Sometimes it takes a village to commit tax fraud, and the New York Attorney General is showing that the whole village can be on the hook.
Most tax enforcement is aimed at the person who owed the taxes. But the New York Attorney General is using the powerful anti-fraud law, the New York False Claims Act to cast a broader net to impose liability on professionals and businesses that facilitate the tax frauds of their clients and customers.
On Nov. 6, 2020, the New York Attorney General filed a complaint against auction house giant Sotheby’s, Inc. alleging that it improperly helped a wealthy art collector commit sales tax fraud. (N.Y. County Supreme Court, Index No. 452192/2020). The complaint alleges that the collector had falsely claimed that he bought art from Sotheby’s for “resale,” and not for personal use, so he could avoid any sales taxes. He settled with the New York Attorney General in 2018. But the story did not end there; the Attorney General has now gone after Sotheby’s for treble damages and penalties for helping the collector commit the tax fraud.
The expansion of tax enforcement to facilitators of tax fraud is particularly good news for whistleblowers who have useful information about the frauds. Under the False Claims Act, they are eligible for rewards of up to 30% of the government’s recovery for reporting tax and other frauds against the New York State or local governments.
New York’s Suit Against Sotheby’s as a Tax Fraud Facilitator
The allegations against Sotheby’s illustrate the perils of facilitating tax fraud. The state alleges that Sotheby’s enabled the art collector to evade $2.4 million in sales taxes on $27 million worth of art sales. Sotheby’s benefit was not in taxes saved, but rather in pleasing a customer in a fiercely competitive industry, and doing so not at its own cost, but at the government’s.
The state alleges that Sotheby’s knew the collector purchased the art for his personal use even while it treated the sales as non-taxable purchases by a dealer for resale. Among other things, its employees helped the collector hang some of the art in the collector’s Manhattan apartment as part of his personal collection.
Sotheby’s has publicly denied liability, but has not yet formally responded to the complaint.
The False Claims Act Contemplates Liability for Facilitators
The New York False Claims Act is the state’s primary tool for combatting frauds against the government. It applies to facilitators just as it applies to the central beneficiaries of fraud, and it imposes liability on companies and people for helping the fraud or deliberately looking the other way, even if they did not reap the fraud’s benefits. In the words of the Act, liability extends to anyone who “knowingly makes or uses, or causes to make or use, false records or statements that are material to an obligation to pay money to the government” and to co-conspirators. (N.Y. State Fin. Law Section 189(1)(c) & (g)).
Tax Frauds Commonly Have Facilitators
Tax schemes are rarely accomplished without help. They commonly involve facilitators such as an accountant who creates the proverbial “second set of books,” or professionals who give opinions based on false facts, or other advisors who help advance a fraud. Whether a facilitator can be held liable under the False Claims Act, however, is a question of whether it had knowledge of the falsity. Under the Act, knowledge can be established by proof of actual knowledge, reckless disregard of the truth, or deliberate indifference to the truth. (See N.Y. State Fin. Law Section 188(3).) Sotheby’s is accused of both deliberately helping the client evade sales taxes and recklessly disregarding the fact that the collector was purchasing the art for his own use.
Whistleblowers Can Play a Key Role in Establishing Facilitators’ Liability
By incentivizing whistleblowers with the same type of monetary incentive that motivates tax violators, the False Claims Act encourages the disclosure of tax fraud schemes, including of the role of any facilitators. Whistleblowers with the appropriate information can help direct government investigators to all potentially liable parties and, ideally, will have evidence of the facilitator’s role and knowledge or will be able to lead investigators to such evidence.
Uncovering Facilitators Who Have Turned Illegal Tax Schemes into Cottage Industries
The pursuit of facilitators can help the government reap particularly broad rewards by revealing schemes or strategies that have been promoted to numerous clients. A facilitator may have turned its approach into a “cottage industry” and caused several clients or counterparties to have also falsified their tax returns and other documents. The most telling example exists at the federal level, where a whistleblower notified the IRS Whistleblower Office of schemes by Swiss banks to promote secret off-shore accounts to evade US taxes. The federal government’s pursuit of the banks led to the disclosure of large numbers of clients who took part in the scheme and to billions of dollars in recoveries. It also led to the largest ever tax whistleblower award.
The message suggested by the new Sotheby’s case is that facilitators and potential whistleblowers should be vigilant, and that all persons involved in the knowing commission of New York tax frauds should expect to be discovered and pursued.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Randall Fox is a partner at Kirby McInerney LLP, which represents whistleblowers in state and federal False Claims Act cases and before the Whistleblower Offices of the IRS, SEC, and CFTC. Mr. Fox was formerly the founding Bureau Chief of the New York Attorney General’s Taxpayer Protection Bureau.