Figuring out a 1040 can be difficult in the best of circumstances, but some former dot-com workers may not get a W-2 form and will find themselves struggling to prepare their own records.
With tax season fast approaching, companies will soon be sending W-2 forms to employees, stating what they made and how much they paid in taxes last year. But with hundreds of companies having closed shop in the last year, many former high-tech employees may not get a W-2 form this year and instead may find themselves having to rely on their own records to prepare their taxes.
"There are a lot of employees out there who might end up suffering," said Mohamed Poonja, a bankruptcy trustee in the San Francisco area. "Some people don't remember to keep their pay stubs. They always rely on their W-2."
The Internal Revenue Service requires companies to send out a W-2 form to each of their employees and to the federal government by Jan. 31. The form provides a summary for employees of wages earned and taxes paid over the previous year. The government depends on the W-2 form as a means of checking whether an employee has paid the appropriate amount of tax.
"They are a major part of how our tax system works," said IRS spokesman Bruce Friedland.
But this year, some companies may not be sending any W-2 forms.
Last year, some 537 Internet companies shut down, according to Webmergers.com. That's double the number from 2000. Meanwhile, more than 100,000 technology workers lost their jobs in 2001, many from companies that later closed shop.
The majority of bankruptcies in the United States are Chapter 7 liquidations, in which the company ceases operations and sells off whatever assets it has left to pay creditors.
But in the overwhelming majority of Chapter 7 bankruptcy cases, companies leave behind little or no assets, and employees end up "pretty much on their own" in terms of tax-return preparation, says Ed Wolkowitz, a panel trustee in the Central District of California. That may be the case even more so with bankrupt dot-com companies, many of which counted little more than a few computers among their real assets.
Poonja said he's overseen some 20 Chapter 7 liquidation bankruptcies among dot-coms in the last 18 months. Of those, only three or four had enough assets to pay for administrative functions. In the rest of the cases, the court closed the companies' files, and Poonja didn't send any W-2s.
Although Poonja said he has helped locate employees' W-2 forms in cases where the company has already prepared them, he is under no obligation to send a W-2 if the company has no assets left.
"It's not the trustee's responsibility to pay out of his own pockets to send out a W-2," he said.
To be sure, not everyone who worked for a now defunct dot-com will miss out on their W-2 forms. In some cases where a company files for bankruptcy or ceases operations, the company has enough assets to continue basic administrative functions such as sending W-2 forms to former employees.
If a company has filed for bankruptcy, those administrative functions are usually handled by the remnants of the company or the court-appointed bankruptcy trustee. In non-bankruptcy cases, the business may hire a management company to handle such administrative chores while it sells off the assets. If companies don't provide payroll information to the IRS within 30 days of shutting down, they face penalties.
The San Francisco district office of H&R Block, one of the largest in the country, filed 6,500 returns last year, but saw fewer than a dozen clients who hadn't received W-2s from out-of-business employers.
"I wouldn't be surprised to see more people this year than last year," says Kathy Stephenson, an H&R Block office manager.
The IRS encourages employees to wait several days into February to receive their W-2 forms; employers can mail them as late as Jan. 31. The agency advises employees who have not received their forms to contact the company, or the company's trustees, if it's gone into bankruptcy. If employees still have not received their W-2 forms by Feb. 15, the IRS encourages them to contact the agency.
Why bother paying?
In other words, even if you haven't received your W-2, don't think you can get away with not paying taxes on that income. Even if a company hasn't prepared the W-2, it could have paid the government the withholdings, which the IRS would have on record. Most of the time, however, it's in the taxpayer's interest to file a return, according to the IRS. Eighty percent of returns refund withholdings, rather than require people to pay.
Furthermore, the IRS still requires employees to file a tax return by April 15. If they haven't received a W-2 by that date, the IRS requires that employees fill out Form 4852, on which they can estimate the amount of wages they earned and the amount of taxes they withheld the previous year.
The IRS does not allow taxpayers who use Form 4852 to file electronically, and such employees may see their tax returns delayed while the agency checks the records.
The taxpayers should also check with the Social Security Administration to make sure the agency has a record of their contributions, advises Stephenson. "It's important when you go to collect Social Security," she said.
H&R Block can help taxpayers missing W-2s to file Form 4852, company representatives said. Tax preparers can use employees' last pay stubs with year-to-date withholding information. If taxpayers don't have those, the company can calculate withholdings based on the employees' best knowledge of the amount of pay they received and the number or exemptions claimed on the W4.
"A return can always be filed, even if it's a best-guess scenario," Stephenson said.