Section 7434 Only Creates a Cause of Action if Information Return is False or Misleading

(Parker Tax Publishing December 2022)

A district court held that a former employee could not bring a cause of action against his former employer under Code Sec. 7434 for intentionally filing Form 1099s instead of W-2s for the period that the business treated him as an independent contractor but for which he claimed he was an employee. According to the court, Code Sec. 7434 only creates a cause of action if the information return is false or misleading as to the payment amounts reflected on the return. Sokoloff v. Bio World Merchandising, Inc., 2022 PTC 347 (M.D. Ga. 2022).

Background

Adam Sokoloff was a director of sales for Bio World Merchandising, Inc. from December 2009 through April 2021. He worked out of the corporation's Athens, Georgia office. Rajeev Malik, the CEO, managed the day-to-day operations of Bio World, supervised employees, and made employee and compensation decisions. Until May 2020, Sokoloff was classified as an independent contractor; he was reclassified as an employee in May 2020, though his duties and job title remained the same.

In 2022, Sokoloff filed a lawsuit under the Fair Labor Standards Act (FLSA) asserting that both Bio World Merchandising, Inc. and Malik, were his "employers," that he was misclassified as an independent contractor instead of an employee, and that Bio World and Malik failed to pay him overtime wages. Sokoloff also asserted a claim for civil tax fraud under Code Sec. 7434, as well as state law claims for breach of contract and tortious interference with business expectancy.

Code Sec. 7434(a) permits a civil action against a person who willfully files a fraudulent information return with respect to payments purported to be made to any other person. Sokoloff alleged that Bio World and Malik willfully misclassified him as an independent contractor instead of an employee. He further alleged that because of this misclassification, Bio World filed IRS Form 1099s reporting money paid to Sokoloff as non-employee wages, and Bio World did not pay employment taxes on the money it paid to Sokoloff.

Bio World moved to dismiss the Code Sec. 7434 claim, contending that Sokoloff did not allege any facts supporting a reasonable inference that Bio World willfully filed a fraudulent information return with respect to the payments it made to Sokoloff. In support of this argument, Bio World relied on Tran v. Tran, 239 F.Supp. 3d 1296, 1297 (M.D. Fla. 2017) in which a district court concluded that liability under Code Sec. 7434 requires a misstatement of the amount of payment and does not create a private right of action for tax fraud where the alleged misrepresentation giving rise to the action is unrelated to the amount of payments a taxpayer received from a business. Sokoloff did not respond to this argument.

The key question before the district court on the Code Sec. 7434 claim was whether Code Sec. 7434 creates a cause of action for an information return that is false or misleading in any respect, even if the return accurately reports the amount of money paid to the taxpayer, or if it only creates a cause of action if the information return is false or misleading as to the payment amounts reflected on the return. The district court noted that it had not located any appellate decisions addressing this question.

Analysis

The district court held that to state a claim for civil tax fraud under Code Sec. 7434(a), a taxpayer must allege that a business willfully filed information returns that misrepresented the amount of payments made. In this case, the district court concluded that because Sokoloff did not allege that Bio World misrepresented the amount of payments it made to him on the Forms 1099s and instead only alleged that Bio World should have issued him Form W-2s instead of Form 1099s, Sokoloff failed to state a claim under Code Sec. 7434 and the court thus dismissed his claim.

In reaching its decision, the court relied on several district court decisions, including Tran and Liverett v. Torres Advanced Enterprise Solutions LLC, 2016 PTC 239 (E.D. Va. 2016) in which the courts analyzed the text of the statute and concluded that it did not create a claim for intentionally filing the wrong form (i.e., a Form 1099 instead of a W-2) that included the right amount. Rather, those courts concluded that Code Sec. 7434 only creates a cause of action if the information return is false or misleading as to the payment amounts. The court did cite one case, however - the decision in Leon v. Tapas & Tintos, Inc., 51 F.Supp. 3d 1290 (S.D. Fla. 2014) - in which the court concluded, without examining the statutory language - that a Code Sec. 7434 claim could be based on filing the wrong tax form.

For a discussion of civil damages for fraudulent filing of information returns, see Parker Tax ¶262,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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