23 April 2012

New York Files False Claims Suit Against Sprint Alleging Tax Evasion

Posted by Matthew D. Krueger and Gordon D. Todd

Last Thursday, New York intervened into a qui tam suit against Sprint under the State’s False Claims Act alleging underpayment of sales taxes. This marks the first such case since New York amended its False Claims Act specifically to allow whistleblowers to file state tax-fraud cases.

The complaint alleges that Sprint knowingly failed to collect and pay $100 million of sales taxes over the past seven years. According to the complaint, in 2005, Sprint began attributing a portion of subscribers’ monthly charges to interstate calls and did not pay New York sales taxes on that portion. The lawsuit also alleges that Sprint concealed its practice from state tax authorities. Under New York’s law, if liable, Sprint would have to pay three times the underpaid taxes—$300 million—plus penalties. The case will be closely watched as it tests the often-murky boundary between tax-management strategies that companies may lawfully pursue and false claims that give rise to hefty liability.

In contrast to New York’s law, the federal False Claims Act does not reach tax fraud. A provision of the Tax Code does, however, reward whistleblowers with 15 to 30 percent of proceeds that they lead the IRS to collect. 26 U.S.C. § 7623.

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