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Date: December 30, 2010

Bulletin Number: 1047

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Subject

Processing 2010 Salary Refunds received by OSC after January 7, 2011.

Purpose

To inform agencies of the process for handling the late submission of Form AC230 (Report of Check Return For Refund Or Exchange) and the impact on employee’s 2010 Form W-2 (Wage and Tax Statement) and agency appropriations.

Affected Employees

Employees who have a salary refund (AC230) submitted and processed after the January 7, 2011 deadline.

Effective Date(s)

Immediately.

Background

AC230s received by January 3, 2011 for the Administration cycle and January 7, 2011 for the Institution cycle will be reflected in the employee’s 2010 Form W-2 and be refunded in full to the agency appropriation.  Unfortunately, there are processing limitations for AC230 received after this date.

Impact on Employee Form-W2 Reporting
The IRS considers overpayments for 2010 that are returned in 2011 to be income in 2010 for reporting purposes because the employee had use of the funds (constructive receipt).  As a result, when an AC230 is received after the January 7, 2011 deadline, the employee is due a corrected wage statement (Form W-2C).  However, in most cases, the Federal, State and Local tax balances for 2010 will not be reduced.

The exception to the constructive receipt rule is when the entire original check is returned.  The IRS considers that constructive receipt has not occurred and, therefore, the employee should not have the income reported or be subject to any taxation.

Impact on Recovery of Taxes
OSC has a limited ability to recover taxes for salary refunds that were originally paid in a prior year.  The IRS requires the employer apply a reasonable standard when requesting refunds for prior year taxes. Refunds are requested through the quarterly IRS reporting process and, therefore, must adhere to an established timetable.  OSC will only seek refunds of taxes for 2010 AC230s received by February 18, 2011.

OSC Actions

OSC is required to issue a “corrected” Form W-2 (Form W-2C) for 2010 if an AC230 is received after the January 7, 2011 deadline.  If the original check is returned, all wages and taxes will be reduced on the Form W-2C. 

If a personal or agency check is submitted with the AC230, Federal, State and Local wages and taxes will not be reduced.  Only Social Security and Medicare wages and taxes will be updated to reflect the return of the funds and a credit letter will be sent to the employee by OSC. 

Agency Actions

AC230s received by OSC with the entire original check, on or before February 18, 2011, should include all taxes as recoverable items.  Any AC230 received after February 18, 2011 should be completed without taxes included.  Those taxes should be considered unrecoverable.

Agencies must be diligent in their efforts to submit AC230s timely.

The NPAY539 (Non-Negotiated Payroll Checks), Control D Report,  as described in Payroll Bulletin 908, (Non-Negotiated and/or Undeliverable New York State Payroll Checks) was created as a tool for agencies to identify outstanding checks so appropriate action can be taken.

Questions

Questions regarding AC-230s may be emailed to the Payroll Deductions mailbox.

Questions regarding Tax implications may be emailed to the Tax and Compliance mailbox.