The False Claims Act Tax Bar

By Jonathan DeSantis

The False Claims Act (“FCA”) generally applies to all false or fraudulent “claims” and broadly defines “claims” as including any request or demand for Government funds.[1]  However, a little known provision of the FCA provides that it “does not apply to claims, records, or statements made under the Internal Revenue Code.”[2] This provision is generally known as the FCA Tax Bar.

While the FCA Tax Bar prohibits relators from pursuing FCA claims where it applies, relators often can report tax-related fraud to the IRS Whistleblower Office and receive up to 30% of whatever funds the Government recovers.

History of the FCA Tax Bar

Congress added the tax bar to the FCA.[3]  Courts have explained that the “Tax Bar is designed to allow the [IRS] to enforce the [tax code] as it sees fit.” U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 2003 WL 21998968, at *5 (S.D.N.Y. Aug. 21, 2003).[4]  Other courts have explained that the FCA Tax Bar is designed to recognize that it is unnecessary to pursue FCA claims based on tax-related issues because the IRS maintains its own whistleblower program, described below.[5]

Applying the FCA Tax Bar

The FCA Tax Bar only applies with respect to FCA claims premised on “claims, records, or statements made under the” tax code.  The quintessential example of this would be a relator’s attempt to bring FCA claims based on an individual’s or entity’s failure to pay taxes.  These claims would almost certainly be barred under the FCA Tax Bar.

However, courts have broadly interpreted the FCA Tax Bar to apply to claims involving tax issues even if the claims do not directly arise in the context of submission of documents or tax returns to the IRS.

For example, in one case,[6] the relators alleged that the defendant violated the FCA by submitting false statements in connection with efforts to obtain low income housing credits that were part of a governmental rural development program.  Even though the misrepresentations were made in connection with obtaining loans related to a development program – and not in submitting actual tax returns – the district court concluded that the FCA Tax Bar applied.

The district court explained: “The Plaintiffs are correct that the Rural Development Program is not part of the Tax Code. However, to the extent that Plaintiffs seek to recover . . . for allegedly ill-gotten tax credits . . .  this Court lacks jurisdiction [under the FCA’s tax bar].” Id. at *1.  Apart from this specific examples, courts have typically afforded a broad interpretation to the FCA Tax Bar.[7]

IRS Whistleblower Program

Fortunately, the IRS operates its own whistleblower program that allows individuals to submit information to the IRS involving tax fraud and “[i]f the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.”[8]

This is a robust whistleblower program. Indeed, in 2016, the IRS reported that in the preceding ten years, “information submitted by whistleblowers has assisted the IRS in collecting $3.4 billion in revenue, and, in turn, the IRS has approved more than $465 million in monetary awards to whistleblowers.”[9]

Conclusion

In conclusion, while the FCA Tax Bar prohibits bringing many claims based on tax-related issues, the same issues can serve as the basis for submissions to the IRS’s whistleblower program.  Berger & Montague represents whistleblowers with respect to both the FCA and the IRS’s whistleblower program and can assist you in determining the proper course in reporting tax-related fraud.

[1] 31 USC § 3729(b)(2).

[2] 31 USC § 3729(d).

[3] FALSE CLAIMS AMENDMETNS ACT OF 1986, PL 99–562 (S 1562), PL 99–562, October 27, 1986, 100 Stat 3153.

[4] See also U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 377 F.3d 145, 152–53 (2d Cir. 2004) (“Those courts that have considered the Tax Bar have concluded that it was intended to codify case law existing before  the 1986 amendment, which reserved discretion to prosecute tax violations to the IRS and barred.”).

[5] See U.S. ex rel. Calilung v. Ormat Indus., Ltd., 2015 WL 1321029, at *14 (D. Nev. Mar. 24, 2015) (“The Tax Code provides its own whistleblower statute whereby parties can provide information directly to the IRS if a tax-related violation is known or suspected.”

[6] Sears v. Livingston Management, 2013 WL 5816690 (M.D. La. Oct. 29, 2013).

[7] E.g. Barber v. Paychex Inc., 439 F. App’x 841, 842 (11th Cir. 2011) (affirming dismissal of FCA claims that “involve[d]” the IRC); U.S. ex rel. Lissack v. Sakura Glob. Capital Markets, Inc., 377 F.3d 145, 153 (2d Cir. 2004) (“[N]othing . . . suggests that the Tax Bar should prohibit only actions that, on their face, seek to recover tax.”).

[8] IRS, Whistleblower-Informant Award, available at https://www.irs.gov/uac/whistleblower-informant-award.

[9] IRS, IRS Whistleblower Program Fiscal Year 2016 Annual Report to Congress, available at https://www.irs.gov/pub/whistleblower/fy16_wo_annual_report_final.pdf.

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By | 2018-03-25T15:24:59+00:00 August 18th, 2017|Tax Fraud|