How the False Claims Act Helps Fight Tax Fraud

How the False Claims Act Helps Fight Tax Fraud

The False Claims Act (FCA) is an important tool for fighting tax fraud. It allows the government to prosecute people and companies who knowingly submit false claims to get money from the government. This includes submitting false tax returns to get refunds or avoid paying taxes owed. The FCA has been around since the Civil War, but was strengthened in 1986. Since then, it has recovered over $62 billion for taxpayers.

What is the False Claims Act?

The FCA imposes liability on any person who:
– Knowingly presents a false claim for payment or approval
– Knowingly makes or uses a false record to get a false claim paid
– Conspires to defraud the government by getting a false claim allowed or paid
There are stiff penalties for violating the FCA, including fines and up to triple damages.

The law also allows whistleblowers to file qui tam lawsuits on behalf of the government. A qui tam suit lets a private citizen sue someone defrauding the government. If successful, the whistleblower can get 15-30% of the money recovered.

Over 80% of FCA cases involve healthcare fraud. But the law applies to any type of fraud involving government money. This includes tax fraud to get unwarranted refunds or avoid paying taxes owed.

How Tax Fraud Violates the False Claims Act

There are a few ways tax fraud can violate the FCA:
– Filing false tax returns to get bigger refunds
– Hiding income and assets to lower taxes owed
– Abusing tax credits like the Earned Income Tax Credit
– Payroll tax fraud by businesses

When someone files a bogus tax return, they are knowingly submitting a false claim to the government. The IRS suffers damages because it pays out refunds it does not actually owe. This is a textbook case of FCA fraud.

If audited, tax cheats often use false records to conceal their fraud. This includes fake invoices, altered books, shell companies, and offshore accounts. Producing these false records to obstruct an IRS audit is another form of FCA violation.

Even if someone does not file false returns themselves, they can be liable under the FCA for conspiring to help others evade taxes. This includes accountants, lawyers, financial advisors, and bankers who facilitate tax fraud schemes.

Recent Tax Fraud Cases Under the False Claims Act

The Department of Justice has ramped up pursuit of tax cheats using the FCA in recent years. Some notable cases include:

• In 2022, a Texas tax preparer was fined over $100 million for helping wealthy clients hide assets in offshore accounts.
• In 2021, a Fortune 500 company paid $1.5 billion to settle claims it used fake bonuses to lower payroll taxes.
• In 2020, a bank paid $100 million in fines for helping U.S. citizens hide money in secret Swiss accounts to evade taxes.

Most tax fraud FCA cases are initiated by whistleblowers who know about the misconduct. In many cases, accountants, bankers, or insiders report the fraud.

IRS Whistleblower Program vs. False Claims Act

The IRS Whistleblower Program also rewards people who report tax cheating. But there are advantages to filing an FCA qui tam suit:

• FCA rewards are higher, from 15-30% of recovered funds vs. up to 30% under the IRS program.
• The FCA provides more protection for whistleblowers against retaliation.
• Qui tam cases can be filed anonymously in federal court.
• The FCA covers a broader range of tax fraud than the IRS program.

However, the IRS program handles individual tax evasion, while the FCA focuses on larger schemes involving multiple false claims. The two programs are complementary and can be used together.

How Lawyers Use the False Claims Act Against Tax Fraud

Specialized whistleblower lawyers are leveraging the FCA more than ever to combat tax fraud on behalf of clients. Experienced attorneys can help maximize rewards and protect sources.

Lawyers can analyze complex tax schemes to identify possible FCA violations. They also know how to package and present evidence to the DOJ to prompt an investigation. DOJ statistics show that nearly 90% of successful FCA cases involve attorneys.

Once the DOJ investigates, experienced qui tam counsel can provide legal support and keep cases moving forward. They know how to negotiate the best possible reward for whistleblowers who risk so much to report fraud.

The FCA and capable qui tam attorneys are taxpayers’ best chance to fight large-scale tax fraud. Billions have been recovered thanks to whistleblowers and their lawyers filing qui tam suits.

Benefits of the False Claims Act Against Tax Fraud

The FCA has many benefits in combating tax scams and recovering lost revenues:

• Powerful tool to supplement IRS enforcement efforts
• Stiff penalties deter fraud more than regular audits
• Whistleblower rewards incentivize insiders to report fraud
• Billions recouped for taxpayers and the Treasury
• Broad application to many types of tax cheating
• Tax cheats held fully liable for massive damages

Without the FCA, large-scale tax fraud would be rampant. Whistleblowers would have little incentive to take personal risks to report misconduct. Billions more in taxes would be lost each year.

Criticisms and Concerns About Using the FCA Against Tax Fraud

While an effective tool, using the FCA to combat tax evasion has some criticisms and concerns:

• Rewards may tempt some whistleblowers to report frivolous claims
• Tax privacy issues when whistleblowers report individuals
• Legal costs of prolonged litigation if defendants fight back
• DOJ may struggle to handle influx of tax qui tam cases
• FCA may be overkill against small-time individual cheats

However, DOJ reviews each case before intervening, and frivolous suits get dismissed quickly. Privacy concerns also must be balanced against the public good of catching tax cheats.

Going forward, the FCA needs more resources to pursue tax fraud effectively. But overall, its benefits outweigh concerns.

The Future of the False Claims Act

The FCA will continue expanding as a tool against tax fraud. Several reforms could strengthen it even more:

• Increase whistleblower rewards to spur more insiders to come forward
• Expand anti-retaliation protections for whistleblowers
• Allow direct filing of qui tam suits to bypass DOJ review
• Increase DOJ resources to pursue more tax fraud cases
• Pass additional laws to close loopholes and improve transparency

With reforms like these, the False Claims Act can recover even more money lost yearly to tax fraud.

The FCA already strikes fear into tax cheats. This Civil War-era law has proven itself a potent weapon against those who defraud the tax system. Taxpayers are the ultimate beneficiaries when whistleblowers and lawyers harness the FCA’s power to fight fraud.

Sources:
[1] https://www.justice.gov/civil/false-claims-act
[2] https://www.justice.gov/sites/default/files/civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf
[3] https://www.law.cornell.edu/uscode/text/31/3729
[4] https://www.law.cornell.edu/uscode/text/31/3730
[5] https://ag.ny.gov/sites/default/files/2022-08/nyfca.pdf