New Tax Bill Gives Refunds
to Employees/Employers

WASHINGTON - Recent tax law changes affect the tax treatment of educational assistance provided under employer-provided educational assistance plans. These changes could mean refunds for both employers and employees who participated in these plans in 1992 or 1993. Accordingly, the IRS has set up special procedures to make it easier for individuals to claim their refunds and to expedite the processing or refund claims by both employers and their individual employees. In addition, for purposes of retirement programs and individual retirement arrangements, the incomes of those employees who are entitled to these refunds may be treated as including or excluding this educational assistance.

Under the new law, the annual exclusion from income of up to $5,250 of educational assistance benefits applies retroactively to July 1, 1992. This tax benefit under section 127 of the Internal Revenue Code had previously expired on June 30, 1992. Employees can now get refunds of federal income, social security, and medicare taxes paid on excludable educational assistance benefits provided in the second half of 1992 and social security and medicare taxes paid on excludable benefits provided in 1993.

Some employers continued to exclude these benefits from their employees' income after June 30, 1992. Employees affected by these employer actions have not overpaid taxes on educational benefits and, thus, are not entitled to any refunds.

Employee Income Tax Refunds

Employee entitled to refunds of income taxes for 1992 can claim them from the IRS by filing a Form 1040X, Amended U.S. Individual Income Tax Return. To do this, the employee needs a Form W-2c, Statement of Corrected Income and Tax Amounts, from their employer showing the corrected wages.

Assume a single employee received a Form W-2, Wage and Tax Statement, showing $21,000 in wages which includes $2,625 of employer-provided educational assistance during the second half of 1992. The Form W-2c the employee should receive will show the corrected wages as $18,375.

Recognizing the unique circumstances surrounding the retroactive extension of the exclusion for employer-provided educational assistance, the IRS has developed special procedures to make it easier for affected employees to get their income tax refunds on an expedited basis. Under these special procedures, most employees need only include their name, address, social security number and "1992 tax year" on the Form 1040X, sign the form, and attach their Form W-2c. To expedite the processing of these amended returns, employees should notate "IRC 127" on the Form 1040X in the top margin of the form. Representatives within IRS service centers have been trained to look for Form 1040X filings with the "IRC 127" designation, to accurately complete Form 1040X filings based on Form W-2c data provided by affected employees, and to process the "IRC 127" Form 1040X returns as a priority item on an expedited basis.

Some employees with a Form W-2c showing corrected wages of $22,370 or less for 1992 may now qualify for an earned income credit. These employees should complete a 1992 Schedule EIC. If you meet the qualifications of Part I, attach the Schedule EIC to Form 1040X. Taxpayers who received the earned income credit in 1992 do not need to complete another Schedule EIC. IRS will automatically re-calculate the earned income credit and make the appropriate adjustments.

Employee Social Security & Medicare Tax Refunds

For both 1992 and 1993, employees should request reimbursement of social security and medicare taxes from their employers. Reimbursements of social security and medicare taxes withheld so far in 1993 on educational assistance benefits may, for example, be used to adjust current or future pay. Under the facts mentioned above, that employee would get a refund of about $200 of social security and medicare tax from his or her employer. In the unusual case in which an employee is not able to obtain a refund of 1992 and 1993 social security and medicare taxes from his or her employer, the employee may file a Form 843, Claim for Refund and Request for Abatement, with the IRS. As with the Form 1040X, employees filing a claim for refund on Form 843 should include the "IRC 127" notation in the top margin to expedite processing of their claim.

Employer Social Security, Medicare, & Unemployment Tax Refunds

The rules governing the payment of social security and medicare tax refunds from an employer to its employees are not being changed. Under these rules, after refunding social security and medicare tax overwitholdings to their employees, employers may be able to reduce their federal income tax liability and deposits for both the employer and employee portions of these taxes. Adjustments should be reported on Form 941, Employer's Quarterly Federal Tax Return and can be explained by the employer on Form 941c, Supporting Statement To Correct Information.

The rules governing employer social security and medicare tax refunds to employees, as well as rules governing refunds to employers of any social security, medicare, and unemployment taxes that they may have overpaid in 1992 and 1993 are summarized in Circular E, Employers's Tax Guide. While these rules generally remain unchanged, any employer filing a Form 843 to claim a refund of social security, medicare, and unemployment taxes should also include a "IRC 127" notation on the top margin of that form in order to avail itself of the same expedited refund claim procedures applicable to their employees upon filing a Form 1040X.

Taxpayer Assistance

Employees and employers having questions should call 1-800-829-1040. Calls received on this line will be forwarded to IRS taxpayer service representatives who are trained to answer questions about the retroactive extension of the employer-provided educational assistance exclusion. Additionally, Forms 1040X and Forms 843 and instructions can be obtained by calling 1-800-TAX-FORM (1-800-829-3676).

Previous | Next

1993 IRS News Releases | News Releases Main | Home