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D.C.’s Tax Fraud Qui Tam Statute Has Been Passed.  Who’s Next?

On January 13, 2021, Washington, D.C. Mayor Muriel Bowser signed the False Claims Amendment Act of 2020 into law. Unless it is opposed by a joint Congress during their 30-day review period, which is not expected, it will soon become effective.

The Amendment, passed by a 12-1 supermajority vote of D.C’s Council members, makes four key changes to D.C.’s existing false claims statute, which collectively authorize and incentivize the filing of qui tam actions by whistleblowers with knowledge of certain tax violations.

  • It lifts the previous ban on a whistleblower’s ability to file claims related to tax fraud. Now, when whistleblowers become aware of tax fraud by a company or individual with income, sales, or profits of over $1 million dollars annually, and there are at least $350,000 in damages at stake, they can file a complaint under the statute.
  • The Amendment increases the potential whistleblower award from 10% to up to 30% of the amount the whistleblower recovers on behalf of D.C. government.
  • The Amendment makes the standard for tax fraud violations under D.C. law “knowingly.” This is in accordance with other provisions of the D.C. False Claims Statute.
  • The Amendment allows for recovery for tax fraud going back up to ten years and is retroactive. This allows whistleblowers to come forward now and file qui tam claims, even if the unlawful conduct occurred many years in the past.

In addition to the changes listed above, D.C’s tax fraud qui tam statute continues the tradition of treble damages and penalties recoverable in qui tam cases. It also includes protections for confidential taxpayer information by limiting public disclosure and disclosure to parties of this sensitive information.

D.C.’s recent changes to its False Claims statute is certainly a departure from the federal False Claims Act, which explicitly excludes tax claims from its reach (although whistleblower with information about underpayment of federal taxes can file a special type of claim with the IRS Whistleblower Office).  But the D.C. amendment aligns with a handful of states that create an avenue for tax fraud qui tam claims. Delaware, Florida, and Nevada have no explicit limitations of tax qui tam actions. Moreover, Illinois, Indiana, and Rhode Island only prohibit income tax qui tam actions. New York and Illinois have perhaps the two broadest and most widely used tax qui tam statutes.

New York’s tax qui tam statute is the gold standard. It became effective in 2010 and allows a whistleblower, to file a qui tam action where the profit of the organization defrauding New York is at least $1 million dollars per tax year and the damages at stake are at least $350,000. These parameters have both limited non-meritorious cases and kept recovery potential high. Notably, in 2018, New York reached a settlement under its statute of $330 million with Sprint Corporation that resulted in a $62.7 million award for the whistle blower who filed the underlying qui tam action.

New York’s success has no doubt inspired other states to view tax qui tam actions as an important mechanism for combatting tax fraud. D.C.’s City Council made it no secret that their amendment was influenced by New York’s success. In the D.C. Council’s Committee Report on the Amendment, it noted that New York’s Tax Fraud Amendment has led to recovery of $460 million for the state. It also cited New York’s Attorney General in its rationale for an amendment requiring consultation with the state tax commissioner.

As much as New York’s tax qui tam statute serves as an aspirational model for various states, some look to Illinois’s statute as a cautionary tale. Illinois’s tax qui tam statute allows a much lower threshold for bringing forth a tax fraud false claims action: none. As a result, there has been discussion over whether the statute lends itself to frivolous filings. One attorney is notorious for filing over 900 tax fraud qui tam cases in the state, many of which were later dismissed. D.C.’s Council concluded, however, that by modeling New York’s law, and because the anomalies that allowed for many of the filings in Illinois that were later dismissed (notably ambiguities over whether and how the Illinois’s tax fraud statute applied to retailer) are not present here, it has created an avenue for fruitful and effective litigation to recover tax dollars. It is also worth noting that Illinois’s tax qui tam statute does have its fair share of successful actions. Recently, a whistleblower suit against Call One, a telecommunications provider based in Chicago, settled for $2.5 million dollars.

With New York’s model on how to effectively create a tax fraud qui tam statute, and Illinois’s warning on how to avoid judicial waste, and the desire for localities to recover their lost tax revenue, as demonstrated by D.C.’s recent law change, it is only a question of who’s next. A few other states have also recently introduced their own tax fraud qui tam statutes.

During California’s 2019 and 2020 legislative sessions, state Assembly Member Mark Stone introduced amendments to California’s False Claims Act to expand California’s qui tam law to include tax fraud. Both years, the amendment passed in the house and stalled in the senate. If he reintroduces the amendment this year, and it is passed, it will depart from the D.C. Amendment in a few ways: it will lower the threshold for profit in order to pursue a tax fraud action to $500,000 and the threshold for damages to $200,000 and it will not be retroactive- only applying to claims and statements made after the law goes into effect.  Nonetheless, it will still introduce a key mechanism for recovery of lost tax income on behalf of California, protect confidential tax information while doing so, and allow for civil penalties and treble damages.

In 2019, Michigan lawmakers also introduced legislation to add tax fraud to its false claims act qui tam statute. The proposed Michigan statute is modeled on New York’s parameters for a claim, with the income or sales of at least $1 million dollars for the taxable year and damages of at least $350,000. The proposal allows for slightly higher civil penalties than its New York model (between $6,000 and $12,000) in addition to allowing for treble damages. Although the bill did not pass when introduced in 2019, it is likely that the idea will come around again in Michigan.

An interest in passing tax fraud qui tam laws is ongoing in many states. The recovery potential for the states is massive. The only fair question that remains is which brave state is next?