Title 26, United States Code, Section 7205(a), makes it a crime to provide false information on a withholding exemption certificate or failure to supply such information and provides as follows:
(a) Withholding on wages – Any individual required to supply information to his employer under section 3402 who willfully supplies false or fraudulent information, or who willfully fails to supply information thereunder which would require an increase in the tax to be withheld under section 3402, shall, in addition to any other penalty provided by law, upon conviction thereof, be fined not more than $1,000, or imprisoned not more than 1 year, or both.
In order for the government to prove a case of fraudulent withholding exemption certificate or failure to supply information under § 7205(a), four elements must exist beyond a reasonable doubt:
- an individual was required to furnish an employer with a signed withholding exemption certificate (Form W-4) relating to the number of withholding exemptions claimed,
- an individual supplied their employer with a signed withholding statement,
- the information supplied to the employer on the signed withholding statement was false or fraudulent, and
- the individual acted willfully.
Section 7205(a) is a misdemeanor violation and concerns individuals who attempt to impede proper income tax wage withholding by providing false Forms W-4 to their employers. This section is rarely used, as these violations are generally charged as affirmative acts in felony tax evasion cases under § 7201.
Duty to Complete and File Form W-4
The first and second elements the government must prove are that the individual was an employee required to, and did, submit a signed Form W-4 to their employer.
Section 3402 provides that an individual must submit to their employer information relating to the number of exemptions to which they are entitled, as follows:
On or before the date of the commencement of employment with an employer, the employee shall furnish the employer with a signed withholding exemption certificate relating to the number of withholding exemptions which he claims, which shall in no event exceed the number to which he is entitled. 26 U.S.C. § 3402(f)(2)(A).
To prove the individual was employed and was required to submit a W-4 to their employer is simply accomplished through testimony of the employer, payroll records, and Forms W-2. The government does not need to prove the exact date the Form W-4 was submitted to the employer.
False or Fraudulent Information
The third element the government must prove is that the individual provided false or fraudulent information on their Form W-4. It has been determined that false or fraudulent information is not merely incorrect information, but information provided with intent to deceive in such a way as to prevent the government from receiving the proper withholding.
A false or fraudulent Form W-4 usually claims the individual is either entitled to too many withholding allowances or that the individual is exempt from withholding. As for false exemption claims, individuals are required to certify the following on the Form W-4:
I claim exemption from withholding for [year], and I certify that I meet both of the following conditions for exemption.
Last year I had a right to a refund of all federal income tax withheld because I had no tax liability and
This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.
The government can show an individual had a tax liability in the prior year by introduction of their prior year tax return or by computing the individual’s tax liability for the year(s) in question. Also, if an individual has a refund in one year because their withholding was more than their tax liability, they cannot claim an exemption in the following year.
For example: An individual had $10,000 in taxable income, tax liability of $900, and had $1,300 in withholding, resulting in a refund of $400 in the prior year. Although the individual received a refund of $400, the individual cannot certify on his Form W-4 that they “had no tax liability.”
Willfulness
In the context of a §7205 prosecution, the willful element requires the government to prove that a defendant knew the information supplied on a Form W-4 was false and intentionally supplied said false information. Where failure to supply information is alleged, the government must prove that the defendant knew of his duty to supply information and intentionally failed to supply such information.
Examples of actions in support of willfulness include an individual who:
- claims a large number of exemptions on Form W-4 in one year, when the prior year no exemptions were claimed,
- claims no tax liability in a prior year and none expected in the current year on a Form W-4, when the prior year tax return shows a tax liability,
- claims an increasing number of exemptions on Form W-4 each year as their income increased,
- falsely files a Form W-4 after receipt of IRS communications advising of legal requirements with regard to Form W-4,
- falsely files a Form W-4 after receipt of communication from their employer advising of legal requirements with regard to Form W-4, and
- falsely files a Form W-4 after expressing a moral and/or religious reasons in opposition to paying taxes.
Venue
The venue, for purposes of prosecution for submitting a false or fraudulent withholding statement under §7205, is in the district in which the false Form W-4 is submitted to the employer.
Statute of Limitations
The statute of limitations for violations of § 7205 is three years from the date the false or fraudulent W-4 is submitted.