AC230s received by January 6, 2012 will be reflected in the employee’s 2011 Form W-2 and be refunded in full to the agency appropriation. Unfortunately, there are processing limitations for AC230s received after this date.
Impact on Employee Form-W2 Reporting
The IRS considers overpayments for 2011 that are returned in 2012 to be income in 2011 for reporting purposes because the employee had use of the funds (constructive receipt). As a result, when an AC230 is received after the January 6, 2012 deadline, the employee is due a corrected wage statement (Form W-2C). However, in most cases, the Federal, State and Local tax balances for 2011 will not be reduced.
The exception to the constructive receipt rule is when the entire original check is returned. The IRS deems that constructive receipt has not occurred. Therefore, the employee should not have the income reported or subject to 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 employers to apply a reasonable standard when requesting refunds for prior year taxes. OSC will only seek refunds of Federal, State and Local taxes for 2011 AC230s submitted with original checks and received by February 15, 2012.