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Thursday, February 14, 2019

Odd rules - example involving 1099-MISC for employee

Some situations can lead to odd tax results and often additional efforts a taxpayer had to go through to get the right result (or close to it). A case from November 2018 fits this category. Here is a brief summary and some observations.

Czerw v. Lafayette Storage & Moving Corp., et al, #16-CV-6701-FPG (WD NY, 11/9/18) – C started working for L as a mover in 1993. L started having financial problems in 2014 causing C to not regularly receive paychecks and some checks bounced. C continued working for L until March 2015 when it was clear he would not be paid. L alleges he only received wages of $4,000 for 2015. This was received as two checks of $2,000 that Ferrentino, the president and owner mailed to C. Despite that, L issued a 1099-MISC to C for $5,500. In all prior years, C received a Form W-2 from L. C requested a corrected from L and F, but they refused.

C brought action under IRC §7434, alleging that L and F “willfully, purposely, and fraudulently filed the false Form 1099-MISC as part of a scheme ‘to defraud state and federal taxing authorities … by lessening [] Lafayette’s tax obligations and the amount of its worker’s compensation insurance premiums.’”

The court noted that district courts usually require three elements to be shown:

  1. Defendant issued an information return;
  2. The information return was fraudulent; and
  3. The defendant willfully issued that fraudulent return.

For (1), the court examined whether both L and F were liable. L was the employer, but 7434 refers to a person who willfully files a fraudulent information return. The court noted that F caused the form to be issued and to ignore that “would exempt from liability otherwise culpable agents, contrary to common-law principles of corporate officer liability and legislative intent.” Thus, element (1) was satisfied for both L and F.
For (2) and (3), “willfulness … connotes a voluntary, intentional violation of a legal duty.” The court found that these elements were met in that the amount on the form was wrong and C was misclassified for the year the form was issued. In a footnote, the judge noted that 7434 does not provide a remedy for worker misclassification. But since the amount on the 1099-MISC was incorrect, element (2) was met.

C sought only statutory damages of $5,000 rather than actual damages, costs or legal fees. The court awarded C $5,000.

Observations: While not covered in the case, a possible reason for issuance of the Form 1099-MISC was that L did not pay the employment taxes on the $4,000 it paid to C (L was having financial problems). There was no discussion of how C reported the 1099-MISC on his return. Arguably, he could have included Form 8919, Uncollected Social Security and Medicare Tax on Wages, and only report his share of the FICA and Medicare taxes owed (7.65% x $4,000) rather than pay 15.3% self-employment tax since he is an employee, rather than a contractor. However, L likely would also need to file Form SS-8 because justifications for filing Form 8919 do not include success on a claim under IRC §7434. What a lot of steps for this employee to go through - arguing with the long-time employer, taking the employer to court, and figuring out how to report his income for that year. 

What do you think?

1 comment:

Form 1099 Online said...

Nice post professor Nellen, many things have been covered in this post. Thanks for writing great article on Odd rules - example involving 1099-MISC for employee