Purpose

The purpose of this bulletin is 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 the employee’s 2019 Form W-2 (Wage and Tax Statement) and agency appropriations.

Affected Employees

Employees who have a salary refund (AC230) submitted and processed after the December 27, 2019 (Inst) or January 3, 2020 (Admin) deadline will be affected.

Effective Date(s)

Immediately

Background

AC230s received by December 27, 2019 (Inst) or January 3, 2020 (Admin) will be reflected in the employee’s 2019 Form W-2 and the agency appropriation will be refunded in full. Unfortunately, there are processing limitations for AC230s received after this date.

Impact on Employee Form W-2 Reporting
The IRS considers overpayments for 2019 that are returned in 2020 to be income in 2019 for reporting purposes because the employee had use of the funds (constructive receipt). As a result, when an AC230 is received after the December 27, 2019 (Inst) or January 3, 2020 (Admin) deadline, the employee is due a corrected wage statement (Form W-2C). However, in most cases, the Federal, State and Local tax withholding balances for 2019 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 2019 AC230s submitted with original checks and received by February 14, 2020.

OSC Actions

OSC is required to issue a “corrected” Form W-2 (Form W-2C) for 2019 if an AC230 is received after the December 27, 2019 (Inst) and January 3, 2020 (Admin) deadline. If the original check is returned, all wages and taxes will be reduced on the Form W-2C.

If a bank or agency check is submitted with the AC230, Federal, State and Local wages, and taxes will not be reduced. Only Social Security and Medicare wage taxes will be updated to reflect the return of the funds and a credit letter will be sent to the employee by OSC. Credit letters are issued during year end processing as indicated in the chart below.

Agency Actions

Agencies must be diligent in their efforts to submit AC230s timely. The Control D Report NPAY539 (Non-Negotiated Payroll Checks) 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 and take appropriate action.

Before submitting an AC230 agencies must review and discuss with their auditor any existing Q-codes that have been created in the employee’s record. End dating and/or adjusting the Q-code should occur, if necessary, in order to mitigate any potential duplicate recovery.

Please refer to the table below to determine whether or not to include Federal, State and Local taxes on the Form AC230:

* Taxes should be included in the check as gross wages, and employee will receive a corrected W-2 and/or Credit Letter.

Questions

Questions regarding AC230s may be emailed to the Payroll Reversal and Exchange mailbox.

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