If you think that issuing a Form 1099 under false pretenses can't come back to haunt you, think again. Those who knowingly file false information returns can be civilly prosecuted for fraud under Internal Revenue Code Section 7434(a).
Consider the recent case of David Shiner v Bernard I. Turnoy. Shiner received a check from Turnoy at the end of 2012 that was for less than the amount due to him for commissions on the sale of certain life insurance policies. The check had a restrictive notation "endorsement constitutes full & absolute release/hold-harmless by Shiner &/or all interested persons/parties, as per cover letter". Turnoy's cover letter to Shiner indicated that he was going to send Shiner a Form 1099 for the amount of the check. Shiner filed a lawsuit charging Turnoy with breach of contract. By the time Shiner started the lawsuit Turnoy had already issued a 1099 to Shiner, which was upon the advice of Turnoy's accountant. However, Turnoy failed to disclose to his accountant that he had added language to the check acknowledging Shiner's option to refuse it.
Turnoy kept sufficient funds in the bank to cover the check until late February. Shiner did not cash the check and returned the check to Turnoy in August 2013. Shiner argued that the endorsement language qualified as substantial limitations or restrictions. The Court sided with Shiner and held that he did not have constructive receipt of the funds. The Judge's opinion was that Turnoy violated Section 7434 by willfully filing a false information return when he filed a 1099 reflecting that he had paid $149,059.91 to Shiner in 2012 when payment had not in fact been made and when he had no good-faith basis to believe that it had.
If a defendant is found liable for filing a fraudulent information return, 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.The period for bringing action may be brought only with the later of --
(1) 6 years after the date of the filing of the fraudulent information return, or
(2) 1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care.Any person bringing an action under Section 7434 is required to provide a copy of the complaint to the Internal Revenue Service upon the filing of such complaint with the court.
For purposes of Section 7434, the term "information return" means any statement described in section 6724(d)(1)(A) which includes: Forms W-2, W-2C, W-2G, 1042S, 1098, 1098E, 1098T,1099A, 1099B, 1099DIV, 1099G, 1099INT, 1099LTC, 1099MISC, 1099OID, 1099PATR, 1099R, 1099S, 5498, 5498-ESA. Specifically excluded from this definition is Form 1099C even though it is considered to be an information return.
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