The D.C. Council is once again preparing to consider legislation (B23-0035; the False Claims Amendment Act of 2019) that would authorize tax-based false claims actions, allowing private, profit-motivated parties to bring punitive civil enforcement lawsuits—a practice that is prohibited under current law consistent with the vast majority of other states with similar laws.
The Committee of the Whole is expected to consider the bill at its committee mark-up meeting on Tuesday, January 21, and we understand that it will closely resemble the bill that was introduced early last year, which in turn closely resembles prior iterations of the legislative proposal (e.g., the False Claims Amendment Act of 2013, the False Claims Amendment Act of 2016 and the False Claims Amendment Act of 2017).
Most taxpayers and their advisors understand just how problematic this proposal is. As we have seen in jurisdictions like New York and Illinois, opening the door (even a crack) to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving the state Attorney General in tax enforcement decisions. One Chicago-based law firm has filed over a thousand qui tam actions under the Illinois statute. Few of these cases involve internal whistleblowers, actual fraud or reckless disregard of clear law. Instead, the cases usually involve inadvertent errors or good-faith interpretations of murky tax law. Many of the defendants accused of improperly administering provisions of Illinois’s sales and use tax law even proactively sought guidance from and were audited by the tax authority.
Summary of the Proposal
The bill would amend the existing false claims act in the District of Columbia (D.C. Code Ann. § 2-381.01 et seq.) to expressly authorize tax-related false claims actions against a person so long as they “reported net income, sales, or revenue totaling $1 million or more in a tax filing to which that claim, record, or statement pertained, and the damages pleaded in the action total $350,000 or more.” Because the current false claims statute includes a bright-line tax claim prohibition (consistent with a majority of jurisdictions with similar laws), this bill would represent a major policy departure in the District. See D.C. Code § 2-381.02(d) (stating that “[t]his section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 that refer or relate to taxation”).
Unlike the typical three to six year statute of limitations for tax audits and enforcement, the statute of limitations for false claims to be alleged is 10 years after the date on which the violation occurs. See D.C. Code § 2-381.05(a). Additionally, treble damages would be authorized against taxpayers for violations, meaning District taxpayers would be liable for three times the amount of any damages sustained by the District (including tax, interest and penalties). See D.C. Code § 2-381.02(a). A private party who files a successful claim may receive between 15–25 percent of any recovery to the District if the District’s AG intervenes in the matter. However, if the [...]