ASK THE EDD LAWYER – ARE YOU THE VICTIM OF A FALSE W2 OR 1099? WHAT ARE YOUR RIGHTS?
By Robert S. Schriebman
Are you the victim of a false W2 or 1099? Did someone who has a beef against you send the IRS a phony W2 or 1099? Did an employer improperly classify you as an independent contractor and send the IRS a 1099 instead of a W2? Malcontents often send a phony 1099 to the IRS trying to get even with a person of authority such as a judge, law enforcement officer, or a former employer. If you are the victim of a phony W2 or 1099, you may have rights under the Internal Revenue Code. However, before charging forward you should be aware of the case of Thom V. Tran, a Florida resident who took his former employer to Federal Court for damages for improperly classifying him as an independent contractor. Tran found an obscure Internal Revenue Code section that allows for the award of civil damages when someone sends the IRS an improper W2 or 1099. Here’s the story.
The Case of Thom V. Tran v. Ngoc Tran, et
M.D. Florida, 2017-1 USTC §50,208 (Mar.7, 2017)
Thom Tran brought a civil action in the Florida District Court against his former employers seeking damages under the Internal Revenue Code for misclassifying Thom as an independent contractor and sending the IRS a 1099 instead of a W2. Thom worked in a nail salon as a nail technician in 2015 and 2016. His employer treated him as an independent contractor. The amount paid to Thom on the 1099 form was accurate. His employers did not attempt to state more or less income than Thom actually received. Thom paid his 2015 income taxes as well as self employment taxes.
Thom sought civil damages under IRC §7434. This obscure law permits damages for the greater of $5,000 or actual damages. His case was initially heard by a Federal Magistrate Judge. The Magistrate found the employers to be liable for the minimum $5000 damages. The employers did not show up in court.
The key IRS Code § 7434 provides that if any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, the victim may bring a civil action for damages against the person who filed the fraudulent return. The damages are a minimum of $5,000 or out-of-pocket costs, whichever is greater. Reasonable attorney’s fees are also allowed.
The Magistrate Judge ruled that the misclassification of Thom as an independent contractor did indeed constitute a fraudulent information return even though the dollar amount paid to Thom was accurate.
The Magistrate Judge’s decision was reviewed by the U.S. District Court in Tampa, Florida. Unfortunately for Thom the District Court did not agree with the Magistrate Judge’s opinion.
Thom Won, But He Also Lost
US District Judge Merryday agreed that Thom was improperly classified as an independent contractor; he should have been an employee. However, Judge Merryday reviewed IRC § 7434 and held that a key element was missing. The Magistrate Judge needed to go further. §7434(e) provides that there must be a showing of fraud on the part of the person who submitted the phony W2 or 1099. Fraud stems only from misrepresentations of the amounts paid to the worker. In other words, a court must find that the wrongdoer committed tax fraud before damages can be awarded.
A phony or fraudulent information return is defined under the law as follows:
“If a person willfully files a fraudulent [statement of the amount of payments to another person] with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filling such return.” (IRC §§ 7434(f) and 6724(d))
In other words, the defining characteristic of an information return is not the wrong worker classification; it is the reporting of the worker’s income. Whether innocent or deliberate, the misclassification of a worker, by itself, does not establish any liability under IRC § 7434 unless the W2 or 1099 willfully misstates the worker’s income.
It would be nice to get even with someone who misclassified a worker as an independent contractor instead of an employee. However, the law does not allow for damages for misclassification alone. The dollar amount on the phony W2 or 1099 has to be wrong, and the error has to be deliberate and intentional. Thom was right to be angry, but he was wrong under the law. Some laws are just not fair! When I was in law school our Dean taught us many of his cherished mottos. One now comes to mind as I write this article, “There is not enough justice to go around.”
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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