In early March, New York State Attorney General Letitia James and New York City Corporation Counsel John E. Johnson announced a $105 million settlement against a hedge fund manager for tax evasion. The New York authorities were alerted to the potential of fraud in October 2018 by a whistleblower lawsuit brought under New York’s False Claims Act (FCA). This settlement adds to the more than $460 million in tax-related false claim settlements the state has collected to date. This recovery should alert businesses to the continued trend of states pursuing tax claims under their respective FCAs even though the federal FCA does not include tax claims.
New York passed its Fraud and Enforcement Recovery Act (Act) in 2010. The Act lifted the tax bar for FCA claims and allowed whistleblowers to file qui tam lawsuits regarding tax fraud for a portion of the recovery. Since then, New York has been a leader in this space. Last year, New York AG Letitia James wrote to then-California AG Xavier Becerra in support of legislation to amend California’s FCA to include tax issues. And recently when D.C. amended its FCA, council members said New York’s law inspired the change. Michigan has also considered similar amendments.
Proponents for including tax fraud in state FCAs stress that it is a powerful mechanism for enforcing tax laws and generating revenues. As previously indicated, these benefits are even more appealing given the way the pandemic has stretched state and local resources. This point was not lost on New York authorities. As Corporation Counsel Johnson put it: “Tax revenues pay for vital city services. When a deadly pandemic has eviscerated the economy and severely strained our city’s budget, every dollar counts.” Given the tight budgets of many cities and states, individuals and businesses should carefully monitor their state’s upcoming legislation, as states may consider expanding their FCAs to tax fraud claims by either adding an analog to the federal FCA or expanding liability under an existing state false claims law.