IRS May Shift W-2 Deadlines to Combat Identity Theft and Tax Fraud

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The Internal Revenue Service is being urged to move up its W-2 filing deadline to January 31 and to lower the threshold for requiring electronic filing of W-2 returns in an effort to curb the growing trend of identity theft related tax fraud.

A new report from the Government Accountability Office suggested that additional actions such as these could help the IRS combat the threat of tax refund fraud. Based on a preliminary analysis, the IRS estimates it paid $5.2 billion in fraudulent identity theft refunds in the 2013 filing season, while preventing $24.2 billion in such refunds, based on what it could detect. The full extent of the fraudulent refunds is unknown, however, because of the challenges endemic in detecting identity theft-related refund fraud.

Identity theft-related refund fraud takes advantage of the IRS’s “look-back” compliance model, the GAO pointed out. Under this model, rather than holding refunds until completing all of its compliance checks, the IRS issues the tax refund after conducting selected reviews.

While there are no simple solutions, one option is earlier matching of employer-reported wage information to taxpayers’ returns before issuing tax refunds, the GAO noted. The IRS currently cannot do such matching because employers' wage data (from Form W-2s) are not available until months after the IRS issues most tax refunds. As a result, the IRS begins matching employer-reported W-2 data to tax returns in July, after tax season. But if the IRS had access to W-2 data earlier—through accelerated W-2 deadlines and increased electronic filing of W-2s—it could conduct pre-refund matching and identify discrepancies to prevent the issuance of billions in fraudulent refunds, according to the GAO report.

The Treasury Department proposed earlier this year that Congress accelerate W-2 deadlines to January 31. However, the IRS has not yet fully assessed the impacts of this proposal, the GAO noted, and without this assessment, Congress does not have the information it would need to determine the merits of such a significant change to W-2 deadlines or the use of pre-refund W-2 matching. Such an assessment is consistent with the IRS’s strategic plan, which calls for analytics-based decisions, and would help the IRS ensure effective use of resources, the GAO pointed out.

The Treasury Department has also requested authority to reduce the 250-return threshold for e-filing information returns. The Social Security Administration estimated that to meaningfully increase W-2 e-filing, the threshold would have to be lowered to include those filing five to 10 W-2s. In addition, the SSA estimated an administrative cost savings of about $0.50 per e-filed W-2. Based on these cost savings and the ancillary benefits they would provide in supporting the IRS’s efforts to conduct more pre-refund matching, a change in the e-filing threshold is warranted, according to the GAO. Without this change, some employers’ paper W-2s could not be available for IRS matching until much later in the year, due to the additional time needed to process paper forms.

The GAO recommended that Congress should consider providing the Treasury with the authority to lower the annual threshold for e-filing W-2s. In addition, the GAO suggested, the IRS should fully assess the costs and benefits of shifting W-2 deadlines and provide this information to Congress.

The IRS neither agreed nor disagreed with the GAO's recommendations, and stated it is determining how these potential corrective actions would align with its available resources and IRS priorities.

“The ability to narrow or close the gap between the time tax returns are filed and the time at which third-party information is available for use by the IRS is a concept with the potential to yield significant benefits to the government and to taxpayers, but can also impose burdens that must be quantified and carefully considered by policy makers,” wrote IRS deputy commissioner for services and enforcement John Dalrymple in response to the report. “Implementing such a change to the tax system would be a substantial undertaking, and we agree that the Congress needs to have a well-informed understanding of the costs and benefits in order to determine the best course of action.”

Ellen Minkow, a CPA tax practitioner in New York, said she sees problems with the proposals. “I do not believe you can change the filing deadline of the W-2s,” she said in an email.  “All entities have 30 days to reconcile and file W-2s for their employees. This is a tremendous task to do in 30 days.”

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