A federal appeals court has upheld the conviction and 21-month prison sentence of an employee who filed W-4 forms on which he falsely claimed an exemption from income tax withholding. The ruling raises the ante for tax protesters who commit W-4 fraud. (U.S. v. Gross, No. 08-2362, 6th Cir., 2010)
Go to jail, go directly to jail. An employee filed three W-4s on which he falsely claimed an exemption from income tax withholding. He also failed to file 1040s for those years. Using the amounts reported on his W-2s, the IRS determined that his tax liability would have been $39,305. The employee was prosecuted for willfully attempting to defeat tax, based on the false W-4s. He was convicted and sentenced to prison. On appeal, he argued that filing false W-4s can’t serve as the basis for a conviction to evade or defeat tax because prior to April 15, he technically owed no tax.
The appeals court upheld his conviction and sentence. Court: When a W-4 containing false information is on file, it’s possible that the IRS might rely upon that information while investigating a taxpayer’s failure to file a return. In such a case, the W-4 would facilitate the taxpayer’s attempts to evade payment of tax. Similarly, filing false W-4s allowed the employee to ensure that the IRS wouldn’t receive, through withholding, any of the taxes it was owed.
PAYROLL PRACTICE TIP: W-4 fraud is a cheap and easy way to protest taxes, and it can snowball quickly. What to do: Honor all W-4s unless you have a reason to believe the forms are invalid. The reasonable-belief standard is flexible. If you doubt the forms’ validity, and employees haven’t filed updated forms, withhold on the basis of old forms you believe to be valid, or withhold using single/zero status.
This is the first case we’ve run across in which an employee was sent to prison for filing a false W-4. It probably won’t be the last. You might want to tuck it away for future reference, just in case you’re stuck dealing with a tax protester.