Report Opposing Legislation to Further Expand the False Claims Act Into Matters of Tax Administration

The State and Local Taxation Committee opposed two pending state bills, A.2543/S.4730 and A.2506/S.5319, which would further expand the False Claims Act (“FCA”), found at N.Y.S. Finance Law §§ 187 to 194, into matters of tax administration which are more properly vested by the state’s Department of Taxation and Finance (“Department”) under its existing authority. In addition to divesting the Department of matters within its ambit, the Committee raised concerns regarding the overbreadth of the bills.

A.2543 (AM Weinstein) / S.4730 (Sen. Krueger) – Relates to the liability of a person who presents false claims for money or property to the state or a local government (NYS 2021)

A.2506 (AM Weinstein) / S.5319 (Sen. Hoylman) – Relates to the liability of a person who makes or uses a false record or statement material to an obligation to pay money to the state or a local government under the tax law (NYS 2021)

OUTCOME

A.2543 / S.4730 Vetoed by the Governor, Veto Memo 83 – December 31, 2021

REPORT

REPORT ON LEGISLATION BY THE STATE AND LOCAL TAX COMMITTEE

A.2543 (M. of A. Weinstein)

S.4730 (Sen. Krueger)

AN ACT to amend the state finance law, in relation to the liability of a person who presents false claims for money or property to the state or local government

A.2506 (M. of A. Weinstein)

S.5319 (Sen. Hoylman)

AN ACT to amend the state finance law, in relation to the liability of a person who makes or uses a false record or statement material to an obligation to pay money to the state or a local government under the tax law, or who conceals or improperly avoids or decreases an obligation to pay money to the state or a local government under the tax law

THESE BILLS ARE OPPOSED

The State and Local Tax Committee of the New York City Bar Association writes to express opposition to the pending bills, which would further expand the False Claims Act (“FCA”), found at N.Y.S. Finance Law §§ 187 to 194, into matters of tax administration which are more properly vested by the state’s Department of Taxation and Finance (“Department”) under its existing authority.[1]

The State’s FCA did not originally apply to tax claims.  In 2010, as part of amendments that sought to create a “false claims act on steroids”[2] and with the Department recommending approval, the FCA was expanded to include state tax claims.  L. 2010, c. 379.  That legislation included treble damages and mandatory civil penalties for tax fraud and created the “first-in-the-nation program to allow whistle-blowers to go after millionaire tax cheats that defraud the state of over $350,000.”[3]  Supporters of the legislation touted it as a fraud deterrence and revenue raising measure.  However, detractors of the FCA tax expansion provisions pointed to its potential misuse , its long statute of limitations period (10 years), which substantially exceeds the statute of limitations periods provided under the State’s tax laws (generally three years and extended to six years if there has been a substantial tax understatement).  There is no statute of limitations in instances of fraud.  Another criticism of using the FCA in tax matters is that such application may directly conflict with considered positions taken by the Department on audit, undermining the Department’s ability to resolve disputed issues with finality.[4]  The proposed bills would expand the FCA’s reach even further.

A.2506/S.5319 would remove the statutory requirement that the individual or business make the false claim “knowingly.”  Removing the “knowingly” prerequisite could potentially extend to every situation where a tax deficiency may be asserted, creating a serious overbreadth concern.  Tax law is not black and white but is often gray.  It is not unusual for positions taken by the Department to be overturned by the State’s Tax Appeals Tribunal or the courts.  Although the proposed legislation would limit the damages to the amount of tax, plus consequential damages, including interest, rather than the treble damages and statutory civil penalties otherwise imposed by the FCA, the legal costs and resources needed to defend against an FCA action, and award of attorneys’ fees and costs to a successful relator provided by the FCA can be daunting.  Further, since the bills provide that they would apply to false claims, records, statements and obligations avoided or decreased on prior to the effective date, such retroactive application creates significant due process concerns.[5]  For these reasons, the Committee recommends that this proposed legislation be rejected.

A.2543/S.4730 would extend the FCA to instances where a taxpayer knowingly fails to file a return, which the sponsor’s memo states is a “loophole” in the current FCA because the statute imposes a liability where a person made or used false statements or records that were material to an obligation to pay money to the government, such that nonfilers may be viewed as falling outside the FCA’s scope.  However, the Attorney General’s office has long taken the position that nonfilers are within the scope of the FCA, settlements have been obtained on such basis, and the position has already been upheld by the courts.[6]  Further, many nonfiler situations involve nexus (tax jurisdiction) situations, determinations of domicile, and applications of Public Law § 86-272,[7] which often require subjective fact-specific determinations and the application of developing law.  One need only review tax decisions on nexus, domicile and P.L. 86-272 to conclude that the delineation between taxable and nontaxable is often unclear and such determinations are best addressed by the Department as part of the normal tax administration function, rather than through the FCA.  The Committee recommends that this proposed legislation be rejected.

State and Local Tax Committee

Amy F. Nogid, Chair

April 2021