Tax Enforcement Needs Qui Tam Lawsuits

Today’s Op-Ed guest post comes from Eric L. Young and James J. McEldrew, III, who are partners at the Philadelphia law firm McEldrew Young. The firm focuses on various types of complex litigation, including whistleblower suits.  Attorney Young represented the first whistleblower award recipient under Section 7623(b).  Attorney McEldrew has represented many clients in whistleblower claims, and previously served as President of the Philadelphia Trial Lawyers Association.  In this post, Messrs. Young and McEldrew argue that the current tax whistleblower regime is insufficient, and allowing qui tam suits under the FCA or similar statute could decrease fraud and help the nations bottom line.  Stephen

President Trump introduced his tax proposal, which includes a deep reduction in business tax rates with a 15% flat tax for all businesses, in April.  After the announcement, the Wall Street Journal reported that the plan would decrease government revenue by $288 billion in its first year.  The Trump administration can offset this decline and make these tax cuts more palatable with a stronger enforcement scheme built on qui tam lawsuits from tax whistleblowers.

A qui tam lawsuit is an enforcement action initiated by an individual on behalf of the government.  It is a shortened version of a Latin phrase that can be translated as “[he] who sues in this matter for the king as well as for himself.”  Qui tam lawsuits are the primary mechanism for enforcement of the False Claims Act, the nation’s leading tool in the fight against fraud.

However, the Federal False Claims Act specifically excludes tax claims.  It “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”  31 U.S.C. 3729(d).  Most states have followed the lead of the United States and barred qui tam lawsuits over tax claims.

In 2006, Congress chose to create the IRS whistleblower program to funnel tips about tax noncompliance to the IRS rather than extend the False Claims Act to tax evasion.  Since the establishment of the IRS Office of the Whistleblower, the IRS has received thousands of tips and whistleblowers have helped the IRS collect more than $3 billion in taxes.  The Dodd-Frank whistleblower programs at the SEC and CFTC were modeled after the IRS program.

However, the IRS program has fallen short of expectations to this point.  Senator Chuck Grassley, the nation’s leading advocate in Congress for whistleblowers and the author of the 2006 provisions that created the section 7623(b) program for tax noncompliance over $2 million, criticized the “trickle” of whistleblower payments in 2015.  Grassley blamed slow processing of tips, insufficient communications with whistleblowers and hyper technical arguments made to justify denying awards.


If handled properly, whistleblowers could be a boon for the IRS.  Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said recently in a press release, “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”  The SEC has already paid out $150 million to 43 whistleblowers.

One problem with the IRS whistleblower program is that it relies exclusively on government enforcement and enforcement actions are expensive. Earlier this year, Aitan Goelman, the former head of enforcement at the CFTC, told Reuters that the derivatives regulator had to triage cases because of a lack of resources.  In the interview, he cited two cases that would have used up half of the 2017 operating budget for CFTC enforcement if they were taken to trial.

Like the CFTC, the IRS has had to make due with limited budget resources recently.  Since 2010, Congress has cut the IRS budget by approximately $2.4 billion.  Adjusted for inflation, that is a 17 percent decrease from its 2010 budget.  The decrease in funding has translated into 13,000 fewer employees enforcing the tax laws and providing taxpayer services.

Tax noncompliance is a serious problem and limited resources only make it worse.  Between 2008 and 2010, the estimated average annual tax gap – the difference between total taxes owed and collected – was $406 billion. The number has likely increased since then. In 2016, the total number of tax audits of individuals fell for the fifth year in a row.  The IRS’ Large Business & International (LB&I) Division is also undergoing a significant makeover.  Driven by resource constraints and personnel reductions, it is moving to issue-based examinations.

Ten years after the creation of the IRS whistleblower program, the time is ripe for improvements. In March, Senators Grassley and Ron Wyden proposed the IRS Whistleblower Improvements Act of 2017 to (1) enhance communications between the IRS and whistleblowers; and (2) provide anti-retaliation protections for tax whistleblowers.  These changes could be bolstered by allowing qui tam lawsuits.

For the past few years, New York State has led the charge against tax evasion through whistleblower usage of its qui tam statute.  New York has one of the only False Claims Act laws to allow the recovery of taxes through a qui tam lawsuit after it amended its statute in 2010 to allow them.  New York targeted large scale corporate tax schemes, requiring the defendant to have more than $1 million in income and have deprived the state of more than $350,000 in revenue.

On April 19, 2017, New York announced the largest settlement ever of a tax claim initiated by a whistleblower under its False Claims Act.  The $40 million settlement covered unpaid taxes, penalties, and interest on hundreds of millions in income which hedge fund Harbinger Capital Partners did not report to New York State between 2004 and 2009.  New York paid the tax whistleblower $8.8 million for bringing the matter to the attention of the State.

The IRS could operate more efficiently with its limited resources if it adopted the New York approach and utilized qui tam lawsuits for tax noncompliance.  The IRS is already outsourcing more services than it ever did before.  In a controversial move, the IRS hired law firm Quinn Emanuel in May 2014 to serve as a litigation consultant in an audit of Microsoft.  More recently, it is about to outsource debt collection to four private companies to recover money owed by hundreds of thousands of people.

Qui tams are already used to fight billions of dollars in Medicare and Medicaid fraud annually.  The system perfected in the fight against fraudulent claims for payment could be adapted and used to recover unpaid taxes as well.  When the United States concludes that it does not have the time or resources to expend in pursuit of tax evasion, the whistleblower and their counsel could pursue collection of the tax on behalf of the United States.

If the IRS had unlimited resources, there would be no need for qui tam lawsuits.  However, it does not.  Budgetary shortfalls demand nimble and thoughtful approaches to regulatory enforcement.  In 1986, Congress recognized that government spending was fraught with problems and strengthened the public-private partnership between the government and whistleblowers.  It must do so again now with tax evasion and whistleblowers.

The False Claims Act is America’s most important tool to fight fraud against taxpayers. Congress and more state legislatures should put its terms to use in the fight against fraud by taxpayers.