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Proposed Changes to NY FCA Tax Provisions Rattle Potential Tax Fraudsters

Posted  October 16, 2020

New York is one of several states that has provisions in its state False Claims Act (“NY FCA”) allowing whistleblower (or qui tam) suits for violations of the state’s tax laws. On August 3, 2020 (Senate) and October 7, 2020 (Assembly), the New York state legislature, introduced bills proposing revisions to the NY FCA’s tax provisions.

The Proposed Legislation

The Senate bill’s accompanying memorandum states that the new provisions would allow the government and whistleblowers to bring NY FCA claims against individuals and businesses for false claims regarding unpaid tax obligations, without having to show the individuals or businesses made the false claims “knowingly.” Essentially, the bill removes the “scienter,” or knowledge, requirement for NY FCA matters related to tax fraud, meaning individuals and businesses can be found culpable for unpaid tax obligations even if the false claims leading to the tax avoidance were not made knowingly or with reckless disregard. The bill would also apply this change retroactively. The bill leaves unchanged the current threshold structure of the NY FCA tax provisions, which requires a damages threshold of $350,000 and net income or sales of over $1 million for at minimum one tax year at issue.

These changes would enable both the New York Attorney General’s office and whistleblowers to more aggressively pursue individuals or businesses that avoid paying substantial amounts of taxes. By maintaining the thresholds, the bills ensure that not every minor mistake or error will be deemed a tax violation subject to litigation. They require Individuals and businesses to be responsible for their tax obligations, just like everybody else.

Whistleblowers Play a Key Role in Enforcement

Predictably, following the announcement of the proposed bills, defense-bar commentators—who earn their keep defending accused fraudsters—retreated to tired tropes, dubbing potential qui tam whistleblowers “opportunistic” and arguing that whistleblower rewards amount to paying a “commission.” Whistleblowers are an essential part of uncovering fraud and have already paid a key role in enforcement of the NY FCA tax provisions. Over the last ten years, New York has recovered hundreds of millions of dollars from tax cheats using its statute.   For example, in December 2018, Sprint paid $330 million to settle a whistleblower action alleging it knowingly failed to pay state sales taxes. And in 2017, New York reached a $40 million settlement with Harbart Management Corporation for violating the law. Another aspect defense-bar commentators often forget is that whistleblowers take on great personal and professional risks, as whistleblowing often leads ostracism, retaliation, and blacklisting when a whistleblower’s identity becomes public.

At the federal level, whistleblowers have made substantial contributions to collecting tax proceeds through whistleblower submissions. In its FY 2019 annual report, the IRS whistleblower office reported that proceeds collected from whistleblower-initiated actions exceeded $1.4 billion in FY 2018 and $600 million in FY 2019. The new legislation proposed in New York positions whistleblowers to expose even more fraudulent tax avoidance schemes.

The bills are in the early stages of consideration. What is not in doubt is that the NY FCA’s tax provisions have already borne substantial fruit, and should grow to ensnare more tax cheats who bilk all of us.

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Tagged in: FCA State, IRS Whistleblower Reward Program, Legislation and Regulation News, Tax Fraud,


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