Robert J. Fedor, Esq., L.L.C.

Government report recommends changes to IRS' W-2 verification practices

Ohio residents who have filed an income tax refund, likely recall including information from and a copy of one or more W-2 forms. A W-2 is issued by an individual's employer and includes information related to an individual's gross income earnings and tax deductions. This information is crucial in determining how much a taxpayer owes in taxes. Likewise, W-2 information is also needed to assess whether a taxpayer is eligible to receive an IRS tax refund.

The U.S. tax system relies heavily on taxpayers being honest and complying with IRS regulations and requirements. Taxpayers are expected to file their tax returns on time and to ensure appropriate tax forms are accurate and complete. This is not; however, always the case and a growing number of individuals in the U.S. appear to be taking advantage of the IRS' lax W-2 verification process.

During 2013 alone, the IRS estimates that it paid $5.2 billion dollars in "fraudulent identity theft refunds." These tax fraud schemes took advantage of the IRS' practice of verifying the vast majority of W-2 information after tax returns have already been issued to eligible taxpayers.

Currently, the IRS requires that taxpayers include a copy of their W-2 form upon filing individual tax returns by April 15. The IRS then conducts "selective reviews" to match W-2 data and, if applicable, individual taxpayer returns are issued. More comprehensive W-2 checks are then completed at a later date.

A recent report by the Government Accountability Office reviewed the IRS' current W-2 verification practices and found that the agency's "look-back compliance model" makes the agency vulnerable to those seeking to commit tax fraud.

The GAO recommendations for combating tax fraud are in line with previous requests made by the U.S. Treasury Department including instituting a Jan. 31 W-2 filing deadline and reducing "the 250-return threshold for e-filing information returns." The IRS has yet to assess the proposed cost-savings benefits of the changes recommended by the GAO and Treasury Department.

Source: Accounting Today, "IRS May Shift W-2 Deadlines to Combat Identity Theft and Tax Fraud," Michael Cohn, Sept. 22, 2014

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