Legislation Authorizes IRS to Penalize Employers Who File Inaccurate SSNs

Internal Revenue Code Section 6721 authorizes IRS to penalize employers  for failure to file an information return by the required filing date, failure to  include complete information, and failure to include correct information  including accurate SSNs. Prior to the enactment of the Tax Reform Act of 1986, IRS was authorized  to assess penalties for failure to file information returns including wage  statements filed by employers. The 1986 Act also established the amount of a penalty, $5 per  information return, limited those penalties to a maximum of $20,000 per  filer in any calendar year except in cases of intentional disregard, and  included the reasonable cause waiver. The second provision limits total penalties assessed against an employer to  a maximum dollar amount in any calendar year. IRS Does Not Have a Dedicated Compliance Program to Penalize Employers Who File Wage Statements with Inaccurate SSNs

According to IRS officials, IRS has the capability to identify employers who  file wage statements with inaccurate SSNs but does not have a dedicated  compliance program for penalizing them. IRS’s  regulations for implementing the penalty provisions include the steps an  employer can take to demonstrate that any filing of wage statements with  inaccurate SSNs was due to reasonable cause and not willful neglect. In  addition, IRS has been conducting an assessment of 100 “egregious”  employers who filed large numbers of wage statements with inaccurate  SSNs or had a high rate of such filings to determine whether and how to  implement a penalty program that would create incentives for employers to  improve the accuracy of SSNs included on wage statements. Although IRS’s Regulations Meet Statutory Requirements, It Is Unlikely Employers Will Be Penalized; IRS Will Consider Changes

IRS’s regulations for penalizing employers who file wage statements with  inaccurate SSNs meet the statutory requirements; however, under current  regulations, employers are unlikely to be penalized for filing wage  statements with inaccurate SSNs and IRS has no record of ever penalizing  an employer for inaccurate SSNs on wage statements. IRS officials then said that they would  consider a range of changes to improve the accuracy of SSNs on wage  statements. However, the criteria for meeting the reasonable cause waiver  included in the regulations are easy to meet making penalization of  employers very unlikely. As previously described, to qualify for a reasonable cause waiver, an  employer is responsible only for soliciting an SSN from each employee  from one to three times depending on when the employer has been  contacted by the IRS and told that the SSN provided on the wage statement  is inaccurate. An earlier pilot test of a voluntary employment verification system  illustrates other issues that may affect employers and other federal  agencies if IRS requires SSN verification. IRS officials said they will design the evaluation after a penalty  program is adopted. Conclusions

Inaccurate SSNs on wage statements contribute to growth in the SSA  Earnings Suspense File, increase IRS’s workload to ensure that wages are  properly identified for the individual earning them, and burden individuals  who must work with SSA and IRS to resolve disputes that may affect their  tax obligations and social security benefits. Both Acts emphasize the use of  penalties as a tool to help ensure that employers file information returns  with complete and accurate information but also include a reasonable  cause provision under which penalties can be waived. Objectives, Scope, and Methodology

Our first objective was to describe the statutory provisions authorizing the  Internal Revenue Service (IRS) to penalize employers who file Forms W-2  (Wage and Tax Statements), hereafter referred to as wage statements, with  inaccurate social security numbers (SSNs).
Why GAO Did This Study

Inaccurate social security numbers (SSN) on wage statements contribute to growth in the Social Security Administration's (SSA) Earnings Suspense File, increase the Internal Revenue Service's (IRS) workload to ensure that wages are properly identified for those earning them, and burden individuals who must work with SSA and IRS to resolve disputes that may affect their social security benefits and tax obligations. IRS's ability to penalize employers for submitting inaccurate SSNs on wage statements is intended to promote SSN accuracy. Items GAO was asked to describe included: (1) the statutory provisions authorizing IRS to penalize employers who file wage statements with inaccurate SSNs; (2) IRS's program to penalize such employers; and (3) the extent IRS's program meets legislative requirements, the likelihood of any penalties, and any program changes being considered.

What GAO Found

IRS is authorized to penalize employers who fail to file information returns or fail to include complete and correct information on them. Prior to 1986, IRS was authorized to assess penalties for failure to file information returns. The Tax Reform Act of 1986 added penalties for failure to include complete and correct information, established penalty amounts, and had two provisions limiting those penalties--the "reasonable cause waiver" and a maximum of $20,000 in penalties per filer per calendar year. The Omnibus Budget Reconciliation Act (OBRA) of 1989 increased the penalty amounts and the maximum total penalty amounts, ranging from $25,000 to $250,000 per filer per calendar year and added a third limit--a "de minimis provision" limiting the number of penalties that can be assessed. These statutes apply to employers who submit wage statements with inaccurate SSNs. Both acts authorize penalties as a tool to help ensure that information returns include complete and accurate information. According to IRS officials, IRS has the capability to identify employers who file wage statements with inaccurate SSNs but does not have a dedicated compliance program for penalizing them. Currently employers may be penalized based on an employment tax examination. IRS regulations define the steps an employer needs to take to demonstrate that any filing of wage statements with inaccurate SSNs was due to reasonable cause. If reasonable cause exists, any potential penalty will be waived. To qualify for the reasonable cause waiver, employers must be able to demonstrate they solicited an SSN from each employee one to three times, depending on the circumstances, and that they used this information to complete the wage statements. Employers are not responsible for verifying the accuracy of an SSN. IRS is conducting a review of 100 "egregious" employers who filed large numbers or percentages of wage statements with inaccurate SSNs to determine whether and how to implement a penalty program. IRS's regulations that implement the penalty provisions meet the statutory requirements; however, the criteria for meeting the reasonable cause waiver is such that few if any employers are likely to be penalized for filing inaccurate SSNs. IRS has no record of ever penalizing an employer, including the employers who were contacted during IRS's review of "egregious" employers. IRS officials said they would consider changes, including requiring employers to verify SSNs provided by employees, as part of the "egregious" employer study. Requiring SSN verification, however, may affect employers and other federal agencies with roles related to federal immigration policy since some portion of inaccurate SSNs on wage statements is attributable to illegal aliens using invalid SSNs. IRS officials said they would likely take the views of other agencies into account after drafting regulations.