If you knew of a major corporation that was defrauding the federal government out of $100 million in taxes, could you bring a qui tam case under the federal False Claims Act?
No.
Why not?
There is a loophole in the federal law prohibiting a whistleblower from bringing a tax qui tam case.
If you knew of a major corporation that was defrauding the state of New York out of $100 million in taxes, could you bring a qui tam case under New York’s False Claims Act?
Yes.
New York closed the tax loophole in its state False Claims Act case in 2010.
And in fact, a whistleblower brought such a case. And earlier this year, Eric Schneiderman, the Attorney General of New York intervened in that case against Sprint-Nextel Corp. for deliberately under-collecting and underpaying millions of dollars in New York state and local sales taxes on flat-rate access charges for wireless calling plans.
If the state of New York recovers the $100 million, the whistleblower stands to pull in a bounty worth anywhere from $15 million to $25 million.
You mean New York’s False Claims Act is tougher than the federal False Claims Act?
Yes.
To gain some insight as to how this came about, we called on Gregory Krakower.
Krakower is Attorney General Schneiderman’s senior advisor and counselor.
“Whistleblowers have been so effective in fighting Medicaid fraud and defense contracting fraud and fraud against educational programs under the False Claims Act,” Krakower told Corporate Crime Reporter in an interview last week. “So we thought – why a loophole for tax cheats? It was something we thought we could fix.”
“The False Claims Act is universally accepted as the most effective tool governments have in fighting fraud. So, why keep this loophole?”
“We all wanted to close this loophole. And it was closed.”
“If something works for fraud type A, it’s probably going to work for fraud type B. People who opposed this law argued – tax frauds are so complicated, why would anyone want to get involved with tax frauds?”
“That’s exactly why a whistleblower law was so important for tax frauds. Who better could untangle and explain to enforcement officers the complicated schemes in tax fraud than a whistleblower?”
The Internal Revenue Service has a whistleblower office now. Whistleblowers can go to the IRS and file a complaint. But if the IRS decides not to take the case, the whistleblower case is done. There is no qui tam provision – the whistleblower can’t proceed without the IRS.
“But at the time this legislation was being passed in New York (2010), the results from that IRS program were considered disappointing by both False Claims Act lawyers and key members of Congress,” Krakower said. “And one reason it wasn’t effective in our opinion was that they didn’t do what we did here in New York. They didn’t have a qui tam.”
“Under the qui tam provision, where some whistleblower has the power to sue on behalf of the government, that means if the government doesn’t go after the fraud, or the government doesn’t take it seriously, or the government puts it in a box, the whistleblower gets to do it on behalf of the government.”
“And that creates a powerful dynamic. And responsible prosecutors say – aha, I can team up with the whistleblowers. And even if you have a prosecutor who doesn’t want to focus on civil fraud against government programs, they know that if they don’t, it’s not optimal to have someone take over your job for you. Not to mention that a whistleblower will get a larger recovery in a qui tam if the government doesn’t intervene.”
Krakower says there are thresholds built into the law.
To be a whistleblower in a tax whistleblower case in New York, the defendant has to have at least $1 million in income and deprive the state of at least $350,000 in revenue.
“So, we are looking for large scale corporate tax schemes,” Krakower said.
“And that was done to prevent this office from being flooded with cases about your neighbor’s nanny, or routine divorce cases, and to protect defendants from frivolous lawsuits.”
“The thresholds have been very successful.”
“As a result, we’ve gotten a number of cases, but we’re not flooded. And this office wants to go after large scale corporate tax cheats, or very well off – millionaire – tax cheats.”
“What is more complicated than telephone taxes? Not much. Telephone taxes are fairly complicated. And a whistleblower came in alleging that Sprint had determined that 25 percent of its flat rate charges to New Yorkers – the monthly charge – was not taxable.
And our complaint alleges they did this secretly. And we allege they did this in a way that none of its other competitors – not AT&T, not T-Mobile – nobody was doing.”
“The law is fairly clear. Your flat rate charges are taxable. And this was a sales tax case. So, Sprint was not collecting or remitting sales taxes to the tune of about $100 million.”
“The great thing about this case is that it’s not just a case about taxes. It’s also a case about business integrity and fair competition. Sprint’s alleged motivation for this was that it put them at a competitive advantage to their other competitors, because they didn’t charge customers sales tax that they should have been charging.”
“And obviously, $100 million in revenue – that’s a lot of schools, teachers, government programs that could have been funded in times of tight budgets. And this was a fraud against New York state and local governments.”
“We have intervened in that case. And it is in litigation now so everything I have said are mere allegations. But anyone who was asking whether this tax provision could be implemented – they have to look at Sprint. This is a groundbreaking case.”
[For the complete q/a transcript of the Interview with Gregory Krakower, see 26 Corporate Crime Reporter 47(13), December 3, 2012, print edition only.]