Military paid $170K Seperation Wages then took 1/2 back

[joelgilb]

Have a new client that went to a CPA to prepare their 2008 return

Hub was in military for 16 years and when he left the service they paid him $170K. Later they told him they had made an error and requested $88K back. Of course they already spent it (bought a house), so the military agreed to a $500/month repayment plan plus interest, essentially converting it into a loan.

W-2 gets issued for full $170K and is under withheld by $25K (must admit thet the taxpayers should have set aside tax $)

Of course the military refuses to correct the W-2, and instead tells taxpayer that they will issue vouchers for each years repayments and that they can deal with it on future returns.

Since this is now a loan the W-2 is clearly incorrect. Not sure how to handle it or where to find support for the position

First thought was to report the entire W-2 and then offset on the other income line for the portion (with full disclosure attached) that needs to be paid back. Thought there rather than just reducing the W-2 to reduce IRS exposure, since if reduce the W-2 it is guaranteed that IRS will look at the return closely via the matching program. If offset separately then there is a possibility that it will never be questioned.

Thought of Suing the US military, but dollars are not enough to make this worthwhile, besides this is like suing City Hall and I may need to get help from someone to get standing in Federal Court (only licensed to practice before the Tax Court myself, and can;t bring it there. Also thought of contacting their Local US Senator and asking for assistance. With all that is going on in our economy though wonder if they would bother taking the time to deal with it.

Any thoughts?

[kcjenkins]

I think you are right, and your choice of solution is the right one. It has the unfair effect of leaving the extra payroll tax behind, but that is a small amount on that much income, Medi only. And while it may be audited, it is probably less likely to be than any other alternative. I'd also file that one on April 14th. While I know they audit a % of returns filed on all dates, it's a simple fact that the number of returns filed that week are the largest single 'pool' of returns, so that improves his odds just a little.

[joelgilb]

Thx KC

Always good to to get confirmation of an idea.

[grandmabee]

I think you are right, and your choice of solution is the right one. It has the unfair effect of leaving the extra payroll tax behind, but that is a small amount on that much income, Medi only. And while it may be audited, it is probably less likely to be than any other alternative. I'd also file that one on April 14th. While I know they audit a % of returns filed on all dates, it's a simple fact that the number of returns filed that week are the largest single 'pool' of returns, so that improves his odds just a little.

They did receive the money. there is a credit or deduction you take for that very thing. If you report income in one year(year received) and then have to pay back different year you can use the credit or take the deduction. as long as its over 3,000 per year of repayment you can chose which. goes to Sch A misc not sub to 2% or a tax credit. See IRC 1341 or look in quickfinder page 5-17. as for the med care I would make then subtract that from the balance.

[kcjenkins]

Yes, they did receive the money. BUT, if you get a LOAN, that is not taxable income. Nor is the repayment deductible. So it is wrong for him to be thrown into the higher tax bracket because of a loan. That is the real consequence that Joel is trying to avoid. If the mistake had not been discovered until later, the treatment would be as you describe. But since the mistake was found, and converted, in the same year, they really should have corrected the W-2. Joel is trying to correct that error. It's a gray area, but I'm with Joel on siding with what actually occured.