Ten years ago, New York became the first state to grant its Attorneys General the novel power to prosecute tax evasion under its state False Claims Act (FCA) statute. Since then, Washington, D.C., Maryland, and three other states have expanded their State Attorneys' General enforcement powers and may now prosecute individuals and businesses that defraud the state by evading or underpaying taxes. This marks a significant shift in the enforcement landscape as the authority to prosecute tax evasion has historically been reserved solely for state and federal tax agencies, such as the IRS.

New Horizons in Tax Enforcement

The panel opened with a reflection on the statutory history behind granting State Attorneys General this enhanced enforcement authority. In every jurisdiction represented – New York, Washington, D.C., and Maryland – the passage of the legislation was hotly contested, with opponents arguing the tax code was too specialized and sophisticated for State Attorneys General offices to pursue cases. Another criticism was that if State Attorneys General gained this new power, it would implicate privacy concerns linked to the release of tax returns. Opponents also argued that granting this power would open the floodgates to an onslaught of frivolous whistleblower cases that would deluge the courts. Others simply contended that granting State Attorneys General power to bring civil enforcement actions was redundant and unnecessary.

The panelists justified their expanded power as an imperative mechanism for upholding the integrity of our fiscal systems. "It's a crucial safeguard," said D.C. Attorney General Brian Schwalb. He further explained that IRS and state tax agencies do not always have the money or the manpower to catch all – or even a fraction – of the people cheating taxpaying Americans. Attorney General Schwalb emphasized that the expanded power helps create a level playing field in a passive system that otherwise operates based on random audits. The D.C. statute is unique in that it mandates that enforcement actions may only be brought in instances where the defendant earns over one million dollars annually and where the government stands to recover a minimum of $350,000 or more in lost tax revenues.

Despite the initial skepticism in the legislative phase, State Attorneys General have increasingly been taking advantage of their states' false claims statutes, bringing high-impact and high-profile cases against (1) individuals who falsely claim to reside in a state with a lower tax burden; and (2) companies that underpay employees (on the basis that such practices constitute fraud because they deprive the state of the total amount of taxes owed).

For example, in August 2022, former D.C. Attorney General Karl Racine (now Partner and Chair of the State Attorney General Practice at Hogan Lovells) announced his office was bringing a lawsuit under the District's False Claims Act against billionaire technology executive Michael J. Saylor, co-founder of the publicly traded data analytics company, MicroStrategy. The lawsuit alleged that Saylor illegally avoided paying the District more than $25 million in taxes by falsely claiming to be a resident of Florida, even though he had allegedly been a resident of the District since 2005. That same year, the New York Attorney General's office intervened in and ultimately settled a New York False Claims Act case against Egon Zehnder International, Inc., a headhunting firm that allegedly bilked the state out of $13.3 million in taxes by grossly underreporting revenue it earned for services performed in New York.

Looking Ahead

The panelists also shared insights on how their offices innovate and think creatively about potential enforcement actions. Maryland Assistant Attorney General Shelly Martin, for example, explained how the Maryland Office of Attorney General has used its power to bring reverse False Claims Act cases against employers that underpay their employees, thereby depriving the state of the full extent of its due tax revenues. Chief of the New York Taxpayer Protection Office, Teige Carroll, likewise previewed that the New York Office of the Attorney General has brought similar cases against retailers for evading sales tax. The office has also considered bringing enforcement actions against third-party accountants and advisors who sell their blessings in certifying books and records. Further, Attorney General Schwalb indicated that his office has used its FCA power to improve public safety by using the new authority to prosecute individuals who falsely certify to renovating abandoned properties, which, when left vacant, can pose health and safety risks.

The panelists also previewed that their offices are not only leveraging data analytics and technology to prove existing enforcement actions but also to identify cases ripe for investigation and prosecution.

The discussion emphasized the crucial role State Attorneys General now assume in upholding the rule of law and safeguarding taxpayer interests. Panelists urged constituents across their districts to report any known or suspected tax violations to their State Attorney General's Office for a thorough investigation. The enactment of this statutory authority signifies a notable progression in state tax enforcement, signaling a new era in which State Attorneys General position themselves to lead the way toward a more equitable and transparent tomorrow.

If your organization wishes to gain further insight into navigating these advancements, we encourage you to contact our experienced lawyers. Our State Attorneys General and Investigations, White Collar, and Fraud practices can assist you in assessing options that align with your organization's needs.

This article was authored by Melissa Giangrance-Jacobs.