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entitled 'Tax Administration: IRS Needs to Consider Options for 
Revising Regulations to Increase the Accuracy of Social Security 
Numbers on Wage Statements' which was released on October 05, 2004.

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Report to the Chairman, Subcommittee on Immigration, Border Security 
and Claims, Committee on the Judiciary, House of Representatives:

August 2004:

TAX ADMINISTRATION:

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

GAO-04-712:

GAO Highlights:

Highlights of GAO-04-712, a report to Chairman of the Subcommittee on 
Immigration, Border Security and Claims, Committee on the Judiciary, 
House of Representatives

Why GAO Did This Study:

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:

* the statutory provisions authorizing IRS to penalize employers who 
file wage statements with inaccurate SSNs;
* IRS’s program to penalize such employers; and
* the extent IRS’s program meets legislative requirements, the 
likelihood of any penalties, and any program changes being considered.

What GAO Found:

IRS is authorized to penalize employers who fail to file an information 
return 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 are 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.

What GAO Recommends:

GAO recommends that IRS consider options for revising the reasonable 
cause waiver and consult with other agencies that could be affected by 
such a change prior to issuing any proposed regulations. IRS agreed 
with our recommendations and said that IRS must proactively work with 
other potentially affected agencies on possible changes.

www.gao.gov/cgi-bin/getrpt?GAO-04-712.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Michael Brostek at (202) 
512-9110 or brostekm@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Legislation Authorizes IRS to Penalize Employers Who File Inaccurate 
SSNs:

IRS Does Not Have a Dedicated Compliance Program to Penalize Employers 
Who File Wage Statements with Inaccurate SSNs:

Although IRS's Regulations Meet Statutory Requirements, It Is Unlikely 
Employers Will Be Penalized; IRS Will Consider Changes:

IRS Plans to Design an Evaluation of Its Penalty Program if a Program 
Is Adopted:

Conclusions:

Recommendations:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comments from the Internal Revenue Service:

Appendix III: Comments from the Social Security Administration:

Table:

Table 1: Individual Penalty Amounts and Maximum Total Penalty Amounts 
under OBRA of 1989:

Letter August 31, 2004:

The Honorable John N. Hostettler: 
Chairman, Subcommittee on Immigration, Border Security and Claims: 
Committee on the Judiciary: 
House of Representatives:

Dear Mr. Chairman:

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 the individual 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. For example, one of SSA's goals is to ensure that 
individuals receive the social security benefits to which they are 
entitled. To do so, SSA uses annual earnings information recorded in 
each person's social security account that is established in the 
individual's name with a unique social security number to calculate 
their benefits. Employers use IRS Form W-2 (Wage and Tax Statements) to 
report this information to SSA. Due to name and SSN inaccuracies on the 
Forms W-2 (hereafter referred to as wage statements), SSA has been 
unable to assign billions of dollars of social security wages earned 
each year to the individuals who earned them. The IRS, as well as 
others, has responsibility for taking steps to assure information 
submitted on wage statements is accurate. One tool that IRS can use to 
do this, which is authorized by legislation, is penalizing employers 
who file wage statements with inaccurate information; such penalties 
were established to help ensure employers would report accurate 
information.

Because of your interest, this report describes:

* the statutory provisions authorizing IRS to penalize employers who 
file wage statements with inaccurate SSNs;

* IRS's current program for identifying and penalizing employers who 
file wage statements with inaccurate SSNs;

* whether the current program meets legislative requirements, the 
likelihood that employers will be penalized for filing wage statements 
with inaccurate SSNs, and any program changes being considered; and:

* how IRS is evaluating or planning to evaluate the effectiveness of 
its program on curtailing the filing of wage statements with inaccurate 
SSNs.

To address these objectives, we reviewed pertinent legislation, 
regulations, legal files, penalty assessment records, and Treasury 
Inspector General for Tax Administration (TIGTA) and IRS's Large and 
Mid-Size Business (LMSB) Division reports. We interviewed IRS officials 
including those in the Office of Chief Counsel, the National Program 
for Penalties and Interest office, the Small Business/Self Employed 
(SBSE) Division, and the LMSB Division. We also examined the design of 
IRS's study for determining whether and how to implement a program for 
penalizing employers who file wage statements with inaccurate SSNs by 
reviewing documents and interviewing officials. In addition, we 
interviewed SSA officials to obtain information about the number of 
wage statements filed by employers with names and SSNs that do not 
match SSA's records, the relationship between wage statements with 
inaccurate SSNs and social security benefits, and the tools SSA makes 
available to employers to verify SSNs. We also reviewed literature and 
reports related to the use of SSNs by the Department of Homeland 
Security (DHS) and discussed this use with knowledgeable GAO staff. We 
did not conduct a data reliability assessment because IRS does not 
collect data on penalties related to wage statements filed with 
inaccurate SSNs. We performed our work from November 2003 through June 
2004 in accordance with generally accepted government auditing 
standards. Our scope and methodology are discussed in greater detail in 
appendix I.

Results in Brief:

Internal Revenue Code Section 6721 authorizes IRS to penalize employers 
for failure to file an information return by the required filing date, 
failure to include complete information, and failure to include correct 
information including accurate SSNs.[Footnote 1] The Tax Reform Act of 
1986 authorized IRS to assess penalties against employers for failure 
to include complete or correct information, including correct SSNs, on 
an information return filed with the IRS.[Footnote 2] Wage statements, 
which are filed by employers, are one type of information return 
falling under this statutory authority. Under this Act, the penalty was 
$5 for each problem information return up to a maximum of $20,000 
assessed against an employer in any calendar year. As under prior law 
that authorized penalties when employers failed to file information 
returns, the Act included an exception, referred to as the "reasonable 
cause waiver," if the failure to include complete or correct 
information was due to reasonable cause and not to willful neglect. The 
Omnibus Budget Reconciliation Act (OBRA) of 1989 consolidated the 
penalty for failure to include complete or correct information on an 
information return with the penalty for failure to file an information 
return.[Footnote 3] This Act also included the reasonable cause waiver 
and revised the amounts of penalties that could be assessed against 
employers. OBRA imposed a penalty of $15 to $50 per offense depending 
on the circumstances with a maximum of $250,000 per calendar year per 
employer regardless of the number of information returns that were 
either not filed or were filed with incomplete or incorrect 
information. OBRA also reduced the penalty if corrections were made 
within a specified time period and eliminated the penalties in some 
cases if information returns are completed or corrected by a specific 
date, referred to as the "de minimis provision." Even though both Acts 
included provisions that limited or waived penalties, they authorized 
the use of penalties as a tool to help ensure that employers and others 
file information returns with 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. However, at 
times, this is done within the context of employment tax examinations. 
IRS does have regulations for implementing the penalty provisions and 
has been conducting an assessment to determine whether and how to 
implement a penalty program that would create incentives for employers 
to improve the accuracy of SSNs included on wage statements. The 
regulations include the steps an employer must take to qualify for the 
reasonable cause waiver and avoid a penalty. To comply with the 
regulations and avoid a penalty, employers must request each employee 
to provide an SSN, use that SSN to prepare the employee's wage 
statement, and if notified by IRS that the SSN is incorrect, make up to 
two annual solicitations for a correct SSN from the employee. If the 
employer takes these steps and still files a wage statement with an 
inaccurate SSN that was provided by the employee, then in most cases, 
the employer qualifies for the reasonable cause waiver and no penalty 
will be assessed. Employers are not responsible for verifying the 
accuracy of the SSNs. IRS is also reviewing 100 "egregious" employers 
who were selected based on the number or percentage of wage statements 
they filed with inaccurate SSNs for tax year 2000.[Footnote 4] IRS 
plans to use the reviews to determine what actions, if any, it will 
take to best implement a penalty program.

IRS's regulations that implement the provisions penalizing employers 
who file wage statements with inaccurate SSNs meet the statutory 
requirements; however under current regulations, employers are unlikely 
to be penalized for filing wage statements with inaccurate SSNs. Under 
the legislation, penalties are to be waived if the employers meet the 
reasonable cause waiver. The criteria in IRS's regulations for meeting 
the waiver are such that few, if any, employers are likely to be 
penalized for submitting inaccurate SSNs. In fact, IRS has no record of 
ever penalizing an employer for inaccurate SSNs on a wage statement. 
This is borne out, in part, by IRS's review of the 100 "egregious" 
employers, i.e., employers who have made high numbers of SSN errors on 
wage statements or who had high rates of errors. After reviewing 78 of 
100 employers, IRS did not identify any who should be penalized because 
these employers were able to demonstrate they made the required 
solicitations.

As part of their study of "egregious" employers, IRS officials said 
they would consider a range of changes, including requiring employers 
to verify SSNs provided by employees. This option was among draft 
recommendations based on the portion of IRS's study looking at the 50 
employers with high numbers of SSN errors. Regarding the part of the 
review related to small and self-employed businesses, IRS's SBSE 
Division concluded that for the employers reviewed to date, many of 
their employees for whom inaccurate SSNs had been filed appeared to be 
aliens. TIGTA has estimated that in tax year 2000, at least 265,000 
illegal aliens had wage statements with invalid SSNs. In part because 
illegal aliens contribute to inaccurate SSNs, corrective measures like 
requiring employers to verify SSNs provided by employees may affect 
employers and other federal agencies that have roles related to federal 
immigration policy. For example, verification requirements might lead 
to additional employer responsibilities to verify employees' employment 
eligibility, which is in the purview of the DHS. In addition, the 
Office of Special Counsel for Immigration Related Unfair Employment 
Practices in the Department of Justice could oversee employers' actions 
vis-ŕ-vis employees. Although IRS officials said that they likely would 
take the views of these other agencies into account in considering 
revisions to IRS's regulations, this most likely would not occur until 
the agencies comment on draft regulations.

IRS officials have indicated that if a penalty program is developed and 
implemented, they do plan to evaluate its effectiveness on curtailing 
the filing of wage statements with inaccurate SSNs. Officials said they 
would determine the specific design for an evaluation after a program 
is adopted.

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, we 
recommend that the Commissioner of Internal Revenue consider options 
for revising this standard. Further, because changes to this standard 
likely would have consequences for other federal agencies, the 
Commissioner 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. The Commissioner agreed with our recommendations and said 
that IRS must proactively work with other potentially affected agencies 
on possible changes.

Background:

When employees are hired, they must complete an IRS Form W-4 
(Employee's Withholding Allowance Certificate) so that the employer can 
withhold the correct federal income tax from their pay. Shortly after 
the end of each calendar year, every employer who pays employees 
remuneration for services must furnish a wage statement to each 
employee and submit this information to SSA. Wage statements include 
the employee's name, SSN, and the amount of wages earned, among other 
things and generally, employers use the employee names and SSNs on the 
Forms W-4 to prepare them.

Wage statements are the critical documents used by SSA for assigning 
social security benefits. When an employer submits a wage statement to 
SSA, SSA posts the employee's earnings to the employee's earnings 
record, which is then used to determine an individual's eligibility 
for, and amount of, retirement, disability, or survivor benefits 
administered by the agency. When the wage statement contains a name/SSN 
combination that does not match SSA's records, SSA conducts a series of 
procedures to try and match them to its records. If these procedures do 
not result in a match, then SSA is unable to post the employee's 
earnings to the employee's earnings record and instead, the wage 
statement and the associated wages are placed in the Earnings Suspense 
File (ESF).

The ESF represents the cumulative amount of wage statements for 1937 
through 2003 for which SSA does not have a matching name/SSN. Through 
tax year 2001, which is the most recent year for which complete data 
are available, the ESF included over 244 million records involving 
wages of over $421 billion. Since 1990, this file has been increasing 
by an average of 5 million records and at least $17 billion 
annually.[Footnote 5] These records and their associated earnings are 
only removed from the ESF when the wages can be matched and posted to 
an individual's earnings record. Items can be removed through SSA 
efforts to match names and SSNs or when a person provides an accurate 
name/SSN combination and information that proves he or she earned the 
wages. If they are not removed, employees will not receive benefits 
based on these wages.

Besides affecting SSA's workload and burdening individuals with trying 
to work with SSA to prove they earned certain wages, errors in SSNs on 
wage statements also affect IRS and individual taxpayers. For example, 
an individual may give an employer someone else's name and SSN. The 
employer then files a wage statement with the SSN. The person to whom 
the SSN belongs will not claim the wages on his or her tax return. IRS 
will then send a notice to the individual about the unclaimed wages. 
IRS and the individual must then work together to resolve the problem, 
adding to both IRS's workload and the burden on the taxpayer to comply 
with the tax laws. In addition, IRS must try to identify which 
individual actually earned the wages.

Legislation Authorizes IRS to Penalize Employers Who File Inaccurate 
SSNs:

Internal Revenue Code Section 6721 authorizes IRS to penalize employers 
for failure to file an information return by the required filing date, 
failure to include complete information, and failure to include correct 
information including accurate SSNs. This legislation also places 
limits on the penalties including providing for the waiver of penalties 
if the behavior of employers in failing to provide information or 
report complete and accurate information was due to reasonable cause 
and not a result of willful neglect. The penalties were authorized as a 
tool to help IRS ensure that employers and others file information 
returns with complete and accurate information.

Prior to the enactment of the Tax Reform Act of 1986, IRS was 
authorized to assess penalties for failure to file information returns 
including wage statements filed by employers. The 1986 Act authorized 
IRS to assess penalties for failure to include all required information 
on information returns and for failure to include correct information, 
including accurate SSNs. The 1986 Act also established the amount of a 
penalty, $5 per information return, limited those penalties to a 
maximum of $20,000 per filer in any calendar year except in cases of 
intentional disregard, and included the reasonable cause 
waiver.[Footnote 6]

OBRA of 1989 increased the penalty amounts to $15 to $50 for each non- 
filed, incomplete, or inaccurate information return with the amount 
depending on if and when corrections were made and included three 
provisions that limit penalties assessed against employers. The first 
provision, which was included in previous legislation, is the 
reasonable cause waiver. IRS regulations, which are discussed later in 
this report, provide guidance for determining if someone acted with 
reasonable cause rather than with willful neglect.

The second provision limits total penalties assessed against an 
employer to a maximum dollar amount in any calendar year. The maximums 
range from $25,000 to $100,000 for small businesses and from $75,000 to 
$250,000 for large businesses with the penalty amount depending on if 
and when corrections are made.[Footnote 7] The maximum penalty amounts, 
which are presented in table 1, are the total maximum penalty amounts 
that can be assessed against an entity regardless of how many 
information returns it must file and for any of the three reasons for 
which a penalty can be assessed. For example, if a large business could 
be assessed a $200,000 penalty for failing to file dividend information 
returns and a $100,000 penalty for failing to file wage statements with 
accurate SSNs, the maximum penalty that could be assessed is not 
$300,000 but rather $250,000. These penalty amounts are for 
unintentional failures.

Table 1: Individual Penalty Amounts and Maximum Total Penalty Amounts 
under OBRA of 1989:

Reason for penalty: Failure to file, to include complete information, 
or to include correct information; 
Penalty per failure: $50; 
Small business: $100,000; 
Large business: $250,000.

Reason for penalty: Corrected return filed within 30 days; Penalty per 
failure: $15; 
Small business: $25,000; 
Large business: $75,000.

Reason for penalty: Corrected return filed after 30 days but on or 
before August 1 of the calendar year in which the required filing date 
occurs; 
Penalty per failure: $30; 
Small business: $50,000; 
Large business: $150,000.

Source: OBRA of 1989.

[End of table]

The third provision limiting penalties is the "de minimis provision." 
Under this provision, penalties will not be assessed for incomplete or 
inaccurate information returns if they are corrected on or before 
August 1 of the calendar year in which the required filing date occurs. 
The number of information returns this provision applies to shall not 
exceed the greater of 10 returns or one-half of 1 percent of the total 
number of returns to be filed.

IRS Does Not Have a Dedicated Compliance Program to Penalize Employers 
Who File Wage Statements with Inaccurate SSNs:

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. However, at 
times, this is done within the context of an employer's employment tax 
examination. IRS's regulations for implementing the penalty provisions 
include the steps an employer can take to demonstrate that any filing 
of wage statements with inaccurate SSNs was due to reasonable cause and 
not willful neglect. In addition, IRS has been conducting an assessment 
of 100 "egregious" employers who filed large numbers of wage statements 
with inaccurate SSNs or had a high rate of such filings to determine 
whether and how to implement a penalty program that would create 
incentives for employers to improve the accuracy of SSNs included on 
wage statements.

No Dedicated Compliance Program for Penalizing Employers:

According to IRS officials, although IRS has the capability to identify 
employers who file wage statements with inaccurate SSNs, it does not 
have a dedicated compliance program for penalizing them. In September 
2002, TIGTA also reported that IRS did not have such a compliance 
program and recommended that IRS initiate a regularly scheduled program 
for proposing penalties when employers file wage statements with 
inaccurate SSNs.[Footnote 8] In response to the TIGTA report, IRS 
management said that IRS did not develop a regularly scheduled program 
because of concerns about the level of resources needed to administer 
the program and the complexity of administering such a program in 
comparison to the benefits that it would have for tax administration. 
Management added that they are developing a program for identifying and 
penalizing employers when warranted.

According to IRS officials, when the legislation was passed to 
authorize penalties for failure to file complete and accurate 
information returns, Congress was primarily concerned with Form 1099 
information returns, such as for interest income and dividends and 
distributions, rather than wage statements because of the possible 
effect on tax revenues. IRS officials said that the non-reporting of 
Form 1099 income by taxpayers had a greater effect on tax revenues 
since no taxes had been withheld from income reported on Forms 1099, 
whereas, in most cases, some taxes had been withheld from income 
reported on wage statements. IRS started assessing penalties related to 
some Forms 1099 in the early 1990s and has gradually added other types 
of Forms 1099 to the penalty program. Now IRS believes that compliance 
associated with Forms 1099 has shown improvement allowing the agency to 
focus on developing a penalty program for employers that file wage 
statements with inaccurate SSNs.

Employment Tax Examinations Can Be Used to Assess Penalties:

Employment tax examinations may result in penalties for filing wage 
statements with inaccurate SSNs. Employment tax examinations cover 
areas such as determining if social security and Medicare taxes were 
properly withheld, whether persons were properly classified as either 
employees or as independent contractors, and whether the employers 
provided the appropriate information returns to IRS and their 
employees.[Footnote 9] According to the Director of the SBSE Office of 
Employment Tax, IRS staff may review the accuracy of SSNs on wage 
statements to determine if penalties should be proposed when conducting 
an employment tax examination. Even though the filing of wage 
statements with inaccurate SSNs is not a criterion used to select 
employers for an employment tax examination, if IRS has an indication 
that there is a problem with inaccurate SSNs, the tax examiner is to 
draw a sample of wage statements to determine if the SSNs on them are 
the same as the SSNs on the Forms W-4. If they are the same, then no 
penalty is proposed. If any or all are dissimilar, the employer would 
be instructed to make annual solicitations as described later in this 
report or face an IRS penalty.[Footnote 10] LMSB employment tax 
examination officials said that they do not routinely compare SSNs on 
wage statements to the SSNs on Forms W-4; however, an examination could 
result in the assessment of a penalty.

IRS Regulations Require Employers to Solicit Employees' SSNs:

The IRS regulations that implement the penalty provisions require 
employers to solicit SSNs from their employees but they are not 
required to verify them.[Footnote 11] Draft temporary regulations for 
assessing penalties for failing to provide complete and correct 
information on information returns related to the Tax Reform Act of 
1986 were circulating within the IRS as early as December 1986. IRS 
issued temporary regulations in September 1987 that included a 
solicitation for public comments.[Footnote 12] IRS received public 
comments on the draft regulations and issued final regulations in April 
of 1991.[Footnote 13] Although OBRA of 1989 subsequently revised the 
penalty provisions, these initial regulations did not reflect any 
revisions relative to OBRA even though they were issued almost a year 
and a half after OBRA was passed. IRS issued temporary regulations for 
OBRA in February 1991,[Footnote 14] and after receiving public comments 
and holding a public hearing, issued final regulations for the revised 
penalty provisions in December 1991.[Footnote 15]

The regulations include guidance for implementing the reasonable cause 
waiver included in the legislation. IRS officials said that when they 
developed this guidance, they tried to balance encouraging voluntary 
compliance with the law with the burden placed on filers for complying. 
Under the waiver, filers of information returns will not be assessed a 
penalty for any of the three types of failures included in the 
legislation, including failing to file a wage statement with an 
accurate SSN, if they can show that the failure was due to reasonable 
cause and not willful neglect. To do so, they must demonstrate either 
there were significant mitigating factors for the failure or that the 
failure arose from events beyond their control. In addition, they must 
demonstrate they acted in a responsible manner both before and after 
filing the information returns including wage statements.

Significant Mitigating Factors and Events Beyond the Filer's Control:

The regulations include examples of significant mitigating factors or 
events beyond the filer's control. Examples of significant mitigating 
factors are that the filer was never required to file this type of 
information return before or the filer has an established history of 
complying with the information return reporting requirements. Examples 
of events beyond the filer's control are the unavailability of business 
records due to unforeseen conditions, such as a fire, that damaged 
business records or actions of other parties such as IRS, the filer's 
agent, or the payee of the item included in the information return. In 
the case of the latter, the filer must show that the failure resulted 
from the failure of the payee to provide the information to the filer 
or that the payee provided incorrect information to the filer. Thus, an 
employer may claim that the failure to include correct information on a 
wage statement was due to the actions of the payee if the employer 
received an SSN from the employee, relied on that number in good faith, 
and used it on a wage statement.

Acting in a Responsible Manner:

Acting in a responsible manner means that the filer exercised the same 
degree of care that a reasonably prudent person would use under the 
circumstances both before and after the failure. It also includes 
taking steps to avoid the failure such as attempting to prevent it if 
it was foreseeable, acting to remove the cause of the failure, or 
correcting the failure as promptly as possible.

When a penalty is proposed for an incorrect SSN, filers must then 
comply with special rules to demonstrate they acted in a responsible 
manner. In the case of an employer who files wage statements, the 
employer needs to make an initial solicitation for an employee's SSN at 
the time the employee begins work. The employee's SSN is documented 
upon IRS Form W-4. Following the initial solicitation, no additional 
solicitation for the SSN is required unless the IRS notifies the 
employer that the employee's reported SSN is incorrect. Following the 
receipt of such notice, the employer may be required to make up to two 
annual solicitations for the correct SSN.

The first annual solicitation of an employee's SSN is required only if 
the IRS notifies the employer that the employee's SSN is incorrect and 
if the employer's records contain that incorrect SSN at the time it 
receives the notice.[Footnote 16] The solicitation for the SSN must be 
made by December 31 of the year in which the notice was received (or by 
January 31 of the following year if notified in December) and may be 
made in person or by mail or telephone. The solicitation is necessary 
only if there will be reportable payments to that employee in that 
year. A second annual solicitation would be required if the employer 
receives an IRS notice of an incorrect SSN for the employee in any 
subsequent year. An employer may rely on the SSN that an employee 
provided in response to a solicitation, and the employer may use that 
SSN in filing a wage statement for that employee. If an employer 
receives an IRS notice of an incorrect SSN provided by an employee 
after having made two annual solicitations and reporting the SSN 
provided by the employee, the employer is not required to make further 
solicitations.

Acting with Intentional Disregard:

The rules for determining if an employer acted responsibly do not apply 
if the employer acted with intentional disregard for the requirement to 
file an accurate SSN. Intentional disregard occurs when the employer 
knows, or should know, of the regulation to file accurate SSNs and 
chooses to ignore the requirement. Indications of intentional disregard 
include the employer did not promptly correct the error upon discovery 
or the employer has a pattern of failures.

IRS Is Reviewing 100 Employers to Determine Whether and How to 
Implement a Penalty Program:

IRS is determining whether and how to develop a penalty program for 
assessing penalties for filing wage statements with incorrect SSNs. The 
IRS Program Director for Penalties and Interest said that the program 
will likely have multiple components with the primary focus on the most 
"egregious" filers; however specific details have not been developed. 
As part of the process to develop the penalty program, IRS is 
conducting, but has not finished, a review of 100 employers who are 
"egregious" filers of wage statements with incorrect SSNs and the 
results of these reviews will be used to help develop the penalty 
program. The intent of this review is to gain insight and data to help 
IRS determine whether and how to implement a penalty program that would 
create incentives for employers to improve the accuracy of SSNs filed 
on wage statements while avoiding unnecessary burden and hardship.

IRS selected the 100 employers from two lists of the most "egregious" 
filers provided by SSA for tax year 2000. SSA developed the lists from 
data it maintains on the number of wage statements filed by employers 
with SSNs and name combinations that did not match SSA's records. IRS 
selected fifty employers from a list of the 100 employers that filed 
the most wage statements with inaccurate SSNs. These employers were 
among the nation's largest employers and the number of wage statements 
they filed with incorrect SSNs was a function of the large numbers of 
wage statements they filed. The second fifty employers were from a list 
of 100 employers who filed the highest percentage of wage statements 
with inaccurate SSNs. These employers generally issued fewer than 1,000 
wage statements but had error rates of 93 percent or higher.

As part of the review, IRS officials made on-site visits, interviewed 
employers, and examined various documents. The objectives were to 
determine the processes employers used to obtain SSNs to report on wage 
statements, if the employers attempted to verify SSNs, how they dealt 
with letters from SSA indicating that some employees' names and SSNs 
did not match SSA's records, the barriers to obtaining correct SSNs, 
and whether any penalties should be assessed. IRS's LMSB Division has 
completed the review of the larger employers and summarized the results 
in an April 2003, report.[Footnote 17] As of May 2004, IRS's SBSE 
Division had reviewed 28 of the 50 employers who had filed the highest 
percentage of wage statements with inaccurate SSNs. Of the remaining 22 
employers, 21 are out of business and one could not be located. In 
early 2004, IRS requested that SSA provide another list of 50 
"egregious" employers from which IRS will select 22 for review. As of 
May 2004, IRS has not received the new list. When it does, officials 
estimate it will take 4 to 5 months to complete the additional reviews. 
At that time, SBSE officials will prepare a report documenting the 
results of all 100 reviews. When the entire review has been completed, 
options will be developed for the IRS Commissioner to consider which 
would increase the likelihood that employers would file accurate SSNs 
on wage statements.

Although IRS's Regulations Meet Statutory Requirements, It Is Unlikely 
Employers Will Be Penalized; IRS Will Consider Changes:

IRS's regulations for penalizing employers who file wage statements 
with inaccurate SSNs meet the statutory requirements; however, under 
current regulations, employers are unlikely to be penalized for filing 
wage statements with inaccurate SSNs and IRS has no record of ever 
penalizing an employer for inaccurate SSNs on wage statements. Based on 
its review of the 50 large and mid-size businesses included in IRS's 
review of 100 "egregious" employers, LMSB officials and employers 
developed recommendations intended to reduce or eliminate the filing of 
wage statements with inaccurate SSNs. IRS officials then said that they 
would consider a range of changes to improve the accuracy of SSNs on 
wage statements. Regarding the part of the review related to small and 
self-employed businesses, IRS's SBSE Division concluded that for the 
employers reviewed to date, many of their employees for whom inaccurate 
SSNs had been filed appeared to be aliens. If IRS takes steps to 
improve the accuracy of SSNs reported on wage statements, there could 
be implications for thousands of illegal immigrants and their 
employers, and in turn, on other federal programs which specifically 
deal with federal immigration policy. Consequently, other federal 
agencies, including DHS, could be affected by revisions to IRS's 
approach for ensuring that the accuracy of SSNs on wage statements is 
improved.

The Internal Revenue Code requires that (1) employers be financially 
penalized if they fail to file accurate SSNs on wage statements and (2) 
penalties should be waived if reasonable cause exists for the failure. 
The regulations that IRS has established to implement the laws contain 
both of these dimensions; therefore the regulations are consistent with 
the legislation. However, the criteria for meeting the reasonable cause 
waiver included in the regulations are easy to meet making penalization 
of employers very unlikely. This reduces or eliminates the potential 
effectiveness of penalties in encouraging more accurate filing of SSNs 
on wage statements.

As previously described, to qualify for a reasonable cause waiver, an 
employer is responsible only for soliciting an SSN from each employee 
from one to three times depending on when the employer has been 
contacted by the IRS and told that the SSN provided on the wage 
statement is inaccurate. The current regulations do not hold employers 
to more stringent requirements, such as verifying the accuracy of an 
SSN provided by an employee, or ensuring that an employee provides an 
alternative SSN when their reported SSN was determined to be 
inaccurate. 

If employers voluntarily wish to verify SSNs, their options are 
limited. IRS maintains a system for verifying the taxpayer 
identification numbers in its records, of which individual SSNs are one 
type. However, IRS is prohibited by law from verifying SSNs for 
employers.[Footnote 18] Pending legislation would allow IRS to do 
so.[Footnote 19] Employers can voluntarily use SSA's Employee 
Verification Service (EVS) prior to filing wage statements to determine 
if SSNs are valid. Under EVS, employers can call an 800 number to 
verify SSNs for up to five employees, submit a paper request for up to 
50 employees, or submit requests for larger numbers using tapes or 
discs. Paper requests can take up to 30 days to process. SSA is also 
pilot-testing another system--the social security number verification 
service (SSNVS)--for voluntary use by employers to verify SSNs and, 
according to SSA officials, hopes to roll out the program nationwide in 
January 2005. When using SSNVS, employers can verify up to ten SSNs via 
computer and receive an instant response and for larger requests, can 
upload a file to SSA and receive a response within 1 business day.

Our attempt to determine if IRS has ever penalized employers for filing 
a wage statement with an inaccurate SSN found no evidence of any 
penalties being assessed. IRS does not have any information documenting 
that any employer has ever been assessed such a penalty.[Footnote 20] 
IRS collects data on the number and dollar amount of penalties assessed 
for all information returns, including wage statements that are filed 
late; filed with missing or inaccurate taxpayer identification numbers, 
which include SSNs; or which were not filed on magnetic media when 
required. IRS does not separately collect the same statistics for wage 
statements. However, according to the Program Director for Penalties 
and Interest, he has requested that this information be collected in 
the future. He hopes that changes can be made to IRS's computer systems 
so that IRS can begin collecting this information for wage statements 
by the end of fiscal year 2005.

IRS's recent review of the 100 "egregious" employers provides evidence 
that under the current criteria for meeting the reasonable cause 
waiver, it is improbable that employers would be penalized for filing 
wage statements with inaccurate SSNs. As of May 2004, IRS concluded 
that none of the 78 employers examined should be assessed a penalty. 
This includes 50 employers reviewed by the LMSB Division for which IRS 
officials could not find any evidence that they had ever been 
penalized. This does not mean, however, that the employers filed wage 
statements free of inaccurate SSNs. It simply means that they solicited 
and used the SSNs provided by the employees to prepare the wage 
statements regardless of whether the SSNs provided by the employees 
were accurate. Again, under the regulations implementing the reasonable 
cause waiver, as long as the employers solicit SSNs from employees and 
use those SSNs to prepare wage statements, they will meet the 
reasonable cause waiver and will not be penalized.

The LMSB Division prepared a report in April 2003 summarizing the 
results of its review of the 50 "egregious" employers who filed large 
numbers of wage statements with inaccurate SSNs. The report includes 
five barriers identified by employers to filing wage statements with 
accurate SSNs and 13 recommendations that LMSB officials and employers 
think may reduce or eliminate the filing of wage statements with 
inaccurate SSNs. The recommendations fall into four general areas: 
legislative and regulatory changes, SSA changes, employer changes, and 
IRS changes. All would represent substantive changes to the current 
requirements for employers. For example, one recommendation is that 
employers use SSA's EVS to verify the SSN of all new hires. Another 
recommendation is to require employers to review and obtain a copy of 
the employee's social security card prior to hiring the new employee. A 
third recommendation is that if re-solicitations of SSNs are required, 
employers would verify new SSNs provided by employees using the SSA EVS 
system. These initiatives would require legislative and regulatory 
changes and might result in changes to the reasonable cause standard. 
The division also pointed out that several employers have taken 
innovative steps to address the compliance problem. One such initiative 
is using a service that will conduct a background check on each 
employee, including verifying the SSNs, for a minimal fee. Assessing 
the viability of these recommendations was not within the scope of our 
evaluation.

Regarding the small and self-employed businesses review, after 
completing the reviews of 28 employers, SBSE preliminarily concluded 
that (a) employers' acceptance of an employee's information without any 
verification by the employer is common practice, (b) employers have no 
responsibility to verify the accuracy of an employee's SSN, and (c) 
many of the employees whose SSNs were identified in the review as 
inaccurate appeared to be aliens.

Although the options for improving the accuracy of SSNs on wage 
statements have not yet been developed, IRS officials said they would 
consider a range of changes including, as LMSB's report suggests, 
requiring employers to verify SSNs provided by employees on Forms W-4. 
In judging how to proceed, the officials said that a number of factors 
would need to be weighed. For example, the regulations for information 
returns currently apply uniformly to all providers of such returns. To 
the extent that addressing the problem of inaccurate SSNs on wage 
statements might adversely affect other providers of information 
returns, IRS may need to consider separate regulations only applying to 
entities in their capacity as employers. IRS officials indicated that 
one initiative they have discussed is changing the criteria employers 
must meet to qualify for the reasonable cause waiver if they file 
inaccurate SSNs on wage statements. They added the Department of the 
Treasury would have to agree to this change. In addition, in crafting 
changes to encourage more accurate wage statements, officials said that 
they would need to assess any increased burden placed upon employers, 
such as increases in cost. The Commissioner of Internal Revenue, in 
testimony before Congress, has raised the issue of whether a more 
rigorous program could drive employers into underreporting wages paid 
to employees, which could result in more employees not participating in 
the federal tax system. This would be contrary to what IRS sees as part 
of its basic mission: to assure that all appropriate taxpayers are part 
of the system. In addition, the Commissioner of IRS recently testified 
that any increase in IRS's compliance activities in this area may place 
an increased demand on resources and that "absent added funding for 
such activities, this would likely come at the expense of other 
compliance activities."[Footnote 21] Finally, some options for 
addressing the issue of inaccurate SSNs may require legislative 
changes, such as authorizing IRS to make its taxpayer identification 
number verification system available to employers for purposes of 
verifying employees' SSNs.

Although IRS officials did not focus on them in discussing their review 
with us, certain other issues likely would be relevant when considering 
changes in employers' responsibilities. SBSE's preliminary conclusion 
that many of the employees whose SSNs were identified as invalid in its 
review appeared to be aliens raises the question of whether addressing 
the accuracy of SSNs has immigration-related implications for employers 
and other federal agencies. Even though incorrect SSNs may result from 
such things as inadvertent errors on employees' or employers' part or 
from individuals not reporting a name change to SSA, some portion of 
inaccurate SSNs likely are due to illegal aliens using false or stolen 
SSNs when completing Forms W-4 for employers. TIGTA estimated, for 
example, that 353,000 taxpayers could be identified as illegal aliens 
from IRS tax year 2000 data and that of these at least 265,000 had wage 
statements with invalid SSNs.[Footnote 22] Since significant numbers of 
individuals with inaccurate SSNs on Forms W-4 may be illegal aliens, 
some employers have raised concerns about whether being required to 
verify employees' SSNs would trigger obligations to other federal 
agencies, such as DHS. In general, if questions arise about an 
employee's work authorization, DHS guidance provides that an employer 
might need to take certain actions, such as providing the employee 
another opportunity to provide proper DHS Form I-9 
documentation.[Footnote 23]

An earlier pilot test of a voluntary employment verification system 
illustrates other issues that may affect employers and other federal 
agencies if IRS requires SSN verification. The Illegal Immigration 
Reform and Immigrant Responsibility Act of 1996 directed the Attorney 
General to conduct a pilot program of an employment verification system 
intended to prevent employers from hiring unauthorized aliens.[Footnote 
24] The voluntary participants in this system agreed to electronically 
check newly hired employees' SSNs against SSA's SSN records and, if the 
SSNs did not match and the employees were unable to resolve the 
mismatch, to terminate their employment. This pilot program includes 
the employer contacting DHS to verify employment eligibility of a 
potential employee. The basic pilot of the program is operating in six 
states (California, Florida, Illinois, Nebraska, New York, and Texas) 
and can be expanded to all 50 states by December 2004. In evaluating 
the basic pilot program, researchers found that the system confirmed 
that 87 percent of the employees were authorized to work but that some 
employers took adverse actions against employees on the basis of a 
tentative nonconfirmation (e.g., the employee's name and SSN did not 
match SSA's records) although they were prohibited from doing so under 
the program. Federal law protects certain individuals from unfair 
immigration-related employment practices of a U.S. employer. The 
federal government entity charged with oversight of the laws protecting 
against unfair immigration-related employment practices is the Office 
of Special Counsel for Immigration Related Unfair Employment Practices, 
which is part of the Civil Rights Division of the Department of 
Justice. 

IRS officials are aware that changes to the reasonable cause standard 
could have consequences for other federal agencies. For example, when 
TIGTA recommended that IRS initiate a regularly scheduled penalty 
program to penalize employers for submitting inaccurate SSNs on wage 
statements, IRS was contacted by the Departments of Labor, Justice and 
Homeland Security, seeking information. Regarding coordinating any 
initiatives with other federal agencies, IRS officials said that they 
would take other agencies' views into account most likely through their 
formal comments on any regulatory proposal IRS and Treasury would make.

IRS Plans to Design an Evaluation of Its Penalty Program if a Program 
Is Adopted:

If IRS implements a program to assess penalties against employers who 
file wage statements with inaccurate SSNs, IRS plans to evaluate the 
effectiveness of its program on curtailing the filing of such wage 
statements. IRS officials said they will design the evaluation after a 
penalty program is adopted. In its September 2002 report, TIGTA 
recommended that the Program Director for Penalties and Interest 
develop a methodology for monitoring and analyzing the results of the 
penalty program and that the data collected should include the number 
and amount of penalties proposed, assessed, waived (and the reason for 
the waiver), and collected.[Footnote 25] TIGTA also said the data 
should include the number of wage statements corrected in response to 
penalty actions. Developing and implementing a design for evaluating 
whatever program IRS moves ahead with will be important so that IRS can 
understand how well the new program succeeds in increasing SSN accuracy 
on wage statements while minimizing potential adverse effects like 
decreased participation of wage earners in the tax system.

Conclusions:

Inaccurate SSNs on wage statements contribute to growth in the SSA 
Earnings Suspense File, increase IRS's workload to ensure that wages 
are properly identified for the individual earning them, and burden 
individuals who must work with SSA and IRS to resolve disputes that may 
affect their tax obligations and social security benefits. Under the 
Tax Reform Act of 1986 and OBRA of 1989, Congress provided IRS 
authority to penalize employers who submit wage statements with 
inaccurate SSNs to help assure the accurate reporting of wages. Both 
Acts emphasize the use of penalties as a tool to help ensure that 
employers file information returns with complete and accurate 
information but also include a reasonable cause provision under which 
penalties can be waived.

However, the reasonable cause standard is not difficult for employers 
to meet. IRS has no record of penalties having been levied against 
employers and none have been levied to date as part of IRS's study of 
employers with substantial numbers or percentages of wage statements 
with inaccurate SSNs.

Because little or no likelihood exists for penalties to be levied, the 
potential of the statutory penalty tool to encourage greater accuracy 
of wage statements is compromised. Further, because employers have no 
responsibility to verify SSNs, opportunities to detect and correct SSN 
inaccuracies before SSA and IRS need to react to them and possibly 
consider penalizing employers are lost. Accordingly, thoroughly 
exploring options to change the reasonable cause standard, including 
possibly requiring that employers take steps to verify the accuracy of 
SSNs provided by employees, must be a critical part of IRS's 
consideration of how to make their penalty program more effective.

Nevertheless, because a change to the reasonable cause standard could 
have consequences for IRS, employers, and other federal agencies, 
determining whether and how to modify the standard will require 
balancing numerous, sometimes conflicting, issues. Accordingly, in 
considering options for revising the standard, IRS would benefit from 
understanding these potential consequences. Although IRS officials 
anticipate receiving formal comments from other federal agencies on any 
regulatory proposal they may publish, they do not have plans to work 
with representatives of these agencies as they initially consider what 
options may best address inaccurate SSNs.

Recommendations:

We have two recommendations. First, 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, we recommend that the Commissioner of Internal 
Revenue consider options for revising this standard. Second, because 
changes to this standard likely would have consequences for other 
federal agencies, the Commissioner 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 Comments and Our Evaluation:

The Commissioner of Internal Revenue provided written comments on a 
draft of this report in an August 10, 2004, letter, which is reprinted 
in appendix II. The Commissioner agreed with our recommendations, 
saying that IRS would consider revisions to the reasonable cause 
standard and that IRS must proactively work with other potentially 
affected agencies on possible changes to the standard. Regarding 
possible changes to the reasonable cause standard, we encourage IRS to 
explore options for having employers verify the accuracy of SSNs. Then, 
if an employee provided an inaccurate SSN, the employer could take 
timely actions to obtain a valid SSN. In agreeing that IRS should work 
with other agencies, the Commissioner did not indicate when or how IRS 
planned to do so. We believe it is important for IRS to work with the 
other affected agencies before draft regulations are developed so IRS 
has the benefit of the agencies' views when designing the draft 
regulations.

The Commissioner of SSA provided written comments on a draft of this 
report in an August 6, 2004, letter, which is reprinted in appendix 
III. The Commissioner said that due to the possible impact on SSA, 
employers, and employees, SSA should be involved in the development of 
any requirement imposed on employers to verify SSNs provided by 
employees, thus agreeing with our recommendation that IRS should 
consult other federal agencies prior to making any changes to the 
reasonable cause standard. In addition, at SSA's request, we clarified 
a description of a pilot program for verifying employment eligibility.

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its date. At that time, we will send copies to the Chair and 
Ranking and Minority Member of the Senate Committee on Finance; the 
Chair and Ranking Minority Member of the House Committee on Ways and 
Means and its Subcommittees on Oversight and on Social Security; the 
Chair and Ranking Minority Member of the Senate Committee on the 
Judiciary and the Chair and Ranking Minority Member of its Subcommittee 
on Immigration, Border Security and Citizenship; the Chair and Ranking 
Minority Member of the Senate Special Committee on Aging; the Chair and 
Ranking Minority Member of the House Committee on the Judiciary and the 
Ranking Minority Member of its Subcommittee on Immigration, Border 
Security and Claims; the Chair and Ranking Minority Member of the House 
Select Committee on Homeland Security; the Chair and Ranking Minority 
Member of the House Committee on Government Reform and its Subcommittee 
on National Security, Emerging Threats, and International Relations; 
the Secretary of the Treasury; the Commissioner of Internal Revenue; 
the Commissioner of Social Security; the Director of the Office of 
Management and Budget; and other interested parties. We will make 
copies available to others on request. In addition, the report will be 
available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov].

This report was prepared under the direction of Boris Kachura, 
Assistant Director. If you have any questions regarding this report, 
please contact him at (202) 512-3161 or [Hyperlink, kachurab@gao.gov]  
or me at (202) 512-9110 or [Hyperlink, brostekm@gao.gov]. Key 
contributors to this report were Shirley Jones, Jean McSween, Jay 
Pelkofer, and Shellee Soliday.

Signed by: 

Michael Brostek: 
Director, Tax Issues:

[End of section]

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Our first objective was to describe the statutory provisions 
authorizing the Internal Revenue Service (IRS) to penalize employers 
who file Forms W-2 (Wage and Tax Statements), hereafter referred to as 
wage statements, with inaccurate social security numbers (SSNs). To 
address the first objective, we identified the laws that gave IRS this 
authority, verified this with IRS Office of Chief Counsel staff, and 
researched the legislative history of those laws.

Our second objective was to describe IRS's current program for 
identifying and penalizing employers who file wage statements with 
inaccurate SSNs including any changes under consideration. To address 
the second objective, we reviewed IRS's current penalty program with 
various IRS officials including the Program Director for Penalties and 
Interest and reviewed a Treasury Inspector General for Tax 
Administration (TIGTA) report addressing the same subject.[Footnote 26] 
We interviewed Small Business/Self Employed (SBSE) Division and Large 
and Mid-Size Business (LMSB) Division Employment Tax officials to 
determine how employment tax examinations can be used to identify 
employers who should possibly be assessed a penalty for filing wage 
statements with inaccurate SSNs. We also sought from the Program 
Director for Penalties and Interest, the SBSE Office of Employment Tax 
Director, and the LMSB National Program Manager for the Employment Tax 
Program any data collected by IRS that would show the number of 
employers who had been assessed penalties for filing wage statements 
with inaccurate SSNs.[Footnote 27] We reviewed the IRS Office of Chief 
Counsel file related to the regulations implementing the legislation 
identified under objective one as well as the regulations themselves 
and interviewed Chief Counsel staff and the National Program Director 
for Penalties and Interest about what employers must do, under the 
regulations, to avoid a penalty for filing a wage statement with an 
inaccurate SSN. We also reviewed information IRS provided to employers 
about their responsibilities in relation to filing accurate SSNs. We 
reviewed documents related to IRS's review of 100 "egregious" employers 
who filed large number of wage statements with inaccurate SSNs 
including an LMSB Division report summarizing the results of its review 
of 50 of those employers as well as discussed the study with the 
Program Director for Penalties and Interest.[Footnote 28] These 
discussions covered, among other things, the objectives and methodology 
used for the reviews, any results to date, and how IRS planned to use 
the results, including IRS's plans for developing a penalty program.

Our third objective was to describe the extent to which IRS's program 
meets legislative requirements and the likelihood that employers will 
be penalized for filing wage statements with inaccurate SSNs under that 
program. To address the third objective, we compared the information we 
collected related to the first objective--the statutory provisions--to 
the information we collected related to the second objective-- 
specifically IRS's program for identifying and penalizing employers who 
file such wage statements. We also reviewed any data IRS collected on 
penalties assessed against employers who filed such wage statements and 
the regulations implementing the legislation. We reviewed IRS's 
examination of 100 "egregious" employers who filed large numbers of 
wage statements with inaccurate SSNs, and the LMSB Division report 
summarizing the results of its review of 50 of the 100 employers. We 
also met with Social Security Administration (SSA) officials to obtain 
information about the number of wage statements filed by employers with 
names and SSNs that do not match SSA's records, the relationship 
between wage statements with inaccurate SSNs and social security 
benefits, and the tools they make available to employers to verify 
SSNs. In addition, we reviewed literature and reports related to the 
use of SSNs by the Department of Homeland Security and discussed this 
use with knowledgeable GAO staff.

Our fourth objective was to describe how IRS is evaluating, or planning 
to evaluate, the effectiveness of its program on curtailing the filing 
of wage statements with inaccurate SSNs. To address the fourth 
objective, we interviewed the IRS Program Director for Penalties and 
Interest and reviewed the TIGTA report referred to previously. We did 
not review and analyze any documents related to an evaluation design 
since IRS does not have one.

We did not conduct a data reliability assessment because IRS does not 
collect data on penalties related to wage statements filed with 
inaccurate SSNs. We performed our work from November 2003 through June 
2004 in accordance with generally accepted government auditing 
standards.

[End of section]

Appendix II: Comments from the Internal Revenue Service:

COMMISSIONER:

DEPARTMENT OF THE TREASURY: 
INTERNAL REVENUE SERVICE:
WASHINGTON, D.C. 20224:

August 10, 2004:

Mr. Michael Brostek:
Director, Tax Issues: 
United States Government Accountability Office: 
Washington, D.C. 20548:

Dear Mr. Brostek:

Thank you for the opportunity to review your draft report titled, Tax 
Administration-IRS Needs to Consider Options for Revising Regulations 
to Increase the Accuracy of Social Security Numbers on Wage Statements 
(GAO-04-712). We agree that inaccurate Social Security Numbers (SSNs) 
on wage statements result in the IRS being unable to determine if wages 
have been reported on individual income tax returns. We are also 
cognizant that inaccurate SSNs affect other agencies' ability to 
accomplish their missions, such as the Social Security Administration 
(SSA).

The information reporting penalty and penalty waiver sections of the 
Internal Revenue Code (Code) apply to payers of many reportable 
payments, not just employers. For example, the reasonable cause 
provisions were designed to apply to businesses paying independent 
contractors, banks paying interest, brokers paying stock sale proceeds, 
and many other payers in addition to employers. The rules for obtaining 
waivers of information reporting penalties were designed to ensure 
payers act responsibly in complying with requirements and that they 
take appropriate steps to attempt to correct inaccuracies when they 
become known.

Our research has identified that the majority of inaccurate SSNs on 
wage statements are due to employee error, not employer noncompliance. 
Thus, implementing new requirements that are more difficult for 
employers to meet, resulting in assessment of penalties, may not result 
in more accurate SSNs on Forms W-2, Wage and Tax Statement.

We believe that the accuracy of reporting may increase if legislation 
is enacted allowing the IRS to respond to Taxpayer Identification 
Number (TIN) Matching requests by employers. Up-front TIN Matching for 
employers would afford employers and employees an opportunity to 
correct errors prior to the filing of Forms W-2. The IRS has learned 
that many employers would welcome up-front assistance in verification 
of employees' SSNs. As your report notes, however, the IRS' TIN 
Matching program, which may be used by payers of reportable payments 
subject to backup withholding, is not available to employers because of 
statutory constraints. A proposed amendment to Code Section 6103, 
currently pending in Congress, would allow employers to participate in 
the IRS' TIN Matching program. This issue has repeatedly been raised by 
employer groups, as well as by employers who use SSA's SSN verification 
program. Employers may generally use the latter for the same purpose, 
but because the database does not correspond directly to the IRS' 
database, a match in SSA's database will not necessarily provide 
reasonable cause for waiver of the fine for an inaccurate SSN. 
Nonetheless, while we do not require use of SSA's verification program, 
for the reasons just noted, we have stated that it may be a useful tool 
for employers.

At this time, we believe the best course of action is for the IRS to 
analyze options and consider how best to increase accuracy of 
reporting, including, as your report recommends, whether the reasonable 
cause provisions of the regulations should be revised. However, as I 
testified on March 10, 2004, the impact of significantly raising "due 
diligence" requirements could have a negative impact on the 
participation of employers and employees in the tax system. Such a 
change to the regulations under Code Section 6724 may also require 
coordinated revisions to regulations under other Code sections related 
to information reporting. We are currently conducting compliance checks 
on employers with the most egregious cases of reporting incomplete or 
incorrect employee SSNs. Once the checks are completed, we will use the 
resulting data to develop strategies to enhance compliance. We are also 
committed to improving the accuracy of information reporting on Forms W-
2 through improved communications with our outside stakeholders to 
further clarify and ultimately reduce taxpayer burden associated with 
wage reporting compliance.

We also agree that we must proactively work with other potentially 
affected agencies on any possible changes. By working with other 
affected agencies, we will best be able to design and implement any 
necessary changes without impeding their respective missions. To that 
end, we work continually with SSA regarding the problem of SSN 
mismatches, and we understand their concerns.

We appreciate your continued interest and assistance in this important 
area of tax administration. If you have any questions please contact 
me, or a member of your staff may contact Robert L. Hunt, Acting Deputy 
Director, Compliance Policy, at (202) 283-2200.

Sincerely,

Signed by: 

Mark W. Everson: 

[End of section]

Appendix III: Comments from the Social Security Administration:

SOCIAL SECURITY:

The Commissioner: 
August 6,2004:

Mr. Michael Brostek: 
Director, Strategic Issues Tax Team:
U.S. Government Accountability Office: 
Washington, D.C. 20548:

Dear Mr. Brostek:

Thank you for the opportunity to review and comment on the draft report 
"Internal Revenue Service (IRS) Needs to Consider Options for Revising 
Regulations to Increase the Accuracy of Social Security Numbers (SSN) 
on Wage Statements" (GAO-04-7112).

Due to the possible impact on employers, employees and our Agency, any 
requirement that is imposed on employers to verify the name and SSN 
provided by employees should include our involvement in the development 
process prior to implementation.

Enclosed are our comments on the draft report. If your staff has 
questions about the comments, they may contact Candace Skurnik, 
Director, Audit Management and Liaison Staff, at (410) 965-4636.

Sincerely,

Signed by: 

Jo Anne B. Barnhart:

Enclosure:

SOCIAL SECURITY ADMINISTRATION:	
BALTIMORE MD 21235-0001:

COMMENTS ON THE GOVERNMENT ACCOUNTABILITY OFFICE (GAO) DRAFT REPORT 
"INTERNAL REVENUE SERVICE NEEDS TO CONSIDER OPTIONS FOR REVISING 
REGULATIONS TO INCREASE THE ACCURACY OF SOCIAL SECURITY NUMBERS ON WAGE 
STATEMENTS (GAO-04-7112):

We appreciate the opportunity to review and comment on the draft 
report. Since the report recommendations are not directed toward our 
Agency, we will only provide technical comment. We believe that it is 
important and necessary to clarify some information in the draft report 
to prevent a misunderstanding of how the Social Security 
Administration's (SSA) letters to employers concerning names and Social 
Security numbers (SSN) on Form W-2s that do not match SSA's records and 
the notification to employers through the Department of Homeland 
Security's (DHS) "pilot test" differ.

On pages 21 to 22, the report describes a pilot test of a voluntary 
employment verification system as, "The voluntary participants in this 
system agreed to electronically check newly hired employees' SSNs 
against SSA's SSN records and, if the SSNs did not match and the 
employees were unable to resolve the mismatch, to terminate their 
employment." This seems to suggest that the pilot process and SSA's 
employer "no match" letters are directly comparable.

However, in the pilot, the employer contacts DHS to verify employment 
eligibility. DHS sends certain data to SSA to determine if it matches 
SSA's Numident record. SSA sends a response back to DHS, which then 
provides a response to the employer. If the I-9 indicates that the 
individual is an alien, the DHS system checks the "A" number in the DHS 
system. Based on the DHS data, the employer may be given a tentative 
non-confirmation message. There are a number of additional steps before 
the employer receives a final non-confirmation and can terminate the 
employee.

In SSA's "no match" letters to the employers, an Agency notice is sent 
to an employer after the processing of the Form W-2 and SSA was unable 
to match the name and SSN to the Numident record for posting to the 
earnings record. The Agency attempts to send a notice directly to the 
employee first; if no address is supplied or the address was determined 
to be incorrect, the notice is then sent to the employer. 

[End of section]

(450272):

FOOTNOTES

[1] Internal Revenue Code Section 6724 lists the information returns 
covered by these penalty provisions. For example, they apply to banks, 
stockbrokers, and other financial institutions that pay interest and 
dividends, as well as to employers. Because our focus is on wage 
statements filed by employers with inaccurate SSNs, we refer only to 
this issue when discussing the statutory and regulatory provisions 
except when reference to other information return providers is needed 
for clarity. 

[2] Public Law 99-514, October 22, 1986.

[3] Public Law 101-239, December 19, 1989.

[4] As of May 2004, IRS had completed 78 of these reviews.

[5] The Social Security Administration's Earnings Suspense File 
Tactical Plan and Efforts to Reduce the File's Growth and Size, Office 
of the Inspector General, Social Security Administration A-03-97-31003 
(February 2000).

[6] In cases of intentional disregard, the penalty will be $100 or 
greater for each failure but there is no limit on the total amount of 
penalties that can be assessed. IRS regulations, which are discussed 
later in this report, provide guidance for determining if someone acted 
with intentional disregard.

[7] By law, a business is defined as small if for any calendar year the 
average annual gross receipts for the most recent 3 taxable years 
ending before such calendar year do not exceed $5,000,000.

[8] The Internal Revenue Service Does Not Penalize Employers that File 
Wage and Tax Statements with Inaccurate Social Security Numbers, TIGTA 
Reference Number 2002-30-156 (September 2002).

[9] IRS's SBSE Division is responsible for providing program leadership 
for all IRS employment tax matters. SBSE officials conduct employment 
tax examinations related to small businesses and self-employed 
taxpayers and LMSB officials do the same for large and mid-size 
businesses.

[10] An employer cannot avoid a penalty simply by making an annual 
solicitation. The annual solicitation is necessary to establish 
reasonable cause; and if after making an annual solicitation, an 
employee provides a new SSN, the employer must use the recently 
provided SSN on any subsequent wage statements.

[11] 26 CFR 301.6721 through 301.6724.

[12] 52 FR 34355, September 10, 1987; employers and other information 
return filers were to follow the temporary regulations from the date of 
their publication.

[13] 56 FR 15040, April 15, 1991.

[14] 56 FR 6969, February 21, 1991; employers and other information 
return filers were to follow the temporary regulations from the date of 
their publication.

[15] 56 FR 67178, December 30, 1991.

[16] If an employer receives a notice from IRS, the employer has 45 
days to submit an explanation as to why the penalty should be waived. 
In certain cases, SSA may send employers letters indicating that the 
names and SSNs for certain employees do not match SSA's records. A 
notice from SSA does not trigger IRS's requirement that an employer 
solicit an SSN from an employee.

[17] Internal Revenue Service Large and Mid-Size Business Division: The 
Form W-2 SSN/Name Mismatch Project (April 28, 2003).

[18] Section 6103 of the Internal Revenue Code protects the 
confidentiality of SSNs and does not generally permit disclosure of 
these numbers or whether these numbers match IRS records to third 
parties such as employers.

[19] H.R. 1528 Tax Administration and Good Government Act.

[20] The Director of the SBSE Office of Employment Tax surveyed his 
field managers and they said that employers had been assessed penalties 
for filing wage statements with inaccurate SSNs but they did not have 
any evidence of how often this occurred or of any penalties being paid.

[21] Individual Taxpayer Identification Numbers (ITINs) and Social 
Security Number Matching: Testimony by the Commissioner of Internal 
Revenue; March 10, 2004.

[22] This estimate is only for resident aliens who filed tax returns 
using an IRS assigned individual taxpayer identification number, or 
ITIN, and is not an estimate of the number of illegal aliens overall 
who may have filed tax returns. Internal Revenue Service's Individual 
Taxpayer Identification Number Creates Significant Challenges for Tax 
Administration, TIGTA, Reference Number 2004-30-023 (January 2004).

[23] The Immigration Reform and Control Act of 1986 made all United 
States employers responsible to verify the employment eligibility and 
identity of all employees hired to work in the United States after 
November 6, 1986. To implement the law, employers are required to 
complete Employment Eligibility Verification forms (DHS Form I-9) for 
all employees, including United States citizens.

[24] Pub. L. 104-208, Div. C, September 30, 1996.

[25] TIGTA 2002-30-156.

[26] TIGTA 2002-30-156.

[27] Although IRS collects data about penalties related to information 
returns, it does not collect data about penalties for filing wage 
statements with inaccurate SSNs.

[28] Internal Revenue Service Large and Mid-Size Business Division: The 
Form W-2 SSN/Name Mismatch Project (April 28, 2003).

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