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California considers tax whistleblower program

California state officials are moving to incorporate tax fraud into the state’s False Claims Act.

In an effort to empower whistleblowers to pursue tax fraud and help California bridge its “tax gap” of unpaid taxes, California state officials are moving to incorporate tax fraud into the state’s False Claims Act.

Proposed legislation introduced last month would incentivize whistleblowers with information about substantial tax fraud against the state of California to come forward.

The bill, AB 2570, authorizes the California attorney general and certain prosecuting authorities to pursue tax fraud cases under the state’s False Claims Act. This means that entities found liable for tax fraud under the California False Claims Act could have to pay up to three times the amount owed plus penalties.

Only claims where the damages alleged exceed $200,000 and the income, gross receipts or sales at issue in the matter exceed $500,000 for any taxable year could be pursued under the proposed changes to the False Claims Act. The provision would apply to claims, statements or records made after Jan. 1, 2021 and is not retroactive. The bill also includes provisions for protecting certain confidential tax information.

Whistleblowers who report California tax fraud

Whistleblower cases alleging tax frauds that meet these thresholds would proceed like other qui tam actions under the California False Claims Act. Whistleblower rewards would range from 15 percent to 33 percent, and whistleblowers would have the option to pursue a case on their own to recover funds on the state’s behalf if the government does not pursue the case.

Whistleblowers reporting tax fraud would be subject to protections under the California False Claims Act provisions prohibiting retaliation for blowing the whistle. Whistleblowers who are retaliated against may sue for reinstatement, doubled back pay, additional damages and punitive damages where appropriate.

In addition to the expanding the False Claims Act’s coverage to tax fraud, the proposed amendment also expands the prohibition on retaliation against whistleblowers generally to protect them not only from retaliation affecting the terms and conditions of employment but also from other harms by an employer or contractor.

Over the past decade, the Golden State has seen an increasing “tax gap” – the difference between the amount the state is owed and the amount it collects. The number has ballooned to approximately $20 billion in 2020.

California Attorney General Xavier Becerra and Assemblymember Mark Stone proposed AB 2570 last month. The bill was referred to California’s Judiciary Committee and Committee on Revenue and Tax earlier this week.

“The California False Claims Act has been an effective tool at revealing, deterring, and punishing those who defraud the government of public funds,” said Stone in a statement. “AB 2570 will expand and improve upon this law, allowing California to better protect public dollars and combat fraud against the state and local governments.”

Insiders are often the only way government prosecutors and auditors can learn about frauds costing the government millions and billions of dollars.

State tax whistleblower laws

Many states have laws modeled on the federal False Claims Act. They empower whistleblowers to bring lawsuits on behalf of the state government and share in a portion of funds recovered. In many cases, the laws specifically target healthcare fraud. The New York False Claims Act also covers state tax violations.

Currently, 29 states, the District of Columbia and Puerto Rico have false claims laws that offer whistleblower rewards. The California False Claims Act has been one of the most successful state whistleblower laws in the country.

Before filing a whistleblower claim, whistleblowers should consider consulting with an experienced whistleblower lawyer to understand the opportunities and risks that could be involved in their cases. (See Choosing a whistleblower lawyer.)

If you are aware of fraud against the federal or state governments, including tax fraud, and would like to know your options, contact Phillips & Cohen for a free, confidential review of your matter.

About Phillips & Cohen LLP

Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from our cases totaling over $12.3 billion. We have been recognized for our work by numerous national awards. Our attorneys and cases have been in The New York Times, The Wall Street Journal, the Financial Times and other news media. Three of our cases were featured in the CBS series, “Whistleblower.” Phillips & Cohen’s roster includes former federal prosecutors, the first head of the SEC Office of the Whistleblower, a former deputy administrator of the Centers for Medicare and Medicaid Services, the author of a leading treatise on the False Claims Act and attorneys with decades of experience representing whistleblowers.


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