California Attorney General Xavier Becerra and Assembly Member Mark Stone announced February 20 that they are reintroducing legislation (AB 2570, Stone) to expand the False Claims Act to claims, records, and statements made under the Revenue and Taxation Code.
The legislation closely mirrors the last amended version of last session’s version (AB 1270, Stone), which was approved by the Assembly but failed to clear the Senate Appropriations Committee. Among other things, it would allow private lawyers to bring nuisance suits based on tax disputes – with the possibility of receiving major financial rewards – and would create uncertainty for taxpayers because the False Claims Act conflicts with existing state tax law.
The bill would apply the False Claims Act to claims, records, or statements made under the Revenue and Taxation Code if specified conditions are met, including if damages pleaded in an action under the act exceed $200,000 and the claim, record, or statement was made on or after January 1, 2021.
“This legislation is completely unnecessary, since California already has very strong anti-fraud laws, huge penalties and tax agencies known for their aggressive pursuit of anyone who attempts to evade taxes,” CalTax President Robert Gutierrez said. “This legislation would introduce conflicting standards into tax law and would create double-jeopardy by allowing private attorneys to sue taxpayers even after a tax agency determines the taxpayer doesn’t owe anything and hasn’t violated any laws.”
Becerra and Stone announced their legislation at a press conference in the Attorney General’s Office. During the media event, they repeatedly cited the Franchise Tax Board’s estimate of a $20 billion “tax gap,” alleging that the figure represents fraud and illegal tax dodging by large corporations. However, a Legislative Analyst’s Office report in 2005 stated, “The IRS estimates that individual non-compliance represents about three-quarters of the tax gap and business activity represent[s] the remaining one-quarter.” The analyst found that underreporting of income represented approximately 80 percent of the tax gap, and that when it comes to business underreporting, small businesses and independent contractors presented the biggest problems.
“The FTB, as well as independent researchers, have identified particular businesses and occupations that seem especially prone to underreporting income and other types noncompliance that contribute to the tax gap,” the analyst wrote. “These activities appear to be concentrated in areas where cash payments are common and there are difficulties with information reporting. Some examples include: nannies, tutors, house keepers, and landscapers, as well as other types of service businesses. In addition, professional or informal contractors who work for cash also seem to be susceptible to noncompliance, as do some waitresses and waiters, and professionals who trade or barter services.”
The analyst added, “Noncompliance among larger corporations tends to result from interpretation of existing tax laws which can result in excessive deductions or credits based on business activities.” Since the FTB already has a robust system for auditing and disallowing deductions and credits, it is unlikely that AB 2570 would result in additional revenue from large corporations.
FTB publishes lists of delinquent taxpayers, showing the amount of income taxes determined to be due and payable, but not yet collected for reasons that could include insufficient funds, business closures, bankruptcies, willful defiance by tax protesters, etc. – not necessarily related to fraud.
Gutierrez noted that the FTB aggressively pursues tax liabilities using penalties, liens on bank accounts and other assets, interception of federal tax refunds and other methods.
A fiscal analysis of last year’s legislation did not project any increase in revenue to California, illustrating that there is no lack of anti-fraud statutes or mechanisms in state law. California applies civil and criminal liability for fraud under Revenue and Taxation Code Section 19706 (tax fraud) and Penal Code Section 72 (false statement to public entities may constitute a felony).
Additionally, the Franchise Tax Board maintains a website that encourages individuals to report suspected tax fraud, and the agency imposes large penalties for fraud. For example, a limited liability company that understates its tax liability will face an accuracy penalty of 20 percent of the underpayment or a fraud penalty of 75 percent of the underpayment (Revenue and Taxation Code Section 19164).
“The state of California punishes tax cheats severely, as it should,” Gutierrez said. “This bill, however, would inject for-profit lawyers into tax enforcement, creating an incentive for unscrupulous attorneys to file meritless suits to scare employers into paying settlements.”
Opponents noted that in Illinois, a similar law has been abused by a lawyer who filed hundreds of False Claims Act suits after ordering products online and alleging that the out-of-state companies improperly complied with Illinois tax law.