California is debating a bill that will allow the Attorney General and private attorneys to sue taxpayers who have mitigated their tax liabilities by lawful behavior.
AB 1270, introduced by assembly member Mark Stone earlier this year and passed by the Assembly in late May, removes the "tax bar" from the state's False Claims Act (CFCA), allowing attorneys to sue taxpayers for perceived tax errors.
Other states have False Claims Acts but they explicitly prohibit FCA litigation in the tax context, because of the risk of abuse by "bounty hunters" or the state itself.
If enacted, this bill will open the door for a cottage industry of financially driven plaintiffs' lawyers to act as bounty hunters in the state and local tax arena"
With its declared intent of "protecting public dollars against fraud", it lists a number of actions that would expose the actor to a CFCA lawsuit without there having been any finding of civil fraud. A taxpayer who "knowingly and improperly … decreases an obligation to pay or transmit money or property to the state or to any political subdivision" would be in violation of the CFCA.
"If enacted, this bill will open the door for a cottage industry of financially driven plaintiffs' lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation—even when the Attorney General's Office (AG) declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration," law firm McDermott Will & Emery warned.
The business community has concerns about allowing for-profit attorneys into tax enforcement. "This is particularly true when discussing a tool like the FCA, which provides massive penalties for the taxpayer and massive rewards for the private litigant. California's FCA provides the following penalties:
- $5,000-$11,000 per violation, adjusted for inflation.
- Two-to-three times the amount of actual damage to the public entity, as an added penalty.
- Attorney's fees if the plaintiff is successful, adding potentially hundreds of thousands of dollars to the cost of the lawsuit for a business.
Based on these strong penalties, a $200,000 tax dispute under the FCA could quickly balloon into a potential million-dollar dispute. Plaintiff's attorneys will be incentivized to bring lawsuits without any merit to scare businesses into paying settlements, and, facing such steep penalties, businesses will be compelled to pay to settle meritless claim," California's Chamber of Commerce said.
Last Friday (August 30), the state Senate Appropriations Committee voted to hold the bill under submission.