A Decade Of Lessons Learned From State Tax False Claims Act Cases

The last decade has witnessed a large upswing of False Claims Act (FCA) cases filed in the state tax arena. New York, particularly in the last few years with Attorney General Eric Schneiderman at the helm, has sharpened its tools and upped its enforcement efforts. The New York False Claims Act was amended in 2010 to allow private citizens acting on behalf of the state to bring a tax claim alleging fraud against taxpayers who met a certain financial threshold. The amendments provide for treble damages, rewards of up to 30 percent of liability and a 10-year statute of limitations, which is years beyond the statute of limitations governing state tax audits. In Illinois, hundreds of state tax FCA cases have been filed by a single plaintiff law firm, triggering a State House Revenue and Finance Committee hearing on the abuse of the Illinois FCA, as well as proposed legislation that would put significant limitations on the filing of such claims. Across the United States, unclaimed property laws also have seen their fair share of FCA litigation.

At present, 29 states, the District of Columbia, New York City, Chicago, and Allegheny County, Pennsylvania, have FCA statutes. Of those jurisdictions, eight (Delaware, Florida, Nevada, New Hampshire, New York, Washington, Wisconsin and Chicago) permit state tax FCA claims involving any type of tax. Three others (Illinois, Indiana and Rhode Island) bar only income tax FCA actions; any other type of state or local tax is fair game. The remaining jurisdictions either bar all tax-related claims or are limited to Medicaid-related claims.

FCA laws, also referred to as qui tam or whistleblower laws, allow third-party private citizens ("whistleblowers" or "relators") acting on behalf of a government to sue persons who knowingly make or use a false statement material to an obligation to pay money to the government. In the tax arena, such claims frequently are brought as "reverse" false claims, alleging a knowing concealment or avoidance of a tax obligation. "Knowingly" is broadly defined by the FCA laws as actual knowledge, deliberate ignorance of the truth or falsity of information, or acting in reckless disregard of the truth or falsity of information.

The penalties associated with an FCA violation are severe, and the potential reward to a whistleblower is significant. Persons found to have violated a state FCA may be found liable for three times the amount of unpaid tax, interest and penalties, plus per-occurrence civil penalties (up to $11,000 per false claim in Illinois) and costs. Up to 30 percent of the proceeds of any judgment or settlement may be awarded to the whistleblower, together with its costs, expenses and reasonable attorneys' fees.

The groundswell of such litigation appears to be rising...