Backers of ‘False Claims Act’ Bill Make False Claims of Their Own

Robert Gutierrez
President and CEO of the California Taxpayers Association

The sponsors of AB 2570 – a flawed proposal to deputize profit-seeking attorneys to engage in tax collection – continue to claim that California has a $20 billion “tax gap,” despite being alerted that the that number has no basis in fact.

The “tax gap” is the estimated difference between what taxpayers owe under the law and what they actually pay. The $20 billion claim was used in the AB 2570 proponents’ press conference and social media posts, and appeared again in the analysis for this week’s hearing of the Assembly Judiciary Committee, which is chaired by the bill’s author. The analysis states that the Franchise Tax Board estimated the tax gap to be $20 billion to $25 billion in 2019, and cites the figure again after noting that it “has since been removed” from the FTB’s website.

The analysis does not explain that the figure was removed from the FTB’s website because the tax agency determined it could not be substantiated.

It is disappointing that proponents of this bill continue making false claims rather than admitting they have been relying on a “statistic” that doesn’t exist.

In February, CalTax asked the FTB how its tax gap estimate was calculated, noting that the agency’s website then indicated the figure was based on a dated IRS report on federal taxes. The FTB responded: “Thank you for bringing this to our attention. As FTB looked through our archives, we were not able to determine a reference point for the $20 – $25 billion. We will remove this statement to ensure further confusion does not occur.”

The FTB did the right thing by taking immediate corrective action to ensure that the public and elected officials are not misinformed as the Legislature considers AB 2570.

This legislation proposes extending California’s False Claims Act to issues already enforced by the tax agencies. The False Claims Act allows profit-seeking lawyers to sue individuals and business owners and collect damages if they win. The law currently doesn’t apply to tax disputes because state tax agencies already aggressively enforce these laws, using their special access to the confidential financial information of businesses and individuals.

Supporters of AB 2570 make the false claim about California’s tax gap in an effort to mislead people into thinking the legislation would result in a revenue windfall for the state.

Any estimate of the tax gap should be examined closely to determine, among other things:

  •       Is it Current? According to the FTB, the withdrawn $20 billion estimate was based on an IRS report that examined compliance with federal tax laws – not California tax laws – during the 2008 to 2010 tax years. California has made many tax-administration improvements since 2008, including implementing the Enterprise Data to Revenue Project, which the FTB said generated approximately $3.7 billion in additional revenue from 2011 to 2016, and an additional $1 billion annually thereafter. The project is now in its second phase, and one of the five major components of this stage is: “Increased audit modeling and fraud detection – Using new data and dynamic modeling strategies to proactively approach noncompliant behavior and address the tax gap.” Before deputizing profit-seeking attorneys to also engage in tax collection, the state should fully implement and review the existing anti-fraud effort, which includes significant spending on technology and additional personnel.
  •       Does it Reflect Tax Administration in California? California’s tax agencies are known for being more aggressive than the IRS, with authority to impose harsher penalties to encourage compliance, so federal compliance data is not an accurate measurement of state compliance. For example, the FTB has authority to impose an assortment of 79 penalties, including a fraud penalty of 75 percent of the disputed amount (in addition to the actual tax liability). Additionally, tax gap reports from the IRS examine federal taxes that may not relate to California’s unique sales tax, tobacco tax, gas tax, property tax or other taxes. Tools used by California’s tax agencies include undercover investigations of restaurants, bars, cannabis shops and other businesses to check for fraud; whistleblower tips to county assessors on new construction and other factors that might increase property taxes; law enforcement reports to the California Department of Tax and Fee Administration on recreational vehicles driven in California, so the CDTFA can check for possible taxes owed; and extensive data-sharing with state and federal government agencies to discover unreported income and questionable transactions.
  •       Does it Include Taxes That Are Late but Will Be Collected? Some “tax gap” estimates include tax liabilities that are overdue, but almost certainly will be collected – with penalties and interest – under the existing system. Late payments are common, and typically are made either through self-compliance or through the tax agencies’ authority to take collection action and seize funds from bank accounts. Due to stiff penalties and interest charges, the state does not lose money on payments that are made after the legal deadlines.
  •       Does it Include Taxes That Are Uncollectable? “Tax gap” estimates are likely to include taxes that are simply uncollectable, for reasons including the death of the taxpayer, the failure of the business that owes the taxes, or the taxpayer’s inability to pay. When considering tax gap estimates, policy makers should not assume they represent a potential revenue windfall.
  •       Does it Include Tax Liabilities That Would Not Be Impacted by the “Solution” Being Proposed? Tax gap estimates typically include every form of tax avoidance – people who claim head-of-household filing status when they don’t qualify, business owners who inflate business expenses, restaurant owners who pocket cash instead of reporting taxable sales, workers who don’t report tips as income, etc. – but it is unlikely that any proposal to address the tax gap would impact all of these areas. When considering tax gap estimates in relation to proposed solutions, policy makers should consider only the portion of the tax gap that would be impacted.
  •       What Is the Margin of Error? Tax gap estimates typically include broad disclaimers indicating a large margin of error, because tax agencies simply have no way of knowing exactly how many tax dollars are going uncollected. Policy makers should treat tax gap figures as educated guesses made at certain points in time, not concrete calculations of potential new revenue.

California’s aggressive, high-tech tax collectors are experts at catching and punishing tax cheats, and their work benefits all law-abiding taxpayers. There’s no need to change things simply to benefit the profit-seeking lawyers who are supporting this legislation. This bill is not only unnecessary, but is also a distraction from the COVID-19 relief that lawmakers should be focusing on.

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