DC Council Expands False Claims Act to Tax Claims

The DC Council has passed an amended bill (the False Claims Amendment Act of 2020, B23-0035) that beginning as early as January 2021 will allow tax-related false claims to be raised against large taxpayers for up to 10 years of prior tax periods! This troubling legislation creates a real and imminent possibility of prior tax periods that are closed for assessment under the DC tax law pursuant to DC Code § 47-4301 being reopened by the DC attorney general and/or a private qui tam plaintiff.

While the introduced bill passed a first reading of the Committee of the Whole on Tuesday, November 17, 2020, by a vote of 8-5, the second reading (as amended) passed by a vote of 12-1 (a veto-proof supermajority) on December 1, 2020. The amended bill (as approved by the DC Council) will be sent to Mayor Muriel Bowser for consideration. If the mayor does not veto the bill or if her veto is overridden, the legislation will be assigned an Act number and sent to Congress for a 30-day review period before becoming effective as law. While extremely rare, Congress has an opportunity to reject the DC Council’s Act by passing a joint resolution, which must be signed by the president of the United States to prevent the Act from becoming law. Assuming this doesn’t happen, the Act will become law after the expiration of the 30-day Congressional review period. Assuming the Mayor quickly approves the legislation and Congress does not seek a joint resolution disapproving the Act, the legislation passed by the DC Council could take effect as early as next month!

As amended, the False Claims Amendment Act of 2020 passed by the DC Council will:

  • Remove the taxation bar that exists as part of current law (see DC Code § 2-381.02(d)) and replace it with explicit authorization allowing by the DC attorney general and private qui tam plaintiffs to pursue taxpayers for claims, records or statements made pursuant to Title 47 that refer or relate to taxation when “the District taxable income, District sales or District revenue of the person against who the action is being brought equals or exceeds $1 million for any taxable year subject to any action brought pursuant to this subsection, and the damages pleaded in the action total $350,000 or more.”
  • Require that the DC attorney general “consult with the District’s chief financial officer about the complaint” when tax-related claims are filed by a qui tam
  • Prohibits a claim by a qui tam plaintiff “based on allegations or transactions relating to taxation and that are the subject of an existing investigation, audit, examination, ruling, agreement or administrative or enforcement activity by the District’s chief financial officer.”
  • Not require the District’s chief financial officer “to produce tax information, or other information from which tax information can be inferred, if the production thereof would be a violation of federal law.”
  • Increase the maximum statutory reward for informants under the Taxation Title (DC Code § 47-4111) from 10% to 30% of the proceeds collected as a result of the information obtained.

Practice Note:

The passage of this False Claims Act expansion legislation by the DC Council is a very troubling development for taxpayers doing business in the District and threatens to subject them to the same nightmares (and the cottage industry of plaintiffs’ lawyers) that states like Illinois and New York have allowed over the past decade. As we have seen in those jurisdictions, opening the door to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving profit-motivated private parties and the local attorney general (AG) in tax enforcement decisions.

Because the statute of limitations for false claims is up to 10 years after the date on which the violation occurs, the typical tax statute of limitations for assessment under the DC tax law will likely not protect taxpayers from false claims actions if this legislation takes effect in the coming months as anticipated. See D.C. Code § 2-381.05(a) (stating that an action may not be brought “more than 10 years after the date on which the violation . . . is committed”). As passed by the DC Council, there is no prospective application and upon becoming law the False Claims Act will immediately apply retroactively to reopen periods that are closed for assessment under the DC tax laws. If reopening prior tax periods up to seven years beyond what is permitted under current law was not enough, treble damages would also be permitted against taxpayers for violations, meaning District taxpayers would be liable for three times the amount of any damages sustained by the District. See D.C. Code § 2-381.02(a). When the starting point for negotiation is treble damages, one can imagine the companies regularly settle false claims attacks for sometimes large dollar amounts despite strong defenses to avoid the costs of litigation and potentially substantial financial risk that can quickly add up when tax, penalties and interest are multiplied. Sophisticated qui tam plaintiffs understand this and regularly extort money out of companies that are far from the “fraudsters” that false claims acts were originally aimed to punish. While the DC Tax law already provides the Office of Tax and Revenue (OTR) and the DC attorney general with more than enough tools to punish those committing fraud or tax evasion (including no statute of limitations, substantial penalties and interest, etc.), the DC Council apparently felt it was necessary to open the floodgates to private qui tam plaintiffs and allow them to take DC tax enforcement into their own hands.

A qui tam plaintiff who files a successful claim may receive between 15–25% of any recovery to the District if the District’s AG intervenes in the matter. If the qui tam plaintiff successfully prosecutes the case on their own, they may receive between 25–30% of the amount recovered. This financial incentive encourages profit-motivated bounty hunters to develop theories of liability not established or approved by the agency responsible for tax administration. While the legislation passed by the DC Council requires the DC attorney general to “consult with the District’s chief financial officer about the complaint” a similar provision under the New York False Claims Act has not given the Department of Taxation and Finance any meaningful autonomy and input in whether to pursue, permit or seek to dismiss the complaint. Allowing private parties to intervene in the administration, interpretation or enforcement of the tax law commandeers the authority of the tax agency, creates uncertainty and can result in inequitable tax treatment. In addition, while the protection against qui tam plaintiff claims for taxation matters “that are the subject of an existing investigation, audit, examination, ruling, agreement or administrative or enforcement activity by the District’s chief financial officer” is a step in the right direction, the protection does not go far enough. For example, it does not protect a taxpayer for matters (such as prior tax periods that are now closed) that were audited by OTR several years ago but are not the subject of an existing audit or examination. Thus, closed audit periods that were audited by OTR and for which OTR cannot assess a tax obligation pursuant to § 47-4301 may be reopened in the very near future and reexamined by the DC attorney general or qui tam plaintiffs as a result of the legislation passed. With such a lucrative and perverse incentive to raise fringe legal attacks in court against companies that have closed tax periods (and perhaps even destroyed related records pursuant to standard record retention laws and internal policies that would allow them to defend against the claims), we expect a cottage industry of plaintiffs’ lawyers to develop in the District of Columbia in 2021 similar what has transpired in Illinois and New York over the past decade. We can only hope that this legislation is an anomaly and doesn’t develop into a nationwide legislative trend in 2021.

We encourage all companies doing business in the District that are troubled by this legislative development to contact the authors to discuss what can be done to mitigate the substantial new risks that are expected to be enacted into law by the False Claims Amendment Act of 2020.



Governor Newsom Announces New Relief for Remitting California Sales Tax

On Monday, November 30, 2020, Governor Gavin Newsom announced that California will provide temporary tax relief for eligible businesses impacted by restrictions imposed to control the COVID-19 pandemic.

The announcement indicates that the Governor will direct the California Department of Tax and Fee Administration (CDTFA) to:

  1. Provide an automatic three-month extension for taxpayers filing less than $1 million in sales tax on the return and extend the availability of existing interest- and penalty-free payment agreements to companies with up to $5 million in taxable sales;
  2. Broaden opportunities for more businesses to enter into interest-free payment arrangements; and
  3. Expand interest-free payment options for larger businesses particularly affected by significant restrictions on operations based on COVID-19 transmissions.

No information was provided as to how the CDTFA will expand interest-free payment options for larger businesses, or what constitutes “significant restrictions” on a business’ operations for purposes of this temporary tax relief. Nevertheless, we applaud the governor’s move to initiate this relief for California’s taxpayers, and we will keep readers up to date as additional details are revealed for this program.



False Claims Act Tax Expansion Bill Advanced by DC Council

The DC Council has once again advanced a bill (the False Claims Amendment Act, B23-0035) that would allow tax-related false claims against large taxpayers! The bill passed a first reading of the Committee of the Whole on Tuesday, November 17, 2020, by a vote of 8-5. The bill is sponsored by Councilmember Mary Cheh, who introduced identical bills over the past few legislative sessions that ultimately were not passed. The troubling bill is now eligible for a second (and final) reading at the next legislative meeting on Tuesday, December 1, 2020.

As introduced, the bill would amend the existing false claims statute in the District of Columbia to expressly authorize tax-related false claims actions against a person that “reported net income, sales, or revenue totaling $1 million or more in the tax filing to which the claim pertained, and the damages pleaded in the action total $350,000 or more.” If enacted, it would make the District one of only a few jurisdictions that allow tax-related false claims actions across the country.

Practice Note:

The advancement of this legislation by the DC Council is a very troubling development for taxpayers doing business in the District and threatens to subject them to the same nightmares (and the cottage industry of plaintiffs’ lawyers) that states like Illinois and New York have allowed over the past decade. Because the current false claims statute includes an express tax bar, this bill would represent a major policy departure in the District. See D.C. Code § 2-381.02(d) (stating that “[t]his section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 that refer or relate to taxation”). As we have seen in jurisdictions like New York and Illinois, opening the door to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving profit-motivated private parties and the state attorney general (AG) in tax enforcement decisions.

Because the statute of limitations for false claims is 10 years after the date on which the violation occurs, the typical tax statute of limitations for audit and enforcement may not protect taxpayers from false claims actions. See D.C. Code § 2-381.05(a). Treble damages would also be permitted against taxpayers for violations, meaning District taxpayers would be liable for three times the amount of any damages sustained by the District. See D.C. Code § 2-381.02(a). A private party who files a successful claim may receive between 15–25% of any recovery to the District if the District’s AG intervenes in the matter. If the private party successfully prosecutes the case on their own, they may receive between 25–30% of the amount recovered. This financial incentive encourages profit-motivated bounty hunters to develop theories of liability not established or approved by the agency responsible for tax administration. Allowing private parties to intervene in the administration, interpretation or enforcement of the tax law commandeers the authority of the tax agency, creates uncertainty and can result in inequitable tax treatment.

While many other problems exist with application of false claims to tax matters, those issues are beyond the scope of this blog. Those concerned about this legislative development are encouraged to contact the authors.



New York Issues Much-Anticipated Guidance on Taxation of Telecommuting Employees

Since the outset of the COVID-19 pandemic and work-from-home mandates, New York employers and their nonresident employees have been waiting for the Department of Taxation and Finance to address the million-dollar question: Do wages earned by a nonresident who typically works in a New York office but is now telecommuting from another state due to the pandemic constitute New York source income? New York has historical guidance concerning the application of its “convenience of the employee/necessity of the employer” test, the test used to determine whether a telecommuting nonresident’s wages are sourced to New York, but until recently the Department had been silent as to whether or how such rule applied under the unprecedented circumstances of the COVID-19 pandemic.

As many expected, in a recent update to the residency FAQs, the Department clearly stated its position that a nonresident whose primary office is in New York State is considered to be working in New York State on days that he or she telecommutes from outside the state during the pandemic unless the employer has “established a bona fide employer office at [the] telecommuting location.” The Department adopted the “bona fide employer office” test in 2006 as its way of applying the convenience of the employee rule to employees that work from home. The bona fide employer office test is a factor-based test and, for the most part, a home office will not qualify as a bona fide employer office unless the employer takes specific actions to establish the location as a company office. (See: TSB-M-06(5)I, New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others.) As is apparent in the FAQ, the Department is mechanically applying this test to employees working from home as a result of the pandemic and is not providing any special rules or accommodations for employees that have been required or encouraged by New York State and local governments to telecommute.

Interestingly, the Massachusetts Department of Revenue took a similar approach to New York’s by promulgating a regulation requiring nonresidents that typically work in Massachusetts but are telecommuting from outside the state to pay tax on their wages. On October 19, 2020, New Hampshire filed a Motion for Leave to File Bill of Complaint with the United States Supreme Court challenging the constitutionality of Massachusetts’ regulation. We understand that New Jersey is considering joining New Hampshire in this lawsuit based on New York’s recent guidance, which would require many New Jersey residents to pay New York income tax even though they are no longer working in New York. The US Supreme Court has twice declined to rule on the constitutionality of the convenience-of-the-employee test, so stay tuned on this important development.



New York Legislation Proposes to Retroactively Remove FCA Culpability Standard for Tax Law Claims

With Halloween just a few weeks away, a scary proposal is brewing in the New York State Legislature that should give taxpayers chills. Companion bills Assembly Bill 11066 and Senate Bill 8872 were recently introduced by committee chairs (Assembly Ways and Means Chairwoman Helene Weinstein and Senate Committee on Judiciary Chairman Brad Hoylman). This legislation would substantially expand the scope of the New York False Claims Act (FCA) for claims under the New York State Tax Law by retroactively creating a new tax-specific cause of action that would award single (as opposed to treble) damages, including consequential damages when the taxpayer makes a false statement or record material to their obligation to pay money to state or local governments under the tax law by mistake or mere negligence.

Specifically, the bill would not modify the existing “knowing” causes of action in NY State Fin. Law § 189(1) that, if proven, result in civil penalties, treble damages and consequential damages. Instead, the bill would create a new tax-specific cause of action with strict liability—i.e., no intent requirement that the violation be shown to have been committed “knowingly” (with actual knowledge or deliberate ignorance or reckless disregard for the truth). As a result, inadvertent non-reckless tax mistakes, misunderstandings or mere negligence of the law would result in the taxpayer being subject to a viable claim under the FCA—something that is currently expressly prohibited by law. (See NY State Fin. Law § 188(3)(b) (“acts occurring by mistake or as a result of mere negligence are not covered by this article”).)

To make matters worse, the companion bills (as introduced) would “apply to all false claims, records, statements and obligations concealed, avoided or decreased on, prior to, or after such effective date.” (§ 4; emphasis added.) Thus, if enacted, the bill would open the door to 10 years of backward-looking scrutiny of tax law violations in court by private relators and the New York Attorney General—including years of tax periods that are currently closed under the New York Tax Law or were settled with the New York Department of Taxation and Finance. (See NY State Fin. Law § 192(1) (“[a] civil action under this article shall be commenced no later than ten years after the date on which the violation of this article is committed”).) As a reminder, the FCA would continue to only apply to tax law violations with pleaded damages in excess of $350,000 by persons with net income or sales of more than $1 million in at least one tax year at issue.

Practice Note

As if managing tax audits and potential compliance mistakes administratively was not enough, the introduced New York companion bills would allow a separate parallel path for litigious private parties and the New York Attorney General to enforce the tax law as they see fit in court—creating a framework that is ripe to drag well-intentioned taxpayers through the mud and force them to either defend themselves through costly litigation or unreasonably settle tax disputes over grey areas of the law to avoid bad publicity. As with current FCA practices, the Department of Taxation and Finance would sit on the sidelines during this process and have very little input on the trajectory of the litigation. If this proposal is enacted, it would result in a lose-lose situation for New York taxpayers and strip the Department of Taxation and Finance of its authority to administer the tax laws. In lieu of their autonomy to administer the tax laws when fraud or knowing violations are not present, the bill would create a tax compliance nightmare for everyday individual taxpayers and companies—benefiting only plaintiffs’ lawyers and the New York Attorney General (increase in population of available claims and taxpayers they can pursue) and state and local tax lawyers (increased legal advisory and defense work).

The good news is these troubling companion bills are still very early in the legislative process—both in committee in their chamber of origin. The current session adjourns December 31, 2020, and pending bills will not automatically carry over to the next legislative session. Like a storyline in a Vincent Price Halloween movie, this legislation should be buried and not brought into polite society. We encourage those interested in this troubling legislative development to contact the authors.



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