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Presented by Hodgson Russ, the Whistleblower Blog is written by a team of lawyers experienced in successfully guiding both whistleblowers and companies accused by whistleblowers of wrongdoing through the False Claims Act process.

As COVID-19 Strangles State Revenues, Some Legislatures Move to Ax the Tax Bar

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Over its 200-year history, the federal False Claims Act (“FCA”) has saved the federal government billions of dollars in false claims for payment. But one type of false claim remains off limits in federal courts. A provision of the federal FCA known as the “tax bar” prohibits suits based on failure to pay federal taxes. See 31 U.S.C. § 3729(d). Whistleblowers who uncover federal tax fraud are limited to the Internal Revenue Service’s whistleblower program.

Many states have enacted their own FCA statutes. These laws typically are modeled on the federal FCA, and so include a tax bar. Some states, however—including New York and Illinois—permit state FCA actions based on failure to pay state income, sales, or other tax. By jettisoning the tax bar, these states have extended the efficiencies of crowd-sourced compliance mechanisms like the FCA to an area (tax law) that is ripe for abuse. This decision has paid off handsomely for New Yorkers: according to Bloomberg Tax, tax-based FCA actions have netted the state nearly $470 million since 2010, a return on investment of more than 3300%.

New York’s aggressive fraud-fighting tactics may be gaining popularity. In 2019, legislatures in California (A.B. 1270), Michigan (H.B. 4875), and Washington, DC (Bill 23-0035) introduced bills that would allow tax-based FCA suits. A new California bill (A.B. 2570) was introduced earlier this year. Such efforts to protect the public fisc resonate now more than ever, as the COVID-19 pandemic dries states’ revenue streams.

Amid this shifting legislative landscape, whistleblowers with knowledge of multi-state tax-dodging schemes should consult with experienced counsel to determine where their claims can be heard.

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