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04/30/24 | Articles and TV
Whistleblowers Can Call Out State and Local Tax Violations, But Only in a Few Jurisdictions
Published in: The Anti-Fraud Coalition
Tax violations have received unique treatment in the whistleblower world. The federal government’s primary whistleblower statute, the False Claims Act, bars cases alleging violations of federal tax laws. Only in 2006 did Congress provide for the creation of an agency-based tax whistleblower program, administered within the Internal Revenue Service, in an effort to collect unpaid taxes.
At the state level, a small but growing number of jurisdictions have tax whistleblower programs aimed at recovering state and local tax dollars. The absence elsewhere should be felt keenly by taxpayers, for their governments are failing to recover untold billions of dollars in tax revenues. The loss is untold because most states do not regularly analyze their own “tax gap” between taxes due and taxes paid. At the federal level, the IRS has estimated that the tax gap is about $625 billion per year. While states often collect taxes differently than the federal government, for example through sales and property taxes, it can be expected that their own tax gaps are proportionally glaring.
State tax whistleblower opportunities exist in New York, the District of Columbia, Illinois, Maryland, Indiana, Rhode Island, Delaware, Hawaii, Nevada, New Hampshire, and Guam. The programs fit within one of two models: litigation-based or agency-based.
Most states use the litigation-based model of the state’s False Claims Acts and permit private citizens with knowledge of tax violations committed knowingly (as opposed to mere mistakes) to file lawsuits for treble damages and penalties in the name of the government. After investigating the claims, the states’ attorneys general either intervene and take over the case or decline to intervene and permit the whistleblower to proceed with the litigation on the government’s behalf. If the case is successful, the whistleblower may be awarded a share ranging between fifteen and thirty percent of the government’s recovery.
The statutes in New York, the District of Columbia, Illinois, and Guam explicitly authorize claims for tax violations, although Illinois excludes income tax claims. New York and the District of Columbia’s laws are tailored to focus claims only on larger cases, for they impose dollar thresholds that must be met for a case to be viable. The attorneys general’s offices in New York, the District of Columbia, and Illinois have set up bureaus or designated staff specifically to handle tax whistleblower cases.
The New York tax whistleblower program provides the best glimpse of a tax False Claims Act’s possibilities. In 2020, the New York Attorney General’s Office reported that approximately 204 tax whistleblower cases had been filed under the New York law.[1] Over the nearly thirteen years of its program, New York has recovered about $588 million in tax cases, including whistleblower awards of about $112 million. These included more than $300 million from a single case against a giant mobile telephone company, and more than $100 million from a case against a hedge fund manager. Based on an estimate of the New York Attorney General’s costs in running the tax whistleblower program, the program’s return on investment is more than 3,000 percent.[2]
Indiana, Rhode Island, Delaware, Hawaii, Nevada, and New Hampshire permit tax-related False Claims Act cases because their False Claims Act statutes do not bar them; however, these states have not established formal programs specifically devoted to tax claims.
Maryland took a different path by modeling its tax whistleblower program on the IRS’ agency-based program. A whistleblower with knowledge of any Maryland tax violations (not just “knowing” violations) can submit information, and if the Maryland Comptroller’s Office obtains a recovery based on the submission, the whistleblower can receive a percentage of the collected proceeds. There is no option for a whistleblower under the Maryland program to proceed with a claim if the government turns it down.
Maryland’s agency-based program is younger, but it appears to be off to a good start. In its two inaugural years, it received 63 tax whistleblower matters, many of which have been referred for audits. Last year, the state assessed nearly $1.8 million in unpaid taxes as a result of whistleblower submissions, and it has generated a positive return on investment for the program.[3] Notably, whistleblower programs usually have slow starts because the programs are not known to many potential whistleblowers and the audits or investigations themselves can take time.[4]
Although they may not be able to eliminate tax gaps entirely, state and local tax whistleblower programs can put a significant dent in the amount of tax revenues lost, especially those lost due to fraud. The data for states without tax whistleblower programs is fairly easy to assess: they have recovered exactly $0.00 dollars as a result of incentivizing persons with knowledge of tax violations to come forward. Tax fraud whistleblower programs have an enormous potential to allow states and local governments to recover crucial taxpayer dollars, promote fairness among taxpayers, and reward and protect the persons who report the violations.
Tax Whistleblowing in the States - The Anti-Fraud Coalition (taf.org)
Randall M. Fox is a Partner at Kirby McInerney.
[1] See April 27, 2020 letter from New York Attorney General Letitia James to California Attorney General Xavier Becerra.
[2] Data on public New York False Claims Act tax cases is compiled and published on the Kirby McInerney website at this link: https://www.kmllp.com/whistleblower-resources
[3] Data supplied by the Office of Delegate Julie Palakovich Carr, one of the sponsors of the tax whistleblower law, in an April 24, 2024 e-mail.
[4] For the sake of comparison, New York did not announce any recoveries in tax cases until two years after the Bureau in the Attorney General’s Office devoted to these cases was formed.
At the state level, a small but growing number of jurisdictions have tax whistleblower programs aimed at recovering state and local tax dollars. The absence elsewhere should be felt keenly by taxpayers, for their governments are failing to recover untold billions of dollars in tax revenues. The loss is untold because most states do not regularly analyze their own “tax gap” between taxes due and taxes paid. At the federal level, the IRS has estimated that the tax gap is about $625 billion per year. While states often collect taxes differently than the federal government, for example through sales and property taxes, it can be expected that their own tax gaps are proportionally glaring.
State tax whistleblower opportunities exist in New York, the District of Columbia, Illinois, Maryland, Indiana, Rhode Island, Delaware, Hawaii, Nevada, New Hampshire, and Guam. The programs fit within one of two models: litigation-based or agency-based.
Litigation-based Model
Most states use the litigation-based model of the state’s False Claims Acts and permit private citizens with knowledge of tax violations committed knowingly (as opposed to mere mistakes) to file lawsuits for treble damages and penalties in the name of the government. After investigating the claims, the states’ attorneys general either intervene and take over the case or decline to intervene and permit the whistleblower to proceed with the litigation on the government’s behalf. If the case is successful, the whistleblower may be awarded a share ranging between fifteen and thirty percent of the government’s recovery.
The statutes in New York, the District of Columbia, Illinois, and Guam explicitly authorize claims for tax violations, although Illinois excludes income tax claims. New York and the District of Columbia’s laws are tailored to focus claims only on larger cases, for they impose dollar thresholds that must be met for a case to be viable. The attorneys general’s offices in New York, the District of Columbia, and Illinois have set up bureaus or designated staff specifically to handle tax whistleblower cases.
The New York tax whistleblower program provides the best glimpse of a tax False Claims Act’s possibilities. In 2020, the New York Attorney General’s Office reported that approximately 204 tax whistleblower cases had been filed under the New York law.[1] Over the nearly thirteen years of its program, New York has recovered about $588 million in tax cases, including whistleblower awards of about $112 million. These included more than $300 million from a single case against a giant mobile telephone company, and more than $100 million from a case against a hedge fund manager. Based on an estimate of the New York Attorney General’s costs in running the tax whistleblower program, the program’s return on investment is more than 3,000 percent.[2]
Indiana, Rhode Island, Delaware, Hawaii, Nevada, and New Hampshire permit tax-related False Claims Act cases because their False Claims Act statutes do not bar them; however, these states have not established formal programs specifically devoted to tax claims.
Agency-based Model
Maryland took a different path by modeling its tax whistleblower program on the IRS’ agency-based program. A whistleblower with knowledge of any Maryland tax violations (not just “knowing” violations) can submit information, and if the Maryland Comptroller’s Office obtains a recovery based on the submission, the whistleblower can receive a percentage of the collected proceeds. There is no option for a whistleblower under the Maryland program to proceed with a claim if the government turns it down.
Maryland’s agency-based program is younger, but it appears to be off to a good start. In its two inaugural years, it received 63 tax whistleblower matters, many of which have been referred for audits. Last year, the state assessed nearly $1.8 million in unpaid taxes as a result of whistleblower submissions, and it has generated a positive return on investment for the program.[3] Notably, whistleblower programs usually have slow starts because the programs are not known to many potential whistleblowers and the audits or investigations themselves can take time.[4]
Conclusion
Although they may not be able to eliminate tax gaps entirely, state and local tax whistleblower programs can put a significant dent in the amount of tax revenues lost, especially those lost due to fraud. The data for states without tax whistleblower programs is fairly easy to assess: they have recovered exactly $0.00 dollars as a result of incentivizing persons with knowledge of tax violations to come forward. Tax fraud whistleblower programs have an enormous potential to allow states and local governments to recover crucial taxpayer dollars, promote fairness among taxpayers, and reward and protect the persons who report the violations.
Tax Whistleblowing in the States - The Anti-Fraud Coalition (taf.org)
Randall M. Fox is a Partner at Kirby McInerney.
[1] See April 27, 2020 letter from New York Attorney General Letitia James to California Attorney General Xavier Becerra.
[2] Data on public New York False Claims Act tax cases is compiled and published on the Kirby McInerney website at this link: https://www.kmllp.com/whistleblower-resources
[3] Data supplied by the Office of Delegate Julie Palakovich Carr, one of the sponsors of the tax whistleblower law, in an April 24, 2024 e-mail.
[4] For the sake of comparison, New York did not announce any recoveries in tax cases until two years after the Bureau in the Attorney General’s Office devoted to these cases was formed.
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