Sprint’s recent $330 million settlement with the New York State Attorney General’s Office set a record for the largest settlement for a single state under a state’s false claims law.
The settlement, announced Dec. 21, resolved a “qui tam” lawsuit that alleged Sprint failed to collect state and local taxes on wireless phone calls from 2005 to 2014. The carrier was required to do so under a tax law enacted by New York in 2002.
The whistleblower, who filed the qui tam lawsuit under the New York False Claims Act, received a $62.7 million award for reporting the fraud and assisting the government in its investigation.
The New York State Attorney General’s Office said its investigation revealed that Sprint was aware of the tax collection law and knew that the law applied to certain wireless phone plans offered by Sprint. Despite this, Sprint declined to collect and pay taxes on the plans until 2014, when it began complying with the law. New York lost out on over $100 million in taxes during that time period as a result.
The New York False Claims Act differs from many other states’ false claims laws and the federal False Claims Act in a major way: Unlike those statutes, the New York law allows whistleblowers and the government to prosecute state tax violations. Prior to the Sprint settlement, in 2015 New York recovered $40 million in a settlement with Harbert Management Corp. for allegations of tax fraud. While several other states’ false claims laws permit tax claims to varying degrees, New York has been the most aggressive in pursuing such cases.
New York amended its False Claims Act in 2010 to allow whistleblowers to bring claims for tax code violations. The amendment removed the bar that had previously excluded tax claims and set thresholds for the kinds of tax claims permitted. The federal False Claims Act and some states’ laws specifically exclude tax claims. Some states’ laws fail to mention tax claims, leaving the door open for potential claims. Other states allow limited actions or set thresholds for tax claims, similar to New York. However, only New York has embraced the prosecution of tax frauds under its False Claims Act with aggressive enforcement of its law.
The IRS has a whistleblower program that offers rewards to whistleblowers who report federal tax fraud that exceeds $2 million. However, the IRS program has failed to reach its full potential and has faced criticism for its resistance to working with whistleblowers. And unlike the federal False Claims Act and similar state laws—including New York’s—the IRS program does not offer whistleblowers protection from retaliation.
Several jurisdictions have recently considered adding tax claims to the scope of their false claims acts. At the end of 2018, the District of Columbia Council held hearings on a bill to amend D.C.’s False Claims Act to allow reporting of tax fraud. Previous attempts to add tax claims in 2013 and 2016 failed. Several states, including Michigan and Arkansas also have recently considered adding tax claims to their false claims laws, while Pennsylvania considered a Protection Against Fraud Act that does not bar whistleblower from reporting tax fraud, but does not explicitly mention tax suits. Illinois has also considered several bills in the past few years that would change the current treatment of tax-related claims under its false claims law. So far, none of these efforts have succeeded.
More states should consider amending their false claims laws to permit tax claims to encourage and reward whistleblowers to report tax fraud. Whistleblowers would provide states with important information about tax fraud and assistance in investigations. As New York’s track record in tax recoveries under its False Claims Act indicates, states that exclude tax claims from their false claims laws are leaving money on the table.