Office of Tax and Revenue Archives

Office of Tax and Revenue

DC Council Expands False Claims Act to Tax Claims

by Stephen P. Kranz, Diann Smith and Eric D. Carstens | Dec 1, 2020 | District of Columbia, False Claims Act, Nationwide Importance

The DC Council has passed an amended bill (the False Claims Amendment Act of 2020, B23-0035) that beginning as early as January 2021 will allow tax-related false claims to be raised against large taxpayers for up to 10 years of prior tax periods! This troubling legislation creates a real and imminent possibility of prior tax periods that are closed for assessment under the DC tax law pursuant to DC Code § 47-4301 being reopened by the DC attorney general and/or a private qui tam plaintiff.

While the introduced bill passed a first reading of the Committee of the Whole on Tuesday, November 17, 2020, by a vote of 8-5, the second reading (as amended) passed by a vote of 12-1 (a veto-proof supermajority) on December 1, 2020. The amended bill (as approved by the DC Council) will be sent to Mayor Muriel Bowser for consideration. If the mayor does not veto the bill or if her veto is overridden, the legislation will be assigned an Act number and sent to Congress for a 30-day review period before becoming effective as law. While extremely rare, Congress has an opportunity to reject the DC Council’s Act by passing a joint resolution, which must be signed by the president of the United States to prevent the Act from becoming law. Assuming this doesn’t happen, the Act will become law after the expiration of the 30-day Congressional review period. Assuming the Mayor quickly approves the legislation and Congress does not seek a joint resolution disapproving the Act, the legislation passed by the DC Council could take effect as early as next month!

As amended, the False Claims Amendment Act of 2020 passed by the DC Council will:

Remove the taxation bar that exists as part of current law (see DC Code § 2-381.02(d)) and replace it with explicit authorization allowing by the DC attorney general and private qui tam plaintiffs to pursue taxpayers for claims, records or statements made pursuant to Title 47 that refer or relate to taxation when “the District taxable income, District sales or District revenue of the person against who the action is being brought equals or exceeds $1 million for any taxable year subject to any action brought pursuant to this subsection, and the damages pleaded in the action total $350,000 or more.”
Require that the DC attorney general “consult with the District’s chief financial officer about the complaint” when tax-related claims are filed by a qui tam
Prohibits a claim by a qui tam plaintiff “based on allegations or transactions relating to taxation and that are the subject of an existing investigation, audit, examination, ruling, agreement or administrative or enforcement activity by the District’s chief financial officer.”
Not require the District’s chief financial officer “to produce tax information, or other information from which tax information can be inferred, if the production thereof would be a violation of federal law.”
Increase the maximum statutory reward for informants under the Taxation [...]

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Plaintiffs’ Lawyers Descend as DC Considers False Claims Act Expansion Again!

by Eric D. Carstens and Stephen P. Kranz | Jan 16, 2020 | False Claims Act, Nationwide Importance

The D.C. Council is once again preparing to consider legislation (B23-0035; the False Claims Amendment Act of 2019) that would authorize tax-based false claims actions, allowing private, profit-motivated parties to bring punitive civil enforcement lawsuits—a practice that is prohibited under current law consistent with the vast majority of other states with similar laws.

The Committee of the Whole is expected to consider the bill at its committee mark-up meeting on Tuesday, January 21, and we understand that it will closely resemble the bill that was introduced early last year, which in turn closely resembles prior iterations of the legislative proposal (e.g., the False Claims Amendment Act of 2013, the False Claims Amendment Act of 2016 and the False Claims Amendment Act of 2017).

Most taxpayers and their advisors understand just how problematic this proposal is. As we have seen in jurisdictions like New York and Illinois, opening the door (even a crack) to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving the state Attorney General in tax enforcement decisions. One Chicago-based law firm has filed over a thousand qui tam actions under the Illinois statute. Few of these cases involve internal whistleblowers, actual fraud or reckless disregard of clear law. Instead, the cases usually involve inadvertent errors or good-faith interpretations of murky tax law. Many of the defendants accused of improperly administering provisions of Illinois’s sales and use tax law even proactively sought guidance from and were audited by the tax authority.

Summary of the Proposal

The bill would amend the existing false claims act in the District of Columbia (D.C. Code Ann. § 2-381.01 et seq.) to expressly authorize tax-related false claims actions against a person so long as they “reported net income, sales, or revenue totaling $1 million or more in a tax filing to which that claim, record, or statement pertained, and the damages pleaded in the action total $350,000 or more.” Because the current false claims statute includes a bright-line tax claim prohibition (consistent with a majority of jurisdictions with similar laws), this bill would represent a major policy departure in the District. See D.C. Code § 2-381.02(d) (stating that “[t]his section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 that refer or relate to taxation”).

Unlike the typical three to six year statute of limitations for tax audits and enforcement, the statute of limitations for false claims to be alleged is 10 years after the date on which the violation occurs. See D.C. Code § 2-381.05(a). Additionally, treble damages would be authorized against taxpayers for violations, meaning District taxpayers would be liable for three times the amount of any damages sustained by the District (including tax, interest and penalties). See D.C. Code § 2-381.02(a). A private party who files a successful claim may receive between 15–25 percent of any recovery to the District if the District’s AG intervenes in the matter. However, if the [...]

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D.C. Proposes Law to Allow Indefinite Suspension of Limitation Period for Assessment and Collection

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 6, 2015 | Audits, District of Columbia, Income Tax, Procedure, Sales Tax, Transaction Taxes

The Fiscal Year 2016 Budget Support Act of 2015 (BSA), introduced by the Washington, D.C. Council at the request of Mayor Muriel Bowser on April 2, 2015, contains a subtitle (see Title VII, Subtitle G, page 66-67) that would give the Office and Tax and Revenue (OTR) complete discretion to indefinitely suspend the period of limitation on assessment and collection of all D.C. taxes—other than real property taxes, which contain a separate set of rules and procedures. The change to the statute of limitation provision would eliminate a fundamental taxpayer protection that exists today in all states. Those concerned should reach out to members of the D.C. Council to discourage adoption of this subtitle of the BSA.

Current Law

Under current law, the amount of tax imposed must be assessed (in other words, a final assessment must be issued) within three (3) years of the taxpayer’s return being filed. See D.C. Code § 47-4301(a). Practically speaking, this requires the mayor to issue a notice of proposed assessment no later than two (2) years and 11 months after the return is filed—to allow the taxpayer the requisite 30 days to file a protest with the Office of Administrative Hearings (OAH). See D.C. Code § 47-4312(a). As the law reads today, the running of the period of limitation is suspended between the filing of a protest and the issuance of a final order by OAH, plus an additional 60 days thereafter. See D.C. Code § 47-4303. The District has 10 years after the final assessment to levy or begin a court proceeding for collections. See D.C. Code § 47-4302(a).

Proposed Changes

The BSA would extend the limitation period for assessment and collection, as follows:

The BSA would add a new provision to statutorily require the chief financial officer (CFO, the executive branch official overseeing the OTR) to send a notice of proposed audit changes at least 30 days before the notice of proposed assessment is sent; and
The BSA would toll the running of the statute of limitation on assessment and collection during the period after the CFO/OTR issues the aforementioned notice of proposed audit changes until the issuance of a final assessment or order by OAH.

The BSA does not indicate an applicable date for these changes. As a result, the provision likely would be applicable to any open tax period, effectively making the change retroactive to returns already filed.

Effect

By changing the law to toll the statute of limitation for the period after OTR issues a notice of proposed audit changes, the BSA would allow OTR to unilaterally control whether the three-year statute of limitation is running. The current statute requires that OTR issue its notice of proposed assessment before the expiration of the three-year statute—and gives taxpayers the ability to protest such notices before the OAH. By tolling the statute upon issuance of a notice of proposed audit changes, which is not subject to review by OAH, the BSA would strip taxpayers of the [...]

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New Market-Based Sourcing in DC: Major Compliance Date Problem Fixed… For Now

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Feb 5, 2015 | Allocation/Apportionment, District of Columbia, Income Tax, Massachusetts, Tax Base, UDITPA

The Problem

On September 23, 2014, the District of Columbia Council enacted market-based sourcing provisions for sales of intangibles and services as part of the 2015 Budget Support Act (BSA), as we previously discussed in more detail here. Most notably the BSA adopts a single sales factor formula for the DC franchise tax, which is applicable for tax years beginning after December 31, 2014. But the market-based sourcing provisions in the BSA did not align with the rest of the tax legislation. Specifically, the BSA market-based sourcing provisions were made applicable as of October 1, 2014—creating instant tax implications on 2014 returns. Absent a legislative fix, this seemingly minor discrepancy will trigger a giant compliance burden that will require a part-year calculation for both taxpayers and the Office of Tax and Revenue (OTR) before the 2014 franchise return deadline on March 15. For example, taxpayers filing based on the new BSA provisions, as originally enacted in September, will have to use the cost-of-performance approach for the first nine months of the 2014 tax year and the new market-based sourcing approach for the remaining three.

The Fix

Citing to the unintended compliance burden, the Council recently enacted emergency legislation to temporarily fix the unintended compliance burden. However they have not solved the problem going forward. On December 17, 2014, Finance and Revenue Committee Chairman Jack Evans introduced identical pieces of legislation that included both a temporary and emergency amendment to quickly fix on the problem (both pieces of legislation share the name “The Market-Based Sourcing Inter Alia Clarification Act of 2014”). These legislative amendments explicitly make the applicability of market-based sourcing provisions synonymous with the other provisions of the BSA, beginning for tax years after December 31, 2014. In DC, “emergency” legislation may be enacted without the typical 30-day congressional review period required of all other legislation, but is limited to an effective period of no longer than 90 days. Because the emergency market-based sourcing legislation was signed by Mayor Muriel Bowser on January 13, it will expire on April 13. Important to DC franchise taxpayers, this date is before the September 15 deadline for extended filers.

The second piece of legislation was introduced on a “temporary” basis. Unlike emergency legislation, temporary legislation simply bypasses assignment to a committee but must still undergo a second reading, mayoral review and the 30-day congressional review period. The review period is 30 days that Congress is in session (not 30 calendar days). Because the temporary Act is still awaiting Mayor Bowser’s approval at the moment, which is due by this Friday (February 6), it will not become effective until after the 2014 DC Franchise Tax regular filing deadline of March 15—even if it is approved by the Mayor and not subjected to a joint-resolution by Congress. Neither the House nor Senate is in session the week of February 15, which pushes the 30-day review period to roughly April 1 (assuming it is immediately submitted to Congress). However, once passed, [...]

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