ISSUE 1, DECEMBER 2013
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Strategic alliance with MWE China Law Offices (Shanghai)
It is with great pleasure that McDermott Will & Emery presents
the first quarterly issue of Focus on Tax Controversy, which
specifically addresses the complex issues surrounding U.S.
federal, international, and state and local tax controversies.
We hope that you enjoy these legal news updates and that they
will be informative and useful to you as you look to stay
abreast of changes and new developments in the law.
Jean A. Pawlow
Partner and Chair of the Tax Controversy Practice
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.
Although one state (Tennessee) amended its statute to bar the
use of FCA cases in the tax arena, proposed legislation to
amend the Illinois statute to limit tax-related claims has stalled
in committee. Recently, the Multistate Tax Commission
Income and Franchise Tax Uniformity Subcommittee formed a
working subcommittee to begin drafting a model provision for
state false claims acts.
With no universal shutdown of state tax FCA actions on the
horizon, this article offers the following practical
recommendations to the taxpayer community for defending
against third-party FCA claims. A subsequent article will offer
practical tips for guarding against FCA claims brought by
insiders, including employees.
1. Oppose the enactment of these laws. Be a strong voice
against the use of FCA litigation in the tax arena. Emphasize
the powerful enforcement mechanisms that already are present
and available for use by state tax departments against tax
cheats. Explain the risks created when private citizens, with no
tax experience, are armed with legislation that gives them the
power to drive tax policy by filing whistleblower claims. Do
not accept any assurance that a state statute is a copy of the
federal FCA, which “has a tax prohibition.” Smart
whistleblowers recognize that there is ample opportunity to
bring tax-related state FCA litigation under such statutes,
because they only prohibit income-tax-related claims. See, e.g.,
