Salary Theft - Bounced payroll checks.

[garyweintraub]

Based in Texas - My wife worked remotely for a Montana Company.  The company was going under and during that time they bounced multiple employee paychecks to her totaling almost $27,000. This income is still listed under the w2 as if she received it. Where and how should this loss be reported on Federal taxes and Montana State Taxes?   

[DianeC958]

The best option is to file form 4852, Substitute W-2 form which reflects the actual compensation she received.

Prepare your return with the actual information for her compensation. Please keep records to show how much she actually received in compensation. 

After you put in the information for the amount of compensation she actually received, then the program asks, Do any of these uncommon situations apply to this W-2?  Mark the box that says,  Substitute form - I didn't get a W-2 from my employer and need to complete a substitute form.

You may receive a letter from the IRS about this since the amount you are claiming does not agree with the W-2, when you receive the letter, then you can explain to the IRS about why you claimed a lesser amount of income. Include any documentation from the bank, showing the checks bounced, or any other documents you may have.

Once the IRS has opened its phone lines again, you need to report  her employer to the IRS.

@gartweintraub

[garyweintraub]

Thank you very much for your response,  I just got ahold of the laid-off accountant and he said that he should be able to send a corrected w2... If I can actually get that... Where would I then claim her loss of pay? 

[Hal_Al]

You do not get to claim her loss of pay.  It is simply income that was never received and  will not be taxed. Not having to pay tax on it is the same as deducting it.

You are not automatically entitled to deduct a debt because the obligation has become worthless. To get a deduction, you must have suffered an economic loss. According to the IRS, you have a loss only when:

-you have already reported the money owed as  income

-you paid out cash, or

-you made credit sales of inventory that were not paid for.

[DaveF1006]

if there is a corrective W2 issued, the pay on that W2 should be correct. i would be hesitant to tell you how to claim the loss of pay unless the amount of pay you received was different than what is issued on the corrected W2 because this is something that could lead to an audit.  

[garyweintraub]

Ok, I did some more research, why have none of you recommended, to claim the salary theft on a form 4684?  Is there a reason not too, or a better place for it. 

[Anonymous]

personal casualty losses are no longer deductible. and there would still be nothing to claim   and i really don't think this rises to the level of a theft. 

[garyweintraub]

A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be:

• Illegal under the law of the state where it occurred. (Bouncing Checks is Illegal Payroll Theft is a second crime) 
• Done with criminal intent (Writing Checks for payroll with no funds is the intent)

Theft includes the taking of money or property by:

• Blackmail
• Burglary
• Embezzlement
• Extortion
• Kidnapping for ransom
• Larceny
• Robbery
• Fraud or misrepresentation. ( Paying someone for labor with bad check)

A theft can be claimed on Form 4684.

[SusanY1]

While Form 4684 is used to report thefts, individual taxpayers can longer deduct casualty losses unless they are related to federally declared disasters.  This is why it was not recommended for you.  It will not result in a deduction on your tax return.  

The best course of action is a corrected Form W-2, in which case the correct amount of income received is what is reported and taxed.  

Note the "Reminders" in the Form 2019 instructions, found here: IRS Form 4684 Instructions.

[Hal_Al]

You are not automatically entitled to deduct a debt because the obligation has become worthless. To get a deduction, you must have suffered an economic loss. According to the IRS, you have a loss only when:

-you have already reported the money owed as  income

-you paid out cash, or

-you made credit sales of inventory that were not paid for.

References:

https://smallbusiness.chron.com/can-claim-unpaid-wages-taxes-small-business-did-work-for-13716.html

https://ttlc.intuit.com/community/taxes/discussion/can-i-claim-services-render-but-customer-didn-t-p...

https://www.nolo.com/legal-encyclopedia/why-most-self-employed-service-providers-cant-deduct-bad-bus...

[macuser_22]

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@garyweintraub wrote:

Ok, I did some more research, why have none of you recommended, to claim the salary theft on a form 4684?  Is there a reason not too, or a better place for it. 

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Have you read the 2019 4684 form instructions?

https://www.irs.gov/pub/irs-pdf/i4684.pdf

Limitation on personal casualty and theft
losses. Personal casualty and theft losses of
an individual sustained in a tax year beginning
after 2017 are deductible only to the extent
they're attributable to a federally declared
disaster. The loss deduction is subject to the
$100 per casualty and 10% of your adjusted
gross income (AGI) limitations.
An exception to the rule above limiting the
personal casualty and theft loss deduction to
losses attributable to a federally declared
disaster applies if you have personal casualty
gains for the tax year. In this case, you will
reduce your personal casualty gains by any
casualty losses not attributable to a federally
declared disaster. Any excess gain is used to
reduce losses from a federally declared
disaster. The 10% AGI limitation is applied to
any remaining losses attributable to a federally
declared disaster.