A recent federal appeals court decision should serve as a warning that employers may be found civilly liable for “knowingly and recklessly” reporting incorrect information regarding an employee’s income on a Form W-2, Wage and Tax Statement. The case involves a taxpayer who claims his former employer overstated his taxable income by including workers’ compensation as taxable income on his Forms W-2 when it knew the payments weren’t taxable.

The decision came on an appeal of a federal district court’s grant of summary judgment to the former employer after finding the Forms W-2 were not false because they reflected payments made to the taxpayer, that no jury could find that the employer acted willfully and that the employer lacked the mental state to have acted willfully.

The U.S. Court of Appeals for the D.C. Circuit disagreed, finding in Doherty v. Turner Broadcast Systems, Inc., No. 22-7072 (D.C. Cir. 2023), that the taxpayer provided enough evidence for a reasonable jury to conclude his former employer was liable for the inaccurate Forms W-2. It then sent the case back to the district court for further proceedings.

Payments for on-the-job injury
Martin Doherty worked as a photojournalist for Turner Broadcasting Systems Inc., for more than 15 years. In 2012, he injured himself while loading camera equipment. Doherty required medical treatment and was unable to perform his job. Turner provided him with compensation in lieu of his wages for the injuries.

Turner had two policies for compensating employees on leave due to an injury: a workers’ compensation policy and a short-term disability leave policy. Turner took the position that it paid Doherty under the disability policy, contending it fulfilled its workers’ compensation obligation. The Forms W-2 that Turner filed on Doherty’s behalf for the 2014 through 2016 tax years included all injury-related compensation as part of his gross taxable income.

Jury could find employer liable
The appeals court found that to award civil damages for the fraudulent filing of information returns under §7434(a), a plaintiff must show:

1. The defendant filed an information return on his or her behalf
2. The return was false as to the amount paid
3. The defendant acted knowingly and recklessly

Finding there was no disputing the fact that Doherty’s Forms W-2 qualified as information returns, the appeals court found it only needed to determine that he had raised genuine issues of material fact with regard to the returns reporting false amounts and whether Turner filed them knowingly or with reckless disregard.

The appeals court explained that the tax code excludes workers’ compensation payments from an employee’s taxable gross income. It then noted that Turner knew Doherty filed a claim for workers’ compensation and the D.C. Office of Workers’ Compensation had concluded that his injuries stemmed from a work-related incident. In fact, Turner had never disputed those findings. Therefore, the court determined that there was a factual dispute as to whether Turner had overstated Doherty’s taxable income on his Forms W-2.

Finally, the appeals court found Doherty raised factual questions as to whether Turner acted knowingly or recklessly in overstating his taxable income. It said that as early as 2013 it knew that Doherty’s injuries were job-related and that the payments he received fell under the workers’ compensation policy. It concluded that this was a question that needed to be answered by a jury.

For more information on preparing year-end tax forms like the Form W-2, check out our on-demand webinar where this form and others will be discussed.