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.