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Business Tax

Employer liable for damages for sending IRS false information return

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

Vanderbilt, (DC FL 7/24/2019) 124 AFTR 2d ¶ 2019-5084

An employer was liable for statutory damages under Code Sec. 7434 because he sent false information about a worker’s income to the IRS.

Background. Code Sec. 7434(a) provides that if any person willfully files a fraudulent information return with respect to payments purported to be made to another person, the other person may bring a civil action for damages against the person so filing such return. Code Sec. 7434(b) provides for statutory damages of the greater of $5,000 or actual damages caused by the false information return filing.

For purposes of Code Sec. 7434, an information return is any statement of the amount of payments to another person required by Code Sec. 6724(d)(1)(A), which includes payment statements made using Form 1099-MISC, Miscellaneous Income.

Facts. In Nov. 2017, Valerie Vanderbilt entered into a verbal contract for employment with Boat Bottom Express, LLC, (BBE). The contract provided that BBE would pay Valerie $1,000 per month plus 7% of BBE’s yearly gross revenue.

After consulting with a CPA, Valerie twice told her boss at BBE that she should be classified as an employee, not as an independent contractor. However, in January 2019, Valerie received an IRS Form 1099-MISC from BBE. The Form 1099-MISC stated that BBE paid Valerie nonemployee compensation for 2018.

Valerie argued that the Form 1099-MISC was evidence that BBE gave false information to the IRS indicating that she was an independent contractor when, in fact, she was an employee based on the verbal contract.

District court’s decision. The district court agreed with Valerie’s argument. The district court found that the evidence showed that Valerie entered into a contract of employment with BBE. The evidence also showed that Valerie told her boss that, based on the advice of her CPA, she should be classified as an employee, not as an independent contractor. However, Valerie received a Form 1099-MISC from BBE that reported Valerie’s receipt of nonemployee compensation for 2018.

The district court found that BBE furnished the false Form 1099-MISC to the IRS and, thus, was liable for statutory damages under Code Sec. 7434.

Checkmark Observation.  For a case that came to the opposite conclusion, see No civil damage  to employee who received 1099 instead of W-2.

References: For civil damages for fraudulently filing an information return, see FTC 2d/FIN ¶S-4470United States Tax Reporter ¶74,344.

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