In today’s society, one of the biggest concerns that every business or individual wants to avoid are lawsuits. Under the False Claims Act (FCA), there is a liability to businesses or individuals who commit fraudulent behavior that impact governmental programs. Most cases resulting from the FCA are in regards to health care, housing and mortgage frauds.
Unfortunately for businesses, there is a higher risk of involvement in a lawsuit due to the Qui Tam provisions of the FCA. The Qui Tam provisions allows informants or “whistle blowers” to bring forth a lawsuit against the business or individual on behalf of the government. Qualified informants must be directly involved and knowledgeable of the fraudulent behavior conducted and must not be from a secondary source. The incentive for informants to come forward is that they will receive a portion of the funds recovered from a successful settlement or judgment (generally 15 to 30 percent of the recovery).
There has been an increasing popularity in Qui Tam cases since 2009. Prior to 2009, Qui Tam cases averaged 300-400 cases per year. For years after 2009, the average rose to more than 600 new Qui Tam cases per year, with 2013 and 2014 exceeding 700. This sudden popularity has created a huge source of revenue for our Government and more incentive for people to try to get a piece of the lawsuit pie.
In fiscal year 2014, $3 billion of the $5.69 billion recovered through the False Claim Act was related to Qui Tam lawsuits. In the same year, the amount awarded to individuals who filed Qui Tam complaints amounted to $435 million.
In fiscal year 2015, $2.8 billion of the $3.5 billion recovered through the False Claim Act was related to Qui Tam lawsuits. In the same year, the amount awarded to individuals who filed Qui Tam complaints amounted to $597 million.
Why does it matter for tax purposes?
Qui Tam actions may include charges of improper sales and use tax collection as well as corporate income tax filing. Improper collection of tax could be a result of erroneous positions on product/service taxability or sourcing conventions.
Approximately 30 jurisdictions have enacted their own FCAs. Some states have limitations on the type of fraud accepted. There are a number of state FCAs which include statutes containing “tax bars” prohibiting Qui Tam actions against allegedly false tax claims – some of which are CA, DC, HI, MA, NM, NYC, NC, TN, and VA. There are also others, like IL, IN, and RI who have a tax bar only with respect to income tax.
A number of states also do not appear to impose any restrictions on a particular type of fraud. These states include DE, FL, NV, NH, and NJ. On the other hand, New York became the first state to explicitly authorize the application of its FCA to tax claims.
As more Qui Tam cases are being filed, businesses and individuals must be even more diligent in properly identifying sales tax issues – particularly in evolving fields, like technology.
