and allows a whistleblower to file an instant lawsuit where the profit of the organization cheating New York is at least $ 1 million per tax year and the damage is at least $ 350,000. These parameters have both limited unmeritable cases and high recovery potential. Specifically in 2018, New York reached a $ 330 million settlement under its law with Sprint Corporation that resulted in an award of $ 62.7 million for the whistleblower who filed the underlying Qui-Tam lawsuit would have.

The success of New York City has no doubt inspired other states to view tax measures as an important mechanism for combating tax fraud. DC City Council made no secret of the fact that their change was influenced by New York’s success. The DC Council Committee’s report on the change found that the New York tax fraud change resulted in a $ 460 million recovery for the state. She also quoted the New York attorney general in his rationale for a change that requires consultation with the state tax commissioner.

As much as the New York Tax Act serves as an aspiration model for various states, some consider Illinois law a cautionary story. Illinois tax law has a much lower threshold for filing a tax fraud claim: none. As a result, it has been discussed whether the law lends itself to frivolous filings. One attorney is notorious for filing over 900 tax fraud cases in the state, many of which were later dismissed. However, the DC Council concluded that by modeling New York law, and because the anomalies that allowed many of the later rejected filings in Illinois (specifically, ambiguities about whether and how the Illinois tax fraud law was applied to retailers), Don’t exist here It has created a path for fruitful and effective litigation to reclaim tax money. It’s also worth noting that the Illinois tax law has a fair share of successful action. Recently, a whistleblower lawsuit against Call One, a Chicago-based telecommunications provider, settled for $ 2.5 million.

With New York’s model of effectively creating a Qui-Tam law on tax fraud and the Illinois warning to avoid judicial waste and the desire of local governments to regain their lost tax revenues, as the recent DC amendment shows, it’s just a question of who next comes. Several other states have recently introduced their own Quitam laws for tax fraud.

During the 2019 and 2020 California Legislative Sessions, State Assembly Member Mark Stone introduced changes to California’s False Claims Act to add tax fraud to California’s law. Both years the amendment was passed in the House and remained in the Senate. If he reintroduces the change this year and it gets passed, it will deviate from the DC change in a few ways: it will lower the breakeven point to $ 500,000 to prosecute a tax fraud lawsuit and the damage threshold to $ 200,000 and it isn’t retrospectively and only applies to claims and declarations made after the law came into force. Nonetheless, it will continue to establish a key mechanism for recovering lost tax revenue on behalf of California, protecting sensitive tax information while respecting civil penalties and triple damages.

In 2019, Michigan lawmakers also introduced laws to add tax fraud to its false claims law. The proposed Michigan law will be aligned with the New York parameters for a claim with income or sales of $ 1 million or more for the tax year and damages of $ 350,000 or more. The proposal envisages slightly higher civil penalties than the New York model (between $ 6,000 and $ 12,000) and also takes into account triple damage. Although the bill was not passed when it was first introduced in 2019, it is likely that the idea will reappear in Michigan.

There is still interest in passing tax fraud laws in many countries. The recovery potential for the states is enormous. The only fair question remains, which courageous state comes next.