A bill that would include private plaintiffs’ attorneys in tax enforcement actions passed the California Assembly last week, a move that opponents say would add to the state’s budget crisis and lead to costs that cause more businesses to shut down or move out of California.
“AB 2570 is a solution without a problem,” Kyla Christoffersen Powell, president and CEO of the Civil Justice Association of California (CJAC) told the Northern California Record by email. “Expansion of the False Claims Act [CFCA] under this bill would make plaintiffs’ attorneys into tax bounty hunters with a license to shakedown taxpayers and businesses alike. These attorneys, unlike unbiased regulators, would be incentivized to wage litigation in order to garner fees – further burdening businesses during these unprecedented times.”
Powell noted that California already has two well-funded tax agencies with nearly 10,000 employees and entire investigation and legal teams to identify and prosecute tax evasion and fraud: The California Franchise Tax Board and the California Department of Tax and Fee Administration.
In a letter to California State Assembly Members prior to last week’s vote, CJAC VP Jaime Huff wrote, “Penalties for violations of the CFCA range between $5,000 and $11,000 per violation, plus treble damages, including consequential damages, and the cost of bringing the action.
“As a result, in a situation where a person or business takes an aggressive but credible position on a tax return, the bill could turn a $200,000 tax dispute into a potential exposure for the taxpayer that could easily exceed seven figures,” Huff said.
AB 2570, sponsored by Assembly Member Mark Stone, D-Monterey Bay, is similar to AB 1270, which Stone proposed last year but did not pass the legislature.
“In a normal legislative year with no Covid this would have gone through the tax committee,” David Kline, VP of Communications and Research with the California Taxpayers Association (CalTax), told the Record.
“Because of Covid, they scaled back committee hearings. What they did with AB 2570, they canceled the tax committee hearing and the chairman of the Judiciary Committee is the author of it, so even for a huge change in tax policy, they never held a tax committee hearing. This definitely bypassed the true policy discussion that you would want to have on a bill like this,” Kline said.
Assembly member Stone did not reply to a request for comment.
The bill now moves to the Senate, where it will be referred to one or more policy committees for a hearing and vote in the second half of July, Jith Meganathan, staff counsel, Assembly Judiciary Committee, told the Record by email.
“AB 2570 will be amended in the Senate to prohibit private attorneys from filing cases if they make pre-suit settlement demands. This amendment will prevent lawyers from seeking to intimidate businesses by threatening suits they have no intention of filing,” Meganathan said.
“It creates a new threat of litigation even for law abiding taxpayers, and with no real benefit to the state because fraud is already aggressively pursued and punished,” Kline of CalTax said.
Opponents also say the legislation will not produce the revenues that some supporters have projected.
“The author and others have claimed that this bill will address California’s ‘Tax Gap’ – however there is no evidence that AB 2570 will increase the state’s tax revenue at all,” Powell said. “Taxpayers and businesses already face substantial challenges this year; this bill would only further damage California’s economic recovery.”