refusal to change incorrect W2

This is a nasty situaion which is against you in many ways.

You had to make a repayment when you fully expected to be able to keep the money. In efect you had to repay the company so it in turn could repay social security.

The company is deemed to have made payments to you, as the payments were available to you for the taking. And then for the repaying.

By not cooperating with them, you did not change the fact the money was constructively offerred and received even though you never took it.

You entered the world of Repayments of income, and if thhe repayment was more than $3,000 you have a "claim of right" to seek tax relief.

You Substitute for a W-2 to try to say the 3rd Party Sick Pay income was never received should not be accepted by the IRS as it was made constructively available to you, even though it later had to be repaid.

And unfortunately you cannot just reduce the repayments from the income because, well, maybe because that would be too logical and simple, and neither term applies to much of the tax code.

But this occurs so often the IRS has a pretty good description of how you should treat Repayments on your tax return (and of course you are expected to treat the reported third party sick pay as taxable income.)

See Repayments

Can OP just send the company a 1099 and then deduct it from what he received?

Nope.

At least if you follow Pub 525 Repayments, there are only two pathways avaialble. Either the claim of right tax recalcualtion, or the Schedule A full, not 2%, deduction.

I'm thinking the claim of right doctrine isn't even in the code, but follows court decisions, but I haven't tried to track that down.

It's actually Title 26 Section 1341.

Thanks Alan.

By the way.. if you look at Pub 525, it tells you it derives from Sec. 1341.

"If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 68, and enter ?I.R.C. 1341? in the column to the right of line 68."

"You had to make a repayment when you fully expected to be able to keep the money. In effect you had to repay the company so it in turn could repay social security. "

First of all thanks for your help! The LTD Company does not have to give any money to social security, they keep it and yet still file a W2 on me as if they paid me. According to the policy which premiums were paid for, they could reduce the benefits they paid me by their own calculations of what they decided I should receive from Social Security once approved. Which they did and stopped further payments to me until they recouped what their own calculations said they could. The W2s they have filed for money they did not send me should be fraud on their part if they are taking that amount of money and including it to reduce their own tax burden. If I include the amount of money on the W2 that I did not receive in my tax calculations it puts me in a higher tax bracket and I would owe nearly half of my social security received to the IRS leaving myself and family homeless. Not to mention not being able to recoup previous years taxes paid on the money they have kept. I have yet to find any circumstance giving a company the right to file a W2 on a person where no money was received by the person. When I have contacted the insurance company about this they basically refuse to justify it and hang up on me. One person at the company said I would receive a letter the following year saying I never received the money reported on the W2. They are basically making it impossible for me to file my taxes on time because I would not have the money to pay the IRS for the increased taxes on money I never got. The IRS told me to file a form 4852 in place of the W2 but that I have to wait until after Sept 15th to file to give the Insurance company time to correct the W2, which as I said they refuse to do. One person at the IRS asked me to prove I never got the money, how do I prove a negative? Shouldn't the insurance company have to prove through canceled checks that they paid me? Meanwhile I am close to foreclosure on my house because I can't get the refund I am owed from 2006. I tried to get help from legal aid and they essentially gave up after a few bouts with the insurance company.

Thanks, I am aware of that way to deal with the money I paid taxes on previously that was now being returned but that doesn't address a W2 reporting income I never received.

The company poperly considers that you constructively received the money.

You have to declare the income in order to invoke your claim of right to either take a schdule A credi or a tax credit to reduce the tax consequnce.

Right - the company asked for payback due to social security payments made to you.

And I'll bet in the policy language they can certainly do that.

So re-read all I stated above, and then realize you would have to declare the income constructively received, then decide if you ae better off taking the deduction on Sch A or calculating the tax crdit.

Their W-2 is almost certainly right, and your options are te deduction or the tax credit.

I think you are trying to apply logic, such as "I never saw those dollars so why should they be income to me?" but it is income "constructively received." It is income you should be declaring on your W-2. And then invoking the better of the two Claim of Right recoveries.

The issue still remains that I would never actually recover the taxes paid in the previous years if I am required to accept the W2 as earnings during the time I actually received no money. As an example , for a given tax year I add the amount on the W2 to my gross income then deduct the same on schedule A thereby canceling the additional income I didn't receive that year, that still leaves me with no way to recover the taxes paid in the previous year not to mention the portion of the money that my son received as income under his social security number that the insurance company is reducing my benefits by but filing a W2 under my social security number for that amount as well. Am I missing some part of the picture here? It still appears to me that this will never balance out. If this is correct the IRS told me wrong and my last 3 years of filings are wrong and I am in serious tax trouble. Thanks for the info.

I think I've gone as far as it goes here. If you don't believe what I've said, and the references I've suggested, then seek local professional advice from someone whose experience and practice includes filing claim of right credits or deductions.

They didn't stop paying you, they are simply redirecting the payments to your balance due, since you refused to pay it directly.

You've received money, paid tax on it, but now it turns out the money doesn't belong to you. As you return it, you have a claim of right deduction (or credit) for the taxes you paid on it.

It was your decision to pay it back out of future "earnings" instead of cash on hand, but that doesn't change the basic concept.

You've got it backwards. The deduction on Schedule A *is* for the taxes you paid in the previous year. You still owe current tax on the current payments you are simultaneously receiving and using to pay back the money you are obliged to return.

Well, it was nice that SSA paid money to your son even though he wasn't disabled, no? I prefer to get money and pay tax on it versus get no money. There's also a lesson here that many parents learn -- unearned income that belongs to minor children has a funny way of not being used according to the parent's wishes.

You haven't given any information why your last three years of filings might be wrong. You had free use of money that isn't yours and the luxury of an interest-free installment plan to pay it back.

Art is correct, but I'll give it one last try. Here is the IRS written information that pertains to your situation. Again, remember that the claim of right deduction/credit you take *now* is to offset the taxes you paid in a *previous* year. The taxes you pay on taxable income in the *current* year has nothing to do with it, even if the income is being used to pay off an obligation.

Pub 915:

"Disability payments. You may have received disability payments from your employer or an insurance company that you included as income on your tax return in an earlier year. If you received a lump-sum payment from SSA or RRB, and you had to repay the employer or insurance company for the disability payments, you can take an itemized deduction for the part of the payments you included in gross income in the earlier year. If the amount you repay is more than $3,000, you may be able to claim a tax credit instead."

-Mark Bole

Nope. OP is not in a trade or business.

ChEAr$, Harlan

I don't understand what's going on here. I'm going to make up some numbers to make the example concrete.

OP had a long-term disability policy, that guaranteed income of $4000/month inclusive of Social Security.

January 2008 he became disabled, and filed with SS. The insurance company paid him $4000/month. At the end of 2008, it send a W2 for $48,000.

January 2009 SS ruled he was eligible for $2000/month from them, and sent him a catch-up check for $24,000. The insurance company asked OP to send them the $24,000, but OP didn't.

So the insurance company set OP's payments to $2,000/month, and withheld the first $24,000 of them, paying him nothing in 2009.

For 2009, SS sends OP a W2 for $48,000 (the total amount they paid him). The insurance company is apparently also sending a W2 for $24,000 (the amount they would have paid him if he gave it to them first). So he's getting W2s for $72,000, despite receiving only $48,000 in income. That seems quite wrong.

If I offer to pay you $10,000 provided that you pay me $10,000 first, somehow I don't think that puts you in "constructive receipt" of the $10,000. Under that theory, OP is not in constructive receipt of any money from the insurance company that they didn't actually pay him.

I realize that if OP had paid the insurance company the $24,000, he could have deducted it. In effect (according to the insurance company), they're paying him $2,000/month (their W2 claims) and then taking it back. Can't he deduct the "taking it back" the same as if he'd voluntarily handed over $24,000? The effect is certainly the same.

Seth

An excellent idea. Perhaps this will help finally put this thread to rest.

Here are my comments, largely a restatement of what others said, and with the disclaimer that I am not a tax professional (nor do I play one on TV).

OK. So far everything seems normal.

OK. This is the point where the "claim of right" doctrine kicks in.

Because the OP received $24,000 from the insurance company that he was required to repay (and which he did repay -- through insurance company "withholding"), he has the ability to handle the $24,000 that was repaid to the insurance company using the claim or right rules.

So he can take a Schedule A deduction for $24,000 (which brings his taxable income back down to the $48,000 he actually received) so everything is OK.[*]

There is also an alternate tax-credit option that could be used instead. But I don't know how that option works. But the OP can use whichever one gets him the best result.

Yes. That is exactly what the claim of right procedure allows the OP to do.

The insurance company in the example has sent him a W2 for $48,000 and another W2 for $24,000, for a total of $72000. They sent him only $48,000 total. Is that legal?

I assume the missing $24000 is not being paid by the insurance company to the Social Security Administration nor to the IRS.

No, they paid (are paying) $72K, but $24K of it was (is being) paid back, for a net of $48K over the two year period.

It's not "missing". Not sure what the insurance company paying SSA has to do with it.

It's no different than you getting a claim payment from your auto insurer after a collision, then later you get a payment from the other driver's insurance company, so you have to pay your company back per your insurance contract. That doesn't mean your insurance company is paying anything to the other insurance company.

-Mark Bole

Their reasoning is that in 2009, they paid him $24,000, and he used it (involuntarily) to repay them the $24,000 he owed them (due to the SS back payment).

They should report the $24,000 as repaid by OP (just as if he'd sent them a check as soon as SS send him the $24,000).

Seth