Tax Administration:

IRS Needs to Consider Options for Revising Regulations to Increase the Accuracy of Social Security Numbers on Wage Statements

GAO-04-712: Published: Aug 31, 2004. Publicly Released: Oct 5, 2004.

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Inaccurate social security numbers (SSN) on wage statements contribute to growth in the Social Security Administration's (SSA) Earnings Suspense File, increase the Internal Revenue Service's (IRS) workload to ensure that wages are properly identified for those earning them, and burden individuals who must work with SSA and IRS to resolve disputes that may affect their social security benefits and tax obligations. IRS's ability to penalize employers for submitting inaccurate SSNs on wage statements is intended to promote SSN accuracy. Items GAO was asked to describe included: (1) the statutory provisions authorizing IRS to penalize employers who file wage statements with inaccurate SSNs; (2) IRS's program to penalize such employers; and (3) the extent IRS's program meets legislative requirements, the likelihood of any penalties, and any program changes being considered.

IRS is authorized to penalize employers who fail to file information returns or fail to include complete and correct information on them. Prior to 1986, IRS was authorized to assess penalties for failure to file information returns. The Tax Reform Act of 1986 added penalties for failure to include complete and correct information, established penalty amounts, and had two provisions limiting those penalties--the "reasonable cause waiver" and a maximum of $20,000 in penalties per filer per calendar year. The Omnibus Budget Reconciliation Act (OBRA) of 1989 increased the penalty amounts and the maximum total penalty amounts, ranging from $25,000 to $250,000 per filer per calendar year and added a third limit--a "de minimis provision" limiting the number of penalties that can be assessed. These statutes apply to employers who submit wage statements with inaccurate SSNs. Both acts authorize penalties as a tool to help ensure that information returns include complete and accurate information. According to IRS officials, IRS has the capability to identify employers who file wage statements with inaccurate SSNs but does not have a dedicated compliance program for penalizing them. Currently employers may be penalized based on an employment tax examination. IRS regulations define the steps an employer needs to take to demonstrate that any filing of wage statements with inaccurate SSNs was due to reasonable cause. If reasonable cause exists, any potential penalty will be waived. To qualify for the reasonable cause waiver, employers must be able to demonstrate they solicited an SSN from each employee one to three times, depending on the circumstances, and that they used this information to complete the wage statements. Employers are not responsible for verifying the accuracy of an SSN. IRS is conducting a review of 100 "egregious" employers who filed large numbers or percentages of wage statements with inaccurate SSNs to determine whether and how to implement a penalty program. IRS's regulations that implement the penalty provisions meet the statutory requirements; however, the criteria for meeting the reasonable cause waiver is such that few if any employers are likely to be penalized for filing inaccurate SSNs. IRS has no record of ever penalizing an employer, including the employers who were contacted during IRS's review of "egregious" employers. IRS officials said they would consider changes, including requiring employers to verify SSNs provided by employees, as part of the "egregious" employer study. Requiring SSN verification, however, may affect employers and other federal agencies with roles related to federal immigration policy since some portion of inaccurate SSNs on wage statements is attributable to illegal aliens using invalid SSNs. IRS officials said they would likely take the views of other agencies into account after drafting regulations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In December 2006, IRS completed its review of employers that it undertook to determine if changes should be made to the reasonable cause standard. Based on the results of the review, IRS chose not to make changes to the reasonable cause standard. Even though IRS chose not to make changes to the standard, since IRS did consider making changes to the standard, IRS did implement GAO's recommendation. (Previous information entered about the status of this recommendation: In December 2004, IRS told Congress that the corrective action implementation date was August 31, 2005. As of August 25, 2006, IRS is still working on this recommendation. IRS was in the process of conducting a study of employers who filed W-2s with inaccurate SSNs. The study will be used to develop possible changes to the reasonable cause standard. IRS planned to complete this study by the end of November 2005; however, due to Hurricane Katrina, the study was rescheduled for completion as of February 15, 2006. The delay was due to the possible inclusion of taxpayers affected by Katrina. As of March 2006, IRS was analyzing the collected data and needed additional time to draw conclusions and write the report. As of August 16, 2006, action on this recommendation has been delayed until January 15, 2007. Per IRS, there are several ongoing related employment tax audits and numerous proposals are in the works. IRS needs additional time to finalize actions associated with this recommendation.)

    Recommendation: Given the central role that the reasonable cause standard plays in defining the responsibilities of employers and thereby potential progress in improving the accuracy of SSNs on wage statements, the Commissioner of Internal Revenue should consider options for revising this standard.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS could only implement this recommendation if it chose to make changes to the reasonable cause standard. Since IRS chose not to make changes to the reasonable cause standard, IRS could not implement this recommendation. Therefore, this recommendation is closed and was not implemented. (Previous information entered about the status of this recommendation: In December 2004, IRS told Congress that the implementation date would be 60 days prior to any issuance of new regulations. As of August 25, 2006, IRS is still working on this recommendation. IRS planned to meet with SSA and DHS at the end of October 2005 to discuss possible changes to the reasonable cause standard. As of April 14, 2006, action on this recommendation had been delayed until December 15, 2006. IRS's study of egregious filers was scheduled for completion in August 2006. IRS will need additional time to confer with its counterparts in affected federal agencies before making any changes to the reasonable cause standard.)

    Recommendation: Because changes to this standard likely would have consequences for other federal agencies, the Commissioner of Internal Revenue should ensure that as IRS officials consider whether and how to modify this standard, representatives of other potentially affected federal agencies are consulted prior to issuing any proposed regulations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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