Civil Damages for Fraudulent Information Returns: 26 USC 7434
Explore the federal civil remedy for intentionally filed fraudulent information returns, detailing the legal framework for pursuing statutory damages and costs.
Federal law provides a remedy for individuals harmed by the intentional filing of false tax documents in their name. The law, found in 26 U.S.C. § 7434, allows a person who is the subject of a fraudulently filed information return to sue the filer for financial damages. This civil action compensates victims for the trouble and expense caused by such acts, which can create problems with the Internal Revenue Service (IRS). The statute provides a direct path for victims to seek financial recovery outside of any action the IRS might take.
Prohibited Actions Under the Statute
The law targets the fraudulent filing of an “information return,” which is a tax document that payers must file with the IRS to report certain payments made to others. These forms are part of the IRS’s income verification process. Common examples include:
- Form W-2 for wages
- Form 1099-NEC for nonemployee compensation
- Form 1099-MISC for miscellaneous payments
- Form 1099-INT for interest income
A fraudulent filing is not a simple clerical error. The law targets actions where a person or business willfully files an information return with the intent to deceive. This includes knowingly reporting income that was never paid or intentionally misclassifying an employee as an independent contractor to avoid paying taxes. The act must be a deliberate falsehood submitted to the IRS.
Elements of a Civil Claim
To succeed in a lawsuit, the plaintiff must prove that another person or entity filed a fraudulent information return concerning the plaintiff. For example, a plaintiff would need to show that a business filed a Form 1099-NEC with the IRS that falsely claimed it paid the plaintiff $20,000.
A central requirement is proving the filing was “willful.” The plaintiff must demonstrate that the defendant acted intentionally and in violation of a known legal duty. It is not enough to show the filer was careless or negligent, as the evidence must point to a deliberate choice to file a false return.
The plaintiff must be the person with respect to whom the fraudulent return was filed. This ensures that only the individual directly harmed by the false reporting can bring a lawsuit. The court’s decision in such a case will include a finding of the correct amount that should have been reported on the return.
Available Damages and Costs
A successful plaintiff is entitled to recover monetary damages. The defendant is liable for an amount equal to the greater of $5,000 or the sum of “actual damages.” This guarantees a victorious plaintiff a minimum award of $5,000, which serves as a penalty against the fraudulent filer.
“Actual damages” are the out-of-pocket costs the plaintiff incurred as a direct result of the fraudulent filing. These can include fees paid to accountants to resolve tax issues with the IRS, costs from responding to audits, and other expenses for correcting the record. The goal is to make the victim whole for the financial burdens imposed on them.
The court may also award the costs of the lawsuit to the successful plaintiff. This can include court filing fees, expenses for serving legal documents, and reasonable attorney’s fees. This provision makes it more feasible for victims to hold fraudulent filers accountable without their legal expenses outweighing their potential recovery.
How to File a Lawsuit
A lawsuit under this statute must be filed in a United States District Court, which are the primary trial courts of the federal system. The process is initiated when the plaintiff files a legal document known as a “complaint” with the appropriate court.
The complaint outlines the plaintiff’s case against the defendant. It must state the facts showing the defendant willfully filed a fraudulent information return concerning the plaintiff and detail the resulting damages. When filing the complaint, the plaintiff must also provide a copy to the IRS.
A strict statute of limitations applies to this type of lawsuit. An action must be brought within six years from the date the fraudulent information return was filed, or one year from the date the fraudulent return would have been discovered through reasonable care, whichever is later. Given the complexities of federal court litigation, anyone considering such a lawsuit should consult with a qualified attorney.