IRS Alerts Employees About Wage Calculation Issues

In recent weeks, the IRS has informed several employees that there were errors in how their wages were reported on their tax forms, prompting them to consider filing amended returns.

This situation revolves around mistakes with the non-taxable portion of overtime wages. The “One, Big Beautiful Bill Act,” signed into law last year, removed taxes on overtime pay. Taxpayers can deduct up to $12,500 for overtime from their taxable income, while joint filers can deduct up to $25,000.

This week, the IRS sent an email notifying some employees that the USDA-based National Finance Center, which manages payroll for the government, found that overtime pay was miscalculated and reported inaccurately on tax forms.

“We are writing to inform you of an issue identified on a Form W-2 previously issued by the National Treasury Center for the most recent tax year. If you receive this message, you are affected and should take action,” the email stated.

Employees affected by this issue have received revised W-2 forms indicating the correct taxable overtime amounts. The IRS has specified that employees may need to file amended returns if their taxable income changes as a result of this error.

According to the IRS, for many, this amendment might not impact the total wages or withholdings that are taxable, but they’re encouraged to review their forms closely.

Although the tax filing deadline is April 15, the IRS acknowledged a good number of employees may have already submitted their returns.

There was no immediate feedback from the IRS regarding the situation when contacted.

Some within the agency expressed worries about the notification since maintaining an accurate tax liability is a crucial aspect of their job requirements. The Office of Government Ethics mandates that all federal employees “faithfully discharge one’s duties as a citizen, including economic obligations, especially those related to taxes.”

Shannon Ellis, president of the Treasury Employees Union Chapter 66, voiced concerns via email that this error could lead to disciplinary actions or even termination for employees.

“Another worry is that some employees might not even be aware they made a mistake,” Ellis noted.

The IRS is advising affected employees to report the issue to their supervisors and keep a copy of the notification in the event it comes up during the agency’s Employee Tax Compliance Program evaluation.

If an employee is penalized for inadvertently filing an inaccurate return, the IRS suggests they call to request a penalty waiver, citing the agency’s error in issuing the incorrect W-2.

The agency emphasized that employees who are impacted should file an amended return, even if they cannot immediately pay any additional taxes owed.

Under the Trump administration, the IRS has seen a significant reduction in staff, losing over 25% of its workforce, which has made it hard to meet hiring expectations for tax season. Ellis mentioned that temporary staff are struggling to manage the workload and sending much of the work back to the IRS.

This situation has led to tight schedules, with employees working over 30 hours of overtime each week while the problems caused by the contractor are sorted out.

IRS employees reported that there are concerns about incurring extra fees when having to amend their returns.

“This poses a major issue for employees who need to ensure they comply with their tax obligations, as failure could jeopardize their jobs,” one anonymous employee stated.

Another employee mentioned this is the first time they have filed an amended return in almost four decades of service.

“My main concern is that under-reporting could lead to complications for employees in the future since compliance is essential,” said a different IRS staff member.

One IRS official indicated that such errors are not uncommon. With the agency’s reduced staff and an unusually busy tax season due to the changes from the “One, Big Beautiful Bill Act,” there has been a significant need for updates in federal tax calculations.

“Is it surprising that the first application of a newly assigned formula for determining what part of an overtime salary is taxable creates issues when there’s a reduced HR team being asked to manage more?” questioned an employee.

The IRS indicated in their email that they are “currently evaluating options to lessen the impact on affected employees.”

To assist those impacted, the IRS mentioned utilizing Volunteer Income Tax Assistance (VITA) sites around the country to help employees prepare and electronically file amended returns if necessary.

The agency advised administrators to allow reasonable time for affected employees to access VITA services during work hours.

This isn’t the first instance this year where IRS employees were alerted about potential inaccuracies. Earlier in January, an email informed staff that an incorrect pay period had been assigned for W-2 purposes.

“This misassignment resulted in errors with calendar-based deductions like Social Security and Thrift Savings Plans, leading to inaccurate totals,” the IRS reported. They urged employees to verify their income and keep statements for their records.

IRS CEO Frank Bisignano told the House Ways and Means Committee that the tax filing season was progressing smoothly. He remarked, “The tax season has surpassed the 40% mark, and I’ve heard from many sources that tax revenue is coming in without issues.”

Concerns about the IRS’s preparation for the tax filing season were raised by Senators Elizabeth Warren (D-Mass.) and Angus King (R-Maine) along with 15 other senators in a letter.

“We express serious concern that the IRS is not ready for the upcoming tax filing season, which could lead to delays and complications for taxpayers as they file their returns and await refunds,” the senators stated.