California’s second attempt at establishing a state-based False Claims Act law which allows individuals to bring claims based on tax violations progressed from Assembly Committee to California State Senate earlier this month. A.B. 2570, introduced in February 2020 by Assemblyman Mark Stone (D), aims to remove the tax bar from the state’s existing False Claims Act law. The California bill to allow whistleblowers to report alleged tax fraud passed its first vote. However, a similar bill (AB 1270) was introduced in 2019 but did not succeed.
The California False Claims Act law currently mirrors the federal FCA law and, like the federal law, excludes claims based on tax violations. Individuals can bring federal qui tam lawsuits seeking to recapture fraudulently obtained funds on behalf of the government. However, this power to bring suit on behalf of the government does not extend to controversies related to tax violations. The IRS is solely responsible for the enforcement of tax violations and maintains a highly successful independent whistleblower program. Few states have such a program, and many are seeking to revisit their state FCA laws to include tax violations.
In 2005, New York State adopted a False Claims Act law that broadly covers all types of tax fraud. Thirteen years later, in 2018, New York obtained it’s the largest recovery in single state action when it settled with Sprint, a telecommunications company, after it “knowingly failed to collect and remit more than $100 million in state and local sales taxes owed on its flat-rate wireless calling plans sold to New Yorkers.” The Attorney General of New York recognized the contributions of whistleblowers to the investigation, and the suit was brought under the New York FCA law, bringing considerable attention to the value of eliminating bars to bringing claims based on tax fraud, which were included in the majority of state FCA laws.
Now, California takes another swing at ensuring that tax compliance can be supported by whistleblower participation. AB 2570 sits in the California Senate for deliberation, and negative opinions about the benefits of including tax fraud as actionable misconduct under the state’s FCA law must be considered alongside the success such protections have had in New York and at the Federal level.
Today, whistleblowers who seek to relay information about tax fraud are largely limited to federal reporting programs. The lack of protections and availability of qui tam actions for tax fraud on the state level creates a gap that ultimately deprives state taxpayers of funds that should be rightfully directed to public service and initiatives – which are largely paid for using state monies. Under the current circumstances, where states expenditures are high and tax revenues reduced, it is essential that every tax dollar is properly collected.
As demonstrated in New York, including tax frauds in state FCA laws empowers whistleblowers to help protect tax dollars with a big pay-off for the state. California is the largest state in the United States with the largest tax revenue in the country, a law protecting that revenue will both fortify the state’s ability to collect any fraudulently withheld payments and set a positive precedent for the rest of the United States.
Without state-based FCA protections, whistleblowers who seek to report tax violations should seek an experienced whistleblower attorney to navigate other options. Violations that on the surface may appear to be solely tax related, and therefore excluded from many state FCA laws, may be actionable under other provisions. Remedies will be limited until states adopt FCA laws which include tax fraud provisions, until then, experienced counsel is essential.
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