Senator Ben Allen (D-Santa Monica) recently introduced California Senate Bill 799 (SB 799), which would expand California’s False Claims Act (CFCA) to tax fraud, which the Act does not currently cover. The CFCA authorizes California’s Attorney General and local prosecutors, as well as private whistleblowers, to go after fraud against the State and local governments. The CFCA has returned hundreds of millions of dollars to the State, with the majority of settlements involving fraud against Medi-Cal, California’s Medicaid system. Extending the Act to tax fraud could have an even bigger impact. The State of California Tax Franchise Board estimated that in 2023, the tax gap in California—that is, the difference between taxes owed to the state and taxes voluntarily paid—was approximately $25.5 billion.
The Office of the Attorney General, who supports the bill, observed that, “Fraud and false claims against the government rob our communities of funding necessary to support essential public services, such as improving our schools, providing healthcare, increasing public safety, and fixing our roads. SB 799 seeks to aid the discovery and civil prosecution of hard-to-find cases of tax fraud by incentivizing whistleblowers to come forward and report egregious cases of fraud.”
The proposed expansion of the CFCA follows the model of New York State, which extended the New York False Claims Act in 2010 to cover tax evasion. New York’s inclusion of a tax provision in its False Claims Act has proven very successful, leading to the recovery of roughly $588 million. For example, in 2021, as the result of a whistleblower initiated matter, New York announced a recovery of $105 million owed in back taxes. That case involved allegations that Hedge Fund Manager Thomas Sandell and his company Sandell Asset Management Corporation (SAMC) had recognized over $450 million in fees for services performed in New York but failed to pay the taxes owed. In 2018, as the result of another whistleblower initiated case, Sprint Corporation paid $330 million to resolve allegations that it had failed to collect required sales taxes.
Under both the New York provisions and SB 799, private whistleblowers who bring successful cases are entitled to an award based on a percentage of the government’s recovery. Under the CFCA, rewards range between 15 and 33 percent. Since the expansion of the New York False Claims Act, New York has paid out awards of approximately $112 million to whistleblowers who brought cases under the law, according to the Anti-Fraud Coalition. To protect confidential tax information, SB 799 would provide that whistleblowers who pursue tax claims under the CFCA on behalf of the State would not have access to otherwise confidential records relating to taxes or other obligations under the State’s tax code.
Like the New York False Claims Act’s tax provisions, SB 799 is designed to focus on significant tax evasion. Under New York’s law, in order to pursue a tax claim, a potential defendant’s net income or sales must equal or exceed $1 million and result in underpayments of at least $350,000. California’s proposed law also has a minimum threshold. A case may only be brought if the potential defendant must have taxable income, gross receipts, or total sales exceeding $500,000 per taxable year, or damages from the fraud exceeds $200,000.
In addition to New York, the District of Columbia, Illinois, and Guam have false claims acts that explicitly authorize claims for certain tax violations, although Illinois excludes claims based on income tax evasion. Indiana, Rhode Island, Delaware, Hawaii, Nevada, and New Hampshire permit tax-related False Claims Act cases because their statutes do not bar them; however, these states’ false claims acts do not have specific provisions addressing tax fraud claims. The federal False Claims Act expressly excludes cases based on violations of the Internal Revenue Code, although the IRS has a whistleblower program and pays between 15 to 30 percent of the proceeds collected and attributable to the whistleblower’s information.
The CFCA has been very successful in redressing other areas of fraud, resulting in over $2 billion in recoveries to the State since 2001, with most of the cases brought by whistleblowers. The expansion of the law to tax cases would address a significant enforcement gap.
Phillips & Cohen attorneys have extensive experience in whistleblower cases brought under the federal and state False Claims Acts and the IRS whistleblower program. If you would like to speak to an experienced whistleblower attorney, contact Phillips & Cohen for a confidential review of your case.