In a forthcoming article in State Tax Notes, Eversheds Sutherland SALT partner Jeff Friedman and associate Dennis Jansen explore the issues with A.B. 2570 – California’s latest attempt to extend the state’s whistleblower statute to tax claims.

The bill is purportedly designed in increase revenues by targeting tax fraud. However, instead of exposing tax cheats, this proposal likely will primarily benefit a cottage industry of law firms that specialize in filing predatory shakedown lawsuits against unsuspecting businesses.

A.B. 2570, would amend the California False Claims Act (CFCA) to allow private parties to bring lawsuits on behalf of the state alleging tax violations, known as qui tam actions. These types of lawsuits are ripe for abuse because businesses will be coerced to settle or face the prospect of the CFCA’s financially devastating penalties and the legal costs associated with responding even to frivolous claims. A similar bill, A.B. 1270, failed last year after widespread opposition from California’s business community.

Lawmakers say that A.B. 2570 will increase tax collections, citing $470 million collected by New York after it extended its whistleblower statute to tax claims in 2010, and revenues generated by the IRS’s whistleblower program. However, for the reasons explored in this article, A.B. 2570 is unlikely to meet its lofty revenue projections. Similar measures in other states have failed to generate meaningful revenues while miring both businesses and the state in costly litigation.