Posted by HL Rogers and Loui Itoh
Although the federal FCA specifically exempts tax fraud, New York is one of over 30 states and four municipalities that have enacted separate FCA laws. These state FCA laws generally follow the federal FCA but vary in certain specifics. For instance, New York’s state FCA law specifically exempted tax fraud, similar to the federal FCA, when it was passed in 2007. However, it was expanded in 2010 by amendments that allowed, among other things, whistleblower claims related to tax fraud. This expanded provision had not been successfully used until this month when New York announced its first FCA tax recovery. The settlement marks the first time that an FCA has been used to penalize tax fraud. Critics and experts will be watching closely to see if this recent recovery will lead to a new national trend.
On March 5, 2013, New York Attorney General Eric T. Schneiderman announced that tailor Mohanbhai “Mohan” Ramchandani and his business corporation, Mohan’s Custom Tailors, Inc., pled guilty to a ten-year tax evasion scheme and agreed to pay a $5.5 million civil settlement for claims filed under New York State’s False Claims Act. The civil claims were first raised by a whistleblower who offered insider information and will receive a $1.1 million award under the New York FCA’s relator award provisions.
The Attorney General’s investigation concluded that since 2002, Mohan and his business had knowingly failed to pay at least $1.7 million in state and local sales taxes, and that Mohan himself owed at least $256,000 in state and local personal income taxes. Mohan confessed to these charges before the New York County Supreme Court, admitting that he and his business had knowingly failed to pay nearly $2 million in taxes. In addition to the civil settlement, Mohan faces up to three years in prison for the felony charges.
Although it specifically exempted tax fraud when it was passed in 2007, New York’s FCA was expanded in 2010 by amendments authored by Attorney General Schneiderman, who was then a state senator. Schneiderman called the newly expanded state FCA, a “False Claims Act on Steroids.” The revised FCA allows a whistleblower to bring a qui tam suit against an individual or business that makes more than $ 1 million net income and defrauds the state by more than $350,000 in taxes. The relator may keep up to 25 to 30 percent of the recovery, depending on whether the government joins the suit. The question remains whether this will become a national trend and another consistent tool in state governments’ arsenals to penalize tax fraud.