Triple the Risk, Triple the Uncertainty: Tax False Claims Act Suits. -

Part one of a two part series -

During a single hearing in March 2016, a Cook County Circuit Judge dismissed over 200 False Claims Act (“FCA”) suits brought by one qui tam relator in Illinois against out-of-state liquor retailers. As states continue to enact FCA statutes (or expand existing FCA statutes to cover tax claims), the proliferation of qui tam litigation has added a new layer of difficulty to managing a corporation’s state and local tax risks. Although the flood gates have not opened everywhere the way they have in Illinois, FCA statutes are quickly becoming a new consideration for state and local tax professionals, above and beyond the normal audit and administrative enforcement mechanisms. FCA actions create uncertainty in the form of new procedures and new parties: they often permit qui tam litigants to bring suits alleging violations of the tax law in the name of the state, and to share in the recovery, giving individuals, known as “relators,” new incentive to file lawsuits raising allegations of fraud. Relators can include not only current and former employees who claim to have inside information, but also mere observers who claim to have uncovered a new theory of liability. In addition to allowing the relator to recover proceeds, FCA statutes have high financial and nonmonetary stakes—they often provide for treble damages and they can result in negative publicity.

As FCA statutes become increasingly common, corporations can be caught off guard by claims alleging tax fraud. Tax practitioners and legislators often debate the policy issues raised by applying FCA statutes to the tax law. Deputizing tax enforcement to citizens and non-tax governmental agencies undermines some of the chief safeguards and policy goals of endowing exclusive authority for execution of the tax laws in a specialized agency with tax expertise. The certainty that comes with well-established procedural mechanisms for tax assessments and appeal rights is thrown out the window in the FCA context—as is a corporation’s established strategy for evaluating its state and local tax liabilities. While a corporation normally can dispute tax assessments within the confines of the confidentiality provided by a normal administrative audit, FCA actions present the added difficulty of litigating tax issues in a public forum. These policy discussions that will continue as states, taxpayers and tax practitioners grapple with the added complexity of tax FCA suits do little to answer the most immediate question a corporation faces in this developing field: what to do when it suddenly faces a multimillion (or even a multibillion) dollar claim that it fraudulently evaded a state or local tax obligation. In the first part of this two part series, we begin to answer that question.