State False Claims Acts: “Knowing” Why They Matter for Tax Professionals

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Like the federal government, many states have adopted False Claims Act (FCA) provisions that exclude tax matters from coverage. The federal model makes clear that matters under the Internal Revenue Service are not covered by the law,[1] and in the vast majority of cases, states also explicitly exclude tax from coverage.[2] However, there is a growing number of states seeking to extend FCA liability to tax cases in which “knowing” causes of action apply to any person that knowingly conceals, avoids or decreases an obligation to pay the state.[3] In such states, FCA liability, including punitive penalties and damages, will be argued to create liability for certified public accountants (CPAs) and other tax professionals who advise clients to take a favorable tax position on a tax return or simply file a return with an “error.” Under a “knowing” standard, an “error” is asserted to exist when the taxpayer’s position differs from someone else’s view of the law—the reasonableness of the position simply does not matter.

This risk is not hyperbole. On March 23, 2022, New York Attorney General Letitia James issued a warning to cryptocurrency investors and their tax advisors: “The consequences of a taxpayer’s failure to properly report income . . . are potentially far-reaching and severe [and could] result in taxpayer liability under the New York False Claims Act,” adding, “False Claims Act liability may also extend to tax professionals advising clients. . .”[4]

New York and Washington, DC, already extend FCA liability to tax cases and apply a “knowing” standard. In other states, FCA expansion bills have started popping up, too. For instance, there is currently a FCA bill before Ohio legislature proposing to extend FCA liability to tax cases and any person that “[k]nowingly present[s], or cause[s] to be presented, to an officer or employee of the state. . .a false or misleading claim for payment or approval.”[5] Recently, a proposal to expand the Connecticut FCA to tax cases failed to advance.[6] While the Connecticut FCA already includes a “knowing” standard, it only applies to false claims made in the Medicaid context. Additionally, New York legislature is considering a bill that would further expand the application of its FCA’s “knowledge” standard to “obligations” under the Tax Law.[7] However, the term is not defined in the Tax Law, making it unclear whether it would apply only to the “obligation” to file a return or to situations where a CPA or tax advisor provides general advice on a specific tax matter.

The trend to loosen the standard for state FCAs liability is a problematic shift leading to lawsuits that will assert that simply providing advice or a good-faith interpretation of the tax law to a client could result in liability under a state’s FCA. Adding insult to injury, these suits will threaten treble damages, attorneys’ fees and civil penalties per occurrence. Taxpayers and their advisors should know the breadth of each state’s FCA provisions and take them into account as they advise clients on tax compliance obligations. Failure to do so will result in exposure to entrepreneurial plaintiffs seeking to exploit the weaknesses in the tax law to assert liability against companies and their advisors.

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[1] See 31 U.S.C. § 3729(d) (“This section does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”).

[2] See, e.g., Cal. Gov’t Code § 12651(f) (2018); Iowa Code § 685.2(5) (2011); Md. Code Ann., Gen. Provisions § 8-102(a) (2015); Mass. Gen. Laws Ann. ch. 12, § 5B(d) (2012); Minn. Stat. § 15C.03 (2019); N.C. Gen. Stat. § 1-607(c) (2018); Vt. Stat. Ann. tit. 32, § 631(d) (2015); 2004 Va. Acts ch. 589.

[3] See, e.g., N.Y. State Fin. Law § 189(1).

[4] TAXPAYER NOTICE: Attorney General James Reminds Crypto Investors to Pay Taxes on Virtual Investments, March 23, 2022 (available at https://ag.ny.gov/press-release/2022/taxpayer-notice-attorney-general-james-reminds-crypto-investors-pay-taxes-virtual).

[5] Ohio House Bill No. 533, Sec. 2747.02(1) (2022).

[6] Connecticut Raised Bill No. 426 (2022).

[7] New York Bill S. 8815 (A. 9975) (2022).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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