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How does the False Claims Act apply to tax fraud?

How the False Claims Act Applies to Tax Fraud

The False Claims Act (FCA) is a federal law that allows private citizens to file lawsuits on behalf of the government against individuals or companies that have defrauded the government. The FCA imposes liability on any person who knowingly submits false claims to the government for payment. While the FCA does not directly apply to tax fraud, it can be used in some cases where tax fraud is connected to false claims submitted to the government.

The FCA specifically excludes claims, records or statements made under the Internal Revenue Code from liability under the statute. This means you can’t directly use the FCA to go after someone for tax fraud like failing to report income or falsifying deductions on a tax return. However, where tax fraud intersects with government contracts or payments, the FCA may still apply.

How Tax Fraud Can Connect to False Claims

Here are some examples of how tax fraud could potentially lead to FCA liability:

• A company defrauds the IRS by not reporting income, and then submits claims to Medicare/Medicaid or obtains government contracts by falsely certifying it is tax compliant.
• A company claims tax credits or deductions it wasn’t entitled too, lowering its tax liability, and then submits claims for payment to the government based on its falsified tax returns.
• A government contractor falsifies its taxes but then certifies it is tax compliant in order to obtain a contract with the federal government.
• A healthcare provider commits tax fraud but then falsely certifies its compliance with tax laws in submitting Medicare/Medicaid claims.

In these situations, while the underlying conduct is tax fraud, there is a connection to a false claim made directly to the government for payment or a government contract. This could potentially trigger FCA liability for treble damages and civil penalties.

Requirements for FCA Tax Fraud Claims

For tax fraud to lead to liability under the False Claims Act, a few specific elements must be met:

1. There must be a false or fraudulent claim for payment made directly to the federal government, not just tax fraud.
2. The false claim must result from or be connected to the underlying tax fraud in some way.
3. The false claim must meet the FCA requirement that it was made “knowingly” – with actual knowledge, deliberate ignorance or reckless disregard for the truth.
4. The person or company submitting the false claim cannot be an actual taxpayer, they must be a third-party government contractor, healthcare provider, etc.

The connection between the tax fraud and the false claim made to the government cannot be too attenuated. There must be a fairly direct link between the two for FCA liability to attach. The tax fraud must also materially contribute to or induce the false claims made for FCA purposes.

FCA Damages and Penalties

If these requirements are met, the FCA imposes substantial civil liability on the defendant for defrauding the government. FCA violations include:

• Treble damages – Damages are calculated as 3 times the amount the government was defrauded.
• Civil penalties – Penalties range from $11,803 to $23,607 per false claim in 2022.

In tax fraud cases, damages could be calculated based on the amount the government overpaid the defendant due to the false claims induced by the tax fraud. Civil penalties could be assessed on each fraudulent claim submitted to the government.

IRS Whistleblower Program

While the FCA may not directly apply to tax fraud, the IRS does have its own whistleblower program that rewards individuals who report tax fraud. Under the IRS program, whistleblowers can receive between 15% and 30% of the proceeds the IRS collects from the tax fraud case. This serves a similar purpose as the FCA by incentivizing whistleblowers to come forward and report financial fraud against the government.

However, the IRS whistleblower program has some limitations compared to the FCA. Awards are discretionary, there are no additional penalties or treble damages imposed, and whistleblowers have fewer protections from retaliation. The FCA may still be preferable in cases where both tax fraud and false claims are present.

Strategic Use of FCA in Tax Fraud Cases

In light of these issues, the FCA can be used strategically in cases that involve both tax fraud and false claims made to the government. Potential whistleblowers should consider:

• Whether the case involves both clear tax fraud/evasion and false claims for payment made to the federal government.
• How directly the tax fraud contributed to or made possible the false claims.
• Whether the false claims meet the FCA requirement of being submitted “knowingly.”
• The extent of potential FCA damages and penalties versus potential whistleblower award under the IRS program.
• The strength of the evidence supporting both the tax fraud and false claims.

Whistleblowers should consult with an attorney experienced in FCA litigation to evaluate the merits of their case and whether pursuing a qui tam action under the False Claims Act is likely to be successful.

The FCA provides a powerful tool to combat tax fraud connected to government payments and contracts. While tax fraud alone is not covered under the statute, creative application of the FCA can provide substantial remedies when tax evasion schemes lead to other false claims made directly to the federal government. The FCA’s qui tam provisions allow whistleblowers to bring these cases forward and receive a portion of the recovery as reward. In the right circumstances, the FCA can offer enhanced incentives and protections for whistleblowers reporting on tax fraud affecting government programs.