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IRS continuing to expand W-2 verification code program

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

During last week’s IRS payroll conference telephone call, IRS provided further information on its plans to expand the W-2 Verification Code (VC) pilot program.

Background. The program was implemented during the 2016 filing season (2015 W-2 forms) as a way to combat tax-related identity theft and refund fraud. IRS partnered with four major payroll service providers who added a 16-digit verification code to a box on Form W-2, copies B (To be filed with employee’s federal tax return) and C (For employee’s records) on approximately 1.5 million W-2 forms (see Weekly Alert ¶ 30 11/25/2015).

Each verification code number was calculated based on a formula and key provided by IRS, using data from the Form W-2 itself, so that each number generated was known only to IRS, the payroll service provider (PSP), and the individual who received the Form W-2. Since this identifier was unique, any changes to the Form W-2 information provided were detected by IRS when filed. Individuals whose W-2 forms were affected by the pilot program, and who used tax software to prepare their personal income tax returns (Form 1040), entered the code when prompted to do so by their Form 1040 software program.

The code is not included on W-2 forms or W-2 data submitted by the PSPs to the Social Security Administration, or any state or local departments of revenue. Individuals who file their personal income tax returns on paper are not included in this project.

IRS considered the pilot program to be highly successful and is looking to expand it.

W-2 pilot program for 2017 filing season (2016 W-2 forms). IRS plans to increase the scope of the W-2 pilot program in the 2017 filing season by expanding on the number of W-2s in the pilot program from roughly 24 million to 50 million (roughly 20% of the W-2s expected to be filed). It also plans to increase the number and types of W-2 issuers in the program to include smaller sized issuers and large federal organizations. IRS will test using the validated verification code (VC) results in such a way that, if the VC is a match, it will accept the W-2 data submitted with Form 1040 to be valid, and reduce the likelihood that IRS will falsely select a personal income tax return as having a potential problem (false positives). IRS is encouraging payroll professionals who are associated with PSPs/employers participating in this initiative to encourage employees to enter the VC at the prompt in their 1040 software program.

W-2 pilot program for 2018 filing season (2017 W-2 forms). Scott Mezistrano, IRS Industry Stakeholder Engagement and Strategy, noted that the draft version of the 2017 W-2 form has a specific box number for the verification code (Box 9). Currently, the box labeled “Verification Code” on Form W-2 is not assigned a box number. The instructions for Box 9 state that the verification code assists IRS in validating the W-2 data submitted with the personal income tax return. It advises e-filers who have a verification code on Box 9 to enter the code when prompted by their personal income tax return software. They should disregard the prompt if their Form W-2 doesn’t have a code in Box 9 (i.e., because their employer is not using a PSP that is participating in the IRS pilot program).

References: For identity theft, see FTC 2d/FIN ¶ T-10164.4.

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