Received W2-C: Do I NEED to file amended tax return?

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taxeconomist
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Received W2-C: Do I NEED to file amended tax return?

Post by taxeconomist »

Before replying yes (which seems obvious), here is a minor kink:

My former employer overpaid me on my last paycheck almost 2 years ago and I repaid them back the gross amount minus what was withheld (as I never saw it in my paycheck). The net payback amount was approx $3.5k. The federal and state withheld amount (that I never saw and did not pay back to ex-employer) was approximately $1k.

Ex-employer recently sent me a W2-C and, with it, they are asking me to sign a form that they say allows them to recover my portion (not the employer's portion) of just the FICA amounts paid to the government for that paycheck (this amounts to under $100).

I just re-ran TurboTax with the W2-C values and am now owed a refund of approx $600.

So my questions are:

1. Am I legally obligated to amend my tax return in the case I am due a refund?
2. Is the $600 refund an amount that I am owed or my employer is owed? The employer indicated to me that when I paid them back the net amount ($3.5k), I had no more obligations to them.
3. Can the employer file without my approval to recover the $1K federal and state withheld amounts (in addition to the $100 FICA tax withheld)?
4. If I do amend my tax return, is there any issue the IRS will see if the employer has the ability to recover the $1k federal and state withheld amount on behalf (i.e., two parties seeking a refund on the same amounts withheld)?

I acknowledge this is not easy, but the ex-employer is terribly organized and has not done a good job on any of this (and has caused me to expend substantial time and energy on this issue). Thank you!
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dodecahedron
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by dodecahedron »

What a mess, ugh!

I do not know the answers to #2,#3, and #4. But at least there is an easy and quick answer to your question #1. There is, in general, no legal obligation for a taxpayer to file an amended return under any circumstances. For authoritative support, see the citations in this June 2010 article from the Journal of Accountancy. The most relevant excerpt is quoted below:
While taxpayers have a legal duty within any applicable statute of limitations to pay the correct tax, neither the IRC nor the Treasury Regulations require them to unilaterally correct tax return submission errors or omissions. Instead, the regulations state that upon discovering an error or omission involving an understatement of income or an overstatement of deductions, a taxpayer “should” [as opposed to "shall"] file an amended tax return and pay any tax due (Treas. Reg. §§ 1.451-1(a) and 1.461-1(a)(3)). In Badaracco Sr. v. Commissioner, 464 U.S. 386 (1984), the U.S. Supreme Court said that a taxpayer is under no legal obligation or duty to file an amended return even after an error or omission is discovered.
If your computation is correct that, if anything, the impact of this corrected W-2C means you overpaid your taxes, then I would also argue that you have no moral obligation to file a 1040-X either.

If you believed at the time of filing that the facts stated on your return were correct, you have done all the law legally requires you to do.

See below for additional advice after further research on my part.
Last edited by dodecahedron on Sat Jun 24, 2017 6:26 pm, edited 3 times in total.
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dodecahedron
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by dodecahedron »

I have thought about this further and done some additional research. At least some employers (see, e.g., here) have policies requiring that if the recovery happens after the tax year in which the overpayment occurred, the employee is required to repay the gross amount of the overpayment, not the net one. Likely this policy is to avoid precisely this kind of messy situation. Thomsons Reuters Tax and Accounting blog clearly considers it a best practice.

Edited to add: the more I think about it, the more I believe your former employer handled this entirely incorrectly. Read the Thomsons Reuters link above and compare it to the W-2C you received. Sorry for all the trouble your former employer's bad organization is causing for you.

If they handle it correctly on their end and document it on a correct W-2C, it sounds to me that there is absolutely no reason for you to file a 1040X for the year of the overpayment but you will be able to claim a deduction of any amounts repaid on your return for the year of the repayment.
jebmke
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by jebmke »

dodecahedron wrote:If they handle it correctly on their end and document it on a correct W-2C, it sounds to me that there is absolutely no reason for you to file a 1040X for the year of the overpayment but you will be able to claim a deduction of any amounts repaid on your return for the year of the repayment.
Is this a Claim of Right (Sec 1341) deduction?
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dodecahedron
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by dodecahedron »

jebmke wrote:
dodecahedron wrote:If they handle it correctly on their end and document it on a correct W-2C, it sounds to me that there is absolutely no reason for you to file a 1040X for the year of the overpayment but you will be able to claim a deduction of any amounts repaid on your return for the year of the repayment.
Is this a Claim of Right (Sec 1341) deduction?
I am not really familiar with all the details of the possibilities for tax relief (I am under the impression that Claim of Right is a credit, rather than a deduction, but it might well be better than the deduction route depending on the numbers involved and both alternatives could be considered [edited to add that it turns out that Claim of Right can either be a credit or a deduction]) but in any event, it seems to me that all appropriate remedies for tax mitigation for the OP belong on the return for the tax year of the repayment, not the year of the original overpayment.

Edited to add: there seems to be an excellent description of the options for correctly handling this on the TaxSlayer Professional blog.
Topic Author
taxeconomist
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by taxeconomist »

dodecahedron wrote:What a mess, ugh!

If you believed at the time of filing that the facts stated on your return were correct, you have done all the law legally requires you to do. If the employer sent you a corrected W-2C, I presume the employer has filed a copy of the W-2C with the IRS as well. The IRS has all the information needed to correctly recompute your tax liability.

If I were in your shoes, I would sit tight and wait for correspondence from the IRS (hopefully with an eventual refund if you are correct in believing you are entitled to an additional $600 refund) rather than sending more redundant paperwork into the cumbersome system.
Thank you for the response. So are you saying that I should amend my return and have the IRS determine if I am entitled to a refund? If I do nothing, I doubt the IRS will send me a check. What do you mean by me avoiding sending more paperwork into the system?
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dodecahedron
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by dodecahedron »

taxeconomist wrote:
dodecahedron wrote:What a mess, ugh!

If you believed at the time of filing that the facts stated on your return were correct, you have done all the law legally requires you to do. If the employer sent you a corrected W-2C, I presume the employer has filed a copy of the W-2C with the IRS as well. The IRS has all the information needed to correctly recompute your tax liability.

If I were in your shoes, I would sit tight and wait for correspondence from the IRS (hopefully with an eventual refund if you are correct in believing you are entitled to an additional $600 refund) rather than sending more redundant paperwork into the cumbersome system.
Thank you for the response. So are you saying that I should amend my return and have the IRS determine if I am entitled to a refund? If I do nothing, I doubt the IRS will send me a check. What do you mean by me avoiding sending more paperwork into the system?
If you read my subsequent posts and the links therein, it now seems clear that IF your employer had handled the repayment correctly the W-2C should not have resulted in any change to your 2015 federal or state tax liability as a result of your repayment. If you are computing a $600 refund based on the W-2C, I am guessing that your employer did something wrong, because only boxes 3 through 6 should have changed (based on the Thomson Reuters advice linked above.) I would not advise filing a 1040X for 2015.

At this point, based on what I understand of the actual facts (as opposed to what is on your W-2C), I do not believe you are entitled to a refund on your 2015 return. If you repaid the amount in 2017, then you can claim the repayment as a deduction or credit on your 2017 return next year, no amendment needed. If you repaid the amount in 2016, then you should have claimed the repayment as a deduction or credit on your 2016 return (if 2016 is on extension, you can just include the repayment as a deduction when you file the 2016 1040; otherwise you can amend your 2016 return with 1040X.)

I do not believe there is any way your employer can recover the erroneous federal or state income tax withholding from the IRS or state tax authorities. Last July you posted that your employer was asking you to repay the "gross" amount (as opposed to the net of withholding amount). That seems to have been the correct protocol as I advised at the time. I am not sure why your employer accepted the net amount instead. But, as I also posted back then, the correct remedy for you is to mitigate the tax consequences by declaring the payment as a deduction or credit in the year of repayment. The corrected W-2C (as the Thomsons Reuters blog makes clear) is a narrowly circumscribed way that the employer can recover the incorrect SS/Medicare payments (and also correct your SS earnings record.) It should not impact your 2015 tax liability. There is no way for your employer to recover the incorrectly withheld federal and state income taxes from the IRS at this point. The money was forwarded by your employer to the IRS and state and you already have gotten credit for those funds against your 2015 liability. Your only remedy is a "Claim of Right" credit or deduction on your return in the tax year in which you made a repayment of wage compensation paid in error.
Topic Author
taxeconomist
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by taxeconomist »

dodecahedron wrote:
taxeconomist wrote:
dodecahedron wrote:What a mess, ugh!

If you believed at the time of filing that the facts stated on your return were correct, you have done all the law legally requires you to do. If the employer sent you a corrected W-2C, I presume the employer has filed a copy of the W-2C with the IRS as well. The IRS has all the information needed to correctly recompute your tax liability.

If I were in your shoes, I would sit tight and wait for correspondence from the IRS (hopefully with an eventual refund if you are correct in believing you are entitled to an additional $600 refund) rather than sending more redundant paperwork into the cumbersome system.
Thank you for the response. So are you saying that I should amend my return and have the IRS determine if I am entitled to a refund? If I do nothing, I doubt the IRS will send me a check. What do you mean by me avoiding sending more paperwork into the system?
If you read my subsequent posts and the links therein, it now seems clear that IF your employer had handled the repayment correctly the W-2C should not have resulted in any change to your 2015 federal or state tax liability as a result of your repayment. If you are computing a $600 refund based on the W-2C, I am guessing that your employer did something wrong, because only boxes 3 through 6 should have changed (based on the Thomson Reuters advice linked above.) I would not advise filing a 1040X for 2015.
Thanks for the reply. My employer corrected my wages (box 1), federal income tax withheld (box 2), the similar state wages and state tax withheld as well as boxes 3-6.

That being said, since the W2-C has been filed by my employer with IRS (with reduced wages), can I submit a 1040X for 2015 (despite not being obligated to do so)?
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dodecahedron
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Re: Received W2-C: Do I NEED to file amended tax return?

Post by dodecahedron »

taxeconomist wrote: That being said, since the W2-C has been filed by my employer with IRS (with reduced wages), can I submit a 1040X for 2015 (despite not being obligated to do so)?
Yes, anyone can submit a Form 1040X amended return claiming an additional refund they believe is due to them at any time within three years after the date of filing of the original Form 1040.

Note that all amended returns are necessarily paper filings and they are processed manually at the IRS. The IRS warns that it can take up to 16 weeks to process.

Given what you have said above about your employer's "disorganization" in recordkeeping and handling of this matter and my understanding of how they should have handled it, I personally would have some reservations about relying entirely on the W-2C. Personally, if I were filing this 1040X, I would feel an obligation to attach not only the W-2C but also a statement describing my reservations and providing relevant details and explanation of what actually happened since a 1040X (like all IRS filings) requires the taxpayer to sign "under penalty of perjury" that the information provided on the return is "true, correct, and complete to the best of my knowledge and belief."

Since the return is necessarily a paper filing anyway, it would be easy to attach a statement describing what happened. (There is a small amount of space provided directly on the 1040X for an explanation of why you are amending but you would likely need additional room to accurately represent the facts and can just write: "See attached statement" and provide an additional page briefly describing the chronology of what has transpired.)

Edited to add: via an email discussion, sscritic suggests that it would be an excellent idea to dig up your paystubs from that year, especially the last one. The first step would be to reconfirm that your original W-2 appropriately agrees with the figures on your final paystub. (It is good practice to do this routinely every year before filing, though I realize not everybody does.) Both sscritic and I are puzzled as to why the withholding figure would have changed from the original W-2, since employers can't get excess income tax withholding back after the tax year closes out.

What follows is my advice: If you do file a 1040X, you might want to reference and annotate a copy of that final paystub as part of your attached statement. Conceivably, the IRS might contact your former employer and spur a conversation with whoever handles their payroll records about how to document situations like yours properly.
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