ASK THE EDD ATTORNEY – HOW TO GET EVEN WHEN YOU RECEIVE A BOGUS W-2 OR 1099
By Robert S. Schriebman
Sometimes we receive a W2 or a 1099 that is incorrect. We may receive one of these forms with a wrong dollar amount or one issued to someone else with our social security on it. Most of the time someone made an honest mistake that can be corrected. The IRS does provide correcting forms that are filed by the issuer. Having said this, there may be an instance when you are on the receiving end of an erroneous W-2 or a 1099 that has been deliberately issued by someone with bad motives. Is there anything you can do to get even with this person? Yes there is.
In this article we will look at the case of Nicholas Angelopoulos v. Martin R. Hall, M.D. et al 2015-1 USTC ¶50,306, (May 15, 2015).
The Case of Nicholas Angelopoulos v. Martin R. Hall
Dr. Nicholas Angelopoulos (hereafter referred to as Nicholas) joined a medical partnership headed by Dr. Hall. This partnership was known as Keystone. He also entered into a second business relationship with Dr. Hall and other physicians known as WACHN, LLC. It turned out that Dr. Hall was a major crook and did everything in his power to cheat his fellow partners out of their fair shares. The partnerships did not last long. When the partners found out the nature and the extent of Hall’s cheating, they all wanted out. Even in the process of dissolving the partnerships, Dr. Hall falsified records in an attempt to show that the partnerships were not profitable. He tried to cram a settlement down the throats of his partners. When Nicholas refused the deal, Hall decided to get even. At the end of the year he sent Nicholas a false Form 1099-MISC issued by Keystone in the amount of $160,000, although Nicholas only earned $38,000. Hall caused Keystone to file the 1099 with the IRS.
What Happened to Nicholas?
Nicholas filed his federal income tax return correctly reporting to the IRS only $38,000 from the partnership. This caused the IRS to send him a letter challenging the return because of the $160,000 bogus 1099. The IRS issued a Notice of Deficiency alleging that Nicholas had failed to pay taxes on $160,000 of income. Nicholas had to file a petition in the U.S. Tax Court alleging that the income reported on the 1099 was inflated. Eventually the IRS agreed with him. Nicholas turned around and sued Hall in the U.S. District Court for damages suffered by the bogus 1099. Nicholas used IRC §7434 to get even with Hall.
IRC § 7434
IRC § 7434 is entitled, “Civil Damages for Fraudulent Filing of Information Returns.” This section of the Internal Revenue Code allows you to sue someone who issued you a fraudulent W-2 or 1099. If you prevail your award is the greater of $5,000 or the sum of the actual damages you incurred, plus court costs, and at the court’s discretion, reasonable attorney fees. In order to prevail you have to show a “bad motive” on the part of the person who issued the fraudulent 1099. An honest mistake is not going to win the day for you.
How did Nicholas come out?
Hall Tries to Weasel Out of His Exposure
Hall tried to defend himself without success. He argued that he personally did not issue the 1099, rather the Keystone partnership issued it. Therefore, Hall should not be personally liable. Hall argued the case of Vandenheede v. Vecchio, 2013 U.S. Dist. LEXIS 25845 (E.D. Mich 2013). In this case the trustees of a trust caused an accounting firm to issue a fraudulent 1099. The accountants were sued along with the trustees. The accountants argued successfully that they were not responsible under the law because they merely put down what the trustees told them. The accountants won.
The judge held that Hall could not hide behind Keystone and dodge the bullet. He was directly responsible.
The judge cited the history behind IRC § 7434. Before its enactment federal law provided no private cause of action to a taxpayer injured because a fraudulent information return had been filed with the IRS asserting that payments had been made to the taxpayer. Some taxpayers may suffer significant personal loss and inconvenience as a result of the IRS receiving fraudulent information returns, which had been filed by persons intent on either defrauding the IRS or harassing taxpayers. These are the reasons why IRC § 7434 was enacted.
As Keystone’s president and secretary, Hall used his control over its finances, its record keeping, and its tax filings to report false information about Nicholas in Keystone’s returns. The judge stated, “As a person allegedly ‘intent on either defrauding the IRS or harassing taxpayers’ through Keystone’s returns, Hall appears to be precisely the type of person whose conduct the legislative history addressed.”
Nicholas won his lawsuit against Hall for issuing to him a fraudulent information return, Form 1099. Sending a fraudulent W-2 or 1099 to the IRS is cowardly thing to do. It’s easy to do and it causes the recipient much grief. If this happens to you, you do not have to take it lying down.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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