NY Attorney General breaks new ground against fraud

[michaelmars]

THE LAST SENTENCE SAYS IT ALL!!!

N.Y. Attorney General Finds Law Tailor-Made for Tax Case

BY RICHARD J. KORETO

March 12, 2013 2:25 PM

In a case that will be no doubt be remembered for both the novel application of a state law and its farcical aspects, well-known New York City custom tailor Mohanbhai "Mohan" Ramchandani, of Mohan's Custom Tailors, admitted before the New York County Supreme Court to failure to pay nearly $2 million in sales and income taxes. He pleaded guilty to felony charges and agreed to pay $5.5 million to settle separately filed civil claims. Mohan also faces up to three years in prison, as noted in a release from New York State Attorney General Eric T. Schneiderman.

It's a landmark case because, according to Schneiderman, this is first time that New York's False Claims Act has been used in resolving a tax case. The release explained that the act requires defendants to pay treble damages and civil penalties if found liable. To make the law even more powerful, in 2010 the state added amendments to the law, allowing whistleblowers to come forward to make claims about tax law violations. The law entitles whistleblowers who report fraud against the government to claim a share of the recovery.

Indeed, it was a whistleblower who first reported Mohan. Although the release did not state the whistleblower's name or connection with Mohan or his business, an article in the New York Times said a former employee, Vijay Tharwani, filed a whistleblower lawsuit against Mohan, which led to the charges. Tharwani is expected to receive $1.1 million from the money Mohan needs to repay.

What the False Claims Act Accomplishes

The attorney's general's website explains the key provisions and implications of the act. Chiefly, it allows the attorney general, a local government—or indeed, anyone—to file a lawsuit against a person or a company that "obtains or withholds funds or property from the state or local government through false or fraudulent conduct." When citizens file, they may do so in secret to give investigating authorities time to investigate.

If the investigations and prosecutions are ultimately successful under the New York law, the individuals may be able to keep a portion of the funds they help recover. If they're employees of the company found guilty, the law also protects them against retaliation.

However, individuals must bring suit themselves, with a lawyer they've hired. The attorney general's office does not represent individuals in any situation, nor can it make a referral to a private attorney. There are attorneys who do specialize in False Claim Act cases, the site notes.

The act itself is also posted online.

Significance of Mohan Case

Attorney Jack Trachtenberg, formerly Deputy Commissioner and Taxpayer Rights Advocate at the New York State Department of Taxation and Finance, said in an interview that this case was important because it was the first time in the state there was money paid out as a result of a tax-related False Claims Act case.

"If the law stays as it is, we're going to see more tax cases like this. As word spreads, people will see an opportunity to be rewarded," said Trachtenberg.

The law, Trachtenberg continued, is publicly touted as an anti-fraud measure; that's what the press releases say. "But there doesn't have to be any intent of fraud for the False Claims Act to come into play," he said. Even a reckless disregard or deliberate ignorance could lead to liability, and it may be hard to draw the line between that and an honest mistake. Further complicating the situation is the New York law's conspiracy provisions: tax preparers or advisors who are seen as conspiring on tax evasion with a business owner, for example, could be liable, added Trachtenberg.

This means that tax preparers need to be more aware than ever before. "They should be doing due diligence and heightening scrutiny. You can't stick your head in the sand," said Trachtenberg.