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NY Lawmakers OK Expanding Tax Whistleblower Law

06/10/2021 | Law360 Tax Authority
The New York Legislature passed a bill that would expand the state's False Claims Act to hold taxpayers liable for failing to file state returns, as opposed to only for providing false records.

The New York Senate approved S.B. 4730 by a 52-11 vote Wednesday. The bill, sponsored by Sen. Liz Krueger, D-Manhattan, is meant to expand the state's False Claims Act   by targeting corporations and the wealthy that don't file state tax returns, according to a bill summary. The bill has already been approved by the state's Assembly and now goes to Democratic Gov. Andrew Cuomo.

"Because of a loophole in the law, wealthy individuals and businesses who knowingly conceal or avoid their tax obligations by not filing any tax returns are not currently liable under the New York False Claims Act," Krueger said.

The act as currently written applies only to claims under the tax law if a person knowingly uses, or causes to be used, a false record related to an obligation to pay a state or local government. The bill would repeal a section of state finance law in order to make corporations or individuals with net income or sales of more than $1 million liable under the False Claims Act. They would be "knowingly and illegally" failing to file state tax returns that would cost the state at least $350,000 in lost revenue, according to a bill summary.

Because of the way the current law is written, some individuals and businesses may avoid state False Claims Act tax liability if they never file any tax returns in New York, a bill summary said. The omission means those individuals and businesses are liable under the False Claims Act for knowingly filing false tax returns, but not liable for knowingly and illegally failing to file any tax returns at all.

The New York False Claims Act was amended in 2013 because the U.S. Department of Health and Human Services determined that the state act was not as strict as the federal False Claims Act. The federal department required that the state act to provide a similar level of oversight as the federal act in order for New York to qualify for an increased allocation of Medicaid money recoveries.

Krueger previously told Law360 that state Senate Republicans in the 2013 change inserted a last-minute amendment that resulted in the current law, which does not hold liable entities that do not file at all.

Assemblywoman Helene E. Weinstein, D-Brooklyn, who sponsored the House's version of the bill told Law360 in a statement Thursday that the bill will help strengthen the state's False Claim Act, which she said has already recovered $582 million from large tax avoiders over the last decade.

"Filling this significant loophole will protect New York businesses from being at a competitive disadvantage to businesses headquartered out of New York who do business here, but do not file tax returns here as the law otherwise requires," Weinstein said.

Randall Fox, a partner at Kirby McInerney LLP who represents whistleblowers, told Law360 that the current law was created as a part of a compromise that left out liability for concealing or avoiding tax obligation in exchange for adding tax violations to the act.

"That meant, at least theoretically, that a tax cheater who knowingly failed to file a return at all might be able to avoid liability while a tax cheater who filed a return, but a knowingly false one, would face liability," Fox said. " From a policy perspective, there is no reason to draw that distinction between tax cheaters, and the new legislation takes that illogical distinction out of the mix."

Fox added that the bill's changes are especially important for going after out-of-state corporations and wealthy individuals who fail entirely to meet their New York tax obligations.

Gregory Krakower, former counselor to the New York attorney general who drafted the 2010 tax amendments to the state's False Claim Act, told Law360 that the bill should make those large out-of-state corporations that illegally source the income they earn in New York to states with lower taxes nervous.

"It also has implications for cases involving use taxes where, for example, fine art buyers purchase art in New York, and ship it back-and-forth out of state to a [New York] pied-á-terre — or office — to avoid sales taxes, and simply never file returns," Krakower said. "These are but samples of [New York] tax violations that whistleblowers, including accountants, are now clearly protected and rewarded for exposing in" the state.

Krakower added that the bill also sends a message that New York's tax qui tam experience is working and proves that the law is not abusive as some opponents predicted it would be when tax violations were added. Instead, the state has sought to expand the law after over a decade because of its success.

"That's a message to other states and Congress that tax whistleblower actions must be a tool to reduce tax fraud," he said.

The offices of state Republican minority leaders and state Democratic majority leaders in the Senate and Assembly didn't immediately respond to requests for comment on Thursday.

Cuomo's office didn't immediately respond to requests for comment on Thursday.