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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 [...]

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AB 2570: Déjà vu All over Again as California Attempts to Amend CFCA

California’s Attorney General, Xavier Becerra, and Assembly Member Mark Stone have again advanced legislation that would amend the California False Claims Act (CFCA) to enlist private bounty hunters to go after California taxpayers. Becerra described the latest bill, AB 2570, as an additional tool to combat against “corporate cheats” whom Becerra claimed cost the state billions in lost revenue in 2019. Of course, the state already possesses an arsenal of tools to combat any underreporting: currently, the power to investigate cases of suspected tax fraud rests with the California Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA). Thus, as many of the predecessor bill’s critics have adeptly noted, AB 2570 is more appropriately characterized as a “solution in search of a problem.”

The text of AB 2570 is almost identical to its predecessor, AB 1270, which failed to make it out of the legislature last year, and has likely given California’s business-savvy taxpayers a sense of dread-filled déjà vu. AB 1270 came under intense opposition last summer because, as seen in other states, allowing qui tam plaintiffs to initiate civil suits for state and local tax issues leads to abusive practices and undermines the goal of voluntary compliance in tax administration.

Like AB 1270, AB 2570 is replete with problematic provisions, including: (1) the imposition of a separate statute of limitations that will arguably trump any shorter limitations periods imposed by the Revenue & Taxation Code (See Cal. Gov’t Code § 12654(a) which permits claims under the CFCA to be pursued for up to 10 years after the date the violation was committed, compared to standard three or four years for tax audits); (2) a more lenient burden of proof for elements of an alleged violation; and, (3) extremely punitive damages—violators are subject to treble damages (i.e., three times the amount of the underreported tax, interest and penalties), an additional civil penalty of $5,500 to $11,000 for each violation, plus the costs of the civil action to recover the damages and penalties including attorney’s fees.

Unfortunately, private enforcement of state tax code violations has erupted over the past few years after whistleblowers in New York and Illinois purportedly have racked up multimillion dollar settlements as the result of such claims. If enacted, AB 2570 will open the floodgates to a slew of financially incentivized plaintiffs’ attorneys who are eager to enter the litigation lottery in hopes of winning a jackpot settlement payout from California’s taxpayers.

As discussed in our blog post from August 26, 2019, Vultures Circling as Bill to Expand California FCA to Tax Looms in Legislature, regarding AB 1270, when a false claims suit is filed by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds are divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds. See Cal. Gov’t Code § 12652(g)(3). Thus, this practice can be very lucrative for aggressive plaintiff’s attorneys.

Even [...]

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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…)




DC Council Introduces False Claims Expansion – Taxpayers Beware!

Last month, a bill (The False Claims Amendment Act of 2017, B22-0166) was introduced by District of Columbia Councilmember Mary Cheh that would allow tax-related false claims against large taxpayers. Co-sponsors of the bill include Chairman Jack Evans and Councilmember Anita Bonds. Specifically, the bill would amend the existing false claims statute to expressly authorize tax-related false claims actions against persons 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. The bill was referred to the Committee of the Whole upon introduction, but has not advanced or been taken up since then. Nearly identical bills were introduced by Councilmember Cheh in 2013 and 2016. (more…)




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