September 16, 1993
New Tax Bill Gives Refunds
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
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.
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).
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