Earlier this month, the District of Columbia Council passed an amendment to its False Claims Act, which extended the Act to include tax-related claims. Under the amended D.C. False Claims Act, violations may be alleged against persons and entities filing taxes in D.C.: (1) that report at least $1 million in income and (2) that understate tax liability or seek a tax refund resulting in damages of $350,000 or more. D.C. joins only two states—New York and Illinois—that authorize tax fraud claims under their False Claims Acts; even the federal False Claims Act expressly excludes tax-related false claims. In 2015, New York’s largest-ever qui tam recovery was made under its False Claims Act tax provision, when Sprint paid $330 million to settle claims that it had fraudulently avoided its obligations to collect and pay state and local taxes on certain wireless phone plans. If enforcement in New York is any indicator of what to expect in D.C., large District taxpayers should beware. Below are the three primary ways the D.C. amendment could expand your tax-related liability.
- Effectively extends the statute of limitations for tax fraud claims to ten years.
Ordinarily, claims related to the amount of tax imposed by the D.C. government must be filed within three years of the return at issue. However, the statute of limitations for false claims is ten years after the date on which the violation occurs. Therefore, the D.C. False Claims Act allows the attorney general and qui tam plaintiffs to reopen tax periods that are currently closed for assessment under the general D.C. tax laws. Notably, as drafted, the amended False Claims Act will apply immediately and retroactively upon becoming law.
- Increases the amount of potential damages for a tax-related claim by imposing treble damages.
The D.C. False Claims Act allows courts to impose treble damages for violations of the Act. Therefore, taxpayers facing claims under the False Claims Act may be held liable not only for the taxes actually due to the D.C. government for the relevant tax periods, but also for a penalty three times that amount.
- Expands enforcement authority of tax-reporting violations by allowing private citizens to file qui tam
The amended False Claims Act authorizes private citizens to file complaints against taxpayers for tax fraud in a qui tam action. Private citizens are limited from filing claims that are already being investigated or audited by D.C.’s chief financial officer. Still, qui tam plaintiffs may be highly motivated by the opportunity to receive 15-30% of any amount recovered in the False Claims Act proceeding. Coupled with the potential for treble damages, this financial incentive will likely create a “cottage industry” of firms seeking opportunities to file tax-related false claims against District taxpayers.
PilieroMazza will continue to monitor the amended D.C. False Claims Act as it is considered by Mayor Muriel Bowser, reviewed by Congress, and likely implemented in January 2021. If you have questions about how the amended D.C. False Claims Act could impact you, contact Camilla Hundley, the author of this blog, or another member of PilieroMazza’s Litigation & Dispute Resolution Group or False Claims Act Group.