Fraudulent Tax Practices And State FCA Statutes
The False Claims Act (FCA) allows private citizens to sue individuals and entities on behalf of the government for fraud. When hearing about and referring to FCA cases, most articles and cases are based on the federal False Claims Act. However, many states have their own version of this qui tam statute, some of which include tax claims.
New York – Specific Inclusion
The federal False Claims Act covers fraud involving any federally funded program or contract, except tax and securities fraud. These have separate whistleblower programs in the federal system. However, some states, in particular New York, allow fraud involving tax claims to be prosecuted under their FCA statutes. While many states simply do not bar the inclusion of fraudulent tax practices in qui tam actions, in 2010 New York amended its FCA statute to specifically include these types of claims. The amendment has since resulted in the State of New York pursuing companies like Sprint-Nextel (underpaid sales tax) and Vanguard (income shifting to reduce tax liability) among others.
Most recently, the Attorney General of New York announced the largest tax whistleblower recovery in its history. In a case against an Alabama-based investment management company with operations in New York City and State, the Attorney General’s office obtained a $40M settlement based on the state’s False Claims Act statute. The allegations revolved around the hedge fund claiming it owed no New York state taxes despite it deriving significant income from operations there.
The Texas FCA Statute
Texas does not include tax claims as part of its whistleblower program. In fact, the False Claims Act statute in Texas is limited to fraud involving Medicaid or other state healthcare funds. As with other state FCA actions, claims in Texas can be brought as part of a consolidated action under the federal False Claims Act if the case involves healthcare funds.
Any entity that touches funds related to the government must be aware of statutes that allow recovery for fraud. The federal False Claims Act is the most well-know of the whistleblower programs; however, as noted above the same statutory framework exists for tax and securities fraud, including the significant damages and harsh penalties. Additionally, defendants may also face state claims in a consolidated action or separately as seen in the example above of the hedge fund settling for unpaid state taxes. Government contractors and entities in the healthcare industry have long been targets of qui tam suits; however, with the inclusion of tax claims at the state level in places like New York and Illinoise, companies (even if they are not domiciled but are doing business there) should be increasingly diligent in understanding and complying with state and local tax laws.
Kristi Morgan Aronica, Attorney