IRS Issues Provide Focus for New Government Affairs Subcommittee
By Brian O'Laughlin, Esq.
The Affordable Care Act, the Fiscal Cliff, and the Real Time Tax System are just three recent issues on which APA has offered extensive comments to the IRS on behalf of the payroll profession. If you are interested in being an integral part of these and future discussions, consider joining the newest subcommittee of APA's Government Affairs Task Force: IRS Issues.
Co-chairing the subcommittee are Becky Harshberger, CPP (pictured, left), and Karen Salemi, FLMI, CPP (right), both of whom currently serve on IRS advisory committees. Harshberger is in her third and final year representing APA on the Information Reporting Program Advisory Committee (IRPAC), which helps to resolve information reporting issues of mutual concern between IRS and the reporting community. Salemi is in her first year representing APA on the IRS Advisory Council (IRSAC), which advises IRS on issues that have a substantive effect on federal tax administration.
Future APA representatives to IRPAC, IRSAC, and the Electronic Tax Administration Advisory Committee (ETAAC) may be expected to be drawn from this subcommittee.
Contact Bill Dunn, APA's Senior Manager of Government Relations, at [email protected] or Brian O'Laughlin, APA's Manager of Government Relations, at [email protected] if you are interested in joining or learning more about this exciting new subcommittee.
IRS Oversight Board Welcomes Real Time Tax System Comments
By Brian O'Laughlin, Esq.
The concept of an IRS Real Time Tax System does not appear to be fading anytime soon, despite its visionary's departure from office last fall. In 2011, IRS Commissioner Douglas Shulman introduced his vision for a Real Time Tax System, in which the IRS would receive information returns from employers up front, thus having them on file when the tax season started and significantly reducing refund fraud and identity theft. When he left office, however, the status of his vision remained cloudy.
On April 16, Steve Miller, Acting IRS Commissioner, alluded to the idea of a Real Time Tax System when he testified in front of the Senate Finance Committee on how the IRS plans to fight refund fraud and identify theft going forward. In response, the IRS Oversight Board, an independent body that oversees the IRS in its administration and management, organized a public forum to discuss a variety of tax administration issues, including the proposed Real Time Tax System.
Panelists included representatives from the payroll industry, South Carolina Department of Revenue, and the National Association of Enrolled Agents. Pete Isberg, President of the National Payroll Reporting Consortium (NPRC), which represents large payroll service providers, provided a detailed payroll perspective. In response to the Commissioner's Real Time Tax System proposal, the NPRC commissioned a study in 2011 from Ernst & Young on how employers prepare Forms W-2, including the typical employer W-2 preparation process and the feasibility of accelerating W-2 reporting deadlines.
As a result of the study, the NPRC formulated four alternatives the IRS should consider if it wants to accelerate the availability of tax information for a Real Time Tax System. The most obvious alternative, according to Isberg, would be earlier annual reporting deadlines. Most employers have W-2 information in final form by the end of January, and the current March 31 electronic filing deadline with SSA is of little value for employers today. Therefore, accelerating the W-2 reporting deadline to SSA is a feasible option and should be considered.
However, an earlier annual reporting deadline could invoke a trade-off between timeliness and accuracy. IRS statistics estimate that less than 1% of Forms W-2 are subsequently amended. APA surveyed the Government Affairs Task Force on this topic for the meeting. Members were asked, "After preparing initial employee W-2s in January, if you or the employee find a mistake, are you able to make corrections to the W-2 before filing with SSA or do you create a W-2c?" About half of the 41 respondents (21) indicated that they correct the W-2, and half responded that they created a W-2c. Most who responded that they issue a W-2c did so because their payroll service provider had an early cut-off date and the only choice they had was to issue a W-2c. Those that performed payroll in-house mostly responded that they can correct the W-2 because they have control over it and they wait longer to file the master file with the SSA. Further study is needed to assess the earliest deadline that would not compromise accuracy or impose increased employer burden, Isberg said.
The second alternative deserving further study is more frequent (i.e., quarterly) W-2 reporting. This notion is not new; the IRS received quarterly reports of employee earnings with Forms 941 until Congress changed it to an annual system in 1976. The IRS should look to the states and survey their experiences, Isberg said. Some states, such as New York and Massachusetts, have already shifted from annual W-2 reporting to some variation of quarterly reporting. If quarterly reporting is considered, however, a certain amount of time before submission is necessary to ensure that employer wage reports are correct and complete, Isberg cautioned.
Next, the IRS should consider having employers report to it directly. Form W-2 is the only information return that is not currently filed directly with the IRS, Isberg said. He mentioned that, in recent years, large employers are increasingly being contacted by specialized units within the IRS to provide electronic W-2 data to them long before they are filed with the SSA. Although voluntary, this practice has proven valuable for the IRS to validate claims of earnings and withholding during tax season, thus helping to identify potential fraudulent returns and prevent refund fraud.
Expanding electronic filing of information returns by reducing the threshold for electronic filing is a fourth alternative to accelerate the availability of tax information. Currently, employers filing fewer than 250 Forms W-2 are permitted to file on paper despite major improvements in technology. This threshold was largely developed because of the difficulty and cost associated with electronic transmissions. Today, however, electronic submission of Forms W-2 does not involve physical delivery, secure transmission of large files typically costs very little, and supporting software and services are widely available, Isberg indicated. As a best practice, payroll service providers generally report all Forms 941 and W-2 electronically and remit all federal taxes electronically. Even small employers can simultaneously create Forms W-2 for employees and electronically file them at no cost through the SSA's Employer Services website, Isberg noted.
The states should also be consulted for their experience in expanding electronic filing of employment taxes, quarterly wage reports, annual Forms W-2, and other information returns, Isberg advised. Many states have successfully adopted a 100% e-file system, while others have adopted e-file thresholds of anywhere from 25 to 5 employees.
Panelists Weigh In
When asked whether there are any problems so large that exploration of a Real Time Tax System should be halted, all four panelists concluded this is a step in the right direction toward reducing refund and identity fraud and should be explored further.