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Whistleblowing Under State False Claim Acts

10 Oct 2012

Much has been written in recent weeks about the $104-million windfall that Bradley Birkenfeld, a former UBS employee, received under the federal Whistleblower Act for divulging to the IRS massive avoidance of federal income taxes by US citizens with Swiss bank accounts, a practice that the whistleblower himself participated in. Taxand USA explores the rise of whistleblowing in tax cases and the legislation which incentivises the practice.

A False Claims Act (FCA) is a law that imposes liability on persons or organisations that make a false record or file a false claim with the government. A key feature of an FCA is what is known as a "qui tam" provision, which allows private persons (i.e., whistleblowers) to file civil actions on behalf of the government against alleged wrongdoers and recover a portion of the damages. Therefore, the FCA has the potential to empower someone, for example an employee, or worse, a competitor, to report fraud, whether for moral or pecuniary gain.

There has been much debate about the morality of an FCA. From a policy perspective, there are a number of reasons the extension of an FCA to taxes could be viewed as overreaching by the state:

  • It allows for litigation outside the context of pre-existing tax administration procedures could add an additional layer of complexity to tax administration
  • It could be seen as a duplication of efforts in light of existing tax enforcement efforts
  • An FCA allows employees to steal confidential information or sensitive documentation.

Discover more: Whistleblowing under state FCAs


Taxand's Take

While qui tam actions in connection with FCAs have historically been applied in cases of Medicaid fraud, New York broke new ground in the UBS case, in expressly extending application of qui tam actions to tax cases. It is expected that activity in this area will increase, and with employees incentivised to turn against employers, multinationals should be prepared for their tax activity in the US to be closely scruntised.

Your Taxand contact for further queries is:
Michael Lippman
T. +1 240 429 4083

Taxand's Take Author