PROCESSES ARE NEEDED TO ENSURE RELIABILITY OF FEDERAL
UNEMPLOYMENT TAX CERTIFICATION
FILES AND TO WORK MULTI-STATE CASES
Final Report issued on December 22, 2015
Highlights of Reference Number:† 2016-40-009 to the Internal Revenue Service Chief Technology Officer and Commissioner for the Small Business/Self-Employed Division.
IMPACT ON TAXPAYERS
The Federal Unemployment Tax Act (FUTA) requires that Federal and State Governments work in cooperation to establish and administer unemployment insurance programs to provide benefits to unemployed workers.† The IRS is responsible for collecting the FUTA tax which is a Federal employer tax on wages paid to employees to fund State Workforce Agencies.† During Tax Year 2012, employers reported FUTA tax totaling more than $7.6 billion on Forms 940, Employerís Annual Federal Unemployment (FUTA) Tax Return.
WHY TIGTA DID THE AUDIT
Employers that pay both the FUTA tax and a State unemployment tax are allowed a credit of the FUTA tax.† The IRSís FUTA Certification Program verifies that State unemployment funds that employers claim on their Form 940 were actually paid into the Statesí unemployment funds.† The overall objective of this review was to evaluate whether the IRSís FUTA Certification Program ensures the accuracy of FUTA credit claims.
WHAT TIGTA FOUND
TIGTAís review identified that the IRSís validation of the State FUTA Certification Data Files does not ensure the reliability of the data prior to its use in identifying discrepancy cases.† Review of the data submitted by State Agencies identified that 94 percent of the State Agencies submitted data that contained formatting errors in key data fields used to identify FUTA discrepancy cases.† For one State, the errors resulted in the Stateís certification data being excluded from the FUTA Certification Program.
In addition, the IRS does not have a process to ensure State certification data are complete.† Our comparison of the 5,064,269 single-State employers identified 3,452 employers in which no information was reported back from the State.† As a result, these employers were excluded from the IRSís FUTA Certification discrepancy analysis.††
TIGTA also identified 3,729 multi-State employers with potential discrepancies totaling more than $200 million.† The IRSís processes do not accurately identify multi-State employer discrepancy cases.
Finally, the IRS incorrectly assessed 12,171 employers more FUTA tax than the employer owed, totaling almost $3.2 million, due to a programming error and using an incorrect FUTA tax rate to compute the amount of tax owed. †
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Commissioner, Small Business/Self Employed Division, develop a process to identify errors in State FUTA Certification Data Files; work with State Agencies to ensure that all records are returned; revise its process to accurately identify multi-State employer discrepancy cases; correct tax assessments made on the 12,171 employers as a result of programming errors; and ensure that programming is updated to accurately calculate tax adjustments.
The IRS agreed with all but one recommendation for which it partially agreed.†
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number ††/† 202-622-6500
E-mail Address †/† TIGTACommunications@tigta.treas.gov
Website†††††† ††††††/† https://www.treasury.gov/tigta