A Public Service Announcement In The Interest Of Domestic Tranquility
Sooner than it seems possible (more so every year!), New Year’s Day will be upon us… and we all know what that means: The start of another “tax season”. As always, the first move in this annual rite is the production and distribution of W-2’s and 1099’s by companies across America, the little paper testaments by which those companies declare, under oath, to have paid the listed amount of “wages as defined in 3401(a)” and “wages as defined in 3121(a)” (of the Internal Revenue Code) to their workers; or to have paid more than $600 of “gains, profits and income” to the identified recipient in the course of their “trade or business”. These declarations constitute the key evidence on the basis of which both the ‘payee’ and the ‘payor’ are perceived by the government as being liable for an “income” tax.
What many of us don’t seem to know is that there are significant legal implications, both civil and criminal, associated with insufficient diligence in producing those forms-- such as simply listing on a W-2 the amount of money paid, as opposed to the amount of “wages as defined in 3401(a) and 3121(a)”; or just putting down on a 1099 the number of dollars paid to someone, instead of the amount paid in the course of a “trade or business”. Each of these errors expose the producer of such forms to substantial penalties. They also create paperwork burdens for the recipients, possibly rising to the necessity of legal action against both the government and the issuer of the form.
Preventing such widespread inconvenience and risk, ill will among participants in shared enterprises, and strain on a judicial system that really should be dealing with actual disputes and deliberate criminal behavior is, I believe, in everyone’s interest. Here, therefore, well in advance of the deadline for the production of W-2s and 1099s, is a reminder to potential victims and perps alike of just how significant a downside is attendant upon carelessness in this area. It is my hope that this forewarning will ensure that everyone has plenty of time, and plenty of incentive, to get it right this year.
(What follows is excerpted from ‘Lies, Damned Lies, and W-2s’ in ‘Cracking the Code- The Fascinating Truth About Taxation In America’)
…The certificate to which the section refers is currently known as Form W-2. Let’s look at the code language under which W-2’s are to be issued (drawn from the Current Payment Tax Act of 1943 by which withholding was most recently re-enacted):
Sec. 6051. - Receipts for employees
Every person required to deduct and withhold from an employee a tax under section 3101 or 3402, or who would have been required to deduct and withhold a tax under section 3402 (determined without regard to subsection (n)) if the employee had claimed no more than one withholding exemption, or every employer engaged in a trade or business who pays remuneration for services performed by an employee, including the cash value of such remuneration paid in any medium other than cash, shall furnish to each such employee…a written statement showing the following:
(1) the name of such person,
(2) the name of the employee (and his social security account number if wages as defined in section 3121(a) have been paid),
(3) the total amount of wages as defined in section 3401(a),
(4) the total amount deducted and withheld as tax under section 3402,
(5) the total amount of wages as defined in section 3121(a),
(6) the total amount deducted and withheld as tax under section 3101,
(d) Statements to constitute information returns
A duplicate of any statement made pursuant to this section and in accordance with regulations prescribed by the Secretary shall, when required by such regulations, be filed with the Secretary.
Recall that the “wages as defined in section 3401(a)” consist
exclusively of remuneration paid to “an officer, employee, or
elected official of the United States, a State, or any political
subdivision thereof, or the District of Columbia, or any agency or
instrumentality of any one or more of the foregoing.” or, “an
officer of a [federal] corporation.”. Recall that
those “defined in section 3121(a)” are exclusively paid by
the United States or a company which is resident within territory under
the exclusive jurisdiction of the United States, for the
performance of "service" (as defined by the Classification Act
of 1923). Remember
that “every employer engaged in a trade or business” is
engaged in “the performance of the functions of a public office”.
It is clear that the restricted application of the W-2 certificate has
not changed. It was and is the document used to assert payment of
“income” to “employees”-- which is today used in many cases to
make erroneous claims to that effect against private-sector workers,
just as the 1099 is similarly used against private-sector persons who
work for themselves.
Once a W-2 (or 1099) has been transmitted, it is legally presumed to be honest and accurate. It is an affidavit, signed under penalty of perjury by way of the Form W-3 with which a W-2 is transmitted to the government. (The 1099-related counterpart of the W-3 is the Form 1096 transmittal document).
The payee identified on such a document will, of course, be presumed to have received taxable income. They will be subject to all the mistreatment for which the IRS is famous, until they have either endorsed the claims of the transmitted documents-- and paid accordingly-- or have rebutted the claims as false or incorrect. The issuer of an erroneous document is also open to some government mistreatment, (though only in a roundabout way)-- by being misled into committing a tort and/or crime, entirely on their own and in defiance of the clear language of the law. The penalties can be quite severe.
are selections of the language enumerating the potential regulatory and
statutory civil liabilities of the issuer, from the "Instructions for Forms W-2 and W-3", 2002 edition (emphasis is in the original):
following penalties generally apply to the person required to file Form
W-2. The penalties apply to paper filers as well as to magnetic
to file correct information returns by the due date.
you fail to file a correct Form W-2 by the due date and cannot show
reasonable cause, you may be subject to a penalty. The penalty applies
Include incorrect information on Form W-2
amount of the penalty is based on when you file the correct Form
W-2. The penalty is:
$15 per Form W-2 if you correctly file within 30 days (by March
30 if the due date is February 28); maximum penalty $75,000 per year
($25,000 for small businesses, defined later).
$30 per Form W-2 if you correctly file more than 30 days after
the due date but by August 1; maximum penalty $150,000 per year ($50,000
for small businesses).
$50 per Form W-2 if you file after August 1 or you do not file
required Forms W-2; maximum penalty $250,000 per year ($100,000 for
you do not file corrections and you do not meet any of the
exceptions to the penalty stated below, the penalty is $50 per
to the penalty. The following are exceptions to the failure to file
The penalty will not apply to any failure that you can show was due to reasonable
cause and not to willful neglect. In general, you must be able to
show that your failure was due to an event beyond your control or due to
significant mitigating factors. You must also be able to show that you
acted in a responsible manner and took steps to avoid the failure.
An inconsequential error or omission is not considered a
failure to include correct information.
and omissions that are never
are those relating to:
Any money amounts.
disregard of filing requirements. If any failure to file a correct
Form W-2 is due to intentional disregard of the filing or correct
information requirements, the penalty is at least $100 per Form W-2 with
no maximum penalty.
to furnish correct payee statements. If you fail to provide correct
payee statements (Forms W-2) to your employees and you cannot show
reasonable cause, you may be subject to a penalty. The penalty applies
if you fail to provide the statement by January 31, you fail to include
all information required to be shown on the statement, or you include
incorrect information on the statement.
penalty is $50 per statement, no matter when the correct statement is
furnished, with a maximum of $100,000 per year.
penalty is not reduced for furnishing a correct statement by August 1.
and omissions that are never inconsequential are those relating to:
A dollar amount,
damages for fraudulent filing of Forms W-2. If you willfully file a
fraudulent Form W-2 for payments you claim you made to another person,
that person may be able to sue you for damages. You may have to pay
$5,000 or more. [Pursuant to IRC section 7434]
is the language of section 7434, which applies to erroneous 1099’s as
well as W-2’s:
Sec. 7434. - Civil
damages for fraudulent filing of information returns
If any person willfully files a fraudulent
information return 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 filing such return.
In any action brought under subsection (a),
upon a finding of liability on the part of the defendant, the defendant
shall be liable to the plaintiff in an amount equal to the greater of
$5,000 or the sum of -
any actual damages sustained by the plaintiff
as a proximate result of the filing of the fraudulent information return
(including any costs attributable to resolving deficiencies asserted as
a result of such filing),
the costs of the action, and
in the court's discretion, reasonable attorneys' fees.
As the W-2 penalty provisions are arguably confined in application to “the person required to file form W-2” (known to you, O educated reader, to be a specialized ‘person’), the one that counts the most is that very last paragraph regarding section 7434 civil liability to the listed payee for filing a fraudulent information return alleging payments made to another person. It is also the most artistic. The scheme undertakes numbingly complicated measures to fool a private company into the belief that they MUST file these forms falsely declaring their workers and contractors to be being paid in connection with the conduct of a public office, and then quietly acknowledges that if they do so, they can be sued by the aggrieved parties.
Understand clearly that this is the character of that last element of the penalty notice. It is making false claims of payments made to the listed person, not payments made on behalf of that person that are addressed here. In other words, this notice refers to the filing of a form by a company claiming to have paid “wages as defined in 3401 or 3121” or “gains, profits or income” in the course of a “trade or business” to a person when in fact they did not. A company making false claims regarding how much tax they withheld and paid to the IRS on behalf of someone answers to the government for the mistake by way of the other penalties listed above (and possibly for perjury as well). The worker is always credited with any amount withheld as tax under section 31, even if the money was never paid by the withholding company-- and liability for such amounts remains with the company, under section 3403.
The statutory 7434 liability to a worker or contractor with regard to whom a false W-2 or 1099 is filed is a risk in addition to that of common-law liability to that same person for all the money being improperly withheld, of course, along with any costs of action; and any other penalties provided by law for the making of unauthorized deductions from pay, which are provided under many union state codes. Furthermore, impersonating a federal official or employee, as in pretending to be engaged in the performance of the functions of a public office and withholding from one’s “employees” accordingly, is a felony under 18 USC 912:
- Officer or employee of the United States
Whoever falsely assumes or pretends to be an
officer or employee acting under the authority of the United States or
any department, agency or officer thereof, and acts as such, or in such
pretended character demands or obtains any money, paper, document, or
thing of value, shall be fined under this title or imprisoned not more
than three years, or both.
Needless to say, the private company undertaking all these risks is presumed to be fully familiar with the law, and is doing what it is doing entirely on its own. As we noted previously, the government and its agencies are careful not to cross the line into commanding illegality-- they content themselves with the generally satisfactory consequences of private misunderstanding, incompetent professional assistance and an abiding, deeply planted and frequently watered fear of acting contrary to what the widely-reputed-to-be-rogue-and-dangerous agency appears to want.
This is not to say that the tax-collection engine is complacent, of course. Substantial and sophisticated measures are taken to support the errors of understanding which contribute to the process. Among these is always presumptively referring to all workers as “employees”. If asked, the IRS or its industry allies will always declare that, “All employees are subject to withholding,”. They will not make such a statement when inaccuracy carries a risk of liability, such as over a personal signature, or under oath, without adding the qualifier regarding the definition of “employees”. You will notice, if you have occasion to have much contact with this agency, that they will NEVER say “All workers are subject to withholding”, or, “Everyone who works for you is subject to withholding” (unless the questioner is engaged in a “trade or business”, of course). They will run a malicious “Who’s on first?” routine with the unsuspecting: “Do I have to withhold from my workers?” “Are they your employees?” “Uh, I guess so…” “Then you have to withhold from them!”
Communications sent from the IRS to businesses (and workers) will always be constructed to mislead. The most egregious and pernicious example of this is the Form 688-W Notice of Levy by which the agency seeks to co-opt a company into committing theft-by-conversion by sending it part of a workers pay in the absence of a court order to do so. This form not only repeatedly refers to its target as an “employee”, inviting agreement by acquiescence, but it includes extended excerpts from Section 6331 of the IRC, concerning Levy and Distraint, on its back, allowing those excerpts to imply authority for the requested seizure. The careful observer will notice, however, that the excerpts start with subparagraph (b) of that section.
and sale of property
The term ''levy'' as used in this title
includes the power of distraint and seizure by any means. Except as
otherwise provided in subsection (e), a levy shall extend only to
property possessed and obligations existing at the time thereof. In any
case in which the Secretary may levy upon property or rights to
property, he may seize and sell such property or rights to property
(whether real or personal, tangible or intangible).
Here is the subparagraph (a) which is deliberately left out:
(a) Authority of Secretary--If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. Levy may be made upon the accrued salary or wages of any officer, employee, or elected official, of the United States, the District of Columbia, or any agency or instrumentality of the United States or the District of Columbia, by serving a notice of levy on the employer (as defined in section 3401(d)) of such officer, employee, or elected official. If the Secretary makes a finding that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made by the Secretary and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period provided in this section. (Emphasis added).
Documents like the Notice of Levy sent to a private-sector company end with a “Thank you for your cooperation”, and they mean it. Without a private-sector company’s cooperation, in withholding and/or sending other people’s lawlessly demanded money AND accepting all the legal risk for the lawsuit and possible criminal charges, the IRS would never see an unprivileged, private-sector dime. And let’s never forget, congress set them up with their quite well-paying jobs (which are financed out of the take) for no purpose except to bring in every penny on which they can get their hands.