Last week, the Multistate Tax Commission (the “MTC”) conducted its 2015 Winter Committee Meetings in Kansas City, Missouri. Among the agenda topics were model provisions concerning the application of consumer class action and False Claims Act (“FCA”) statutes to state and local tax matters. The MTC’s Uniformity Committee, which has been assigned to the project, is debating whether it should base its model “whistleblower” provisions on the Internal Revenue Service Whistleblower Office or FCA statutes such as those that have been adopted in Illinois and New York. The IRS Whistleblower program is considered to be an “administrative audit” model, while the Illinois and New York approaches incorporate qui tam provisions and reflect a “litigation” model of tax enforcement.

At the Uniformity Committee meeting, Reed Smith’s Adam Beckerink and Jack Trachtenberg presented their insights into the respective advantages and disadvantages of the IRS and FCA models, along with specific examples from their experiences in handling dozens of FCA matters in Illinois, New York and Delaware. They noted the following:

  • Taxpayers that are the subject of FCA lawsuits are often labeled as “frauds” even though most state FCA statutes do not require any showing of an intent to defraud the government.
  • Tax statutes are frequently ambiguous and should not be enforced through FCA lawsuits because reasonable minds can disagree on how the law should be interpreted.
  • FCA lawsuits usurp the authority of the state departments of revenue by allowing private citizens to pursue financial gain for alleged tax violations.
  • FCA lawsuits may create a disincentive for taxpayers to cooperate with auditors during a traditional Department of Revenue audit and may make some taxpayers reluctant to disclose and remedy past tax filing errors through voluntary disclosure and tax amnesty programs.
  • FCA lawsuits upset the traditional administrative audit and appeals processes, thereby subjecting taxpayers to expensive and time consuming public court proceedings where their tax, business or personal matters are not protected by taxpayer secrecy statutes.
  • In the context of sales and use taxes, the threat of FCA lawsuits often puts taxpayers in the untenable position of having to determine whether they should collect tax under an ambiguous taxing provision and risk being subject to a consumer class action lawsuit or forego collecting tax and risk being sued under an FCA statute.