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Rise of the Tax "Snitch": How Amendments to New York's False Claims Act May Ensnare Taxpayers and Practitioners Alike

New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under New York tax law. If subject to the FCA, a taxpayer could be subject to civil penalties, treble damages, and

March 9, 2011

New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under New York tax law. If subject to the FCA, a taxpayer could be subject to civil penalties, treble damages, and reimbursement of the plaintiff’s costs including attorney fees. N.Y. STATE FIN. LAW § 189(1)(g), (3).

While the FCA has been in existence in New York since 2007, the recent amendment repeals a statutory preclusion for actions related to the tax law. Under the amendment, a taxpayer is subject to the FCA if it has at least $1 million in income or sales in a tax year and the whistleblower pleads damages in excess of $350,000. Id. § 189(4)(a). This dramatic change occurred quietly because the FCA is in the Finance Law rather than the Tax Law. Interestingly, Eric Schneiderman, New York’s Attorney General, was a chief proponent of the amendment while a member of the New York Senate, and he now has enhanced authority to investigate and commence civil actions under the amended FCA. Id. § 190(1).

The FCA provides incentives for whistleblowers to bring a lawsuit by awarding up to 30 percent of the recovered proceeds. Id. § 190(6). A whistleblower who planned or initiated the false act may even recover an award provided that the person is not convicted of a crime for the false act. Id. § 190(8). In addition, a strengthened immunity provision and added protections from retaliation virtually encourage current and former employees, contractors, or agents to become whistleblowers. Specifically, employees, contractors, and agents are protected from retaliation for transmitting any information for the purpose of investigating, filing, or potentially filing an action under the FCA, even if the transmission “violate[s] a contract, employment term, or duty owed to the employer or contractor.” Id. § 191(1)–(2).

Under the FCA, a false claim is “any request or demand...for money or property” that is fraudulent, in whole or part, and “is presented to...a state or local government” or a contractor on a government’s behalf. Id. § 188(1)–(2). Taxpayers could fall within this definition by filing a return for a refund or reduced liability. If so, liability would hinge on whether the taxpayer “knowingly” filed a false claim. A false claim is “knowingly” filed if the taxpayer had actual knowledge of the information or acted in “deliberate ignorance” or “reckless disregard” of the information’s veracity. Id. § 188(3). As a result, liability could exist even if the false claim is not intentional. Furthermore, the line between a recklessly filed false claim, which creates liability, and a negligently filed false claim, which does not create liability, is gray. For example, a taxpayer may file a return that knowingly contradicts guidance published by the Department of Taxation and Finance because the taxpayer believes that the guidance exceeds the Department’s authority or violates a constitutional limitation on state taxation. Even if such returns were filed under a reasonable belief that the guidance is incorrect, taxpayers may nonetheless incur liability under the FCA.

Tax practitioners should also have significant concerns. A person that “conspires” to knowingly file a false claim is subject to the FCA. Id. § 189(1)(c). This would include attorneys advising on the filed claim. Moreover, conspirators have the same liability as the taxpayer, which includes civil penalties, treble damages, and attorney fees. Id. § 189(1)(c), (g). Rest assured, we will be following this one closely!

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