Today we welcome back guest blogger Omeed Firouzi, who discusses a recent case involving a dispute over employees’ tax withholding. Omeed notes that withholding disputes may become more frequent as the payroll tax deferral plays out. Christine
The Tax Anti-Injunction Act has been the subject of several posts on this site over the years. The law garnered national political attention in the summer of 2012 in the aftermath of the U.S. Supreme Court’s NFIB v. Sebelius decision. In NFIB, the Supreme Court upheld the Affordable Care Act’s individual mandate on the basis that the shared responsibility payment was within Congress’ taxing authority. The Tax Anti-Injunction Act (26 U.S.C. Section 7421) reads, in relevant part:
No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.
This law was at the center of a recent case decided in the U.S. District Court for the District of Oregon in July 2020. The plaintiff in this case, Alex Wright, alleged in a class action suit that his employer, Atech Logistics, Inc., wrongly withheld more taxes than they should have. Wright alleged unpaid wages and unpaid overtime as well.
With regard to the federal tax component of his case, Wright specifically alleged that Atech improperly rounded up his Federal Insurance Contributions Act (FICA) withholding on his paychecks to the next penny “instead of down as required by 26 C.F.R. Section 31.3102-1(d).” Consequently, Wright “on behalf of a proposed class of all current and former Atech employees…[sought] a $200 statutory penalty, a declaratory judgment that Atech violated the law, and attorney’s fees and costs.”
The magistrate judge agreed with Atech’s claim that the Anti-Injunction Act and the Declaratory Judgment Act “bar Wright’s claims relating to Atech’s alleged FICA tax miscalculation.” Virtually all of the court’s analysis relies on controlling precedent in the Ninth Circuit courtesy of the very similar case Fredrickson v. Starbucks Corp., 840 F.3d 1119, 1124 (9th Cir. 2016). In Fredrickson, the Ninth Circuit ruled that the Anti-Injunction Act barred Starbucks employees’ claims of improper federal and state tax withholding that the employees alleged was “based on an improper estimate of tips received.” The Fredrickson court cited U.S. Supreme Court precedent to justify its ruling, specifically United States v. Am. Friends Serv. Comm., 419 U.S. 7, 10 (1974), a case that found an employer’s withholding of taxes to be a kind of collection that can’t be enjoined under the Anti-Injunction Act. The Wright magistrate here, in turn, cited these precedents to recommend that the district court “grant Atech’s motion to dismiss.” The magistrate states plainly that Wright and his fellow employees could not challenge their employer’s tax withholding because the employees were attempting to restrain a collection of tax in direct contravention of the Anti-Injunction Act.
The court’s ruling here presents a frustrating predicament for taxpayers like Mr. Wright. When employers actively withhold more taxes than they should, workers are seemingly left with little recourse because of courts’ sweepingly broad interpretation of a decades-old statute. Such rulings mean that taxpayers like Mr. Wright are forced to pursue other options. One such option might be a refund suit, as suggested by the court in a footnote (“he can seek a refund of any amount Atech improperly withheld.”)
This route would lead Mr. Wright down a path of paying, through withholding, taxes that he should not have to pay, in violation of the “right to pay no more than the correct amount of tax,” per the Taxpayer Bill of Rights. He would then need to file a return or make a claim on which he would somehow seek a refund of the improperly withheld taxes. If that fails, he would then possibly have to file a refund suit (six months after filing the return or within two years from a notice of disallowance) – something he could of course only do after having paid all the taxes in full thanks to the Flora rule much discussed on this blog. During this entire process, it is unclear, per that very same Am. Friends case, whether he could seek injunctive relief against his employer, because of the Anti-Injunction Act, if he continues to work for him and the employer continues to withhold improperly.
What to make of the fact that this timeline may not yield success and could be cumbersome? The Supreme Court made clear in Am. Friends that the “frustrat[ing]” or “inadequate” nature of a refund suit does not change the fact the Anti-Injunction Act bars such suits. There are at least a couple of perplexing questions that come to mind here. First, if a worker can sue their employer under the Fair Labor Standards Act (FLSA) for failure to pay them proper wages or overtime pay, why can’t a worker sue their employer for failure to pay them enough in net take-home pay after tax deductions? The same principle of adequate, proper pay under federal law would seem to apply in the case of FICA deductions as would apply in FLSA cases (and of course both FICA and FLSA are products of the same New Deal progeny of the Depression-era federal social safety net overhaul).
Second, a worker can challenge their active misclassification, for example, as an independent contractor. If the worker succeeds, and their employer is ineligible for Section 530 safe harbor protections, the employer would have to abide by the IRS SS-8 determination and start withholding income and employment taxes. The tax withholding would change in real time as a result of the worker’s action to challenge their status; no separate proceeding is required. In addition to filing form SS-8, workers can also file a Form 3949-A to report “failure to pay tax” or “failure to withhold,” among other tax violations. If workers are permitted, even with the Anti-Injunction Act on the books, to take these actions related to their employers’ withholding, why should Mr. Wright’s claims be barred?
If these results seem inconsistent, consider the vexing nature of the Anti-Injunction Act that was articulated in the Supreme Court’s aforementioned NFIB decision. In NFIB, the Court famously saved the Affordable Care Act and its individual mandate partly on the grounds that the penalty for lack of health insurance (“the shared responsibility payment”) functionally amounted to a tax that Congress had the power to create.
But the Court interestingly held that the Anti-Injunction Act was not applicable to the shared responsibility payment because Congress specifically structured it as a “penalty” rather than as a “tax” that would be couched in the language of the Anti-Injunction Act. Therefore, while the individual mandate was upheld, the tax that enforces it was considered a “penalty” that was constitutionally a tax but notably not a tax for purposes of the Anti-Injunction Act – so suits against it could be maintained and the court could rule on its merits.
If Congress decided to recategorize FICA taxes in a way that did not explicitly tie them to the language of the Anti-Injunction Act, then Mr. Wright may have gotten past the initial barrier here. However, even with the Anti-Injunction Act firmly in place, we likely have not heard the final say on this matter.
Consider that currently some employers are following through on President Trump’s recent executive order on suspension of the employee share of FICA taxes. Absent congressional action, these taxes will have to be repaid. That could lead to large amounts of FICA withholding on some paychecks right before the deadline for repayment. That could mean miscalculations and inaccuracies, whether intentional or not, that produce improper withholding on paychecks. In turn, frustrated taxpayers might turn to the courts to recoup unauthorized deductions as workers try to make ends meet during an economic crisis. It remains to be seen how all of these developments will unfold considering courts’ generally broad reading of the Anti-Injunction Act.