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Tax Institute Update

July 27, 2012

Chamber Calls for Reform of the False Claims Act

At the request of the Illinois Chamber, the House Revenue & Finance Committee met yesterday in Chicago for a Subject Matter Hearing to consider needed reforms to the Illinois False Claims Act (a.k.a. the “Whistleblower Act”).    Connie Beard, Executive Director of the Illinois Chamber’s Tax Institute, testified in favor of needed reforms that would exclude tax cases from the False Claims Act and establish a new administrative process for “whistleblower” reports of tax evasion.   Tax practitioners who have defended these frivolous lawsuits and taxpayers who have been victims of them came forward to testify about the current abuses of the Act.

The Chamber is proposing a legislative remedy in HB 6202, sponsored by Rep. Mike Zalewski.  HB 6202 proposes to amend the Illinois False Claims Act (FCA) to prevent individuals and/or law firms from bringing private lawsuits to enforce Illinois’ tax laws for their own financial gain and to reserve the authority to investigate and prosecute reported violations of the tax laws to the Department of Revenue and the Illinois Attorney General.  The proposed revisions would still reward whistleblowers who report tax law violations.  

The Illinois FCA excludes actions related to the Illinois Income Tax Act.  Unfortunately, by oversight, the Illinois FCA does not exclude state sales and excise taxes.  This loophole in the FCA has created an opportunity for persons to file private lawsuits for their own financial advantage.   Over 200 private “whistleblower” lawsuits have been filed against Illinois business taxpayers on questionable interpretations of Illinois tax laws.   As a result, Illinois business taxpayers are now being forced to negotiate settlements and/or defend tax cases brought by private individuals and are incurring costs way in excess of appropriate penalties or interest that would have been charged by the Department of Revenue if the taxpayer had been held in violation of a tax law.  

The Illinois FCA is intended to impose liability on persons who knowingly present false or fraudulent claims for payment to the state or local governments; misappropriate government property; or deceptively conceal or avoid an obligation to pay the government.  A defendant may be ordered to pay up to three times the actual harm to the state, plus a fine of between $5,500 and $11,000 for each violation of the Act. Successful whistleblowers may receive between 15 and 25 percent of any recovery by the state if the Illinois Attorney General prosecutes the matter. If the plaintiff proceeds with the case on his own, he may receive between 25 and 30 percent of amount recovered. The court may reduce the value of the award if the whistleblower planned or initiated the fraud, or if the action is largely based on information disclosed in the media or public hearings. 

The Illinois FCA provides that there does not have to be a showing of specific intent to defraud the government for FCA liability to attach.  Many courts interpret this to mean that the person bringing the lawsuit only has to establish that the taxpayer’s position is incorrect—whether the Department of Revenue has ruled on the correctness of the position, or not.   This allows private lawsuits by so-called “whistleblowers” who assert a tax policy position that the State may not even agree with, and forces Illinois business taxpayers to argue the State’s tax policy with a private citizen, rather than the Department of Revenue. 

The Illinois Chamber believes that tax administration issues should be left to the Department of Revenue, the agency charged with administering tax laws for the State of Illinois, and not to private individuals.   

HB 6202 proposes that all tax actions be removed from the False Claims Act and gives sole responsibility for enforcing Illinois tax laws back to the Department of Revenue working with the Attorney General’s office to litigate cases it deems appropriate.  The amended law would still encourage true whistleblowers to report known tax evasion to the Department of Revenue, but would allow the Department of Revenue to audit or investigate each case before determining whether a tax law violation has occurred.  Whistleblowers reporting violations would continue to be rewarded for reporting violations if the report ultimately resulted in additional tax collections by the Department of Revenue.  

HB 6202 would eliminate abuse of the FCA laws but still preserve the concept of rewarding those who report tax evasion activity.

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