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New York tax whistleblower case recovers record $40 million for state

A $40 million settlement in New York was the largest tax whistleblower case in state history.

New York is the only state with a law that explicitly allows for tax-related whistleblower lawsuits, and its decision to include tax fraud and evasion under the state False Claims Act is paying off in a big way.

The New York State Attorney General announced earlier this month that with the help of a whistleblower, it reached its largest ever settlement for tax fraud under the state False Claims Act.

The $40 million settlement with Alabama-based Harbert Management Corporation involved a “brazen and deliberate decision to avoid paying millions in taxes owed to New York State,” according to New York Attorney General Eric Schneiderman. New York’s False Claims Act had been amended in 2010 specifically to include tax claims.

A whistleblower alerted the New York Attorney General’s office to the alleged fraud in 2015 by filing a NY False Claims Act case against Harbert Management. Harbert allegedly failed to pay taxes on profits generated by a $26 billion hedge fund, Harbinger Capital Partners, which it sponsored. Harbinger, located in New York, did not apportion any income from its performance fees to New York State, according to the Attorney General. When a fund operates in both New York and other states, it is required to pay taxes on the business generated in New York.

After investigating the matter, the state said Harbert failed to pay New York state taxes on profits from 2004 to 2009—despite its compliance department advising the company that taxes were owed. Not only did the company’s state tax returns fail to apportion any income to New York, according to the investigation, but on several occasions they did not even acknowledge that a New York office existed.

Of the $40 million recovered by the state, $8.8 million was awarded to the whistleblower, who remains anonymous.

While 35 states have state False Claims Acts, only New York’s FCA explicitly allows for tax-related whistleblower suits, although some other states have FCA statutes that implicitly allow tax matters. And although the IRS has a tax whistleblower program, that program is focused on federal — not state — tax evasion, and can be a slow-moving process for whistleblowers.

Financial fraud, such as tax evasion or illegal tax shelters, is particularly hard to detect without the help of knowledgeable, well-placed insiders. Having state False Claims Acts that explicitly include tax fraud encourages these insiders to come forward. The growing success of the New York FCA’s tax cases should cause state legislatures to consider explicitly adding a tax provision to their states’ False Claims Acts.

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