Income tax intercepts coming to employers

Tax intercepts against claimants for recovering over-payments have been occurring for numerous years now. That is, a claimant who owes money to the Department of Workforce Development because of an over-payment has seen the Department intercept federal and state tax refunds due the claimant in order to recover that over-payment. The official name for these tax intercepts is the Treasury Offset Program, or TOP.

The 2013 budget act at the federal level required states to implement treasury offsets for ALL unemployment debts. Wisconsin has previously only applied treasury offsets for collecting claimants’ debts. To continue to receive federal grants for administering unemployment law, Wisconsin needs to make treasury offsets applicable to employers’ debts as well.

To that end, at the February 19th Advisory Council meeting the Department prepared a proposal, D15-03, for implementing a treasury offset against employers. Besides setting forth new and changed statutory language, this proposal explained:

Impact: This proposal is expected to save the Trust Fund approximately $4.3M annually via additional employer state Ul tax collections.

Summary of the Proposal: The Treasury Offset Program (TOP) is a Federal tax intercept collection tool used to collect unpaid debts owed to various government agencies. DWD UI previously implemented TOP to recover fraud and wage non-fraud overpayment debts from claimants. This proposal expands the use of the TOP program to unpaid employer contributions when personal and corporate liability can be assigned. However, the Federal government does not have the functionality to collect from corporate tax accounts at this time. The proposal is written to include corporate accounts for future enhanced Federal capabilities. Expansion of TOP is mandated by the Federal government. Fees are charged by the TOP program directly to the participant and would not affect the UI Trust Fund.

Methodology: Employer tax debt that would be certifiable for TOP is mainly debt from preliminarily closed and closed employer accounts. From 2010-2014 the average yearly amount of delinquent debt due to preliminarily closed/closed accounts is approximately $43M of which approximately 38% is recovered by Ul collections.

In 2012, TOP for claimant benefit overpayments was expanded to include fraud and non-fraud wage overpayments. From 2012—2014 the average annual amount of benefit overpayment debt certifiable for TOP was $25.2M of which approximately $12M was recovered by UI collections, or 48%.

At a 48% recovery rate, approximately $20.6M of employer debt certifiable for TOP would be collected annually. Much of the debt UI already recovered would now be collected with TOP; however, it would be collected more efficiently. Since UI can already collect approximately 38% of TOP certified debt using other collection tools, adding TOP as an additional tool would increase employer debt tax collections by approximately 10% of the certified debt annually. Ten percent of the average $43M employer debt certified for TOP would result in Trust Fund savings of approximately $4.3M annually via additional employer tax debt collections.

Note that while a federal process for applying treasury offsets against corporations is not yet in place, these treasury offsets will certainly take effect against employers whose businesses are included in their personal tax returns, such as limited liability corporations. Accordingly, the Department acknowledges that these offsets will have an immediate effect of $4.3 million in additional collections for employer debts.

At its March 19th meeting, the Advisory Council approved this proposal. As a result, it will be included in the Department’s UI bill along with other changes approved by the council. That bill should be presented to the legislature this fall or winter. So, for the 2016 tax year and perhaps for the 2015 tax year (if the bill is enacted in 2015), employers will have to face the loss of their state and federal refunds if they have unpaid unemployment taxes.