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Aug. 12 — The Internal Revenue Service will allow only one 30-day, nonautomatic extension of time for filing W-2 forms and other information returns instead of the automatic extensions available now, as the agency seeks to curb tax return fraud.

In temporary and final regulations (T.D. 9730, RIN 1545-BM50) issued Aug. 12, the IRS said identity thieves and “unscrupulous preparers” often file electronically early in the filing season, leaving the agency unable to verify wage and other information from the W-2 providers until much later. The new rules apply to information returns, including new Affordable Care Act-related Forms 1094-C, 1095-B and 1095-C, starting in the 2017 filing season. The automatic extension is still available for 2016.

The agency has been seeking to accelerate the filing of information returns so the data can be used to detect identity theft and refund fraud. Fraudsters typically file returns under stolen identities in January to collect a refund before the legitimate filers submit their returns, Marcus Christian, a partner at Mayer Brown LLP, told Bloomberg BNA Aug. 12.

Need for Speed

“The problem has been that the IRS gets the forms too late,” Christian, who is based in Washington, said. “The question is still though, will the IRS get them soon enough? One of the pressures, a requirement actually, is to send the refunds out really quickly.”

Requests for extensions will now require the filer to explain extra time is needed because of an “extraordinary circumstances or catastrophe, such as a natural disaster or fire destroying the books and records” the rules said.

The IRS also released proposed rules (REG-132075-14, RIN 1545-BM49) incorporating the temporary regulations and seeking comments by Nov. 12 on matters including whether any transitional considerations should be allowed for a category of forms or filers.

Persistent Problem

Electronically filed Form W-2s are due to the IRS by March 31. The 30-day extension means the IRS receives the information from employers after it has received returns from individuals.

The United States Government Accountability Office has repeatedly cited the IRS's receipt of information returns late in the filing season as a contributing factor in payment of fraudulent refunds due to identity theft and preparer misconduct. The most recent report from the GAO, released Feb. 11, said the IRS issued about $5.8 billion in refunds to individuals who filed returns under stolen identities in 2013 tax season (29 DTR G-5, 2/12/15).

These rules are “a step” in combating refund fraud, though will probably not be able to stamp out the problem, Christian said. If cases of fraud continue to increase, Congress could face increased pressure to take more drastic measures—like delaying the time line for issuing refunds—to curb cases where tax refunds end up in fraudulent filers' bank accounts.

The final rules are effective July 1, 2016.

T.D. 9730 and REG-132075-14 are scheduled to appear in the Federal Register Aug. 13.

Reproduced with permission from Daily Tax Report, 156 DTR G-2 (Aug. 14, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033)