Mississippi is considering qui tam (whistleblower) legislation that would allow whistleblower awards for unpaid state taxes. The federal False Claims Act specifically excludes taxes from the law. Presently New York and Illinois are the only two states that permit such awards and although Illinois excludes income taxes.
So what is the big deal and why does it matter?
To answer the question, a little bit of history is needed. The original whistleblower law was the federal False Claims Act. Passed during the Civil War and signed into law by President Abraham Lincoln, the law is designed to allow ordinary citizens with original source information about fraud against the government to file a lawsuit in the name of the government. The government must investigate the claims and can then decline to intervene or take over the case. For his or her part, the whistleblower (called a “relator”) is entitled to an award of up to 30% of whatever the government collects.
The law was originally passed because the during the Civil War, the federal government simply didn’t have enough money or people to fight fraud. That law is still on the books today and has lead to billions of dollars being returned to hard working taxpayers.
The federal false claims law excludes tax claims, however. For that, there is a separate IRS whistleblower program. Although there have been some very notable successes – UBS whistleblower Bradley Birkenfeld received a $104 million whistleblower award – the IRS does not have a great track record in pursuing claims.
The difference, of course, is that under the False Claims Act the government knows that if it doesn’t pursue the claim, private lawyers might. The IRS is insulated from that pressure. If they ignore the whistleblower information there is nothing anyone can do.
What makes the false claims laws so successful are that they are insulated from politics. The government may decide not to intervene in a whistleblower lawsuit but there is little they can do to stop the relator from pursuing the case.
Recently several states have passed their own whistleblower laws. Many are limited to Medicaid and healthcare fraud. Others are patterned after the federal law and are much broader in scope. As noted above, however, very few state laws reach tax fraud. We think that is wrong.
An attorney for a Chicago law firm recently wrote that some law firms have begun filing frivolous whistleblower suits in Illinois for unpaid or unreported sales tax. Although he cites no specific examples, assuming his observations are correct the solution is to fix the problem by addressing frivolous legal claims. Simply saying that the state tax department should have unfettered discretion as to when and where it wishes to investigate fraud complaints is not a solution. In fact, that does nothing but introduce politics into an already inefficient system.
Recently the IRS has been under scrutiny for its alleged political bias against conservative non-profits. Whatever your political viewpoint, we should all agree that politics has no place in tax administration. Let’s not give political appointees who run most tax departments the last word in which tax fraud complaints get investigated.
Another reason why we don’t want to see tax departments have the final say in who gets audited is resources. While the IRS did a great job in pursuing UBS bank for helping Americans evade taxes, most of the medium tier and smaller whistleblower claims in their inventory are simply ignored. Why? Because the IRS has too few people and too many more important enforcement priorities.
We are not fans of frivolous claims. Although we don’t believe that there are many such claims, we do support addressing lawyers and relators who file them. The bulk of the legitimate claims should either be properly investigated or given back to the relator to enforce privately.
Whistleblowers are the new American heroes. People who stand up to fraud and corruption should be praised and awarded, not ignored because some state tax department doesn’t have the resources.
If you feel that you have inside and original information about fraud against taxpayers or information about a business or person not paying their fair share of taxes, speak with an experienced whistleblower lawyer. Having the right lawyer could mean the difference between a large whistleblower award check and not receiving anything.