The federal statute 26 U.S.C. § 7434 permits a person to claim that another has filed a false tax return on his or her behalf, potentially subjecting an employer to a statutory penalty of $5,000 and attorneys’ fees. Sometimes, disgruntled former employees and independent contractors (collectively referred to as “workers”) will use this statute to try to get leverage over an employer in a dispute. Often the former workers will claim that they were misclassified as an independent contractor when they should have been classified as an employee. While there are some cases which have found that “misclassification” of a worker as an independent contractor is a violation of § 7434, the view most courts have held that misclassification is not a violation of § 7434. Courts have held this even when the business believed the misclassification as an independent contractor is improper. Peter Mavrick is a Fort Lauderdale employment attorney who defends the interests of businesses and business owners against claims asserting alleged discrimination and retaliation (in federal and state court proceedings and before the EEOC, Florida Commission on Human Relations, and local government agencies enforcing anti-discrimination laws) and against claims for allegedly owed overtime wages, minimum wages, and other wages.
Determining whether a worker is an employee or an independent contractor is not always easy for Florida employers. Under Florida law, there are ten factors to consider in making this determination, the “most important factor” of which is the “extent of control” that the hiring company has over the worker. McGillis v. Dep’t of Econ. Opportunity, 210 So. 3d 220 (Fla. 3d DCA 2017). Accurately classifying whether a worker is an employee or an independent contractor can have important tax and liability consequences for a business; however, a Florida business should not be risking a violation of 26 U.S.C. § 7434 even if it misclassified a worker.
The federal tax fraud statute, 26 U.S.C. § 7434, allows a person to sue any other entity if that other entity issued a tax return which inaccurately represented the money being paid. In part, § 7434 provides:
“(a) In general.–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.
(b) Damages.–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–
(1) 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),
(2) the costs of the action, and
(3) in the court’s discretion, reasonable attorneys’ fees.”
However, a handful of cases have found that it is a violation of § 7434 to misclassify an employee as an independent contractor. E.g. Seijo v. Casa Salsa, Inc., 12-60892-CIV, 2013 WL 6184969 (S.D. Fla. Nov. 25, 2013) (determining that if a company had “willfully” issued a 1099-MISC rather than a W-2, that it was a violation of § 7434). These court decisions have been criticized and do not represent the majority/modern rule. Tran v. Tran, 239 F. Supp. 3d 1296 (M.D. Fla. 2017) (“With little or no analysis of Section 7434’s text, several decisions hold that Section 7434 establishes liability for filing the wrong information-return form [that is, filing a Form 1099 rather than a Form W–2] even if the return accurately reports the money paid to the plaintiff”).
A more careful examination of the statute reveals that Congress originally intended the statute to refer to fraudulent tax returns which inaccurately represent the amount of money paid, not whether the person should have been issued a W-2 rather than a Form 1099. “Congress’s concern in enacting Section 7434 was to provide a remedy for taxpayers who ‘suffer significant personal loss and inconvenience as the result of the IRS receiving fraudulent information returns, which have been filed by persons intent on either defrauding the IRS or harassing taxpayers.’” Culver-Taylor v. Foster, 5:17-CV-289-LC/MJF, 2019 WL 1430402 (N.D. Fla. Feb. 22, 2019), report and recommendation adopted, 5:17CV289/MCR/MJF, 2019 WL 1430418 (N.D. Fla. Mar. 30, 2019). These courts find that the language from § 7434 referring to “payments purported to be made” evinces Congress’ intent to curb inaccurate payments, not improperly classified payments.
“Whether innocent or deliberate, the payor’s filing of the wrong form establishes no liability under Section 7434 unless the form willfully misstates the payee’s income.” Tran v. Tran, 239 F.Supp.3d 1296 (M.D. Fla. 2017). While some courts in the Southern District of Florida (the federal trial courts governing South Florida) are hesitant to outright state that previous case law has incorrectly held that misclassification, by itself, violates § 7343, more recent court holdings appear to hold that misclassification is not a violation of § 7343. See, for example, Vera v. Challenger Air Corp., No. 16-cv-62354-GAYLES, 2017 WL 2591946 (S.D. Fla. June 15, 2017) (recognizing that many courts have found allegations that a defendant willfully misrepresented the plaintiff’s employment status to be sufficient, but following other cases that require a defendant to willfully file information returns that misrepresent the amount of payments made); Kinne v. IMED Health Products, LLC, CV 18-62183-CIV, 2019 WL 2866787 (S.D. Fla. July 3, 2019) (discussing the different conclusions reached by the various courts but ultimately finding that the claim made in that case was concerning the amount and not just misclassification, avoiding adjudication of the issue).
Until the issue is ruled upon by the United States Eleventh Circuit Court of Appeal or the United States Supreme Court, the issue as to whether misclassification is a § 7434 violation will remain an open question. Until that point, substantial case law supports employers in defending lawsuits that contend that misclassification of a worker is a type of tax fraud under § 7434. Peter Mavrick is a Fort Lauderdale employment lawyer. This article does not serve as a substitute for legal advice tailored to a particular situation.