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Alert: California False Claims Expansion Bill Advances to the Senate

Like the days of the Old West, last week a masked gang held up local businesses demanding their wallets. Unlike the days of the Old West, this was not the hole-in-the-wall gang, but the California State Assembly who, on June 10, 2020, approved AB 2570, a bill that authorizes tax-based false claims actions. If passed, AB 2570 would expand the California False Claims Act (CFCA) to allow private, profit-motivated parties to bring punitive civil enforcement tax-based lawsuits. The bill now heads to the California Senate where its predecessor bill, AB 1270, failed last year.

According to the bill’s author, Assembly Member Mark Stone, there are two key differences between AB 2570 and last year’s AB 1270. First, AB 2570’s definition of “prosecuting authority” has been revised to remove the term “counsel retained by a political subdivision to act on its behalf.” In his comments on the Assembly floor, Stone explained that this amendment was “sought by the bill’s opponents” as it prevents local governments from contracting with private attorneys to bring tax CFCA lawsuits.

Second, AB 2570 mandates that a plaintiff’s complaint must be kept under seal for 60 days and can only be served on a defendant by court order. According to Stone, this second amendment will prevent qui tam attorneys from bringing suit if they send demand letters to the taxpayer before the expiration of this 60-day period.

Although these amendments are minor improvements upon last year’s bill, they are not enough to prevent the rampant abuse that will certainly accompany an expansion of the CFCA. Moreover, as Stone has acknowledged AB 2570 rests on the faulty premise that insider information is generally required to establish a “successful” tax enforcement claim. In his comments to the assembly, Stone stated:

No one questions the ability of the Franchise Tax Board and the California Department of Tax and Fee Administration (CDTFA) to skillfully administer the tax law within their respective jurisdictions. This bill, rather, rests on the premise that there are individuals—often current or former employees of a company—who have access to information establishing that tax authorities have been misled as to the amounts owed by the company. These cases are difficult to uncover without the cooperation of an insider because there is no other way to bring the relevant documents and information to light if a company is determined to commit fraud.

However, as evidenced by the states where an FCA has been expanded to tax cases, such as Illinois and New York, very few FCA tax cases involve internal whistleblowers, actual fraud or reckless disregard of clear law. Instead, they typically involve inadvertent errors or good-faith interpretations of murky tax law. As a result, expanding the CFCA to tax claims will only serve to hurt good-faith taxpayers who are already struggling to survive and recover from the economic impacts of COVID-19. Such legislation could force taxpayers to incur enormous costs or pressure them into settlements to make the case go away to avoid the [...]

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Vultures Circling as Bill to Expand California FCA to Tax Looms in Legislature

Legislators in Sacramento are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade. AB 1270, introduced earlier this year and passed by the Assembly in late May, would amend the California False Claims Act (CFCA) to remove the “tax bar,” a prohibition that exists in the federal False Claims Act and the vast majority of states with similar laws.

If enacted, this bill will open the door for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation—even when the Attorney General’s Office (AG) declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration. (more…)




California Bill Would Remove Tax Bar to False Claims Act

California legislators have recently introduced a bill, AB 1270, that would amend the False Claims Act (Act) to strike the tax bar. As introduced, the bill would amend the existing false claims statute in the state of California to expressly authorize tax-related false claims actions against a person whose reported taxable income, net income, or sales totaled $500,000 or more in to which the claim pertained, and the damages pleaded in the action total $200,000 or more. Also, “[t]he bill would authorize the Attorney General or the prosecuting authority, but not the qui tam plaintiff, to obtain otherwise confidential records relating to taxes, fees, or other obligations under the Revenue and Taxation Code. The bill would prohibit the disclosure of federal tax information to the Attorney General or the prosecuting authority without authorization from the Internal Revenue Service.”

Under current California law, those making false or fraudulent claims to state or local governments can be liable to the state or locality for treble damages, including consequential damages, attorneys’ fees and a civil penalty of between $5,500 and $11,000 for each violation. The False Claims Act does not apply to claims made under the Revenue and Taxation Code.

In addition to repealing the exception for false claims made under the Revenue and Taxation code, the bill would expand the definition of “prosecuting authority” to include “counsel retained by a political subdivision to act on its behalf.” This opens a wide door to the use of contingent fee “bounty hunters” by localities for the prosecution of false tax claims.  The bill makes no provision for review of the allegedly false tax claims by any of the governmental agencies charged with interpretation of the Revenue and Tax Code, such as the Franchise Tax Board or the California Department of Tax and Fee Administration.

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 in tax enforcement decisions. Allowing private parties to intervene in the administration, interpretation or enforcement of the tax law commandeers the authority of the tax agency, compounded by the use by local governments of contingent-fee outside attorneys, 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.




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