How New York State's Tax Whistleblower Statute Revolutionized Tax Compliance
One year ago, New York expanded the reach of its False Claims Act to affirmatively include cases involving significant tax fraud. With this step, New York boldly went where the IRS and other states have so far declined to go—they brought the power of qui tam whistleblowers to help the state expose tax fraud and, at the same time, increase tax compliance. Attorney General Schneiderman, then a state senator, took the lead in securing passage of this historic legislation, and he has wasted no time as attorney general in using the power of his office and this new law to tackle tax fraud. In February 2011, he created the Taxpayer Protection Bureau to handle tax (and other non-health state False Claims Act cases) and appointed veteran Assistant Attorney General Randy Fox to head the bureau. By June, Fox reported at a symposium sponsored by the attorney general and attended by whistleblower attorneys from around the nation that his bureau was already “building a critical mass of tax cases” that were under investigation. Then, later this summer, in a move that unmistakably signaled the seriousness of his commitment to tax cases, Schneiderman recruited Daniel Smirlock, who had been serving as counsel and deputy commissioner at the New York State Department of Taxation and Finance, to join the Taxpayer Protection Bureau.
With Smirlock’s addition to the team, the word is that the whistleblower community should “stay tuned” for announcements about tax fraud false claims actions under New York’s new statute. Indeed, there have even been whispers that New York tax whistleblower cases could be forthcoming in the upcoming months and even possibly before the end of 2011. Wow. Nothing would more compellingly demonstrate the power and nimbleness of New York’s tax whistleblower statute than to see that it has produced a significant tax whistleblower case in such short order.
Nimbleness is not a word that has been used to describe the enhanced IRS whistleblower program under IRC section 7623(b). To the contrary, the program has been plagued by complaints that it is frustratingly slow-moving, overly bureaucratic, and not transparent to whistleblowers. Nonetheless, as we approach the fifth anniversary of the new IRS program, which mandated increased whistleblower awards in cases where the tax liability (together with interest, penalties, and additions to tax) exceeds $2 million, the evidence is growing that the program has generated solid leads and that those leads are about to bear fruit. Judging from statistics recently released by the IRS Tax Whistleblower Office, the federal program is bringing in more and better tips of tax noncompliance than ever. Many of these tips will inevitably lead in the coming year (and years) to the payment of significant taxpayer awards under the new statute. Such successes will, the thinking goes, breed more tips and thus more success.
Impact of NY's Whistleblower Statute
Indeed, in its FY 2010 Annual Report to Congress, the IRS Whistleblower Office reported that in 2010 it had received 431 submissions alleging violations meeting the $2 million threshold for 5,429 taxpayers—the greatest number of noncompliant taxpayers identified by whistleblowers in a single year (up from 2,150 in FY 2009). The report noted that many of the whistleblowers “claimed to have inside knowledge of the reported transactions, often with extensive documentation.” Altogether, since 2007, the IRS has received 1,328 whistleblower submissions that meet the section 7623(b) $2 million threshold against 9,532 taxpayers. Given this impressive volume of complaints, which have presumably been under active IRS scrutiny, it is not surprising that the report also confirmed that the IRS Whistleblower Office expects to begin paying awards for section 7623(b) cases in the second quarter of FY 2011. To date, there has only been one public report of such an award and that report came from the whistleblower’s attorney and not the IRS.
Given these IRS numbers and the buzz regarding the New York program, the whistleblower community should indeed “stay tuned” for developments in the coming months.
