IRS Verification Program Expands Efforts to Protect Tax Data

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By Caitlin Reilly, Michael Trimarchi and Keith M. Hill

Safeguarding tax information and preventing identity theft remain top priorities for the Internal Revenue Service through year-end payroll processing and into 2017.

The 2016 verification code pilot program for Forms W-2, Wage and Tax Statement, is to expand in the new year to include more payroll service providers, IRS officials said Nov. 3 during a monthly payroll industry teleconference.

The program uses a 16-character alphanumeric code to verify W-2 data appearing on Form 1040, U.S. Individual Income Tax Return, to fight tax fraud and identity theft. Employees are to enter the verification code on the 1040 when using tax-preparation programs.

4 More Groups Join Program

Payroll People Inc., PrimePay and Ultimate Software Group Inc. are to join Automatic Data Processing LLC, Ceridian LLC, Intuit Inc. and Paychex Inc. in including the code on some of the W-2s they process, said Scott Mezistrano, IRS representative for industry stakeholder engagement and outreach.

The National Finance Center, which issues W-2s to some federal agencies, also is to join the program, he said. The code is to appear on 50 million forms for tax year 2016, or 20 percent of the W-2s issued, compared with about 2 million forms for tax year 2015, he said.

The IRS also met with providers of tax-preparation software to encourage them to include the codes on forms they process, Mezistrano said. So far none of the providers have told the IRS that they would not participate in the program, he said.

For filing year 2017, the IRS plans to test the verification codes during processing instead of later, Mezistrano said. A missing or incorrect code would not prevent or delay the processing of an individual form, he said. However, the presence of a correct code may prevent a return from being selected for further review.

The Social Security Administration completed volume testing and is ready for the filing season, said Ed Kernan, senior analyst in the SSA’s Division of Annual Wage Reporting and Balancing. The testing took into account concerns about an increase in W-2 corrections because of the earlier deadline, he said.

Additionally, improved identity-theft protections were finalized by the IRS after a recent security summit with state tax agencies and industry partners, the agency said Nov. 3.

Leaders of the security summit, which was formed in 2015 to fight identity theft, said new and expanded safeguards for taxpayers in 2017 would help ensure the authenticity of taxpayer and tax returns before, during and after the time when returns are filed, the IRS said in a news release (IR-2016-144). Such trusted-taxpayer features would build on 2016 initiatives to fight fraudulent returns and protect tax refunds, the leaders said.

Collective efforts through the security summit initiative have led to an improvement in the battle against identity theft during 2016, public- and private-sector leaders said. Identity theft affidavits fell sharply, the number of fraudulent refunds dropped by more than 50 percent and shared information stopped more counterfeit returns, the IRS said.

The IRS, with its public- and private-sector partners, has aggressively fought identity theft as new schemes arise. For example, more than 20 states are working with the financial services industry to create versions of a program that allows the industry to flag suspicious refunds before they are deposited into taxpayer accounts, the IRS said.

A new scam, revealed Nov. 4 by the IRS, involves a fraudulent e-mail that directs tax professionals using electronic services to a fake website to update accounts. The phishing e-mail had “Security Awareness for Tax Professionals” as the subject and was sent by “Your e-Services Team.” The e-mail had an IRS logo and an e-services logo that were linked to a URL verified as a phishing site.

1099-MISC, ACA Forms

Other issues discussed during the Nov. 3 teleconference included:

•When reporting nonemployee compensation, such as payments to independent contractors, on Forms 1099-MISC, the amount may be split between two of those forms, said Joe Guillen, teleconference moderator. Employers may allocate the amount in Box 7, nonemployee compensation, on two forms, each filed by its deadline, he said. Amounts in Box 7 must be filed by Jan. 31 and amounts in other boxes must be filed by Feb 28, if using paper forms, and April 2 if filing electronically. The use of two forms is voluntary, he said.

•Two Affordable Care Act forms may accommodate employee birth date information in two formats for month, day and year, said Martin Pippins, director for customer service and stakeholder relations of the IRS’s ACA office. The instructions for 1095-B, Health Coverage, called for YYYY/MM/DD while the instructions for 1095-C, Employer-Provided Health Insurance and Coverage, called for YYYY-MM-DD. “What we’ve verified is that there is no impact,” Pippins said. “You can either use the hyphen or the slash in that format. When filing, the format MMDDYYYY should be used for paper forms and the format YYYYMMDD should be used for electronic,” he said.

By Caitlin Reilly, Michael Trimarchi and Keith M. Hill

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

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