September 9, 2015
New York Attorney General Eric Schneiderman has been given permission by the New York Appellate Court to continue a lawsuit against Sprint-Nextel Corp. using the state’s False Claims Act (FCA). See Press Release. The suit alleges that Sprint was involved in a scheme to deliberately evade sales tax, which cost state and local governments approximately $130 million. The New York FCA specifically covers tax fraud and the Attorney General began its investigation of Sprint after a whistleblower filed a qui tam action in March 2011.
The suit alleges that Sprint has illegally failed to collect and pay New York sales taxes on revenue from mobile phone monthly access charges. The Attorney General contends that the company repeatedly and knowingly submitted false statements to New York state authorities in a seven-year scheme that is still ongoing. As with the federal FCA, the New York FCA mandates that parties found liable face treble damages, bringing a potential recovery against Sprint to over $300 million. Unfortunately, the federal FCA excludes tax fraud from its purview. See 31 U.S.C. § 3729(d). Instead, enforcement and recoveries depend on the IRS.
The suit is an example of the potential recovery for tax systems that can be obtained through the use of whistleblowers and zealous enforcement. In just two short years the NY Attorney General has managed to produce a suit that has the potential to recover hundreds of millions of dollars that will benefit taxpayers. While the IRS has a whistleblower program, so far there is little evidence that the agency has the zeal or the resources to leverage it. Let’s hope these types of actions by the NY Attorney General provide incentive for the IRS to use whistleblower’s knowledge and resources to pursue diligent enforcement of its own federal whistleblower program.