A disturbing trend is developing in state and local taxation: the use of false claims acts (FCAs) with qui tam provisions as a basis for challenging taxpayers’ tax return filings. On April 19 the New York state attorney general unsealed a $300 million FCA lawsuit against Sprint-Nextel Corp. (and related companies) for allegedly undercollecting and underreporting sales tax on flat rate plans. Furthermore, law firms in Illinois, at times with support from the state, have actively pursued FCA lawsuits against taxpayers claiming undercollection of sales taxes on Internet purchases and shipping charges.
FCA and qui tam actions vary, but generally impose significant penalties for ‘‘knowingly’’ failing to comply with a state (or federal) law. As discussed below, New York’s FCA imposes treble damages — tripling allegedly due taxes — in addition to other penalties. Moreover, New York’s FCA contains an expansive, 10-year statute of limitations.
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