TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

MILLIONS OF DOLLARS IN POTENTIALLY ERRONEOUS EXCESS SOCIAL SECURITY TAX CREDIT CLAIMS ARE NOT ADDRESSED

Final Report issued on March 15, 2019

Highlights of Reference Number:  2019-40-026 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The Federal Insurance Contributions Act tax is a U.S. Federal payroll tax imposed on both employees and employers to fund Social Security and Medicare.  Most employers withhold the Social Security tax from employees’ wages and pay it to the IRS on the employees’ behalf.  Individuals with more than one employer and whose combined Social Security tax withholding from all employers exceeds the maximum annual withholding amount may claim the excess amount of Social Security tax withheld as a refundable credit.  As of December 28, 2017, the IRS received more than 1.5 million Tax Year 2016 tax returns claiming the Excess Social Security Tax Credit.  These taxpayers received credits totaling more than $3.1 billion.

WHY TIGTA DID THE AUDIT

This audit was initiated to follow up on TIGTA’s previous audit recommendations and to evaluate the IRS’s efforts to detect and prevent erroneous Excess Social Security Tax Credit claims.

WHAT TIGTA FOUND

TIGTA’s analysis of more than 2.5 million tax returns e-filed in Processing Years 2017 and 2018 with an Excess Social Security Tax Credit claim found that processes implemented in response to our prior audit have improved the IRS’s identification of questionable claims.

However, the IRS paid more than $74 million in potentially erroneous Excess Social Security Tax Credits as a result of incomplete Social Security tax credit selection criteria, insufficient procedures, and tax examiner processing errors.

In addition, incorrect return selection criteria resulted in the IRS unnecessarily expending approximately $1.1 million to manually review 737,735 valid Social Security Tax Credit claims filed during Processing Years 2017 and 2018.  Finally, the majority of potentially erroneous Excess Social Security Tax Credit claims identified by its post-processing income matching program continue to not be addressed.

WHAT TIGTA RECOMMENDED

TIGTA made eight recommendations to improve the IRS’s efforts to detect and prevent erroneous Excess Social Security Tax Credit claims.  TIGTA recommended that the IRS update its internal procedures and ensure that employees are following the procedures to accurately determine the correct amount of Excess Social Security Tax Credit.  In addition, the IRS should develop processes to ensure that the Social Security tax maximum withholding amounts are annually updated in systemic programs that select claims for review and establish a process to send and measure the success associated with soft notices that alert individuals to potential errors related to Excess Social Security Tax Credit claims.

IRS management agreed with all eight recommendations and plans to take appropriate corrective actions.  These actions include implementing a review process for the 2019 filing season to ensure tax examiners correctly address potential errors.  The review results will be evaluated to identify the cause of the incorrect actions.  The IRS will also ensure that the maximum withholding amounts are updated annually, and agreed to determine the feasibility of sending and measuring the success of soft notices related to the excess Social Security Tax Credit.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2019reports/201940026fr.pdf.

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  http://www.treasury.gov/tigta