California tax agencies are known for aggressive enforcement of tax laws, so it was surprising when two state officials recently claimed government tax collectors aren’t up to the job, and more profit-seeking private lawyers should be allowed to jump into the tax-enforcement business.
That was the message in an event by Attorney General Xavier Becerra and Assembly Member Mark Stone promoting Assembly Bill 2570, which would extend California’s False Claims Act to issues already vigilantly enforced by the tax agencies.
The False Claims Act allows profit-seeking attorneys to sue people and collect damages if they win. The law currently doesn’t apply to tax disputes because state tax collectors already prosecute personal and corporate income tax fraud, and crack down on anyone who attempts to evade sales tax or other taxes.
Individuals and businesses that don’t strictly follow tax laws are penalized heavily. The Franchise Tax Board has an assortment of 79 penalties, including a fraud penalty imposed at 75 percent of the disputed amount (in addition to the actual tax liability), and large penalties for missing deadlines to file and pay income taxes. Many of the penalties can be enforced even if the taxpayer made a good-faith attempt to comply with the law.
The FTB’s website includes an online form for reporting suspected fraud, and existing provisions in the Revenue and Taxation Code give the FTB authority to establish a reward program for whistleblowers.
On top of that, any citizen can file a “private attorney general action” against a business based on allegations of tax avoidance, and if the business loses it will be ordered to pay the citizen’s legal fees.
Becerra and Stone don’t think that’s enough. They want to allow private attorneys to sue – for a large cut of the money, not just legal costs – when the disputed amount exceeds $200,000.
The flawed legislation would put taxpayers at risk of having to defend legitimate tax positions multiple times against multiple parties. After the FTB audits and clears a taxpayer, the attorney general or “prosecuting authority” could decide to investigate purported fraud, forcing the taxpayer to again defend itself against these allegations. Even if the attorney general agrees there is no fraud or crime and decides not to pursue the case, a private attorney could sue for alleged tax fraud.
Any claim or record made under the tax code could lead to a suit. This includes unintentional mistakes like errors in estimating quarterly sales tax prepayments, minor errors in calculating or reporting income or deductions, etc.
Under AB 2570, unscrupulous lawyers could seek awards up to three times the amount of actual damages the government sustained from the alleged false claim, along with civil penalties of $5,500 to $11,000 for each alleged violation. This could turn a $200,000 tax dispute into an $800,000 suit. Factor in legal expenses, and the cost to the taxpayer could increase to $1 million in the blink of an eye.
With such high stakes, even flimsy suits would pressure taxpayers to decide between spending on prolonged litigation, or simply paying less to settle.
California has experience with the side-effects of deputizing citizens in this manner. Some lawyers make a fortune suing small businesses for alleged violations of the Americans with Disabilities Act and offering settlements to make the suits go away.
Because many tax laws are open to interpretation, reasonable people can come to entirely different conclusions with the same set of facts. There have been significant debates, for example, over what constitutes “research” and “manufacturing” for tax credit purposes.
AB 2570 would allow lawyers to go after taxpayers who take reasonable but unprecedented positions, even when taxpayers fully disclose their intentions to the state. These taxpayers aren’t trying to defraud anyone – in fact, by disclosing their positions they alert tax agencies to potential issues.
The bill also would create confusion because there are different burdens of proof, evidentiary standards and statutes of limitations under the FCA and the Revenue and Taxation Code.
We don’t need to fix a system that isn’t broken – especially at a time when politicians should be laser-focused on strategies to get Californians back to work and reopen the economy.