Late Form W-2s Doubled, Penalties to Come

The earlier filing deadline on January 31 for Forms W-2 resulted in more than double the number of late-filed returns, according to Tim McGarvey, Social Security Administration branch chief, who was speaking on an IRS payroll industry conference call.  He said that, to date, the SSA has received close to 50,000 late Form W-2 submissions, compared to an average of 25,000 late submissions annually in the past few years.  In response to an inquiry from the Tax Withholding & Reporting Blog, Mr. McGarvey indicated that the 50,000 submissions represent approximately 4 million late-filed 2016 Forms W-2.

In addition to the jump in the number of late-filed returns, Mr. McGarvey said that the number of Forms W-2c filed has also increased dramatically—up 30 percent from last year.  In response to an inquiry, Mr. McGarvey reported that the SSA has received approximately 2.7 million Forms W-2c in 2017, with some 2.2 million of those correcting 2016 returns.  That compares to a total of approximately 2 million Forms W-2c processed in 2015.

The January 31 deadline for filing and furnishing recipients with the Form W-2 and a Form 1099-MISC that reports nonemployee compensation (Box 7) became required under the Protecting Americans from Tax Hikes (PATH) Act to combat identity theft and fraudulent claims for refund (see prior coverage).

Late filers and those that struggled to provide accurate filings by the January 31 deadline should take steps now to prepare for the 2017 filing season.  Employers who provide taxable non-cash fringe benefits (such as the personal use of company cars) may want to consider imputing income for those benefits using the special accounting rule and flexibility in Announcement 85-113, if they are not already doing so.  Announcement 85-113 permits employers to treat non-cash fringe benefits as received on certain dates throughout the year (such as on the first of each month, each quarter, semi-annually, or annually).  It also allows employers to treat the value of non-cash fringe benefits actually received in the last two months of the calendar year as received in the following calendar year.  Making use of these rules can ease the year-end payroll crunch.  The earlier employers can provide copies of Forms W-2 to employees, the greater the chance there is for employees to identify errors and request corrections before the January 31 filing deadline.

Earlier Deadline for Filing Forms W-2 and 1099-MISC Looms

The earlier filing deadline for the Form W-2 and a Form 1099-MISC that reports nonemployee compensation (Box 7) is fast approaching.  In prior years, electronic filers had until as late as March 31 to file copies of such forms with the IRS (or the Social Security Administration (SSA), in the case of Forms W-2).  Additionally, filers could request an automatic extension to push the deadline back another 30 days.  Many large filers requested automatic extensions in the normal course to provide extra time to clean up their filings and avoid penalties.  For 2016, however, Forms W-2 and Forms 1099-MISC reporting nonemployee compensation in Box 7 are required to be filed by January 31, 2017–the deadline for furnishing copies to recipients–regardless of whether they are filed electronically or on paper.

Section 201 of the Protecting Americans from Tax Hikes (PATH) Act, enacted last December, accelerated the filing deadlines to combat identity theft and fraudulent claims for refund.  In past years, the IRS often issued refunds to taxpayers well before filers were required to file copies of the Form W-2 with the SSA and copies of the Form 1099-MISC reporting nonemployee compensation with the IRS.  Because the IRS had to process certain tax returns and refund claims without having all of the third-party payor information, the process was susceptible to fraudulent returns claiming refunds.  The new January 31 deadline makes the payor information available to the IRS sooner, thus reducing the potential for fraud.  This change comes on top of temporary Treasury Regulations issued last year that eliminated the automatic 30-day extension for Forms W-2 and proposed Treasury Regulations that would eliminate the same extension for other information returns, including Forms 1099-MISC, when effective.  Because the proposed regulations are intended to take effect sometime after the filing of 2016 information returns, they will not affect the availability of the automatic 30-day extension for 2016 information returns.

Although the earlier deadline and elimination of automatic extensions address valid concerns, the new rules inevitably increase the risk of penalties for erroneous information returns under section 6721 of the Code.  Combined with the increased penalty rates adopted as part of the Trade Preferences Extension Act of 2015 (see prior coverage) and subsequent inflation adjustment, the new deadlines increase the risk of large penalties, particularly for large filers.  For example, many employers with large expatriate workforces use the first quarter of the year to perform tax equalization calculations and prepare tax returns for their overseas workers.  That process often results in adjustments to the Form W-2 that could previously be made before filing the forms with the SSA.  Now, those same adjustments may well result in penalties.  Although the filing of corrected Forms W-2 have not consistently attracted the automatic information reporting penalties that corrections of other information returns have historically attracted, the changes to the filing deadlines and the statutory penalty rates create cause for concern.

Given the earlier deadlines, filers should take steps now to prepare for the 2017 filing season.  For example, lining up outside vendors to prepare and print recipient copies of returns earlier in January will provide recipients with some time before the January 31 filing deadline to identify potential errors and request corrections.  Many filers have traditionally waited until late January to print and send recipient copies knowing that they had time to make corrections before the filing deadline.  That strategy is no longer prudent in the face of simultaneous IRS/SSA filing and recipient copy deadlines.  To that end, large filers should notify the departments making the payments of the earlier deadline, and instruct them to provide required information with sufficient lead time to allow for processing of the data to prepare information returns for review and timely filing.  Filers should consider setting deadlines for transmitting payment data internally early in January to allow for the earlier distribution of recipient copies.

In addition, filers of Forms 1099-MISC reporting nonemployee compensation in Box 7 should submit a Form 8809 requesting an automatic 30-day extension in January 2017 to extend the filing deadline until March 2.  This extension will provide some additional time to identify errors and make corrections before the returns are filed.  Filers who believe that a non-automatic 30-day extension is warranted for Forms W-2 should be forewarned that the IRS will only grant such an extension in extraordinary circumstances, such as a natural disaster or a fire that destroys the filer’s books and records.