This article, written by attorney Amy Crafts, was originally published by New England Biz Law Update and can be found here.
With the Department of Justice (“DOJ”) expected to focus on immigration and drug offenses under the new administration, it is uncertain whether federal false claims enforcement will remain a supported and well-resourced enforcement priority. In addition, areas of false claims enforcement may shift to advance the new administration’s priorities, including eliminating DEI-related programs as set forth in Executive Order 14173, signed by the President on January 21, 2025.
While federal false claims enforcement may be in flux, enforcement at the state level is gaining momentum. Many states have enacted false claims acts that mirror the language or intent of the federal act, aimed at ferreting out fraud in government contracting, and some states have expanded that authority beyond the boundaries of the federal act. The most recent expansion, in Massachusetts, relates to increased liability for private equity and other investors. On a national level, there is a growing trend utilizing the false claims act to address tax fraud.
Increased Liability for Investors in Massachusetts
As part of a new health care law in Massachusetts, the Attorney General has expanded enforcement powers under the state false claims act. While intended to address private equity investment in the healthcare sector, the revised language is not limited to healthcare-related investments and is more broadly applicable.
Under House Bill 5159, signed by Governor Healey on January 8, 2025 and set to take effect 90 days thereafter, the Massachusetts False Claims Act was revised to include a new basis of liability for any person who (1) “has an ownership or investment interest in any person who violates” another liability provisions in the statute, (2) “knows about the violation,” and (3) “fails to disclose the violation to the commonwealth or a political subdivision thereof within 60 days of identifying the violation.” This amendment attaches liability merely for knowing that a violation has occurred which, under the false claims act, is proven by demonstrating actual knowledge, deliberate ignorance or reckless disregard.
This is a first in the nation amendment to a state false claims act. While certain to be utilized for private equity investment in healthcare, investors in other industries should be mindful that it applies to any entity doing business with the Commonwealth that has investors meeting the definition of “ownership or investment interest.” This includes not just private equity funds but also those who own, directly or indirectly, 10% of the capital, stock or profits of an entity facing false claims enforcement.
National Movement to Eliminate Tax Bar
With shifts in federal funding under the new administration, states looking to generate revenue may join an emerging national trend towards eliminating the tax bar from state false claims acts, allowing whistleblowers to file and state attorneys general to pursue tax fraud matters as violations of the false claims act.
The federal False Claims Act and many state acts specifically exempt claims related to tax matters. The federal act “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.” 31 U.S. Code § 3729(d). And, by way of example, the Massachusetts act “shall not apply to claims, records or statements made or presented to establish, limit, reduce or evade liability for the payment of tax to the commonwealth or other governmental authority.” M.G.L. chap. 12, §5B(d).
While the Internal Revenue Service has its own whistleblower program to incentivize tax fraud reporting at the federal level, there is often no similar mechanism at the state level, resulting in an enforcement gap. Since eliminating its tax bar in 2010, New York has recovered approximately $600 million in false claims tax matters alone. In 2023, New York again amended its false claims act to close a loophole and ensure accountability for those who knowingly and improperly fail to file a tax return.
Noting New York’s success, a handful of additional states have eliminated their tax bars and there is growing momentum in this direction. Most recently, 2021 amendments in D.C. mirror the language in New York and, in 2024, resulted in the first resolution by D.C.’s Attorney General where a company and its executive agreed to pay $40 million for lying about the executive’s permanent residence, depriving the District of tax proceeds. Other states, including Michigan and California, are debating similar amendments to their state false claims acts.
This is an emerging trend to watch. With the federal tax gap estimated at over $625 billion per year, it’s likely states also have significant gaps which, coupled with changes in federal funding, could prompt legislatures to seek additional sources of revenue.