Treasury Inspector General for Tax Administration
November 23, 2015
TIGTA - 2015-38
Contact: Karen Kraushaar, Director of Communications
WASHINGTON — The Internal Revenue Service (IRS) does not always assess penalties against employers who fail to respond to requests that they resolve discrepancies related to wage information that they have reported to the Federal Government, according to a new report released by the Treasury Inspector General for Tax Administration (TIGTA).
Each year, the Social Security Administration (SSA) matches wage and withholding information that employers send to the SSA to tax returns that those employers file with the IRS to identify discrepancies between the information they submit to both agencies. In this process, known as Annual Wage Reporting, the SSA’s primary focus is to identify discrepancies in which earnings and tax withholdings that employers reported to the IRS on filed tax returns differ from amounts that employers submitted to the SSA on Forms W-2, Wage and Tax Statement.
The SSA refers unresolved discrepancy cases to the IRS, because the IRS has the authority to penalize an employer, if the employer fails to file complete and accurate Forms W-2 and W-3, Transmittal of Wage and Tax Statements. TIGTA evaluated the IRS’s processes and procedures for working SSA Combined Annual Wage Reporting discrepancy cases, and found that the IRS did not always assess penalties against employers who did not reply to the IRS’s requests to resolve SSA-reported discrepancies, as required by law.
TIGTA’s analysis of discrepancy cases for Tax Year 2011 found that the IRS did not correctly assess more than $200 million in penalties on 32 cases. A comparison of wages and withholding reported by these 32 employers on their tax return to Forms W-2 submitted to the SSA identified underreported Form W-2 wages totaling more than $2 billion. The IRS had not established a process to identify these cases and, as a result, the penalties were not assessed as required.
In addition, TIGTA’s analysis of discrepancy cases identified that the IRS excluded 22,814 of the 134,937 cases referred from the SSA. Of the 22,814 cases, 608 were excluded because of computer programming errors. As a result, the IRS did not assess more than $22 million in penalties. A comparison of wages and withholding reported by these 608 employers identified underreported Forms W-2 wages totaling more than $225 million. As part of a settlement agreement from a lawsuit to force prompt resolution of the backlog of unreconciled cases, the IRS is required to work all cases that the SSA refers. IRS management indicated that the 608 cases were erroneously excluded because of computer programming errors.
“It is important that the IRS hold employers accountable for filing complete and accurate wage information,” said J. Russell George, Treasury Inspector General for Tax Administration. “Discrepancies in the wages credited to an individual’s Social Security account may affect the amount of Social Security benefits available to the employee upon retirement,” he added.
TIGTA recommended that the IRS (1) develop a process to identify and ensure that penalties are assessed as required on those employers who do not reply to the IRS’s requests for missing Forms W-2, and (2) correct computer programming errors to ensure that cases are accurately reflected as needing to be worked and penalties assessed when appropriate. The IRS agreed with TIGTA’s recommendations and plans appropriate corrective actions.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.