Social Security:

Trust Funds Can Be More Accurately Funded

HEHS-94-48: Published: Sep 2, 1994. Publicly Released: Sep 2, 1994.

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Jane L. Ross
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Office of Public Affairs
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Pursuant to a congressional request, GAO reviewed the effect of unreported tax-exempt income on the taxation of social security benefits, focusing on: (1) additional compliance measures that would improve the Internal Revenue Service's (IRS) ability to assess and collect social security benefit taxes; and (2) how the Department of the Treasury and IRS determine the amount of revenue owed to social security trust funds.

GAO found that: (1) Treasury does not credit all revenues from taxes on social security benefits to the social security trust funds; (2) Treasury does not consider the results of IRS assessment of additional taxes on benefits when it determines the amount of revenue from taxes on social Security benefits owed to the trust funds from this revenue source; (3) the trust fund shortfall was more than $200 million for tax years 1984 through 1989; (4) limitations in the IRS accounting system make it difficult to calculate accurate amounts for trust fund shortfalls; (5) IRS cannot routinely detect underreported tax-exempt income because the payers of such income are not required to file information returns; (6) taxpayers may have understated their tax-exempt income for 1989 by about $7.2 billion; (7) the tax loss will probably increase because a greater portion of social security benefits will be subject to taxation and the number of social security beneficiaries will dramatically increase; (8) earnings information is generated and provided to most investors in tax-exempt securities, but a copy is not provided to IRS; and (9) the administrative cost and burden of processing tax-exempt information returns could be minimized by including tax-exempt income on existing information returns.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Treasury has not directed IRS to identify the amounts of additional taxes that have been assessed on social security benefits through its underreporter program. Plans were being made to more precisely measure the extent of underreporting of taxable benefits on the trust funds through the Taxpayer Compliance Measurement Program (TCMP). However, TCMP was halted by budgetary constraints. Absent an accounting system that can precisely measure the amount of additional revenues arising from underreporting of taxable social security benefits, Treasury has decided that no additional transfers of revenue to the social security trust funds should be made. As a result, all plans to address this recommendation have been cancelled.

    Recommendation: The Secretary of the Treasury should direct IRS to identify the amount of additional taxes that have been assessed on social security benefits through its underreporter program. Treasury should use this information to revise its methodology for transferring to the trust funds revenues derived from taxing social security benefits.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Not Implemented

    Comments: IRS had planned to address this recommendation through its Taxpayer Compliance Measurement Program of 1995 tax returns. However, due to budget constraints, the Commissioner postponed TCMP indefinitely. As a result, planned corrective actions related to this recommendation were cancelled in November 1996.

    Recommendation: Given the uncertainty of the tax revenue losses from underreporting of tax-exempt income and the financial industry's potential processing burden, IRS should conduct a detailed study of tax returns to better identify the benefits of having payers report tax-exempt income. In addition, IRS should obtain data on the costs of reporting and processing such information. The study could involve the IRS 1994 Taxpayer Compliance Measurement Program or a pilot study that solicits the cooperation of several payers so that the benefits and costs of reporting tax-exempt income can be estimated. If a favorable cost-benefit ratio is identified, IRS should take appropriate steps to make it possible to routinely acquire this information.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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