Recent reports from the Franchise Tax Board estimate that California faces a roughly $6.5 billion “tax gap” from unpaid taxes. Remarkably, the state has overlooked an easy solution that is already on its books to help close the tax gap: a reward program to encourage whistleblowers to report tax fraud and tax evasion.
Years ago the California legislature passed legislation enabling both the Franchise Tax Board (FTB) and Board of Equalization (BOE) to reward whistleblowers for information leading to the recovery of unpaid income, sales or use taxes. But it seems those programs were mothballed even before they were launched.
It’s time to change that. Insiders are often the only way government prosecutors and auditors can learn about frauds costing the government millions and billions of dollars. The Internal Revenue Service knows this – it has a whistleblower reward program that in just two years has brought in solid reports of major tax violations worth billions overall. The federal Justice Department knows this – its whistleblower program has become the chief federal civil fraud enforcement tool and has returned $3 billion to the federal Treasury in just the past year. Even the California Attorney General knows this – California’s False Claims Act modeled on the federal whistleblower provisions has returned billions to California’s coffers.
While the FTB and BOE acknowledge that “Tax evasion is a crime that hurts all of us,” they have delayed implementation of a whistleblower program for decades. One explanation the FTB has raised for its inaction is that shelter schemes have become more complex and sophisticated, making it difficult to determine how much to reward whistleblowers. Shelter schemes certainly are complex, but that is exactly the reason the FTB should have a whistleblower reward program. Informed whistleblowers are often the best – if not the only – tool enforcement officials have to crack the complexity and bring schemes to light.
It is well-established that financial incentives are needed to encourage informed insiders to take the personal and professional risks to step forward. Many of these individuals never work again and suffer from retaliation for standing up for what’s right against employers who do wrong. But the benefits to the state for rewarding whistleblowers would be huge. As Sen. Charles Grassley (R-IA) said after Congress passed the law creating the new IRS whistleblower program that he had proposed, “One well-positioned whistleblower could expose millions of dollars of fraud. It might take [government] auditors years to catch that much cheating on their own.”
To create an effective tax whistleblower program, California should invigorate the never-used FTB and BOE whistleblower programs authorized by the state Revenue and Tax Code and model them on the best of the IRS and California False Claims Act whistleblower provisions. Create threshold amounts of tax owed, such as $1 million, in order for whistleblowers to receive a reward to avoid the program getting tied up with investigating small-time tax frauds, and match the reward amount paid by the IRS of 15 percent to 30 percent of the recovery. Just as important would be to create an opportunity for qualified private lawyers to act as “private attorneys general” to pursue meritorious whistleblower information on the state’s behalf either on their own or in a collaborative relationship with government attorneys – which is allowed for other types of fraud under both the state and federal false claims laws. With these provisions, California would gain needed resources to go after tax cheats and focus enforcement efforts on the highest value claims.
Let’s bring to tax fraud enforcement in California the same principles of public-private partnership between the state and whistleblowers and their attorneys that the IRS, the Justice Department and the California Attorney General have found so beneficial. It takes a lot of people working together to build a bridge – including ones that bridge tax gaps.