IRS Starts Anti-Fraud Program Using Codes Input by Payroll Processors to Verify W-2s

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By Michael Trimarchi and Mike Baer

A pilot program to add a verification code to employee copies of Forms W-2, Wage and Tax Statement, was started by the Internal Revenue Service for tax year 2015 in a bid to combat fraud and identity theft, an agency official said Oct. 1.

A limited number of payroll service providers are to participate in the program to test the capability of verifying W-2 data, said Scott Mezistrano, IRS representative for industry stakeholder engagement and outreach. The service providers would select employer clients to join the project, he said during a monthly payroll industry teleconference.

We're looking to see if this code would be useful in evaluating the integrity of the W-2 data that taxpayers submit when they e-file their 1040s, he said, adding that the code would not be used on W-2s filed with paper Forms 1040, U.S. Individual Income Tax Return.

If the program is successful, W-2s could possibly change to include a verification code field no earlier than for tax year 2017, Mezistrano said.

The IRS is to provide payroll processors with an algorithm to generate a unique code of 16 alphanumeric characters, separated into groups of four that would be separated by hyphens, Mezistrano said. Data from the W-2 are to be included in the code, he said.

The code would appear on Copy B of Form W-2 that is filed with an employee's federal tax return and Copy C, which is for the employee's records.

No New Box Added to Wage, Tax Statement During Test

The W-2 would not include a new box during the pilot, Mezistrano said. The information would be added by the service provider on the substitute forms that are distributed to the employer and employees. Service providers were encouraged to include information about the code in instructions to employees on the reverse side of the W-2.

An omitted verification or incorrect verification code would not delay the acceptance or the processing of a return by the IRS or the issuing of a refund during the pilot, Mezistrano said. Codes would not appear on W-2s that are sent to the Social Security Administration or to any state or local revenue departments, he said.

The verification program is part of ongoing antifraud efforts taken by the IRS. In August, the agency said that it would allow only one 30-day, nonautomatic extension of time for filing Forms W-2 instead of the automatic extensions available now.

In temporary and final regulations, the IRS said identity thieves and unscrupulous preparers often file electronically early in the filing season, leaving the agency unable to verify wage and other information from the W-2 providers until much later.

The new rules are to apply starting in the 2017 filing season, leaving the automatic extension available in 2016.

Form 1095 Filing Guidance

The IRS payroll teleconference included information about Affordable Care Act reporting requirements related to the final 2015 versions of Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1095-B, Health Coverage, and instructions that were released Sept. 16.

Shortly after the forms were released, the IRS published Notice 2015-68, which offered a range of guidance for what needs to be included in meeting Internal Revenue Code Section 6055 minimum essential coverage reporting requirements, said Donna Crisalli, senior level counsel at the agency.

A Social Security number still is needed for Forms 1095 reporting, even though dates of birth for covered dependents and spouses currently are acceptable, Crisalli said.

Employers still should make solicitations of those covered for the actual Social Security number, according to time frames outlined in the IRS notice.

The IRS plans to match names and dates of birth if Social Security numbers are not provided, said Martin Pippins, director for customer service and stakeholder relations of the IRS's ACA office.

The guidance clarified the need to report when employees have supplemental coverage through a health reimbursement arrangement and also have other coverage, Crisalli said.

The notice also said:

  • employer tax identification numbers may be truncated on statements furnished to individual taxpayers,
  • statements sent to expatriates regarding expatriate health plans can be delivered electronically with an opt-out by the expat and
  • under certain circumstances, health insurance issuers would be required to report on Form 1095-B the coverage in catastrophic health insurance plans enrolled in through a health-care exchange.

Specific issues related to filling out the ACA forms included the ability to keep blank line 15 of Part 2 of the 1095-C form if code 1A is used for line 14, Pippins said.

For 2015 reporting purposes, accuracy-related penalties would not be applied to employers that could show a good-faith effort was made to accurately file, Pippins said.

To contact the reporters on this story: Michael Trimarchi in Washington at mtrimarchi@bna.com. and Mike Baer in Washington at mbaer@bna.com