Under the federal False Claims Act (FCA), and in those states that have adopted their own version of the Act, private individuals and companies, known as relators, with inside knowledge of fraud against the government can sue the offender on the government’s behalf. Unlike the federal FCA, however, several states, including New York and Illinois, do include tax claims as part of qui tam actions.
Why does this matter? In states that do not bar the pursuit of unpaid taxes under state FCAs, there has been an increase in tax litigation. As a result, this has allowed for significant monetary recoveries for relators who alleged that taxpayers fraudulently failed to collect or pay taxes. Recently, for example, Bristol-Myers Squibb Co. paid $6.2 million to settle a qui tam tax case alleging that a former medical imaging subsidiary knowingly evaded New York state and New York City corporate income taxes.
In another example, in an FCA case currently pending in New York, Sprint Nextel Corporation is defending a $300 million qui tam lawsuit in which the relator alleges that Sprint Nextel deliberately did not collect state or local sales taxes on access charges for wireless calling plans. Sprint Nextel has unsuccessfully tried to dismiss the lawsuit, most recently in the New York Appellate Court, arguing that it did not knowingly violate the tax law at issue.
What justification can exist for not including the ability to recover unpaid taxes in the federal or any state False Claims Act? At a time when the government is in need of tax revenue, the laws need to change so that this important tool to the recovery of money owed to the government can be made available to citizens to help collect what is owed.
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