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New York's False Claims Act:
Good or bad tax administration?
Flying below the tax community's radar screen, the New York State Legislature effectively repealed the exemption for tax claims in the State's False Claims Act (FCA),¹ making New York what would appear to be the only state whose false claims act affirmatively applies to tax claims. Modeled on the federal False Claims Act² and those of other states, New York’s FCA sets forth procedures under which whistleblowers can provide information about false claims against New York state or its local governments and recover rewards based on recoveries from the false claimants.
Liability under the New York False Claims Act
In addition to actions commenced by whistleblowers, the FCA authorizes the attorney general and local governments to initiate their own false claims actions (in which case rewards are not paid to whistleblowers).
The FCA imposes a civil penalty of 300 percent of the amount of damages sustained by the state or local government.3 False claimants are also liable for attorney fees.4 Awards to whistleblowers under the FCA can be correspondingly large, ranging as high as 30 percent of the amount recovered.5
Liability under the FCA may be imposed on any person who:
- Knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval
- Has possession of money used, or to be used, by the state or local government and knowingly delivers, or causes to be delivered, less than all of that money
- Knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government, or
- Conspires to do any of the above6
The FCA now appears to cover false tax returns that understate tax liability or seek a tax refund.7 Because penalties are extended to persons conspiring to commit those acts, they potentially apply to tax preparers and tax advisers as well as the taxpayers themselves.8 These FCA penalties apply in addition to the civil and criminal penalties on taxpayers and preparers under the Tax Law.
This article explores the implications of the new law for tax administration in New York and potentially in other jurisdictions that are considering New York’s approach.
By Jim Wetzler of Deloitte Tax LLP, originally published in Tax Analysts in April 2011
1The FCA is found under N.Y. State Fin. Law sections 187-194. The law amending the exemption for tax claims (and making various other modifications to the FCA) is 2010 N.Y. LAWS 379.
231 U.S.C. sections 3729-3733.
3 N.Y. State Fin. Law section 189.1(g). There is also a penalty of between $6,000 and $12,000. Id. The maximum penalty is reduced to 200 percent of the damages if the false claimant cooperates with the investigation in certain ways. Id. at section 189.2.
4 Id. at section 189.3.
5 Id. at section 190.6(b).
6 Id. at sections 189.1(a), (c), (d), (g).