September 8, 2021
Ohio taxpayers allege double taxation resulted from state's failure to correctly attribute withheld taxes
On August 5, 2021, two taxpayers, on behalf of the State of Ohio, filed an action with the Ohio Supreme Court (Court) against the Tax Commissioner and Treasurer of the State (defendants).1 The taxpayers allege that they were taxed twice due to defendants' "systemic failure" to correctly credit their individual income tax accounts with Form W-2 information from their employers. The taxpayers request that the Court direct the defendants to jointly adopt policies and procedures to make accurate transcripts available to taxpayers listing state withholding taxes paid by employers.
Facts alleged in complaint
One of the taxpayers (Taxpayer A) did not file Ohio individual income tax returns for 2016 through 2018. In 2020, Taxpayer A wanted to comply for tax years 2016 to 2018 but did not have the Form W-2 information furnished by his employers for those years. One of Taxpayer A's employers during this period had gone out of business so he could not get the Form W-2 information from that former employer. He was, however, able to get wage and income statements from another former employers for those tax years, but those statements only listed federal taxes withheld and not state taxes. Taxpayer A believed that the employer had also withheld and remitted Ohio taxes.
A second taxpayer (Taxpayer B) did not file returns for tax years 2017 through 2019. Taxpayer B abruptly left her home to escape domestic violence and was unable to take her tax records with her. The estranged spouse burned all her belongings and fraudulently issued a change of address form directing the taxpayer's mail to be forwarded to his mother's house. For these reasons, Taxpayer B's W-2 information for tax years 2017 through 2019 was either destroyed or wrongfully diverted to where she could not retrieve it.
The taxpayers separately contacted the Ohio Department of Taxation (Department) to determine the amount of state taxes their employers withheld and remitted during the tax years at issue. The Department told both taxpayers that it did not keep such withholding and payment information. The Department instructed the taxpayers to report that zero dollars had been withheld by their employers for the tax periods at issue. The taxpayers filed individual income tax returns listing the amount withheld by employers as "unknown" and attached their federal wage and income statements. In processing these returns, the Department changed the "unknown" designation to zero taxes withheld. As a result, the Department's records showed that the taxpayers had amounts due while the taxpayers both believed their Ohio taxes had been properly withheld and remitted to the Department.
Ohio Rev. Code Section 5703.058 requires the Tax Commissioner and the Treasurer to consult and jointly adopt policies and procedures for processing tax payments so the payments are deposited in or credited to the appropriate account or fund within 30 days after receipt. The taxpayers allege that the failure to adopt such policies harmed them and would harm other taxpayers who justifiably lack access to their Form W-2 information.
Request for relief
The complaint asserts that a writ of mandamus (ordering the state government agency and official to take action) is necessary because employees, such as the taxpayers, cannot access or acquire their withholding information on their own if their employers no longer exist or if their information is destroyed. Accordingly, the taxpayers are "at the mercy of the State of Ohio to properly credit their accounts with the funds they collect and receive on their behalf under Ohio law when they no longer have access to their W-2 information." The failure to adopt the procedures required by Ohio Rev. Code Section 5703.058 eliminates any possibility of pursuing the typical administrative remedies to address the problem, as they have no access to records to prove the amounts paid on their behalf.
The taxpayers have asked the Court to direct the defendants to "jointly adopt policies and procedures for the processing of payment of taxes … such that payments are deposited in or credited to the appropriate account or fund within thirty days after receipt," as required by statute and to notify taxpayers of any credit account balance for which a refund is due. The taxpayers also requested that:
On August 25, 2021, the Court announced that the matter was referred to mediation and that it will not issue a decision on the merits until the mediation is concluded. The Department has not commented on the case as it does not comment on pending litigation.
The Department's failure to maintain withholding and payment information puts taxpayers who do not possess and cannot obtain Form W-2 information in a challenging position. Adopting policies and procedures, as requested by the taxpayers in this case, would be helpful in resolving issues where these problems arise and would help to mitigate the risk of double taxation. Implementing these policies and procedures would presumably benefit the Department, as it would be able to verify the W-2 information a taxpayer attaches to his or her tax return. EY will continue to monitor developments in this area.