ILW.COM - the immigration portal Immigration Daily

Immigration Daily: the news source for legal professionals. Free! Join 35000+ readers

Home Page

Advanced search


Immigration Daily

Archives

Processing times

Immigration forms

Discussion board

Resources

Blogs

Twitter feed

Immigrant Nation

Attorney2Attorney

CLE Workshops

Immigration books

Advertise on ILW

VIP Network

EB-5

Chinese Immig. Daily

About ILW.COM

Connect to us

Make us Homepage

Questions/Comments


SUBSCRIBE

Immigration Daily

 

Chinese Immig. Daily



The leading
immigration law
publisher - over
50000 pages of free
information!

Copyright
©1995-
ILW.COM,
American
Immigration LLC.

Immigration Daily: the news source for
legal professionals. Free! Join 35000+ readers
Enter your email address here:



< Back to current issue of Immigration Daily < Back to current issue of Immigrant's Weekly

Prosecuting Employers For Wage And Earnings Violations Under The Social Security Act And The Internal Revenue Code

by John K. Webb, Esq.

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.


Immigration Daily: the news source for
legal professionals. Free! Join 35000+ readers
Enter your email address here: