Prosecuting Employers For Wage And Earnings Violations Under The Social Security Act And The Internal Revenue Code
I. Introduction
Each year employers file more than 200
million W-2 forms (Annual Statement of Wages
and Taxes) with the Social Security
Administration (SSA), reporting the wages they
have paid to their employees. The Form W-2
shows wages paid the previous tax year for each
employee. In addition, employers file quarterly
wage reports with the Internal Revenue Service
(IRS) on Form 941 (Employer's Quarterly Federal
Tax Return), which shows the aggregate amounts
of wages the employer paid to all employees
during the quarter, and the amounts withheld for
income and Social Security taxes under the
Federal Insurance Contributions Act (FICA ). See
I.R.C. §§ 3101(a) - 3111(a). Specifically, SSA
uses the Form W-2 to credit workers' earnings to
their Social Security accounts, which are later
used as a basis to calculate Social Security
program benefits. The IRS uses Form 941 to
ensure the prompt and correct deposit of
employment taxes (income and Social Security
taxes withheld from employees and the employers'
share of the Social Security tax) to the United
States Treasury. These wage and earnings reports
are critical to the operations of each agency.
- Form W-2 Reports. SSA provides its W-2 information to the IRS, which uses it to ensure that individuals accurately report their income on their tax returns and employers report and pay the appropriate amount of income and Social Security taxes. See I.R.C. § 6051(a).
- Form 941 Reports. The IRS provides SSA with Form 941 information, which SSA uses to insure that it has received W-2s from all employers who reported that they withheld
Social Security taxes and that the aggregate
amount of Social Security wages reported on
the W -2 forms are equal to the aggregate
amount of Social Security wages reported on
the 941 forms for each employer. See I.R.C.
§ 6011.
II. Legislative history and statutory
authority regarding wages and earnings
Both SSA and the IRS are empowered by
Congress to impose strict wage and earnings
reporting obligations on employers.
The Secretary of the Treasury shall make
available information returns filed pursuant to
part III of subchapter A of chapter 61 of
subtitle F of the Internal Revenue Code of
1986, to the Commissioner of Social
Security.... The Commissioner of Social
Security shall process any withholding tax
statements or other documents made available
to the Commissioner by the Secretary of the
Treasury....
See Pub. L. No. 94-202, § 232, 89 Stat. 1135
(1976) (codified at 42 U.S.C. § 432).
The Commissioner of Social Security is
responsible for establishing and maintaining a
record of the earnings of all persons who work for
employers or who are self-employed and are
covered under the various Title II Social Security
programs, which include retirement, disability,
and survivorship (children and spouse).
Specifically, Title II of the Act states:
On the basis of information obtained by or
submitted to the Commissioner of Social
Security, and after such verification thereof as
the Commissioner deems necessary, the
Commissioner of Social Security shall
establish and maintain records of the amounts
of wages paid to, and the amounts of
self-employment income derived by, each
individual....
See Section 205(c)(2)(A) of the Social
Security Act (the Act); see also 20 C.F.R.
§ 404.801.
The earnings records maintained by SSA and
IRS are used to determine entitlement to, and the
amount of, benefits that may be payable to a
person under the Social Security Title II
programs. Eligibility and amount of benefit paid
by Social Security is based on a person's earnings
as defined in the Act. See 42 U.S.C. §§ 401-434;
42 U.S.C. §§ 301-1399; see also 20 C.F.R.
§ 404.801. In addition, Congress requires that
SSA certify the earnings records of employees
based on the reporting of employers and
self-employed individuals.
There is hereby appropriated to the Federal
Old-Age and Survivors Insurance Trust
Fund...100 per centum of the taxes imposed
by... Chapter 21 of the Internal Revenue
Code...with respect to wages... which wages
shall be certified by the Commissioner of
Social Security on the basis of the records of
wages established and maintained by such
Commissioner....
See Section 201(a) of the Act.
The Internal Revenue Code (IRC) contains
the authority for insuring that the employer collect
tax from the wages of employees, and requires
that employers and employees keep accurate wage
and earnings records. "Every person liable for any
tax imposed by this title, or for the collection
thereof, shall keep such records... as the Secretary
may from time to time prescribe." I.R.C. § 6001
(1994).
Similarly, the IRC requires that employers
provide each employee with a W-2.
Every person required to deduct and withhold
from an employee a tax under section 3101 or
3402...shall furnish to each such
employee...on or before January 31 of the
succeeding year, or, if his employment is
terminated before the close of such calendar
year, within 30 days after the date of receipt
of a written request from the employee if such
30-day period ends before January 31, a
written statement showing...(6) the total
amount deducted and withheld as tax under
section 3101....
I.R.C. § 6051(a).
IRC regulations also require that employers
who file 250 or more W-2 wage reports per year
must file them on magnetic media, unless the IRS
specifically grants the employer a waiver.
(b)...If the use of Form W-2, W-2P...is
required...the information required by such
form shall...be submitted on magnetic
media....
(c) Exceptions-....(B) In the case of a
calendar year or annual period beginning on
JANUARY 2005 UNITED STATES ATTORNEYS' BULLETIN 25
or after January 1, 1987-...(2) The person
was not required to file 250 or more returns
on such form for the preceding year....
(f) Failure to File. If a person fails to file a
return on magnetic media when required to do
so... such person is deemed to have failed to
file the return.
26 C.F.R. § 301.6011-2
III. Importance of the Federal
Insurance Contributions Act (FICA)
Employers are required by the IRS to
withhold FICA taxes for reporting to SSA. "The
tax imposed by section (FICA) 3101 shall be
collected by the employer of the taxpayer, by
deducting the amount of the tax from the wages as
and when paid." See I.R.C. § 3102(a).
A. Legislative history of FICA
Congress originated the present income tax
withholding system in section 1972 of the
Revenue Act of 1942, 56 Stat. 884, charging IRS
with responsibility for collection and enforcement
of taxes. In 1943 Congress passed the Current Tax
Payment Act of 1943, 57 Stat. 126, which also
kept tax collection and enforcement
responsibilities with the IRS. The current version
of FICA was initially passed by Congress in 1954,
and it also charged IRS with collection and
enforcement responsibilities. Prior to January
1978 employers filed their tax reports and wage
reports with the IRS on a quarterly basis. The
quarterly FICA tax report forms used were Forms
941 (regular), 942 (household work), and 943
(agricultural work). A ttached to these were
Schedule A forms showing the detailed amounts
of wages for each employee by Social Security
Number (SSN). Schedule A forms were first used
by SSA to post wages quarterly to each worker's
earnings record. In 1976 the wage and earnings
reporting system was streamlined and the
Combined Annual Wage Reporting (CAWR)
system was created to require yearly W-2s to be
filed by all employers for each employee, and to
report quarterly aggregate employee wage
amounts to the IRS on Forms 941. See Pub. L.
No. 94-202, § 232, 89 Stat. 1135 (1976) (codified
at 42 U .S.C. § 432).
B. Memorandum of Understanding (MOU)
between SSA and IRS on the CAWR
process
Under the authority provided by § 232 of the
Act, the IRS and SSA entered into an interagency
agreement, a Memorandum of Understanding
(MOU), that specified how the CAWR process
was to work. Specifically, under the CAWR
process, employers continue to file Forms 941,
942, and 943 quarterly with IRS, but no Schedule
A forms are filed. Instead, W-2 forms are filed by
the employer as the annual wage report for his
employees. These reports, in the form of Copy A
of the W-2's and a copy of the employer
transmittal Form W-3 (or in the form of electronic
records of W-2 and W-3 data plus transmittal
Form 6559), are filed with SSA annually, on or
before the last day of February in the year
following the wage reporting year. Included in
this process are FICA and non-FICA wage reports
and reports from payers of periodic pensions,
annuities, retired pay, or Individual Retirement
Accounts (IRA's). See Programs Operation
Manual (POMS) RM 01101.009 (IRS/SA CAWR
Agreement).
C. Importance of the MOU
The MOU that exists between the SSA and
the IRS is designed to ensure that wage and hour
reporting standards are carefully administered,
and that employers judiciously adhere to their
reporting obligations. The MOU requires that the
SSA and the IRS work together to insure the
effective and efficient processing of employer
wage and earnings reports and to reconcile any
discrepancy in reporting by employers. See 42
U.S.C. § 432; 20 C.F.R. § 422.114(a). To
accomplish the goals of the MOU, employers are
instructed by the IRS to file annual wage reports
with the SSA on paper Forms W-2 (Wage and
Tax Statement) and W-3 (Transmittal of Income
and Tax Statements), or by using the equivalent
W-2 and W-3 magnetic media reports. See 20
C.F.R. § 422.114(a). SSA processes all wage
reporting forms for updating to its earnings
records and the IRS tax records identifies
employer reporting errors and untimely filed
forms for IRS penalty assessment action, and
takes action to correct any reporting errors
identified. See 20 C.F.R. § 422.114(a). SSA also
processes Forms W-3c (Transmittal of Corrected
Income Tax Statements) and W-2c (Statement of
Corrected Income and Tax Amounts), as well as
their magnetic media equivalents, that employers
are required to file with the SSA when certain
previous reporting errors are discovered. See 20
C.F.R. § 422.114(a).
D. Employer payment of Employee FICA
or State Unemployment Tax
Generally, payment by an employer of the
employee's portion of FICA tax, or any payment
required to be made by an employee for state
unemployment compensation, without deducting
it from the employee's wages, is added to the
employee's wages. See I.R.C. § 3121(a)(6)(A)-(B)
available at http://www4.law.cornell.edu/uscode/26/3121.html; see also Rev Rul 86-14, 1986-1 CB
304 available at http://www.taxlinks.com/rulings/1986/revrul86-14.htm.
However, if payment is
made to an employee for domestic service in a
private home of the employer, or for agricultural
labor, the amount of the payment is not wages for
FICA purposes. See I.R.C. § 3121(a)(6) available
at http://www4.law.cornell.edu/uscode/26/3121.html.
In addition, cash payment is not
considered FICA wages if it is less than $1,000 in
any calendar year for domestic services in the
employer's private home, or less than $100 in a
calendar year for service not in the course of the
employer's trade or business. See I.R.C.
§ 3121(a)(7)(B)-(C) available at http://www4.law.
cornell.edu/uscode/26/3121.html.
E. What constitutes wages for FICA
withholding
Generally, wages for FICA purposes means
all remuneration for employment, including the
"cash value of all remuneration, including
benefits, paid in any medium other than cash." See
I.R.C. § 3121(a) available at http://www4.law.cornell.edu/uscode/26/3121.html.
Thus, salaries,
fees, bonuses, and commissions on sales or on
insurance premiums, are wages if paid as
compensation for employment. See Reg
§ 31.3121(a)-1(c). Id. The basis upon which
remuneration is paid is generally immaterial in
determining whether the remuneration constitutes
wages, and it may be paid hourly, daily, weekly,
monthly, or annually. See Reg § 31.3121(a)-1(d)
available at http://www.irs.gov/irb/2004-10_IRB/ar12.html.
How the remuneration is paid is
immaterial, and it may be paid in cash or in goods,
lodging or clothing. See Reg § 31.3121(a)-1(e)
available at http://www.irs.gov/irb/2004-10_
IRB/ar12.html. Pay for employment constitutes
wages even if the remuneration is received after
termination of the employment relationship
between employer and employee. See Reg
§ 31.3121(a)-1(i) available at http://www.irs.gov/irb/2004-10_
IRB/ar12.html.
F. Reconciliation of SSA and IRS records
SSA provides its W-2 information to IRS,
which uses it to ensure that individuals accurately
report their income on their tax returns and
employers report and pay the appropriate amount
of income and Social Security taxes. Likewise, the
IRS provides SSA with Form 941 information,
which SSA uses to insure that it has received
W-2s from all employers who reported that they
withheld Social Security taxes and the aggregate
amount of Social Security wages reported on the
W-2 forms are equal to the aggregate amount of
Social Security wages reported on the 941 forms
for each employer. See POMS RM 01101.002-009
available at http://policy.ssa.gov/poms.nsf/poms.
(Annual Wage Reporting Process).
IV. Employers' obligation to accurately
maintain and report wages and
earnings to SSA and IRS
Employers or individuals who knowingly or
intentionally furnish false information in
connection with earnings records are subject to
criminal penalties dealing with fraudulent
statements under the Social Security Act (Title II),
the Internal Revenue Code (Title 26), and
provisions of the federal criminal code (Title 18).
See 20 C.F.R. § 422.108; 26 C.F.R. §§ 7202 and
7204; and 18 U.S.C. § 1001; see also POMS, RM
01101.001 available at http://policy.ssa.gov/poms.nsf/poms. The felony fraud provisions of the
SSA Title II programs, including fraud in wage
and earnings reporting, are found in 42 U.S.C.
§ 408(a)(1)-(8). Under the Social Security Act, a
person defined as an employer or an individual
will be guilty of a felony and, upon conviction,
will be fined or imprisoned for not more than five
years, or both, if the person
willfully, knowingly, and with the intent to
deceive [SSA] as to his true identity (or the
true identity of any other person) furnishes or
causes to be furnished false information [to
SSA] with respect to any information required
JANUARY 2005 UNITED STATES ATTORNEYS' BULLETIN 27
by [SSA] in connection with the
establishment and maintenance of records.
42 U.S.C. § 408(a)(6).
Similarly, any employer or individual who makes
or causes to be made any false statement or
representation
for the purpose of causing an increase in any
payment [by SSA], or for causing any
payment to be made where no payment is
authorized...as to whether wages were paid or
received for employment, or the amount of
wages or the period during which wages were
paid or the person to whom the wages were
paid...shall be guilty of a felony and upon
conviction thereof- shall be fined or
imprisoned for not more than five years, or
both.
42 U.S.C. § 408(a)(1)(A).
In addition, any employer or employee who uses a
Social Security Number other than his or her own
in the reporting of wage and earnings, or for any
purpose, will "be guilty of a felony and, upon
conviction thereof shall be fined under Title 18 or
imprisoned for not more than five years, or both."
42 U.S.C § 408(a)(7).
A. Importance of accurate wage and
earnings reporting to SSA and IRS
Accurate earnings information is essential to
SSA. The Title II programs, including those that
pay benefits towards retirement, disability, and
survivor's benefits for spouses and children, are
based on the lifetime earnings of each worker.
Thus, the lifetime accumulation of earnings of
each worker are used to establish the worker's
eligibility for, and the amount of, Social Security
benefits they (or their children or spouses) will
receive.
B. Social Security benefits based on
earnings credits
The amount of Social Security benefits and
tax money that the Social Security trust funds are
entitled to is based on the earnings recorded in the
Social Security accounts of individual wage
earners. If SSA fails to record all or part of an
individual's annual earnings, the Social Security
benefits calculated by SSA for each individual
might be counted as less than properly due. In
addition, the SSA trust funds would not be
entitled to all the tax revenue due them by a fair
accounting. Earnings in Social Security-covered
employment enable an individual to build
sufficient credits, called quarters of coverage, to
gain eligibility for Social Security benefits. Once
sufficient quarters of coverage are earned and
retirement, survivors, or disability conditions are
met, SSA uses the amount of earnings to calculate
an individual's benefit. See POMS RM 01103.009
(Employer's Responsibility for Maintaining
Employment Records) available at http://policy.ssa.gov/poms.nsf/poms.
C. The self-financing principle of the Title
II Social Security programs
The Title II Social Security programs
(Retirement, Survivors, and Disability Insurance)
were established by Congress to be self-financing,
and benefits from the various programs are paid
from trust funds that principally receive money
generated by dedicated employment taxes (FICA)
on designated wages and self-employment
income. The Title II programs are in stark contrast
to the Title XVI Supplemental Security Income
(SSI) program, which is funded from the general
tax revenues and is not based on FICA earnings.
The self-financing principle has been fundamental
to the insurance concept of the Retirement,
Survivors, and Disability Insurance programs. The
first programs were established in 1935, 1939, and
1966, respectively. See 42 U.S.C. § 409(a).
D. Funding methods for the Title II Social
Security programs
Three approaches have been used to fund the
Title II Social Security programs. The authorizing
legislation of the original 1935 Act established an
Old Age Reserve Account to maintain a sufficient
reserve for payment of benefits under the
program. See General Accounting Office,
GAO/HRD 92-81 Social Security IRS/SSA
Reconciliation Efforts available at http://gao.gov.
By law, the reserve account was structured to
receive an annual appropriation, beginning in
fiscal year 1937, sufficient to pay benefits and to
build up a required reserve. At the same time, also
beginning in 1937, the original Act established
payroll taxes to be levied on employees and
employers based on a percentage of each worker's
annual wages. However, because of constitutional
concerns, the original Act did not link the
appropriations made to the Old Age Reserve
Account with the taxes. Ambiguity about the
intention of the original funding was resolved by
the Social Security Amendments of 1939, which
created a social security trust fund that received
revenues on a collection basis. The 1939
Amendments required that the Department of the
Treasury (Treasury) transfer to the Social Security
trust funds all of the Social Security tax revenue
(including interest, penalties, and additions to the
taxes) that it collected.
This collection-based funding approach
remained in place until 1960, when Congress
again changed the funding approach with the
enactment of Section 201(a) of the Social Security
Act, which simplified the tax collection
procedures for both the taxpayer and the
government. Id. Under Section 201(a), the Social
Security trust funds receive revenues based on the
total amount of Social Security covered wages
certified as being recorded for each individual in
SSA's records. Treasury then applies the
appropriate tax rate to the certified aggregate
amount of Social Security wages recorded by
SSA, and transfers revenues directly to the trust
funds. Under this funding approach, the trust
funds do not receive any interest and penalty
revenue derived from the late payment of Social
Security taxes. In addition, Section 201(a)
provides that the trust funds receive tax revenue
for all Social Security wages regardless of
whether Treasury collects the taxes. At the
beginning of each month, Treasury advances tax
revenues to the Social Security trust funds based
on estimates of Social Security taxes to be
collected during the month. The certification
process is periodically adjusted when SSA advises
Treasury of the total Social Security wages that
SSA has recorded. If the estimates are too high,
funds are to be returned to the general revenues of
Treasury. See POMS RM 02201.001 (Overview
of Earnings Adjustment Process) available at http://policy.ssa.gov/poms.nsf/poms.
V. Charging decisions and elements of
the crime for wage and earnings
violations under the Social Security
Act-42 U.S.C. §§ 408(a)(1)(A)-(C);
408(a)(6); and 408(a)(7)(B)
Title II of the Social Security Act, cited as 42
U.S.C. § 408(a)(1)-(8), contains the A ct's primary
criminal provisions and carefully spells out the
Act's restraints on fraud involving the reporting of
wage and earnings by employers and individuals.
Initially enacted as a misdemeanor statute,
Congress amended Title II of the Act in 1981 to
make Social Security fraud (including SSN
misuse) a felony, punishable by five years in
prison and a fine up to $250,000. (See 1981
Amendments, Pub. L. No. 97-123, 95 Stat. 1659,
1663-64). The following is an analysis of each of
the subsections of 42 U.S.C. §§ 408(a)(1)(A), (B),
(C); 408(a)(6); and 408(a)(7)(B), including a
breakdown of the elements necessary to prove a
charge under each, and a brief suggestion of when
and how each subsection should be charged.
A. 42 U.S.C. § 408(a)(1)(A)
The elements required to prove a violation of 42
U.S.C. § 408(a)(1)(A) are:
- defendant made a false statement or representation;
- as to whether wages were paid or received for employment; or
- as to the amount of wages or the period during which wages were paid or the person to whom wages were paid;
- used to cause payment or an increase in payment of benefits where no payment is authorized.
See 42 U.S.C. § 408(a)(1)(A).
B. 42 U.S.C. § 408(a)(1)(B)
The elements required to prove a violation of 42
U.S.C. § 408(a)(1)(B) are:
- defendant made a false statement or representation;
- as to whether net earnings from self-employment were derived; or
- as to the amount of such net earnings or the period during which or the person by whom derived;
- used to cause payment or an increase in payment of benefits where no payment is authorized.
See 42 U.S.C. § 408(a)(1)(B).
C. 42 U.S.C. § 408(a)(1)(C)
The elements required to prove a violation 42
U.S.C. § 408(a)(1)(C) are:
- defendant made a false statement or representation;
- as to whether a person entitled to benefits;
- had earnings in or for a particular period, or
- as to the amount of earnings for a particular period;
- used to cause payment or an increase in payment of benefits where no payment is authorized.
See 42 U.S.C. § 408(a)(1)(C).
D. When to charge
While most fraud in Social Security benefits
programs involves the falsification of a document
or record offered as proof of disability, or occurs
when an applicant misrepresents material facts on
an application for benefits, a significant amount of
fraud involves the false reporting of wages and
earnings by employers and employees. Title II of
the Act (42 U.S.C. § 408(a)(1)(A)-(C)) makes it a
felony to make, for the purpose of receiving any
benefit, or increasing any benefit to which the
intended recipient is not entitled, a false statement
or representation regarding: (1) whether wages
were paid or received for employment, the amount
of wages, the period during which wages were
paid, or the person to whom wages were paid
(§ 408(a)(1)(A)); (2) whether net earnings from
self-employment were derived, the amount of
such earnings, the period during which
self-employment earnings were derived, or the
person by whom such earnings were derived
(§ 408(a)(1)(B)); or (3) whether a recipient of
benefits had earnings that might warrant
deductions from benefits or the amount of such
earnings (§ 408(a)(1)(C)). It is also a felony to
cause any such false statement or representation to
be made (§ 408(a)(1)). The following are
examples of violations that could result in
criminal prosecution for false reporting of wage
and earnings:
- furnishing false information of identity in connection with the establishment and maintenance of Social Security records, or with the intent to gain information as to the date of birth, employment, wages, or benefits of any person;
- forging or falsifying SSA documents;
- using a Social Security Number obtained on the basis of false information or falsely using the Social Security Number of another person, for the purpose of obtaining or increasing a payment under Social Security or any other federally funded program, or for any other purpose;
- disclosing, using, or compelling the disclosure of the Social Security Number of any person for unauthorized purposes;
Making or causing to be made any false
statement or representation as to:
- whether wages were paid or received, the amount of such wages, the period during which wages were paid or received, or the person to whom such wages were paid; or
- whether net earnings from self-employment were received, the amount of such earnings, the period during which such earnings were received, or the person who received them.
See 42 U.S.C. §§ 408(a)(1)(A), (B), (C).
E. Examples of wage and earnings fraud
(42 U.S.C. § 408(a)(1))
In United States v. Mauro, 80 F.3d 73, 75 (2d
Cir. 1996), the Second Circuit affirmed the
conviction of a defendant under section (a)(1)(A)
because the defendant made false statements to
the Social Security Administration. Mauro
convinced a man named Bolognese to place
Mauro's son on the payroll of Bolognese's
company, Atlas. Bolognese issued Mauro's son a
payroll check in the amount of $340, withholding
$160 in federal and state taxes. Mauro then repaid
Bolognese $500. Id. Bolognese noted Mauro's son
as a "no-show" employee, and the scheme allowed
Mauro's son to receive health insurance.
In United States v. Kaczowski, 882 F.Supp.
304 (W.D.N.Y. 1994), defendants were convicted
of violating section (a)(1)(A) as to "whether
wages were paid or received." The defendants
created a scheme wherein Kaczowski was placed
in a "no-show" job on the payroll of a company
called "Kampus Kitchen." Id. at 305. The scheme
was devised to show that Kaczowski had a
legitimate source of income from a company,
rather than from illegal gambling proceeds. The
defendant argued that no crime had been
committed because his codefendant, Gawel, paid
federal and state withholding, unemployment
insurance, and Social Security taxes. The district
court responded that, regardless of the obligation
to pay Social Security taxes, defendants had made
a false statement regarding the source of the
income, which goes to whether "wages were paid
or received."
In United States v. Krogstad, 576 F.2d 22, 23
(3d Cir. 1978), the Third Circuit affirmed the
conviction of a defendant who filed false
employer tax returns by understating the true
number of its employees, and failing to pay the
appropriate amount of income and Social Security
taxes withheld as to such employees.
F. 42 U.S.C. § 408(a)(6)
The elements required to prove a violation of
42 U.S.C. 408(a)(6) are:
- defendant willfully, knowingly, and with intent to deceive as to his true identity or the identity of another person;
- furnishes, or causes to be furnished, false information to SSA;
- with respect to any information used by SSA to establish or maintain records.
See 42 U.S.C. § 408(a)(6).
A person may also be subject to criminal penalties
under § 408(a)(6) for furnishing false information
in connection with earnings records. See also 20
C.F.R. § 422.108. For example, criminal liability
arises under 42 U.S.C. § 408(a)(6) when an
employer,
knowingly, and with intent to deceive the
Commissioner of Social Security as to his
identity furnishes, or causes to be furnished
false information to the Commissioner...with
respect to any information required...in
connection with the establishment and
maintenance of the records.
This usually occurs when an employer, who
knows that an employee is working while using a
false Social Security Number and/or identity,
makes false statements in wage and earnings
reports to SSA (Form W-2) and to the IRS (Forms
W-2, 940, 941) as to such wages and earnings or
identity. This charge is especially applicable to
companies who frequently hire individuals that
the company suspects may have provided false
identity documents in order to work. Prosecution
of vulnerable employees for trying to make a
living in order to survive is unappealing to
prosecutors for a number of reasons. However,
prosecution of corporate offenders whose lax
hiring policies are the source of false wage and
earnings reporting is a more practical and
effective approach to prosecuting wage and
earnings cases. In addition to SSA felony charges,
an employer can face Title 18 felony charges for
making false statements on IRS documents W-2,
W-3, and 940 (18 U.S.C. § 1001), as well as
immigration fraud (18 U.S.C. § 1546) for false I-9
and W-4 Forms.
G. 42 U.S.C. § 408(a)(7)(B)
The elements required to prove a violation of
42 U.S.C. § 408(a)(7)(B) are:
- false representation of a Social Security account number;
- with intent to deceive;
- for any purpose.
See United States v. Means, 133 F.3d 444,
447 (6th Cir. 1998) (setting forth the elements for
prosecution of a case under 42 U.S.C.
§ 408(a)(7)(B)). See also United States v.
McCormick, 72 F.3d 1404, 1406 (9th Cir. 1995).
The felony provisions of 42 U.S.C.
§ 408(a)(7)(B), which deal with the misuse of a
Social Security Number, are particularly effective
in charging cases involving wages and earnings
fraud when an individual or company has
attempted to circumvent wage and earnings laws
by using false Social Security Numbers to hire
employees who might otherwise be ineligible to
work. In recent years, it has become common for
service companies to knowingly hire individuals
using false identity documents. Some rogue
employers have gone so far as to provide Social
Security Numbers for individuals known by the
employer to be illegal and to help the individuals
complete wage and earnings reporting documents
(W-4, W-2, and 940 forms). Each of the reporting
forms that SSA and IRS require an employer to
complete must include a Social Security Number.
Thus, each time a false number is reported by an
employer or employee on a wage and earnings
document required by an employer, it constitutes a
felony violation of § 408(a)(7)(B). The charging
standard, "for any purpose," is broad and
self-explanatory, and any false representation of a
Social Security Number, with an intent to deceive,
is actionable conduct that may be charged as a
felony under § 408(a)(7)(B). See United States v.
Silva-Chavez, 888 F.2d 1481 (5th Cir. 1989);
United States v. Perez-Campos, 329 F.3d 1214
(10th Cir. 2003); United States v. Ettienne, No.
02-4850, 2003 WL 21313165 (4th Cir. Jun. 6,
2003); United States v. Charles, 949 F.Supp. 365
(D.V.I. 1996).
In the case of United States v. Chapman, No.
98-5093, 1999 WL 551919 (6th Cir. July 21,
1999), the Sixth Circuit convicted the defendant,
her supervisor, and a few others for Social
Security fraud in violation of 42 U.S.C.
§ 408(a)(7)(B). The individuals engaged in an
illegal scheme to obtain applications by locating
homeless persons and having them sign up for
TennCare. Id. at *2. The defendant was a
part-time marketing representative for Omnicare,
a managed care organization contracting with
TennCare, a program administered by the state of
Tennessee that provided medical benefits to
Medicaid-eligible and to uninsured/uninsurable
persons. The defendant provided application
forms to subcontractors who would then fill in
information on the forms by using names from
telephone directories and fabricating Social
Security Numbers and dates of birth. Id. at *3.
VI. Charging decisions and elements of
the crime for wage and earnings
violations under the Internal Revenue
Code-I.R.C. §§ 7202, 7204, 7205, &
7206
I.R.C. § 7202 criminalizes both the willful
failure to collect taxes and the willful failure to
account truthfully for and pay over taxes. A
conviction for violating § 7202 can result in fines
of up to $10,000, imprisonment for up to five
years, or both. I.R.C. § 7204 provides the
exclusive sanction for an employer who furnishes
employees with a false W-2 statement. I.R.C.
§ 7206 makes it a felony for any employer to
willfully fail to "collect, truthfully account for,
and pay over" any tax that the employer has a
duty to collect. What follows is a description of
I.R.C. §§ 7202, 7204, and 7206, including a
breakdown of the elements necessary to prove a
charge under each, and a brief suggestion of when
and how each subsection should be charged.
A. I.R.C. § 7202
The elements required to prove a violation of
I.R.C. § 7202, Part 1: Failure to Collect Tax are:
- defendant had a legal duty to collect, account for, and pay over a tax;
- defendant failed to collect that tax; and
- defendant acted willfully.
See I.R.C. § 7202.
Prosecutions for willful failure to collect a tax
are usually charged when there is a failure by an
employer to properly withhold the
statutorily-required amounts from employees'
wages, and when the employer is negligent in
paying over such amounts to the government.
The elements required to prove a violation of
I.R.C. § 7202, Part 2: Failure to Truthfully
Account for Tax are:
- defendant had a legal duty to collect, account for, and pay over tax;
- defendant failed to truthfully account for and pay over that tax; and
- defendant acted willfully.
See I.R.C. § 7202.
Prosecutions for "willful failure to truthfully
account for and to pay over a tax" are usually
charged when an employer withholds taxes from
employees' paychecks but fails to account for or
pay over the withheld amount to the government
at the end of the quarter. Id.
B. I.R.C. § 7204 (misdemeanor)
If an employer willfully fails to furnish a
Form W-2 to an employee as required by 26
C.F.R. §§ 6051 and 6053(b), or if an employer
furnishes a false or fraudulent Form W-2 to an
employee, the employer will be subject to a
penalty of $50 for each violation. See 26 C.F.R.
§ 6674. Any penalty assessed under I.R.C. § 7204
is collected in the same manner as the Social
Security FICA taxes payable by employers under
26 C.F.R. § 3111. The $50 civil penalty may be
imposed in addition to any criminal penalty
charged against an employer under I.R.C. § 7204.
Providing false W-2's to employees can be
sufficient to prove an aiding and assisting offense
pursuant to § 7204. See United States v.
Gambone, 180 F. Supp. 2d 660 (E.D.Pa. 2001).
C. I.R.C. § 7205 (misdemeanor)
Section 7205 is usually charged in response to
tax avoidance schemes. For example, whenever an
individual/employee willfully executes a false
W-4 or W-9 in connection with wages and
earnings withholding for reporting purposes, or
files a return that he believes may contain material
factual misrepresentations, he may be charged
with a misdemeanor violation of I.R.C. § 7205.
As an example, employees of a company
involved in a strike and lock-out were encouraged
to work using false names and Social Security
Numbers in order to by-pass features of the
company's payroll and personnel system that
identified and rejected locked-out employees.
Some employees who worked during the lock-out
filed false W-4 and I-9 forms using Social
Security Numbers and names that were totally
fictitious or borrowed from their spouses,
children, or other relatives. The bogus W-4 and
I-9 forms were filed with their employer (and
coconspirator), resulting in the reporting of false
wage and earnings (W-2 and Form 941) to the
IRS and SSA.
D. I.R.C. § 7206 (felony)
The elements required to prove a violation of
I.R.C. § 7206, Willful False Statement are:
- defendant signed a federal income tax document containing a written declaration that it was being signed under the penalties of perjury;
- defendant knew that the document contained false information; and
- defendant willfully and intentionally made the false statement.
The elements required to prove a violation of
I.R.C. §7206, Fraudulent Aid or Assistance are:
- defendant assisted, procured, counseled, advised, or caused the preparation and presentation of a return;
- the return was fraudulent or false as to a material matter; and
- defendant acted willfully.
See United States v. Perez, 565 F.2d 1227, 1234
(2d Cir.1977)
For a conviction under § 7206, proof of
willful making or subscribing, or willfully
assisting in the preparation of a false return, is
required. Section 7206 is also a felony statute, and
in order to get a conviction, the government need
not prove a tax deficiency.
Whenever an employer or individual willfully
makes a false statement on any reporting
document (such as a W-2, W-3, or Form 941),
which is verified by a written declaration made
under penalties of perjury, it is a felony that may
be punishable by a fine of not more than $100,000
($500,000 in the case of a corporation), or up to
three years imprisonment, or both, together with
the costs of prosecution. See I.R.C. § 7206(1). The
penalties are the same whenever an employer or
individual willfully aids or assists in, or advises in
the preparation or prosecution of a return,
affidavit, claim, or other document that contains
fraudulent or false material statement. See I.R.C.
§ 7206(2).
As an example, owners of a company
participated in a scheme designed to reduce the
amount of tax paid by the employees and the
company, by paying employees partially or
completely for their services with a check charged
against the company's operating account, with the
remainder being charged against the company's
wages account. Employee withholding for federal
income tax, state income tax, and FICA, was
charged only from the checks written from the
wages account. No withholding was done for
payment of wages charged against the company's
operating account, nor was the payment of
employee wages from the operating account
reported on the W-2 forms provided to the
employees and filed with the IRS by the company.
Employees who participated in the scheme used
the false W-2 forms to prepare their understated
federal income tax returns. Further, the portion of
the employee's wages payable from the company's
operation account was to a nonexistent person or a
relative of the employee, usually a child, who was
not employed by the company. Defendants were
charged with aiding and assisting in the
preparation and filing of a false federal income tax
return, in violation of I.R .C. § 7206, and with
conspiring to defraud the federal government by
aiding and assisting in the preparation of the false
returns through understated W-2 forms in
violation of 18 U.S.C. § 371. See United States v.
Isaksson, 744 F.2d 574 (7th Cir. 1984). If an
employer is convicted under the criminal
provisions of § 7206, the employer will be guilty
of a felony and subject to imprisonment. See
I.R.C. § 7206.
In United States v. Romanow, 509 F.2d 26
(1st Cir. 1975), co-owners of a furniture store
were convicted of perjury where they filed falsely
inflated Employers Quarterly Tax Returns, even
though the IRS did not rely on the false
information in calculating the tax, because
materiality is measured by a statement's potential,
rather than its actual, impact.
VII. Conclusion
Accurate earnings information is essential to
SSA because the earnings of workers are
instrumental to the concept behind SSA benefits
programs that are critically important to the lives
of many Americans. Failure to properly collect
and account for FICA taxes from employee wage
and earnings can severely damage the SSA Title II
Programs and short change many Americans,
including those that pay benefits towards
retirement, disability, and survivor's benefits for
spouses and children. Aggressive prosecution of
employers who violate wage and earnings laws
benefits all Americans.
[Editor's Note: This article was obtained from the United States Attorneys' Bulletin]
About The Author
John K. Webb, Esq. is a Senior Attorney with the
Office of Chief Counsel for the Inspector General,
Social Security Administration, and a Special
Assistant United States Attorney with the
United States Attorney's office for the Central
District of California, Los Angeles, where he
serves as Identity Theft Coordinator. He is
responsible for prosecuting federal crimes
involving identity fraud and abuse of Social
Security programs, and has participated in the
indictment and prosecution of individuals related
to the terror attacks of 9/11, as well as the
planning and implementation of Operation
Tarmac/Operation Safe Harbor in Phoenix and
Los Angeles. Mr. Webb has served as an
instructor at the National Advocacy Center and is
a frequent lecturer on the topics of Identity Theft,
Social Security Number Misuse, and Federal
Benefits Fraud. Mr. Webb is a regular contributor
to the United States Attorneys' Bulletin.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.
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