Passed in 2010 as a response to the devastating financial crisis that led to the demise of Lehman Brothers and global economic instability, Dodd-Frank granted government agencies that regulate financial markets the authority to incentive whistleblowers with cash awards. Cases of tax fraud, on the other hand, are normally submitted to the IRS, although several states have laws that allow for qui tam lawsuits in relation to state or local tax evasion.
Despite distinctions in legal authorization and agency jurisdiction, all whistleblowers stand to gain significant financial rewards for reporting and pursuing money owed to the government.
Financial Fraud Covered By The False Claims Act
Despite the passage of Dodd-Frank, some forms of financial fraud continue to fall under the False Claims Act, namely fraud involving federal funds. Thus, any fraudulent activity involving money from the Troubled Asset Relief Program (TARP) would customarily be litigated by way of a qui tam lawsuit, filed by a private citizen under the provisions of the False Claims Act. Knowledge, for example, that a bank submitted false information to the federal government in order to secure TARP funds would fall under the False Claims Act’s purview.
To clarify any confusion, Congress in 2009 passed the Fraud Enforcement and Recovery Act, which made plain (in contrast to a Supreme Court decision the previous year) that “any request or demand” submitted to a government program that includes false records or fraudulent statements falls within the scope of the False Claims Act. That draws the fraudulent obtainment or use of federal funds, including those offered through the Troubled Asset Relief Program, fully into the domain of traditional qui tam law and provides whistleblowers within the financial sector every right to step forward and file a civil lawsuit on the government’s behalf.
Dodd-Frank, on the other hand, extended whistleblower powers and protections over violations of nearly every federal law or regulation governing securities, commodities and derivatives.
Dodd-Frank Whistleblower Rules
Dodd-Frank extends far beyond the fraudulent acquisition or use of government funds. In fact, individuals with knowledge of financial fraud that does not touch on federal money won’t have to file a traditional qui tam lawsuit at all. Instead, they will turn to whichever government agency regulates their sector of the financial markets.
Dodd-Frank authorized the Securities and Exchange Commission to pay out awards, often quite substantial, to whistleblowers who step forward and report fraud. The Commodities Futures Trading Commission was granted an identical authority to reward whistleblowers who come forward with “high-quality” and “original” information on fraud in commodities and futures contracts, as well as the derivatives market.
Reporting Fraud To The SEC Or CFTC
The Securities & Exchange Commission encourages individuals to report violations of securities law, including late trading, insider trading and money laundering, and works extraordinarily hard to maintain informer confidentiality. The Commission also handles reports of violations of the Foreign Corrupt Practices Act, which prohibits the influencing of foreign officials through personal payments.
The Commodities Futures Trading Commission works similarly, providing cash award incentives to whistleblowers who provide information on violations of the Commodity Exchange Act.
Both agencies reward whistleblowers who provide “high-quality original information,” but provisions found in Dodd-Frank limit the scope of informants who are entitled to receive an award. To secure compensation for their efforts, a whistleblower’s information must lead to an enforcement action that results in over $1 million in monetary sanctions. Jumping this hurdle comes with substantial benefits. Successful whistleblowers, by statute, are entitled to between 10% and 30% of the SEC or CFTC’s total recovery.
Regardless of their award, all people who provide information to the SEC or CFTC are protected by broad anti-retaliation provisions. Tips can be submitted anonymously and, needless to say, retaliating against someone who tips the SEC or CFTC off to financial fraud is strictly prohibited by Dodd-Frank. In the event of retaliation (which Dodd-Frank defines broadly as any form of “harassment,” from discharge to verbal threats), whistleblowers gain the right to a separate cause of action and can file an additional civil lawsuit against their employer. The rewards for succeeding in a retaliation lawsuit can be quite substantial themselves, including double pack pay, reinstatement and attorney’s fees.
Individuals who wish to submit information anonymously must be represented by legal counsel. Counsel is not a requirement for whistleblowers who disclose their identities, but is strongly suggested to ensure that Dodd-Frank’s anti-retaliation provisions are respected.
IRS Whistleblower Office
Violations of the US tax code are explicitly written out of the False Claims Act, a fact that inspired Congress in 2006 to formally open a Whistleblowers Office within the Internal Revenue Service (IRS). The Whistleblowers Office handles tips from members of the public, who can choose to submit information anonymously or disclose their identities. Information can pertain to tax evasion or fraudulence committed by businesses or individuals.
In certain circumstances, the IRS is authorized to reward whistleblowers who tip the agency off to particularly large cases of tax evasion.
If the IRS pursues an enforcement action against a business and secures more than $2 million in taxes, penalties and interest, the whistleblower who initiated the action can receive between 15% and 30% of the government’s total recovery. The same is true for enforcement actions against individual taxpayers, although the threshold for an award is pegged to the individual’s gross income. Informants who blow the whistle on taxpayers with a gross income of $200,000 or more are eligible to secure a cut from the IRS’s recovery.
State Tax Laws May Allow Qui Tam Lawsuits
A select number of states have chosen to allow qui tam lawsuits involving state or local tax fraud.
Illinois, Indiana and Rhode Island have laws that explicitly allow individual state citizens to file qui tam lawsuits over tax fraud on behalf of the state government. However, these three state’s also exclude income taxes from the realm of qui tam litigation. Cases of income tax fraud, therefore, must be directed toward the respective state’s Department of Revenue. All other cases of tax fraud, though, may be grounds for a qui tam lawsuit.
Implied Right To Tax-Related Qui Tam
A second group of states (and one municipality) have false claims laws that, while not explicitly permissive, imply that violations of the tax code may be the subject of qui tam litigation:
- New Hampshire
Whether or not the courts allow a tax-related qui tam lawsuit in these jurisdictions is a matter of judicial discretion. Some judges will accept the case, while others will instruct the whistleblower to inform a Department of Revenue. In any event, these 7 jurisdictions make no distinction between income tax violations and violations of other tax laws. Their qui tam laws relate to all forms of tax evasion.
New York’s False Claims Act
New York, as in many other contexts, is the exception on this count. The State is extraordinarily aggressive on tax fraud and the New York False Claims Act of 2007 is currently the only state qui tam law to provide a categorical provision on tax fraud. In New York, all forms of tax fraud can result in a civil whistleblower lawsuit, although the State’s laws are targeted toward high-income earners, major tax law violators and businesses.
- individual with net income of at least $1 million
- business with sales of at least $1 million
- taxpayer owes more than $350,000
Enforcement actions against individuals or businesses who satisfy the conditions listed above can be hefty. Taxpayers convicted of fraud are liable for triple the amount of taxes they owe, along with an extra $6,000 to $12,000 for each false or fraudulent act for which they are found guilty. Victorious qui tam plaintiffs, meanwhile, can win anywhere from 15% to 30% of the New York State government’s total recovery, depending on whether or not the State’s attorney general or a local prosecutor decided to intervene in the case.
New York’s law is exceptional for another reason, too. It provides legal immunity to whistleblowers who steal confidential documents from their employer, when those sensitive files are necessary to prove violations of the State’s tax code.
Qui Tam Resources