Government and academic sources refer to the difference in the amount of money paid in taxes and the amount owed as the “Tax Gap.” The IRS Commissioner recently cited the federal tax gap as $1 trillion per year. Mind that gap!
In addition, each state has its own tax gap. Estimates of these gaps are hard to come by. But the analysis that has been done indicates that states are losing billions every year to “gapsters” – those who don’t pay their fair share. California collected $196.6 billion in tax revenues in 2019. But the California Franchise Tax Board estimates that in fiscal year 2018/2019, the state’s tax gap was $24 billion – more than 12% of the total amount collected! It falls to law-abiding taxpayers to fill these gaps – meaning that while the gapsters enjoy their padded pocketbooks, the rest of us are bearing more than our fair share.
The Federal False Claims Act can’t be used to close the federal tax gap as it precludes an action for tax revenue, but in 2010 Congress created the IRS Whistleblower Program.1 Most states, even those with False Claims Acts, do not have any mechanism for whistleblowers to report gapsters.
New York State does. And other states are looking to follow New York’s lead.
New York amended its False Claims Act in 2010 to allow whistleblower actions alleging tax fraud. The New York law has thresholds, so unreported tip income by a waiter, or other small scale tax cheating, are not actionable under the statute.2
New York’s law is paying off and picking up speed. Since the law was amended to add tax liability, at least 21 Defendants have settled cases worth $577.8 Million for New York tax fraud allegations. The bulk of this recovery came from two huge cases settled in the last 5 years. In the first, telecommunications company Sprint paid $330 million to settle claims by New York that it failed to collect more than $100 million in sales taxes from customers for nearly a decade. In the second, hedge fund manager Thomas Sandell paid $105 million to settle allegations that he defrauded New York state and New York City out of taxes on deferred compensation earned in 2017.
Not surprisingly, given the success of the NY State law, the idea is spreading. Both Maryland and the District of Columbia have adopted tax whistleblower programs in recent years. The False Claims Acts of Illinois, Indiana, and Rhode Island allow whistleblower suits related to violations of non-income tax laws. Delaware, Florida, and Nevada’s False Claims Acts do not have any explicit prohibition against filing tax cases. Nevada has publicly thrown its support behind a currently pending case alleging high-profile online travel companies like Orbitz and Travelocity avoided paying hundreds of millions of dollars in hotel room taxes. While it has not yet come to fruition, California legislators have attempted at least twice to remove the tax bar from California’s False Claims Act.
Of course, the real number for taxpayers to think about, like those in California (2022 GDP: $3 trillion), Texas (2022 GDP: $1.8 trillion), and Florida (2022 GDP: $1.1 trillion), is $0. That is how much most states collect to close their state tax gaps caused by fraudulent gapsters absent a whistleblower provision to help fight major state tax fraud. New York has collected $577.8 million more than that. The numbers show these states have two choices to close their tax gaps. Adopt whistleblower laws like NY and others to recoup the money from tax cheats…or collect more from you.
1. The IRS whistleblower program allows whistleblowers to report fraud to the IRS and seek an award, but does not allow whistleblowers to file their own action in court.
2. Net income or sales in one year must exceed one million dollars and the damages to New York exceed $350,000.