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

By , and on October 14, 2020

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.

Stephen P. KranzStephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.


Diann SmithDiann Smith
Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. Her goal is to find the most effective method to achieve a client's objective regardless of when or how an issue arises. Diann emphasizes the importance of defining a client's objective - whether it is finality of a frequently audited issue, quick resolution of a stand-alone tax liability, or avoiding competitive disadvantages in the application of a tax. The defined objective then governs the choice of the path to a solution. Read Diann Smith's full bio.


Eric CarstensEric Carstens
  Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.

STAY CONNECTED

TOPICS

ARCHIVES