Consequences of Refusing to Provide IRS Form 4699 to a Former Employer

Hello, in 2012 I was misclassified as an independent contractor by a former employer who is now being investigated by the IRS for systematic misclassification. I have refused to sign IRS form 4699, which would relieve the employer of having to pay taxes related to my employment in 2012. The employer has now sent me a letter threatening to sue me to recoup the taxes that they should have paid in the first place. Two questions: 1) would their suit hold up in court, and 2) what is the best response to attempts at intimidation like this?

Here is their letter:

The XXX team has reached out to you via email and phone (if available) on multiple occasions during the past three months to coordinate the submission of Form 4669 as requested by the IRS. Despite these efforts, we have not been able to produce a form in your name that is acceptable by IRS standards. If Form 4669 is impossible to fill out due to intractable personal financial circumstances, you can download a more informal letter by which you can attest to your tax compliance without requiring access to exact records. If this letter is not signed by Friday, May 15, 2015, two things will happen:

1) Your name will be on a very short IRS list of XXX contractors who did not comply with this very serious government request.

2) XXX will have to pay your 2012 taxes, even if you in fact paid them years ago, and will retain an attorney to recoup that amount directly from you. Please note the IRS is requiring XXX to pay your taxes in addition to penalties and interest that total ~30% of your 1099 income from XXX for that year.

I am writing to you personally at this time to underscore the severity of your status. Inaction on your part to comply now will unfortunately result in the harsh scenarios mentioned above. You may also receive a call ensuring that you received this critical communication. Thank you for your attention to this urgent matter.

There is no law that requires that you sign the form 4669. However, if you filed your 2012 return and reported all your income from this employer on the return then there is no harm to you in providing a truthful certification of what you reported on that return. Whether the employer might prevail in a lawsuit if it sued you is an issue of state law, and I did not see that you indicated anywhere in your post the state in which the employer is located and, if different, the state in which you currently reside.

Thank you! The employer is located in CA and I also reside in CA. How would CA law regard a lawsuit like this?

With regard to federal tax law and federal tax forms, a California court would probably have to rule that the federal government occupies the field in how the federal tax system and its forms are administered as a matter of constitutional law (the supremacy clause and the federal preemption doctrine). Since there is no federal law to compel you to execute the form, it is difficult to imagine how a state statute or any common law doctrine could compel you to do so.

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Quoting CLR

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1) would their suit hold up in court,

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No.

Two reasons:

1 - If the IRS finds that you were illegally misclassified, then you haven't done anything wrong to your former employer for which your former employer could win a lawsuit.

2 - If the IRS finds that you were properly classified as an employee, your former employer wouldn't have to pay anything and therefore would have nothing to sue for.

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Quoting CLR

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2) what is the best response to attempts at intimidation like this?

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The best response is no response. I suggest you ignore and not get into any discussion with your former employer. The letter is hot air and is designed to scare you.

In fact, that letter might be extortion under the CA Penal Code:

http://www.leginfo.ca.gov/cgi-bin/di...0&file=518-527

All that being said, I don't see where you got the idea that the form would "relieve the employer of having to pay taxes related to my employment in 2012."

I don't see anything on the form that does that.

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Quoting adjusterjack

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All that being said, I don't see where you got the idea that the form would "relieve the employer of having to pay taxes related to my employment in 2012."

I don't see anything on the form that does that.

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From the Form 4669 instructions:

“A payor who fails to withhold the required tax from a payee, may be entitled to relief, under sections 3402(d), 3102(f)(3), 1463 or Regulations section 1.1474-4, if the payor can show that the payee reported the payments and paid the corresponding tax. Form 4669 is used by a payor to show that it is entitled to such relief.”

In short, if the employer can prove that the employee paid taxes that should have been withheld by the employer then the employer can get relief from having to pay that part of the employment taxes. The employer would still owe the employer’s share of FICA at the very least, however, plus interest and potential penalties. While a court could not compel the OP to sign the form, it might hold the OP liable if by his refusal to sign the employer was forced to pay more than it should have had to pay. I’m not familiar enough with California court decisions in this regard (if there are any) to know how that might come out. But it’s not out the realm of possibility. Given that there is really no downside to providing the information if in fact the taxes were paid, I don’t see a point in refusing to provide the form and run a possible risk of getting sued over it. At the very least, getting sued means paying to defend the claim. Even if the OP wins, those costs he wouldn’t get back.

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Quoting adjusterjack

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In fact, that letter might be extortion under the CA Penal Code:

http://www.leginfo.ca.gov/cgi-bin/di...0&file=518-527

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The threat to sue if the employee refuses to provide the form is not extortion. Under the CA statute you linked, the extortion must involve an attempt to get money or property from the OP. That is not what is happening here.

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Quoting adjusterjack

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No.

Two reasons:

1 - If the IRS finds that you were illegally misclassified, then you haven't done anything wrong to your former employer for which your former employer could win a lawsuit.

2 - If the IRS finds that you were properly classified as an employee, your former employer wouldn't have to pay anything and therefore would have nothing to sue for.



The best response is no response. I suggest you ignore and not get into any discussion with your former employer. The letter is hot air and is designed to scare you.

In fact, that letter might be extortion under the CA Penal Code:

http://www.leginfo.ca.gov/cgi-bin/di...0&file=518-527

All that being said, I don't see where you got the idea that the form would "relieve the employer of having to pay taxes related to my employment in 2012."

I don't see anything on the form that does that.

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I am a little unsure of the bolded. I have not personally dealt with cases involving systematic misclassification...only ones involving individual misclassifications. In those instances I always had the taxpayer file form 8919 with their tax return so that they did not have to pay the employer's share of social security and medicare taxes.

I have some small concern that signing form 4669 would get the employer off the hook for the employer's share of the social security and medicare taxes.

I hope one of the other tax professionals here has dealt with a systemic misclassification and can clarify that point.

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Quoting llworking

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I have some small concern that signing form 4669 would get the employer off the hook for the employer's share of the social security and medicare taxes.

I hope one of the other tax professionals here has dealt with a systemic misclassification and can clarify that point.

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It does not. The applicable relief provisions in the Code and regulations, which the Form 4669 cited in the paragraph I quoted earlier, are all provisions that relieve a person from responsibility for tax that should have been withheld from the payee (the employee here) if the payee has already paid the tax himself directly to the IRS. The code does not give relief for the share of FICA tax imposed directly on the employer. Nor does the Code give relief to the employer for the penalties and interest that would otherwise have been due for the withheld taxes, either.

All that happens here is that supplying the Form 4669 simply subtracts from what the employer would owe the amount of tax the employer should have withheld from the employee and that the employee has already paid himself. That’s fair since the employee would have paid those taxes anyway had the employer properly withheld the tax.

Taxing Matters, under what doctrine could California law compel a party to sign a form 4669 when there is no federal statute or regulation that compels them to do so? What authority could any state have to compel a party to execute a federal tax document under such a circumstance? I can't see how it could ever be upheld. But perhaps there is some doctrine in this regard I am unaware of. Supremacy and preemption would seem to preclude it, in my view.

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Quoting badzombie

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Taxing Matters, under what doctrine could California law compel a party to sign a form 4669 when there is no federal statute or regulation that compels them to do so?

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As I said before, the OP could not be compelled to sign the form. That’s not what the employer would sue for here. It would be a suit for money damages. If the OP declined to provide the information needed to aid the employer a court might find the employee liable to the employer for money damages for the extra the employer had to pay as a result under some some doctrine like unjust enrichment or indemnification. The specific facts would matter, of course. Bear in mind that without that information the employer is paying extra tax that it should not have to pay. Again, I do not know if the California courts have adopted any position like that, but it is not totally outside the realm of possibility. This is not a premption situation. Federal tax law says nothing about what the employee might owe the employer in a case like this. Federal tax law is only concerned with ensuring the federal government gets the tax that it is due.