The District of Columbia is moving forward with proposed qui tam legislation that would allow private citizens to file tax actions on behalf of the government, all for a sizable reward—up to 30% of the monetary damages recovered if the law passes.
More frequently referred to as "whistleblower cases", a number of state governments have adopted a counterpart to the federal False Claim Act (FCA) whereby private citizens are monetarily incentivized to come forward and report fraudulent activity that harms the government. While tax claims are still excluded from the federal FCA, certain states have expanded their FCA provisions to include tax. In a District Council member meeting held November 17th, the District became the latest jurisdiction to reconsider the benefit of making tax claims eligible under its FCA.
As introduced by Councilmember Cheh, B23-005 provides that the District's FCA may apply to tax matters if the (alleged) defendant taxpayer reports net income, sales, or revenue totaling $1 million or more in a tax filing and the damaged pleaded in the action total $350,000 or more.
During the Council discussion, proponents of B23-005 advocate that the bill is simply one more tool in the enforcement process and other jurisdictions, namely New York in the Sprint decision, have seen significant results since the passage of amendments to include tax within their respective FCAs. Moreover, in addition to the proposed thresholds, the bill would provide protections for taxpayers by imposing a knowingly false or deliberate fraudulent standard, as well as an exemption for reasonable reliance on an advisor.
Those councilmembers in opposition highlight significant challenges to adoption and effectiveness of the bill including, but not limited to, the following:
- Privacy concerns raised by the District Office of the Chief Financial Advisor (OCFO) regarding the necessity of disclosing federal information in a FCA case;
- Similar to New York and Illinois, the broadening of the FCA will encourage law firms to bring voluminous qui tam cases for the chance at recovery—resulting in a drain on resources at the Office of the Attorney General (OAG) and the Office of Tax & Revenue (OTR);
- Reputational & financial damage done to business in defense of frivolous claims;
- Responsibility of identifying and prosecuting cases already lies with the OAG and OTR; and
- The Multistate Tax Commission (MTC), of which the District is a member, strongly opposes the tax enforcement role being placed on those outside the relevant tax agency.
Irrespective of those challenges, in an 8-5 vote, the District Council approved the bill to move forward to a second reading to be held December 1, 2020. If approved, the bill will be sent to the Mayor for approval or veto.
In the current budgetary environment for states, passage of qui tam legislation—often viewed by legislatures as a revenue neutral provision, may be on the rise. In that process, careful consideration must be given to the benefits and burdens such legislation derives
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.