Fraudulent Form W-2 Is Not a Fraudulent Return

An individual files an individual income tax return, Form 1040EZ, reporting taxable income from employment, income tax, an income tax prepayment credit for withholding shown on an attached Form W-2 and an overpayment of income tax for which a refund is claimed.

The IRS identifies the return under its Questionable Refund Program, designed to detect and stop fraudulent or questionable claims for refund. Because the return is apparently complete, it is processed; the taxpayer's account shows filing of the return, assessment of reported income tax and posting of reported income tax prepayment credits. (The Service freezes the account so that a refund or credit is not made.)

The IRS investigates the Form W-2 information and discovers that, for the period covered by that form, the taxpayer was not employed by the identified employer and was incarcerated for most or all of the time. Therefore, he was not paid income, did not have any tax withheld and was not issued a Form W-2 by the employer identified on the Form W-2. Thus, the employment, income and withholding information reported on the Form W-2 are false.

Because the taxpayer did not earn any income, he is not liable for any tax liability reported on the return. Thus, the income tax assessment based on the liability reported on the return is excessive.

Because the W-2 withholding items are false, the withholding credits reported on the income tax return are false. The return reports more payment credits and, thus, claims an overpayment and a refund to which the taxpayer is not entitled. The basic assessment period of Sec. 6501(a) has expired.

Analysis

Sec. 6501(c)(1) provides that, for fraudulent returns with the intent to evade tax, the Service may assess the tax at any time. For Sec. 6501(c)(1) purposes, a "return" is the return on which the taxpayer reports a liability and the Service makes an assessment. A Form W-2 is an information return on which the employer does not report tax and the IRS does not assess tax. Form W-2 is separate and distinct from Form 1040. Thus, a fraudulent Form W-2 does not constitute a fraudulent income tax return; the limitless assessment period under Sec. 6501(c)(1) does not apply merely because the Form W-2 is fraudulent. On the other hand, the Sec. 6501(c)(1) limitations period may apply to an income tax return based on a false Form W-2, if the Service can show that the return is false or fraudulent with intent to evade tax.

The IRS is not required to assess additions to tax for fraud before the limitations period under Sec. 6501(c)(1) is triggered. The plain and unambiguous language of Sec. 6501(c)(1) permits assessment at any time when a taxpayer files a false or fraudulent return. Sec. 6501(c)(1) is separate and distinct from the provisions for additions to tax for fraud; it does not require that an addition to tax for fraud be asserted or assessed as a precondition to its application.

Conclusion

A Form W-2 is an information return, separate and distinct from an income tax return. Thus, a fraudulent Form W-2 does not constitute a fraudulent income tax return. The Sec. 6501(c)(1) limitations period may apply to a return based on a false Form W-2, if the Service can show that the income tax return for which the assessment is being made is false or fraudulent with the intent to evade tax. At the same time, it is not required to assert or assess the civil fraud penalty for the unlimited period of Sec. 6501(c)(1) to apply.

IRS Letter Ruling 200014001 (4/10/00)