Perspectives on the Responsibility of Secure Choice Organizations to Guard against Wage Theft
Several states have enacted “Secure Choice” retirement savings programs that require employers that do not already offer a qualified retirement savings plan to enroll workers in a state-run retirement savings plan, and to make and remit payroll deductions. These programs feature automatic enrollment and automatic escalation of retirement contributions, and are designed to minimize employer involvement. As of January 2018, states with such legislation include CA, CT, IL, MD and OR, but other states and cities are considering similar programs.
One program design issue that has arisen is how state Secure Choice retirement savings organizations should guard against wage theft (i.e., employers could withhold retirement contributions but not remit them). For example, should states contact employers to ask about variations or disruptions in expected contributions? NPRC produced an explanation of causes and related issues and made recommendations.
How Quickly Can Employers Respond to Changes to the Additional Medicare tax?
A key priority of the NPRC has been to educate lawmakers as to any lead time needed by employers to implement potential legislation. With legislation being crafted in early January 2017 to repeal and replace the Affordable Care Act, there was concern that Congress could repeal the ACA Additional Medicare tax retroactively or with an immediate/midquarter effective date. This could require potentially extensive programming changes with little lead time.
In this case, a brief e-mail to the relevant committee staff was thought to be most effective. Although it is not likely that this tax would be immediately repealed, NPRC serves in part to help policymakers craft laws and regulations that are effective and can be implemented in the time allowed.
NPRC Meets with IRS Commissioner Koskinen to Improve Affordable Care Act (ACA) Reporting
The IRS invited NPRC members to participate in an Affordable Care Act (ACA) Information Reporting meeting on September 21, 2016. NPRC later recapped NPRC priorities and recommendations in the following areas:
- Name/Taxpayer Identification Number (TIN) Errors
- AIR Systems Enhancements
- Support Enhancements
- Streamline the Process for Extensions of the Deadline to Furnish Forms
We look forward to working with the IRS to improve the ACA information reporting systems.
NPRC Asks IRS to Modify Form W-4
The NPRC asked the IRS to add “First Date of Work” to Form W-4. Form W-4 was not designed to be submitted to any government agency. However, the 1996 Welfare Reform Act (PRWORA) required all employers to report the hiring of new employees, and provided that employers may submit a copy of IRS Form W-4. In 2010, “hire” date (first date of employment) was added as a mandatory reporting element under federal law, so all states require “hire date” on New Hire reports, and yet Form W-4 does not have a space for it. This results in missing data, which drives up costs for employers, states and government integrity programs.
NPRC worked with the Federal Office of Child Support Enforcement, which estimated that roughly 180,000 new hire reports annually are missing the hire date. New hire reports are also used by Unemployment Insurance agencies to identify active UI claimants who have become reemployed. But without the hire date, they can’t use the information, and as a result, state UI taxes for all employers are higher than necessary. Additionally, child support agencies may not be able to locate persons who owe child support if the hire date is missing.
NPRC Concerns and Suggestions Related to Emancipation Day and Memorial Day Federal Tax Deposit (FTD) Penalty Notices
NPRC wrote to IRS Wage and Investment Division Commissioner Holland to express concerns as to invalid Emancipation Day and Memorial Day Federal Tax Deposit (FTD) penalty notices. We recommended programming logic to identify large notice volumes for internal systemic review and validation and assessment of known problem spots to minimize the reoccurrence of significant issues (i.e. holiday-related FTD logic considerations), among other things.
NPRC Makes Additional Recommendation on Proposed EEO-1 Report
On July 14, the Equal Employment Opportunity Commission (EEOC) published a second proposal and comment request concerning the annual EEO-1 report (an annual summary of employment data by ethnicity, race, sex, and job category, with proposed additions of W-2 earnings and hours worked).
The NPRC had commented previously (see below), and the EEOC had adopted appropriate changes consistent with the recommendations. An additional rule seems necessary to clarify how to report hours worked in pay periods that span calendar years (e.g., some wages paid within a calendar year will relate to hours worked in the prior calendar year, and some hours worked in the current calendar year will be paid in the subsequent year. NPRC commented that "Optimally, the EEO-1 report should reflect W-2 Box 1 earnings and the corresponding hours worked."
NPRC Comments on Proposed EEOC Reporting Requirements
The Equal Employment Opportunity Commission (EEOC) proposed substantial revisions to the annual EEO-1 report, which currently summarizes data about employees' ethnicity, race, and sex, by job category. EEOC proposes to add employees' W-2 earnings and hours worked, to assist in enforcing the Equal Pay Act, which prohibits wage discrimination between men and women if they perform jobs that require substantially equal skill, effort, and responsibility under similar working conditions.
The NPRC is neutral as to the appropriateness or need for the proposed changes to the EEO-1 annual report, but we offer constructive technical assistance to government policymakers concerning proposals that affect employment-related reporting. NPRC made recommendations in the following areas:
- Definitions and guidance are needed concerning Hours Worked.
- More specific definition is needed concerning the “ W-2 earnings” basis.
- September 2018 may be the earliest feasible effective date for the revised EEO-1 Report.
December 2015 NPRC Appeals for Extension for Furnishing Affordable Care Act Forms 1095-C
In December 2015, NPRC members met with the IRS to recommend immediate guidance permitting extensions of the deadline for furnishing Forms 1095-C to employees. Previously, employers were required to send a letter requesting such an extension to the IRS, which can be submitted as late as February 1, and await approval. The IRS would have had to respond to potentially tens of thousands of requests in January.
The IRS subsequently issued Notice 2016-4, which provides for an automatic extension of 60 days to furnish Forms 1095-C, and an additional 90 days in which to file them with the IRS.
NPRC Asks for TIN Matching System for ACA Forms 1095-C
In November, the NPRC wrote to the U.S. Treasury to draw attention to a potentially significant problem. In June 2015, The Trade Preferences Extension Act more than doubled penalty amounts for errors in 2015 Forms 1094-C/1095-C, among others. Beginning with 2015 reports (the first year of mandatory 1095-C reporting), penalties may apply for employee names and/or Social Security Numbers (SSNs) that don t match the IRS database. The Social Security Administration s W-2 reporting system – with which employers are familiar – does not generally result in name/SSN accuracy penalties; yet the new IRS AIR system could assess name/TIN mismatch penalties for employees that may have been on an employer s payroll system for years. Additionally, self-insured employers will be gathering and reporting for the first time the TINs of employees dependents and spouses.
Employers have ample incentives to ensure accurate Forms 1095-C, but no tools to do so. They cannot use the SSA s Social Security Number Verification system. They cannot use the E-Verify system. They cannot use the IRS s TIN Matching System. NPRC suggested that the IRS or Treasury consider guidance or legislation to offer employers appropriate tools with which to verify that reported names and taxpayer identification numbers (generally Social Security Numbers) match the IRS s database.
June 15, 2015
NPRC Response to USDOL Request for Comment - Wage Reporting Expansion
A USDOL Notice of Proposed Rulemaking (NPRM Docket ETA-2015-0001), intended to implement part of the Workforce Innovation and Opportunity Act (WIOA) raised the prospect that wage records could be expanded to include many other data elements, including standard occupation code, hours worked, weeks worked, hourly pay rate, and worksite address, among others. The NPRM further proposed federal definitional standards covering reportable elements, and standardized formats for wage reporting. Each of these proposed provisions could create significant transitional and/or ongoing costs to employers to comply with expanded and revised wage reporting obligations.
The proposal could adversely affect a wage reporting process that is relatively efficient, and impede the core purpose of wage reporting. For example, might states reject an entire wage report for a missing or apparently incorrect element (such as worksite address or hours worked)? For elements that can be validly blank or zero (such as hours worked in the case of severance), what reasonableness standards might a state establish? How would occupational codes be validated? E.g., might a state reject a wage report if an employee is reported with an occupational code unrelated to the business of the employer? The NPRC response raises such concerns and makes suggestions.
February 17, 2015
The Federal Office of Child Support Enforcement recently requested comments for their report to Congress on possible improvements to the program. NPRC actively supports and encourages efforts to periodically analyze and consider whether laws and systems can be improved for better results.
Employers currently experience substantial burdens in complying with existing support enforcement rules and systems. NPRC believes that child support collections could be substantially improved, and employer burden reduced, through certain revisions. We made recommendations in three areas:
- New Hire Reporting
- “ Lump Sum Payment” Reporting and Withholding
- Standardizing State Practices
NPRC Assists IRS and Congress in Addressing Tax Refund Fraud
NPRC is assisting the IRS and states as they rapidly consider measures to combat identity theft and tax refund fraud. NPRC offered testimony at IRS and IRS Oversight Board hearings and has held many discussions with IRS and state tax authorities and the U.S.
Senate Finance Committee on potential measures.
In August 2014, GAO report 14-633 identified acceleration of employer W-2 reporting deadlines as perhaps the most promising answer. Indeed, employer W-2 reports should be available to the IRS and states during the income tax season so that claims of refund can be validated. Many filing deadlines are unnecessarily late, and increased electronic filing would facilitate access. NPRC supports such changes to the W-2 reporting system and stands ready to assist in evaluating specific proposals.
New IRS Regulations Require Payroll Firms to Make Quarterly Disclosures to Clients
On July 26, 2012, the Internal Revenue Service (IRS) released Revenue Procedure 2012‐32, which provides requirements for payroll firms and others that act as “ Reporting Agents.” Authorized Reporting Agents sign and electronically file federal employment tax returns, such as Forms 940, 941 and W-2, and make federal tax deposits electronically via the Electronic Federal Tax Payment System (EFTPS).
The IRS Revenue Procedure specifies that Reporting Agents must notify and remind clients at least quarterly that the taxpayer remains liable for employment taxes, even if they outsource tax filings and/or payments to a third party. The disclosure statement must suggest that the employer use the IRS EFTPS system to periodically confirm that deposits have been made as expected, and note that state tax authorities may offer similar verification programs.
This disclosure statement has long been a best practice among NPRC member companies, which collaborated with the American Payroll Association and other industry associations, as well as the IRS Taxpayer Advocate, the U.S. Department of the Treasury, IRS and congressional tax-writing committees to advocate for IRS adoption of such a disclosure requirement within IRS rules.
Disclosures serve an important function in reminding employers to be cautious in the selection and monitoring of any service provider entrusted with the administration of federal taxes.
Over the years, the federal government and various states have considered policy measures to eliminate the risk of diversion of tax funds held by third parties. While extremely rare, incidents of this nature have seriously affected the client companies involved. State and federal policymakers broadly agree that there is no better safeguard than raising awareness of the risks, and providing tools (e.g., www.EFTPS.gov) by which businesses can protect themselves.
Revenue Procedure 2012-32 is effective November 19, 2012
NPRC Releases Study of Employer Wage and W-2 Reporting
In early 2011, IRS Commissioner Shulman presented a new IRS vision for improved information reporting systems, with the ultimate goal that returns such as Forms W-2 and 1099 would be on file with the IRS during the tax season rather than after. Members of the National Payroll Reporting Consortium subsequently discussed the issues with senior IRS officials, and determined that a background study of the factors involved might be helpful.
Coincidentally, similar questions arose in the context of state unemployment insurance reporting. As a result of the ARRA of 2009, 22 states adopted a more recent “ base period” for qualifying earnings, which put pressure on the quarterly wage reporting systems to make employer-reported wages available sooner. The issues and questions for both systems were essentially the same.
NPRC asked Ernst & Young to summarize the processes that businesses follow in preparing Forms W-2; challenges businesses face in reporting such information timely; the impact to employers of accelerating current filing deadlines, and policy considerations that may hasten the availability of W-2 and quarterly wage data. NPRC participated minimally its preparation and the report should not be viewed as a reflection of the views of NPRC or its members. The study was merely intended to inform those involved in considering IRS Information Reporting improvements. It does not generally offer recommendations, other than noting that the extended March 31 deadline for electronically filed returns could be eliminated without difficulty.
Ernst & Young also concluded that expanding electronic filing is very effective in achieving more rapid access to such data (e.g., Massachusetts noted that electronically filed wage records are available two days after receipt; whereas paper reports took a month to process).
NPRC members have been privileged to work with the IRS, SSA and state tax authorities for many years to improve employment tax administration. NPRC actively supports appropriate electronic filing systems as the most effective way to improve the efficient flow of employment tax returns and related reporting.
Industry Disclosure Regs Pending to Safeguard Client Funds
In recent years, there have been a handful of incidents in which a small payroll processing firm failed to pay the employment taxes of its clients. The incidence of such failures is very rare, but each occurrence created significant problems for the affected clients.
Fortunately, technology is already available to address the problem. The IRS Electronic Federal Tax Payment System (EFTPS) makes it easy for businesses to verify federal tax payments made on their behalf. If employers had been aware of and used EFTPS, every past incident would have been detected almost immediately and losses minimized.
The payroll industry trade associations, led by NPRC, worked together to develop standard disclosures that would effectively prevent future losses, and asked the IRS to revise existing regulations to require payroll service providers to make these disclosures at least quarterly. The IRS is considering revised regulations at this time. In the meantime, payroll service providers should consider including the following message prominently within periodic tax reports to clients.
IMPORTANT INFORMATION FROM THE IRS:
The employer is ultimately responsible for the deposit and payment of federal tax liabilities, even if a third party is making the deposits. The IRS recommends that employers enroll in and use EFTPS (Electronic Federal Tax Payment System) to confirm payments made on their behalf. Enroll online at www.eftps.gov, or call 800-555-4477 for an enrollment form.
State tax authorities generally offer similar means to verify tax deposits. Contact the applicable state offices directly for details.
W-2 Reporting Deadlines
IRS Commissioner Shulman announced an initiative to reconsider core information reporting programs (e.g., W-2s & 1099s) to make the data available to the IRS during the tax season, which may involve accelerating employer reporting due dates. NPRC wrote to the commissioner to express support and interest in working with the IRS to consider alternatives.
Implementation of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
NPRC responded to questions from the Administration about the implementation of H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), which was enacted on December 17, 2010 and effective January 1, 2011. The Act affected every U.S. worker and employer, and is notable due to its late enactment relative to the effective date.
NPRC advised the Treasury Department that large payroll service providers are probably the best equipped to handle last-minute tax law changes. Despite significant challenges, the payroll services industry successfully implemented the tax changes on time, and the change was largely seamless to clients and their employees. The Treasury was advised that other employers who may rely on payroll software which is not frequently updated, or that handle payroll calculations manually, may not meet the deadlines.
Final IRS Preparer Tax Identification Number (PTIN) regulations were published on September 30. Reporting Agents that do not provide tax advice to clients, and that comply with Rev. Proc 2007-38 are not subject to the regulation. [“A tax return preparer does not include … an individual described in § 301.7701–15(f).” ] The PTIN regime for tax preparers generally includes registration, fees, testing for competency and background checks, which might have applied to employees of Reporting Agents.
Reporting Agents that provide tax advice to clients, and/or that do not comply with IRS Rev. Proc 2007-38 should generally register for a PTIN and familiarize themselves with the new PTIN regulations.
Electronic Federal Tax Payments are Mandatory in 2011
IRS regulations expected to be final in December, will eliminate the paper Federal Tax Deposit coupon system, a system that dates back to World War I, according to the IRS.
All but the smallest businesses must use the IRS Electronic Federal Tax Payment System (EFTPS) for all federal tax payments beginning in January 2011. EFTPS is free and easy to use, and can reduce errors. However, employers will face new 10% penalties for taxes not paid electronically, on top of the roughly eight million IRS penalty notices employers receive annually for payroll taxes alone. Payroll tax penalties average over $1,100 per employer annually.
Large payroll service providers have been at the forefront of electronic tax administration since the early 1980 s; generally paying and reporting all client taxes electronically for enhanced accuracy and efficiency.
Given the penalty exposure for non-electronic deposits, those who are converting to EFTPS for the first time should review all related procedures and back-up systems. For example, be sure to register far enough in advance, and consider potential problems like lost passwords, input cutoff times, unexpected absence of responsible individuals, power or Internet interruptions, inclement weather and coordination with tax advisors.
NPRC provides additional comments on IRS PTIN regulations
The IRS issued separate regulations regarding fees for registering as a Return Preparer to obtain a Preparer Tax Identification Number (PTIN). This is related to the March “ Preparer” regulations (which excluded Reporting Agents); however, RAs were not excluded from this regulation, and the IRS suggested that NPRC respond to this as well. This letter also addresses a proposal to require background checks for RA employees with access to IRS e-Services.