The federal government and most state governments value qui tam litigation as a helpful mechanism to curb various types of fraud. Qui tam litigation may be more popularly understood as “whistleblowing”—where a private party, motivated at least in part by a monetary reward, reports another party’s fraud and files suit on behalf of the government. However, even though tax fraud is widely known to cost billions of dollars every year, the federal government – and the vast majority of state governments — expressly exclude tax fraud from their False Claims Acts (i.e. their codified qui tam provisions). While the federal government has attempted to address this exclusion with its Whistleblower Program, only a very small number of states’ False Claims Acts permit an individual to blow the whistle on alleged tax fraud.
On November 17, 2020, members in the Council of the District of Columbia propelled a bill further along in the legislative process which, if ultimately enacted, would expand false claims liability to include certain tax-related actions.1 Practically speaking, this means that private citizens of the District, acting as whistleblowers, could potentially receive a substantial monetary reward for filing tax fraud actions on behalf of the government against large taxpayers. Unlike a number of its failed predecessors over the past few legislative sessions, this bill has made it to the final reading—scheduled to occur in early December 2020. And, if enacted, although the government may indeed see greater tax compliance without a corresponding increased enforcement burden on its part, there are legitimate concerns that it will create a rise in indiscriminate and frivolous litigation targeting D.C. taxpayers—especially those doing business in the District.
Like the federal government’s and many states’ false claims acts, the District of Columbia’s False Claims Act2 permits a private party to file an action on behalf of the government against a party or parties who allegedly engaged in fraudulent activity against the government. Specifically, according to D.C. Official Code §2-381.03(b), “[t]he action shall be brought in the name of the District. The person bringing the action shall be referred to as the qui tam plaintiff.”
Over the years, however, the District’s False Claims Act has not applied to “claims, records, or statements made pursuant to those portions of Title 47 of the District of Columbia Official Code that refer or relate to taxation [emphasis added].”³ This stance comports with the vast majority of jurisdictions across the country which do not allow tax-related false claims actions.
If the bill is passed, the District will belong to a very small number of states that have only recently shifted their longstanding policy of leaving tax enforcement exclusively in the hands of state tax/revenue agencies to empowering private individuals with the ability to pursue tax cases.
The express purpose of the District’s pending bill is “to expand false claim liability to certain false claims made pursuant to those portions of Title 47 of the District of Columbia Code that refer or relate to taxation.”⁴ The bill would accomplish its purpose by amending D.C. Official Code §2-381.02(d) so that the longstanding language excluding taxation is revised to read as follow:
This section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 of the District of Columbia Official Code that refer or relate to taxation, unless the person making any such claim, record, or statement reported net income, sales, or revenue totaling $1 million or more in a tax filing to which that claim, record, or statement pertained, and the damages pleaded in the action total $350,000 or more.”
In other words, if passed, the District would allow tax-related false claim actions if the false claimant reported net income, sales, or revenue totaling at least $1 million and the purported damages total at least $350,000.
Depending on whether or not the District’s Attorney General intervenes in the suit, the whistleblower could receive between 15% – 30% of the amount ultimately recovered.⁵ And considering that a taxpayer may end up paying treble damages—the whistleblower could be looking at a substantial amount of money.⁶
Again, the District’s False Claims Act does not currently authorize private, profit-motivated citizens to bring tax-based false claims actions. However, the District’s pending bill has gained a momentum which its predecessors failed to achieve. On one hand, if passed, the results could range from: (1) increased tax compliance; (2) large monetary recoveries for the District; (3) citizens pocketing considerable monetary rewards. On the other hand, it could open a can of worms, including: (1) a rise in indiscriminate and frivolous litigation targeting D.C. taxpayers—especially those doing business, and (2) an unsettling atmosphere of uncertainty where tax law enforcement, administration, and interpretation no longer solely rest in the hands of the District’s tax agency.