Social Security:

Better Coordination among Federal Agencies Could Reduce Unidentified Earnings Reports

GAO-05-154: Published: Feb 4, 2005. Publicly Released: Mar 4, 2005.

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Barbara D. Bovbjerg
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Each year, the Social Security Administration (SSA) receives millions of employer-submitted earnings reports (Form W-2s) that it is unable to place in an individual Social Security record. If the Social Security number (SSN) and name on a W-2 do not match SSA's records, the W-2 is retained in the Earnings Suspense File (ESF). SSA's ability to match earnings reports is essential to calculating Social Security benefits. Because of concerns about the size of the ESF, GAO was asked to determine (1) how SSA processes workers' earnings reports, (2) the types of errors in ESF reports and the characteristics of employers whose reports are in the ESF, (3) how often earnings from repeatedly used SSNs have been reinstated and who receives the earnings from theses reports, and (4) what key factors contribute to ESF postings.

Upon receiving over 250 million earnings reports annually from employers, SSA uses various processes to post such reports to workers' Social Security records. For reports in which worker names and SSNs exactly match SSA's information, the earnings are credited to the appropriate Social Security record. When SSA encounters earnings reports that do not match its records, SSA attempts to make a match through various automated processes. Such processes have allowed SSA to identify valid records for an average of 15 million reports annually. However, about 4 percent of the reports still remain unmatched and are retained in the ESF. SSA uses additional automated and manual processes to continue to identify valid records. The most recent data show that SSA posted ("reinstated") over 2 million earnings reports in the ESF to valid records from such processes. Earnings reports in the ESF have serious data problems and are particularly likely to be submitted by certain categories of employers. Such problems include missing SSNs and employer use of the same SSN for more than one worker in the same tax year. Additional problems include missing surnames or names that include nonalphabetic characters. Forty-three percent of employers associated with earnings reports in the ESF are from only 5 of the 83 broad industry categories. Among these industry categories, a small portion of employers account for a disproportionate number of ESF reports. SSA has reinstated a substantial number of earnings reports with SSNs that appear repeatedly in the ESF. We analyzed the most frequently occurring 295 SSNs, which appeared in ESF 1,000 times or more between tax years 1985 and 2000. Of the earnings reports associated with these SSNs, SSA reinstated 13.1 million to the records of about 11.7 million workers. Although most reinstatements were for U.S.-born workers, in recent years the percentage of reinstatements to foreign-born workers has markedly increased. Also increasing is the percentage of foreign-born workers that received reinstatements for earnings in years prior to receiving a valid SSN--a potential indicator of unauthorized employment. Three major factors contribute to ESF postings. Under IRS regulations, employers must ask new hires to provide their name and SSN, but are not required to independently corroborate this information with SSA. DHS requires employers to visually inspect new workers' identity and work authorization documents, but employers do not have to verify these documents, and they can be easily counterfeited. Further, IRS regulations are minimal; IRS has no record of assessing a penalty for filing inaccurate earnings reports; and DHS enforcement efforts against employers who knowingly hire unauthorized workers has been limited in recent years because of shifting priorities following the events of September 11, 2001. Last, although SSA and DHS offer employers verification free of charge, these services are voluntary, have some limitations, and remain underutilized.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The agency agreed with this recommendation. In FY05, IRS reported that, in coordination with SSA, it is conducting compliance checks on those employers with the most egregious cases of reporting incomplete or inaccurate employee SSNs to SSA. When the checks are completed, IRS will analyze the results and formulate strategies to address the mismatch issues GAO identified. In this way, IRS can identify employer-employer reporting patterns and activities that could constitute an intentional disregard of the tax rules and regulations. IRS reported that in FY07 it completed a comprehensive compliance check questionnaire. The responses provided the agency with a better general understanding of the obstacles and circumstances facing employers in W-2 taxpayer ID number compliance. They analyzed the results and reviewed the reasonable cause standard and options for revising it, as well as other strategies to enhance accuracy of employee SSNs contained on Forms W-2. For example, IRS examined a sample of non-respondent employers and found that only 6% resulted in employment tax issues being raised. This would indicate employment taxes aren't being avoided and the employers are generally compliant with their tax obligations. Any change in the reasonable cause standard, imposing procedures on employers that are too stringent or requiring too much documentation from employees may have the effect of driving certain economic activities underground. This would be a negative affect on an otherwise compliant sector. Of the W-2's at issue for these employers, 98% were for wages of less than $30,000 (83% less than $10,000). Given these low dollar amounts, and the fact that there was withholding, IRS believes it is unlikely that there is a substantial amount of income tax unreported.

    Recommendation: To better ensure that workers are accurately identified on Form W-2s necessary for the efficient administration of Social Security and tax laws, the Commissioner of the Internal Revenue Service should coordinate its ongoing effort to reassess employer requirements for soliciting and verifying worker names and SSNs with SSA. This could include utilizing SSA's ESF data to identify employer reporting patterns and activities that could constitute intentional disregard and using such data to develop criteria to better target and penalize only those employers who chronically submit inaccurate earnings reports or requiring such employers to verify worker identity information with SSA.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS agreed with this recommendation. In FY05, the agency reported that it is working with SSA to identify the most egregious filers of W-2s with mismatched identification numbers and they are conducting compliance checks on these employers. They also coordinated with Department of Homeland Security. IRS completed this effort in coordination with SSA in FY07. Specifically, they conducted compliance checks on those employers with the most egregious cases of reporting incomplete or inaccurate employee SSNs to SSA. They also analyzed the results, which provided a better understanding of the obstacles and circumstances facing employers in W-2 taxpayer ID number compliance, to determine how to address the mismatch issues GAO identified.

    Recommendation: To better ensure that workers are accurately identified on Form W-2s necessary for the efficient administration of Social Security and tax laws, the Commissioner of the Internal Revenue Service should ensure the development of any new reasonable cause requirements occurs in consultation with SSA and DHS, which operate employee verification services. Such consultation could facilitate systems improvements to ensure the integrity, timeliness, and efficiency of existing verification services.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: SSA agreed to investigate this recommendation to determine its impact on SSA's operation and the employer community. After investigating this option, SSA determined that it does not believe it is prudent to make the date of birth field a mandatory field for wage reporting verification purposes. SSA based its conclusion on two aspects: 1) the ongoing lack of resources to make the necessary changes to make the date of birth field mandatory in light of higher priority improvements in wage reporting overall; and 2) the fact that requiring the date of birth would put additional burden on both the employers and SSA. The agency does not believe that making the date of birth field mandatory would improve wage reporting.

    Recommendation: The Commissioner of the Social Security Administration should require employers seeking verifications, via SSA's electronic batch process, to submit the workers' dates of birth, for matching against SSA's records.

    Agency Affected: Social Security Administration

  4. Status: Closed - Implemented

    Comments: In 2005, DHS stated that it is taking the necessary steps to determine the best use of the annual SSA-provided listing of persons with earnings who lack work authorization. However, the agency cautioned that there are significant technical, procedural and funding impediments to accomplishing this. Much of this has been addressed by the use of E-Verify, a free web system operated by DHS in partnership with the Social Security Administration (SSA). E-Verify compares employee information from the Employment Eligibility Verification Form (I-9) with records in the SSA database and DHS immigration databases. It allows participating employers to electronically verify the employment eligibility of their newly hired employees and the validity of their Social Security Numbers. The number of employers registered greatly increased and there has also been a substantial increase in the number of states that have passed legislation requiring E-Verify for some or all employers within the state. An OMB directive required all federal government agencies to sign up for E-Verify by October 1, 2007. Also in October 2007, SSA implemented EV-STAR in partnership with DHS, a system through which SSA automatically returns the response to a contested mismatch through the E-Verify system once it has been manually checked and resolved at an SSA field office. E-Verify implemented a series of important enhancements in May 2008 to improve the accuracy of the system?s automatic confirmation processes. In July 2009, the Secretary of DHS announced support for a regulation that will award federal contracts only to employers who use E-Verify to check employee work authorization. DHS expects participation and use of E-Verify to grow significantly over the next few years.

    Recommendation: The Secretary of the Department of Homeland Security should take steps to determine how DHS can best use SSA-supplied data on potential illegal work activity and specific industries associated most frequently with such activity to support its worksite enforcement efforts.

    Agency Affected: Department of Homeland Security: Directorate of Border and Transportation Security


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