New York’s Tax Whistleblower Law Helps Close the Tax Gap

The gap between taxes owed and taxes paid is enormous. The IRS estimates the gap amounts to $381 billion annually at the federal level. But, as the IRS budget for tax enforcement stagnates and the IRS tax whistleblower program fails to produce results, New York’s 2010 enactment of a tax whistleblower provision for the New York State False Claims Act[1] has produced substantial results for New York State.

The New York State False Claims Act’s tax provision[2] permits whistleblowers to file qui tam lawsuits alleging tax fraud on behalf of the State and local governments in New York State against individuals and businesses with net income or sales in excess of $1 million that result in tax underpayments in excess of $350,000.

The New York statute’s jurisdictional thresholds limits the application of the tax whistleblower provision to large tax violators. For example, a $350,000 tax underpayment of New York income taxes, equates to untaxed income of about $4 million or sales of over $8 million, based on the State sales tax rate of 4% (over $4.3 million if local sales tax laws are applied).

The tax qui tam provision, which was enacted in 2010, has resulted in the recovery of over $588.5 million from tax cases, and tax whistleblowers have received awards of more than $112 million. The Act incentivizes whistleblowers with awards amounting to 15% to 30% of the amount recovered by the government.[3]

The largest tax case recovery has been the $330 million that Sprint Corporation paid to settle claims that it failed to collect and remit sales taxes on its fixed rate monthly calling plans.

In that case, the plaintiff-relator whistleblower filed a case alleging that Sprint had failed to collect the full amount of tax due on its monthly calling plans, claiming that tax was not due as a portion of the calls made were for interstate calls. The State intervened in the case in 2012. Sprint vigorously contested the case, appealing a trial court order that declined to dismiss the case to the New York Court of Appeals. The Court of Appeals upheld the State’s complaint-in-intervention’s allegations that Sprint failed to collect the full amount of tax due on the monthly calling plans.[4]

The Court of Appeals held that the tax statute unambiguously imposed sales tax on the full amount that Sprint charged for its fixed rate monthly calling plans, the tax statute was not preempted by federal law, and the claims were not barred by the Ex Post Facto Clause of the United States Constitution. The United States Supreme Court declined to accept Sprint’s appeal from that decision.[5]

As the federal government continues to face huge annual gaps in the amount of tax owed as compared to the amount of tax actually paid, the New York’s tax qui tam law provides a proven model for a public-private partnership to augment the government’s resources to enforce the tax laws to bring to justice people who cheat the government and place extra tax burdens on those who are honest and pay their fair share of taxes.

Written by David A. Koenigsberg from Menz Bonner Komar & Koenigsberg

1] N.Y. State Finance Law § 187 et seq.

[2] N.Y. State Finance Law § 189(4).

[3] N.Y. State Finance Law § 190(6). A successful relator ma also recover costs, expenses and reasonable attorneys’ fees.

[4] People v. Sprint Nextel Corp., 26 N.Y.3d 98, 21 N.Y.S.3d 158, 42 N.E.3d 655 (2015).

[5]Sprint Nextel Corp. v. New York, 576 U.S. 1012, 136 S. Ct. 2387, 195 L.Ed.2d 762 (2016).