Identity theft is an increasingly significant issue in the tax arena. As the preamble to TD 9730, discussed below:
Identity theft and refund fraud is a persistent and evolving threat to the nation's tax system. It places an enormous burden on the United States Government, with the most painful and immediate impact being on the victims whose personal information is used to commit the crime and the most pervasive impact being an erosion of public confidence in the tax system.
The tax refund fraud category of identity thieves most often make use of fictitious W-2’s to carry out the fraud. The W-2s most often make use of the name and employer identification number of an actual employer, along with the name and social security number of a real taxpayer. However, that taxpayer quite often has never worked for that employer or, if the taxpayer did, the amounts reported on the W-2 are not what was actually paid to the taxpayer.
Those who have taken on this line of “work” noticed that while electronically filed tax returns are accepted beginning in mid-January most years, W-2 forms are not required to be filed with the IRS until February 28 (for paper forms) or March 31, for those filed electronically). And even then an employer can get an automatic 30 day extension of time to file the forms, along with a second, non-automatic 30 day extension that the IRS can grant the employer who shows cause. Thus, the W-2 may not be received by the IRS until the end of May for an electronically filed form that receives both the automatic and additional extension.
The IRS has decided to shorten that time period by removing the automatic 30-day extension option for W-2s and by adopting only a single non-automatic extension. The IRS published this in TD 9730, which removes the old Reg. §1.6081-8 and adds a new Temporary Reg. §1.6081-8T. As well the IRS has published proposed regulations that would make permanent the changes contained in Temporary Reg. §1.6081-8T (REG-132075-14).
The regulations will also eventually remove the automatic 30 day extension of time to file other information returns, replacing that will the single 30 day non-automatic extension that must be requested.
The preamble warns that the IRS does not plan to grant many such extensions, noting:
Accordingly, Sec. 1.6081-8T provides a single 30-day non-automatic extension of time to file information returns on forms in the W-2 series (except Form W-2G) due in 2017 that the IRS may, in its discretion, grant if the IRS determines that an extension of time to file is warranted based on the filer's or transmitter's explanation attached to the Form 8809 signed under the penalties of perjury. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases where the filer's or transmitter's explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances or catastrophe, such as a natural disaster or fire destroying the books and records a filer needs for filing the information returns. If the IRS does not grant the extension of time to file, information returns filed after their due dates are not timely filed, regardless of whether the application for extension of time to file was filed timely.
As the above paragraph notes, these changes will not take place immediately. The current rules under old Reg. §1.6081-8 will remain in place for filing 2015 Forms W-2 filed in 2016, with the new rules becoming effective for the 2016 W-2 forms that will be filed in 2017.
As well, the IRS will keep the old rules in place for other information returns for at least one year, with the new rules not being required for those returns no earlier than information returns due on or after January 1 of the year the regulations are adopted as final or, if later, those due on or after January 1, 2018.
The IRS justifies the earlier application of the rules to Forms W-2 by noting:
Over the next several years, the IRS intends to remove the 30-day automatic extension of time to file certain information returns. Under Sec. 1.6081-8T, which will not be effective until the 2017 filing season, the first information returns subject to these new rules are information returns on forms in the W-2 series (except Form W-2G). These information returns are particularly helpful to the IRS for identifying fraudulent identity theft refund claims and preventing their payout. This is because a significant portion of most taxpayers' income and withholding information is reported on Forms W-2. Forms W-2 are also a major source of the false income and withholding that is reported by identity thieves and unscrupulous preparers. Having access to Forms W-2 earlier in the filing season will improve the IRS's ability to conduct pre-refund matching and identify incidences of identity theft and tax refund fraud.
Payroll departments that have traditionally relied upon the 30 day extension rule will need to start working on speeding up their processing in order to meet the shortened deadlines. Similarly, others filing information returns should be aware that their ability to use automatic extensions is also on a “death watch” at this point, so they should start preparing for filing the form on stated due date without an extension.
Note that this is as far as the IRS can move these dates without Congressional action and even with these dates there will still be a fairly large window of opportunity for refund fraud. Advisers should warn information return filers that deadlines may be moved even closer to the beginning of the year if Congress decides to take action as constituents affected by identity complain.
The preamble cites a GAO report on the topic in this area:
Receipt of information returns earlier in the filing season will improve the IRS's ability to identify fraudulent refund claims and stop the refunds before they are paid. The United States Government Accountability Office (GAO) has cited the IRS's receipt of information returns late in the filing season as a contributing factor in payment of fraudulent refunds due to identity theft and preparer misconduct. See GAO Report GAO-14-633, Identity Theft, Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud.