Proposed legislation in California to allow whistleblowers to report state tax law violations advanced through the state senate on Tuesday, as supporters refuted claims from business groups that it would lead to abusive lawsuits and that tax fraud should be exempt from scrutiny. The bill passed the California Senate Judiciary Committee by a 10-2 vote, and next will be heard in the Revenue and Taxation Committee.

What SB 799 would do

Senate Bill 799, authored by California State Senator Ben Allen and sponsored by California Attorney General Rob Bonta, would fix an existing loophole in the California False Claims Act (CFCA), the state’s premier fraud-fighting law. The CFCA empowers the government and whistleblowers to protect public funds by establishing liability for those who knowingly submit false claims to the state. But the CFCA currently excludes tax fraud cases. Senate Bill would eliminate this exemption for the most significant tax fraud cases, as long as they meet specific thresholds.

Specifically, the bill would allow the CFCA to apply to tax fraud cases where (1) the alleged tax fraud exceeds $200,000 and (2) the person involved had more than $500,000 in taxable income, gross receipts, or sales in any taxable year when the alleged fraud occurred. The legislation also includes several procedural safeguards. In addition to the dollar thresholds, which mean the CFCA would apply only to the largest tax frauds, Senate Bill 799 also would require the Attorney General to consult with tax authorities before filing actions and to maintain the confidentiality of tax records.

Senate Bill 799 is critical to California for several reasons. California's tax gap—the difference between taxes legally owed and what is voluntarily paid—is estimated to be $25.5 billion each year. That’s a massive loss of revenue that could fund critical public services like education, healthcare, infrastructure, and public safety. By expanding the CFCA to tax fraud cases, SB 799 will:

- Incentivize whistleblowers to come forward with inside information about tax fraud that might otherwise go undetected.
- Recover hundreds of millions in rightfully owed tax dollars, as other tax whistleblower programs do.
- Deter would-be tax evaders by increasing the risk of exposure.
- Help address budget shortfalls facing state and local governments.

New York State implemented similar provisions in 2010 and recovered approximately $470 million in unpaid taxes and damages over a ten-year period, demonstrating the potential effectiveness of this approach. The District of Columbia did the same around five years ago, and quickly recovered tens of millions of dollars. And contrary to opponents’ fear-mongering, neither jurisdiction has witnessed a flood of lawsuits or abuses of any kind.

Senate Bill 799 is sponsored by California Attorney General Rob Bonta and supported by the Consumer Attorneys of California, the California Federation of Labor Unions, the California District Attorneys Association, and Taxpayers Against Fraud (TAF). Whistleblower Partners is a proud member of Taxpayers Against Fraud and has been instrumental in the organization’s efforts to support this legislation.

The bill’s opponents include numerous business groups and anti-tax advocates, like the California Chamber of Commerce, the California Taxpayers Association, the Civil Justice Association of California, and the Howard Jarvis Taxpayers Association. Interestingly, though, not everyone in the business community opposes the bill. The San Francisco Taxpayers Association submitted a letter to the senate committee supporting the bill, noting that the “debate over whether whistleblowers can aid the government in arresting fraud is long over.”

The gutting of the IRS makes SB 799 essential

Senate Bill 799’s importance today cannot be overstated. In light of massive reductions in funding and personnel at the Internal Revenue Service (IRS), the federal tax agency, state-level enforcement mechanisms are vital.

News reports indicate that the Trump Administration plans to cut IRS staffing by 25 percent or more. In its first month alone, the Administration’s efforts resulted in 11 percent of the IRS workforce leaving the agency. Over two-thirds of the reductions have been among enforcement staff responsible for ensuring voluntary compliance, collecting taxes from the wealthiest taxpayers, and auditing the largest partnerships.

With the IRS failing to maintain adequate enforcement capabilities, more tax cheats will escape detection at the federal level. When tax fraud seems like a low-risk proposition at the federal level, tax cheats will be emboldened at the state level, too.

Moreover, California's tax system relies partly on federal tax determinations. When federal enforcement lags, state enforcement naturally suffers as well. SB 799 provides California with an additional tool to combat tax fraud independently of federal enforcement capabilities.

The IRS estimates that for every $1 invested in tax enforcement, the government recovers $5-$7 in revenue. Similar economics likely apply at the state level, making SB 799 not just an enforcement mechanism but a potential revenue generator.

Tax fraud is not victimless. It shifts the tax burden onto honest taxpayers and reduces funding for essential services. By creating a state-level remedy that doesn't depend on federal enforcement, SB 799 helps ensure that California can maintain tax compliance even when federal efforts falter.

SB 799 represents California's effort to take tax enforcement into its own hands at a time when federal assistance cannot be counted upon, protecting the state's fiscal health and ensuring everyone pays their fair share regardless of federal enforcement capabilities.