[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                 SOCIAL SECURITY NUMBER AND INDIVIDUAL


          TAXPAYER IDENTIFICATION NUMBER MISMATCHES AND MISUSE

=======================================================================

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT

                                  AND

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 10, 2004

                               __________

                           Serial No. 108-53

                               __________

         Printed for the use of the Committee on Ways and Means





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99-672                 WASHINGTON : 2005
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                      COMMITTEE ON WAYS AND MEANS

 BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois
E. CLAY SHAW, JR., Florida
NANCY L. JOHNSON, Connecticut
AMO HOUGHTON, New York
WALLY HERGER, California
JIM MCCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHIL ENGLISH, Pennsylvania
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY C. HULSHOF, Missouri
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia                CHARLES B. RANGEL, New York
                                     FORTNEY PETE STARK, California
                                     ROBERT T. MATSUI, California
                                     SANDER M. LEVIN, Michigan
                                     BENJAMIN L. CARDIN, Maryland
                                     JIM MCDERMOTT, Washington
                                     GERALD D. KLECZKA, Wisconsin
                                     JOHN LEWIS, Georgia
                                     RICHARD E. NEAL, Massachusetts
                                     MICHAEL R. MCNULTY, New York
                                     WILLIAM J. JEFFERSON, Louisiana
                                     JOHN S. TANNER, Tennessee
                                     XAVIER BECERRA, California
                                     LLOYD DOGGETT, Texas
                                     EARL POMEROY, North Dakota
                                     MAX SANDLIN, Texas
                                     STEPHANIE TUBBS JONES, Ohio
 Allison H. Giles, Chief of Staff
   Janice Mays, Minority Chief 
              Counsel

_________________________________________________________________

                       SUBCOMMITTEE ON OVERSIGHT

 AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio
JERRY WELLER, Illinois
SCOTT MCINNIS, Colorado
MARK FOLEY, Florida
SAM JOHNSON, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia                EARL POMEROY, North Dakota
                                     GERALD D. KLECZKA, Wisconsin
                                     MICHAEL R. MCNULTY, New York
                                     JOHN S. TANNER, Tennessee
                                     MAX SANDLIN, Texas
_________________________________________________________________

                    SUBCOMMITTEE ON SOCIAL SECURITY

   E. CLAY SHAW, JR., Florida, 
             Chairman

SAM JOHNSON, Texas
MAC COLLINS, Georgia
J.D. HAYWORTH, Arizona
KENNY C. HULSHOF, Missouri
RON LEWIS, Kentucky
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin                 ROBERT T. MATSUI, California
                                     BENJAMIN L. CARDIN, Maryland
                                     EARL POMEROY, North Dakota
                                     XAVIER BECERRA, California
                                     STEPHANIE TUBBS JONES, Ohio

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.




                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 3, 2004 announcing the hearing.................     2

                               WITNESSES

Internal Revenue Service, Hon. Mark W. Everson, Commissioner.....     9
Social Security Administration, Hon. James B. Lockhart III, 
  Deputy Commissioner............................................    15
                               __________
Internal Revenue Service, Nina E. Olson, National Taxpayer 
  Advocate.......................................................    51
Social Security Administration, Patrick P. O'Carroll, Acting 
  Inspector General..............................................    61
U.S. Department of the Treasury, Pamela J. Gardiner, Acting 
  Inspector General for Tax Administration.......................    49
U.S. General Accounting Office, Michael Brostek, Director, Tax 
  Issues.........................................................    37
                               __________

                       SUBMISSIONS FOR THE RECORD

American Association of Motor Vehicle Administrators, Arlington, 
  VA, Linda R. Lewis, statement..................................    87
National Council of La Raza, Raul Yzaguirre, statement...........    88
 National Immigration Law Center, Los Angeles, CA, Marielena 
  Hincapie and Linton Joaquin, statement.........................    91
Patriot Tax International, LLC, statement........................    98
Strategic Services on Unemployment and Workers' Compensation, 
  Eric J. Oxfeld, statement......................................   100
Willis, George L., Tustin, CA, letter............................   101


 SOCIAL SECURITY NUMBER AND INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER 
                         MISMATCHES AND MISUSE

                              ----------                              


                       WEDNESDAY, MARCH 10, 2004

         U.S. House of Representatives,    
                   Committee on Ways and Means,    
                             Subcommittee on Oversight,    
                            Subcommittee on Social Security
                                                    Washington, DC.
    The Subcommittees met, pursuant to notice, at 10:07 a.m. in 
room 1100 Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee on Oversight), and Hon. E. Clay 
Shaw, Jr. (Chairman of the Subcommittee on Social Security) 
presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                  CONTACT: 202-225-7601
FOR IMMEDIATE RELEASE
March 03, 2004
OV-11

                Hughton and Shaw Joint Hearing on Social

                Security Number and Individual Taxpayer

              Identification Number Mismatches and Misuse

    Congressman Amo Houghton (R-NY), Chairman of the Subcommittee on 
Oversight, and Congressman E. Clay Shaw, Jr. (R-FL), Chairman of the 
Subcommittee on Social Security, Committee on Ways and Means, today 
announced that the Subcommittees will hold a joint hearing on Social 
Security number and Individual Taxpayer Identification Number 
mismatches and misuse. The hearing will take place on Wednesday, March 
10, 2004, in the main Committee hearing room, 1100 Longworth House 
Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives of the Social Security 
Administration (SSA), the Internal Revenue Service (IRS), and the U.S. 
General Accounting Office (GAO).
      

BACKGROUND:

      
    There are two types of taxpayer identification numbers individuals 
use for Federal tax purposes: Social Security numbers (SSNs) assigned 
by the SSA, and Individual Taxpayer Identification Numbers (ITINs) 
issued by the IRS. SSNs were created in 1936 to keep track of the 
earnings of people who worked in jobs subject to Social Security taxes, 
in order to assure proper payment of taxes and crediting of wages 
toward Social Security benefits. The ITIN was created in 1996 to 
improve compliance with tax laws and is assigned to certain resident 
and nonresident aliens, their spouses, and their dependents who do not 
qualify for a SSN but must have a taxpayer identification number for 
tax purposes.
      
    Neither number was created to serve as a form of identification. 
However, use of the SSN by both government agencies and the private 
sector has exploded over the decades as automation of record keeping 
and other business processes encouraged use of this unique number that 
virtually every American possesses. As a result, many have called it a 
de facto national identifier. Likewise, use of ITINs as an identifier 
for those who cannot legally obtain a SSN has rapidly increased during 
its short period of existence. To date, the IRS has issued more than 
7.3 million ITINs.
      
    SSA, the IRS, and U.S. Department of Homeland Security (DHS) all 
have responsibilities regarding these numbers, and each agency's 
policies are designed to promote its individual goals. This raises 
questions regarding whether better coordination across agency 
boundaries is needed to promote enforcement of laws and regulations.
      
    One example of an area where better coordination of agency policies 
is needed is the growing Earnings Suspense File (ESF) maintained by the 
SSA. The ESF houses records of W-2s where the name and SSN do not match 
the SSAs records. Cumulative earnings in the ESF covering 1937-2001 
total over $420 billion (equaling less than 1 percent of all earnings), 
representing 244 million wage reports from employers that could not be 
matched to the correct worker. The SSA has taken steps to reduce the 
number of mismatched wages, including voluntary SSN verification 
services for employers, computer routines to identify typographical 
errors, letters to employees and employers regarding mismatches, and 
employer education.
      
    However, the SSA cannot enforce accurate reporting of wages. It 
must rely on the IRS to penalize employers who submit mismatched wages 
and the DHS to enforce immigration laws. The IRS to date has not 
enforced its penalty authority for name and SSN mismatches on W-2s, but 
intends to begin advising employers of mismatch conditions and their 
responsibilities under the law starting in the fall of 2004 for tax 
year 2002. In addition, the IRS only requires employers to send 
solicitations to the employee asking for the correct SSN information. 
There is no mandate for the employer to take other action if the 
employee fails to cooperate. Finally, DHS instructions tell employers 
to accept documentation of work authorization if it reasonably appears 
genuine, and that employers cannot specify which documentation a worker 
must provide from a list of acceptable documents. The DHS does not 
provide specific written instructions on how employers should respond 
to a SSA ``no-match'' letter.
      
    In addition, lack of coordination among agencies potentially aids 
use of SSNs and ITINs to commit identity fraud and terrorism. In 
responding to issues raised in the National Taxpayer Advocates 2003 
Annual Report to Congress, the IRS commented that ``[t]he Service 
believes that most ITIN holders whose wages are reflected on valid 
Forms W-2 furnished to the service are using stolen or fabricated 
SSNs.'' The IRS also stated that ``[t]he Service is also fully 
sensitive to the possible dangers that can arise from the misuse of 
ITINs for the purpose of creating an identity, including the possible 
threat to national security.''
      
    A November 2002 IRS memorandum from the Commissioner of Internal 
Revenue stated that banks and other financial institutions are 
accepting ITINs as proof of identity, and illegal aliens are 
increasingly using ITINs to open bank accounts, which aids their 
ability to live in the United States without complying with immigration 
laws or quotas. Also, the ability of third parties to secure ITINs and 
use them for drivers licenses (which provides them with access to air 
travel and other transportation systems) and to access financial 
systems raises national security concerns.
      
    To address these concerns, the IRS sent letters to State 
departments of motor vehicles and governors warning them of the risks 
of using ITINs for identity verification purposes. The IRS indicated 
that it does not validate the authenticity of documents submitted to 
obtain an ITIN, require applicants to appear in person, or verify 
applicants' legal presence in the United States. In order to strengthen 
its controls over ITIN issuance, the IRS recently changed its rules to 
require more stringent documentation and verification in ITIN 
applications, as well as proof the ITIN is needed for tax purposes.
      
    Generally, policy coordination and data-sharing across these 
agencies involves tradeoffs between tax compliance and immigration 
enforcement. For example, Internal Revenue Code disclosure provisions 
do not permit the IRS to share returns and return information with 
other agencies like the DHS to identify or locate illegal aliens or 
routinely share information with the SSA about likely cases of SSN 
misuse by unauthorized immigrants and others.
      
    In announcing the hearing, Chairman Houghton stated, ``We're 
holding this hearing to look into what should be the right balance 
between cooperating with the IRS and maintaining the highest standards 
of taxpayer privacy. The IRS made great improvements in the ITIN 
process by making it more secure and reaching out to remind the public 
that ITINs are to be used only for tax purposes.''
      
    Chairman Shaw said, ``The Federal Government created SSNs and ITINs 
for work and tax purposes and has a responsibility to prevent their 
misuse. Effective coordination across Federal agencies is critical to 
protecting law-abiding individuals and our nation from identity 
thieves, or even terrorists.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the respective responsibilities of the 
SSA, IRS, and DHS in ensuring accurate earnings reporting and tax 
payments, as well as the degree to which policies and procedures are 
coordinated among agencies to prevent misuse of SSNs and ITINs.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to hearing 
[email protected], along with a fax copy to (202) 225-
2610, by the close of business,Wednesday, March 24, 2004. Those filing 
written statements who wish to have their statements distributed to the 
press and interested public at the hearing should deliver their 200 
copies to the Subcommittee on Oversight in room 1136 Longworth House 
Office Building, in an open and searchable package 48 hours before the 
hearing. The U.S. Capitol Police will refuse sealed-packaged deliveries 
to all House Office Buildings. Please note that in the immediate 
future, the Committee website will allow for electronic submissions to 
be included in the printed record. Before submitting your comments, 
check to see if this function is available.
      

FORMATTING REQUIREMENTS:

      
    1. All statements and any accompanying exhibits for printing must 
be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman HOUGHTON. Good morning, everybody. It is great to 
have you here, and great to have our witnesses. I would like to 
begin our session and welcome my colleagues from the 
Subcommittee on Social Security to this joint hearing with the 
Subcommittee on Oversight. Today, we are going to explore the 
use of two kinds of numbers, Individual Taxpayer Identification 
Numbers (ITINs) and Social Security Numbers (SSNs). First, we 
will hear from the agencies, the Internal Revenue Service (IRS) 
and the Social Security Administration (SSA), to learn how 
these numbers are issued and used. We are holding this hearing 
to look into what should be the right balance between 
cooperating with the IRS and maintaining the highest standards 
of taxpayer privacy. The IRS made great improvements in the 
ITIN process by making it more secure and reaching out to 
remind the public that ITINs are to be used only for tax 
purposes.
    I would also like to note that we invited the U.S. 
Department of Homeland Security (DHS) to testify as part of 
this panel. Unfortunately, they are unable to join us. However, 
DHS has agreed to provide full answers to any questions that 
you may have for the record.
    Our second panel, which includes the U.S. General 
Accounting Office (GAO), the Inspector General (IG) for the IRS 
and the SSA, and the National Taxpayer Advocate (NTA), will 
present us with their concerns about problems associated with 
these numbers, and what might be done to improve these 
programs. While these ITINs and SSNs may assist our government 
in doing its job, and taxpayers in being tax compliant, as 
Chairman of the Subcommittee on Oversight, my interest also is 
in making sure that the programs are secure and that our 
government agencies are coordinated. Now, I would like to yield 
to a good friend of mine, the Subcommittee on Oversight's 
Ranking Member, Mr. Pomeroy from North Dakota, and good 
morning.
    [The opening statement of Chairman Houghton follows:]
Opening Statement of The Honorable Amo Houghton, Chairman, Subcommittee 
 on Oversight, and a Representative in Congress from the State of New 
                                  York
    Good morning. I want to welcome my colleagues from the Subcommittee 
on Social Security to this joint hearing with the Subcommittee on 
Oversight.
    Today, we will explore the use of two kinds of numbers: Individual 
Taxpayer Identification Numbers--also known as ITINs--and Social 
Security Numbers (SSNs).
    First, we will hear from the agencies--the Internal Revenue Service 
(IRS) and the Social Security Administration (SSA)--to learn how these 
numbers are issued and used. We are holding this hearing to look into 
what should be the right balance between cooperating with the IRS and 
maintaining the highest standards of taxpayer privacy. The IRS made 
great improvements in the ITIN process by making it more secure and 
reaching out to remind the public that ITINs are to be used only for 
tax purposes.
    I also would like to note that we invited the Department of 
Homeland Security (DHS) to testify as part of this panel. 
Unfortunately, they are unable to join us. However, DHS has agreed to 
provide full answers to any questions that we may have for the record.
    Our second panel, which includes the General Accounting Office, the 
Inspectors General for IRS and the SSA, and the National Taxpayer 
Advocate, will present us with their concerns about problems associated 
with these numbers, and what might be done to improve these programs.
    While these ITINs and Social Security Numbers may assist our 
government in doing its job and taxpayers in being tax compliant, as 
Chairman of the Oversight Subcommittee, my interest also is making sure 
that the programs are secure and that our government agencies are 
coordinated.
    I would now like to yield to a good friend of mine, the Oversight 
Subcommittee's ranking member, Mr. Pomeroy from North Dakota.

                                 

    Mr. POMEROY. Thank you very much, Mr. Chairman. Thank you 
for calling this hearing. We have made some real strides with 
the implementation of the ITIN and the SSN, and that brings us 
to a new conundrum that we need to wrestle with, balancing the 
purpose for which this national identification number is to be 
used. Strictly for the taxpayer purposes, as it was designed, 
or should it be more broadly used for other purposes, 
legitimate purposes, of the Federal Government?
    I take the position that it is very, very important that we 
maintain the highest standards of taxpayer privacy. I commend 
the IRS for being vigilant about making certain its system is 
responsive to the very deep concerns of the taxpayers of this 
country, and that their taxpaying information submitted to the 
Federal Government is strictly private, strictly for the 
revenue purposes, and not more broadly used as some kind of 
national identification number, national surveillance purposes, 
or anything of the sort. There is a bit of debate in this new 
period we are in relative to the threats on our National 
security in terms of whether we should continue to treat these 
numbers in this strictly private and confidential fashion. We 
will have some discussion of that this morning. It is a very 
important issue, and I really regret that I have a preexisting 
conflict that will perhaps keep me from participating in the 
discussions on the second panel that will bring this more to 
the fore.
    I think that those that would urge a more broad application 
of these taxpayer private numbers, in my book, have a very 
large burden of proof to carry in terms of whether there is 
some compelling national interest that would justify a more 
broad application of these numbers, because obviously the 
privacy interest of the taxpayer is clearly understood by us. 
That is a preeminent interest and needs to be protected. I 
thank the Chairman for calling this hearing.
    [The opening statement of Mr. Pomeroy follows:]
 Opening Statement of The Honorable Earl Pomeroy, a Representative in 
                Congress from the State of North Dakota
    The Oversight Subcommittee, jointly with the Social Security 
Subcommittee, is holding a hearing today to review various issues 
involving the use and misuse of Social Security numbers (SSNs) and 
Individual Taxpayer Identification numbers (ITINs).
    The scope of our hearing is quite broad. It is my hope that the 
testimony we receive today--from the Internal Revenue Service (IRS), 
the Social Security Administration (SSA), the IRS Taxpayer Advocate, 
the U.S. Department of Treasury, Social Security Inspector General, and 
the U.S. General Accounting Office--will help us better understand the 
challenges the IRS and the SSA face in administering our tax and Social 
Security benefit systems and their respective use of unique identifying 
numbers.
    Late in 2003, the IRS instituted new procedures governing the 
issuance of ITINs. Under the new rules, applicants may apply for a new 
ITIN only concurrent with filing a return, rather than applying 
independently of filing.
    I look forward to our discussion of IRSs new ITIN regulations. I 
hope we will discuss: (1) Any problems the IRS has identified in the 
use of ITINs; (2) The IRS's intent and goals that led to the changes in 
the application process; (3) The IRS's projected impact for the new 
rules on tax compliance; and (4) The IRSs outlook of how these changes 
will reduce the inappropriate use of ITINs as a personal identifier for 
non-tax purposes.
    I want to thank Chairmen Houghton and Shaw for scheduling this 
joint hearing. As we proceed, I am confident that we will continue to 
work together to protect the confidentiality of taxpayer information 
which serves as the basis for our voluntary tax system.

                                 

    Chairman HOUGHTON. Thanks very much, Mr. Pomeroy. Now, I 
would like to introduce the Chairman, Subcommittee on Social 
Security, Mr. Clay Shaw.
    Chairman SHAW. Thank you, Mr. Chairman. This morning, all 
of the Ways and Means Subcommittee Members on Social Security 
and the Subcommittee on Oversight join together in exploring 
the purpose and vulnerabilities involved with the issuance and 
use of SSNs and ITINs. The Federal Government created and 
required the use of SSNs and Taxpayer Identification numbers to 
track earnings and improve tax compliance. However, their use 
has grown far beyond their intended purposes. The SSN has 
become our personal identifier, the key that unlocks the door 
to our personal and financial information. Criminals who get 
hold of this key can take advantage of weaknesses in our law, 
and proceed to carry out whatever bad acts their unscrupulous 
minds can conceive.
    Since its creation in 1996, the ITINs are increasingly 
filling the gap as personal identifiers for individuals who do 
not qualify for SSNs. Though never intended as a personal 
identifier, its use beyond tax administration has proliferated 
during its short existence. In response to rapidly growing use 
and reliance on these numbers, the SSA and the IRS have both 
taken steps to strengthen the documentation requirements for 
issuing these numbers. In addition, the IRS has taken steps to 
warn about dangers of using the ITINs as proof of 
identification, including sending letters to State departments 
of motor vehicles warning against such practices. The SSA, the 
IRS, and the DHS all have responsibility with respect to the 
use of these numbers. With such overlapping responsibilities, 
effective coordination across Federal agencies is critical to 
protecting law-abiding individuals and our Nation by preventing 
the SSN and Tax Identification number's misuse committed by 
identity thieves, or even terrorists.
    To prevent misuse of SSNs and the ITINs, we must achieve an 
appropriate balance between voluntary cooperation and our tax 
laws, which rely upon the confidence that personal information 
will remain private, and immigration and other law enforcement. 
Our witnesses today will help explore how best to achieve such 
balance. I look forward to hearing their testimony and thank 
them in advance for sharing with us their experience and their 
recommendations. Mr. Chairman, I now yield to the acting 
Ranking Member on the Democrat side, Mr. Becerra.
    [The opening statement of Chairman Shaw follows:]
    Opening Statement of The Honorable E. Clay Shaw, Jr., Chairman, 
Subcommittee on Social Security, and a Representative in Congress from 
                          the State of Florida
    This morning, the Ways and Means Subcommittees on Social Security 
and Oversight join together in exploring the purpose and 
vulnerabilities involved with issuance and use of Social Security 
numbers (SSNs) and Individual Tax Identification numbers (ITINs).
    The Federal Government created and required the use of SSNs and 
ITINs to track earnings and improve tax compliance. However, their use 
has grown far beyond their intended purposes.
    The Social Security number has become our personal identifier, the 
key that unlocks the door to our personal and financial information. 
Criminals who get hold of this key can take advantage of weaknesses in 
our laws and procedures to carry out whatever bad acts their 
unscrupulous minds can conceive.
    Since its creation in 1996, ITINs are increasingly filling the gap 
as a personal identifier for individuals who do not qualify for a SSN. 
Though never intended as a personal identifier, its use beyond tax 
administration has proliferated during its short existence.
    In response to rapidly growing use and reliance on these numbers, 
the Social Security Administration and the Internal Revenue Service 
have both taken steps to strengthen the documentation requirements for 
issuing these numbers. In addition, the IRS has taken steps to warn 
about the dangers of using ITINs as proof of identity, including 
sending letters to State Departments of Motor Vehicles warning against 
such practices.
    The Social Security Administration, the Internal Revenue Service, 
and the Department of Homeland Security all have responsibilities with 
respect to use of these numbers.
    With such overlapping responsibilities, effective coordination 
across Federal agencies is critical to protecting law-abiding 
individuals and our nation by preventing SSN and ITIN misuse committed 
by identity thieves, or even terrorists.
    To prevent misuse of SSNs and ITINs we must achieve an appropriate 
balance between voluntary cooperation with our tax laws--which relies 
upon confidence that personal information will remain private--and 
immigration and other law enforcement.
    Our witnesses today will help us explore how best to achieve such 
balance. I look forward to hearing their testimony, and thank them in 
advance for sharing with us their experiences and their 
recommendations.

                                 

    Mr. BECERRA. Thank you, Chairman Shaw and Chairman 
Houghton, for this hearing. We are pleased that we have an 
opportunity to speak to and focus upon the U.S. Department of 
the Treasury and the IRS to help us with this particular 
problem. I want to thank in advance all those who will be 
testifying on behalf of Ranking Member Matsui, and all those 
Members on the Democratic side of the Subcommittee, as well.
    The SSNs and the ITIN have become crucial numbers to 
Americans throughout this country for any number of reasons. 
Principally, we are here to try to do what we can to make sure 
that we are protecting the privacy rights of all Americans, and 
assuring that the balance that must exist between the various 
agencies that utilize these numbers is there. We have to make 
sure that we permit our agencies to fulfill their obligations 
under the law to make use of the information provided through 
the SSA and the U.S. Department of Treasury so that we can all 
make sure that the laws are abided by all Americans. I know 
that there is a delicate balance that must be considered here, 
and we are hoping to hear testimony that will shed some light 
on how best to continue to move forward, not only in terms of 
tax collection but certainly, of course, in making sure that 
the SSA can administer the laws to provide the benefits to 
those who have paid into the SSA. So, we are very pleased to 
have all the witnesses present and, Mr. Chairman, we look 
forward to the testimony.
    [The opening statement of Mr. Becerra follows:]
Opening Statement of The Honorable Xavier Becerra, a Representative in 
                 Congress from the State of California
    Chairman Houghton, Chairman Shaw, thank you for calling this 
hearing to review issues surrounding the use and misuse of taxpayer 
numbers, including the Social Security Number--the ``SSN''--and the 
Individual Taxpayer Identification Number--the ``ITIN''.
    The ITIN is a useful and necessary tool in tax processing. Some 
concerns have been raised about Internal Revenue Service (IRS) 
procedures for issuing these numbers, and I understand that IRS has 
recently tightened up that process. I look forward to learning more 
about those changes and what more may need to be done.
    The hearing will also look at how employers use the SSN to report 
the wages of their employees to SSA. It is vitally important that this 
information be correct, since it is used by SSA to determine whether a 
worker is eligible for benefits, and to calculate the proper amount.
    The ITIN and the SSN are the key to efficient tax processing and 
Social Security benefit administration. At the same time, having a 
unique 9-digit personal identifier has become so important to our way 
of life that these numbers are also used in the crime of identity 
theft. We need to make sure that Congress and the Administration are 
doing all they can to reduce the potential for these numbers to be used 
to commit identity fraud.
    Finally, as we are all aware, a variety of agencies--IRS, the 
Social Security Administration, and potentially the Department of 
Homeland Security--have an interest in taxpayer identification numbers 
such as the SSN and the ITIN. Each agency, however, has a separate 
mission to pursue and different laws to enforce. And sometimes these 
missions can appear to be in conflict.
    The question before us today is how to assure the most appropriate 
balance--that is, how to accomplish the priorities of each agency 
without unduly harming the ability of the others to fulfill their own 
missions. This requires thoughtful consideration of sometimes-competing 
priorities in order to assure the most appropriate balance.
    Thank you again for calling this hearing. I look forward to the 
testimony of our distinguished witnesses.

                                 

    Chairman HOUGHTON. Thanks very much. Does any other Member 
wish to make an opening statement? I think we will go right 
into our opening statements of the first panel, the Honorable 
Mark Everson, the Commissioner of the IRS, and James Lockhart, 
Deputy Commissioner of the SSA. We probably have about 7 
minutes now, if you want to rush through your statements, that 
would be great. If not, we will take them as they come. We are 
going to have to go for a vote here in about 7 or 8 minutes. 
Thank you very much. Mr. Everson, it is great to have you here.

   STATEMENT OF THE HONORABLE MARK W. EVERSON, COMMISSIONER, 
                    INTERNAL REVENUE SERVICE

    Mr. EVERSON. Thank you, Chairman Houghton, Chairman Shaw, 
Ranking Member Becerra, Members of the Subcommittees. I am 
pleased to be here to testify on the IRS's use of ITINs, and 
ITIN-Social Security mismatches. I have established a working 
equation at the IRS for my tenure: Service plus enforcement 
equals compliance. This means that the IRS must continue to 
build on the service improvements to taxpayers it has achieved 
since the RRA 1998. Just as importantly, the IRS must 
demonstrate an enforcement presence that assures the honest 
taxpayer that he or she is not being foolish by paying what he 
or she owes while others do not. The IRS must carry out its 
enforcement mission fairly and based on an underlying 
foundation of respect for taxpayer rights. The IRS utilizes 
ITINs to help it track the tax identity, tax history, and the 
compliance of individuals who do not have SSNs. The ITINs are 
useful to the Service because each number is unique and 
permanent, allowing the Service to track the ITIN holder's tax 
record, and administer the tax laws with respect to the holder.
    The ITINs were never intended by the IRS to be used outside 
our tax system. They were created solely for purposes of 
administering our Federal tax laws. Unfortunately, ITINs can be 
and are used for non-tax purposes. The most visible of these 
uses is their acceptance in some States as proof of identity 
for a driver's license. While we estimate that a relatively 
small proportion of ITINs have been issued and never used for 
tax administration purposes, it is about one-quarter, the IRS 
made changes to its administration of ITINs this past December 
in order to tighten up the process and improve tax 
administration. Foremost among these is a requirement put in 
place for the current filing season that all ITIN applicants 
demonstrate a tax need for their ITIN. In the case of 
immigrants working in the United States, this means filing a 
tax return with their ITIN application.
    There is no question that the implications of ITIN 
mismatches and ITIN misuse with respect to tax administration, 
the SSA, immigration, and national security each merit the 
Congress's scrutiny and consideration. I am personally quite 
aware of the issues associated with immigration, both legal and 
illegal, having served as the Deputy Commissioner of the then 
Immigration and Naturalization Service close to two decades 
ago. I might add that my three children are all immigrants, and 
with me today is our daughter Amrong, and her daughter, my 
granddaughter, Erica. Nevertheless, despite the multiplicity of 
these issues and their obvious importance, my responsibility as 
Commissioner of the IRS is to administer our tax laws and run 
our system of tax administration. My comments are thus directed 
to the implications of ITINs, and their misuse on our system of 
tax administration.
    First, there are undoubtedly points of conflict and points 
of tension between our tax laws and our immigration laws. What 
may be beneficial from the perspective of immigration law or 
policy, may not be beneficial from the perspective of tax law 
and tax administration. Second, our tax laws make no 
distinction, either in the tax payment and reporting 
obligations of taxpayers or the tax collection and tax 
administration obligations of the IRS, between immigrants who 
are legally employed in this country, and those who are not. 
The Service must necessarily continue to fulfill its 
obligations to administer the tax laws to taxpayers who are not 
legally employed in our country, but who owe taxes because 
they, in fact, earned income here. Third, the Service must, and 
will continue to solicit the participation of such taxpayers in 
our system, as it does with other taxpayer groups. The IRS 
desires to facilitate these individuals' entry and continuing 
participation in our tax system, and to lessening impediments 
to their participation. Fourth, the Service continues to be 
bound and guided in its sharing of taxpayer information by the 
provisions of Internal Revenue Code section 6103. The 
provisions of section 6103 protect the confidentiality of 
taxpayer information, and broadly restrict the sharing of 
taxpayer information by the IRS with employers or with other 
government agencies, except under narrow circumstances. I would 
urge Congress to carefully balance the competing public 
interest at stake before deciding to make any changes to this 
provision of the tax law. Again, I appreciate the opportunity 
to testify before you on these important questions, and I look 
forward to taking your questions.
    Chairman HOUGHTON. Thank very much, Mr. Commissioner.
    [The prepared statement of Mr. Everson follows:]
  Statement of The Honorable Mark W. Everson, Commissioner, Internal 
                            Revenue Service
Introduction
    Chairman Houghton, Chairman Shaw, Ranking Member Pomeroy, Ranking 
Member Matsui, and honorable Members of the respective subcommittees, 
thank you for the opportunity to appear before you today concerning the 
Internal Revenue Service's use of Individual Taxpayer Identification 
Numbers and Social Security Number mismatches.
Individual Taxpayer Identification Numbers
    First, I want to discuss the challenges the IRS has faced in trying 
to foster voluntary compliance among non-resident and resident aliens 
with a United States income tax obligation. The ITIN program has been 
successful in bringing millions of these taxpayers, ineligible for 
Social Security Numbers, into the tax system. However, we are concerned 
that the ITIN has become an acceptable form of identification similar 
to the Social Security Number.
    Let me begin by providing some background information on ITINs. An 
ITIN is a unique identifying number assigned by the Internal Revenue 
Service to an individual who is required to pay tax to the United 
States, or who has a reporting requirement to the IRS, but who is 
ineligible to receive a Social Security Number (SSN) issued by the 
Social Security Administration (SSA). The Service issues ITINs solely 
for purposes of tax administration; the appearance of the ITIN is 
similar to that of an SSN, but all ITINs begin with the number ``9'' 
and show a fourth digit as either a ``7'' or an ``8'', e.g., 9xx-7x-
xxxx. Since the inception of the ITIN program, the Service has issued 
more than 7,300,000 ITINs.
    The Internal Revenue Service began issuing ITINs in July 1996. By 
law, all taxpayers must have an identifying number (a Taxpayer 
Identifying Number) for themselves, spouses, and dependents required to 
be listed on any return, statement, or other document that they must 
file under the Internal Revenue Code. Any taxpayer eligible for an SSN 
must provide an SSN as this identifying number, however not all 
taxpayers who have a U.S. tax or reporting obligation qualify for an 
SSN.
    The Code also requires that any person with U.S.-source income 
equal to, or in excess of, the exemption amount pay tax on that income 
to the Federal Government. Some individuals falling into this category 
are ineligible for an SSN, such as foreign investors and persons 
working in the United States without authorization. Furthermore, while 
the Code differentiates between resident and non-resident aliens, it 
offers no distinction based upon whether a resident alien is 
``legally'' present in the United States. Thus, some individuals who 
must pay tax to the United States require an alternate to the SSN for 
use as an identifying number on returns, statements, and other 
documents related to that obligation.
    The use of the ITIN provides benefits to tax administration 
accruing both to taxpayers and to the Service. Prior to the ITIN 
program, returns filed by taxpayers without SSNs were assigned a 
temporary identification number called an IRSN. Each IRSN generally was 
valid only for the tax year in which it was assigned. The random 
assignment and short life of the IRSN complicated attempts to track 
taxpayers and documents related to them from one tax year to the next. 
Use of the ITIN remedies both of these difficult aspects of IRSNs. The 
Service assigns ITINs from a single center and a single database, thus 
each is a unique identifier in the tax system. Moreover, the ITIN 
remains a valid number for tax administration beyond the year the 
Service assigns it. This allows taxpayers to use and reuse their ITIN 
when filing any return, statement, or other document with the Service.
    The ITIN program has benefited tax administration but has not been 
without its drawbacks. Most significantly, the ITIN is a number issued 
by the IRS for tax administration purposes only, and all forms and 
guidance disseminated by the Service clearly state this. In August 
2003, the IRS sent a letter to all states and the District of Columbia 
stating that ITINs are not valid identification outside the tax system. 
Despite our efforts to limit the use of the number to its tax 
administration purpose, a number of states currently accept it as an 
identifying number outside the tax system, and other states are 
considering proposals to do so as well. While the Service does not have 
the authority to prevent other agencies from using ITINs for non-tax 
purposes, we will continue to inform other agencies of the 
unsuitability of using ITINs outside of the tax system.
Record Program Enhancements
    In order to address these and other concerns, the Service on 
December 17, 2003, instituted changes to the ITIN application procedure 
and to the issuance of the numbers themselves. The actions we have 
taken reflect the results of an extended period of study during which 
we critically examined the ITIN program. However, we continue to 
monitor the program and have not precluded further alterations.
    The ITIN application procedure has been improved to ensure that the 
ITIN assigned is used for its proper tax administration purpose. In 
most cases, an applicant is now required to file the ITIN application, 
Form W-7, attached to a completed tax return for which he or she needs 
the ITIN. Associating the issuance of the ITIN with the filing of a tax 
return ensures that the number is properly used for tax administration; 
an ITIN will no longer be issued solely based upon the statement that 
an applicant requires an ITIN in order to file a return, without proof 
that the individual in fact needs the number to do so.
    Another enhancement to the application process concerns the 
documentation the Service will accept from an applicant in order to 
establish identity and foreign status. We have decreased the number of 
acceptable types of documents, which will allow the IRS to provide 
better, more consistent, and faster service to ITIN applicants. Because 
the number is intended for tax purposes only, we accept these documents 
at face value without validating their authenticity with issuing 
agencies or conducting applicant background investigations.
    In response to concerns about confusion between ITIN cards and 
Social Security cards, we have put a further change into place. We no 
longer issue the ITIN on a card, as the Social Security Administration 
does when it assigns an SSN. Instead, we send letters to taxpayers that 
provide them their number. This will minimize or eliminate confusion 
between ITINs and SSNs that might arise based on similar appearances.
    The application procedures will not change for certain individuals 
who are not required to attach a tax return to their ITIN applications. 
Such individuals include those who claim benefits under a tax treaty 
and those who have established an account with a financial institution. 
These individuals may file an application at any time throughout the 
year, provided that the necessary documentation supporting the tax need 
is supplied.
    We believe that these steps will not pose an undue burden on those 
who legitimately require an ITIN in order to comply with their tax 
obligations, while at the same time strengthening controls over 
issuance to help ensure that the ITIN is used for its intended tax 
administration purpose. Although we announced the enhancements to the 
ITIN application procedures in December 2003, taxpayers required to 
file a 2003 return with an application could not apply until after the 
beginning of the filing season.
Considerations
    As noted above, the Service implemented changes to the ITIN program 
on December 17, 2003, following extensive evaluation and analysis of 
our experience with the use of ITINs as identifying numbers. The 
conclusions we have made, as embodied in the program enhancements 
described above, represent the actions we are able to take in light of 
the Service's charge to administer and enforce the revenue laws of the 
United States. The Service has no legal authority with respect to the 
enforcement of immigration and social security administration laws.
    Many considerations informed our determination to pursue these 
changes.
    Upon review of the number of ITINs that appear on tax returns, as 
either a primary or secondary number, or for identification of a 
dependent, we have concluded that a substantial majority of ITIN 
holders is compliant with Federal tax laws. This is reflected both in 
the number of ITINs used in tax filings and in the repetition and 
frequency of tax filings by ITIN holders.
    Notwithstanding that many ITIN holders may not be authorized to 
work in the United States, we are broadly restricted under Section 6103 
of the Code from sharing taxpayer information with third parties, 
including other government agencies, except in very limited 
circumstances. This taxpayer information includes the possibility that 
the applicant is not working legally in the United States or is using 
an SSN that does not belong to him or her. As noted above, though, we 
have no legal authority with respect to the enforcement of immigration 
and social security administration laws.
    We must also weigh the potential benefits of any changes to the 
ITIN program against the cost of those changes to the tax system, 
including both direct economic costs and the indirect costs that arise 
from discouraging participation in the tax system. As an example, the 
Service believes at this time that any sharing of confidential taxpayer 
information, directly or indirectly, with immigration authorities would 
have a chilling effect on efforts to bring ITIN holders, and potential 
ITIN holders, into the U.S. tax system. Such an initiative would 
deprive the Federal Government of tax revenue by discouraging illegal 
workers in the U.S. from participating in the tax system, when the Code 
requires them to pay tax on their U.S. earnings.
    Finally, we believe that a number of the ITINs that have been 
issued have subsequently not been used for tax reporting and payment. 
It is widely believed that some ITINs are procured for the purpose of 
creating an identity other than for tax purposes, such as for the 
procurement of a driver's license. We are fully sensitive to the 
possible dangers that can arise from the misuse of ITINs for the 
purpose of creating an identity, including the possible threat to 
national security. Regardless of undesirable behaviors actually or 
potentially associated with ITINs, the Service remains legally 
responsible for enforcement of the nation's Federal tax laws with 
respect to ITIN holders, including the responsibility to assess and 
impose tax on ITIN holders irrespective of the circumstances of their 
employment or the possibility that ITIN applicants may be solely or 
collaterally seeking the procurement of an ITIN to establish an 
identity for non-tax purposes.
Conclusion on ITNs
    The inherent challenges posed by tax laws, immigration statutes, 
and the social security law, and their interaction and application to 
ITIN holders illegally employed in the United States, require a studied 
approach. We believe that, after such a studied approach, we have acted 
consistent with our role as the nation's tax administrator. As noted 
above, though, we understand that we will need to continue to evaluate 
on an ongoing basis our response to the challenges posed by ITINs.
SOCIAL SECURITY NUMBER MATCHING
    Let me now turn to Social Security number matching. The IRS agrees 
with the importance of accurate W-2 form and Social Security number 
reporting. We are committed to improving the accuracy of SSN reporting 
and have worked with the Social Security Administration to explore 
options and initiatives that might improve accuracy.
    I would like to discuss the matching of Social Security numbers 
submitted to employers by employees. As you know, a portion of the 
numbers does not match Social Security Administration records. In the 
case of a mismatch, the SSA cannot give the worker credit for his or 
her earnings. In addition, employers can be assessed penalties by the 
IRS for not providing accurate numbers.
Obligation of Employers Administering Social Security Numbers--Due 
        Diligence is Required
    Let me briefly explain the responsibilities of an employer in 
verifying an employee's Social Security number. Employers are required 
to exercise ``due diligence'' in collecting the numbers. The employer 
has an obligation to obtain information from an employee on Form W-4, 
Employee's Withholding Allowance Certificate. The employer may rely in 
good faith on the number provided and use it in filling out the 
employer's Form W-2, Wage and Tax Statement.
    In addition to securing a signed form W-4 from a new employee, 
employers can, but are not required to, ask for proof of the SSN, 
remind employees to report name changes due to marriage or divorce to 
the SSA and payroll department, and validate the SSN using the SSA 
Employee Verification Service prior to issuing Forms W-2. (Although 
employers may ask the employee to show his/her SSN card, employees are 
not required to show the card if it is not available.)
    Each year, after an employer submits the Form W-3, Transmittal of 
Wage and Tax Statements, and the Forms W-2 to SSA, SSA will validate 
the SSNs. If there are mismatches (which could be marital name changes 
or typographical errors), and certain thresholds are met, SSA notifies 
the employer and requests the employer to correct the SSN and amend 
their Form W-3 and Forms W-2, as appropriate.
    If the IRS subsequently notifies the employer of a mismatch and 
proposes a penalty for inaccuracies, any employer who has retained the 
Form W-4 in its records will be able to document an initial 
solicitation of an SSN and thus that they acted in a responsible 
manner. For purposes of establishing reasonable cause in connection 
with the Form W-2 penalty provisions in the tax code and applicable 
regulations, it is the solicitation of the employee's Social Security 
number that is important, not the response. An employer who establishes 
that it made the proper solicitations will meet the reasonable cause 
requirements regardless of whether the employee returned a corrected 
Form W-4.
    If the IRS notifies an employer that an SSN is incorrect and if the 
employer's records contain the incorrect SSN, the employer is required 
under the regulations to make an annual solicitation for the correct 
SSN. The solicitation for the correct SSN must be made by December 31 
of the year in which the penalty notice was received, and may be made 
by mail, telephone or in person.
    A second annual solicitation is required if the employer receives 
an IRS notice of an incorrect SSN for the employee in any subsequent 
year. The employer is required by the regulations to make only two 
annual solicitations. If the employer receives an IRS notice of an 
incorrect SSN after having made two annual solicitations and reporting 
the number provided by the employee, the employer would not be required 
to make further solicitations. The employer's initial and two annual 
solicitations will demonstrate that the employer has acted in a 
responsible manner before and after the failure and will establish 
reasonable cause for the waiver of a penalty.
Obligation of IRS and SSN in Ensuring Accuracy of Information on Form 
        W-2
    The Internal Revenue Service and the Social Security Administration 
(SSA) each have roles in using and ensuring the accuracy of information 
provided on Forms W-2. SSA is required by law to maintain records of 
wages employers pay to employees. But SSA is given no authority to 
enforce the requirement of reporting correctly.
    As for the IRS role, Form W-2 is subject to Internal Revenue Code 
(IRC) Section 6721 information reporting penalties. The IRS may assess 
employers a $50 penalty for each invalid SSN on the Form W-2, up to a 
maximum $250,000. It is important to realize that employers with 
``mismatch'' problems are, for the most part, trying to comply with the 
intent of the tax laws by reporting the wages paid to their workers. An 
ideal enforcement program would ensure compliance with both tax laws 
and immigration laws. However, the impact of significantly raising 
``due diligence'' requirements could have a negative impact on the 
participation of employers and employees in the tax system.
Compliance Checks on Employers With Large Number of Mismatches
    To assess appropriate steps the IRS might take to improve SSN 
reporting accuracy, we have undertaken a number of initiatives.
    We have worked with the SSA to determine the best approach to the 
SSN mismatch problem. For example, the IRS secured a list of the 
employers with the highest volume and/or highest percentage of 
mismatched W-2s. Many of America's largest employers are on the list of 
those with high numbers of W-2 mismatches yet their accuracy percentage 
rate is very high. The 50 largest companies in the United States have 
an average mismatch rate of only 1.5 percent.
    We also examined a list of the employers with the highest mismatch 
error rates. These employers on this list were much smaller than the 
companies with high accuracy rates. The businesses generally issued 
less than 1,000 Forms W-2 but had error rates of 93 percent and above.
    IRS conducted compliance checks on 78 employers on these two lists. 
Despite the appearance of a high number of errors, we found that the 
employers acted with due diligence required by the law.

      The 50 large businesses on whom we conducted compliance 
checks all had programs and processes for securing the Forms W-4 and 
using the information in preparing Forms W-2. Also, they had in place a 
process for re-soliciting the required information upon receipt of a 
mismatch letter. No penalty potential was identified.
      The compliance checks on 28 of the smaller businesses 
identified that these employers frequently use day labor and have high 
turnover in employees. However, they all knew to obtain Forms W-4 and 
to use the information in the preparation of the Form W-2. To date no 
penalty potential has been identified. In addition, they had processes 
or procedures in place to resolicit the SSN information when a mismatch 
notice was received and the employee was still employed.
Consideration Concerning Changes to Current Penalty Regime
    The current penalty regime is not an effective means to address the 
problem of SSN mismatches. We would, of course, work to execute any 
changes Congress determines to bring into effect. We would point out, 
however, that any potential changes would need to address two issues in 
particular. First, any significant change to the current regime could 
only be implemented following amendment to section 6103 of the Code to 
allow for further information sharing, either interagency or with 
employers, beyond that which is currently permitted by law.
    Second, any requirement to increase our compliance activities in 
this area, including assessing penalties, would involve an increased 
demand on our resources. These activities would require a significant 
rededication of IRS resources to increase compliance in an area that is 
already, in general, compliant. Absent added funding for such 
activities, this would likely come at the expense of other compliance 
activities and with the attendant risk of a decrease in tax revenue 
from those other compliance activities.
    Thank you for inviting me to testify this morning. I would be happy 
to take any questions you might have.

                                 

    Chairman HOUGHTON. Mr. Lockhart, you have got about 5 
minutes here. Can you do it?
    Mr. LOCKHART. Yes, sir.
    Chairman HOUGHTON. All right. Let's go.

   STATEMENT OF JAMES B. LOCKHART, III, DEPUTY COMMISSIONER, 
                 SOCIAL SECURITY ADMINISTRATION

    Mr. LOCKHART. Mr. Chairman and Members of the Committee, I 
welcome this opportunity to discuss the strong steps Social 
Security has taken on two of our key strategic objectives, 
strengthening the integrity of the SSN, and increasing the 
accuracy of earnings records. As you know, the SSN was created 
in 1936 to assure that Social Security kept accurate records to 
ensure accurate benefit payments. However, the simplicity and 
efficiency of using a unique number encouraged widespread use 
of the SSN. It has become the identifying number in many 
records systems. It is also prized by criminals who are intent 
on stealing another person's identity.
    The terrorist attacks of 9/11 reinforced the need for a 
concerted long-term effort to address SSN misuse and identity 
theft. We formed a high-level team to develop recommendations 
to strengthen the process of issuing SSNs, which we call 
enumeration. Some of the recommendations implemented include 
verifying all immigration documents with the DHS; verifying all 
U.S. birth records for applicants age 1 and older; establishing 
enumeration at entry; piloting a card center; and limiting non-
work numbers. Non-work numbers are issued to individuals that 
need a number for Federal benefits or State public assistance 
programs and, until last October, for drivers' licenses. We 
only issued 20,000 non-work numbers last year, which is down 96 
percent from the peak in the mid-nineties. Still, about 570,000 
non-work numbers had earnings reported in 2002.
    Now, turning to the reporting of wages, this is a core 
business process for our agency. Each year, we process over 240 
million W-2s from about 6.5 million employers representing 
about 145 million workers. I am pleased to report during the 
last 5 years that we have automated this process significantly, 
and 53 percent of W-2s are now submitted electronically, up 
from less than 10 percent in 1999. About 10 percent of the W-2s 
we receive have invalid names and SSN combinations. In our 
processing, we use computer systems, which reduces those 
mismatches by about 60 percent, and we do further processing 
that can reduce it further. The mismatches are put together in 
what we call the suspense file. That file has about 244 million 
W-2s in it, which represent about 1 percent of the total 
reported earnings since the beginning of the system. Less than 
two-tenths of 1 percent of that file is represented by ITINs.
    Social Security has taken a number of steps to reduce the 
suspense file's growth. For example, employers with a 
significant number of mismatches are sent ``no match'' letters, 
126,000 last year. We also notify employers and employees if we 
can't process their W-2s. Last year, we sent 9.5 million 
letters to employers and employees. Also, beginning last year, 
we implemented new technologies using earnings records patterns 
to match earnings. We estimate, out of this process, to remove 
at least 30 million W-2s from the suspense file. The important 
thing is to help prevent such mismatches from occurring in the 
first place. Social Security is helping employers make sure 
that they have the information, and can match names and SSNs. 
We provide employers with several options to verify names and 
numbers. They can call a toll-free number. They can submit 
paper listings, walk into a field office, or send reports via 
magnetic media.
    In addition, we are piloting a more efficient Internet 
option known as the SSN Verification System. To date, we have 
processed over 4.5 million verifications for the 85 
participating employers. I would like to conclude by 
emphasizing that we are committed to strengthening the 
integrity of the enumeration process. Recent improvements have 
made it more difficult for individuals to obtain SSNs through 
fraudulent means. We are also committed to improving the 
accuracy of our earnings records, and working with both the DHS 
and the IRS to do so. I want to thank you, Mr. Chairman and 
Members of the Committee, and we look forward to working with 
you on this.
    Chairman HOUGHTON. Thank you, Mr. Lockhart and thank you, 
Mr. Everson.
    [The prepared statement of Mr. Lockhart follows:]
Statement of The Honorable James B. Lockhart, III, Deputy Commissioner, 
                     Social Security Administration
    Thank you for asking me to be here today to discuss the steps SSA 
has taken to improve and strengthen our wage reporting and enumeration 
processes, as well as our efforts to reduce the size of the suspense 
file. We have taken positive action in all these areas. Enumeration, 
which is the issuance of Social Security numbers (SSNs), and wage 
reporting are core Agency functions. Commissioner Barnhart's Five Year 
Strategic Plan has nine strategic objectives, of which two are: 
``Strengthen the integrity of the Social Security number'' and 
``Increase the accuracy of the earnings record.''

History of the Social Security Number and Card

    First, I would like to describe the history and the original 
purpose of the SSN and the Social Security card. Following the 
enactment of the Social Security Act in 1935, the SSN was developed to 
keep track of the earnings of people who worked in jobs covered under 
the new Social Security program. The rules regarding the assignment of 
SSNs to workers were first published in Treasury regulations in 1936.
    The Social Security card reflects the number that has been assigned 
to each individual who applies for an SSN. The card, when shown to an 
employer, assists the employer in assuring that earnings are reported 
properly. Public information documents issued early in the 
administration of the program advised workers to share their SSNs only 
with their employers. Initially, the only purpose of the SSN was to 
assure that SSA kept accurate records of earnings under Social Security 
so that we could pay benefits based on those earnings.

Use of the SSN Expands Over Time

    Although the purpose of the SSN was narrowly drawn from the outset 
of the program, use of the SSN as a convenient means of identifying 
people in large systems of records has increased over the years. In 
1943, Executive Order 9397 required Federal agencies to use the SSN in 
any new record systems for the purpose of identifying individuals. This 
use proved to be an early reflection of what has become an enduring 
trend to expand the use of the SSN. The simplicity and efficiency of 
using a unique number that most people already possessed encouraged 
widespread use of the SSN by both government agencies and private 
enterprises, especially as they adapted their record-keeping and 
business systems to automated data processing.
    In 1961, the Federal Civil Service Commission established a 
numerical identification system for all Federal employees using the SSN 
as the identification number. The next year, the Internal Revenue 
Service (IRS) decided to begin using the SSN as its taxpayer 
identification number (TIN) for individuals. In 1967, the Defense 
Department adopted the SSN as the service number for military 
personnel. At the same time, use of the SSN for computer and other 
accounting systems spread throughout State and local governments, to 
banks, credit bureaus, hospitals, educational institutions and other 
parts of the private sector. During this time, there were no 
legislative restrictions on the use of the SSN.

Statutory Provision Relating to the Public Sector

    The first explicit statutory authority to issue SSNs was not 
enacted until 1972, when Congress required that SSA assign SSNs to all 
noncitizens authorized to work in this country and take affirmative 
steps to assign SSNs to children and anyone receiving or applying for a 
federally funded benefit. Subsequent Congresses have enacted 
legislation which requires an SSN in order to receive Supplemental 
Security Income (SSI), Temporary Assistance for Needy Families (TANF), 
Medicaid, and food stamps. Additional legislation authorized States to 
use the SSN in the administration of tax, general public assistance, 
driver's license, or motor vehicle registration laws within its 
jurisdiction.
    The Privacy Act was enacted in 1974 partly in response to concern 
about the widespread use of the SSN. It provided that, except when 
required by Federal statute or regulation adopted prior to January 
1975, no Federal, State, or government agency could withhold benefits 
from a person simply because the person refused to furnish his or her 
SSN.
    In the 1980s and 1990s, new legislation provided for additional 
uses of the SSN, including employment eligibility verification, 
military draft registration, and for operators of stores that redeem 
food stamps. Legislation was also enacted that required taxpayers to 
provide the SSN for dependents.
    A major expansion of SSN usage was provided in welfare reform 
legislation enacted in 1996. Under welfare reform, to improve child 
support enforcement, the SSN was required to be recorded in a broad 
array of records, including applications for professional licenses, 
marriage licenses, divorce decrees, support orders, and paternity 
determinations.

Use of the SSN by the Private Sector

    Currently, there are no restrictions in Federal law on the use of 
the SSN by the private sector. Businesses may ask for a customer's SSN 
for such things as renting a video, applying for credit cards, 
obtaining medical services, and applying for public utilities. 
Customers may refuse to provide the number, however, the business may, 
in turn, decline to furnish the product or service. Continuing advances 
in computer technology, the ready availability of computerized data, 
and rapidly increasing use of the internet have encouraged the growth 
of information brokers who amass and sell large volumes of personal 
information, including SSNs collected by businesses. When possible, 
information brokers store and retrieve information about an individual 
by that individual's SSN because it is more likely than any other 
identifier to maintain unique records for each specific individual.

Contemporary Challenges Regarding the SSN 

    As you can see, use of the SSN is widespread in our society. This 
usage is the product of numerous decisions made over the years. The 
cumulative effect is to make the SSN an important element in 
establishing and maintaining an individual's identity in various record 
systems, and the ability of individuals to function in our society and 
economy. As a result, the SSN is prized by criminals who are intent on 
stealing another person's identity, or creating a false identity.
    Accomplished identity thieves use a variety of methods to gain 
access to personal data. We at the Social Security Administration want 
to do whatever we can to help prevent identity theft and assist in the 
apprehension and conviction of those who engage in this crime.

Social Security Cards Issuance

    The vast majority of new cards are issued to U.S. citizens or to 
non-citizens who have been permanently authorized to work in the U.S. 
These cards show only the name and SSN of the individual. In 2003 we 
issued approximately 5.4 million new cards. Of these 4.2 million were 
issued to U.S. citizens, nearly 90 percent of these were issued through 
our Enumeration at Birth process, which successfully expedites SSN 
issuance for newborns and facilitates their parents' tax return 
filings. In addition we issued almost 400,000 new cards to non citizens 
who were lawfully admitted for permanent residence.
     Non-citizens who are not authorized to work, or who are only 
temporarily authorized to work will receive a card bearing one of two 
legends. We issued approximately 800,000 of these cards.
    We have been issuing cards with the legend ``Valid for Work Only 
With INS Authorization'' since 1992 in cases where non-citizens come to 
the U.S. with temporary authorization to work. In 2003 about 771,000 of 
these cards were issued.
    We started issuing cards with the legend ``Not Valid for 
Employment'' in 1982 to inform employers that the individual is not 
eligible for work. In 2003 we issued less than 20,000 of these cards. 
Due to changes we have made, we have had a significant decline in the 
number of ``non-work'' SSNs we issue, from a peak level of over half a 
million in the mid-90s.

Strengthening the Enumeration Process

    In connection with this effort, I'd like to discuss what SSA has 
done to strengthen the processes associated with assigning Social 
Security Numbers. The terrorist attacks of September 11, 2001 
reinforced the need for a concerted long-term effort to address SSN 
misuse and identity theft. SSA formed a high-level response team 
meeting regularly to develop recommendations on enumeration policy and 
procedure. Implementation of many of the team's recommendations has 
strengthened our capability of preventing those with criminal intent 
from obtaining and using SSNs and SSN cards.
    For example, effective October 27, 2003, SSA does not assign an SSN 
to noncitizens who are not authorized to work when the only reason for 
needing a number is to comply with a state statute requiring an SSN for 
the issuance of a driver's license.
    SSA changed procedures in February 2002 for verifying a person's 
SSN so that additional private information on SSA's records (NUMIDENT) 
would not be included on the document that verifies the SSN.
    Beginning June 1, 2002, SSA began verifying birth records with the 
issuing agency for all U.S. born SSN applicants age one or older. 
(Under former rules, we only verified birth records for applicants age 
18 and older.)
    SSA no longer assigns SSNs to non-citizens who are authorized to 
work without first verifying the authenticity of their immigration 
documents with United States Citizenship and Immigration Services 
(USCIS).
    As of mid-December, 2001, new audit trails were put in place for 
SSN applications, making the quality checks used under SSA's SSN 
verification processes consistent and more robust.
    Our online SSN verification system (SSNVS) pilot for employers has 
expanded from the original 9 employers to 85. This system holds great 
promise, but, we are proceeding carefully to ensure that the system is 
secure as well as user friendly.
    We have been successful in establishing a process, administered 
jointly by SSA and the Department of State, which allows SSA to assign 
SSNs and issue SSN cards to non-citizens who choose to apply for an SSN 
as part of the process that allows them to enter the country as 
permanent residents. (Thus, this process is not available to students 
or tourists.) Under this process, known as Enumeration at Entry (EAE), 
the data required to assign an SSN, including verification of the 
individual's immigration and work authorization status, are provided to 
SSA by the Department of State (DOS) and the Department of Homeland 
Security, (DHS), (formerly INS). SSA electronically receives the 
information needed to enumerate the individual from the INS with no 
need for further document review and verification.
    SSA has reserved a block of Social Security numbers specifically 
for assignment under the EAE process. Therefore, all non-citizens 
choosing to use this process to request their SSN receive a number from 
this special series. All US consular sites now have the software 
necessary to allow non-citizens applying for permanent residence in the 
U.S. to participate in EAE.
    We also continue to look for other ways to make the enumeration 
process more efficient and secure. A pilot Social Security Card Center 
opened in Brooklyn, New York in November, 2002. The Center represents a 
joint effort of SSA, SSA's Office of the Inspector General and the 
Immigration and Naturalization Service (now USCIS). The collaboration 
of the parties is intended to strengthen SSN application procedures, 
ensuring that applications are processed with a high degree of 
integrity, efficiency and expertise.
    As of February 2004, the Center has successfully served over 
170,000 visitors. While we are waiting to see the final results from 
the review of the pilot, initial feedback has been extremely positive. 
After considering the final results, we hope to open at least one 
additional Card Center this year. We will move slowly and judiciously 
in deciding when and where to open it.

The Wage Reporting Process

    I would now like to discuss the process of reporting and crediting 
wages. SSA's role in the wage reporting process ensuring that all 
workers receive credit for the work on which they and their employers 
paid FICA taxes is one of SSA's core business processes, and it ensures 
that a worker and his or her family receive benefits that accurately 
reflect all of the worker's earnings.
    Accurate earnings information is important because a worker's 
earnings record is the basis for computing retirement, survivors, and 
disability benefits. If a worker's earnings are not properly recorded, 
he or she may not qualify for benefits, or the benefit amount may be 
too low or too high.
    Employers report wages to the Social Security Administration on 
Forms W-2. Each year, SSA processes about 240 million W-2s from about 
6.5 million employers, that are sent to the Social Security 
Administration (SSA) either on electronic media or on paper. These W-2s 
represent the wages earned by about 145 million workers annually. While 
some employers continue to send paper reports, we encourage electronic 
filing. We work with the employer community to educate them on the 
advantages of this method, and its use continues to grow as technology 
improves. I am pleased to report in 2003 over 53% of W-2s were filed 
electronically up from less than 10% in 1999.
    When a person files for benefits, the SSA employee reviews the 
earnings record with the worker and assists the worker to establish any 
earnings that are not shown or are not correctly posted. However, 
because it may be difficult to accurately recall past earnings or to 
obtain evidence of them, it is better to establish and maintain 
accurate records at the time the wages are paid.
    As you know, SSA mails Social Security Statements to all workers 
over age 25 each year. Among other benefit information on the 
Statement, it shows the worker's annual earnings for past years. This 
gives the worker the opportunity to verify the earnings on SSA's 
records and to determine if any earnings are missing. Corrections can 
be made on a more timely basis by reviewing the Statement, instead of 
waiting until the point that an actual claim is filed.
    In addition to using earnings for Social Security benefit purposes, 
SSA sends the same data to the IRS, which has the responsibility of 
collecting the income taxes due.
    The earnings suspense file is an electronic holding file for W-2s 
that cannot be matched to the earnings records of individual workers. 
This happens when the name and SSN on the W-2s do not match SSA's 
records. The suspense file is maintained so that if SSA later obtains 
the correct name and/or SSN for a worker, the wages can then be 
credited to that person's record. As I mentioned, the suspense file 
contains about 244 million W-2s (data through TY 2001--the most recent 
year for which complete data is available).
    In order for wages to be credited to the correct worker, the 
worker's name and SSN on the W-2 must match the name and SSN recorded 
on the ``Numident'' file--the master record of SSNs issued. We receive 
240 million W-2 reports annually. About 10 percent of the W-2s received 
by SSA have invalid name/SSN combinations when they first come to us. 
In our initial processing, the computer system manipulates the name and 
SSN to try to find a match on our records. A number of separate 
processes address discrepancies between the name reported on the W-2 
and the name on SSA records. For example, compound surnames sometimes 
cause a ``no match''. Other processes assume that the reported name is 
correct but that some mistake has been made with the SSN. The reported 
SSN is adjusted for a variety of prescribed common mistakes, such as 
transposing digits, in an effort to obtain a match. For TY 2001, we 
were able to post 6 percent of all W-2s received to the correct SSN 
through these computer routines--i.e., 60 percent of the 10 percent of 
all W-2s received with invalid name/SSN combinations. The balance, 4 
percent of W-2s received for TY 2001, remains in the suspense file. 
This represents approximately 9.6 million W-2s representing $56.1 
billion in wages and $7.0 billion in social security payroll taxes.
    Subsequent processing reduces this percentage further. W-2s are 
removed from the suspense file on an ongoing basis and reinstated to 
the correct worker's record. These reinstatements can occur for various 
reasons for example, because the worker raises a question about his or 
her earnings when they receive their Social Security Statement, or 
during the benefit application process, or as a result of internal 
processing where SSA can subsequently match the W-2 to the correct 
worker. As a result of this subsequent processing, over time, there is 
a decline in the percentage of W-2s for a given year or period of years 
that remain in the suspense file. For example, for tax years beginning 
in 1978, when SSA began processing W-2s, through TY 2001, about 2 
percent of all W-2s remain in the suspense file.

Individual Tax Identification Numbers 

    Some W-2s received by SSA have an Individual Tax Identification 
Number (ITIN) in the SSN field on the form, instead of a valid SSN. An 
ITIN is a 9-digit number issued by IRS to non-citizens who need tax 
identification numbers for tax purposes and who otherwise do not meet 
the requirements for being assigned an SSN. When employers show an ITIN 
on the W-2, this results in the W-2 being posted to the suspense file 
because an ITIN is not a valid SSN.
    IRS began assigning ITINs effective July 1,1996. Subject to a 1997 
Memorandum of Understanding between SSA and IRS, IRS agreed that ITINs 
will be nine digits beginning with the number ``9'' and initially will 
have either ``7'' or ``8'' in the 4th position.
    A one-time review of our records indicated that for the period 1996 
(the first year ITINs were issued) through 2002, approximately 342,000 
W-2s have been reported under ITINs and remain in the suspense file. 
This represents less than two-tenths of 1 percent of the W-2s in the 
suspense file since its beginning through the time of the review.

Removing W-2 Items from the Suspense File

    SSA is committed to significantly reducing the suspense file's rate 
of growth as well as to reducing its current size. This commitment 
reflects SSA's concern that, when earnings are not posted to an 
individual's earnings record, the individual will not receive proper 
credit, a concern that I discussed earlier. As part of this effort, SSA 
employees carry out a number of activities to assure that W-2s are 
credited to the correct individuals' earnings record.
    One activity that SSA has instituted is to notify employers with a 
significant number of mismatches of all name and SSN errors on the W-2s 
that they reported. SSA also requests corrected W-2s, so that employers 
will avoid the same mistakes in future years. These letters are often 
called employer ``no-match'' letters, and in 2003, SSA sent 126,250 of 
these letters to employers with substantial numbers of mismatched name/
SSN combinations. 
    We also notify employees that we could not process their W-2s due 
to errors on the W-2 and ask them to work with us to resolve the 
problem. These notices are often referred to as employee ``no-match'' 
letters. In 2003, we sent 9.5 million such letters to employees, of 
which 1.9 million went to their employers because we did not have a 
good address for the employee.
    Last year, for TY 2002, the letters were modified to make them 
easier to understand and to emphasize the cautionary language that an 
employer should not take adverse action against the employee. This 
version of the notice was used again for the most recent year.
    For those who did not respond to the employee no-match letters, SSA 
compares the name and address with the name and address on the IRS' 
master file. If there is a match, the person's wages can be credited on 
the basis of the SSN reported to the IRS on the person's tax form.
    On a cyclical basis, SSA runs an electronic operation to review all 
the W-2s in the suspense file in light of improvements that have been 
made to the electronic processes I mentioned before. This operation, 
known as ``SWEEP,'' is run every year for the suspense file back to 
1978 and every two years for the entire suspense file (back to 1937). 
While the SWEEP program is most successful in crediting earnings from 
recent years, it does identify earnings that can be associated with a 
correct SSN for all years.   For the 2002 processing year, the SWEEP 
operation removed 468,000 W-2s from the suspense file and properly 
reinstated them to correct individual's records. This operation 
included reinstatements for all past years back to 1937.
    Beginning in April 2003, SSA implemented a new process that will 
electronically find millions of additional matches of W-2s in the 
suspense file and post those W-2s to the earnings records of the 
correct individuals. While the previous processes to match the name and 
SSN used only the Numident, the new process also uses the worker's 
detailed earnings record (that includes employer information) and the 
master beneficiary record, for those who are receiving benefits, to 
identify the missing earnings with the correct worker. This new process 
also employs new techniques with earnings record patterns to match the 
earnings to the correct individual.
    As a result of this new process, in FY 2003, 2.4 million W-2s were 
removed from the suspense file and posted to the correct earnings 
records. It is estimated that a total of 30 million W-2s will be 
removed from suspense and credited to the records of individual workers 
through these new efforts.

Helping Individuals and Employers Find Missing Earnings

    As I have mentioned, an individual may contact us at any time in 
the event that earnings are missing from his or her earnings record or 
not correctly posted. SSA makes a concerted effort to fully resolve any 
discrepancy. We review the individual's record, item-by item, including 
all earnings and employers, in order to assist the individual in 
identifying the earnings that are in question. We request that the 
individual provide SSA with as much evidence of the earnings (Forms W-
2, pay stubs, etc.) as may be available. With the individual's 
permission, we contact any employers and request that the employer 
check all records for possible evidence of earnings.
    In addition, we check the suspense file both by the worker's SSN 
and by employer identification number in an attempt to locate the 
earnings in question. If SSA is satisfied that the earnings in the 
suspense file belong to the worker based on the evidence that has been 
provided by the worker, the worker's earnings record is credited with 
the earnings.
    In addition to these processing activities, SSA assists employers 
to make sure that the name and SSN provided to them by new employees 
match the information on our records.
    SSA has successfully provided SSN verification services to the 
employer community for many years. In the beginning, this was a manual 
process which was highly labor intensive. SSA's verification workloads 
have increased as the use of the number has expanded. Now, SSA provides 
SSN verification for employers through a special employer 800 number. 
In addition, SSA verifies SSNs for employers via the Employer 
Verification System (EVS). As of January 2004, approximately 13,500 
employers have registered for EVS. In addition, in FY 2003 we responded 
to nearly 1.1 million telephone calls at our employer reporting service 
center.
    EVS is a free, convenient way for employers to verify employee 
SSNs. EVS provides several options to employers depending on the number 
of SSNs to be verified. For up to five SSNs, employers can call SSA's 
toll-free number for employers--1-800-772-6270--weekdays from 7:00 a.m. 
to 7:00 p.m. Employers may also use this number to get answers to any 
questions they have about EVS, or to request assistance.
    Employers also have the option to submit a paper listing to the 
local Social Security Office to verify up to 50 names and SSNs. In 
addition, they may use a simple registration process to verify requests 
of more than 50 names and SSNs or requests submitted on magnetic media 
(regardless of how many items are being verified). All these requests, 
whether made via phone, paper, or magnetic media, are handled through 
the EVS system. However, from an efficiency and accuracy standpoint we 
plan to encourage electronic verification via the internet, and hope to 
continue rolling out SSNVS, which is being piloted.
    The Social Security Number Verification Service (SSNVS), is an 
internet option to verify the accuracy of employees' names and SSNs by 
matching the employee-provided information with SSA's records. To date, 
we have processed over 4.5 million verifications for the85 employers 
who are participating in the pilot. SSNVS provides a quicker and more 
efficient alternative for employers to obtain verifications than some 
of the other methods I have described to verify information. Beginning 
in January 2004, we added death file information to the responses 
received by participating employers. We are considering modifications 
of other automated routines to include death file information. When we 
review the pilot results, we will be in the best position to determine 
what our next steps should be.
    Because correct names and Social Security numbers (SSNs) on W-2 
wage reports are the keys to successful processing of employer 
submitted annual wage reports, each of our regional offices have 
Employer Service Liaison Officers (ESLOs) who work with employers to 
prevent and overcome reporting problems. Employers can also visit SSA's 
website--www.ssa.gov/employer--for more information.

Report on Non-Work SSNs

    Section 414 of Public Law 104-208, the Illegal Immigration Reform 
and Immigrant Responsibility Act of 1996, requires SSA to report to 
Congress the number of SSNs assigned to non-citizens who are not 
authorized to work in the United States for whom we receive W-2s. We 
issued the most recent report for 2003. In it, we stated that SSA 
credited earnings to 571,193 SSNs which were assigned to non-citizens 
who did not have authority to work in the United States when they got 
their SSN.
    SSA also sends an annual report to DHS about earnings reported to 
SSA on a social security number issued to a non-citizen not authorized 
to work in the U.S. The information includes the name and address of 
the non-citizen, the name and address of the person reporting the 
earnings, and the amount of earnings reported.
    I need to point out, however, that since non-citizens are not 
required to report changes in their work authorization status to SSA, 
SSA does not routinely learn of changes in their authority to work in 
the U.S. Therefore, an earnings report under a nonwork SSN does not 
necessarily mean that unauthorized work was performed.
    Given the steps we have taken to limit the assignment of non-work 
SSNs, we are confident that the problem of earnings being posted to 
non-work numbers will diminish.

Cooperation with DHS and IRS

    We have formed an executive level steering committee, together with 
DHS, to oversee and direct cooperative activities. The first issues we 
will discuss will be 1) tightening the assignment of Social Security 
numbers to promote homeland security, and 2) identifying potential data 
sharing activities consistent with rules governing the use of SSA's 
data that would best assist each organization in carrying out its 
mission. The group has already met once and we believe it will be a 
successful and productive effort.
    SSA also supports the Department of Homeland Security (DHS) in an 
ongoing joint initiative, known as the Basic Pilot. The pilot is 
designed to assist participating employers in confirming employment 
eligibility for newly hired employees. Participating employers use an 
automated DHS system to verify SSNs and alien registration numbers 
through verification checks of SSA and DHS databases. As of January 1, 
2004, there were over 13,000 individual employer sites using the Basic 
Pilot. SSA receives over 45,000 Basic Pilot requests each month.
    We have established an interagency effort with IRS to work on 
issues of mutual concern. This is a high level group that will work to 
resolve issues and cooperate on efforts that cross agency lines. We had 
our first meeting on March 5, and we anticipate this interagency 
coordination will be useful and productive for each agency.
Conclusion
    I would like to conclude by emphasizing that we at the Social 
Security Administration are committed to strengthening the integrity of 
the processes that we use to assign SSNs. We believe the recent 
improvements we have implemented have made it more difficult for 
individuals to obtain SSNs from us through fraudulent means.
     The difficult challenge we face is to balance SSA's commitment to 
assigning numbers quickly and accurately to individuals who qualify for 
them and need them to work, with the equally important need to maintain 
the integrity of the enumeration system to prevent SSN fraud and 
misuse.
    We are also continuing to explore ways to improve the accuracy of 
our earnings report records and to limit the growth of the suspense 
file.
    I want to thank the Chairmen and members of both subcommittees for 
inviting me here today and I look forward to working with you to 
continue to improve SSA's processes. I will be happy to answer any 
questions you might have.

                                 

    Chairman HOUGHTON. We are going to suspend the work of the 
Committee now for between 20 minutes and half an hour. We have 
one 15-minute vote, and have only about 3 minutes left. After 
that we have got two 5-minute votes. We will be right back as 
soon as we can. Thanks very much.
    [Recess.]
    Chairman HOUGHTON. Let us continue the hearing. What I 
would like to do is to start with questions from Mr. J.D. 
Hayworth.
    Mr. HAYWORTH. Mr. Chairman, I thank you and Chairman Shaw 
of the Subcommittee on Social Security for offering us this 
chance to visit today in this joint hearing with our friends 
from IRS and the SSA. Commissioner Everson, Deputy Commissioner 
Lockhart, thank you gentlemen for your attendance and your 
testimony. Commissioner Everson, if an illegal immigrant is 
working under a false SSN, when that worker goes to pay his 
taxes using the ITIN, how does the IRS verify that the W-2 he 
submits with his taxes is really his? In other words, what 
keeps him from using someone else's W-2 to save on his tax 
liability?
    Mr. EVERSON. Congressman, what happens is that we match 
through computer data files. We enter all the information, and 
we will see that if you or I, for instance, was using Jim's 
SSN. All of a sudden down the road, sometimes what happens is 
some of these people will be filing very early in the filing 
season because they are a sole wage earner with one job, they 
will file their return over time, and we actually receive Jim's 
statement from his employer, we find that there are two 
employees, one maybe in California and one in Virginia, and 
that are both earning income with the same number. Many times 
we can see what the problem is and who has got the right 
income, but this does pollute the recordkeeping from our point 
of view.
    Mr. HAYWORTH. Thank you, sir. Deputy Commissioner Lockhart, 
does the SSA have the statistics of how many workers are using 
non-matching SSNs, and how many of those are estimated to be 
false, not misprinted, but false numbers?
    Mr. LOCKHART. We certainly have numbers in our suspense 
file about non-matches. Every year, there are about 9 million 
non-matches of names and SSNs. A lot of those can be just 
because people change their names because they transposed their 
middle name, or they used the wrong digit. We do not have data 
to say how many of them are made up of SSNs.
    Mr. HAYWORTH. Presumably, you could take a look at that 
data and give us those numbers, could you not?
    Mr. LOCKHART. Well, it would take a significant amount of 
effort, an investigatory effort, to try to figure out that. 
Certainly what we do, and I think it is the most important 
thing, is we try to do as much matching as we can. We give the 
employers all the information that they need to do the matching 
before they send the W-2s in, and we also work with them on a 
regular basis.
    Mr. HAYWORTH. I understand the man hours involved, but as a 
matter of public policy to understand just the extent of the 
challenge we are facing, it might be good to quantify that, and 
I'd appreciate your answer, and would offer that suggestion in 
the spirit of sound public policy. Commissioner Everson, does 
the IRS have the authority to make employers follow more 
extensive checking of current SSNs beyond the current, quote, 
``due diligence,'' that is required of them?
    Mr. EVERSON. No, sir, we really do not. This gets to the 
issue of penalties and the assessment of penalties. We will 
send notices to employers when there are these mismatches that 
we just spoke of. If we assess a penalty, and the employer can 
demonstrate that they proceeded in good faith, then the penalty 
will not be sustained. The only answer here really is to 
require an employer to check against our database or against 
the Social Security database at the time of the hiring. That is 
not what the I-9 process is now. That is not how it works. To 
do that would require a change in the statute because of these 
confidentiality provisions. I would just add, I am concerned 
that if we take that step, the real issue here is trying to get 
people into the tax system and pay their taxes. Many of these 
people, the immigrants for example, are coming from countries 
which may not have the same respect for paying taxes, or they 
have U.S. citizen children who have the ITINs also. We want to 
get them into the system, so that would be a big change.
    Mr. HAYWORTH. Commissioner Everson, let me just make sure I 
understand. Under 1990 legislation, the IRS was given the 
authority to fine employers $50 per non-matching SSN, up to 
$250,000 in a year. To your knowledge, were any of those fines 
levied last year?
    Mr. EVERSON. Some fines have been levied, it is my 
understanding, but they have not been sustained when appealed 
if the employer shows reasonable cause. What that means is they 
say, look, I went through the I-9 process, I went through the 
W-4 process, and this is what was represented to me by the 
employee. That gets them off the hook, if you will.
    Mr. HAYWORTH. I thank you very much. Mr. Chairman, I 
appreciate your indulgence. Let me again thank the witnesses, 
and let me just inform my colleagues, my friend from North 
Dakota spoke of a conundrum and we certainly have one here now 
in the challenge of making sure that folks are following the 
law, paying their taxes, not abusing the system, and we may 
have to take a look at some legislation. Again, thanks to the 
witnesses, and thank you, Mr. Chairman.
    Chairman HOUGHTON. Thanks very much, Mr. Hayworth.
    Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman. Again, thank you for 
your testimony. Let me ask a question, Commissioner Everson, 
about the changes that you made to the ITIN. My understanding 
is that, and I think you mentioned that you can only receive an 
ITIN at the time of filing your tax return, that you can no 
longer get that ITIN in advance, which used to be the case.
    Mr. EVERSON. Well, some people clean up their records. They 
haven't filed returns. If you are filing multiple years during 
the course of the year and you are catching up, getting into 
the system, if you will, of course we would accept an 
application at that time. When we studied the data on this, we 
found that something like 70 or 80 percent of the ITINs that 
were processed that ultimately were used for legitimate 
purposes were actually applied for during the filing season 
anyway because people wanted to get the ITIN so they could get 
into the system and get their refund. Most people get refunds.
    Mr. BECERRA. I see. You are now issuing a letter, not a 
wallet-size card, is that the case?
    Mr. EVERSON. That is correct. We wanted to stop this 
confusion between the card that Social Security issues and what 
we are doing. As was indicated, we have had outreach to States 
that are using the ITIN to get drivers' licenses. We think that 
is wrong, and we want to do everything we can to try and get 
the controls in there so that it at least doesn't look the 
same.
    Mr. BECERRA. My understanding is that you are now accepting 
fewer types of identification for the purpose of applying for 
the ITIN?
    Mr. EVERSON. That is correct. There were something about 
40-odd pieces of identification that could contribute to a 
favorable reading on an application. We have limited it down to 
about a dozen. I think it is actually thirteen.
    Mr. BECERRA. Are the dozen or so that you have got it down 
to in terms of identification, or forms of identification that 
can help you get the ITIN, are we looking at the types of 
identification or documents of identification that we would 
typically think of? There are 12. Among those twelve, give us a 
sense of what kind of documents.
    Mr. EVERSON. They would tend to be official documents from 
the country of origin, like a passport would be a real 
indicator, or a birth certificate, that sort of paperwork. I 
saw one birth certificate recently when I was inspecting this 
process in Philadelphia, and it had a child's drawing on the 
back of it. It was pretty authentic, it looked like to me.
    [Laughter.]
    Mr. BECERRA. Now, I understand that the GAO may testify 
that they think you still need to do a few more things when it 
comes to tightening up the process for the ITIN. I don't know 
if you have had a chance to review the GAO's testimony on that.
    Mr. EVERSON. I think we made some pretty significant steps 
here. We are going to address those on an ongoing basis. I 
think, as indicated in the testimony, we are working with 
Social Security. The GAO's input is always important to us. So, 
I think we have moved this issue considerably, but that doesn't 
mean we are done. We are going to tweak it. We are gaining 
experience now with the new process. We have to do a lot of 
outreach. We had a little bit of a bumpy start, where some 
people--you know how word passes through these communities 
about what new requirements are. It passes quickly, but it is 
not in a uniform process. We are already seeing changes and 
better documentation coming in, from what we are seeing now. We 
are going to continue to work with this.
    Mr. BECERRA. One final question for the two of you in this 
case. My understanding is that--well, I think everybody knows 
that you all are processing millions of documents and you are 
providing valuable information--some wouldn't say the IRS is 
providing valuable information, but in terms of Social 
Security, some would say that. I think both of you are 
providing valuable information for the country when it comes to 
being able to pay your taxes and get taxes back if you paid 
more than you should have, and in terms of preparing yourself 
for retirement, when you get your Social Security benefits.
    If we now are going to ask you to be more aggressive when 
it comes to the enforcement and protection of the SSN and the 
ITIN number, are you going to be able to do that with the 
resources you currently have, to try to manage all of the 
different obligations you have, along with increased 
enforcement and oversight? Obviously, we want you to do that, 
but I am trying to figure out, do you have the budget in place 
to be even more aggressive than what you already are now?
    Mr. LOCKHART. Well, certainly from a Social Security 
standpoint, I think we have been pretty aggressive since 9/11 
on issuing Social Security cards and numbers, and we have taken 
a whole series of steps to tighten that up and we have done 
that within our resource constraints. As you know, the 
President has asked for, I think a 6.8-percent increase in the 
2005 budget, and that will certainly help us in both our 
service and stewardship obligations.
    Mr. EVERSON. Beyond what we have done right now, if we were 
to significantly step up the enforcement, to do it effectively 
and to really get a grip on this whole issue, would require a 
major resource reallocation. The reason being that I believe 
that your effect would be there are a lot of these businesses 
out there that are complying, trying to comply with 
verification requirements. They are doing their best to work 
within the system and withhold the taxes. If you make it more 
burdensome on employers or take actions that will, in fact, 
discourage some of the people who are working illegally but 
paying their taxes and participating in the system, this will 
go more underground from where it is today. If we want to get 
at that and capture the tax revenues which the government is 
owed, it will take a very significant resource infusion.
    Mr. BECERRA. Thank you. Thank you for your testimony. Thank 
you, Mr. Chairman.
    Chairman HOUGHTON. Mr. Shaw?
    Chairman SHAW. Thank you, Mr. Chairman. Mr. Everson, we 
discussed in Mr. Houghton's office some weeks ago the effect of 
people who pay into Social Security as undocumented workers, 
and then later when they became legal, go back and try to claim 
those payments. Can either of you gentlemen or Mr. Lockhart, 
whomever would be best to aim this toward, give us some idea of 
what type of dollars that we are talking about? It would seem 
to me that if the work was done illegally, the payment was done 
illegally, that people should not have an ability to go back 
and claim retirement that was paid in illegally, and usually 
from a counterfeit number, which in itself is a crime.
    Mr. LOCKHART. Well, certainly from a Social Security 
standpoint, we do collect a lot of Federal Insurance 
Contributions Act (FICA) taxes every year based on W-2s where 
the name and SSN do not match. We estimate that is about $7 
billion in payroll taxes a year at this point, and the total 
amount in the suspense file is about $50 billion of payroll 
taxes that have been credited to the trust funds over the years 
that have not matched. As you know, recently, I think it was 
last week, the President signed your bill, H.R. 743, the 
``Social Security Protection Act of 2004,'' and one of the 
provisions will tighten up how we can pay benefits to people in 
the future, and as I understand that, it means that we can only 
pay benefits to people if they were issued a valid SSN prior to 
January 1, 2004, or a valid work-authorized SSN on or after 
January 1, 2004. We are looking at how to implement those 
provisions, but I think that will tighten that up significantly 
from where it was before.
    Chairman SHAW. I would hope so. As a matter of fact, I 
think we ought to consider legislation that would actually just 
simply say that you don't get credit for what was paid in 
illegally. I would like to direct both of your attentions to a 
series of articles that was run in the Palm Beach Post. This is 
quite voluminous, but I would hope that your staff would review 
these and summarize them because it shows that modern day 
slavery actually exists in the United States, and it is 
centered around SSNs. This newspaper went to great lengths to 
track these workers all the way from Mexico, riding across the 
country with them, saw how they were put to work, saw how some 
of them were actually locked up at night, atrocities, things 
that just simply you wouldn't believe were existing in this 
country.
    A lot of this evolved around the fake SSNs, because all of 
these workers have to come in, and they have got some kind of a 
handler who seems to put some distance between the farmer and 
the illegal worker, so that the farmer can simply shrug his 
shoulders and say, ``I didn't hire him. It is a contract 
thing.'' We ought to have a way to get through that so that 
that huge loophole is not there, that workers that come in and 
do perform a very valuable resource to this country in doing 
jobs, frankly, that you just can't get American citizens to do. 
They are very valuable to the agricultural industry. They are 
not so valuable that we should let these atrocities continue. I 
will make this available to you, and this isn't three copies. 
This is the series. This is one set. I think you will be 
somewhat shocked to see what is going on in the agricultural 
industry. This only deals with a Florida situation, so I am 
sure this same thing goes on all across the country.
    Mr. LOCKHART. We will certainly look at the articles. I 
know our IG has been involved in that case and may be able to 
say more about it later, but it is certainly an issue that we 
will look at.
    Chairman SHAW. We will let him have a copy, too.
    [Laughter.]
    Chairman SHAW. Getting back mainly to the proper 
identifier, all of us want to be sure that there is a certain 
amount of secrecy or confidentiality regarding our SSNs. We 
don't want them to be handed out willy nilly. When you find all 
the people that have access to it, whether you have to write it 
on the back of a check in an Army commissary, whether you are 
using it as identification for the soldier, which they use it 
for in the military. The marketing of the SSN is something that 
we are very concerned about in this Committee. The SSN 
obviously is a key to your treasure. Once your SSN gets in the 
wrong hands, we have found through hearings, that once you are 
a victim of identity theft, that it goes on and on and is a 
continuing problem that we really need to get at. This is the 
fastest growing form of crime in the United States and it is 
really getting just totally out of hand. We are finding so many 
ways that they get your credit card number and then get your 
SSN and your date of birth and they are off to the races. They 
actually become you. Would both you gentlemen comment as to 
what safeguards we should put in place?
    Mr. EVERSON. I think I will mostly leave it to my colleague 
here, but we have tried to do things like take individual SSNs 
off instructions that we send to people. There used to be a lot 
more listing of the number on some of the things we would send 
to people, and we have removed the number just so that, even if 
inadvertently, things fall into the hands of others, we don't 
distribute it. Again, we work very carefully to protect 
taxpayer information as to even what vendors or others can use 
that information, whatever their role is, and I think we are 
trying to be as attentive as we can just for other reasons, but 
we are sensitive to this issue, as well.
    Mr. LOCKHART. Certainly as to the issue of SSNs, we are 
very sensitive to the issue, and to identity theft. Internally, 
we have done the same thing. We have taken the SSN off the 
Social Security check. We have taken it off of other 
correspondence when we can. Then externally, one of the things 
that has been helpful is we do a lot of verifications for State 
and Federal agencies. We perform about 750 million matches a 
year for people that provide--whether it is employers, Federal 
agencies, or State agencies--to help them identify these people 
to make sure that they are not committing welfare fraud, or 
other kinds of fraud. So, we are very actively involved, as is 
our IG, and we consider it a very serious issue.
    Chairman SHAW. You are telling me what you do, but I would 
like to know what we should do to protect the confidentiality. 
What type of safeguards do you seek? I know that you don't form 
the policy, you just inform the policy. If we could get some 
idea as to what is workable, what is reasonable. I had in my 
office just last Friday a lady who was a private detective, and 
she was concerned that we were going to protect the secrecy of 
SSNs, which she relies on to trace people.
    Mr. LOCKHART. There is definitely a tension that way, and 
it is difficult sometimes to walk down that line. From our 
standpoint, we are certainly doing everything we can do to 
protect it. When we see another government agency displaying an 
SSN where it shouldn't be, we talk to them. We actively work 
with other groups to try to discourage them from showing SSNs. 
It is a very difficult issue because it has become a national 
number, one way or another, and it was not meant to be when it 
was started out. We are now working through that issue, and 
trying to figure out how best to do it. There is really no easy 
answer. In this world of computers, everybody wants a number 
for people.
    Chairman SHAW. Yes, they do. I know I tried over Christmas, 
they had a special, if you opened a charge account at Burdine's 
department store down in Florida that you got a big discount. I 
said, well, fine, I will open one. They started going through 
it and they said, SSN. I said, I don't give out my SSN. They 
said, well, you don't get a charge account.
    Mr. LOCKHART. Yes.
    [Laughter.]
    Chairman SHAW. That was the end of that. I advised them 
that I was going to do everything I could to see that they 
couldn't ask that question.
    [Laughter.]
    Chairman SHAW. I thank you, and yield back.
    Chairman HOUGHTON. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman, Commissioner Everson, 
and Commissioner Lockhart. Thank you for joining us today to 
talk about issues of security to every American worker. I 
appreciate your time. Mr. Chairman, if I could take the 
liberty, I have a parochial question I would like to direct to 
Commissioner Everson. Commissioner, you and I have been in 
communication regarding an IRS central distribution facility in 
Bloomington, Illinois, a facility whose future is in question 
at the moment as you go through the competitive sourcing 
process, a process which has some benefits to taxpayers, but 
many of these workers--there are 524 workers--reside in the 
district that I represent, and I am very concerned about their 
jobs. You and I have discussed that.
    As you know, Illinois is a very high unemployment State. 
The Bloomington facility is the largest of three facilities 
that handle the document distribution for the IRS, but it is 
also a facility which already has weekend hours and evening 
hours in which they serve taxpayers, compared to the other two. 
I have urged you to consolidate these three facilities into the 
Bloomington-Normal facility. Not only are these good committed 
workers, but they have a Central Illinois work ethic. I was 
just wondering, can you bring us up to date on the status of 
this process, where we are and where you are on your decisions?
    Mr. EVERSON. This is going through the established 
procedure for competitive sourcing, which, as you indicated, is 
designed to bring benefits to the taxpayer by improving 
business processes and driving down costs. The sourcing 
initiative takes a look at what are called non-inherently 
governmental functions, and in this case, it is not work for 
tax audits or criminal investigations, it is the support work 
to maintain the inventories of the forms and the instructions, 
and then to get them in the mail to people who called in and 
need the forms. So, we made a determination that the process 
and the government, the taxpayer, would benefit by looking at 
this according to the competitive sourcing standards. What 
happens in that process is that there is a competition and the 
government puts together a bid which looks at, in this case, 
all three of those operations and says, these operations are 
doing less volume of business and they try to project what is 
going to happen and they say, how would we configure it? What 
would we best do to make the process more efficient and improve 
it? The same thing happens when the private sector takes a look 
at it.
    This is done independently of my office. It is evaluated 
independent of my office or my senior people, so that it is 
very neutral. Then, the government actually wins if there is a 
cost differential that is not considered significant. We are 
going through that process right now and the benefits of it 
will be, hopefully, improved service to taxpayers and lower 
costs. That is typically what happens if you go through the 
competition process. I honestly can't tell you where that 
will--who will win that competition, whether it will be the 
government or the private sector. More often than not, the 
government wins that competition and retains the work, but it 
might very well be a different model. It might be the model 
that you suggest. It might be a different model that would 
retain all three operations or consolidates it elsewhere. I am 
removed from that process for very valid reasons so as not to 
influence it.
    Mr. WELLER. So, Commissioner, you confirm that two of the 
options, one being maintaining the status quo, or consolidating 
facilities. Those are two of the options?
    Mr. EVERSON. Maintaining the status quo in the sense that 
the work would remain inside the government as opposed to a 
contractor taking over this forms distribution process. I would 
imagine that even if the government wins, that they will take 
decisions to retain the business because the benefit here again 
to the taxpayer is that they know they are up against an 
external bid, so they are going to look to make it as cost 
effective as they can.
    Mr. WELLER. Commissioner, you learn things when you 
actually visit the facility.
    Mr. EVERSON. Yes.
    Mr. WELLER. You learn things when you meet with the 
workers, which I have done. An issue I want to raise with you, 
which I am concerned about from a fairness standpoint as we go 
through this process, obviously, the workers are concerned 
about the future of their employment. There are 524 families 
that are affected by this decision that is waiting to be made 
out there, and you certainly know where I am on this. One of 
the things I learned is that the employees, the regular Federal 
employees who met certain standards, were offered the 
opportunity for a buyout, but the deadline to confirm their 
participation is 4 weeks prior to the decision on what the 
future of their job will be. Now, I would call into question 
the fairness of putting someone in a position to say, gee, I 
will take this offer, not knowing what the future of my job 
will be.
    I have urged you to either extend the deadline past the 
decisionmaking point, once the workers know the future of their 
job, or to give them a second round of buyouts so they would 
have another opportunity to participate if their position is to 
be eliminated. To me, it is a fairness issue, and I would like 
to hear from you what your thoughts are about this, because, do 
you agree it is unfair for a worker to be told, you have to 
make a decision now whether or not to allow yourself to be 
bought out of your position prior to knowing the future of your 
position?
    Mr. EVERSON. The buyouts, which are worked out according to 
standards that the Office of Personnel Management has and 
Office of Management and Budget, they are an important tool 
because they do help people plan for the future rather than 
being up against a short-term decision. We are working with the 
unions. This is a matter that has to be negotiated with the 
unions. We suggested to them some other considerations, some of 
them along the lines of what you are talking about, and that is 
a matter of open discussion. I think you raise some very valid 
questions. We want to treat anybody who would be impacted by 
this fairly, and give them the best possible deal.
    Now, what you want to do is make sure that the work can 
continue, because frequently if people--if the private sector 
picks up the work, frequently individuals will transfer over, 
and it is important to the private sector provider of the 
service to have that expertise from the individual who was 
providing it before. So, you want to do this in a measured way 
where there is a maintenance of the expertise.
    Mr. WELLER. Recognizing I am running out of time here, I 
think there are two things. I am a strong supporter of 
collective bargaining. The union has made the request for an 
extension of the buyout which you have not yet agreed to, and I 
would urge you to extend the deadline or offer a second round 
after a decision is made. I would also urge that if a private 
contractor is going to pick up this contract to supply these 
documents, that they give preference to existing employees at 
this IRS facility for employment under the new contract. Those 
are two things that I think have great concern for everyone who 
is involved.
    Mr. EVERSON. Sure.
    Mr. WELLER. Both the community on the outside as well as 
the workers.
    Mr. EVERSON. I don't think, sir, that either one of those 
is at variance with where we are. My understanding is, the 
state of play with the unions is actually a little bit 
different, but I think we have indicated some flexibility on 
this issue, and I would say to you that it is a matter of 
interest usually to the provider of the services should the 
private sector win, to do just what you said, to work with it, 
and I think that is a factor that can be considered in the bid, 
as well, because we are interested in people who have served 
the government well and efficiently to make sure they have that 
opportunity.
    Mr. WELLER. Commissioner, this is of great concern to me. I 
have 524 families, so I hope to continue working with you, and 
I appreciate your attention to this.
    Mr. EVERSON. Thank you.
    Mr. WELLER. Thank you.
    Mr. EVERSON. Mr. Dalrymple, my deputy, is going to be, I 
think, seeing you later this week.
    Mr. WELLER. Yes.
    Mr. EVERSON. To go over this in more detail. So, if there 
is any follow-up you need from me personally, we will make sure 
that happens.
    Mr. WELLER. Thank you, Commissioner.
    [Letter submitted from Mr. Weller to Mr. Everson follows:]

                                             Washington, D.C. 20515
                                                      March 5, 2004
Hon. Mark Everson
Commissioner
Internal Revenue Service
1111 Constitution Avenue,
N.W. Washington, DC 20224

Dear Mr. Commissioner:

    My letter serves to update you on my findings after visiting the 
IRS service center in Bloomington, Illinois, and to seek your 
assistance for the center's employees. I am disturbed and disappointed 
to learn that employees have been told that employees must make 
decisions on buyouts before the future of the center has been decided.
    It was brought to my attention that the employees at this facility 
were given a letter and a form on February 29, 2004 for a buyout 
package to return no later than March 20, 2004. While this option was 
taken advantage of by several employees who found it an attractive time 
to leave, there are many more who would rather remain employed at the 
facility, and would prefer to wait until the announcement has been made 
on what will happen to their jobs.
    As the deadline to apply for buyout occurs approximately 1 month 
prior to the announcement regarding the fate of this facility and the 
people who work there, I ask you to extend the deadline to apply for 
buyout, or offer another buyout opportunity after the IRS makes it's 
announcement. This will allow employees who have submitted buyout 
applications under some duress to rescind them, and reapply later 
should they ultimately decide they would like to be bought out. 
Additionally, for employees who prefer to wait, but are feeling 
pressured to make a decision, this will give them some time and peace 
of mind to make a more fully informed choice
    I hope you will agree with me that this is a fundamental issue of 
fairness. Please extend the deadline to submit an application for 
buyout, or offer another opportunity for buyout after the IRS announces 
it's decision whether to keep the facility open.
    I look forward to working with you to modernize and streamline the 
IRS while ensuring it's employees are treated fairly.
            Sincerely,
                                                       Jerry Weller
                                                 Member of Congress
                                 

    Chairman HOUGHTON. Thank you. Ms. Tubbs Jones?
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Commissioner, I 
have a question with regard to the obligations of employers to 
report or to assure that the SSNs and the ITIN numbers that 
they receive from employees are accurate. What is their 
obligation?
    Mr. EVERSON. Well, they have to make a good faith effort. 
It is in the I-9; there are really two steps here. There is the 
I-9 process, where someone demonstrates that they are eligible 
to work in this country, and they do that, maybe they have a 
U.S. passport or maybe they have a foreign passport but a 
Social Security card showing that they are eligible to work. 
That is one step. Then you have the W-4 process, where someone 
comes in, and the individual indicates how many exemptions they 
want. If an employer checks, and determines that based on the 
documentation that is provided to them that the individual is 
eligible to work, which would usually mean they wouldn't be 
showing an ITIN in the instances that demonstrate all the 
problems, they wouldn't mention their ITIN. They would say, I 
have XYZ SSN, then as long as they have shown reasonable 
documentation, the employer is okay. If we go back and try and 
assert a penalty, we are not going to be able to sustain it.
    Ms. TUBBS JONES. When you say the employer checks, what 
does the employer check?
    Mr. EVERSON. A false Social Security card, perhaps, might 
satisfy the employer that the person was eligible to work, but 
the employer would not necessarily know that that is a false 
card.
    Ms. TUBBS JONES. How many people do you know that walk 
around with actually a Social Security card when they walk into 
some employer? I am not sure that that is something--what I am 
trying to understand is, other than a good faith effort, there 
is no obligation on an employer to check for the accuracy of a 
SSN?
    Mr. EVERSON. Well, right now, they don't have to--the only 
way you could check it, to get the accuracy, you would have to 
put the employer in direct contact with either the SSA or the 
IRS, and that is not done. That would be at variance with the 
law as to the protection of taxpayer information, as to anybody 
checking with us.
    Ms. TUBBS JONES. So, then you are saying that in terms of 
due diligence for an employer, if due diligence would cause him 
to be in variance with the law because the law won't allow him 
or her to check the SSN of an employee.
    Mr. EVERSON. No, it wouldn't cause them to be at variance 
with the law. It would cause me to be at variance with the law 
because we can't give out the information.
    Chairman SHAW. Would the gentle lady yield?
    Ms. TUBBS JONES. Yes, I will.
    Chairman SHAW. I have a case in point which would probably 
be of great interest to you. If you have a mismatch, and the 
SSA advises you that you have a mismatch, they will also advise 
you cannot fire that employee because of it, which really puts 
you in a catch-22. What do you do?
    Ms. TUBBS JONES. So, I guess my question to you is, since 
there is a low burden and there is a catch-22 situation, what 
do we do about it? Do we just keep moving forward, or do you 
have any suggestions on how we handle this dilemma?
    Mr. EVERSON. Let me just sort of state the dilemma from my 
point of view, administering the tax system. You could ask to 
make that check with our database, and you could change the 
Internal Revenue Code provision. My concern there would be that 
we are trying to get these people into the tax system. Many of 
them come from countries where there is not the same respect 
for the rule of law that is part of our culture, and we are 
trying to get them to participate. My worry is that many of 
these businesses that are making decisions to try to 
participate, if we go back to them and say, you are going to be 
penalized if you don't do this or you don't make this check, 
some of them will just end up operating illegally, and they 
will get to where Congressman Shaw talked about. It will 
further abuses on the one hand, and on the second hand, it will 
actually collect fewer dollars into the Treasury.
    Ms. TUBBS JONES. Let me be clear that I am not on one side 
or the other of this. I am just trying to put on the table the 
dilemma that this whole situation presents. Have we ever even 
penalized an employer for failing to exercise due diligence 
with regard to SSNs?
    Mr. EVERSON. We do have penalties, but when challenged, the 
penalties have not been sustained because inevitably the 
employer says, well, I made this reasonable effort. Even if, as 
the Congressman indicated, we will send letters to employers 
saying there is a mismatch, they can go out and check again, 
but if the employee says the same thing, ``I showed you my I-9 
process. I am legally working here and this is what my number 
is,'' then the employer is okay.
    Ms. TUBBS JONES. Mr. Chairman, just one more question if 
you would allow me, please. Is there any industry in which we 
find greater challenges to address this particular situation 
than in other industries?
    Mr. LOCKHART. If you would look at our suspense file, which 
is really the mismatches between SSNs and names, and as I said 
earlier, we have about 9 million a year. The two top industries 
are agriculture and service, and then bars, and restaurants are 
the third. So, it is basically transient workers that have the 
most mismatches, and it is also the States with the largest 
immigration populations, as well.
    Ms. TUBBS JONES. We are careful to use the term 
``mismatch,'' and not fraudulent use of an SSN or ITIN. Is that 
purposeful? That is my last question, Mr. Chairman.
    Mr. LOCKHART. Some may be fraudulent, but all are 
mismatches, so I am using the larger term, if you will, because 
some may be names reversed or one digit missing in an SSN. So, 
we can't tell necessarily. Now, we are trying to figure that 
out. First of all, I would like to agree with Mark that it is 
very important not to have unintended consequences of driving 
people underground, because I think that would be bad for both 
the IRS and Social Security. We do offer various opportunities 
for employers to match Social Security names and numbers, both 
through the I-9 process and through the Social Security 
process.
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you. Mr. Hulshof?
    Mr. HULSHOF. Thanks, Mr. Chairman. Commissioner Everson, 
Deputy Commissioner Lockhart, welcome. Let me continue along 
this path of asking some hard questions because these are 
questions that a number of us get back in our respective 
districts. Actually, I want to, Deputy Commissioner Lockhart, 
follow along what Chairman Shaw asked you, and I want to 
restate it, and that is as I understand current law, wages 
subject to the FICA tax, the Social Security tax, are credited 
toward benefits even if the worker, the immigrant, has 
overstayed a visa, has purposely evaded our immigration law, 
but basically these wages are credited, and I think you said 
that we collect--you collect--the government collects--$7 
billion a year in FICA taxes from these unauthorized 
immigrants. Is that true?
    Mr. LOCKHART. What I said is in our suspense file, there 
are approximately $7 billion a year of payroll taxes, if you 
will, that we treat as payroll taxes, as if they came from a 
legitimate person. Now, the point is that most of those will 
never be matched to anybody, at least a major portion of them, 
and so they will never be used to pay a benefit from the 
system.
    Mr. HULSHOF. That is the great follow-up question then. Do 
either of you have, because obviously these workers can file 
tax returns and receive refunds, what amount of money goes out 
per annum, if you know, maybe through the IG, to benefits to 
undocumented or unauthorized workers?
    Mr. LOCKHART. From the Social Security standpoint, first of 
all, a person has to be lawfully present in the United States 
when they come in to collect the benefits. So, at that point, 
they are legal. Second, with the recent change in law, it means 
that the person has to have had a legal work authorized SSN 
sometime in his career to collect benefits. Historically, we 
have had a relatively minor number, and I don't really have the 
numbers on it, of people who do come in and present all their 
W-2s, all their monthly payroll stubs, and get some benefits. 
Again, they had to be legally in the United States at the time 
they were presenting that information to us.
    Mr. HULSHOF. Here is the question the Chairman stopped 
short of asking that I want to ask. You have referenced the law 
that President Bush signed, very bipartisan actually as it went 
through the legislative process. This is a policy question, and 
I don't want to make you squirm on purpose.
    [Laughter.]
    What would be the tradeoffs if we decided as a nation that 
we were going to stop paying Social Security benefits, or stop 
paying tax refunds based on unauthorized work?
    Mr. LOCKHART. Well, I will talk from the Social Security 
standpoint, and then let Mark talk from the IRS standpoint. 
First of all, the key thing is the administrative complexity of 
trying to recreate records. Trying to figure out when a person 
was legally working, when a person was not legally working, if 
they had a temporary visa, they were legally working for a 
while, then a period they weren't legally working, would be a 
very cumbersome process because, as I understand it, the 
Immigration and Naturalization Services or DHS does not keep 
records going back that way, and we certainly don't have them 
at Social Security. So, there would be an administrative 
complexity of some detail.
    From a policy standpoint, to answer that, I think there 
definitely is the issue of the potential of driving people 
further underground. Instead of having these payroll taxes 
being paid, they would just stop paying them, and there would 
be less chance that these people would be integrated into the 
American society.
    Mr. HULSHOF. Commissioner Everson, would you like a crack 
at that question?
    Mr. EVERSON. Sure. I believe that the consequences would be 
negative in terms of the amount of money coming into the 
government if you look at it from a revenue generation point of 
view, and also damaging to the long-term health of our tax 
administration system. I say that because already we have many 
people who are working in an undocumented manner. They aren't 
in the system at all. I think that, as Jim just indicated about 
some of the industries that this involves and some of the parts 
of the country where this is more prevalent, you would tend to 
augment the number of those folks who aren't participating. 
They aren't filing at all. Their taxes are not being withheld. 
They are in a cash economy. So, they are not--this problem 
would get worse. It is true, you wouldn't pay out some small 
amount of refunds, but I think you would have a very 
discouraging effect on bringing people into the system, which 
is our objective, of course.
    Mr. HULSHOF. As just a final comment, since the Chair has 
been very gracious with all of us when the red light has come 
on, I would just simply say, first of all, a small thing. It is 
good that each of you refers to each other on a first name 
basis for this reason. There are witnesses coming behind that 
really encourage data sharing and other information sharing 
between the IRS and the SSA. I would encourage you guys to have 
a weekly coffee or whatever, and I say that tongue-in-cheek 
because there are a lot of challenges, and I recognize the 
difficulty and the administrative nightmare, but the ability 
for the IRS and the SSA to share some of this information--we 
have talked about mismatches, we talked about all these 
challenges. It is critical, and I respect that there are 
different missions that the IRS has and the SSA has, but 
unless, and until, we adopt some of these recommendations that 
the IG or the Taxpayer Advocate have suggested, I think we are 
going to continue to meet here every year, and we are going to 
pound the podium and say, oh, here we are again, and we are not 
going to make much progress. Thank you.
    Chairman HOUGHTON. Thanks very much. Mr. Brady?
    Mr. BRADY. Thank you, Mr. Chairman. Clearly, the mismatch 
problem is frustrating for everyone in this room. Clearly, the 
way it is being approached isn't working well. The number of 
letters sent out, the response to it, the enforcement, issues 
like that aren't making much of a dent. Shifting to--could we 
be more effective by preventing the problem in the first place? 
I know we have taken steps to make it easier for employers to 
verify the SSNs up front, which is, I think, where we all want 
to be, and when I am in Washington, I hear we have really made 
great strides that way. When I am back home and talking to 
employers in Texas, they feel like it is a cumbersome process, 
and I can't recall if it is whether they need one verified, or 
if they need a dozen in a day where it gets to be a problem. My 
question is, what are we doing to make the SSN Verification 
Service (SSNVS) more user friendly, more immediate in response? 
Obviously, if we can match them up correctly at the beginning, 
it is going to save us a bunch on the back end. Frankly, 
employers have the responsibility to match these numbers. We 
have the responsibility to make it, in this day and age of 
technology, by sharing information and making it secure, we 
ought to be able to do a good job of that. Would you care, 
Commissioner Lockhart, to answer?
    Mr. LOCKHART. I would be happy to. I think that is a very 
important issue, and we have a lot of activities going on. We 
do have our ongoing employee verification system that allows 
employers the opportunity to call in to a special 800 number 
with 5 SSNs, and get them verified then. Also, people can walk 
into our field offices with up to fifty SSNs and names, and we 
will say whether that is a match or not. That is all we will 
say. We won't say if that is the real person or anything, but 
we will say it is a match. They can also send magnetic data 
tapes for their whole payroll, if they want.
    I am very excited about where we are going. It is this new 
system called SSNVS.This new system is in the final stage of 
piloting, and has been very successful. We now have 85 
employers, including some of the largest employers in this 
country, using it. It is an Internet system that you can get, 
in real time, 10 numbers identified, and overnight, virtually 
as many as you want. That system, as we roll it out, and again, 
we have to finish the evaluation of the pilot, but I can tell 
you that we have satisfaction surveys from the users, and 
something like 93 percent are very satisfied. So, I think that 
is the way we are going.
    Mr. BRADY. How do we accelerate a program like that? How 
many employers today use--earlier, you talked about how you can 
get five by the phone. You can get more than that if you come 
into the office. How many employers, to put it in perspective, 
are using what you have already today?
    Mr. LOCKHART. It varies. Not as many as we would like. We 
are still probably less than 1,000 in some of the various 
aspects of the SSNVS, and we are trying to make it known to 
people that it is available, and certainly we are sending out 
now, I think quarterly newsletters to 6.5 million employers, 
which is virtually every American employer. At this point, they 
are not using it as actively.
    Mr. BRADY. So, put that in perspective. Ten percent are 
using it?
    Mr. LOCKHART. Probably much less than that.
    Mr. BRADY. On the new program, what would you think would 
be an acceptable goal for us to set, both Congress and Social 
Security, to match these accurately up front?
    Mr. LOCKHART. That is a difficult question, and it may be 
part of evaluating our pilot to set those kinds of goals. At 
this point, I think it is a little premature. We have seen some 
of the 85 participating employers use it extremely actively, 
and we have seen others just use it occasionally. As part of 
the evaluation, we are looking to see why some are using it 
much more than others, and I think that will help us set those 
kinds of goals.
    Mr. BRADY. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much. I am not going to 
ask any questions, but I do look out over the next hill and ask 
where we are going here. What are the options? What are we 
doing? There is a mismatch. There is confusion here. You 
realize it. You have got to make sure that people don't go 
underground. Maybe what you could do is to send a one-pager or 
a one-paragraph or something to us outlining some of the 
specific things you think we ought to be aware of as you are 
moving ahead here and trying to make this system work. So, 
thank you very much, gentlemen. I appreciate your 
participation, and we will go to the second panel.
    Chairman HOUGHTON. The second panel is Michael Brostek, the 
Director of Tax Issues, GAO; Pamela Gardiner, Acting IG for Tax 
Administration, Treasury; Nina Olson, National Taxpayer 
Advocate, IRS; and Patrick O'Carroll, Acting IG, SSA. I am 
going to try to move this thing along so that we can get 
through maybe in one-half hour. Would that be all right with 
you? So, gentlemen and ladies, if you could shorten your 
testimony as much as possible so that we can get some questions 
from the panel, I would appreciate it very much. When you are 
ready, Mr. Brostek, you can begin. Please commence, Mr. 
Brostek. Thank you very much, everyone, for being here.

   STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ISSUES, U.S. 
                   GENERAL ACCOUNTING OFFICE

    Mr. BROSTEK. Chairman Houghton, Shaw, and Members of the 
Committee, thank you for the opportunity to testify today on 
issues related to the Taxpayer Identification number, known by 
its acronym as ``ITIN.'' In my summary, I will focus on the 
IRS' controls over ITIN issuance, a limited test we did of 
those controls, and on some concerns of employers and Federal 
agencies that arise when ITINs are issued to illegal resident 
aliens. The IRS' controls over the issuance of ITINs are 
intended to help ensure that applicants are, in fact, who they 
claim to be, and have a tax-related need for an ITIN. Although 
the IRS made changes to approve these controls in December, 
2003 and earlier, the IRS remains limited in its ability to 
thwart improper claims for ITINs. The IRS issues at least 70 
percent of ITINs without seeing the applicant, thus impeding 
its ability to verify the applicant's identity. The IRS also 
does not verify documents supplied by the applicants with third 
parties, and has limited capability to translate documents.
    We tested the IRS' ITIN issuance process and the graphic 
over here shows our results. Before changes in issuance 
controls were made, we were able to obtain an ITIN using a 
counterfeit driver's license and a matricular card. A 
matricular card is a photo identification issued by Mexico. We 
then used the ITIN card that we received from the IRS to open a 
bank account and obtain an ATM card. We also counterfeited an 
ITIN card itself, and used that to obtain a voter registration 
card in one State. This limited test shows that ITINs could be 
obtained under false pretenses, and then used to help blend 
into society. Although the IRS has made changes since we did 
our test, in our opinion, the weaknesses that we exploited were 
not fully addressed.
    The IRS has concluded that most resident aliens who have 
ITINs and earn wage income are not legally employed in the 
United States. When ITINs are used by individuals who cannot be 
legally employed, a number of issues arise. One is how such 
issues contribute to the SSA's earnings suspense file. Using 
2002 data from the SSA, we roughly estimated that about 119,000 
ITINs have shown up in the suspense file from 1996 through 
2000, the period we looked at. During that period, there were 
38 million records added to the suspense file.
    However, ITIN recipients often provide their employers, as 
we have heard earlier, an SSN instead of the ITIN number that 
they receive from the IRS. According to information provided by 
the Treasury IG for Tax Administration, for tax year 2000, 
about 265,000 ITIN recipients had W-2s attached to their 
returns with SSNs that had not been assigned to the ITIN 
holder. Thus, in that year alone, the use of SSNs by ITIN 
recipients likely accounted for more of the growth in the 
suspense file than the ITINs themselves have for the entire 
time they have been in creation. Employers have 
responsibilities to the SSA, the IRS, and the DHS related to 
identifying employees, those employers have raised concerns 
that the DHS--the U.S. DHS--and the IRS might penalize them. In 
general, however, based on the IRS' reply to these employers 
and our understanding of the IRS' regulations, if employers do 
only what they are required to do, those employers appear to 
bear fairly little likelihood of being penalized. Under the 
IRS' guidance, employers have no direct responsibility to 
consider whether the numbers that are provided to them are 
valid.
    From Federal agencies' perspective, because tax returns for 
ITIN holders provide many details about where they live and are 
employed, data the IRS possesses has potential to assist the 
DHS in enforcing immigration laws. Taxpayer data might help the 
DHS identify up to hundreds of thousands of individuals who 
appear to be illegally employed. These data are not shared, as 
we have heard earlier, for several reasons, including the legal 
restrictions on the sharing of taxpayer data, and the potential 
that such sharing might cause individuals to move into the 
underground economy. In summary, in creating the ITIN, the IRS 
had a valid tax administration purpose, but that also opened 
another avenue for individuals to use to establish an identity 
and blend into society. The IRS' controls over the issuance of 
ITINs have been limited, and consequently we had little 
difficulty obtaining an ITIN with bogus documents. The IRS' 
recent efforts to improve its controls have helped somewhat, 
but we believe that some weaknesses remain, the weaknesses that 
we exploited in part.
    A significant number of ITIN holders are illegal resident 
aliens. Cooperation among these agencies might help them in 
carrying out their missions. However, given considerations such 
as the legal and policy issues that are attendant to that 
increased cooperation, the agencies have been somewhat 
restrained in doing that. This hearing is one opportunity for 
Congress to consider whether to provide new guidance to the 
agencies on how they should proceed.
    Chairman HOUGHTON. Thank you very much, Mr. Brostek.
    [The prepared statement of Mr. Brostek follows:]
   Statement of Michael Brostek, Director, Tax Issues, U.S. General 
                           Accounting Office
    Messrs. Chairmen and Members of the Subcommittees:
    I am pleased to participate in the hearing today on various issues 
related to the Individual Taxpayer Identification Number (ITIN) issued 
by the Internal Revenue Service (IRS). As you requested, my statement 
today describes why IRS created the ITIN, the processes and controls 
IRS has in place for issuing ITINs, the results of our limited test of 
the controls over issuing an ITIN, and certain concerns and problems 
for employers and government agencies that ensue when ITINs are issued 
to illegal resident aliens.\1\
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    \1\ In this testimony, we use the term alien to mean a foreign-born 
individual who has not been naturalized and is still a subject or 
citizen of a foreign country. A resident alien is someone meeting this 
definition but also considered a resident of the United States for tax 
purposes, as described later in this testimony. A nonresident alien 
does not reside in the United States, but may have a need to interact 
with IRS. For this testimony, we defined an illegal resident alien is a 
resident alien who is not legally in the United States and also may 
refer to them as illegal aliens, undocumented workers, or unauthorized 
resident aliens.
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    IRS issues ITINs to individuals who are required to have a United 
States taxpayer identification number (TIN) but who are not eligible to 
obtain a social security number (SSN) from the Social Security 
Administration (SSA). An ITIN has nine digits formatted like an SSN 
(NNN-NN-NNNN) but beginning with the number ``9''.\2\ IRS issues ITINs 
for tax processing purposes only. Having an ITIN does not affect a 
holder's immigration status, or authorize the holder to work or receive 
Social Security benefits.
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    \2\ SSA officials said that they also receive other identification 
numbers that start with ``9''.
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    In requesting this testimony, you sought a better understanding of 
the vulnerabilities in the ITIN issuance process, including whether 
weaknesses allow ITINs to be issued and used for illegal purposes and 
possible security breaches. You also expressed interest in the extent 
to which employers may be confused by their responsibilities vis-a-vis 
IRS, SSA, and the Department of Homeland Security (DHS) in ensuring the 
identity of their employees, and whether federal agencies are sharing 
information to deal with illegal resident aliens who may be issued 
ITINs.
    Today's statement is based on interviews, reviews of agency 
documents and various publications, and limited tests of the ITIN 
issuance controls. Specifically, to address the four areas, we 
interviewed officials from IRS including the Taxpayer Advocate Service, 
SSA, and the Departments of the Treasury, Homeland Security, and Labor. 
We reviewed documents from these agencies as well as other literature. 
In addition, our Office of Special Investigations (OSI) did limited 
testing of IRS's controls to determine whether it could fraudulently 
obtain an ITIN by mailing or presenting bogus identity documents to 
IRS. OSI used an IRS-issued ITIN and a fake ITIN it generated for 
nontax purposes. We did our work in Washington, D.C. from September 
2003 through February 2004 in accordance with generally accepted 
government auditing standards and we performed our investigative work 
in accordance with standards prescribed by the President's Council on 
Integrity and Efficiency.
    Our results in these four areas showed that:

      IRS created the ITIN in 1996 to improve tax 
administration. IRS needed a better way to identify and track the tax 
reporting of noncitizens that could not obtain an SSN for use when 
filing tax returns. Beyond the filing of tax returns, ITINS have other 
legitimate tax uses, such as for filing documents other than tax 
returns and for claiming benefits related to a tax treaty. According to 
IRS, most ITINs have been used at least once on a tax return and ITINs 
also have been used for other legitimate tax purposes.
      IRS made changes to improve its processes for issuing 
ITINs in December 2003, but continues to have limited controls to 
verify the identity of ITIN applicants. For example, the majority of 
ITIN applicants apply by mail and IRS cannot be sure the applicant is 
the same individual described by the documentation submitted. IRS also 
does not verify with third parties the validity of the documents 
submitted with the ITIN applications.
      Before IRS changed its procedures in December, we 
obtained an ITIN by applying with bogus documents through the mail. We 
also created a bogus ITIN without applying to IRS. Using the IRS-issued 
ITIN, we opened a bank account and obtained an ATM card. We used the 
bogus ITIN to obtain a voter registration card. While very limited, 
this test illustrates weaknesses in IRS's ITIN controls, which have not 
been completely addressed by the changes made in December, and shows 
that ITINs can be used for nontax purposes, such as blending into 
society under a false identity. Resolving the continuing limitations in 
IRS's ITIN issuance controls would be challenging.
      Although precise data are not available, hundreds of 
thousands of ITINs are issued to aliens who subsequently earn wage 
income. IRS and the Treasury Inspector General for Tax Administration 
(TIGTA) have concluded that these individuals are illegal resident 
aliens. Given this context, employers have raised concerns about 
potentially conflicting obligations to IRS, SSA, and DHS when they 
identify employees and their work eligibility. These concerns appear to 
be largely unfounded if employers do what is specifically required. 
Sharing IRS data with DHS may provide enhanced information to target 
enforcement of immigration laws, but to differing degrees, officials 
cited such factors as legal restrictions and the potential for 
employment to be hidden from tax administrators as affecting their 
decisions about whether and how to share data.
BACKGROUND
    IRS requires a unique TIN to process any tax return or tax-related 
document, and associate the return or document with a taxpayer's 
history. A TIN allows IRS to better manage a host of tax administration 
functions--such as crediting tax payments, and verifying compliance in 
filing returns, reporting income, and paying taxes. IRS also needs it 
to process information returns filed by employers and financial 
institutions to report certain types of payments (e.g., wages or 
interest) made to individuals.
    One type of TIN is the SSN, which SSA is authorized to issue to 
United States citizens, aliens allowed to work in the United States, or 
others, in limited cases, for nonwork purposes. For example, according 
to SSA, if an applicant only needs an SSN to obtain certain government 
benefits as specified in SSA regulations, SSA must issue an SSN and 
social security card but the card specifically states that it is not 
valid for work purposes. Individuals must use an SSN when filing a 
required tax return, unless they cannot legally obtain an SSN.
    For those who cannot obtain an SSN but need a TIN for tax purposes, 
IRS created the ITIN. IRS's 2003 training manual on ITINs identifies 
such individuals, as shown below.

      An alien who does not reside in the United States and who 
is filing a U.S. tax return to (1) claim a tax treaty benefit, (2) 
claim a tax refund, or (3) file a joint tax return with a spouse who is 
a U.S. citizen or resident.
      An alien who lives in the United States and who is filing 
a U.S. tax return.
      Individuals claimed on a U.S. tax return as a (1) 
dependent, or (2) spouse.

    An alien is a resident for tax purposes if the individual (1) is a 
lawful permanent resident (green card test \3\) in the United States 
for any time during the year, (2) is present in the United States for 
31 or more calendar days during the current year and for a substantial 
time--183 or more weighted days--during a 3-year period weighted toward 
the current year (substantial presence test), or (3) elects to be 
treated as a U.S. resident (first-year election test).\4\
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    \3\ A green card is an identity document issued to lawful permanent 
residents by DHS that attests to the permanent residence status of an 
individual in the United States.
    \4\ 26 U.S.C.  7701(b)(1)(A).
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    IRS does not believe that it has the legal authority to distinguish 
between legal and illegal resident aliens for tax purposes. Individuals 
who meet the definition of a resident alien are generally taxed in the 
same manner as U.S. citizens and holders of green cards, meaning that 
they are taxed on their worldwide income. One exception is that 
resident aliens who have ITINs are ineligible to claim the refundable 
earned income tax credit, which requires a valid SSN issued for work 
purposes. A nonresident alien is subject to tax on income from U.S. 
sources but generally not on foreign source income.
IRS CREATED THE ITIN TO IMPROVE TAX ADMINISTRATION
    IRS created the ITIN in July 1996 to improve tax administration for 
individuals who were ineligible to obtain an SSN. IRS needed a better 
way to identify and track tax filing and reporting by these individuals 
and by employers and financial institutions that file other tax 
documents related to the individual's income.
    Each individual taxpayer is to use a unique and permanent TIN, 
which allows IRS to associate their filed tax returns with their tax 
records and with information returns on payments made to them, and to 
more effectively use programs to enforce tax filing and reporting 
compliance. For individuals who lacked an SSN, IRS did not have a 
permanent TIN to use in tracking their tax obligations and history 
prior to the ITIN.
    Prior to July 1996, IRS used a system of temporary TINs when a 
taxpayer did not have an SSN to facilitate one-time processing of a tax 
return. The temporary TIN was assigned to a return filed without an SSN 
rather than to a taxpayer. However, IRS had to post returns with 
temporary TINs to the invalid segment of IRS's masterfile because these 
returns could not be associated with a valid taxpayer account.\5\ 
Posting to the invalid segment created problems for IRS enforcement 
programs, such as negating income verification through document 
matching. Because the temporary TINs were unique to IRS, IRS could not 
easily match the amounts of income and withheld taxes reported on these 
tax returns against information returns submitted by third parties to 
report such amounts.
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    \5\ The masterfile is a record of transactions in a taxpayer's 
account. If a taxpayer has a TIN, IRS posts account information to the 
valid segment of the masterfile. Otherwise, IRS posts the information 
to the invalid segment.
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    In 1995, we reported that accounts in the invalid segment had more 
than doubled the growth rate compared to those in the valid segment 
from 1986 through 1994. We also reported that IRS refunded $1.4 billion 
for tax year 1993 returns posted to the invalid segment.\6\ Although no 
one knows how much of this $1.4 billion may have been erroneously 
refunded, the risk was higher because IRS had less certainty about 
these filers' identities absent a valid TIN and about the accuracy of 
their returns absent the ability to match a filed return with third-
party data.
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    \6\ United States General Accounting Office, Tax Administration: 
IRS Could Do More To Verify Taxpayer Identities, GAO/GGD-95-148 
(Washington, D.C.: Aug. 30, 1995).
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    Also, prior to December 1996, SSA was issuing ``nonwork'' SSNs to 
individuals who had tax obligations but were not authorized to work or 
were not otherwise part of the social security system. With the growth 
in the earnings suspense file--SSA records that could not be associated 
with a wage earner, SSA decided to reduce the number of nonwork SSNs. 
Starting in December 1996, SSA tightened restrictions on who could 
apply for a nonwork SSN.
    In response to these events and the needs of tax administration, 
IRS created the ITIN as a permanent TIN assigned to individuals who 
needed to file a tax return but were ineligible to obtain an SSN. Among 
other things, IRS was concerned was that information returns could not 
be matched with a tax return. Such returns report third-party payments 
made to those such as nonresident aliens who invested in companies or 
real estate in the United States, or received rent and royalty 
payments.
    IRS issued its first ITINs in July 1996. Figure 1 shows that IRS 
has issued over 7.2 million ITINs through December 2003 and over 1 
million ITINs annually in more recent years.\7\
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    \7\ IRS issued 60,682 ITINs in 1996; 1,363,071 in 1997; 566,745 in 
1998; 615,413 in 1999; 818,392 in 2000; 1,088,837 in 2001; 1,493,284 in 
2002; 1,229,097 in 2003; and 77,759 through Feb. 13, 2004.
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Figure 1: Number of ITINs Issued Annually and Cumulative Totals, 
        Calendar Years 1996 to 2003
        [GRAPHIC] [TIFF OMITTED] 99672A.001
        
    Source: GAO analysis of IRS data.
    Note: 1996 does not cover a full calendar year because the ITIN 
program began in July 1996.
    According to IRS, most of the ITINs issued have been used for 
legitimate tax purposes such as on tax returns and other tax-related 
documents. IRS analysis in 2003 showed that about 75 percent of the 
ITINs issued since its inception through September 2003 have been used 
at least once on filed tax returns as a required identification number. 
The actual portion of ITINs used for tax purposes would be higher than 
75 percent if IRS had computed the frequency of uses beyond return 
filing such as to: (1) obtain treaty benefits or exemptions from 
withheld tax, and (2) file information returns on payments made, such 
as Forms W-2 (Wage and Tax Statement) for wage income. IRS does not 
track the frequency of these other uses.
IRS PROVIDES MULTIPLE WAS TO OBTAIN AN ITIN BUT ITS CONTROLS TO VERIFY 
        THE CORRECTNESS OF ISSUANCE AND USE ARE LIMITED
    IRS provides multiple avenues to apply for an ITIN, all of which 
result in IRS reviewing the applications and documents to establish an 
individual's identity. However, IRS's controls over the issuance and 
use of ITINs are limited. IRS made changes to improve its controls in 
December 2003, but the changes did not fully address the control 
limitations. Among other limitations, IRS does not see most applicants, 
documents are not verified with third parties, and few staff can 
translate or verify foreign language documents.
ITIN Application Process
    Individuals apply for ITINs by filing a Form W-7 (Application for 
IRS Individual Taxpayer Identification Number) with IRS. As of December 
17, 2003, applicants must provide the tax return for which an ITIN is 
needed, and documentation and a photograph to verify their identity and 
foreign status, such as a passport, driver's license, or identity card.
    The ITIN application can be mailed to IRS, submitted at an IRS 
walk-in, taxpayer assistance center, or submitted through an acceptance 
agent. Each way has slightly different procedures and requirements.

      An applicant can mail Form W-7 and supporting documents 
to the Philadelphia Service Center (campus). The documents must be 
originals or notarized copies. Under IRS procedures, the documents are 
to be examined by an ITIN unit employee and originals are to be 
returned to the applicant while IRS is to retain notarized copies. 
According to IRS, this mail option historically accounts for about 70 
percent of the applications.
      An applicant can apply at an IRS taxpayer assistance 
center that provides walk-in assistance. An IRS employee is to review 
the application and documents submitted. If the employee deems the 
documented proof to be satisfactory, the employee is to make an 
appropriate notation on Form W-7, copy the documents, and return them 
to the applicant. The employee is to transmit Form W-7 and the copied 
documents to Philadelphia for final review and issuance of the ITIN. If 
the employee deems the documents to be suspect or unsatisfactory, the 
employee is to return them to the applicant. According to IRS, about 20 
percent of applicants use this walk-in option.
      An applicant can use the services of an IRS-approved 
acceptance agent.\8\ Agents include colleges, financial institutions, 
and accounting firms, and can be located outside of the United States. 
Acceptance agents help prepare a Form W-7 and must submit this form and 
related documentation to IRS. Certified acceptance agents are 
authorized to also certify whether the documented proof is adequate. 
They are required to keep copies of the documents for 3 years after 
making an appropriate notation on the Form W-7 and forwarding it to 
IRS. Less than 5 percent of applicants use an acceptance agent--whether 
or not certified.
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    \8\ A list of acceptance agents that are available to the general 
public is available on the IRS Web site (www.irs.gov).

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Limited Controls Over ITIN Issuance

    IRS has limited controls to verify ITIN applicants' identities. 
Among the key limitations in the issuance process are that IRS 
employees do not have to see the applicant in most cases to verify 
their identity, applicants' documents are not verified with third 
parties, and IRS has few staff able to translate or verify foreign 
language documents.
    IRS's ability to establish the applicant's identity is hindered 
when IRS employees do not see the applicant as they review identifying 
information and photographs submitted. This is the case for 
applications that are sent through the mail, which account for 70 
percent of applications. A similar problem can arise for ``walk in'' 
applications because third parties can submit a Form W-7 for ITIN 
applicants. As long as the Form W-7 is signed and documentation is 
provided, IRS does not require applicants to appear.
    IRS employees may have difficulty in determining the validity of an 
unfamiliar document submitted with a Form W-7 to verify identity. An 
IRS letter to state motor vehicle departments in August 2003 indicated 
that IRS generally accepts documents submitted with a Form W-7 at face 
value without validating their authenticity with issuing agencies, or, 
as discussed above, requiring applicants to appear in person. As of 
December 17, 2003, IRS listed 13 types of documents that could be used, 
such as a passport, foreign voter registration card, visa, or U.S. or a 
foreign driver's license.\9\ Prior to that, IRS had listed 40 types of 
documents. IRS reduced the list, in part, because of the difficulty for 
IRS employees who see low volumes of Forms W-7 to know all types of 
documents.]
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    \9\ Other documents include an identification card issued by U.S. 
or foreign military agencies, a state, or a national government; a DHS 
photo identification; birth certificate; and medical or school records 
for dependents.
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    Even with this reduction in the number of acceptable types of 
documents, IRS employees still can encounter many variations to 
consider for each type of document. For example, an IRS research study 
completed in October 2003 indicated that 17 countries accounted for 85 
percent to 87 percent of the ITIN applicants during 1999 through 2001. 
In each of these years, Mexican citizens accounted for 54 percent to 57 
percent of the ITIN applications submitted to IRS. The remaining ITIN 
applicants can come from many other countries. Each country could have 
unique formats for each type of acceptable document, which may be 
unfamiliar to IRS employees.
    IRS employees have limited capability to interpret documents 
submitted in a foreign language. IRS does not track how many documents 
are submitted in a foreign language but as noted above, ITIN applicants 
can come from many countries. As of October 2003, 10 of the 230 
employees at the ITIN Philadelphia site were bilingual--6 in Spanish, 1 
in Chinese, 1 in Korean, 1 in Japanese, and 1 in Ukrainian/Polish, 
according to IRS.
    Nor does IRS generally require ITIN applicants to provide 
translated copies of documents submitted in a foreign language. 
According to the Form W-7 instructions, the applicant may be required 
to provide a certified translation of the foreign language document to 
obtain an ITIN. IRS states that it will attempt to translate any 
foreign documents provided. If IRS cannot translate it, IRS's procedure 
is to ask the applicant for the required translation.
    Even if documents can be read, some IRS employees do not have much 
experience in judging whether the documents are genuine. According to 
IRS officials, much of this knowledge comes from on-the-job 
experience--employees that see more documents are more likely to be 
able to spot an invalid or bogus document. Each IRS employee that 
provides taxpayer assistance receives the standard 8-hour IRS training 
on ITIN, including document identification and validation, given to all 
employees when hired--whether the employee handles ITIN applications in 
Philadelphia or at a walk-in site.

IRS Is Attempting to Improve ITIN Issuance Controls

    Knowing of weaknesses in its ITIN processes and controls, IRS has 
made some changes to improve its controls and is considering other 
improvements. IRS's concern about the large number of ITINs issued 
prompted creation of a task force in 2002 to conduct an in-depth review 
of ITINs. The task force identified many problems and recommendations 
in its September 2002 final report. IRS designated 22 recommendations 
as high priority, and created an ITIN office to study their feasibility 
and oversee any implementation.
    We did not have time to review the implementation status of all 22 
recommendations but know that action has been taken on some of the 
recommendations. For example, IRS has started a campaign to educate 
states, employers, financial institutions, and other government 
agencies on the appropriate use of ITINs. To this end, IRS sent letters 
in August 2003 to the directors of all state motor vehicle departments 
asking them to not accept ITINs for drivers' license purposes. IRS also 
has considered legislative proposals to make ITIN use illegal for 
nontax purposes, and to assess information return penalties for 
improper Form W-7 filings.
    IRS announced three other recommendations that took effect on 
December 17, 2003. First, to help eliminate the nontax use of ITINs, 
the applicant will have to show a federal tax purpose for seeking the 
ITIN. A Form W-7 application without proof that an ITIN is needed for 
federal tax purposes is to be rejected. IRS is requiring taxpayers to 
attach the tax return for which an ITIN is needed to a Form W-7.\10\ 
Nonresident aliens who need an ITIN for tax purposes other than filing 
a tax return, such as to obtain tax treaty benefits, will need to prove 
ownership of the asset that is eligible for a benefit when they file 
the Form W-7. Second, as mentioned earlier, IRS reduced to 13 from 40 
the number of documents that it will accept as proof of identity to 
obtain an ITIN. Third, IRS will no longer issue an ITIN card, reasoning 
that the card could be mistaken for an SSN card. Rather, it will issue 
an authorization letter. Although these changes appear to have the 
potential to better ensure that ITINs are issued for valid tax-related 
purposes, we do not know how much these changes may improve IRS's 
controls over issuance.
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    \10\ Applicants who are not authorized to work but report wage 
income on the tax return could still qualify for an ITIN, as discussed 
elsewhere in this testimony.

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Weaknesses in ITIN Controls Can Contribute to Tax Fraud

    Weak controls over the issuance of ITINs can contribute to tax 
fraud by individuals seeking to obtain a tax refund that is not truly 
owed to them. For example, if an individual uses bogus documentation to 
obtain an ITIN under a false identity, that individual could use that 
ITIN to file fraudulent tax returns that claim tax refunds. In such 
situations, the individual could attach a bogus Form W-2 to the tax 
return to create support for any wages claimed on the fraudulent 
return, even though ITIN holders generally are not authorized to have 
SSNs and earn wages in the United States.\11\
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    \11\ By analyzing a sample of tax returns filed in tax years 1999 
and 2000 with an ITIN for the primary filer, IRS estimated that more 
than 90 percent of the returns also reported wage income.
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    IRS has not measured how often such tax fraud schemes related to 
ITINs have been used but has some anecdotal data. IRS has found that 
ITINs have been used in schemes that resulted in millions of dollars in 
fraudulent tax refunds. For 1999 through 2003, IRS found 12,241 tax 
returns, that used an ITIN with bogus Form W-2s attached that claimed 
refunds in excess of $22.1 million. IRS was able to stop $18 million of 
these refunds. One scheme in California over these four years accounted 
for 9,664 of these false returns.
IRS's ITIN CONTROLS CAN BE CIRCUMVENTED TO OBTAIN ITINS AND USE THEM 
        FOR NON-TAX PURPOSES
    Before IRS instituted the changes during December 2003, we did a 
limited test to assess the security of the ITIN program controls. We 
attempted to improperly obtain and use ITINs for nontax purposes during 
September through November 2003. We were able to obtain an ITIN from 
IRS using fake identity documentation and use this ITIN as well as a 
bogus ITIN we created for nontax purposes. Although IRS changed its 
procedures after we obtained and used the ITINs, the changes made do 
not fully address the weaknesses we exploited, such as IRS's limited 
ability to verify the validity of documents. Overcoming these 
weaknesses would be challenging.
    We applied for an ITIN using two methods. First, we mailed an ITIN 
application to IRS's Philadelphia Service Center using a bogus foreign 
birth certificate as proof of identity. Second, we submitted bogus 
foreign documentation as proof of identity at an IRS taxpayer 
assistance site. After we obtained an ITIN through the mailed 
application, we used it to open a bank account and obtain an ATM card. 
We did not receive the ITIN from the application submitted at the walk-
in site because we already received an ITIN for that individual through 
the mailed application; IRS apparently followed its procedure to not 
issue multiple ITINs to the same individual.
    We also created a bogus ITIN displayed on a fake ITIN card. We used 
the bogus ITIN in lieu of a required SSN to obtain a Virginia voter 
registration card. Virginia requires an SSN to register to vote but 
presumably voter registration officials did not verify the number we 
put on the application.\12\ Only U.S. citizens are eligible to obtain a 
voter registration card. We were twice unsuccessful in using the bogus 
ITIN to open a bank account in the District of Columbia. Officials at 
both banks told our staff that they could not validate this ITIN based 
on their access to a credit reporting agency database.
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    \12\ Given the limited time to do our work, our test only included 
Virginia. We do not know whether other states also would have issued us 
a voter registration card in this manner. Since we did our test, 
Virginia has announced changes to strengthen its checks of 
identification documentation such as for a driver's license.
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    Our test of IRS's ITIN issuance controls and whether an individual 
can use an ITIN for nontax purposes was too limited to show the extent 
to which ITIN issuance controls prevent improperly-issued ITINs. Nor 
does the test show the magnitude of any abuse, in either receiving 
ITINs under false pretenses or using them for nontax purposes. Rather, 
the test indicates that IRS's ITIN process and controls could be 
circumvented, and that a person who obtains an ITIN using bogus 
documentation may have little difficulty in using the ITIN for certain 
nontax purposes.
    Although IRS revised its procedures for issuing ITINs subsequent to 
our test, the changes made do not completely address the control 
weaknesses we exploited. On one hand, IRS staff will need to review 
fewer types of documents and will be further trained in 2004 on 
document validation and document inspection equipment to help identify 
questionable documents. Also, because IRS switched to a letter from an 
SSN-like card to help clarify that the issued ITIN is not an SSN, using 
an ITIN to obtain other documents may be more difficult. On the other 
hand, IRS will neither require applicants to appear in person nor 
verify documents with third parties such as the country issuing them. 
Thus, IRS remains limited in its ability to ensure that the documents 
submitted with an ITIN application are valid and that the applicant is 
the same individual described by those documents.
    IRS officials said that requiring ITIN applicants to apply in-
person and verifying documents with third parties would pose 
challenges, such as significantly delaying the issuance of ITINs and 
processing of returns that are now to be attached to ITIN applications. 
According to IRS, requiring in-person appearances would significantly 
burden IRS and applicants for various reasons. First, IRS locations 
that accept applications do not have the capacity, space or staffing to 
handle the increased ITIN traffic. Second, not all ITIN applicants live 
near such IRS locations and those in foreign countries would have 
virtually no place to go. Third, assistance to customers with other tax 
issues would be diminished, particularly when the ITIN workload now 
only represents about 7 percent of the customers assisted. IRS also 
noted that verifying identification documents would be burdensome on 
customers and costly for IRS, particularly when a significant 
proportion of the documents come from foreign sources.
DIFFICULT ISSUES ARISE WHEN ILLEGAL RESIDENT ALIENS RECEIVE ITINS, 
        BECOME EMPLOYED, AND RECEIVE WAGE INCOME
    Because many ITINs are provided to aliens who are not authorized to 
work but who nevertheless do, employers and government agencies face 
many difficult issues. Often, these issues center on what role 
employers and agencies have, or should have, in furthering the federal 
policy that immigrants should only be in the United States legally.
    Employees who are illegal resident aliens likely provide employers 
inaccurate TINs, which could be either SSNs or ITINs. In this context, 
employers' concerns that they might be penalized if they provide 
inaccurate wage reports to IRS and SSA appear largely unfounded if they 
do what they are required to do. Employers also appear to have been 
concerned about what they are expected to do under the government's 
broader policies on illegal immigration. However, if employers do what 
is required in verifying the identity and work eligibility of 
employees, they appear to limit the likelihood of needing to take 
additional actions under DHS guidance related to possible illegal 
resident aliens.
    When illegal resident aliens obtain employment and earn wages, IRS 
has data that could provide DHS enhanced information to use in 
targeting its enforcement efforts. However, to differing degrees, 
officials cite limited resources, other data sources available to them, 
legal restrictions, and potential impact on voluntary compliance as 
factors affecting their decisions about whether and how to share data.

Tax Returns Using ITINs Often Involve Illegal Resident Aliens and Their 
        Associated Wage Statements Likely Show Up in SSA's Earnings 
        Suspense File

    IRS and TIGTA have concluded that many of the taxpayers who file 
tax returns with ITINs are illegal resident aliens. Although estimates 
are not precise, according to TIGTA, hundreds of thousands of the tax 
returns filed with ITINs each year likely involve employed illegal 
resident aliens. Because a substantial portion of these returns have 
forms W-2 attached with SSNs as the identifying number, they likely 
lead to hundreds of thousands of new records being added annually to 
SSA's earnings suspense file--a large and growing file of wage earnings 
for which SSA cannot identify the owner.
    In a December 2003 letter that responded to a TIGTA report,\13\ IRS 
concluded that most resident aliens who have ITINs and also report wage 
income were not legally employed in the United States because they used 
an ITIN instead of a valid SSN on their tax returns. If these 
individuals had qualified for an SSN, they would not need to file with 
an ITIN. Further, IRS said that it believes that most ITIN holders 
whose wages are reported on Forms W-2 are using stolen or fabricated 
SSNs.
---------------------------------------------------------------------------
    \13\ Internal Revenue Service's Individual Taxpayer Identification 
Number Creates Significant Challenges for Tax Administration, Treasury 
Inspector General for Tax Administration, Jan. 2004, Reference Number 
2004-30-023.
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    In this report, TIGTA had estimated for tax year 2000 that 353,000 
resident aliens who were not authorized to work in the United States 
filed a tax return with an ITIN and also reported wages. TIGTA 
concluded that these individuals likely were unauthorized resident 
aliens (i.e., illegal resident aliens) since they did not use an SSN as 
their identifying number on the tax return. TIGTA estimated that at 
least 265,000 of these returns had Forms W-2 attached that did not use 
valid SSNs.
    These illegal resident aliens can contribute to the size of SSA's 
earnings suspense file when they work and provide their employers an 
incorrect identification number and/or name. New employees are supposed 
to fill out an IRS Form W-4 (Employee's Withholding Allowance 
Certificate) when they begin employment to identify how many, if any, 
exemptions to claim for income tax withholding, and must provide their 
name and SSN. The employer uses the W-4 information to help complete a 
Form W-2 to report wages the employee earned and the amount withheld 
for income tax purposes for the calendar year. The Form W-2 is sent to 
SSA, which uses the form to record the employee's earnings for use in 
determining future benefits. After recording the wages, SSA forwards 
the Form W-2 information to IRS so that IRS can match the wages 
reported on the W-2 to those reported by the taxpayer on a tax return.
    If an illegal resident alien provides an ITIN or an SSN (someone 
else's or an SSN-like number that was made up) on the W-4 and the 
employer records the name and number on a W-2 form, those numbers will 
show up as ``mismatches'' when SSA attempts to validate that the 
employee's name and number match those in SSA's records. In these 
cases, SSA posts a record of the wage earnings into its suspense file.
    Although it is difficult to compute their precise impact, ITIN 
mismatches represent a very small portion of the postings to the 
earnings suspense file since it was created and since the ITIN was 
created. Based on a preliminary analysis in 2002 of SSA data for 1996 
(when the ITIN was created) through 2000 (the most recent year of 
available data then), the suspense file contained roughly 119,000 
numbers that looked like ITINs \14\ and wages of about $936 million. 
The entire file contained over 230 million postings and more than $365 
billion in uncredited wages through 2000. For those same years (1996 
through 2000), about 38 million additional postings (with about $166 
billion in wages) entered the suspense file.\15\ Thus, the initial 
computation of about 119,000 numbers with wages reported under likely 
ITINs represented about 0.3 percent of new postings and about 0.6 
percent of new wages added to the suspense file between 1996 and 2000.
---------------------------------------------------------------------------
    \14\ We did not confirm that each Form W-2 actually reported an 
ITIN because we did not cross match the SSA records with an IRS file of 
issued ITINs. Rather, we counted all numbers in the suspense file that 
appeared to be an ITIN due to their ITIN-like format.
    \15\ For a number of reasons, the number of suspense file accounts 
fluctuates daily, making a precise count difficult. While new accounts 
enter the suspense file, others are withdrawn. SSA has the ability to 
resolve certain types of identification problems for some of the 
accounts. Also, individuals come to SSA to report errors in their 
earnings records. These numbers on the accounts in the suspense file 
cover through tax year 2000, as of November 2003.
---------------------------------------------------------------------------
    Illegal resident aliens' use of SSNs that are not valid for 
employment purposes likely accounts for more of the growth in SSA's 
suspense file than does their use of ITINs. We did not attempt to 
compute the growth in the suspense file that may be due to illegal 
resident aliens improperly using an SSN. However, as discussed earlier, 
for tax year 2000, TIGTA estimated that at least 265,000 tax returns 
\16\ had W-2s attached that used invalid SSNs, which is higher than the 
119,000 likely ITINs in the suspense file since 1996.
---------------------------------------------------------------------------
    \16\ In its report, TIGTA stated that computed the margin of error 
for this estimate was plus or minus 17,732.

If Employers Do What Is Required, They Appear to Face Little Likelihood 
---------------------------------------------------------------------------
        of Being Penalized

    Employers' concerns about potentially being penalized by IRS if 
they submit inaccurate wage reports--which can occur when illegal 
resident aliens provide them ITINs or SSNs upon obtaining employment--
appear to be largely unfounded if employers do what is required. 
Further, if employers do what is required of them, they also appear to 
minimize their responsibilities to take additional actions under DHS 
regulations related to possible illegal resident aliens.
    Employers have responsibilities to IRS, SSA, and DHS when they hire 
employees. In addition to the Forms W-4 and W-2 responsibilities, 
employers are responsible under DHS regulations for verifying 
employees' identity and employment eligibility. Employers must ensure 
that employees fill out a DHS Form I-9 (Employment Eligibility 
Verification Form) when they start work. Employers must review 
documents provided by employees establishing their identity and 
eligibility to work and retain the Form I-9 for 3 years after a person 
begins work or 1 year after a person's employment is terminated.
    Pursuant to your interest, we contacted two groups that represent 
employers to better understand what concerns, if any, they may have 
about their responsibilities to these agencies. Officials from those 
groups did not provide us any examples where the guidance of IRS, SSA, 
and DHS were directly in conflict.
    However, based on our review of two IRS letters,\17\ it appeared 
that some employers may have believed that (1) they had greater 
responsibilities than they actually do under IRS guidance and those 
perceived responsibilities might lead to penalties, and (2) following 
one agency's advice may put them at risk with another agency. 
Representatives of one of the employer groups we spoke with said that 
IRS's responses, as partially described below, allayed their concerns 
by clarifying actions employers are required to undertake.
---------------------------------------------------------------------------
    \17\ On July 24, 2002, the American Society for Payroll Management 
sent a letter and IRS responded to their concerns on January 13, 2003. 
A set of follow-up questions produced another IRS response on September 
23, 2003.
---------------------------------------------------------------------------
    The Information Reporting Program Advisory Committee (IRPAC), which 
represents those (such as employers) who have interests in IRS's 
information returns programs, asked IRS about any advantage or 
disadvantage to using IRS's TIN matching program or SSA's SSN 
verification systems \18\ for purposes of information reporting 
accuracy penalties.\19\ The inference from this question appeared to be 
that some employers believed they were required or expected to use 
these systems to verify that the SSN provided by an employee was 
correct. IRS's response clarified that (1) the TIN-matching program was 
not available to employers for this purpose due to statutory 
restrictions and (2) employers only have to ask an employee fill out a 
Form W-4 and then can rely on the SSN as provided on that form. IRS 
clarified that under its rules employers have no responsibility to 
verify the accuracy of the SSN provided by the employee.
---------------------------------------------------------------------------
    \18\ TIN Matching is an IRS program that allows payers who submit 
certain information returns subject to backup withholding taxes when 
the payee does not provide a TIN to match payee TIN and name 
combinations against IRS records prior to submitting information 
returns. SSA's verification system is a system that employers may 
choose to use in an effort to verify that an SSN matches a given 
individual's name.
    \19\ 26 U.S.C.  6721 provides for a penalty for failure to file a 
complete and accurate information return, including a failure to 
include the correct TIN (or SSN). The penalty is $50 per return up to 
$250,000 per year.
---------------------------------------------------------------------------
    In general, IRS informed employers that they must solicit an SSN 
from the employee when the employee is hired by having the employee 
fill out a Form W-4. The employer should retain the Form W-4 in its 
records and use the SSN provided on the Form W-4 when completing a W-2 
to report wages paid to the employee. If IRS subsequently notifies the 
employer that the SSN is invalid, the employer may need to solicit an 
SSN from the employee once or twice more. The employer may rely on the 
SSN provided by the employee with no further verification.
    The employers' questions to IRS also implied that they were 
concerned that fulfilling their responsibilities to IRS might create 
the need to take action to comply with DHS requirements. In its letter 
to IRS, IRPAC noted that federal immigration representatives had told 
some employers that if an employer used SSA's SSN verification system 
or IRS's TIN matching program, a mismatch notice would constitute 
constructive notice of a possible work authorization issue. In general, 
if questions arise about an employee's work authorization, DHS guidance 
provides that an employer might need to take certain actions, such as 
providing the employee another opportunity to provide proper Form I-9 
documentation. We did not verify whether a mismatch could be 
constructive notice of a work authorization issue. However, because 
employers cannot use the TIN matching program for this purpose and are 
not required to use SSA's SSN verification system, employers can avoid 
possibly having constructive notice of a work authorization issue by 
simply not verifying an employee's identity.

Greater Data Sharing Regarding ITIN Taxpayers Might Help DHS Identify 
        Illegal Immigrants, But Several Issues Affect Any Decision to 
        Increase Data Sharing

    Enhanced sharing of IRS data might help DHS in addressing illegal 
immigration, but whether and how to share data is a complex policy 
issue. Such data sharing could provide DHS additional information to 
use in targeting its enforcement efforts. However, to differing 
degrees, officials cite limited resources, other data sources available 
to them, legal restrictions, and potential impact on voluntary 
compliance as factors affecting their decisions about whether and how 
to share data.
    Among IRS's principal responsibilities, IRS is to ensure that all 
taxpayers meet their tax obligations, including illegal resident aliens 
who are not authorized to work in the United States but who have a tax 
obligation. Among SSA's responsibilities is ensuring that individuals 
who have paid social security taxes on their covered earnings receive 
credit. Such credit is important so that workers will receive the 
benefits to which they are entitled based on their work, even persons 
with such earnings from unauthorized work. In addition to other 
responsibilities, DHS is responsible for enforcing the nation's 
immigration laws, including deterring illegal immigration and locating 
and deporting illegal resident aliens.
    As discussed earlier, IRS data may identify hundreds of thousands 
of individuals who are likely to be illegal resident aliens. 
Individuals who obtain ITINs and report wage income on a tax return may 
be illegal resident aliens. IRS has data that could be used to identify 
illegal resident aliens and/or their employers. The data would include 
such specifics as an individual's name, address, and place(s) of 
employment in the last calendar year.
    Although DHS officials we spoke with said that IRS data might be 
useful in carrying out their responsibilities, they noted that they 
have other sources of data on illegal immigrants and have limited 
resources to pursue all potential leads on illegal immigration. 
Further, they recognized that current statutory restrictions on sharing 
tax data would need to be modified to permit sharing of IRS data with 
them.\20\
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    \20\ Section 6103 of the Internal Revenue Code allows IRS to 
disclose taxpayer information to federal agencies and authorized 
employees of those agencies, but only under specific conditions. 
Section 6103 does not currently authorize data sharing between IRS and 
DHS specifically for immigration enforcement.
---------------------------------------------------------------------------
    IRS officials similarly noted a number of issues that relate to 
increasing data sharing among the agencies. IRS officials said that 
they cannot share these data with DHS under current statutory 
restrictions on the sharing of tax data. IRS officials also said that 
any consideration of additional sharing of tax data with federal 
agencies requires substantial justification and should be considered in 
rare circumstances because the confidentiality of tax data is 
considered to be fundamental to taxpayers' willingness to voluntarily 
and accurately report their tax obligations. Finally, IRS officials 
also noted a potential adverse effect of increased data sharing. To the 
extent that illegal resident aliens become aware of greater sharing of 
information by IRS with other agencies, some of the individuals may 
move into ``underground'' jobs and avoid their tax obligations. Thus, 
IRS faces a fundamental tension in considering steps that might further 
other agencies' achievement of their missions but that potentially 
undercut IRS's ability to ensure that all taxpayers, regardless of 
their legal immigration status, meet their tax obligations.
CONCLUDING OBSERVATIONS
    IRS's creation of the ITIN helped it resolve several tax 
administration challenges. However, in creating the ITIN, IRS opened an 
avenue for individuals to use to establish an identity and to blend 
into society. IRS's controls over the issuance of ITINs have been 
limited and consequently, we had little difficulty obtaining an ITIN 
with bogus documents and then using that ITIN, as well as a completely 
made up ITIN, to take additional steps to blend into society. IRS's 
recent efforts to improve its ITIN issuance process--which changed the 
application procedures from those we tested--might make it somewhat 
more difficult to obtain an ITIN with bogus information but do not 
fully address the weaknesses we exploited.
    Because a significant but not precisely known number of ITIN 
holders are illegal resident aliens, tax return data that IRS receives 
could potentially assist DHS in carrying out enforcement of immigration 
laws. However, agency officials have not aggressively sought to enhance 
data sharing, citing limited resources, legal restrictions, and 
possible voluntary compliance impacts. Changing the current statutory 
provisions that limit the sharing of tax-related data with agencies or 
emphasizing enhanced efforts by IRS, SSA, and DHS to address the 
presence of illegal resident aliens are difficult policy issues. For 
instance, to what extent would increased data sharing undermine the 
willingness of taxpayers to voluntarily and accurately report 
information IRS needs to administer tax laws? What priority should 
these agencies place on addressing illegal resident aliens versus their 
other responsibilities? Given the legal, budgetary, and policy issues 
attendant to increased data sharing, this hearing is one opportunity 
for Congress to consider whether to provide new guidance to the 
agencies on how to proceed.
    Messrs. Chairman, this concludes my prepared statement. I would be 
happy to respond to any questions you or other Members of the 
Subcommittees may have at this time.
    For further information on this testimony, please contact Michael 
Brostek at (202 512-9110 or. Individuals making key contributions to 
this testimony include George Guttman, Jay Pelkofer, and Tom Short.

                                 
    Chairman HOUGHTON. Ms. Gardiner.

 STATEMENT OF PAMELA J. GARDINER, ACTING INSPECTOR GENERAL FOR 
      TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY

    Ms. GARDINER. Chairman Houghton, Chairman Shaw, I 
appreciate the opportunity to appear before you today to 
discuss issues related to individuals who file tax returns 
using the ITIN, and its impact on tax administration. The vast 
majority of the individual tax returns are filed using an SSN 
as identification. However, there are instances where alien 
individuals have a need to file a U.S. tax return. For example, 
a professional golfer who is a citizen of another country but 
tours in the United States would need to report taxes on 
tournament winnings. To enable these individuals to file, 
Treasury regulations were issued in 1996 to provide them with 
ITINs. The number of ITINs issued in the last few years has 
increased dramatically, climbing from 1.1 million in 2001 to 
1.5 million in 2002, a 1-year increase of about 36 percent.
    Normally, ITINs would be used to file a 1040-NR, U.S. non-
resident alien income tax return. However, many ITINs are used 
to file Forms 1040, which creates challenges for tax 
administration. Our analysis of Forms 1040 filed in tax year 
2001 with ITINs, found that approximately 530,000 Forms 1040 
were filed with ITINs as the primary number by aliens who 
resided in the United States, but who were not authorized to 
work and, in general, to reside in the United States These 
returns reported adjusted gross income of $10.7 billion. After 
tax deductions and credits, these tax returns reported a total 
liability of $184 million. Tax returns filed with ITINs present 
two significant challenges for IRS' administration of the tax 
system. First, resident aliens filing tax returns with ITINs do 
so because they typically are not eligible for a valid SSN for 
employment purposes. As a result, the tax returns filed by 
these individuals and the corresponding Forms W-2 often have 
two different identification numbers. We estimate that 309,000 
tax year 2000 Forms 1040 filed with ITINs included W-2s with 
SSNs that did not belong to the individuals who filed the tax 
returns. Instead, many of the SSNs were assigned to other 
individuals.
    Second, individuals filing returns with ITINs often fail to 
fully report income from wages and employee compensation. For 
tax year 2000, we estimate that one in four individuals filing 
with ITINs failed to report wages and employee compensation 
totalling $324 million. However, the mismatches between the 
ITINs and the SSNs limits the IRS' ability to identify this 
particular type of under-reporting. Beyond the tax 
administration challenges, other government agencies are 
affected by ITIN usage because the tax law generally prohibits 
the disclosure of tax information to other Federal Government 
agencies. For example, immigration law contemplates an 
unrestricted exchange of information regarding immigration 
status between Immigration and Customs Enforcement, and other 
government entities and officials. However, there is no current 
exception within the Internal Revenue Code that would permit 
this. In addition, identity theft is the fastest growing finan-

cial crime in the country. The SSA has expressed ongoing 
concerns about the significant problems caused by the misuse 
and sometimes fraudulent use of the SSN. As I indicated 
earlier, tax returns with ITINs have often included W-2s with 
SSNs assigned to other individuals.
    In December 2000, the IRS announced that it was taking a 
number of steps to enhance the ITIN program, as outlined in 
Commissioner Everson's testimony. This ITIN initiative is a 
laudable effort and may reduce the number of ITINs issued for 
non-tax purposes. However, it does not address the issues 
resulting from individuals with ITINs and their employers using 
erroneous or improper SSNs for wage reporting. It is also 
unlikely that it would deter an individual with criminal 
intent, and it might be an impediment to those who seek to 
voluntarily comply with the tax laws. We will monitor the 
impact these initiatives have on the integrity of the ITIN 
program. I would like to close by responding to press reports 
suggesting that Treasury Inspector General for Tax 
Administration has compiled a list of people who we suspect are 
illegal aliens, and that we intend to prosecute them. I can 
assure you that this is completely false. We do not have any 
such list, initiative, or program designed to identify persons 
who are not authorized to work in the United States, and I 
would be happy to answer any questions.
    Chairman HOUGHTON. Thank you very much, Ms. Gardiner.
    [The prepared statement of Ms. Gardiner follows:]
   Statement of Pamela J. Gardiner, Acting Inspector General for Tax 
            Administration, U.S. Department of the Treasury
    Chairman Houghton, Chairman Shaw, Ranking Member Pomeroy, Ranking 
Member Matsui, and distinguished Members of the subcommittees, I 
appreciate the opportunity to appear before you today to discuss issues 
related to individuals who file tax returns using an Individual 
Taxpayer Identification Number (ITIN), and its impact on tax 
administration.
    The vast majority of individual tax returns are filed using a 
Social Security Number (SSN) as identification. However, there are 
instances where alien individuals have a need to file a U.S. tax 
return. For example, a professional golfer who is a citizen of another 
country but tours in the U.S. would need to report taxes on tournament 
winnings. To enable these individuals to file, Treasury Regulations 
were issued in 1996 to provide them with ITINs. An ITIN is intended for 
tax purposes only and creates no inference regarding an alien 
individual's right to live in the U.S. or be legally employed here.
    The number of ITINs issued in the last few years has increased 
dramatically, climbing from 1.1 million in 2001 to 1.5 million in 
2002--a one-year increase of about 36 percent. Normally, ITINs would be 
used to file a Form 1040NR--U.S. Nonresident Alien Income Tax Return. 
However, many ITINs are used to file Forms 1040, which creates 
challenges for tax administration. Our analysis of Forms 1040 filed in 
Tax Year 2001 with ITINs found that approximately 530,000 Forms 1040 
were filed with ITINs as the primary number by aliens who resided in 
the U.S., but who were not authorized to work and, in general, to 
reside in the U.S.

      These returns reported adjusted gross income of $10.7 
billion. After tax deductions and credits, these tax returns reported a 
total liability of $184 million.
      Over half of the tax returns reported no tax liability, 
and $522 million in tax refunds were claimed on these returns.

    Tax returns filed with ITINs present two significant challenges for 
IRS' administration of the tax system. First, resident aliens filing 
tax returns with ITINs do so because they typically are not eligible 
for a valid SSN for employment purposes. As a result, the tax returns 
filed by these individuals and the corresponding Forms W-2 often have 
two different identification numbers. We estimate that 309,000 Tax Year 
2000 Forms 1040 filed with ITINs included W-2s with SSNs that did not 
belong to the individuals who filed the tax returns. Instead, many of 
the SSNs were assigned to other individuals. Second, individuals filing 
returns with ITINs often fail to fully report income from wages and 
nonemployee compensation. For Tax Year 2000, we estimate that one in 
four individuals filing with an ITIN failed to report on their tax 
returns wages and nonemployee compensation totaling $324 million. 
However, the mismatches between the ITINs and the SSNs limit the IRS' 
ability to identify this underreporting.
    Beyond the tax administration challenges, other government agencies 
are affected by ITIN usage because the tax law generally prohibits the 
disclosure of tax information to other Federal Government agencies. For 
example, immigration law \1\ contemplates an unrestricted exchange of 
information regarding immigration status between Immigration and 
Customs Enforcement and other government entities and officials. 
However, there is no current exception within the Internal Revenue Code 
that would permit this. In addition, identity theft is the fastest 
growing financial crime in the country. The Social Security 
Administration has expressed ongoing concerns about the significant 
problems caused by the misuse and sometimes fraudulent use of the SSN. 
As I indicated earlier, tax returns with ITINs have often included W-2s 
with SSNs assigned to other individuals.
---------------------------------------------------------------------------
    \1\ 8 U.S.C. 1373 (2003).
---------------------------------------------------------------------------
    In December 2003, the IRS announced that it was taking a number of 
steps to enhance the ITIN program, including the following:

      An applicant is now required to show a federal tax 
purpose for obtaining an ITIN, and typically must attach a completed 
tax return to the ITIN application.
      The number of acceptable documents to establish proof of 
identity to obtain an ITIN has been reduced from 40 to 13.
      The appearance of the ITIN has been changed from a card 
to a letter.

    This ITIN initiative is a laudable effort and may reduce the number 
of ITINs issued for non-tax purposes; however, it does not address the 
issues resulting from individuals with ITINs and their employers using 
erroneous or improper SSNs for wage reporting. It is also unlikely that 
it will deter an individual with criminal intent, and it might be an 
impediment to those who seek to voluntarily comply with the tax laws. 
We will monitor the impact these initiatives have on the integrity of 
the ITIN program.
    I would like to close by responding to press reports suggesting 
that TIGTA has compiled a list of people whom we suspect are illegal 
aliens and that we intended to prosecute them. I can assure you that 
this is completely false. We do not have any such list, initiative, or 
program designed to identify persons who are not authorized to work in 
the United States.
    I would be happy to answer any question you may have at this time.
    TIGTA's audit report on ITINs is available at: http://
www.treas.gov/tigta/2004reports/200430023fr-redacted.pdf

                                 

    Chairman HOUGHTON. Ms. Olson, nice to have you back with 
us.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. OLSON. Thank you, sir. Mr. Chairman, Ranking Members, 
and Members of the Subcommittees, thank you for inviting me 
here today to discuss ITINs, and what some view as a conflict 
between the laws and procedures governing the U.S. tax, Social 
Security, and immigration systems. Although the IRS ITIN 
administration is not without its problems, I believe that the 
current law and policies of these three systems reflect a 
delicate balance between them that enables each to meet its 
unique requirements effectively without harming the mission of 
the others. It is true that tax law defines the term ``resident 
alien'' differently from immigration law. In 1984, Congress 
explicitly determined that providing a bright line objective 
test of resident alien for tax purposes based on actual 
presence in the United States, regardless of immigration 
status, outweighed other considerations. Both non-resident and 
resident U.S. aliens need some sort of number in order to file 
and report income and pay tax. In 1996, the IRS created ITINs 
for just this purpose. The ITINs, then, are an important tool 
for increased tax compliance.
    The IRS ITIN data demonstrates a strong tendency for 
compliance among ITIN holders. Nearly 75 percent of the 3.1 
million ITINs issued in calendar years 1998 through 2001 have 
appeared on a tax return. Individuals who work in the United 
States without immigration authorization, undocumented workers, 
also have a strong incentive to comply with the tax laws 
because to adjust their immigration status, they must show good 
moral character by paying and filing their taxes. If an 
undocumented worker works for a legitimate business, one that 
is not part of the underground cash economy, the worker must 
have an SSN. He will steal, borrow, or fabricate an SSN and 
obtain false identification documents. Employers use this 
number on the employee's W-2 forms. This identity theft and 
income reporting results in an innocent taxpayer, the identity 
theft victim, being audited and potentially collected against 
for income and tax that are not his. It can take years for the 
victim to get this mess straightened out.
    Let me be very clear here. Identity theft is a crime that 
has lasting effects on its victims. It also causes problems for 
the government. Filing a tax return with an ITIN on the return 
and an SSN on the W-2 form is not a crime in and of itself. In 
fact, these returns enable the IRS to protect identity theft 
victims from needless audits and tax collection. They tell us 
who actually earned the income. Moreover, the ITIN return 
fulfills the taxpayer's legal duty to file. Any proposal that 
addresses misuse of SSNs or immigration issues must demonstrate 
that it enhances tax compliance and protects identity theft 
victims better than the IRS' current procedures. The most 
frequently discussed reform proposals, including authorizing 
the IRS to disclose tax information to Social Security and DHS 
about ITIN holders with earnings, do not stop identity theft or 
prevent undocumented workers from working in the United States. 
These proposals will instead drive the undocumented worker 
underground, where he will continue to use the stolen SSN. They 
will also drive the undocumented worker out of compliance with 
the tax laws.
    Instead, I suggest maintaining status quo plus. Let us 
build upon the IRS' recent improvements to the ITIN process 
that address national security concerns. Let us bring these 
taxpayers into the system through education and outreach, 
working with low-income taxpayer clinics and Volunteer Income 
Tax Assistance sites. Let us accept ITIN-SSN mismatch returns 
electronically and assist these taxpayers at the IRS walk-in 
sites, and let us protect identity theft victims from 
unwarranted compliance actions by fencing off the income that 
is reported under a stolen or fabricated SSN on our tax 
systems. This proposal actually improves tax administration 
while remaining neutral to the administration of Social 
Security and immigration laws. It acknowledges that taxpayers 
filing SSN-ITIN mismatch returns are generally trying to comply 
with the tax laws, even at risk of having their immigration 
status detected. It implements Congress's definition of 
resident alien for tax purposes. It permits the disclosure of 
tax information to Federal agencies only as currently 
authorized by the Tax Code, and does not weaken the important 
privacy protections that are a foundation of our voluntary tax 
system. It helps identity theft victims, and it maintains the 
delicate balancing act between the interests of tax 
administration and the interests of taxpayers without harming 
government's other legitimate interests. In short, it defuses 
the problem. Thank you.
    [The prepared statement of Ms. Olson follows:]
        Statement of Nina E. Olson, National Taxpayer Advocate,
                        Internal Revenue Service
    Chairman Houghton, Chairman Shaw, Ranking Member Pomeroy, Ranking 
Member Matsui, and Members of the respective subcommittees, thank you 
for inviting me to appear before you today to discuss Individual 
Taxpayer Identification Numbers and their impact on tax administration. 
In announcing this hearing, Chairmen Houghton and Shaw noted that the 
Social Security Administration, the Internal Revenue Service, and the 
U.S. Department of Homeland Security all have responsibilities with 
respect to Social Security Numbers and Individual Taxpayer 
Identification Numbers, and that ``each agency's policies are designed 
to promote its individual goals.'' This hearing today is intended, in 
part, to help them determine whether ``better coordination across 
agency boundaries is needed to promote enforcement of laws and 
regulations.''
    Some parties--both inside and outside government--believe that an 
apparent conflict between the laws governing the U.S tax, social 
security, and immigration systems hampers the effective administration 
of these programs. I intend to show in my testimony that there is, in 
fact, no actual conflict between these systems but instead a delicate 
balance between these three systems that enables each to fulfill its 
individual mission effectively without harming the mission of the 
others. I will also discuss why certain proposed solutions to this 
perceived conflict will have a serious impact on tax administration 
without resolving the problems for the other agencies.
Tax Administration Considerations
    Since its earliest incarnation in 1862, the Internal Revenue 
Service (IRS) has been charged with administering and enforcing this 
nation's internal revenue laws. As part of its mission, the IRS must 
create systems that enable taxpayers who wish to comply with the tax 
laws to do so with minimal burden or obstacles. It must also ensure 
that taxpayers who do not wish to fully comply with the tax laws, or 
who actively attempt to evade or undermine these laws, face the 
appropriate level of enforcement actions, including prosecution where 
necessary. The IRS's systems--on both the customer service and 
compliance/enforcement sides of the house--must incorporate protections 
of fundamental taxpayer rights. Accordingly, and perhaps most 
importantly, the IRS must zealously protect the confidentiality of the 
tax information required for making the determination of the correct 
amount of tax that each U.S. taxpayer should pay.\1\
---------------------------------------------------------------------------
    \1\ IRC  6103(b)(1) and (2) refer to this information as 
``return'' and ``return information.''
---------------------------------------------------------------------------
    These four essential elements--confidentiality, customer service, 
enforcement, and taxpayer rights--are all implicated as the IRS 
attempts to fulfill its mission with respect to a particular group of 
taxpayers--those who are not eligible for SSNs and thus must obtain an 
ITIN to meet their tax obligations--and a subset population within that 
group, namely, taxpayers who are working inside the United States 
without legal authorization to do so. It is particularly challenging to 
reconcile these elements when faced with problems such as identity 
theft and domestic and international terrorism, which clearly create 
innocent victims. But reconcile them we must.
Treatment of Aliens for Tax Purposes
    In general, alien persons (that is, individuals who are not U.S. 
citizens) are classified as either nonresident aliens or resident 
aliens. Prior to 1984, the Internal Revenue Code (IRC) did not provide 
a definition for the terms ``resident alien'' or ``nonresident alien.'' 
Treasury regulations under IRC  871 generally required the IRS to 
apply a subjective, facts-and-circumstances test that turned, in part, 
on the alien's intentions as to the length and nature of his stay in 
the United States.\2\
---------------------------------------------------------------------------
    \2\ Staff of Joint Committee on Taxation, 98th Cong., 2d Sess., 
General Explanation of H.R. 4170 at 463 (Dec. 31, 1984)(hereinafter, 
``JCT''). See Treas. Reg.  1.871-2 to -5 (as amended by T.D. 6500, 25 
Fed. Reg. 11910 (Nov. 26, 1960)).
---------------------------------------------------------------------------
    The regulations defined a ``nonresident alien individual'' as one 
``whose residence is not within the United States and who is not a 
citizen of the United States.''\3\ On the other hand, an individual was 
considered a U.S. resident for tax purposes if he (1) had intent to 
make residence in the United States and (2) was physically present in 
the United States. Physical presence alone, however, was not sufficient 
to obtain resident status. The regulations provided that an alien's 
residence depended on whether he was ``a mere transient or sojourner'' 
in the United States.\4\ Thus, an alien could be a resident for tax 
purposes despite his not being a resident for immigration purposes or 
present in the United States for half the tax year.\5\
---------------------------------------------------------------------------
    \3\ Treas. Reg.  1.871-2(a) (as amended by T.D. 6500, 25 Fed. Reg. 
11910 (Nov. 26, 1960)).
    \4\ Treas. Reg.  1.871-2(b); JCT, supra note 2.
    \5\ JCT, supra note 2 (citing Tongsun Park v. Comm'r, 79 T.C. 252, 
aff'd without published opinion, 755 F.2d 181 (D.C. Cir. 1985)). For a 
detailed discussion of pre-1984 law, see Joel D. Kuntz & Robert J. 
Peroni, U.S. International Taxation B1.02[2][b] (2002).
---------------------------------------------------------------------------
    The regulations also created an ``evidentiary'' presumption that an 
alien was presumed to be a nonresident alien, regardless of presence 
(legal or illegal) in the United States. This presumption could be 
rebutted by evidence that the alien had made a declaration of intent to 
become a U.S. citizen \6\ or by proof of the alien's definite intent to 
obtain U.S. residence, or by evidence that the length and nature of the 
alien's stay in the U.S. made him a resident.\7\ This regulatory 
presumption created some confusion in application.\8\
---------------------------------------------------------------------------
    \6\ Treas. Reg.  1.871-4(c)(2).
    \7\ Id.
    \8\ See Kuntz & Peroni, supra note 5, at B1-B25.
---------------------------------------------------------------------------
    It was this subjective and confusing state of the law that led 
Congress in 1984 to distinguish more clearly between resident and 
nonresident aliens in the Internal Revenue Code.\9\ The Joint Committee 
on Taxation described the rationale for the changes as follows:
---------------------------------------------------------------------------
    \9\ Deficit Reduction Act of 1984, Pub. L. No. 98-369,  138.

     Congress believed that the tax law should provide a more objective 
definition of residence for income tax purposes. Congress believed that 
prior law did not provide adequate guidance with respect to residence 
status. Congress understood that an objective definition might allow 
some aliens who should be taxable as residents to avoid resident 
status, and would impose resident status on some aliens who are not 
residents under the current rules. On balance, however, Congress found 
that the certainty provided by the Act's objective definition 
outweighed other considerations.\10\
---------------------------------------------------------------------------
    \10\ JCT, supra note 2, at 463-464.

    Thus, Congress enacted IRC  7701(b), which defines the terms 
``resident alien'' and ``nonresident alien.'' An alien individual is 
considered a resident alien if he or she satisfies either the ``lawful 
permanent resident'' (or ``green card'') test \11\ or the ``substantial 
presence'' test.\12\ A nonresident alien is an alien individual who is 
neither a citizen of the United States nor a resident of the United 
States, as defined above.\13\
---------------------------------------------------------------------------
    \11\ IRC  7701(b)(1)(A)(i). ``A lawful permanent resident is an 
individual who has been lawfully granted the privilege of residing 
permanently in the United States as an immigrant in accordance with the 
immigration laws.'' Treas. Reg.  301.7701(b)-1(b)(1).
    \12\ IRC  7701(b)(1)(A)(ii). An individual meets the substantial 
presence test if he or she has been present in the United States on at 
least 183 days during a 3-year period including the current year. The 
183-day period is computed as follows:
    Current Year: Each day of presence counts as a full day. First 
Preceding Year: Each day of presence counts as \1/3\ of a day. Second 
Preceding Year: Each day of presence counts as \1/6\ of a day.
    IRC  7701(b)(3).  See also Treas. Reg.  301.7701(b)-1(c).
    \13\ IRC  7701(b)(1)(B).
---------------------------------------------------------------------------
    Nonresident aliens are generally subject to U.S. income taxation on 
their U.S.-source income and on certain foreign-source income that is 
effectively connected with the conduct of a trade or business within 
the United States.\14\ Resident aliens, on the other hand, are subject 
to U.S. taxation on their worldwide income under the same rules as U.S. 
citizens.\15\
---------------------------------------------------------------------------
    \14\ IRC  864(c)(1)-(4). A flat 30 percent tax rate (or lower 
treaty rate) is imposed on a nonresident alien's gross U.S. income that 
is not effectively connected with a U.S. trade or business. U.S. source 
net income that is effectively connected with a U.S. trade or business 
is subject to income taxation under the same rules that apply to U.S. 
residents. However, certain treaty exceptions may apply and thereby 
limit taxation or prevent double taxation. See IRC  871.
    \15\ Treas. Reg. 1.1-1(b).
---------------------------------------------------------------------------
    In creating this statutory scheme, Congress acknowledged that it 
was creating an imperfect system but that it had struck the right 
balance between the goals of tax administration and the issues of 
alienage and immigration status. That is, Congress essentially decided 
that U.S. immigration status was not solely determinative of a 
taxpayer's status as a resident alien or nonresident alien for tax 
purposes. In order to distribute the tax burden fairly, Congress 
consciously deviated from the immigration classification system.\16\ 
The Joint Committee on Taxation provided the following explanation:
---------------------------------------------------------------------------
    \16\ There are recent examples where Congress chose to disregard 
immigration status as a matter of tax policy and effective tax 
administration. In 1998, Congress enacted IRC  7526, which creates a 
grant program for funding Low Income Taxpayer Clinics that provide, in 
part, outreach and education to taxpayers who speak English as a Second 
Language. This legislation makes no distinction as to the immigration 
status of these taxpayers. The program was enacted after testimony 
before the National Commission on Restructuring the Internal Revenue 
Service and both houses of Congress that ESL taxpayers, including 
undocumented workers, needed assistance in complying with the tax laws.

     Congress believed that aliens who have entered the United States 
as permanent residents and who have not officially lost or surrendered 
the right to permanent U.S residence should be taxable as U.S. 
residents. These persons have rights in the United States that are 
similar to those afforded U.S. citizens . . . equity demands that they 
contribute to the cost of running the government on the same basis as 
---------------------------------------------------------------------------
citizens.

     Congress similarly decided that it was appropriate to treat as 
residents individuals who spend significant time in the United States. 
Recognizing that there is no single system that is perfect, Congress 
believed that a regime that depends on length of stay meets the 
criteria of objectivity and establishing nexus with the United States 
and is appropriate.\17\
---------------------------------------------------------------------------
    \17\ JCT, supra note 2, at 464.
---------------------------------------------------------------------------
Individual Taxpayer Identification Number (ITINs)
    Individual Taxpayer Identification Numbers (ITINs) were created to 
improve the administration of the tax system with respect to 
individuals who are unable to obtain Social Security Numbers (SSNs) but 
have some nexus with the United States tax system. These individuals 
are a diverse group, including nonresident alien investors in U.S. 
financial instruments, nonresident alien sellers of U.S. real property, 
nonresident alien persons claiming benefits under a tax treaty, and 
resident aliens who are working in the United States without legal 
authorization under U.S. immigration laws (``undocumented workers'' 
\18\). ITINs are available to resident and nonresident aliens, their 
spouses, and their dependents who are not eligible to receive SSNs and 
who have a need for a number for tax administration purposes.
---------------------------------------------------------------------------
    \18\ For purposes of this testimony, the term ``undocumented 
workers'' includes (1) workers who legally reside in the U.S. but do 
not have authorization to work in the U.S. and (2) workers who reside 
in the U.S. without authorization to either work or reside in the U.S.
---------------------------------------------------------------------------
    An ITIN does not authorize an alien to work in the United States, 
grant an immigration status, or qualify the alien for benefits, such as 
the Earned Income Tax Credit (EITC) or Social Security. To receive an 
ITIN, individuals must complete Form W-7, Application for IRS 
Individual Taxpayer Identification Number, and attach documentation 
validating his or her identity and foreign alien status.\19\ Form W-7 
applications are processed at the IRS's Philadelphia campus.
---------------------------------------------------------------------------
    \19\ Internal Revenue Service, Understanding Your IRS Individual 
Taxpayer Identification Number, Publication 1915 (Rev. 02/2004), at 2.
---------------------------------------------------------------------------
    From a purely tax administration perspective, ITINs are a process 
improvement. They enable taxpayers who have an obligation to report 
income or pay taxes under the United States tax system to comply with 
that requirement. ITINs also enable the IRS to track taxpayer 
compliance with those requirements and take appropriate enforcement 
actions where compliance is lax or lacking.\20\
---------------------------------------------------------------------------
    \20\ I have commented extensively, elsewhere, on the problems with 
the IRS's implementation of the ITIN application process. See National 
Taxpayer Advocate, 2003 Annual Report to Congress, Publication 2104 
(Rev. 12/2003), at 60-86.
---------------------------------------------------------------------------
    The creation of ITINs, then, is a positive step in tax 
administration--a system improvement. ITINs are, however, associated 
with problems, including some that impact tax administration. These 
problems arise from the legitimate application of U.S. immigration and 
Social Security laws as well as our legitimate concerns about 
international and national terrorism.
Problems Associated with ITINs
    As discussed above, Congress determined in 1984 that alien 
individuals who meet either the green card test or the substantial 
presence test under the Code are considered resident aliens for U.S. 
tax purposes. Although the green card test keys off U.S. immigration 
status, the substantial presence test, by definition, acknowledges that 
a resident for tax purposes may not be a resident for immigration 
purposes. It is this divergence from immigration law that places the 
IRS and taxpayers alike in a difficult position. It is this divergence 
that creates enormous, and in most instances undue, pressure on the IRS 
to share data with agencies that will, in fact, impair tax 
administration. And it is this divergence that creates obstacles for 
taxpayers who have strong incentives to comply with the tax laws and 
leads to instances of identity theft within the tax system.

Undocumented Workers and the Tax System

    There are approximately 9.3 million individuals whose presence in 
the United States is not authorized by U.S. Citizenship and Immigration 
Services (USCIS) within the Department of Homeland Security (DHS). 
About 6 million of this group are working in the United States, 
including virtually all undocumented males (96 percent) and 60 percent 
of undocumented females.\21\ Approximately, 130 million individual 
income tax returns are now filed each year. Therefore, the 
approximately 6 million undocumented workers constitute a significant 
portion of persons with a potential income tax obligation.
---------------------------------------------------------------------------
    \21\ This estimate of the number of undocumented workers is derived 
by subtracting legal foreign-born residents from the total foreign-born 
population based on the March 2002 Current Population Survey (CPS) with 
an allowance for immigrants not included in the CPS. Data provided by 
Department of Homeland Security and other government agencies are used 
to estimate the number of legal residents. See Urban Institute 
Immigration Studies Program Paper: Undocumented Immigrants: Facts and 
Figures (Jan. 12, 2004).
---------------------------------------------------------------------------
    While more than 4 million undocumented immigrants have resided in 
the United States for less than 5 years, many have been here for a long 
time. Approximately 4 million undocumented immigrants arrived in the 
United States prior to 1995.\22\ More than 4 million adults are in 
approximately 2 million undocumented families. These families include 
more than 1.5 million children who are undocumented immigrants and 
another 3 million children who are citizens by virtue of being born in 
the United States.\23\
---------------------------------------------------------------------------
    \22\ Urban Institute, Crossing Borders: Impact of Immigration (Feb. 
3, 2004), at 3.
    \23\ Id.
---------------------------------------------------------------------------
    Taxpayers who are undocumented workers have a strong incentive to 
comply with the federal tax laws. Recently, for the first time in 
decades, the number of naturalized immigrants has grown, from 6.5 
million in 1990 to over 11 million in 2002.\24\ U.S. immigration 
procedures require applicants for visa status adjustment and 
naturalization to provide tax information and demonstrate tax 
compliance as an indicator of the applicant's ethical conduct and his 
or her willingness and ability to meet legal obligations.\25\
---------------------------------------------------------------------------
    \24\ Urban Institute, Trends in Naturalization (Sept. 2003), at 2.
    \25\ Robert C. Divine, Immigration Practice, 59-61 (3rd ed. 1998). 
It is not necessary for the applicant to have paid his or her tax in 
full; the applicant may demonstrate that he or she has entered into an 
installment agreement or made other arrangements to pay federal taxes 
owing.
---------------------------------------------------------------------------
    IRS ITIN data demonstrates this strong tendency for compliance 
among ITIN holders.\26\ Nearly 75 percent of the 3.1 million ITINs 
issued in calendar years 1998-2001 have appeared on a tax return. Of 
those ITINs, about two-thirds of the ITINs were issued to residents and 
their spouses or dependents, nearly 25 percent were issued to 
nonresident aliens with a tax administration need, and the remaining 8 
percent were issued to people with other needs.\27\ As noted above, 
there are approximately 6 million undocumented workers in the United 
States. The Treasury Inspector General for Tax Administration (TIGTA) 
recently identified 353,000 Tax Year 2000 Forms 1040 filed with a 
primary ITIN and reporting wages.\28\ As the IRS and stakeholders, 
including Low Income Taxpayer Clinics, continue to conduct outreach and 
education to these taxpayers about their rights and responsibilities, 
we can expect the number of ITIN returns reporting wages to increase. 
The increase in filings of such returns is not a problem, in and of 
itself. The problems arise from ancillary issues such as identity 
theft.
---------------------------------------------------------------------------
    \26\ In a recent report, the Treasury Inspector General for Tax 
Administration (TIGTA) stated that almost 25 percent of individual 
taxpayers who filed a Tax Year 2000 Form 1040 with an ITIN 
underreported an estimated $324 million in income. TIGTA noted in a 
footnote that the margin of error for this estimate is +/- $122 
million, or +/- 37.6%. See TIGTA, The Internal Revenue Service's 
Individual Taxpayer Identification Number Creates Significant 
Challenges for Tax Administration (2004-30-023, Jan. 2004), at 4.
    Leaving aside the difficulty of basing tax policy and tax 
administration decisions on data with this large a margin of error, 
there are many explanations for this unreported income. Undocumented 
workers are often transient workers, following various harvests; they 
often work for short periods--sometimes only one day with one employer; 
they share mail boxes and rely on others to forward mail. Each of these 
reasons alone could result in missing W-2 forms and inadvertent 
noncompliance.
    \27\ Individual Master File, Returns Transaction File, analysis 
conducted by MITS, Information Technical Services, Business Systems 
Development, Business Systems and Extracts, Calendar Years 1998-2001. 
Since data is unavailable to validate 1996 and 1997, and ITINs obtained 
in 2003 may take several years to show up on a tax return, we will 
report information on ITIN usage for 1998-2001. Of approximately 2.2 
million distinctive ITINs that were included on tax returns for Tax 
Years 1998-2001, about 40 percent were used by a primary filer, 25 
percent were used by a secondary filer, and about 33 percent were used 
to identify dependents.
    \28\ TIGTA Report, supra note 26, at 16. The total number of 
individual income tax returns with a primary and/or secondary ITIN 
exceeded one million in TY 2001.

---------------------------------------------------------------------------
Undocumented Workers and Identity Theft: Impact on Tax Administration

    All individuals must demonstrate to their potential employers that 
they have legal authorization to work in the United States.\29\ A new 
employee must complete both IRS Form W-4, Employee's Withholding 
Allowance Certificate, supplying a Social Security number that is valid 
for work purposes, and a USCIS Form I-9, (Immigration) Employment 
Eligibility Verification, providing the employer with documentary 
evidence of his or her identity and citizenship, resident, or alien 
status.
---------------------------------------------------------------------------
    \29\ Section 274A(a)(1)(B)(i) of the Immigration and Nationality 
Act, 8 U.S.C  1324A (1992), makes it unlawful for an employer to hire 
an individual without complying with the specific employment 
verification requirements established under the provision.
---------------------------------------------------------------------------
    Undocumented workers, of course, have no such documentation. They 
are not authorized to work in the United States, and they cannot obtain 
Social Security numbers. These workers either steal, ``borrow,'' or 
fabricate Social Security numbers and obtain false identification 
documents using these numbers.\30\ Employers then use these erroneous 
numbers on their annual Forms W-2, Wage and Tax Statement, reporting 
wages, earnings, and withheld taxes to the Social Security 
Administration and the IRS.
---------------------------------------------------------------------------
    \30\ IRC  6723 imposes a penalty on the failure to comply with 
specified information reporting requirements. Treas. Reg.  301.6723-
1(a)(4)(ii)(A) defines ``specified information reporting requirement'' 
to include the provision of a taxpayer identification number on a tax 
return, statement or document. A few workers attempt to provide their 
employers with an ITIN for W-4 and I-9 purposes, but this practice 
should virtually cease with the IRS's substitution of a letter for an 
ITIN card, and with its implementation of a more effective education 
and outreach program to employers about identifying an ITIN.
---------------------------------------------------------------------------
    When an undocumented worker receives his Form W-2 with an erroneous 
SSN, he must decide whether and how he will file his returns. If the 
taxpayer decides to file his tax returns, he must next decide whether 
he should continue to use another person's SSN on his return, or 
whether he will file his return reporting the income under his ITIN. If 
he chooses the latter course, the attachment of a W-2 with an erroneous 
SSN to an ITIN return is a clear admission that he has earned wages 
without authorization to work. If he instead continues to use the 
erroneous SSN on the tax return, he will be perpetuating his violation 
of the Internal Revenue laws.
    If a taxpayer seeks tax advice from a legitimate and principled 
return preparer or representative, he should be advised to use his ITIN 
on the return and attach the Form W-2 with the SSN. Doing so, however, 
creates several procedural and processing consequences. First, 
according to the IRS, it cannot process the return electronically 
because the taxpayer identification number (TIN) on the W-2 does not 
match the TIN on the return. Thus, the taxpayer must file a paper 
return and cannot obtain tax preparation assistance from the IRS 
Taxpayer Assistance Centers (formerly known as ``walk-in 
offices'').\31\ Second, if the taxpayer does not already have an ITIN, 
he must complete a Form W-7, Application for IRS Individual Taxpayer 
Identification Number, and attach it, along with the required 
documentation, to the return. Once the mismatched return is filed, the 
IRS processes it under the ITIN, assesses the tax liability, and issues 
a refund or a notice of assessment and demand for payment of tax, as 
appropriate.
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    \31\ The IRS has adopted the policy that it will only prepare 
electronically filed returns at the Taxpayer Assistance Centers (TACs). 
The IRS could develop a process that would enable W-2/ITIN mismatch 
returns to be electronically filed and thereby assist these taxpayers 
with return preparation.
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    The story does not end there, however. The employer has reported 
wages earned by the taxpayer under a Social Security number that 
belongs to another person. In most instances, the Social Security 
Administration will not be able to post earnings to that SSN holder's 
account because the name associated with the SSN does not match the 
name on the Form W-2. Therefore these earnings will be posted to the 
Social Security Administration's suspense file, where they will sit 
unless and until something happens that enables SSA to reallocate the 
earnings to the appropriate worker.\32\
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    \32\ Some ITIN holders use the name of the SSN holder as well as 
the SSN for employment purposes. In these instances, the SSN holder has 
earnings attributed to his account incorrectly, thereby becoming 
eligible for benefits on earnings that he did not earn. When an 
employer reports earnings to SSA under an ITIN, the earnings will go 
into the SSA suspense file because SSA does not have a valid SSN under 
which to record the earnings. If the taxpayer later becomes eligible 
for an SSN, he can ask SSA to reallocate the ITIN earnings to his SSN 
account.
---------------------------------------------------------------------------
    The IRS, on the other hand, has a wage document that tells it that 
the SSN holder has earned income that is not reported on his or her 
return. Thus, when the IRS conducts a computer match of information 
documents, this taxpayer is likely to receive a notice of unreported 
income from the IRS. (This initiative is called the Automated 
Underreporter Program, or ``AUR.'') If the taxpayer calls the IRS to 
discuss the notice, the taxpayer will have to provide an acceptable 
explanation as to why the income is not properly attributable to him or 
her. For the IRS, this involves, in most instances, a lengthy, time-
consuming, and manually-driven process of validating the taxpayer's 
explanation, decreasing the proposed amount of additional tax from the 
notice, and working with the Social Security Administration to delete 
the wages paid under this SSN from the SSN holder's earnings account. 
In many instances, the SSN holders either do not receive the proposed 
AUR assessment notice or do not understand it and are afraid to call 
the IRS. As a result, the tax attributable to these additional earnings 
will be assessed against the SSN holder.
    This resolution process can take over a year to complete. If the 
issue is not resolved by the following filing season and the IRS's 
system still shows that there is an outstanding assessment, the SSN-
holder may have his subsequent year's refund either frozen or offset. 
Because this process is worked on a yearly matching basis and the 
current IRS systems do not have a reliable identity fraud alert 
indicator on a taxpayer's account, the taxpayer must repeat this 
process each year in which the identity theft occurs.\33\
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    \33\ I have personally represented taxpayers who were caught up in 
the IRS AUR program for years, trying to prove that they did not earn 
wages attributable to someone else's using their SSNs. From October 1, 
2003, to February 29, 2004, the Taxpayer Advocate Service (TAS) 
received 87 cases involving earnings arising from stolen or fabricated 
SSNs. TAS received 133 such cases in FY 2003.
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Proposed Solutions and Their Impact on Tax Administration
    It is clear from the above discussion that the use of ITINs in 
conjunction with SSNs poses problems for taxpayers (both the victims of 
identity theft and the ITIN holders), the IRS and the Social Security 
Administration. Because ITIN holders who are undocumented workers are 
violating the immigration laws, they also pose problems for the 
Department of Homeland Security.
    These problems have led the IRS, the Treasury Inspector General for 
Tax Administration, and others to propose changes in ITIN 
administration as well as routine sharing of tax information between 
the IRS, Social Security Administration, and Federal immigration 
authorities. Let us examine some of these proposals.
    Authorize the use of ITINs on Forms W-4 and W-2. We might address 
the Social Security Administration's concerns about its increasing 
``suspense file'' of unidentified earnings by changing the Treasury 
regulations to permit the use of an ITIN on Forms W-4 and W-2. 
Employers would not be subject to penalty for putting ITINs on these 
documents. This approach, however, would require a change in the Social 
Security Act to enable SSA to create a record of earnings under an 
ITIN. Further, and fatally, it would fly directly in the face of 
immigration law that requires workers to be authorized to work in the 
United States.
    This proposal would force employers to acknowledge that they are 
hiring an undocumented worker. An undocumented worker seeking a job 
therefore would be unlikely to put an ITIN on a Form W-4 because it 
would shine a bright light on his immigration status. Instead, the 
worker would continue to place an SSN on the form. Thus, this proposal 
would merely exacerbate the tension between tax and immigration law 
without eliminating identity theft or tidying up SSA's suspense files.
    Authorize the IRS to disclose to employers a match or mismatch of 
employees' names and identifying numbers.  We might address the problem 
of mismatched or unmatched SSNs by amending the Code to require 
employers to submit all Forms W-4 to the IRS upon hiring new employees 
and amending IRC  6103 to permit the IRS to inform employers when 
there is a mismatch. This approach, of course, does not resolve the 
problem of complete identity theft--that is, where the taxpayer has 
assumed not only the SSN but also the name of the SSN holder. Indeed, 
complete identity theft likely would increase precisely because it 
would enable undocumented workers to slip through, and complete 
identity theft creates far more serious problems for the victim. 
Further, as the Commissioner has noted in his testimony, this approach 
would impose an extra burden on employers without necessarily clearing 
up mismatches (that is, the employer could comply with his due 
diligence requirements and still not have resolved the mismatch).
    Finally, this proposal would not stop identity theft. Let us assume 
an undocumented worker provides his true name and a fabricated SSN to 
his new employer. Under the proposal, the employer would submit this 
information to the IRS and would immediately be notified that there was 
a mismatch. The employer would contact the worker and ask him to 
resolve the mismatch. With this level of scrutiny, the undocumented 
worker, in all likelihood, would either move on to another employer, or 
worse, work for cash in the ``underground economy.'' He would continue 
to use the fabricated or stolen SSN. All we would accomplish, through 
this proposal, is force the undocumented worker underground and out of 
compliance with the tax system.
    Authorize the IRS to disclose tax information to SSA and USCIS 
pertaining to undocumented workers.  In its recent report on ITINs, 
TIGTA recommended that the IRS Deputy Commissioner for Services and 
Enforcement:

     Coordinate with the BCIS [now USCIS] and the SSA to assess the 
benefits to these agencies of seeking legislation to broaden the IRS's 
authority to share information with them regarding unauthorized 
resident aliens and seek legislation as warranted.\34\
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    \34\ TIGTA Report, supra note 26, at 32.

    For almost thirty years, since the enactment of the Tax Reform Act 
of 1976, Congress, the IRS, and taxpayers have had an understanding 
that tax returns and tax return information are, in general, 
confidential. All exceptions to this general rule of confidentiality 
must be specifically set forth in IRC  6103. Recently, taxpayers' 
confidence in the confidentiality of their tax information has been 
shaken by their awareness that this information is available to the 
Treasury Inspector General for Tax Administration.\35\
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    \35\ IRC  6103(h)(1) authorizes inspection and disclosure of tax 
returns and return information to Treasury officials and employees 
``whose official duties require such inspection or disclosure for tax 
administration purposes.'' The Treasury Inspector General for Tax 
Administration is authorized ``to conduct and supervise audits and 
investigations relating to the programs and operations of'' the 
Internal Revenue Service in order ``(A) to promote economy, efficiency, 
and effectiveness in the administration of, and (B) to prevent and 
detect fraud and abuse in'', the programs and operations of the 
Internal Revenue Service. Inspector General Act of 1978, 5 U.S.C.  2 
Appendix 3 (1998). TIGTA employees are subject to the restrictions of 
IRC  6103(h) and (i). TIGTA employees cannot use their authority to 
audit and inspect aspects of tax administration as a means to discover 
and indirectly ``refer'' potential nontax criminal acts that would 
otherwise be prohibited under IRC  6103. In the context of 
undocumented workers who are trying to comply with the tax laws, such 
actions on the part of TIGTA employees can actively undermine tax 
administration.
---------------------------------------------------------------------------
    Congress has specifically authorized the IRS to disclose tax 
information for law enforcement purposes in two sections relevant to 
our discussion here today:
    Disclosures for tax administration purposes: IRC  6103(h)(2) 
provides that in matters involving tax administration, tax information 
shall be open to inspection by Department of Justice employees and 
officers who are ``personally and directly engaged in, and solely for 
their use in'', a Federal grand jury proceeding or preparation for any 
proceeding before a Federal grand jury or any Federal or State court 
(or investigation that may lead to such a proceeding). Congress placed 
limits on this authority, including requiring that the taxpayer be a 
party (or potential party) to the proceeding or that the proceeding 
involve the determination of civil or criminal liability under the Code 
or the collection of tax imposed under the Code.
    Disclosure to agencies for non-tax criminal cases: IRC  
6103(i)(1)provides that during the course of Federal nontax criminal 
investigations, Federal agencies must obtain an ex parte order from a 
Federal district judge or magistrate in order to gain access to tax 
returns and tax information provided by the taxpayer or the taxpayer's 
representative.\36\ Return information that is reported by third 
parties may be disclosed if the head of the Federal agency (or other 
specified official) submits a written request.\37\ Further, the 
Secretary (or his delegate) may disclose, on his own initiative, to the 
appropriate head of agency, evidence of a Federal nontax crime where 
such evidence is not on a tax return and is not tax information 
provided by the taxpayer or the taxpayer's representative.\38\
---------------------------------------------------------------------------
    \36\ IRC  6103(i)(1).
    \37\ IRC  6103(i)(2).
    \38\ IRC  6103(i)(3)(A).
---------------------------------------------------------------------------
    These provisions are narrowly tailored to insure that tax 
information, which is the cornerstone to our voluntary-compliance tax 
system, is only disclosed after much consideration has been given to 
the impact such disclosure would have on tax administration. Within 
these provisions, however, there is ample maneuvering room for Federal 
law enforcement agencies to obtain tax information when they can 
demonstrate the requisite compelling need.
    Thus, notwithstanding our concern about persons who steal and use 
Social Security numbers to create identities for unlawful purposes, 
including terrorism, the answer to these problems does not lie in 
expanding the disclosure of tax information beyond the limits currently 
permitted under IRC  6103. Such proposals would, in practice, have the 
effect of increasing the damage done to the innocent victims of 
identity theft and also undermine the IRS's obligation to provide 
customer service to taxpayers who are attempting to comply with the tax 
laws.
    In fact, we want these mismatch taxpayers to be part of the tax 
system and file their returns. That way, the IRS should be able to 
identify the stolen SSN and the correct ITIN. We could ``fence off'' 
the wages or other income reported under the stolen SSN, thereby 
protecting the identity theft victim from unnecessary IRS audits and 
collection actions. We could notify SSA of the correct number (the 
ITIN) to which to attribute earnings, and prevent overpayment of 
benefits to the SSN holder. And if USCIS or another Federal agency is 
investigating the ITIN holder, we would be able to provide tax 
information to that agency to the extent permissible under IRC  
6103.\39\
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    \39\ When I was a director of a Low Income Taxpayer Clinic, here is 
how I would explain the ITIN rules to clients or audiences in outreach 
sessions to allay fears expressed by undocumented workers about the 
risks of filing their tax returns. In general, for the Department of 
Justice or another Federal agency to obtain tax returns or tax return 
information for purposes of a non-tax administration criminal 
investigation or proceeding, it must obtain an order from a Federal 
judge. Thus, in general, the client should be concerned that his tax 
information could be shared with another Federal agency (for example, 
immigration) if he were already or were likely to be placed under 
investigation for some nontax violation of law. For many undocumented 
taxpayers, this risk is outweighed by the strong incentive for and 
benefits of being compliant with the tax laws--that is, the ability to 
prove good moral character for immigration purposes by filing tax 
returns.
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A Modest Proposal: The Status Quo Plus
    The proposals discussed above do not solve but instead perpetuate 
(and possibly exacerbate) the problem of identity theft, increase tax 
noncompliance, and do not help enforce the immigration laws (because 
undocumented workers will move to the underground economy). Any 
solution must both protect national security and not undermine three 
important tax administration objectives--compliance by taxpayers with 
the tax laws, the provision of customer service to those taxpayers, and 
the elimination of undue burden on taxpayers (and employers) trying to 
comply with the tax laws. The solution must also protect taxpayers from 
misuse of their tax data by third parties (identity theft for tax 
purposes).
    In light of IRS data that clearly indicate that the majority of 
ITIN holders attempt to file and comply with the tax laws, the IRS 
should continue to encourage undocumented workers to obtain ITINs and 
assist all ITIN holders, including those who have Forms W-2 showing 
SSNs, to file returns under their ITINs. ITINs are the entry point for 
these taxpayers into the tax system. Any effort to restrict access to 
obtaining ITINs must be carefully scrutinized to determine whether the 
purpose for the restriction outweighs the tax administrator's core and 
fundamental mission of helping taxpayers to meet their tax obligations.
    Thus, I propose the following approach to the ITIN ``problem'':

      To ensure accurate preparation of ITIN applications, IRS 
should continue to make improvements to the revised ITIN program, 
including improving the timeliness of processing applications and its 
outreach to taxpayers, and their advocates and representatives.
      To increase the accuracy of return preparation, IRS 
should develop a system to electronically file SSN/ITIN mismatch 
returns so that these taxpayers can be assisted at IRS Taxpayer 
Assistance Centers.
      To protect victims of identity theft from unwarranted, 
intrusive, and repetitive audits and/or collection activity 
attributable to the misreported income, IRS should develop a system to 
``fence off'' the income misreported under a stolen or fabricated SSN.

    The advantage of this proposal is that it actually improves tax 
administration while remaining neutral to the administration of Social 
Security and immigration laws. It acknowledges that taxpayers filing 
SSN/ITIN mismatch returns are generally trying to comply with the tax 
laws, even at risk of having their immigration status detected. The 
proposal implements Congress' explicit determination that the 
definition of resident alien for tax purposes should extend beyond its 
definition under immigration law. It permits the disclosure of tax 
information to other Federal agencies as currently authorized by IRC  
6103. And it helps identity theft victims. Fundamentally, the proposal 
maintains the delicate balancing act between the interests of tax 
administration and the interests of taxpayers without harming 
government's other legitimate interests. In short, it defuses the 
``problem.''

                                 

    Chairman HOUGHTON. Thank you very much, Ms. Olson. Mr. 
O'Carroll?

 STATEMENT OF PATRICK P. O'CARROLL, ACTING INSPECTOR GENERAL, 
                 SOCIAL SECURITY ADMINISTRATION

    Mr. O'CARROLL. Good afternoon, Chairman Houghton. Good 
afternoon, Chairman Shaw and Members of the Subcommittee. It is 
a pleasure to have my first hearing before these Subcommittees 
on the important topic of SSN and ITIN mismatches and misuse. 
The growth and misuse of ITINs pose considerable challenges for 
the SSA, and for SSN integrity. My testimony today will provide 
an overview of our work to address challenges in three areas. 
First, the ITIN's impact on the SSA's earning process. Second, 
its impact on SSN misuse and identity theft. Last, our most 
serious concern, the impact of the ITIN or SSN misuse on 
homeland security. I will conclude my remarks with our 
recommendations to improve these processes.
    The SSA is mandated to maintain records of wages employers 
pay to individuals. The SSA has no role in assigning ITINs. 
Many ITINs so closely resemble the nine-digit SSN, many 
employers assume it is an SSN. When employers use ITINs to 
report wages rather than an SSN, the SSA cannot post these 
earnings to the wage earner's record. The SSA's record of wage 
reports where names and SSNs failed to match has grown to about 
$421 billion in wages, representing $244 million in incorrect 
wage items. The ITIN also impacts SSN misuse and identity 
theft. The SSA has made significant progress to strengthen SSN 
integrity. The SSA now independently verifies all non-citizen 
immigration documents prior to issuing an SSN, and we encourage 
the IRS to take similar measures. The SSA recently restricted 
the issuance of non-work SSNs to non-citizens except under very 
limited circumstances. However, this new policy may increase 
ITIN use because non-citizens without work authorization may 
now try to obtain an ITIN for work purposes.
    The ITIN's impact on SSN misuse poses a serious potential 
threat to homeland security. We believe ITIN misuse could 
undermine our ability to provide reliable investigative data to 
the law enforcement community. For example, we recently 
participated in Operation Swipe Out, a large-scale anti-
terrorism initiative concerning a group of foreigners that 
defrauded numerous credit card companies of about $5 million. 
Many of the subjects received lengthy prison sentences and were 
ordered to pay over $1 million in restitution for the SSN 
misuse. As part of our homeland security initiatives, we 
investigated airport employees who used ITINs on identification 
badge applications for access to critical areas. The ITIN has 
also facilitated fraud where ITINs are falsely submitted as if 
it were an SSN. We have also found educational institutions 
advertising on websites that they will issue, quote, 
``temporary SSNs'' to students. These numbers are not issued by 
the SSA, but closely resemble SSNs or ITINs using a nine-digit 
numbering system.
    We need improved coordination and sharing of data, and data 
reliability and the use of shared data. For example, the IRS is 
barred from disclosing tax information to other Federal, State, 
or local agencies. However, we believe expanded coordination 
should be explored to allow for joint pilots or non-
investigative reviews to identify areas where formal disclosure 
agreements could be used. For example, the SSA shares data with 
the IRS to help assess penalties against employers for 
reporting mismatched names and SSNs. The SSA also sends DHS 
information on over 500,000 individuals who are not authorized 
to work in the United States but still show wages in the SSA's 
systems. We believe legislation is needed to require a 
reoccurring cross-verification of identification data between 
governmental, financial, and commercial holders of records and 
the SSA. Cross-verification would be an important step to help 
prevent the spread of SSN misuse, identity theft, and improve 
our homeland security.
    I congratulate Congress and especially Chairman Shaw and 
Ranking Member Matsui on the enactment of H.R. 743, the 
``Social Security Protection Act of 2003,'' which provides new 
safeguards for Social Security programs and beneficiaries. 
Thank you for your continued commitment to these critical 
areas.
    [The prepared statement of Mr. O'Carroll follows:]
  Statement of Patrick P. O'Carroll, Assistant Inspector General for 
  Investigations, Social Security Administration, Baltimore, Maryland
    Good morning, it is a pleasure to be here today for this important 
hearing on the issues of Social Security number (SSN) and Individual 
Tax Identification Number (ITIN) mismatches and misuse. Today's 
discussion will provide valuable insight into the impact and 
implications that ITINs have across the Federal government. Today, I 
would like to focus my comments on the ITIN's impact on the Social 
Security Administration's (SSA) programs and operations.
    SSA's Office of the Inspector General (OIG) has worked very hard 
with the Agency in recent years and made significant progress to 
strengthen the defenses of the SSN. These activities included close 
cooperation with other law enforcement agencies and with the Internal 
Revenue Service (IRS) to strengthen the integrity of SSA's data and 
those who rely upon it.
    Over the past few years, we have testified on numerous occasions 
before Congress on the topics of SSN misuse, document fraud, and 
identity theft. The most important aspect of our mission to combat 
fraud, waste and abuse is the protection and oversight of the SSN. 
Today, the SSN is the single most widely used identifier for Federal 
and State governments, as well as for the private sector. As a result, 
we continuously seek new and innovative ways to prevent SSN misuse and 
work collaboratively with other Federal, State, and local entities. 
Although we have made notable progress, the public's reliance on the 
SSN as a national identifier has made it an increasingly valuable 
commodity for lawbreakers trying to take advantage of SSA's programs 
and operations.
    Similarly, the growth and misuse of ITINs pose considerable 
challenges for SSA. Today, I will highlight three areas and provide an 
overview of our work to address these challenges. First, I will discuss 
the ITIN's impact on SSA's earnings process. Second, I will summarize 
the ITIN's impact on SSN misuse and identity theft. Third, I will 
outline our most serious concern, how misuse of the ITIN or SSN could 
impact Homeland Security. I will conclude my remarks with a brief 
summary of recommendations to improve these processes and outline 
opportunities to open a broader dialogue on these issues.

              The ITIN's Impact on SSA's Earnings Process

    As mandated by Title II of the Social Security Act, SSA maintains 
records of wage amounts employers pay to individuals. Each year, 
employers and self-employed individuals report earnings information to 
SSA using a unique nine-digit number, the SSN. This information is used 
to determine (1) whether an individual is eligible for retirement or 
disability benefits and (2) the size of the benefit payment. 
Accordingly, it is critical that SSA protect the integrity of the SSN 
and properly post wages reported through the Agency's earnings process.
    SSA has no role in assigning ITINs. This function is the sole 
responsibility of the IRS. Nevertheless, IRS use of these numbers may 
negatively impact SSA's ability to accurately record employee wage 
information. Because the nine-digit ITIN so closely resembles an SSN, 
many employers assume it is an SSN. Yet when employers report wages 
earned by an individual to SSA using the IRS ITIN rather than the 
individual's SSN, SSA is unable to post these earnings to the wage 
earner's record.
    When SSA is unable to post earnings to an individuals' record, the 
earnings are captured in SSA's Earnings Suspense File (ESF), the 
Agency's record of wage reports for which wage earner names and SSNs 
fail to match SSA's records. Although SSA is able to post about 96.4 
percent of all reported earnings to individuals' earnings records, 
those earnings that cannot be matched continue to accumulate in the 
ESF. Between 1937 and 2003, the ESF grew to about $421 billion in 
wages, representing about 244 million wage items that could not be 
posted correctly.
    Removal of wage items and their associated dollar value from the 
ESF occurs only when the wages can be matched and posted to an 
individual's master earnings file. Since the Agency does not enumerate 
the owners of ITINs, its ability to match these wages correctly will be 
even more difficult because SSA has incomplete information on the ITIN 
holder.
    Still, while SSA has limited control over the factors that cause 
the volume of erroneous wage reports submitted each year, the Agency 
does have some ability to improve the wage reporting process. SSA can 
work with employers to resolve wage reporting issues, encourage greater 
use of SSN verification programs, and improve coordination with other 
Federal agencies such as the IRS that have separate yet related 
mandates, to foster better sharing of information.
    Additionally, we believe increased coordination between SSA, IRS 
and DHS could be used to detect trends, identify problems in the 
employer community and to propose legislative remedies. For example, 
cooperation between IRS and SSA on the ITIN process could minimize the 
volume of incorrect wages posted to the ESF.

           The ITIN's Impact on SSN Misuse and Identity Theft

    It is no longer realistic to believe that the SSN is simply a 
number for tracking workers' earnings and the payment of social 
insurance benefits. Recognizing the importance of the SSN throughout 
society, SSA has taken significant steps to strengthen controls over 
the issuance of SSNs in recent years. We applaud SSA's efforts, but we 
are concerned that increased misuse of ITINs may undermine some Agency 
initiatives.
    In FY 2001, SSA established a task force to address SSN integrity 
concerns, and took a number of important steps. For example, in 
September 2002, SSA started independently verifying all non-citizen 
immigration documents prior to issuing an SSN. We are currently 
assessing the Agency's compliance with these new procedures. However, 
we do not know whether IRS takes similar measures when issuing ITINs to 
non-citizens.
    SSA also recently restricted the issuance of non-work SSNs to non-
citizens except under very limited circumstances. Under this policy, 
non-citizens should only be issued a non-work SSN because:

      Federal statute or regulation requires that the non-
citizen provide his or her SSN to get the particular benefit or 
service, or
      State or local law requires that the non-citizen provide 
an SSN to get general assistance benefits to which the non-citizen has 
established entitlement.

    As a result of SSA's new policy regarding non-work SSNs, the use of 
ITINs for work purposes may increase. Non-citizens in the United States 
without work authorization who were previously able to use non-work 
SSNs for tax purposes may now obtain an ITIN and present it to a 
prospective employer as an SSN and use it instead for wage reporting.
    Currently, there are several provisions of the law that address SSN 
misuse, such as:

      Social Security Act provisions that make it a felony to 
deliberately represent another person's SSN as your own.
      Identity Theft and Assumption Deterrence Act provisions 
that make it a criminal offense to knowingly use another person's means 
of identification with the intent to commit a violation of Federal law. 
This would include using another individual's personal identifying 
information, such as an SSN, or providing that SSN to obtain a tax 
refund.

    We applaud the recent announcement by IRS that it will discontinue 
its practice of issuing ITINs in the form of cards, and instead will 
notify ITIN applicants by letter. However, we fully expect that the 
growing confusion between ITINs and SSNs will exacerbate problems with 
wage reporting. Additionally, the ease with which one obtains an ITIN 
may negate the robust screening processes used to deter fraudulent 
applications.
    For example, we have found that the ITIN has been used to 
facilitate fraud in cases where an ITIN is submitted as if it were an 
SSN. In one such case, a woman using an ITIN as her SSN obtained loans 
and lines of credit of approximately $300,000. Furthermore, she was 
able to secure a mortgage of nearly $140,000 by furnishing bogus W-2 
forms bearing the ITIN.

              ITIN/SSN Misuse Impact on Homeland Security

    Still, while financial crimes involving SSNs are more numerous than 
terrorism-related crimes involving misuse of the SSN, the potential 
threat SSN misuse poses to homeland security is also of real concern.
    The information SSA stores on each of us is personal, and is 
entitled to all of the protections we can afford. However, I have 
learned during my role leading OIG's investigative effort, that there 
are times when an individual's privacy must be balanced against the 
need of law enforcement agencies for information to protect our 
country. For example, following September 11th, and again during the 
sniper attacks in the Washington, D.C. area, it became necessary to 
share information stored by SSA with appropriate law enforcement 
authorities to permit those authorities to conduct their investigations 
and, more importantly, prevent additional lives from being lost.
    On both occasions, we asked to use the ad hoc authority vested in 
the Commissioner by SSA regulations to permit the sharing of SSA 
information with our law enforcement partners. However, we believe in 
instances like this the Inspector General of Social Security should 
have the ability to disclose such information without prior approval. 
When lives are at stake, every minute is critical, and we need to be 
able to provide this information as expeditiously as possible.
    Those connected with terrorism will at some point either take 
advantage of security gaps across the Federal government or try to 
obtain SSNs or ITINs. They may seek SSNs or ITINs through:

      The use of counterfeit or stolen documents purchased on 
the Internet or created through readily available computer processing 
equipment and software.
      Fraudulent application for genuine documents issued by 
government agencies.

    Therefore, we must remain vigilant to ensure that there are 
adequate safeguards to prevent the misuse of SSNs and ITINs.
    We believe the misuse of ITINs could undermine SSA's programs and 
our investigative ability to provide reliable data to the law 
enforcement community. ITINs could be used to facilitate an underground 
network to undermine homeland security and perpetrate fraud against our 
economy and its citizens. It is incumbent upon us to resolve these 
issues now, before another crisis emerges and data is needed quickly.
    Nationally, OIG has been an active participant on Joint Terrorism 
Task Forces. We have provided round-the-clock support to the national 
criminal investigation of potential terrorist activities. Our special 
agents and attorneys have helped identify, detain, indict, and convict 
individuals who may have a relationship with terrorist activities. For 
example, we have investigated airport employees during our homeland 
security operations who used ITINs on applications to obtain Secure 
Identification Display Area badges.
    Additionally, our Electronic Crime Team rendered assistance to the 
FBI, while our computer specialists wrote programs to more specifically 
query SSA's databases for FBI-requested information. Many of our 
investigators continue to perform substantial work on terrorism 
investigations and respond to allegations of SSN misuse.
    Many of our agents participated in Operation Swipe Out, a large-
scale, anti-terrorism, white collar crime initiative. The investigation 
focused on the fraudulent activities of a Pakistani group involved in 
credit card, Social Security, immigration, bank and mortgage fraud. 
Starting in January 2003, 30 criminal complaints/arrest warrants and 
two search warrants were issued.  The suspects defrauded numerous 
credit card companies of approximately $5 million, sending some of 
their proceeds to banks in Pakistan and Canada. For the 30 criminal 
cases, 17 of the subjects pleaded guilty, receiving sentences ranging 
from 2 years probation to 57 months of incarceration, and being ordered 
to pay $1,137,224 restitution. Two subjects' cases were dismissed; the 
remaining 11 subjects are fugitives. Seven were charged with SSN 
misuse.
    In other situations, criminals ``shop`` for State and local 
governments that do not mandate an SSN, and consequently accept an 
ITIN. One of our investigations detected an SSA employee furnishing 
SSNs to a co-conspirator who supplied them to illegal aliens for 
obtaining driver's licenses. After the employee was arrested and no 
longer able to provide SSNs, the co-conspirator simply moved his 
operation to North Carolina, which allowed the use of ITINs for 
driver's licenses.
    In a 2002 audit, we discussed our concerns regarding SSA's risk of 
exposure to improper enumeration of foreign students. We found SSA did 
not have a reliable system for determining whether a foreign student is 
actually enrolled at an educational institution and required an SSN to 
perform authorized work. Some schools provided work authorization 
letters to students for on-campus employment when the school had not 
actually extended an employment offer to the student. As a result of 
our recommendation, the Agency proposed a regulatory requirement that 
evidence of actual employment be necessary for foreign students to 
receive SSNs.
    In a draft report we recently issued to SSA, we reported that at 
least 22 colleges and universities across the country--9 of which 
represent those with the largest foreign student populations--advertise 
on their web sites that they will issue ``temporary SSNs'' to students. 
These numbers are not issued by SSA, but are generally nine-digit 
numbers that resemble an SSN or an ITIN. One university even provided 
the names of several banks where foreign students could open a bank 
account with one of these ``temporary SSNs.'' We are recommending that 
SSA contact these universities and discourage them from continuing this 
practice. We are also recommending that SSA work with national 
education committees and alliances to spread the word that this 
practice should be halted.

                    Areas for improved coordination

    The areas that need improved coordination are:

      Sharing of data.
      Data reliability.
      Use of shared data.

    SSA maintains two types of information in its databases; 1) SSA 
information received from individuals self-reporting on applications 
for SSNs or Social Security benefits, or from States and the private 
sector; and 2) IRS information received from employers in the form of 
W-2s and W-3s.
    IRS maintains information in its databases generally from W-2s, W-
3s and tax information. However, Section 6103 of the Internal Revenue 
Code restricts (with exceptions) the disclosure of this information to 
any other Federal, State, or local agency.
    Currently, IRS already releases taxpayer data for statistical 
purposes to the Department of Commerce's Bureau of Economic Analysis 
and similar organizations, indicating that such data can be released 
for legitimate governmental purposes. However, further opportunities 
for expansion of coordination should be explored to allow for joint 
pilots and/or non-investigative reviews to allow auditors to identify 
areas where formal disclosure agreements could be later negotiated if 
warranted.
    For example, SSA shared data with IRS on the 100 employers having 
the most wage items in suspense. This information could assist IRS to 
assess penalties against these employers for reporting mismatched names 
and SSNs on W-2 forms. SSA is also cooperating with DHS on unauthorized 
workers in the U.S. economy. Each year SSA sends DHS information on 
over 500,000 individuals who are not authorized to work in the U.S. 
economy, but who nonetheless show wages in SSA's system. A recent 
report we issued, ``Profile of the Social Security Administration's 
Non-work Alien File,'' found DHS is neither using this information to 
take action against these individuals nor advising SSA when they are 
authorized to work in the U.S. economy.
    It is imperative that SSA and IRS have consistent and reliable 
information to improve efficiency and effectiveness, and to reduce 
fraud, waste and abuse. While SSA is already actively sharing its own 
data with other agencies, there are a number of one-way restrictions 
and boundaries by law that limit the sharing of data between IRS and 
SSA. We are working with IRS to improve data reliability. Despite the 
restrictions I have outlined, we stand ready to work with IRS and DHS 
to develop strategies to improve our collective ability to use existing 
information to ensure the integrity of the SSN and strengthen homeland 
security.
    For example, we believe the following combined efforts would enable 
both agencies to make significant strides in addressing the ITIN/SSN 
misuse issue.

      Improved Employee Verification
      Cross-Verification of Data

Improved Employee Verification

    Coordination with IRS on employee verification would assist 
employers with one-stop verification of employee data. SSA already 
assists employers with its Employee Verification Service (EVS) for 
registered employers.
    SSA is also piloting an online Social Security Number Verification 
Service (SSNVS), which allows employers and third parties to verify 
employees' names and SSNs via the Internet with information in SSA's 
records for wage reporting purposes. As with EVS, SSNVS also provides a 
death indicator where SSA records indicate that the employee is 
deceased. Employers have two online options to use SSNVS:

      Key in up to 10 names and SSNs at a time and the results 
are returned in seconds.
      Submit a file containing up to 250,000 names and SSNs per 
file and the results are returned the next business day.

    SSNVS is beneficial because it:

      Helps employers use correct names and SSNs on wage 
reports.
      Reduces the number of submission errors.
      Offers an additional method of requesting verification 
services.
      Reduces the number of telephone calls required for 
employers to verify names and SSNs.

Cross-Verification of Data

    Cross-verification would improve the process without requiring 
major expenditures of money or the creation of new offices or agencies. 
We believe legislation is needed to require mandatory cross-
verification of identification data between governmental, financial and 
commercial holders of records and the SSA on a recurring basis. Much of 
the data already exists and could be drawn from information the 
Federal, State and local governments and the financial sector already 
have.
    All options should be explored to make the cost of providing this 
service budget neutral. The technology is already in place to allow 
these data matches and verifications to take place. Coupled with steps 
underway by SSA to strengthen the integrity of its enumeration business 
process, cross-verification would be an important step to help prevent 
the spread of SSN misuse and identity theft, and to improve homeland 
security.
    Some possibilities for cross-verification are:

      Mandatory SSN verifications for employees in critical or 
sensitive positions, such as defense, energy, chemicals, 
transportation, and national security.
      SSN verification for banks, credit reporting agencies and 
other financial lending institutions.
      The ability to verify SSN data for all law-enforcement 
entities.

    Another positive aspect of cross-verification for SSA is the 
ability to correct errors on a more timely basis--errors that might 
otherwise keep workers from receiving full credit for years of labor 
and credit that can be nullified by simple typographical errors in 
submitting their data.

                               Conclusion

    I want to congratulate Congress, and especially Chairman Shaw and 
Ranking Member Matsui, on the recent enactment of H.R.743, the Social 
Security Protection Act of 2003. This milestone bill, the work of three 
Congresses, provides new safeguards for Social Security and 
Supplemental Security Income (SSI) beneficiaries who have 
representative payees, and will enhance other program protections. It 
will also provide significant new authority to our office to protect 
the SSN, SSA employees, and the Social Security Trust Funds.
    The challenge for Congress and SSA is to balance the SSN's privacy 
against public and private needs to have limited access to this data. 
In the spirit of H.R. 2971, Chairman Shaw's pending SSN legislation, we 
believe the following steps need to be taken to meet this challenge:

      Limit the SSN's public availability to the greatest 
extent practicable, without unduly limiting commerce.
      Prohibit the sale of SSNs, prohibit their display on 
public records, and limit their use to valid transactions.
      Enact strong enforcement mechanisms and stiff penalties 
to further discourage SSN misuse.
      Cross-verify all legitimate databases that use the SSN as 
a key data element.

    We are cognizant of the legal restrictions regarding the sharing of 
data, and respect the right to protect individual privacy concerns, 
however, we believe greater coordination and controlled sharing of data 
will improve the integrity of the SSN and SSA's programs.
    I thank you for your continuing commitment to these critical 
issues, and would be happy to answer any questions.

                                 

    Chairman HOUGHTON. Thanks very much. Mr. Shaw?
    Chairman SHAW. Mr. O'Carroll, I would first of all like to 
say I understand last night, you were named as the Acting IG. I 
would like to congratulate you for that particular position.
    Mr. O'CARROLL. Thank you, Chairman.
    Chairman SHAW. I think I have reason to believe that you 
have been involved somewhat in the study that I made reference 
to earlier regarding the Palm Beach Post and what has gone on 
there. Could you give us an update as to what has happened in 
that particular case? It is headlined, they call it ``Modern 
Day Slavery,'' and I think that is probably a very good choice 
of words based upon the content of the articles.
    Mr. O'CARROLL. As you notice, in one of those articles in 
there, it describes how my office did an investigation on two 
SSA employees who were selling for about $1,500, genuine SSNs 
that were used by this ring. Since then, we have been working 
with the U.S. Attorney's office down there. It is an ongoing 
investigation. I can't go into much detail on it.
    Chairman SHAW. Thank you very much. If you would keep me 
advised as to the progress.
    Mr. O'CARROLL. We will give you the updates.
    Chairman SHAW. I don't want to go down there and have a 
hearing and jump in the middle of an ongoing investigation, but 
some people have to answer to this, and I assume that your 
people are also talking to the folks at the Palm Beach Post to 
get what information they can. I don't think there is any 
privileged information, so I would think they would be very 
forthcoming in assisting us in this investigation.
    Mr. O'CARROLL. Yes, sir.
    Chairman SHAW. I have no further questions. Thank you.
    Chairman HOUGHTON. Mr. Becerra?
    Mr. BECERRA. Thank you, Mr. Chairman. Mr. Brostek, let me 
ask you a couple of quick questions. The information you 
provided in your testimony points out some of the issues with 
the ITIN, as have the other witnesses. Give me a sense, now. I 
know that most of your comments were made prior to the IRS' 
efforts to try to tighten things up within the ITIN process. 
Give me a sense, now that you have seen what the IRS has done, 
what your comments would be as a result of the changes that 
they have made to tighten up the process.
    Mr. BROSTEK. I do believe that the changes that were made 
appear to be improvements in the system, reducing the number of 
documents that are going to be allowed for supporting the ITIN 
from 40 to about a dozen or so, the additional training that is 
going to be provided to the IRS personnel when they review 
those documents, the requirement for some evidence of a tax 
need. I think those are all positive steps. Our ability to have 
gotten an ITIN using false documents wouldn't necessarily be 
addressed by those changes, in part due to a couple of primary 
weaknesses. One, the individual who is applying is not 
necessarily seen, in fact, is often not seen by anyone. You are 
just submitting paperwork, so the IRS doesn't know whether the 
individual applying is really the one whose documents are being 
reviewed. In addition, the IRS is not checking the validity of 
the document with a third party. That is not an easy thing to 
do, and it certainly would also be a very large imposition of 
workload on the IRS were they to actually see each individual. 
More than a million apply every year for an ITIN.
    Mr. BECERRA. If I could stop you there, would you recommend 
that the IRS move forward to try to do some type of checking to 
confirm the identity, in which case you are talking about 
additional resources?
    Mr. BROSTEK. I think it would be useful for the IRS to try 
to figure out additional cost effective ways of improving the 
verification process. We didn't do enough research to have any 
suggestions on exactly what that might be, but these are 
weaknesses that do enable someone to get a card with less 
assurance that they are the person they say they are than, for 
instance, if they are applying for an SSN, where people are 
interviewed and where there is at least some third-party 
verification of documents.
    Mr. BECERRA. I was actually very surprised to see that one 
of the documents that was obtained as a result of using the 
ITIN was a voter registration, and somehow, someone was able to 
register to vote based on an ITIN. The ITIN doesn't even 
indicate on the ITIN card itself where you reside, so I could 
live in California, in Los Angeles where I live, go to New 
York, and if you have someone in the county voter registration 
office, as apparently you must have had in this case, go to 
this person and say I have got an ITIN that is supposedly valid 
and I can apply to be a registered voter in the State of New 
York, or Alabama, or North Dakota. It sounds like what we need 
to do, as well, is try to approach the different agencies and 
private sector individuals who have the authority to authorize 
subsequent documents or identification vehicles and train them, 
as well, on what you can and can't do with particular types of 
Federal documents.
    Mr. BROSTEK. Yes, I think that is a good point, and the IRS 
has started a campaign, as they refer to it, to try to better 
educate businesses and governments about the proper use of the 
ITIN. It is kind of curious in the case that you are citing 
here where we got the voting registration card. The number that 
we gave was never apparently questioned, but when we first 
applied, we just used a post office box as opposed to a 
residential address and that was questioned, so we did have to 
provide further evidence of living in the jurisdiction.
    Mr. BECERRA. That one just really seems so strange, to see 
someone apply for a voter registration card through use of an 
ITIN. Last question. I want to probe this a bit more because I 
know that the responsibilities that the IRS and the SSA have 
are tremendous because they have to deal with the benefits and 
services and taxes of millions and millions of Americans. I 
want to make sure that if we are going to propose something, we 
actually give the agencies the power to do the work without 
straining other obligations that they have. If we were to go to 
some form of third party verification, which would give us more 
of a sense of security that the individual applying for the 
ITIN really is eligible to get it, we would either have to 
move, shift people who are currently doing other types of 
investigative work at the IRS to do this, or bring on more 
personnel, is that true?
    Mr. BROSTEK. Well, certainly to the extent that it would 
increase the amount of work that the IRS has to do, and I think 
by definition it would, there would be a resource requirement 
that would go with that. We don't know what the more cost 
effective ways would be to try to address this problem, so we 
don't have a sense of how much more the resources would be 
required.
    Mr. BECERRA. One final question, if I may, Mr. Chairman. I 
don't know if any of the panel recall the number off the top of 
their head, I know it is a large number, the amount of 
uncollected taxes. It is somewhere in the several hundred 
billion dollars, I believe.
    Mr. BROSTEK. It depends on whether you are referring to the 
tax gap, the annual difference between what is collected and 
what should have been collected?
    Mr. BECERRA. Correct.
    Mr. BROSTEK. I think the most recent estimate is a little 
over $300 billion. Of that, after some voluntary payments 
occur, that comes down to the $250 billion range.
    Mr. BECERRA. So, $250 billion, that is on an annual basis?
    Mr. BROSTEK. Yes.
    Mr. BECERRA. That we don't collect from people who owe it, 
and we don't have the resources to figure out the best way to 
try to collect a quarter of a trillion dollars. So, I am 
assuming that to try to do third-party verification means that 
we are probably going to do an even worse job at collecting 
some of the $250 billion annually unless we figure out a way to 
get either more productive or more novel ways to try to 
complete all these obligations that the IRS has.
    Mr. BROSTEK. One of the biggest sources of noncompliance in 
that $250 billion are individuals for whom we don't have third-
party reports of their income--self-employed individuals, 
independent contractors who don't have information reports that 
go to the IRS that report how much they receive in income. So, 
this is a key issue for tax administration as a whole.
    Mr. BECERRA. Thank you very much. Mr. Chairman, thank you 
very much.
    Chairman HOUGHTON. Thank you. Mr. Hulshof?
    Mr. HULSHOF. Thank you, Mr. Chairman. Mr. O'Carroll, just a 
quick comment. I appreciate very much the recommendations that 
you have made on, for instance, cross-verification of data 
between the IRS and the SSA. I think this additional data 
sharing and increased coordination generally would help detect 
some trends, identify problems, maybe identify some 
administrative remedies, and ultimately possibly some 
legislative remedies. So, I make that quick comment. Ms. 
Gardiner, a question. Ms. Olson, sitting next to you, your 
fellow panelist, recommended some things that the IRS do to 
develop a system to electronically file SSN-ITIN mismatch 
returns--right now, they are done on paper--so that people that 
show up at the IRS taxpayer assistance offices might get some 
help. The other thing I would like you to comment on briefly is 
this idea, really a fascinating idea, to fence off income that 
is under a reported or a fabricated SSN. Generally, your 
reaction to the recommendations by the Taxpayer Advocate?
    Ms. GARDINER. Well, first, I would like to make a 
distinction between the mismatches, because in some cases on 
these ITIN tax returns, the attached W-2 will have the name of 
the person who filed the ITIN return but a different SSN. That 
is what I made reference to in my remarks. Then you also have a 
very large number, in the thousands, of ITIN returns that are 
filed, with W-2s that have both the name and the SSN that 
belong to someone else. In those cases, they truly are victims 
because they get notices from the IRS. I believe it is that 
part of it, in particular, that Ms. Olson is referring to. So, 
victims whose both very name and SSN was misused wouldn't get a 
notice from the IRS saying, where is the rest of our taxes? You 
have this additional income. So, we think that would be a good 
idea. It doesn't solve the problem as much with the mismatches 
where the person does use their correct name and that other 
individual's SSN. That information just isn't really used now.
    Mr. HULSHOF. The fencing off provision?
    Ms. GARDINER. It only works really for both the name and 
number situations.
    Mr. HULSHOF. Ms. Olson, any comment on that comment?
    Ms. OLSON. Well, I am the person who has to solve taxpayer 
problems, and I see people with W-2s where someone has used--
the ITIN holder has used their own name and given the victim's 
SSN, and the victim is getting, in fact, our underreported 
notices. So, my thinking was that the fencing off would be 
something that would protect many victims, and if the SSA 
wanted that information, that could be something that we would 
be notifying them. I would like to make some comments, if I 
might, because I think you would be interested in this, about 
the third-party verification and my idea of people coming into 
the walk-in sites. Right now, the IRS' policy is that whereas 
in the walk-in sites people can deliver their documentation and 
their ITIN applications, the documents are not really verified 
there, and that is the opportunity for the IRS to see an 
applicant face-to-face.
    We changed our procedure saying, send in an application 
with your tax return attach the application to the tax return, 
and the idea of that was to say, we know you have got a tax 
administration purpose. You are not getting the ITIN for a 
driver's license. It means we are holding refunds until we can 
verify. So, if we were to really do the processing of the 
application and the verifying of the documents while the 
taxpayer is right there before us in the walk-in sites, we 
might have better results than shipping them off somewhere, 
delaying refunds.
    Mr. HULSHOF. My time is really short and I want to be 
sensitive to Ms. Tubbs Jones giving questions, so if any of you 
want to chime in on this, again, the same question I proposed 
to the previous panel. Under current law, wages subject to the 
Social Security tax are credited toward benefits even if it is 
an unauthorized immigrant who is doing the work. What are the 
tradeoffs? Some of you referenced this, I think, in your 
testimony, but if anybody wants to quickly answer, what would 
be the tradeoffs if we were to stop paying Social Security 
benefits and tax refunds based on unauthorized work?
    Ms. OLSON. Sir, if I could talk about the refunds briefly.
    Mr. HULSHOF. Okay.
    Ms. OLSON. Because refunds are under the taxpayer's 
control, they will just simply stop doing extra withholding and 
using the IRS as a bank. It won't stop them from using the 
ITIN.
    Mr. HULSHOF. Maybe from the SSA's position, Mr. O'Carroll, 
as IG?
    Mr. O'CARROLL. From our standpoint on it, what we are 
looking at is--as Mr. Lockhart said, it is a confusing point 
right now. We have some jurisdictions now under the new law 
that Chairman Shaw has done, H.R. 743, that is going to make 
people have to be a citizen working under a genuine SSN to get 
benefits, which we agree with and applaud. However, as Mr. 
Lockhart said, the retrospective ones are kind of confusing and 
there is a lot of data matches that have to be done between the 
SSA and the DHS in terms of finding out when non-work SSNs 
because authorized for work, and that is an area that I think 
we all agree on, is that we should be doing much better data 
matching with the DHS on that type of issue.
    Chairman HOUGHTON. Thank you. Judge?
    Ms. TUBBS JONES. Thank you very much. You can tell old 
friends when they call you judge, go back to your old careers.
    [Laughter.]
    Ms. TUBBS JONES. Mr. Brostek, help me out. You were going 
through a process of being able to get various genuine 
documents with counterfeit instruments, counterfeit documents. 
Number three on the ITIN card, you said you had someone take 
the ITIN card and they did what?
    Mr. BROSTEK. They used the ITIN card--they filled out the 
application for a voter registration card, and as I understand 
it, we submitted that application and a copy of the ITIN card 
to the registering official.
    Ms. TUBBS JONES. They were able to get a voter registration 
card?
    Mr. BROSTEK. Yes.
    Ms. TUBBS JONES. With no other identification, they were 
able to do that? The ITIN card doesn't have an address on it, 
right?
    Mr. BROSTEK. Correct, and that is what I pointed out. On 
the application, the first application, rather than putting a 
residential address, we put a post office box, and that was 
questioned and we had to submit a revised application with a 
residential address.
    Ms. TUBBS JONES. When you submitted a revised application 
with a residential address, you did not have to show any other 
evidence of that address?
    Mr. BROSTEK. That is my understanding. I wasn't the 
individual doing this, but that is my understanding.
    [The information follows:]
                                     U.S. General Accounting Office
                                             Washington, D.C. 20548
                                                     March 26, 2004
The Honorable Stephanie Tubbs Jones
U.S. House of Representatives
Washington, D.C. 20515

Dear Ms. Tubbs Jones:

    During our testimony on ITIN (ITINs), before the House Committee on 
Ways and Means' Subcommittees on Oversight and Social Security on March 
10, 2004, you asked how we were able to obtain a voter's registration 
card using an ITIN that we created. The steps we took follow:

      During October 2003, we mailed a voter registration 
application to a local county in the State of Virginia. We entered the 
fictitious ITIN in lieu of the requested SSN on the application, and 
also entered an undercover name, and an undercover post office box as 
the return mailing address.
      During November 2003 (about 5 weeks after we mailed the 
application), we received a letter from the county along with our 
application. That letter denied our request for a voter registration 
card because we used a business address (post office box) instead of a 
residential address in the county.
      Using the undercover name, one of our staff members 
called a voter registration official in the county shortly after we 
received the rejected application. That official said to cross out the 
post office box address, write-in an actual county residential address, 
and re-mail the application. We did so but we also added the words ``in 
care of'' in front of this residential address.
      When we did not receive the voter's registration card 
within 2 weeks, our staff member called the official again. That 
official said that a voter has to live at the county residential 
address listed in the application. Our staff member asked this official 
to cross out ``in care of'' from the address. That official agreed to 
do so and to process the application.
      About a month later in late December 2003, we received 
the voter registration card--issued on December 19, 2003--for that 
fictitious person at the residential address that we listed on the 
application.

    Since we did our work, certain actions, if successfully implemented 
by the States, may limit the opportunities to misuse an ITIN to obtain 
a voter registration card. Federal law \1\ requires States to have 
implemented, by January 2004, procedures under which voter registration 
applicants must provide certain identification documents (e.g., bank 
statement, paycheck, or government document) when they register to 
vote, or the first time they vote in a Federal election. States are 
also required to check voter registration applications for accuracy by 
routinely requiring and verifying the applicant's driver's license or 
Social Security identification number (last four digits) \2\ When the 
verification indicates that a registrant is not eligible, has provided 
inaccurate or fraudulent information, or information that cannot be 
verified, then the voter registration card application must be denied, 
according to executive correspondence from the Department of Justice. 
Had these provisions been in place when we sought a card with 
fraudulent documentation, we may not have been successful.
---------------------------------------------------------------------------
    \1\ See Department of Justice documents on the Help America Vote 
Act of 2002 at http://usdoj.gov/crt/voting/hava/hava.html
    \2\ Most States, including the State from which we obtained the 
voter registration, have applied for a waiver to this requirement until 
January 2006.
---------------------------------------------------------------------------
            Sincerely yours,
                                                    Michael Brostek
                         Director, Tax Issues Strategic Issues Team

                                 
    Ms. TUBBS JONES. I don't want to beat a dead horse or 
anything. I think, though, we ought to have an understanding of 
what happened in order to get a voter registration card because 
you are representing something with this chart, okay? I 
appreciate it. Let me go to Ms. Olson. Ms. Olson, how long have 
you been the Taxpayer Advocate?
    Ms. OLSON. Three years.
    Ms. TUBBS JONES. Three years? What do you think should be 
the major issue that this Subcommittee should consider to 
ensure fair treatment and confidentiality for average Joe 
Taxpayer with regard to the issues we presented today?
    Ms. OLSON. For ITIN taxpayers, I think there are a couple 
of issues. We have talked about ITIN taxpayers using SSNs. I 
think that low-income taxpayer clinics, outreach and education 
to these taxpayers about their rights and responsibilities, is 
perhaps the best thing for that particular taxpayer. Not having 
the government agencies delivering the information, but 
stakeholders that they can trust. On the other hand, for the 
employers of the average Joe Taxpayer, the ITIN taxpayer, the 
IRS has done a study that shows when they went out and 
interviewed employers that many of them didn't recognize the 
ITIN number as an ITIN number. They thought it was an SSN. So, 
when you get into the entry point of the system where someone 
might say, I don't want to hire you because you are giving me a 
suspect number, we don't have a lot of what you would call 
branding issue recognition, and the IRS really needs to do 
something about that, and I think this Committee really needs 
to watch over the IRS to make sure it does that.
    As far as confidentiality, I think my position is really 
clear. I believe that the current 6103, the section of the 
Code, protects taxpayer information, which is a vital part of 
the bargain. That we get taxpayers to file because they know 
their information is going to be held confidential. I think 
there are ample authorities under the law that if immigration, 
or Social Security, or some other agency is looking at a 
taxpayer for a violation of some other law, that they can get 
that data from us. They just can't do fishing expeditions, and 
I think that is the right thing for taxpayers to expect from 
their tax administrator.
    Ms. TUBBS JONES. That is a perfect segue for my question 
for Mr. O'Carroll, since I am running out of time. Ms. 
Gardiner, it is not that I don't want to ask you anything. I 
just don't have enough time. Your testimony, Mr. O'Carroll, 
suggests that the IRS and other Federal agencies work together 
to develop additional ways to share data. Are you suggesting 
that Congress needs to change the disclosure rules in section 
6103 of the Tax Code?
    Mr. O'CARROLL. Yes, Congresswoman. That would take 
legislation to do that type of sharing, but an example of it is 
that in our earnings suspense file, we have about 350,000 
mismatched wages that start with a 9 as the beginning of the 
digit of the 9-digit code, which is--ITINs are usually in the 
900 series. If we were to be able to share information with the 
IRS, we would be able to determine whether those are false 
numbers, whether they are ITIN numbers, or they are other types 
of numbers so that we could be able to work

on the earnings suspense file, and that, at the moment, we are 
unable to share with the IRS.
    Ms. TUBBS JONES. What do you think about that, Ms. Olson? 
Then I am done, Mr. Chairman.
    Ms. OLSON. I think that my understanding is that the ITIN 
numbers, the 900 numbers, don't make up a large portion of the 
earnings suspense file, and so in order to erode 6103 in order 
to deal with a small portion of that issue, it does not meet my 
balancing test for protecting tax administration and 
confidentiality in tax administration.
    Ms. TUBBS JONES. In other words, it is almost like passing 
a constitutional amendment to stay away from big things like 
that, when the issues aren't of that level.
    Ms. OLSON. Section 6103 is fundamental to the 
administration of the tax system.
    Ms. TUBBS JONES. Thank you, Ms. Olson. Thank you, Mr. 
Chairman.
    Chairman HOUGHTON. Thank you very much. I am going to let 
you go here because we are way over time, but I want to ask one 
question. Ms. Olson, the last page of your testimony, I thought 
was very helpful as far as I was concerned because it 
specifically says certain things ought to be done. I have got a 
question. You expressed concern that the proposals to advance 
Social Security and immigration policies through the Tax Code 
could undermine the whole administration of the tax system. Do 
you want to break that down a little bit?
    Ms. OLSON. I think that the more that you ask the IRS to 
administer different laws and different policies other than 
just pure tax policy, you make it harder for us to bring people 
into the system and comply with the system. We keep saying, 
taxes are the life blood of government. So, sometimes there are 
reasons for the tax administrator to essentially adopt a 
``don't ask, don't tell'' policy so that taxpayers do come in 
and the government does collect the funds. I think that looking 
to us to carry the water for other programs makes it very 
difficult for us to do our core job.
    Chairman HOUGHTON. Isn't it possible to create a system of 
discipline and yet have an underlying bed of trust, because 
that is the whole point of our tax system? Another thing is, 
what happens 20 years from now? Are we going to be talking 
about the same issues? Is it going to be the same sort of 
knife-edged type of situation?
    Ms. OLSON. I think that we can do a better job. I talked 
about the educating of the employers. We can certainly get them 
to identify the numbers and not employ people who have these 
questionable numbers. I think that the new system that Social 
Security has talked about, where employers can verify numbers 
on the internet, and that is appropriate for Social Security to 
do that because they are the caretakers of those SSNs. We 
certainly can do a better job, look at verifying information. I 
have made some proposals about the walk-in centers and things 
like that, where when we are seeing the ITIN applicants, we are 
essentially doing what Social Security does with their SSNs. I 
think that if you take those kind of approaches, you are taking 
a balanced approach. You are protecting the tax system and yet 
you are not ignoring the issue. You are addressing the serious 
issue.
    Chairman HOUGHTON. Well, thank you, and thank you very much 
for bearing with us. Thank you for your excellent testimony. 
The meeting is adjourned.
    [Whereupon, at 12:30 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Shaw to Mr. Lockhart, 
Mr. Everson, Mr. Tom Ridge, and Ms. Gardiner, and their 
responses follow:]

 Questions from Chairman E. Clay Shaw, Jr. to Hon. James B. Lockhart, 
                                  III

    Question: You stated in your testimony that the Social Security 
Administration (SSA), Internal Revenue Service (IRS), and Department of 
Homeland Security (DHS) have formed an executive level steering 
Committee. What are your plans for increased agency coordination?
    Answer: As stated in our testimony, SSA has formed an executive 
level steering Committee with DHS to oversee and direct cooperative 
activities. The first areas of discussion will be strengthening the 
integrity of SSNs to promote homeland security and identifying 
potential data sharing activities that would best assist each 
organization in carrying out its mission. We believe it will be a 
successful and productive effort.
    Even more recently, we established another high-level interagency 
group with the IRS to work on issues of mutual concern and efforts that 
cross agency lines. We held our first meeting on March 5th to discuss 
logistics. We anticipate that this interagency coordination will be 
useful and productive for each agency.
    Question: The SSA and IRS match data on earnings, to ensure 
accurate wage reports. Are there any authorizations for sharing 
information between your two agencies in current law that are not being 
utilized, or are under-utilized?
    Answer: We are not aware of any authorizations for sharing 
information between SSA and IRS that are not being utilized or are 
under-utilized.
    Question: In his testimony, the SSA Acting Inspector General 
suggests exploring additional data-sharing opportunities. Do you have 
any recommendations for changes in data-sharing authority that would 
enable both agencies to better do their jobs?
    Answer: With respect to data sharing opportunities, SSA and the IRS 
are exploring expanded online access to employer report and adjustment 
information. This provides wage information processed for a particular 
employer in a given tax year (TY). This includes original as well as 
any adjustments to the employer report. This data is the online 
equivalent to the employer report and adjustment information data files 
that are currently released to IRS on a weekly basis for integration 
into the IRS database. SSA and IRS currently have an online pilot in 
one IRS location and are working to expand access to other sites.
    Question: The National Taxpayer Advocate recommends IRS continue to 
encourage unauthorized workers to file tax returns, so that the IRS 
could identify stolen SSNs and the correct ITINs. She recommends IRS 
notify the SSA of the ITIN to which wages should be attributed when an 
unauthorized immigrant works using a false or stolen SSN. Do you agree 
with this recommendation, and is it feasible?
    Answer: When someone works under an incorrect SSN--possibly a false 
or stolen SSN--the wages are recorded in SSA's earnings suspense file. 
Even if an ITIN is subsequently assigned to the taxpayer by IRS, SSA 
cannot remove the wages from the suspense file, because an ITIN is not 
a valid number for crediting wages. Thus, the additional work involved 
would yield little or no benefit to SSA and would not be an optimal use 
of our resources.
    Question: The SSA Acting Inspector General said that 22 colleges 
and universities will issue ``temporary'' SSNs to students, which are 
not SSNs at all but rather 9-digit numbers that look like SSNs. How is 
the agency addressing this issue and what is being done to deter 
educations institutions from creating these misleading numbers?
    We instructed our regional offices to contact the colleges and 
universities identified by the Inspector General to ask them to remove 
all references to ``temporary SSNs'' from their websites and 
informational materials, and they did so. The colleges and universities 
were advised of the purpose and use of the SSN and the potential risks 
associated with issuing ``temporary SSNs.''
    We also have an on-going relationship and dialog with several of 
the national educational associations. For example, SSA staff provided 
information about the potential risks of referring to student 
identification numbers as ``temporary SSNs'' in a May 25, 2004 national 
meeting with NAFSA, the association of international educators.
    Question: The SSA offers SSN verification to employers on a 
voluntary basis. Are all employers able to verify SSNs of their new 
hires if they so choose? If an employer needs to verify dozens SSNs per 
day, how quickly will the SSA provide a reply? Is the SSA taking steps 
to make the SSNVS more user friendly?
    Answer: The SSA has provided SSNVS to the employer community for 
many years. Employers may contact SSA to verify SSNs via several 
methods.
    The Employer Verification System (EVS) provides several options at 
no cost to employers. For up to 5 SSNs, employers can call SSA's toll-
free number for employers--1-800-772-6270--weekdays from 7:00 a.m. to 
7:00 p.m. Verification is provided immediately for requests submitted 
through the employer 800 number. Employers may also use this number to 
get answers to any questions they have about EVS or to request 
assistance concerning wage reporting.
    Employers also have the option to submit a paper listing to the 
local Social Security Office to verify up to 50 names and SSNs. In 
addition, they may submit verifications on magnetic media. A simple 
registration process is required to use the magnetic media option. 
Paper and magnetic media EVS requests can be submitted at any time and 
generally take about 30 days to process.
    SSA also has a pilot in place that allows participating employers 
to use a secure Internet site to verify names and SSNs. Currently, 85 
employers are participating in this pilot. This pilot is referred to as 
the Social Security Number Verification Service (SSNVS). SSNVS provides 
a quicker and more efficient alternative for employers to obtain 
verifications. This pilot offers the participating employers two 
options to verify SSNs. Employers can receive instant feedback for up 
to 10 names and SSNs, or the employer may upload a file with up to 
250,000 names and SSNs. The response is ready for the employer on the 
next business day.
    We are pleased with the feedback we have received from employers 
using SSNVS. The SSA surveyed pilot participants, and 93 percent of the 
respondents rated this service very good or excellent.
    Question: In March 2003 the SSA Inspector General (SSA IG) found 
that though the IRS is sending the SSA information on wages reported 
under an identity theft victim's name (thus resulting in overreported 
wages on that worker's record), the SSA is not processing this workload 
in a timely fashion. As a result, the SSA IG estimated there was a 
backlog of 80,000 unprocessed referrals. What is the SSA doing to 
resolve this backlog?
    Answer: By the end of December 2003, the SSA had processed to 
resolution the entire backlog of overstated wage referrals that SSA's 
Office of Inspector General reported on in March 2003. Currently, there 
is no backlog of referrals; SSA continues to process current IRS 
referrals as they are received. In order to address the accumulated and 
future referrals, SSA has developed and documented updated standard 
processing procedures. To facilitate the possibility of more efficient 
processing, SSA has elicited IRS support to develop an automated 
application to process this workload. SSA and IRS are continuing to 
meet to discuss how to develop an automated process.
    Question: Since 1997, the SSA has sent information to the DHS on 
wages reported under SSNs issued for non-work purposes. However, the 
DHS has said the information is in an electronic format it cannot use. 
Are you working with the DHS to resolve these problems? Also, are you 
working with the DHS to obtain more up-to-date information on the work 
authorization status of SSN holders?
    Answer: Yes. We are working with DHS to resolve the problems that 
have been brought to our attention with regard to this file. For 
example, in addition to the information sent as required by law, DHS 
recently requested the data in a different electronic format. We 
provided a prototype file of the new electronic format to DHS in early 
April 2004 for testing purposes. However, there are inherent 
difficulties resulting from the fact that each agency maintains unique 
data to support its mission. Our information is indexed under the 
individual's SSN; however, DHS records do not usually contain an SSN. 
DHS uses immigration numbers as its index; SSA records do not presently 
contain the immigration numbers. However, SSA is exploring capturing 
those numbers as part of a future long-term enhancement to its system 
for assigning SSNs, which would be helpful in our efforts to obtain 
more up-to-date information on work authorization status.
    Question: Your agency's letter to employers notifying them of 
mismatched names and SSNs on their wage reports states that employers 
should not use the letter to take any adverse action against an 
employee and that doing so could violate State or Federal law and 
subject them to legal consequences. Did you consult with the DHS on 
this language? Is it also the DHS's policy that employers should not 
take adverse action based on the letter?
    Answer: The SSA discussed the ``No Match'' letter language 
developed in 2002 with the Office of Special Counsel at the Department 
of Justice, which had jurisdiction over the Immigration and 
Naturalization Service (INS). As you know, most of the functions of the 
INS were subsumed under DHS. We would defer to the DHS to address 
questions concerning their policies.
    Question: Could you provide an estimate of the number of clearly 
invalid SSNs (e.g., all zeros, sequential numbers, alphanumeric, ITINs, 
and so forth.)? What much in wages is attributed to these numbers?
    Answer: There are currently about 244 million items in the suspense 
file. (Items refer to quarterly employer reports for individual workers 
for years prior to 1978 and to W-2s for years after 1977.)

      About 91.6 million of these items have an SSN that is 
000-00-0000, reflecting approximately $34.9 billion in wages. The 
percentage of wage items with all zero SSNs has declined significantly 
since 1990. For TY 1990, 17 percent of W-2s received were all zeros; 
for TY 2002, 2.5 percent of W-2s received were all zeros. The use of 
all zeros for the SSN is consistent with instructions issued by SSA and 
IRS for certain situations that employers may encounter until they can 
obtain a valid SSN. For example, where the employer files his/her wage 
reports with SSA electronically and cannot supply a worker's SSN--for 
example, the employer hires a person who does not have an SSN by the 
time the W-2 report is due and who may no longer work for the 
employer--the employer is instructed to complete the SSN field by 
entering all zeros. The use of all zeros allows SSA to record the wages 
in the earnings suspense file and facilitates the payment of taxes on 
these wages. (Once the employee receives his/her SSN, the employer 
should complete and submit a form W-2c to provide the correct SSN.)
      Another 30.1 million of the suspense items have an SSN 
that could not have been assigned by SSA, reflecting $102.9billion in 
wages. This includes the 800 and 900-series that have not been assigned 
by SSA. Since 1996, the 900-series has been reserved for use by IRS to 
issue ITINs. The ITIN is a 9-digit number issued to non-citizens who 
need ITINs for tax purposes and who otherwise do not meet the 
requirements for being assigned an SSN.
      There are approximately 1.5 million items in the suspense 
file reported to 900-series SSNs. Of these, about 342,000 appear to be 
valid ITINS. The total earnings amount associated with these ``apparent 
ITINS'' is $2.8 billion, representing 0.7 percent of all wages in the 
earnings suspense file.

    These three groups account for 50 percent of the items in the 
suspense file--about 122 million out of 244 million items.
    The remaining 50 percent of the items in the suspense file 
represent situations such as individuals not reporting name changes, 
clerical errors, and individuals using another's person's SSN.
    The SSA has developed, and is currently implementing, a new process 
for examining items in the suspense file by considering additional data 
in an effort to move items from the suspense file to the records of 
individual workers. As this implementation continues, we also continue 
to evaluate the results to ensure that earnings are accurately posted 
to the earnings record.
    Question: Could you provide an estimate of the amount of benefits 
received, versus payroll taxes paid, based on unauthorized wages that 
have been removed from the Earnings Suspense File and allocated to the 
correct worker?
    Answer: We are unable to provide this information based on our 
records. SSA has no way of determining whether or not earnings in the 
earnings suspense file (ESF) are from unauthorized work. SSA's source 
of information about earnings is the Form W-2, and there is no 
indication on the W-2 as to an employee's citizenship or immigration 
status. By definition, if reported earnings are in the ESF, we are 
unable to attribute that record to any specific individual. Thus, SSA 
has no way of determining from our records whether earnings removed 
from the suspense file are from unauthorized work.
    Question: The Commissioner of the IRS testified that, while they 
have levied fines on employers who submitted wage reports with 
mismatched names and SSNs, none of these fines have been upheld on 
appeal because the employers complied with IRS and DHS documentation 
requirements regarding collection of information on an individual's 
name, SSN, and work authorization. Similarly, the SSA has previously 
stated their ability to prevent wages from being reported under 
erroneous names and SSNs is limited, because they must rely on the IRS 
to penalize employers and the DHS to enforce immigration laws. Given 
that the ability of both the SSA and IRS to maintain accurate records 
and enforce laws over which they have jurisdiction rely substantially 
upon DHS documentation requirements and immigration enforcement, please 
provide a joint SSA, IRS, DHS response with recommendations to prevent 
erroneous reporting of wage information to the IRS and SSA, including 
any planned changes to employer instructions, other procedures or 
regulations, along with any recommendations for needed change in law.
    Answer: By statute, the SSA, IRS, and DHS each fulfill separate 
roles within the Federal Government. The SSA advances the economic 
security of U.S. citizens through retirement and disability programs. 
The IRS administers and enforces the nation's revenue laws. The DHS 
leads efforts to ensure the security of the United States homeland and 
its citizens, including protection of the nation's borders. Despite 
these separate roles, the three agencies interact with each other, as 
necessary, to fulfill their respective roles and as authorized by law.
    The subject of the March 10, 2004, hearing was SSN and ITIN misuses 
and mismatches. The hearing testimony mainly addressed issues arising 
from the use of SSNs stolen or fabricated by unauthorized workers in 
the United States; the potential problems this caused with regard to 
the SSA's Earnings Suspense File and IRS's collection of revenue; and 
the IRS's attempts to fine employers for submitting information returns 
to the IRS with invalid employee name/SSN combinations, which were not 
upheld on appeal. The hearing also addressed the IRS's issuance and use 
of ITINs in order to facilitate participation in the United States tax 
system by individuals required to pay tax to the United States, but who 
are ineligible for an SSN.
    The issues explored at the hearing focused mainly on the 
interaction between the SSA and IRS. Employers report their employees' 
earnings and withholdings of income and Federal Insurance Contributions 
Act (FICA) tax on IRS Form W-2. These earnings and taxes are tracked 
through the use of the employee's SSN, for which all U.S. citizens are 
eligible. SSA also will issue SSNs to certain non-citizens authorized 
to work in the United States, and to certain non-citizens who qualify 
for Federal or State benefits. DHS determines whether these individuals 
are eligible to work, and the SSA's issuance of an SSN to an immigrant 
is based on this determination.
    Occasionally, an employer will submit a W-2 that contains an 
invalid name/SSN combination, often because of a simple reporting 
error. Generally, such minor errors can be remedied and the wages and 
FICA taxes credited to the proper account at SSA and IRS. There are, 
however, circumstances under which the name/SSN combination cannot be 
matched to any record.
    To decrease the number of invalid name/SSN combinations reported to 
the SSA, the SSA has implemented a name/SSN verification system, called 
the Employer Verification Service (EVS). The EVS matches employees' 
names and SSNs with SSA's records. The EVS is offered to employers and 
third party submitters (e.g., accountants and service bureaus). The SSA 
believes that providing employers with the opportunity to verify names 
and SSNs is an important step in accurate wage reporting. Consequently, 
the SSA provides three options--through paper listings, magnetic media, 
or telephone--for employers to verify names and SSNs. The SSA received 
over 1.1 million phone calls from employers in 2003 to verify the 
accuracy of their employees' reported names and SSNs.
    The SSA is currently piloting an Internet-based application that 
allows employers and third-party submitters to check their employees' 
names/SSNs against SSA's records. The pilot is called the Social 
Security Number Verification Service (SSNVS). The pilot began with six 
participating employers. As of June 20, 2004, SSA has expanded the 
pilot to include 86 employers. Of those, 74 employers have used this 
service over 44,000 times to verify over 8.7 million names and SSNs. 
The SSA is now evaluating the SSNVS pilot.
    Under the SSA's privacy regulations, based on the Privacy Act, an 
employer may not verify a name and SSN prior to hiring. This 
information can be verified only after the employee is hired. Thus, 
even if an employer learns that an employee's name and SSN do not 
match, the employer is still required to send a Form W-2 (wage report) 
with a name and SSN mismatch in cases in which the employee had left 
employment with that employer.
    As a further initiative, the SSA has established a process, 
administered jointly by SSA and the U.S.Department of State (DOS), that 
allows the SSA to assign SSNs and issue SSN cards to non-citizens who 
choose to apply for an SSN as part of the process that allows them to 
enter the country as permanent residents. This process is known as 
Enumeration at Entry. The data required to assign an SSN, including 
verification of the individual's immigration and work authorization 
status, are provided by the DOS and DHS to the SSA. The SSA believes 
this process is an important step to ensuring the integrity of the SSN, 
and ultimately improving the accuracy of wage reporting.
    Moreover, the DHS and the SSA have instituted a pilot program, 
known as the Basic Pilot, to facilitate verification of information 
that employees provide to employers to determine whether it matches 
government databases and whether the employee is authorized to work in 
the United States. By volunteering to participate in the Basic Pilot, 
employers may verify the information provided by all newly hired 
employees. This pilot will be available to employers in all States by 
December 2004. Thus, employers participating in this pilot are able to 
ascertain that the SSN information they have been provided matches the 
SSA's records and that the person hired is authorized to work in the 
United States.
    In contrast with the SSA's and DHS's ability to verify information, 
the IRS is prohibited from doing so under most circumstances. This 
prohibition extends to an individual's name/SSN combination, because 
such information is considered taxpayer information when held by the 
IRS. The Internal Revenue Code currently prohibits the IRS from 
disclosing such information, before or after an employer hires an 
individual, except under very limited circumstances. section 413 of the 
Tax Administration Good Government Act of 2003, which was passed by the 
Senate on May 19, 2004, would permit the IRS to verify taxpayer 
identifying numbers, including the SSN, to requesters who are required 
to provide such information to the IRS for tax administration purposes.
    Even though the IRS is prohibited from prospectively verifying 
name/SSN combinations, the Internal Revenue Code does provide authority 
for the IRS to fine employers that file information returns with 
invalid name/SSN combinations. Through use of information returns, the 
IRS has placed certain reasonable responsibilities on employers with 
respect to reporting wages and withheld taxes for their employees. 
Regulations require a level of diligence on the part of the employer in 
meeting these responsibilities. The IRS forms, such as the Form W-2, 
provide sufficient clear guidance to employers, and are a tax 
administration tool for employers to report wage information to the IRS 
and the SSA. The IRS relies on these forms to administer and enforce 
the revenue laws of the United States. Most information provided on 
such forms is accurate, and the IRS attempts to correct erroneous 
information whenever possible.
    When information returns contain invalid name/SSN combinations, the 
IRS can impose a fine unless the employer qualifies for a ``reasonable 
cause'' waiver. The reasonable cause waiver prevents employers from 
being held as guarantors of the accuracy of information for which they 
serve as mere transmitter. To qualify for a waiver, an employer must 
show due diligence in attempting to solicit an accurate SSN and 
soliciting again upon learning that the SSN provided is inaccurate. The 
IRS believes that this standard is reasonable to encourage employers to 
collect and report the proper tax on income earned in the United 
States, regardless of the immigration status of the taxpayer.
    Forms W-2 that contain invalid name/SSN combinations that cannot be 
matched might be attached to tax forms filed by individuals under an 
ITIN. The IRS created the ITIN for those individuals ineligible for an 
SSN, but who are required by the Internal Revenue Code to pay tax to 
the Federal Government because, for example, they have U.S.-source 
income greater than the exemption amount. The IRS bases its 
determination whether to issue an ITIN on information provided by the 
taxpayer on the Form W-7.
    Even though ITIN holders who file returns and attach Forms W-2 
showing an SSN may not be legally present in the United States, the IRS 
is prohibited by Section 6103 of the Internal Revenue Code from sharing 
that information with the DHS or any other government agency except in 
very limited situations. For example, IRS had been permitted to share 
return information, including taxpayer identity, with Federal law 
enforcement agencies, when that information is related to a terrorist 
incident, threat, or activity, under an amendment to Section 6103 
passed after the terrorist attacks of September 11, 2001. This 
authority expired December 31, 2003, but section 416 of H.R. 4250, the 
``American Jobs Creation Act of 2004,'' which was passed by the House 
of Representatives on June 17, 2004, would re-enact the authority. 
Regardless of potential changes, the protections provided by section 
6103 are fundamental to encouraging voluntary compliance with the tax 
laws. Therefore, the IRS strongly believes that any changes thereto 
should be made only after very careful consideration.
    The information provided to employers by individuals on the 
principal DHS form used for employment eligibility verification, the 
Form I-9, is also restricted as to its uses. By statute, neither the 
form nor the information contained therein may be used for any 
governmental purpose other than enforcement of the Immigration and 
Nationality Act and several specific criminal provisions of Title 18, 
United States Code. See 8 U.S.C.  1324a(b)(5).
    In light of the foregoing discussion, we would disagree with one 
premise of the question, namely, that the ability of the SSA and IRS to 
enforce laws within their respective jurisdictions relies substantially 
on DHS enforcement and documentation requirements. Each agency works to 
prevent document fraud and enforce the laws within its jurisdiction. No 
agency can be held responsible for enforcing laws within another 
agency's jurisdiction. However, each agency, if authorized, may share 
information to further the others' missions. Any changes to the current 
system, which might potentially lead to more accurate information 
reporting, also may have a negative effect, particularly on tax 
administration. They must, therefore, be very carefully considered.

   Questions from Chairman E. Clay Shaw, Jr. to Hon. Mark W. Everson

    Question: The Social Security Administration (SSA) and the Internal 
Revenue Service (IRS) match data on earnings, to ensure accurate wage 
reports. Are there any authorizations for sharing information between 
your two agencies in current law that are not being utilized, or are 
under-utilized?
    Answer: We believe we are using all available statutory authority 
to share information. IRS and SSA meet regularly to explore additional 
data sharing opportunities and methods to increase ease of data 
exchange and ease of use. To solidify our data sharing commitments, a 
Memorandum of Understanding (MOU) was prepared. In drafting the MOU, we 
ensured that both agency needs and goals would be met to improve wage 
reporting and reconciliation and the means to resolve name/SSN 
problems.
    Question: In his testimony, the SSA Acting Inspector General 
suggests exploring additional data-sharing opportunities. Do you have 
any recommendations for changes in data-sharing authority that would 
enable IRS and SSA to better do their jobs?
    Answer: In an effort to increase the sharing of information between 
our agencies and enhance our efforts in the area of matching and 
verifying wage reporting data, the two agencies have agreed that IRS 
will be provided access to the SSA Employer Report Query (ERQY) command 
code. The ERQY command code will allow IRS online access to employer 
report and adjustment information maintained on the SSA Employer 
Control Database (ECDB). The ECDB contains the wages, tips and Medicare 
wage information reported on Forms W-3 and W-2 from the employer 
community for the years 1937 to the present.
    IRS currently has access to the ECDB information that is available 
on microfilm to IRS employees from the Wage Information Retrieval 
System (WIRS) at one location. IRS and SSA also have an on-line pilot 
site in Philadelphia and are working together to expand access to other 
sites. On-line access to this database will facilitate expanded use of 
the information by providing immediate viewing of W-3/W-2 information 
via electronic means. In addition, it will enhance the Service's 
ability to match and verify wage document filings and information 
reported by employers while decreasing the time it takes to determine 
compliance with wage reporting requirements.
    Question: The National Taxpayer Advocate recommends IRS continue to 
encourage unauthorized workers to file tax returns, so that the IRS can 
identify stolen SSNs and the correct ITIN. She recommends IRS notify 
SSA of the ITIN to which wages should be attributed when an 
unauthorized immigrant works using a false or stolen SSN. Do you agree 
with this recommendation? 
    Answer: The IRS will continue to encourage unauthorized workers who 
owe tax to the Federal Government to file tax returns, as they are 
required to do so by law. The National Taxpayer Advocate's testimony 
states that the IRS ``could notify SSA of the correct number (the ITIN) 
to which to attribute earnings.'' However, we are prohibited from 
sharing such information with SSA under section 6103 of the Internal 
Revenue Code, which prohibits the IRS from sharing information 
concerning taxpayers, except under the limited circumstances 
specifically identified in the statute.
    Question: You say that sharing confidential taxpayer information 
with immigration authorities would discourage illegal workers from 
participating in the tax system and deprive the Federal Government of 
tax revenue. Why should illegal workers participate in our tax system, 
and how much tax revenue do they provide to our government?
    Answer: The Internal Revenue Code requires illegal workers to 
participate in the tax system. Any person, regardless of immigration 
status, who has U.S.-source income greater than the exemption amount is 
required to file a tax return and pay any tax due to the Federal 
Government.
    There is no method to accurately calculate the amount of tax 
revenue illegal workers contribute to the Federal Government. Any 
attempt to arrive at an amount would need to consider a number of 
factors, including that there is no reliable measure of the number of 
illegal workers present in the United States. In addition, illegal 
workers contribute to the Federal Government through excise taxes (such 
as gasoline tax and tax on alcoholic beverages), too, which are 
inherently immeasurable based on identified taxpayer groupings. 
Specific to income tax, it is clear that illegal workers are filing 
income tax returns with the Service. However, at this time we have no 
program in place to separately measure the amount of income tax revenue 
paid into the Federal Government by ITIN taxpayers. We will do a 
special extract from our Master File system to measure the total income 
tax liability reported by ITIN taxpayers on Forms 1040 (line 60) for 
the past five tax years, and provide you with the results once they are 
available.
    Question: Why does IRS process returns and issue refunds to 
taxpayers when there is an ITIN/SSN mismatch issue that might indicate 
the misuse of an SSN?
    Answer: The IRS issues refunds based upon demonstration that the 
filer of the return earned the income reported, and that, based upon 
that income, tax was withheld greater than tax owed to the Federal 
Government. The IRS is required by section 6402 of the Internal Revenue 
Code to refund such overpayments.
    Question: On the employee's withholding allowance certificate (Form 
W-4), the employee signs under penalty of perjury that he/she is 
entitled to the number of withholding allowances claimed. However, the 
employee is not stating under penalty of perjury that the name and SSN 
are correct. Why don't employees have to attest to the accuracy of 
their names and SSNs under penalty of perjury on the Form W-4?
    Answer: The purpose of the Form W-4, Employee's Withholding 
Allowance Certificate, is to ensure that the proper amount of tax is 
withheld from an employee's income. The Code mandates that no employee 
claim more withholding exemptions than the number to which the employee 
is entitled. See I.R.C.  3402(f)(2)(A). By signing the W-4, employees 
certify that they are not claiming more exemptions than they are 
allowed to claim, and the purpose of the statute, and by extension the 
form, is fulfilled. The statute provides a remedy as well: an employer 
is required to withhold tax at a higher rate on an employee whom it 
suspects has filed an invalid W-4 or who has failed to file a W-4.
    Furthermore, if an employer does not use one of SSA's SSN 
verification options to verify employees' SSNs, the employer may only 
learn that a SSN is invalid after submitting Forms W-2 after close of 
the tax year. This is due, in part, to the fact that very few W-4s are 
sent to the IRS. A completed W-4 remains on file with the employer 
unless the employee claims more than ten exemption allowances, or 
claims to be exempt from withholding but earns more than $200 per week. 
There is no requirement in law that an employer validate TINs with the 
Service. Currently, the confidentiality provisions of the Code prohibit 
us from disclosing whether the TIN-name combination provided by an 
employee matches the TIN-name combination on file with the Service, 
although legislation recently passed by the Senate, the Tax 
Administration Good Government Act of 2003 (S. 882), would provide the 
necessary authorization.
    Finally, we would anticipate that compliance by non-ITIN taxpayers 
would be negatively impacted, and participation in the tax system by 
ITIN taxpayers discouraged, if a perjury statement were added to the W-
4. A portion of our resources dedicated to combating noncompliance 
would need to be shifted from other noncompliance issues in order to 
administer the new requirement, diminishing our ability to address 
other, more flagrant, areas of noncompliance.
    Question: Under current law, a worker is not eligible for the 
earned income tax credit based on a Social Security number that was 
issued for non-work purposes. Are workers eligible for the earned 
income tax credit if they use a SSN issued based on temporary work 
authorization, if that work authorization has expired? Does the IRS 
match data with the SSA or the Department of Homeland Security to 
determine whether a SSN is based on authorization to work?
    Answer: During the processing of income tax returns, the IRS 
verifies the name and SSN of taxpayers, spouses, and dependents against 
records provided to us by the SSA in its NUMIDENT file. The NUMIDENT 
file indicates whether the SSN was assigned for work or for non-work 
purposes. SSA assigns non-work SSNs to non-citizens legally in the U.S. 
who meet all requirements to be paid a state public assistance benefit, 
other than having an SSN. The tax law allows a taxpayer to claim EITC 
when a non-work SSN was assigned for state benefit purposes. However, 
SSA also assigns non-work SSNs to non-citizens when a Federal statute 
or regulation requires the non-citizen to have an SSN in order to 
receive a federally funded benefit to which the non-citizen has already 
established entitlement, such as a Social Security benefit. A non-
citizen assigned an SSN for this reason does not qualify for EITC. At 
this time, SSA does not identify the specific non-work reason for which 
the SSN was assigned, and thus IRS cannot determine from SSA records 
which taxpayers qualify for EITC. Therefore, IRS does allow a taxpayer 
to claim EITC based on a non-work assigned SSN. IRS has suggested a 
technical correction to the tax law that would eliminate the 
distinction between an SSN assigned for state benefit purposes and one 
assigned for other non-work reasons. The IRS does not match data 
directly with the Department of Homeland Security (DHS). Instead, 
information about a non-citizen's authority to work in the U.S. that is 
provided to us by SSA would be based on information SSA received from 
DHS. It is this information that SSA uses to determine whether to 
assign an SSN and whether the card issued will be for work or for non-
work purposes.
    Question: The Commissioner of the IRS testified that, while they 
have levied fines on employers who submitted wage reports with 
mismatched names and SSNs, none of these fines have been upheld on 
appeal because the employers complied with IRS and DHS documentation 
requirements regarding collection of information on an individual's 
name, SSN, and work authorization. Similarly, the SSA has previously 
stated their ability to prevent wages from being reported under 
erroneous names and SSNs is limited, because they must rely on the IRS 
to penalize employers and the DHS to enforce immigration laws. Given 
that the ability of both the SSA and IRS to maintain accurate records 
and enforce laws over which they have jurisdiction rely substantially 
upon DHS documentation requirements and immigration enforcement, please 
provide a joint SSA, IRS, DHS response with recommendations to prevent 
erroneous reporting of wage information to the IRS and SSA, including 
any planned changes to employer instructions, other procedures or 
regulations, along with any recommendations for needed change in law. 
    Answer: By statute, the SSA, IRS, and DHS each fulfill separate 
roles within the Federal Government. The SSA advances the economic 
security of U.S. citizens through retirement and disability programs. 
The IRS administers and enforces the nation's revenue laws. The DHS 
leads efforts to ensure the security of the United States homeland and 
its citizens, including protection of the nation's borders. Despite 
these separate roles, the three agencies interact with each other, as 
necessary, to fulfill their respective roles and as authorized by law.
    The subject of the March 10, 2004, hearing was SSN and ITIN misuses 
and mismatches. The hearing testimony mainly addressed issues arising 
from the use of SSNs stolen or fabricated by unauthorized workers in 
the United States; the potential problems this caused with regard to 
the SSA's Earnings Suspense File and IRS's collection of revenue; and 
the IRS's attempts to fine employers for submitting information returns 
to the IRS with invalid employee name/SSN combinations, which were not 
upheld on appeal. The hearing also addressed the IRS's issuance and use 
of ITINs in order to facilitate participation in the United States tax 
system by individuals required to pay tax to the United States, but who 
are ineligible for an SSN.
    The issues explored at the hearing focused mainly on the 
interaction between the SSA and IRS. Employers report their employees' 
earnings and withholdings of income and Federal Insurance Contributions 
Act (FICA) tax on IRS Form W-2. These earnings and taxes are tracked 
through the use of the employee's SSN, for which all U.S. citizens are 
eligible. SSA also will issue SSNs to certain non-citizens authorized 
to work in the United States, and to certain non-citizens who qualify 
for Federal or State benefits. DHS determines whether these individuals 
are eligible to work, and the SSA's issuance of an SSN to an immigrant 
is based on this determination.
    Occasionally, an employer will submit a W-2 that contains an 
invalid name/SSN combination, often because of a simple reporting 
error. Generally, such minor errors can be remedied and the wages and 
FICA taxes credited to the proper account at SSA and IRS. There are, 
however, circumstances under which the name/SSN combination cannot be 
matched to any record.
    To decrease the number of invalid name/SSN combinations reported to 
the SSA, the SSA has implemented a name/SSN verification system, called 
the Employer Verification Service (EVS). The EVS matches employees' 
names and SSNs with SSA's records. The EVS is offered to employers and 
third party submitters (e.g., accountants and service bureaus). The SSA 
believes that providing employers with the opportunity to verify names 
and SSNs is an important step in accurate wage reporting. Consequently, 
the SSA provides three options--through paper listings, magnetic media, 
or telephone--for employers to verify names and SSNs. The SSA received 
over 1.1 million phone calls from employers in 2003 to verify the 
accuracy of their employees' reported names and SSNs.
    The SSA is currently piloting an Internet-based application that 
allows employers and third-party submitters to check their employees' 
names/SSNs against SSA's records. The pilot is called the Social 
Security Number Verification Service (SSNVS). The pilot began with six 
participating employers. As of June 20, 2004, SSA has expanded the 
pilot to include 86 employers. Of those, 74 employers have used this 
service over 44,000 times to verify over 8.7 million names and SSNs. 
The SSA is now evaluating the SSNVS pilot.
    Under the SSA's privacy regulations, based on the Privacy Act, an 
employer may not verify a name and SSN prior to hiring. This 
information can be verified only after the employee is hired. Thus, 
even if an employer learns that an employee's name and SSN do not 
match, the employer is still required to send a Form W-2 (wage report) 
with a name and SSN mismatch in cases in which the employee had left 
employment with that employer.
    As a further initiative, the SSA has established a process, 
administered jointly by SSA and the U.S.Department of State (DOS), that 
allows the SSA to assign SSNs and issue SSN cards to non-citizens who 
choose to apply for an SSN as part of the process that allows them to 
enter the country as permanent residents. This process is known as 
Enumeration at Entry. The data required to assign an SSN, including 
verification of the individual's immigration and work authorization 
status, are provided by the DOS and DHS to the SSA. The SSA believes 
this process is an important step to ensuring the integrity of the SSN, 
and ultimately improving the accuracy of wage reporting.
    Moreover, the DHS and the SSA have instituted a pilot program, 
known as the Basic Pilot, to facilitate verification of information 
that employees provide to employers to determine whether it matches 
government databases and whether the employee is authorized to work in 
the United States. By volunteering to participate in the Basic Pilot, 
employers may verify the information provided by all newly hired 
employees. This pilot will be available to employers in all States by 
December 2004. Thus, employers participating in this pilot are able to 
ascertain that the SSN information they have been provided matches the 
SSA's records and that the person hired is authorized to work in the 
United States.
    In contrast with the SSA's and DHS's ability to verify information, 
the IRS is prohibited from doing so under most circumstances. This 
prohibition extends to an individual's name/SSN combination, because 
such information is considered taxpayer information when held by the 
IRS. The Internal Revenue Code currently prohibits the IRS from 
disclosing such information, before or after an employer hires an 
individual, except under very limited circumstances. section 413 of the 
Tax Administration Good Government Act of 2003, which was passed by the 
Senate on May 19, 2004, would permit the IRS to verify taxpayer 
identifying numbers, including the SSN, to requesters who are required 
to provide such information to the IRS for tax administration purposes.
    Even though the IRS is prohibited from prospectively verifying 
name/SSN combinations, the Internal Revenue Code does provide authority 
for the IRS to fine employers that file information returns with 
invalid name/SSN combinations. Through use of information returns, the 
IRS has placed certain reasonable responsibilities on employers with 
respect to reporting wages and withheld taxes for their employees. 
Regulations require a level of diligence on the part of the employer in 
meeting these responsibilities. The IRS forms, such as the Form W-2, 
provide sufficient clear guidance to employers, and are a tax 
administration tool for employers to report wage information to the IRS 
and the SSA. The IRS relies on these forms to administer and enforce 
the revenue laws of the United States. Most information provided on 
such forms is accurate, and the IRS attempts to correct erroneous 
information whenever possible.
    When information returns contain invalid name/SSN combinations, the 
IRS can impose a fine unless the employer qualifies for a ``reasonable 
cause'' waiver. The reasonable cause waiver prevents employers from 
being held as guarantors of the accuracy of information for which they 
serve as mere transmitter. To qualify for a waiver, an employer must 
show due diligence in attempting to solicit an accurate SSN and 
soliciting again upon learning that the SSN provided is inaccurate. The 
IRS believes that this standard is reasonable to encourage employers to 
collect and report the proper tax on income earned in the United 
States, regardless of the immigration status of the taxpayer.
    Forms W-2 that contain invalid name/SSN combinations that cannot be 
matched might be attached to tax forms filed by individuals under an 
ITIN. The IRS created the ITIN for those individuals ineligible for an 
SSN, but who are required by the Internal Revenue Code to pay tax to 
the Federal Government because, for example, they have U.S.-source 
income greater than the exemption amount. The IRS bases its 
determination whether to issue an ITIN on information provided by the 
taxpayer on the Form W-7.
    Even though ITIN holders who file returns and attach Forms W-2 
showing an SSN may not be legally present in the United States, the IRS 
is prohibited by Section 6103 of the Internal Revenue Code from sharing 
that information with the DHS or any other government agency except in 
very limited situations. For example, IRS had been permitted to share 
return information, including taxpayer identity, with Federal law 
enforcement agencies, when that information is related to a terrorist 
incident, threat, or activity, under an amendment to Section 6103 
passed after the terrorist attacks of September 11, 2001. This 
authority expired December 31, 2003, but section 416 of H.R. 4250, the 
``American Jobs Creation Act of 2004,'' which was passed by the House 
of Representatives on June 17, 2004, would re-enact the authority. 
Regardless of potential changes, the protections provided by section 
6103 are fundamental to encouraging voluntary compliance with the tax 
laws. Therefore, the IRS strongly believes that any changes thereto 
should be made only after very careful consideration.
    The information provided to employers by individuals on the 
principal DHS form used for employment eligibility verification, the 
Form I-9, is also restricted as to its uses. By statute, neither the 
form nor the information contained therein may be used for any 
governmental purpose other than enforcement of the Immigration and 
Nationality Act and several specific criminal provisions of Title 18, 
United States Code. See 8 U.S.C.  1324a(b)(5).
    In light of the foregoing discussion, we would disagree with one 
premise of the question, namely, that the ability of the SSA and IRS to 
enforce laws within their respective jurisdictions relies substantially 
on DHS enforcement and documentation requirements. Each agency works to 
prevent document fraud and enforce the laws within its jurisdiction. No 
agency can be held responsible for enforcing laws within another 
agency's jurisdiction. However, each agency, if authorized, may share 
information to further the others' missions. Any changes to the current 
system, which might potentially lead to more accurate information 
reporting, also may have a negative effect, particularly on tax 
administration. They must, therefore, be very carefully considered.

Questions from Chairman E. Clay Shaw, Jr. to Hon. Tom Ridge, Secretary, 
                  U.S. Department of Homeland Security

    Question: The Deputy Commissioner for the Social Security 
Administration (SSA) stated in his testimony that the SSA, Internal 
Revenue Service (IRS), and Department of Homeland Security (DHS) have 
formed an executive level steering committee. What are your plans for 
increased agency coordination?
    Question: The Commissioner of the IRS testified that, while they 
have levied fines on employers who submitted wage reports with 
mismatched names and SSNs, none of these fines have been upheld on 
appeal because the employers complied with IRS and DHS documentation 
requirements regarding collection of information on an individual's 
name, SSN, and work authorization. Similarly, the SSA has previously 
stated their ability to prevent wages from being reported under 
erroneous names and SSNs is limited, because they must rely on the IRS 
to penalize employers and the DHS to enforce immigration laws. Given 
that the ability of both the SSA and IRS to maintain accurate records 
and enforce laws over which they have jurisdiction rely substantially 
upon DHS documentation requirements and immigration enforcement, please 
provide a joint SSA, IRS, DHS response with recommendations to prevent 
erroneous reporting of wage information to the IRS and SSA, including 
any planned changes to employer instructions, other procedures or 
regulations, along with any recommendations for needed change in law. 
    Question: In his testimony, the SSA Acting Inspector General 
suggests exploring additional data-sharing opportunities. Do you have 
any recommendations for changes in data-sharing authority that would 
enable the SSA and DHS to better do their jobs?
    Question: Since 1997, the SSA sent information to the Immigration 
and Naturalization Service (INS), and now to the DHS, on wages reported 
under SSNs issued for non-work purposes. 
    Question: However, we have been informed by DHS that the 
information is in an electronic format your agency cannot use. Are you 
working with the SSA to resolve these problems? Do you have any plans 
to utilize this information for enforcement purposes? Also, are you 
working with the SSA to provide more up-to-date information on the work 
authorization status of SSN holders?
    Question: The SSA sends letters to employers notifying them when 
they submit wage reports with names and SSNs that do not match the 
SSA's records. While in some cases this results from a simple clerical 
error, in other cases it results from false information provided to the 
employer by an individual working in the United States without 
authorization. Has DHS consulted with SSA regarding the instructions to 
employers contained in these letters? What does the DHS instruct 
employers to do if they receive such a letter from the SSA? Are 
employers required to ask for additional documentation for the 
Employment Eligibility Verification form I-9? If so, what documentation 
is required? If the employee fails to provide the documentation, what 
further actions must the employer take? What penalties does the 
employer face if he/she does not take the required actions? Have these 
penalties been enforced? If so, please provide data on penalties issued 
in recent years.
    Question: Legislation has been introduced in the 108th Congress to 
prohibit payment of Social Security benefits based on wages earned 
while an individual lacked authorization to work in the United States. 
Does the DHS have historical information on an individual's work 
authorization status at a point in time? How far back do the DHS 
records on an individual's work authorization status go?
    [At the time of publishing, a response had not been received.]

        Questions from Chairman Houghton for Ms. Pamela Gardiner

    Question: TIGTA Report 2004-30023 finds that 25% of tax filings by 
ITIN holders involve significant fraud in non-reported wage income. 
This finding seems to constitute a major crisis in the ITIN program and 
warrant immediate corrective action. What is your response to the fact 
that the management leadership at the Treasury Department has accepted 
only five of the twelve Recommendations made in Report 2004-30023?
    Answer: Our statistical sample showed that approximately 23 percent 
of returns filed by unauthorized resident aliens appear to have not 
reported all income from wages and non employee compensation. While 23 
percent is significant, the total number of Forms 1040 using an ITIN as 
the primary identifier (for Tax Year 2001--530,000) is proportionately 
small compared to the total volume of Forms 1040 filed (for Fiscal Year 
2002--over 110 million).
    This underreporting can be identified by the Internal Revenue 
Service's (IRS) Automated Underreporter program and by examinations of 
tax returns. However, as we reported, neither method is fully effective 
for finding and taxing income not reported by unauthorized resident 
aliens.
    Only 1 of the 12 recommendations in the report addressed this issue 
(recommendation #6). TIGTA is disappointed that IRS management did not 
take immediate action on this recommendation. Instead, they stated that 
they would have to perform a cost-benefit analysis of implementing our 
recommendation. Management stated that they will continue to study 
whether the actions we recommended might become feasible in the future.
    In commenting on management's response, TIGTA stated that the 
corrective action would involve only an estimated 444,000 of the 89 
million paper filed Tax Year 2001 Forms 1040, or about one-half of 1 
percent. The processing cost would be approximately $435,000, a small 
portion of the Fiscal Year 2003 IRS budget approaching $10 billion.
    Substantial information relating to this audit finding and TIGTA's 
recommendation is sensitive and was redacted from both the audit report 
and this response. If requested, TIGTA would be pleased to brief the 
Committee on that information.
    Question: Does the TIGTA have the resources to fully and adequately 
investigate the widespread fraud that has been documented by TIGTA 
Report 2004-30023? If not, what additional resources are needed?
    Answer: The ITIN fraud referenced in the TIGTA Audit Report 
involves substantive tax violations that are IRS program 
responsibilities.
    Question: In your opinion, does Treasury Department management 
fully support the vigorous investigation and prosecution of ITIN fraud?
    Answer: In December 2003, the IRS made a number of significant 
changes to the ITIN program designed largely to prevent problems from 
occurring. These changes included such things as requiring applicants 
for ITINs to show a Federal tax purpose for requesting them, and 
changing the document issued from a card to a letter to avoid confusion 
with Social Security cards. Further, it is TIGTA's understanding that 
the IRS' Criminal Investigation function evaluates potential ITIN fraud 
cases in the same manner that it evaluates other criminal cases--using 
case selection criteria.
    Question: Has the agency made any determination or set any policy 
with the goal or aim of curtailing or deemphasizing investigation or 
prosecutions of ITIN fraud where the perpetrators appear to be illegal 
aliens?
    Answer: As previously noted, ITIN fraud is a substantive tax 
violation. IRS has program responsibility for investigating these 
violations and for referring cases to the Department of Justice (DOJ) 
for DOJ's prosecutive determinations. We are unaware of any IRS 
decision to initiate or forego investigations based on an individual's 
immigration status.
    Question: Has the Treasury Department, the White House, or any 
agency outside TIGTA pressured or advised you or your staff to slow 
down, deemphasize, or curtail investigation of ITIN fraud in cases 
where the perpetrator appears to be an illegal alien?
    Answer: No.
    Question: Does the TIGTA endorse and support amendments to Section 
6103 of the Internal Revenue Code to permit the sharing of information 
among SSA, IRS, BICE and other Federal agencies to facilitate 
investigations and enforcement of Federal law?
    Answer: During the course of TIGTA's audit activity, TIGTA 
identified what appeared to be conflicting obligations in the 
confidentiality provisions of the Internal Revenue Code (I.R.C.  6103) 
and provisions in Title 8 concerning immigration law enforcement. We 
noted the apparent conflict and suggested IRS confer with the Social 
Security Administration (SSA) and Bureau of Citizenship and Immigration 
Services (BCIS) to determine whether the provisions' effect prevented 
sharing of information that might be helpful in non-tax Federal law 
enforcement. If so, the entities could determine whether to recommend 
to their agency officials to pursue legislative changes to facilitate 
information sharing.
    Question: Did an employee of your agency, Michael Delgado, make a 
telephone call to the U.S. Attorney for the Western District of 
Kentucky, telling him that TIGTA would not support two recently filed 
criminal complaints against two ITIN filers (N. Silva Pina and Carlos 
D. Sanchez, complaint numbers 3:03MJ-405 and 3:03MJ-404, respectively) 
and suggesting that the cases be dismissed?
    Answer: Deputy Assistant Inspector General for Investigations 
(DAIGI) Michael Delgado contacted the United States Attorney's office 
for the Western District of Kentucky and advised an Assistant United 
States Attorney (AUSA) of TIGTA's concerns relating to potential 
operational issues regarding TIGTA's referral of several cases for 
prosecution determination and of TIGTA's internal inquiry to determine 
whether TIGTA policy and procedures were followed. DAIGI Michael 
Delgado requested that the AUSA discuss these concerns with the AUSA's 
supervisors and consider dismissing the criminal complaints.
    Question: Is it true that TIGTA investigative agents were told 
verbally in January through official channels to halt and not proceed 
with investigations of ITIN fraud where the case involves illegal 
aliens?
    Answer: Following allegations that TIGTA improperly investigated 
and referred investigative results to the Department of Justice and 
targeted undocumented aliens, TIGTA temporarily suspended all 
investigations involving non-IRS employees to permit an inventory 
review. TIGTA conducted this inventory review to ensure that all 
applicable policies and procedures were being followed.

                                 

    [Submissions for the record follow:]
  Statement of Linda R. Lewis, American Association of Motor Vehicle 
                  Administrators, Arlington, Virginia
    Thank you for providing the American Association of Motor Vehicle 
Administrators (AAMVA) the opportunity to provide a written statement 
for the printed record regarding mismatches and misuse of the Social 
Security Number (SSN) and Individual Taxpayer Identification Numbers 
(ITIN).
    AAMVA is a state-based, non-profit association representing motor 
vehicle agency administrators and senior law enforcement officials in 
the United States and Canada. Our members are the recognized experts 
who administer the laws governing motor vehicle operation, driver 
credentialing, and highway safety enforcement.
    The driver's license is now the identification document of choice 
throughout North America. With a photo, signature, and physical 
description, the driver's license assumes a role beyond its original 
purpose of identifying a licensed driver. The license is now readily 
accepted as an official identification document for both licensed 
drivers, and, in most jurisdictions, for non-drivers. The motor vehicle 
agencies (MVAs) accept various breeder documents \1\ as proof of 
identity to obtain a driver's license or identification card. MVAs are 
also under increasing pressure to verify the identity of individuals to 
whom they issue a driver's license or identification card. All motor 
vehicle agencies are required to collect the SSN for child support 
purposes while others require the SSN to satisfy legal presence 
requirements. AAMVA recently released A Package of Decisions Based on 
Best Practices, Standards, Specifications and Recommendations to 
Enhance Driver's License Administration and Identification Security 
which included a list of acceptable documents that jurisdictions should 
use when issuing driver's licenses or identification cards. We also 
recommended that MVAs verify the validity of breeder documents with 
issuing agencies like the Social Security Administration (SSA) to 
reduce identity fraud.
---------------------------------------------------------------------------
    \1\ Breeder documents are defined as those documents used to 
confirm identity such as birth certificates, Social Security cards or 
immigration documents.
---------------------------------------------------------------------------
    The AAMVA has developed an online system called Social Security 
Number Online Verification (SSOLV) with SSA to help motor vehicle 
agencies verify an individual's SSN during the driver's license 
issuance or renewal process, while an applicant is still at the 
counter. However, states can use the batch method to which SSA usually 
responds within 24 to 48 hours. Currently, 30 states are electronically 
verifying SSNs with the Social Security Administration through the 
online method.\2\ But that verification process needs improvement.\3\ 
Too frequently SSA's automated system indicates that a number does not 
match, when in reality, after manual investigation, it is a match. This 
is happening due to data updates not being applied to the file that 
DMVs are allowed to access. This situation is deterring other states 
from using the Social Security Administration system. Congress must 
direct the Social Security Administration to improve their system so 
that this unnecessary, labor-intensive process can be eliminated. Each 
check of the system should also reference SSA's death records to ensure 
that a state does not issue a driver's license or identification card 
to an individual presenting personal information of a deceased person. 
Improvement in the Social Security Administration's system will help 
reduce motor vehicle agencies' vulnerability to identity theft and 
fraud.
---------------------------------------------------------------------------
    \2\ Alabama, Arizona, California, District of Columbia, Florida, 
Georgia, Idaho, Maine, Maryland, Massachusetts, Mississippi, Missouri, 
Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, 
Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, 
Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and 
Wyoming
    \3\ General Accounting Office, Social Security Numbers: Improved 
SSN verification and Exchange of States' Driver Records Would Enhance 
Identity Verifications, GAO-03-920, September 2003.
---------------------------------------------------------------------------
    The AAMVA is uneasy about states using the Individual Taxpayer 
Identification Number for driver's licensing purposes. AAMVA shared the 
Internal Revenue Service's (IRS) letter advising states not to use the 
ITIN to determine the identity of applicants for driver's licenses. 
However, MVAs are under pressure from state legislatures to serve the 
driving population in their states since the SSA will no longer issue 
Social Security Numbers for driver licensing purposes. Currently, seven 
states accept the Taxpayer Identification Number in lieu of a SSN and 
legislation is pending in several states to require motor vehicle 
agencies to accept the ITIN as a substitute for a Social Security 
Number. If state legislators are going to require MVAs to accept the 
Individual Taxpayer Identification Number, MVAs need a system to verify 
the number with the IRS.
    The AAMVA is pleased that the Internal Revenue Service has 
strengthened the ITIN issuance process by reducing the number of 
acceptable documents as proof of identity, as well as verification of 
documents. With the new acceptable list of documents developed by 
AAMVA, the Individual Tax Identification Number was not included as an 
acceptable document. The IRS and AAMVA must work together to curtail 
the use of the ITIN.
    The AAMVA strongly supports efforts on the part of Congress, the 
Department of Transportation (DOT), and the Internal Revenue Service to 
curb evasion of the Heavy Vehicle Use Tax (HVUT). We understand that 
this evasion is widespread and damaging to the highway fund. We are 
convinced that the cooperation of all agencies is necessary for 
effective long-term enforcement of the HVUT.
    For many years--in fact ever since the states have been required by 
federal law to verify the payment of the Heavy Vehicle Use Tax before 
registering a heavy commercial vehicle--state motor vehicle 
administrators have desired an electronic means of doing this. Motor 
carrier credentialing systems cannot be fully effective and efficient 
until HVUT verification can be automated. State progress in the DOT-
funded and sponsored Commercial Vehicle Information Systems and 
Networks (CVISN) Project has been held up by this administrative 
bottleneck.
    Section 1307 of the Safe, Accountable, Flexible and Efficient 
Transportation Equity Act of 2003 (SAFETEA) proposes an IRS electronic 
Heavy Vehicle Use Tax Payment Data Base. However, information from the 
completed database could only be shared with ``appropriate State and 
Federal revenue, tax, and law enforcement authorities, subject to 
Section 6103 of the Internal Revenue Code of 1986.`` This appears to 
preclude providing the data to motor vehicle registration officials.
    Even if the IRS were permitted to share notice-of-payment from an 
HVUT Payment Data Base with motor vehicle agencies, it will be of no 
use to state motor vehicle agencies unless it is in a form they can 
use. It is our understanding that IRS does not currently capture 
vehicle identification numbers (VINs) when it processes the Form 2290 
excise tax returns, but relies instead on Social Security and federal 
tax identification numbers (FEINs). Motor vehicle agencies rely very 
heavily on VINs to identify individual motor vehicles, for which SSNs 
and FEINs are not suited. In other words, even if motor vehicle 
administrators can receive information from the projected HVUT Payment 
Data Base, it will be of no use to them in Heavy Vehicle Use Tax 
enforcement if that system is not appropriately designed.
    Since state motor vehicle registration officials will continue to 
be primarily responsible for the verification of the payment of the 
HVUT through examination of a paper IRS Form 2290 presented by the 
registrant taxpayer, AAMVA recommends that Congress amend the Internal 
Revenue Code to give the IRS consent to disclose to MVAs electronically 
whether or not the Heavy Vehicle Use Tax has been paid for each 
individual heavy commercial vehicle. This would not require access to 
tax records, but a simple ``yes`` or ``no`` upon query.
    We think adoption of these recommendations will facilitate the 
common goals of DOT, IRS and the states: HVUT enforcement must be 
improved and the process should be automated. State motor vehicle 
agencies are IRS' and DOT's partners in reaching these goals.
    In conclusion, Congress must ensure motor vehicle agencies have the 
ability, preferably electronically, to verify the validity of source 
documents with issuing agencies, such as the SSA, IRS, Immigration and 
Naturalization Services, vital records agencies and other MVAs. Without 
the ability to exchange and share information, states face a greater 
risk for fraud in motor vehicle administration.
    For more information, please contact Tom Wolfsohn, AAMVA's Senior 
Vice President of Government Affairs at (703) 522-4200.

                                 
        Statement of Raul Yzaguirre, National Council of La Raza
    My name is Raul Yzaguirre, and I am President of the National 
Council of La Raza (NCLR). NCLR is a private, nonprofit, nonpartisan 
organization established in 1968 to reduce poverty and discrimination 
and improve life opportunities for the nation's Hispanics. NCLR is the 
largest national Hispanic constituency-based organization, serving all 
Hispanic nationality groups in all regions of the country through a 
network of more than 300 affiliate community-based groups. I appreciate 
the opportunity to submit comments on the issues of the Social Security 
Administration's (SSA) no-match letters and ITINs.
    The two issues before the Committee have had a disproportionate 
impact on the Latino immigrant community. While we share the 
Committee's concerns about homeland security, we do not believe that 
targeting hardworking, low-income, taxpaying immigrants enhances 
national security. In fact, efforts to keep immigrants underground and 
dependent on a cash economy hinders efforts to identify persons 
residing in the U.S. Furthermore, SSA no-match letters and efforts to 
undermine the ITIN program will only result in poor compliance among 
immigrants with regard to filing taxes; make immigrants more dependent 
on the black market for fraudulent or fraudulently-obtained documents; 
lead to an increase in the Suspense File; and continue to have other 
harmful effects on the Latino community
Individual Taxpayer Identification Number (ITINs)
    The Internal Revenue Service (IRS) created the ITIN on July 1, 
1996, for foreign-born individuals who are required to file tax 
returns. The ITIN, a nine-digit number similarly formatted like a 
Social Security Number (SSN), is issued only to individuals who are not 
eligible for an SSN. Since the inception of the program, the IRS has 
issued nearly 6.9 million ITINs--70% to Latino immigrants. Over a 
million taxpayers reported wages of almost $7 billion and paid more 
than $305 million to the IRS in 2001 using the ITIN as their 
identifier. More importantly, three-quarters of all ITINs issued were 
reflected in tax returns prompting Nina Olson, the Taxpayer Advocate, 
to refer to the ITIN population as a ``very compliant sector of the 
U.S. taxpayer population.''
    Contrary to common perception, ITINs are not solely for 
undocumented immigrants; the ITIN is available to a range of foreign-
born persons. Use of an ITIN does not therefore create an inference 
regarding a person's immigration status. Those eligible for the ITIN 
include nonresident students; professors or researchers; authors who 
earn royalties for their writings or who are paid an honorarium for 
speaking engagements at a university; individuals who have interest-
bearing accounts in a bank, or who receive dividends from money 
invested in stocks but are not eligible for an SSN; and many immigrants 
whose immigration cases are in process but who do not yet have 
employment authorization. Immigrants and U.S. citizens may also apply 
for an ITIN for their spouse or dependents in order to claim them as 
dependents on their tax returns.
    It is important to distinguish between the ITIN as an 
``identifier'' and that of proof of identity. An ITIN alone cannot and 
should not be used to prove identity. Just like the Social Security 
Number, the ITIN is issued so that a taxpayer has a unique identifier 
that is associated with his or her tax return. Since other forms of 
identifiers can either be frequently changed (address) or be shared by 
many people (names and birth dates), the IRS assigns to each individual 
taxpayer a unique number that will not be assigned to any other 
taxpayer.
    The ITIN is a unique identifier provided to individuals who can 
prove their identity and foreign-born status. An individual cannot get 
more than one ITIN assigned to him or her. All applications are 
submitted and approved at a single processing center in the United 
States located in Pennsylvania. The IRS ensures that the W-7, the 
application for an ITIN, is properly filled out and that all of the 
requisite documents have been submitted. The IRS then authenticates the 
documents through a number of validation methods such as the use of 
inspection equipment (Black Lights, Jewelers' Loupe, etc.). All 
documents must be current and either originals, copies certified by the 
issuing agency, copies certified by the U.S. Department of State, 
copies certified or notarized by a military Judge Advocate General 
(JAG) office, or copies notarized in the United States. Documents 
notarized in a foreign country are not acceptable unless they meet 
certain criteria. Documents establishing identity must bear the 
applicant's name and photograph. The only document that is sufficient 
by itself to establish both identity and foreign-born status is an 
unexpired passport. All other documents, including the ``matricula'' 
(the identification issued by Mexican consulates) and voter 
registration card, must be accompanied by a second document in order 
for the applicant to corroborate his or her identity.
    Although tax return filing is clearly the primary purpose for using 
an ITIN, ITINs have also been used to open interest-bearing accounts at 
financial institutions. Linking immigrants to mainstream financial 
services deters crimes and predatory schemes against immigrants, who 
are more vulnerable not only because they are more likely to have a lot 
of cash on hand to pay for daily needs, but because they are the least 
likely of residents to report crimes to local police. Four out of five 
(82%) unbanked individuals use check-cashing outlets and, therefore, 
must often carry large sums of cash making them easier targets for 
crime--especially theft or robbery. Because of these safety concerns, 
police departments across the country support efforts to link immigrant 
workers to mainstream financial institutions as a means of reducing 
crime and violence in neighborhoods and communities and as a means of 
promoting good community policing. Therefore, ITINs facilitate, not 
harm, public safety, crime prevention and investigation, and national 
security efforts.
SSA No-Match Letters
    Sent by the Social Security Administration to certain employers, 
no-match letters have had a devastating impact on immigrant worker 
communities throughout the country. For the last several years, 
advocates have been expressing deep concern about the continued use of 
these no-match letters by employers to discourage immigrant workers 
from asserting their workplace rights. Advocates have also been working 
hard to educate employers who, due to the confusion caused by these 
letters, feel pressured to take some action against employees listed in 
the no-match letters.
    In an effort to update its database, SSA sends no-match letters to 
employers when the names or Social Security Numbers listed on an 
employer's W-2 forms do not agree with SSA records. Attached to each 
no-match letter is a list of employees for whom the SSA database could 
not find a match. The no-match letter is intended to be an educational 
correspondence that informs companies that their employees' wages are 
not being properly credited to their Social Security accounts. SSA aims 
to correct its records so that employees' earnings are accurately 
tracked and can be used to calculate benefit levels when applications 
for retirement or disability benefits are made with SSA. Correcting the 
SSA database is certainly a commendable goal. However, the 
effectiveness of these no-match letters is unproven, and the resulting 
consequences on immigrant worker communities have been devastating.
    Despite hundreds of thousands of no-match letters that have been 
sent in the past several years, the Earnings Suspense Fund (ESF) has 
not decreased. In fact, cumulative earnings in the ESF covering 1937-
2001 total over $420 billion. However, the system's ineffectiveness is 
not its gravest consequence. The impact of the no-match letters on the 
immigrant community has been profound and widespread. The failure of 
the no-match letters to safeguard workers effectively against unfair 
and illegal practices on the part of employers has had devastating 
effects on the workers and their families
    As the SSA admits, there are many reasons for computer no-matches, 
and the no-match letters themselves do not prove any wrongdoing by 
either employer or employee. For example, a large proportion of the 
names on the no-match letters are Latino, Asian, or other names 
frequently misspelled by employers resulting in computer no-matches. 
These honest data-entry mistakes disproportionately affect immigrant 
workers. However, employer misuse of the no-match letters has caused 
great harm to workers nationwide. While the letter explicitly warns 
employers not to take adverse action against workers listed on the 
letter, layoffs, suspensions, firings, retaliations, and discrimination 
against these workers are widespread and well-documented. Some 
employers have simply fired all workers on the list; others have 
incorrectly reverified the work authorization of workers on the list. 
In many cases, only Latino or other ``immigrant'' workers, or workers 
involved in union organizing campaigns, have been fired or harassed 
(See Aaron Nathans, UW and Janitors Settle; Tentative Deal: $24,000 for 
Latinos, Capital Times, Dec. 8, 2001 at A1). And since a 
disproportionate number of names on the no-match lists are ``foreign-
sounding'' names, many employers fear that they will face sanctions if 
they hire additional workers who look or sound ``foreign,'' resulting 
in increased citizenship or national origin discrimination in the 
hiring process.
    Low-wage immigrant workers are the most likely to be affected by 
all of these illegal practices. In fact, Latino communities have 
reported widespread abuse of the SSA no-match letters, resulting in 
greatly increased anxiety within the immigrant community. Many legal 
permanent residents and even U.S. citizens have been affected, and the 
undocumented worker community has been pushed even further underground. 
Because many immigrants live in mixed-status families and close-knit 
communities, when one worker is fired entire families, including U.S. 
citizen children, suffer.
    Thus the SSA's no-match letter policy has not resulted in reducing 
the suspense file, has not eliminated computer no-matches, and has not 
diminished unfair hiring practices. In fact, the consequences have been 
quite the contrary. Particularly in this time of heightened security, 
we must foster an environment that that will encourage individuals to 
emerge from the shadows and participate as productive members of our 
society in order to separate them from those who are here to do us 
harm. Rather than pour the SSA's resources and energies into an 
ineffective and harmful policy, we must be prepared to step back and 
look at the larger picture.
Conclusion
    The problems highlighted during this hearing clearly demonstrate 
the need for comprehensive immigration reform. The SSA suspense file 
shows that immigrant workers, regardless of their immigration status, 
are paying Social Security taxes and are not receiving the benefits of 
those taxes. The evidence presented also demonstrates that immigrant 
workers are essential to the U.S. economy and that U.S. employers have 
knowingly and unknowingly hired many undocumented workers needed to 
fill jobs in key sectors of the economy. These hardworking, taxpaying 
immigrants should be rewarded for their contributions by earning the 
opportunity to legalize their immigration status and obtain permanent 
residence in the U.S. Future immigrant workers must come through lawful 
channels. Only in this way can these workers come out from the shadows, 
be known to U.S. authorities, properly pay all of their taxes, and be 
compensated appropriately. Reforming our nation's immigration system 
and making all immigration lawful would also greatly reduce document 
fraud by virtually eliminating the market for falsified Social Security 
Numbers and other identifying documents, and the Social Security 
Administration and Internal Revenue Service could continue their 
primary missions of administering the Social Security program and 
collecting taxes.
    We urge you to reflect upon the ineffectiveness of the no-match 
letter policy and work toward effective and comprehensive solutions to 
the problems associated with unauthorized labor in the U.S. We look 
forward to working with you in the future.

                                 
     Statement of Linton Joaquin and Marielena Hincapie, National 
            Immigration Law Center, Los Angeles, California
    We, Linton Joaquin and Marielena Hincapie, submit these comments to 
the House Committee on Ways and Means Subcommittee on Oversight 
Subcommittee on Social Security on behalf of the National Immigration 
Law Center (NILC).
    NILC is a national legal nonprofit organization whose sole mission 
is to protect and promote the rights and opportunities of low-income 
immigrants and their family members. NILC's diverse staff specializes 
in the complex intersection of immigration law and the employment and 
public benefits rights of low-income immigrants. We conduct policy 
analysis and advocacy, and impact litigation on these issues as well as 
providing training, publications, and technical assistance for a broad 
range of organizations including immigrant rights coalitions, legal aid 
programs, community and faith based groups, worker advocates, labor 
unions, government agencies, policymakers, and the media.
    Each year, NILC responds to an average of 600 requests for 
assistance with Individual Taxpayer Identification Numbers (ITIN) and 
the Social Security Administration's (SSA) no-match letters, as well as 
other employment-related issues. We appreciate the opportunity to 
submit comments based on the experience we have accumulated over the 
years on these issues that are so critical to low-income immigrant 
workers.

Background

    The changing demographics of our nation and the increasingly vital 
role immigrants play in this society through their contributions in 
building and helping maintain a strong economy, require policy makers 
to prudently balance the mandates of each of the federal agencies 
involved--Internal Revenue Service (IRS), SSA, and the Department of 
Homeland Security (DHS)--with the unintended consequences that may flow 
from any of the legislative or regulatory changes to the ITIN or SSA 
no-match program currently under consideration.
    In order to analyze the impact of any proposed measures, it is 
important to recognize the role immigrants are playing in the U.S. 
society. Immigrant workers now comprise 11 percent of the total U.S. 
population,\1\ nearly 15 percent of the nation's labor force \2\ and 
head 20 percent of low-income households in the U.S.\3\ One out of 
every five low-wage workers in the U.S. is an immigrant worker.\4\ One 
out of every two new labor force participants between 1990 and 2000 was 
a new immigrant; \5\ and nearly two-thirds of the growth in the male 
labor force was due to male immigrant workers.\6\
---------------------------------------------------------------------------
    \1\ Capps, Fix, Passel, et al., A Profile of the Low-Wage Immigrant 
Work Force (Urban Institute, 2003).
    \2\ Sum, Khatiwada, Harrington, et al., New Immigrants in the Labor 
Force and the Number of Employed New Immigrants in the U.S. from 2000 
through 2003: Continued Growth Amidst Declining Employment Among Native 
Born Population (Center for Labor Market Studies, Northeastern 
University, December 2003).
    \3\ Capps, Fix, Passel, et al., A Profile of the Low-Wage Immigrant 
Work Force (Urban Institute, 2003).
    \4\ Passel, Capps, and Fix. Undocumented Immigrants: Facts and 
Figures (Urban Institute, January 2004).
    \5\ Sum, Fogg, Harrington, et al., Immigrant Workers and the Great 
American Job Machine: The Contributions of New Foreign Immigration to 
National and Regional Labor Force Growth in the 1990s (National 
Business Roundtable, August 2002).
    \6\ Sum, Khatiwada, Harrington, et al., New Immigrants in the Labor 
Force and the Number of Employed New Immigrants in the U.S. from 2000 
through 2003: Continued Growth Amidst Declining Employment Among Native 
Born Population (Center for Labor Market Studies, Northeastern 
University, December 2003).
---------------------------------------------------------------------------
    Despite high participation rates in the labor force, immigrant 
workers are disproportionately represented in dangerous jobs such as in 
the construction, manufacturing and agriculture sectors, and in 
hazardous occupations within those industries.\7\ Immigrants are also 
most vulnerable to workplace exploitation such as nonpayment of wages, 
sexual harassment, and other forms of discrimination. Notwithstanding 
the widespread exploitation suffered by immigrants, the output of goods 
and services in the U.S. would be at least $1 trillion smaller than it 
is today without the contribution of immigrant labor,\8\ and the 
civilian labor force would have only grown 5 percent (versus 11.5 
percent) between 1990 to 2001.\9\ The total net benefit to the Social 
Security system if immigration levels remain constant will be nearly 
$500 billion for the 1998-2022 period and nearly $2 trillion through 
2072.\10\
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    \7\ Improving Health and Safety Conditions for California's 
Immigrant Workers. (The Working Immigrant Safety and Health Coalition, 
November 2002).
    \8\ Employment Policy Foundation, Policy Backgrounder, (June 11, 
2001).
    See www.epf.org/research/newsletters/2001/pb20010608.pdf.
    \9\ Sum, Fogg, Harrington, et al., Immigrant Workers and the Great 
American Job Machine: The Contributions of New Foreign Immigration to 
National and Regional Labor Force Growth in the 1990s (National 
Business Roundtable, August 2002).
    \10\ The New Americans: Economic, Demographic, and Fiscal Effects 
of Immigration (National Academy of Sciences, 1997).
---------------------------------------------------------------------------
    It is for these reasons that a ``delicate balance'' must be struck 
between the U.S. tax, social security and immigration systems, as 
National Taxpayer Advocate, Nina Olson, stated in her comments before 
this Committee. Low-wage immigrant workers, who are hard working and 
taxpaying individuals, are the most impacted by the ITIN and SSA no-
match issues. Finally, Congress and the respective federal agencies 
must ensure that any policy changes are in fact addressing the 
underlying problem leading to the growing Earnings Suspense File (ESF).

Individual Taxpayer Identification Numbers (ITIN)

    As the Committee is aware, the IRS created the ITIN in 1996 to 
facilitate the tax compliance of those individuals who have earned 
income in the U.S. and are required to report that tax or have some 
other reporting requirement to the IRS but who are not eligible for a 
Social Security Number. The ITIN can be issued to both resident and 
nonresident aliens as long as they meet the eligibility requirements 
for an ITIN. The Internal Revenue Code distinguishes between resident 
and non-resident taxpayers. These categories are tax definitions of who 
is required to pay what level of taxes based on their physical presence 
in the U.S., and not whether the taxpayer is lawfully present in the 
U.S. under our immigration laws. The ITIN is for tax purposes only and 
does not create any inference into a person's immigration status since 
there are many categories of foreign-born individuals who are eligible 
for the ITIN. Additionally, the ITIN does not authorize a person to 
work in the U.S., nor does it confer any benefits to people such as the 
Earned Income Tax Credit (EITC) or Social Security benefits.
    According to Pamela J. Gardiner, Acting Inspector General with the 
Treasury Inspector General for Tax Administration (TIGTA), there has 
been a dramatic increase in the number of ITINs issued with a 36 
percent increase between 2001 and 2002 alone. Ms. Gardiner appears 
concerned that for Tax Year (TY) 2001 approximately 530,000 1040 forms 
were filed with the ITIN. She notes, ``Normally, ITINS would be used to 
file a Form 1040NR--U.S. Nonresident Alien Income Tax Return.'' 
However, she does not explain what this assumption is based on since 
both resident and nonresident aliens are eligible for ITINs. Indeed, 
the IRS data regarding ITINs indicate that 75 percent of the 3.1 
million ITINs issued for calendar years 1998-2001 were in fact used for 
tax purposes indicating that by and large ITIN holders are complying 
with their tax requirements.
    There are many reasons why the other 25 percent of ITIN holders may 
not have filed tax returns including the fact that many immigrant 
workers earn such low-wages that they may have fallen outside the 
requirement to report their income. In 2000, nearly half of all 
immigrant workers earned less than 200 percent of the minimum wage, 
compared with 32 percent of native workers.\11\ Additionally, many 
workers find themselves in the precarious situation of not getting W-2s 
from their employers and are afraid to ask for this information for 
fear of being fired.
---------------------------------------------------------------------------
    \11\ Capps, Fix, Passel, et al., A Profile of the Low-Wage 
Immigrant Work Force (Urban Institute, 2003).
---------------------------------------------------------------------------
    TIGTA estimates that ``for TY 2000 one in four individuals filing 
with an ITIN failed to report on their tax returns wages and 
nonemployee compensation totaling $324 million.'' However, it is 
unclear how TIGTA came up with this figure, especially considering 
National Taxpayer Advocate Olson's statement that TIGTA noted ``that 
the margin of error for this estimate is +/- $122 million, or +/ - 
37.6%.'' \12\ In her testimony, Acting Inspector General Gardiner 
states, ``the mismatches between the ITINs and the SSNs limits the IRS' 
ability to identify this underreporting.'' Similarly, the testimony 
provided by Patrick P. O'Carroll, Assistant Inspector General for 
Investigations, Office of Inspector General, Social Security 
Administration, claims that the unlawful use of ITINs for employment 
purposes will continue to rise and that it will exacerbate the wage 
reporting problems.
---------------------------------------------------------------------------
    \12\ See, Olson testimony, n. 26, citing to TIGTA, The Internal 
Revenue Service's Individual Taxpayer Identification Number Creates 
Significant Challenges for Tax Administration (2004-30-023, Jan. 2004), 
at 4.
---------------------------------------------------------------------------
    However, it important to remember that the primary reason for the 
mismatch between ITINs and SSNs is the unintended consequence of the 
growth in the black market of false documents and false SSNs that 
resulted after the Immigration Reform and Control Act of 1986 (IRCA) 
was enacted. It is critical to recognize that the mismatch will 
continue to exist until there is a change in this nation's immigration 
laws so that hardworking and taxpaying immigrants do not have to resort 
to using false SSNs as a means of survival. Immigrant workers are not 
terrorists but instead core members of the U.S. society who are 
integral to our economy and who are paying taxes. In fact, one of the 
incentives immigrants have to comply with the U.S. tax laws is that by 
doing so they establish their ``good moral character'' which is also a 
requirement under immigration laws in order for them to adjust their 
immigration status.
    The creation of the ITIN should be applauded as a systems 
improvement which allows an agency such as the IRS to enforce the laws 
under its jurisdiction by helping the many hardworking immigrants who 
want to comply with the tax laws to actually do so independent of their 
immigration status. We support the IRS's efforts to strengthen the 
document validation requirements in issuing the ITIN, as well as 
efforts to standardize the application process and train the Acceptance 
Agents. With the recent changes adopted in December 2003, the IRS has 
already begun taking important steps such as requiring that a tax 
return or supporting documents for an interest-bearing banking account 
be filed along with the ITIN application.
    The testimony provided by both the TIGTA and SSA Inspector General 
Offices call for greater information sharing, stronger enforcement 
mechanisms and penalties, and legislative changes that would in essence 
use SSA and IRS resources to enforce our broken immigration system. Any 
steps toward greater information sharing with the DHS or increased 
enforcement targeting undocumented workers who are simply trying to 
comply with their tax obligations will backfire and deter immigrants 
from coming out of the shadows and paying their share of taxes. The 
recent disturbing incidents out of Louisville, Kentucky involving the 
collaboration of IRS and TIGTA agents to file federal felony charges 
against hardworking immigrants and to place them in deportation 
proceedings sent a chilling wave throughout immigrant communities 
across the country.
    Ill-conceived policies or enforcement actions such as the 
Louisville cases do not address the underlying issue of undocumented 
workers in the U.S., and they have the negative consequence of scaring 
immigrants further into the underground for fear of prosecution and 
deportation for simply by trying to meet their tax obligations. We 
strongly believe that the Treasury Department and the IRS should focus 
their efforts on enhancing the integrity of the ITIN. These efforts 
must be done without unfairly exaggerating the threat of ITIN tax 
filers to national security. The Louisville strategies are flawed and 
ineffective means of combating terrorism and regulating our nation's 
immigration policies. As IRS Commissioner Everson stated, ``any sharing 
of confidential taxpayer information, directly or indirectly, with 
immigration authorities--would deprive the Federal Government of tax 
revenue by discouraging illegal workers in the U.S. from participating 
in the tax system, when the Code requires them to pay tax on their U.S. 
earnings.''
SSA No-Match Letters and the Earnings Suspense File (ESF)
    Since approximately 1997, NILC has been at the forefront of the 
issues created by SSA no-match letters and the growing ESF. NILC has 
taken the lead at the national level to provide training on the rights 
and obligations of both employees and employers, drafting publications 
explaining the ESF and the SSA no-match letters, providing technical 
assistance to worker advocates (and sometimes employers) regarding the 
appropriate steps an employer is to take upon receipt of an SSA no-
match letter. Perhaps most importantly, NILC serves as a liaison to the 
SSA regarding the impact the SSA no-match letters have on the low-wage 
immigrant worker community.
    Throughout the years, NILC has worked closely with representatives 
of the business and labor community to work with SSA in improving the 
text of the no-match letter given that it often leads employers to 
mistakenly believe the letter means the workers who are listed are 
undocumented. SSA admits there are many reasons for a mismatch 
including typographical mistakes, name changes based on marriage, 
compound names that are so common among immigrants, as well as the use 
of false SSNs. After the employer files its Wage and Tax Statement 
(Form W-2), if SSA cannot match the employee's name or SSN, their 
earnings go into the ESF and the worker does not get credit for those 
wages until the discrepancy is corrected. According to the SSA's 
Assistant Inspector General for Investigations O'Carroll's testimony, 
the ESF grew to approximately $421 billion in wages representing 244 
million wage items that could not be posted correctly between 1937 and 
2003.
    SSA sends two types of letters in an attempt to address the 
discrepancy: one directly to workers at their home address listed on 
the W-2, and the other sent to employers listing a group of workers. It 
is this latter letter which has become known as the SSA no-match letter 
that has gotten quite a bit of media attention. In 2002, SSA sent no-
match letters to approximately 950,000 employers who had at least one 
employee with information that did not match SSA's records. This 
created great confusion and chaos for both employers and employees who 
were unaware of each other's responsibilities and how to respond to the 
no-match letters. The result was that tens of thousands of workers, 
mainly low-wage immigrant workers--lost their jobs, and many employers 
also lost hardworking employees they had trained and invested time and 
resources into. In December 2002, SSA decided to change its policy for 
the no-match letters for 2003. This policy change came about after SSA 
realized that despite the large numbers of letters sent to employers 
much of the new information provided by employers still contained 
incorrect information.
    SSA's new policy for 2003 as well as for 2004 is to send no-match 
letters out to employers who reported a no-match for at least 10 
employees, or who reported no-matches for at least \1/2\ of one percent 
of the total number of items the employer reports on the W-2s. 
According to SSA, it sent no-match letters to approximately 126,250 
employers in 2003 representing 7.5 million incorrect W-2s, in 
comparison with 9.5 million letters sent directly to employees. It is 
still unclear how effective the no-match letters sent to employers in 
2003 were at correcting the discrepancies and reducing the ESF. 
However, we do know from previous audit reports by the SSA's Office of 
Inspector General that the employer no-match letters accounted for at 
most two percent of corrections, in comparison to 8 percent of 
corrections resulting from the letters sent directly to employees and 
other internal SSA processes such as the Single Select process which 
accounts for 61 percent of corrections.\13\ In this latter process, the 
worker's name is presumed to be correct and the SSN incorrect. SSA then 
compares the name against its Numident database, which contains all 
valid SSNs, and if only one SSN matches the name, then SSA corrects the 
SSN and posts the worker's earnings correctly.
---------------------------------------------------------------------------
    \13\ Social Security Administration, Office of Inspector General, 
Congressional Response Report: Status of the Social Security 
Administration's Earnings Suspense File (A-03-03-23038) November 2002.
---------------------------------------------------------------------------
    Additionally, we clearly know that while the SSA no-match letters 
are not leading to reducing the ESF, they are leading to increased 
exploitation of workers and misuse by employers. NILC has worked with 
SSA to strengthen the language of the letter advising employers that it 
is unlawful for them to take any adverse action against a worker solely 
because they are listed on a no-match letter. Although the language of 
the no-match letter has been strengthened as much as possible, both 
documented and undocumented workers are often caught up in the 
confusion caused by these letters and end up losing their jobs. NILC 
has provided expert testimony and declarations in at least three labor 
arbitration cases where workers have been wrongfully terminated as a 
result of the SSA no-match letters. Finally, employers keen on hiring 
and exploiting undocumented workers are not deterred by these letters 
and instead use them as a retaliatory tool against workers trying to 
assert their workplace rights.
    In collaboration with the University of Illinois at Chicago's 
Center for Urban Economic Development (UIC-CUED) and other 
organizations throughout the country, NILC conducted a sampling of 
worker surveys to begin documenting the impact of the no-match letters. 
The survey findings are compiled in a report issued by UIC-CUED in 
November 2003.\14\ The major findings of the study are that:
---------------------------------------------------------------------------
    \14\ The full report is available online at http://www.nilc.org/
immsemplymnt/SSA_no-match_survey_final_report_11-20-03.pdf and the 
Executive Summary is included as an attachment to these comments.

      The SSA no-match letters have been ineffective at 
reducing the ESF;
      The letters have inadvertently encouraged employers to 
fire workers with mismatched SSNs;
      The no-match letter program has encouraged some employers 
to take advantage of workers with discrepancies in their name or SSN; 
and
      The no-match letters are ill-suited as an immigration 
enforcement tool.

    Most recently, and at the core of this Committee's March 10, 2004 
hearing, has been the mismatch that exists when a worker files their 
taxes using an ITIN while their W-2 contains an SSN. The earnings 
reported under this SSN will also result in the ESF since it will not 
match SSA's records for that person. Another scenario is when a W-2 
contains an ITIN instead of a valid SSN, which means the worker 
presented the ITIN to the employer at the time of hire. This too will 
result in earnings being posted to the ESF. While O'Carroll's testimony 
seems to equate this type of ITIN use with identity theft in general, 
fraud on a grand scale, and a threat to our national security, the 
reality is that many workers who are presenting an ITIN to an employer 
do so out of the naive idea that it is best to present a government-
issued number (in this case by the IRS) to an employer rather than 
using a false SSN. Moreover, according to SSA's Deputy Commissioner 
Lockhart, a one-time review of W-2s where ITINs were reported in lieu 
of an SSN during the period of 1996 through 2002 resulted in 
approximately 342,000 W-2s for which the earnings were posted into the 
ESF. This represents a negligible less than two-tenths of 1 percent of 
the W-2s contained in the ESF.
    Accordingly, it is critical that Congress and the respective 
federal agencies not resort to legislative changes such as those 
proposed by O'Carroll, and instead look towards policy solutions that 
will indeed address the underlying problems. It is clear from NILC's 
ample experience with the SSA no-match letters that it is an 
ineffective and inefficient program that has failed at its intended 
purpose of ensuring that workers' earnings are properly credited, and 
instead has resulted in greater workplace exploitation.
    We strongly urge SSA to stop wasting its resources in sending the 
employer no-match letters out. Instead the agency should focus on 
developing new systems aimed at more efficiently reducing the ESF such 
as that mentioned by Deputy Commissioner Lockhart in which SSA had 
began implementing a new process in April 2003 to electronically find 
millions of additional matches of W-2s by using the worker's detailed 
earnings record and the master beneficiary record, rather than just the 
information in the Numident. In FY 2003, SSA states that 2.4 million W-
2s were removed from the ESF and posted to the correct earnings 
records--a process which seems much more promising and efficient than 
the SSA no-match letters sent to employers.

Conclusion

    The complexity of the interplay between the tax, social security, 
and immigration laws and policies demand a cautious and measured 
approach at dealing with cross-cutting issues such as the ITIN and SSA 
mismatch. NILC shares the concern over such an exorbitant ESF, which 
means that millions of workers who have labored arduously for years are 
not getting credit for their2 earnings. We urge this Committee not to 
fall prey to fears over national security in addressing the ITIN and 
SSA no-match issues, and instead to recognize that these are 
hardworking taxpaying immigrants caught in a web of complicated and 
often contradictory laws.
    We urge you to follow the proposals set forth by National Taxpayer 
Advocate Olson in safeguarding the integrity of the ITIN while ensuring 
that immigrant taxpayers are able to continue participating in the tax 
and financial systems. We strongly believe that any other legislative, 
regulatory, or administrative changes aimed at greater immigration 
enforcement or further sharing of information between agencies will 
have a negative impact on the tax and financial systems as well as the 
economy. Similarly, any increased enforcement or penalties associated 
with the SSA no-match program will result in greater unfair employment 
practices, while any sharing of information will simply push 
undocumented workers further underground into the informal cash economy 
or it will force them to purchase more false documents as a means of 
surviving.
    It is for these reasons that we highlight the need to address the 
problem of the ESF at its core. It will be only through comprehensive 
immigration reform allowing immigrant workers to truly come put of the 
shadows and amend their earnings records that the ESF will be 
decreased. Additionally, many of the documented workers who are 
currently showing up on the SSA no-match lists were once undocumented 
and are still working with their old false SSN for fear of being fired 
from their job. After IRCA, workers were allowed to come forward to 
correct their records without the fear of losing their jobs since 
employers. It is critical that a similar provision be enacted again so 
that both employers and workers correctly report earnings, and 
therefore not unnecessarily add to the growth of the ESF.
    Finally, in order to address the issue of undocumented workers in 
the U.S., Congress and the federal agencies must focus their efforts on 
increasing and improving the enforcement of this nation's labor laws. 
It is the ability to hire and recruit undocumented workers to toil in 
substandard and inhumane working conditions without any fear of 
penalties that serves as the incentive for employers to lure 
undocumented workers into their employ. One step towards addressing 
this is for Congress to enact legislation that overturns the U.S. 
Supreme Court's decision in Hoffman Plastic Compounds, Inc. v. NLRB, 
denying backpay to undocumented worker under the National Labor 
Relations Act.\15\
---------------------------------------------------------------------------
    \15\ 122 S.Ct. 1275 (2002).
---------------------------------------------------------------------------
    The Hoffman decision established a loophole permitting companies to 
evade basic worker protection laws with relative impunity if they hire 
undocumented workers. This has created perverse incentives that 
undermine both labor and immigration law. The decision undermines 
immigration law by making undocumented workers more attractive to 
employers than they were pre-Hoffman because such workers carry reduced 
liability for labor law violations. The decision weakens the position 
of authorized workers confronting abuse or exploitation because their 
undocumented coworkers have fewer legal avenues for redress of labor 
violations, including unlawful retaliation, and therefore they have far 
less incentive to participate in efforts to improve conditions. 
Businesses that take advantage of this situation can cut legal corners 
and thereby gain a competitive advantage over law-abiding employers.
    Congress should repeal the Hoffman Plastic decision. The result in 
Hoffman was based on statutory interpretation, not constitutional 
considerations, and the Supreme Court specifically noted that Congress 
has the authority to change the law if it is unhappy with the results. 
Repealing the decision would restore the pre-Hoffman environment under 
which the remedy for violating U.S. labor laws was determined by the 
conduct of the employer who violated the law rather than the status of 
the victim. Unscrupulous employers should not be allowed to shield 
themselves behind immigration laws to circumvent their legal 
responsibilities.
    It is the need for measures such as enacting comprehensive 
immigration reform and repealing the Hoffman decision that will address 
the underlying problems creating the ITIN and SSN mismatches. The ESF 
and the administrative problems created for the IRS and SSA are simply 
symptoms of the real problem, which lies in broken employment and labor 
law and immigration systems.
    We thank you once again for the opportunity to submit these 
comments on such an important issue affecting low-income immigrants. 
Please feel free to contact us if we could be of any further assistance 
on this matter. We look forward to working with you in the future.

                                 
              Statement of Patriot Tax International, LLC
    Patriot Tax International, LLC (``Patriot Tax'') is a Kentucky 
Limited Liability Company in the business of filing tax returns for 
United States taxpayers. Patriot Tax is enrolled in the Internal 
Revenue Service's (``IRS'') Individual Taxpayer Identification Number 
(``ITIN'') program as an ITIN Acceptance/Certifying Agent as well as 
the IRS Electronic Return Originator program. Patriot Tax has five (5) 
offices located in three (3) different states in the United States. Our 
clients are almost all Spanish-speaking taxpayers. The majority of our 
clients are undocumented workers. The purpose of this statement is to 
present several concerns about the ITIN program and offer appreciation 
for the IRS's efforts to develop the ITIN program. We have a contract 
with the IRS to certify and submit W-7 applications. We have a duty to 
stay abreast of current policies that may impact our ability to fulfill 
our contractual obligations to the IRS and our ethical obligations to 
our clients.

    1. Testimony before the Committee

    We applaud the efforts of the witnesses who testified on behalf of 
the IRS, Social Security Administration (``SSA''), and Treasury 
Inspector General for Tax Administration (``TIGTA''). Prior to the 
March 10, 2004 hearing (``hearing''), there were widespread rumors that 
the IRS and/or TIGTA would unilaterally disclose taxpayer information 
to other agencies if the information contained on a taxpayer return 
indicated violation of immigration laws, and that taxpayers who filed a 
taxpayer return with an ITIN number would be investigated by IRS or 
TIGTA for a non-tax related crime.
    The testimony of the representatives confirmed the IRS's continued 
efforts to maintain the confidentiality provisions found in Internal 
Revenue Code (``IRC'')  6103.\1\ Mark Everson, Acting Commissioner 
IRS, stated that the confidentiality provisions contained in IRC  6103 
are necessary to the administration of our tax system. He also stated 
that maintaining the strength of these provisions is necessary to 
encourage new immigrants to file taxes.
---------------------------------------------------------------------------
    \1\ IRC 6103(i)(3) allows the Treasury Department, including the 
IRS and TIGTA, to release taxpayer information obtained from tax 
returns that may constitute evidence of a violation of a non-tax 
Federal laws to the extent necessary to apprise the appropriate agency 
of the violation of the law under very specific circumstances. IRC 
6103(i)(3)(A)(ii) provides that a taxpayer's identity can only be 
disclosed if the information contained in the return indicates a 
Federal crime, and under circumstances where: 1) the violation involves 
an imminent danger of death or physical injury to any individual; or 2) 
the circumstances involve a significant risk of flight from Federal 
prosecution. Justifiably, the IRS, TIGTA, and Treasury have greater 
latitude to release taxpayer information when it believes that the 
information contained on a return indicates terrorist activity.
---------------------------------------------------------------------------
    Likewise, Nina Olson, National Taxpayer Advocate, promoted the 
creation of policies and procedures that make it easier for 
undocumented aliens to report income. Her written statement presents a 
clear explanation of undocumented worker reporting scenarios, problems 
relating to returns filed with ITIN's, as well as outlining the 
foundation for the taxpayer confidentiality provisions contained in the 
IRC. She stated:
    In light of IRS data that clearly indicates the majority of ITIN 
holder attempt to file and comply with tax laws, the IRS should 
continue to encourage undocumented workers to obtain to obtain ITIN's 
and assist all ITIN holders, including those who have Forms W-2 showing 
SSN's, to file returns under their ITIN's. Any effort to restrict 
access to obtaining ITIN's must be carefully scrutinized to determine 
whether the purpose for the restriction outweighs the tax 
administration's core and fundamental mission of helping taxpayers to 
meet their tax obligations.\2\
---------------------------------------------------------------------------
    \2\ Hearing before the House of Representatives Committee on Ways 
and Means, Subcommittee on Oversight, Subcommittee On Social Security, 
March 10, 2004, at 11 (written Statement of Nina E. Olson, Taxpayer 
Advocate).
---------------------------------------------------------------------------
    We applaud the efforts of Pamela Gardiner, Acting Inspector 
General, TIGTA, to dispel rumors and press reports that individuals who 
file a tax return with an ITIN are being identified for investigation 
or are at risk of prosecution by TIGTA simply because they filed a tax 
return with an ITIN number. In her written statement submitted to the 
committee, she states:
    I would like to close by responding to press reports suggesting 
that TIGTA has compiled a list of people whom we suspect are illegal 
aliens and that we intend to prosecute them. I assure you that this is 
completely false. We do not have any such list, initiative, or program 
designed to identify persons who are not authorized to work in the 
United States.\3\
---------------------------------------------------------------------------
    \3\ Hearing before the House of Representatives Committee on Ways 
and Means, Subcommittee on Oversight, Subcommittee On Social Security, 
March 10, 2004, at 5 (written Statement of Pamela J. Gardiner, Acting 
Inspector General, Treasury Inspector General for Tax Administration).
---------------------------------------------------------------------------
    Finally, we appreciate the IRS's efforts to try to evolve the ITIN 
program in a manner that protects the integrity of the ITIN.

    2. Marketing Tax Compliance to Undocumented Aliens

    Only a small percentage of the entire population of undocumented 
workers in the United States are attempting to comply with their tax 
obligations through the ITIN program. In contrast, the data indicates a 
high probability that ITIN holders will file their taxes.\4\ The IRS 
estimates that there are 9 million undocumented workers in the United 
States. However, only 530,000 tax returns were filled in 2001 with ITIN 
numbers.\5\ The overwhelming majority of undocumented aliens must use 
an ITIN number to file a tax return because they are not eligible to 
obtain a Social Security Number.\6\ Testimony at the hearing indicated 
that the IRS estimates that it lost approximately 250 billion tax 
dollars due to unreported income. It is unclear what proportion of this 
250 billion in tax dollars can be attributed to unreported income of 
undocumented workers.
---------------------------------------------------------------------------
    \4\ Supra, Written Statement of Nina E. Olson, Taxpayer Advocate, 
at 6.
    \5\ Supra, Written Statement of Pamela J. Gardiner, Acting 
Inspector General, Treasury Inspector General for Tax Administration, 
at 3.
    \6\ Some undocumented workers use Social Security Numbers issued 
for non-work purposes or on expired visas to file a tax return.
---------------------------------------------------------------------------
    The testimony at the hearing clearly establishes the intentions of 
the IRS and TIGTA to continue to promote tax compliance through the 
ITIN program. However, there is still significant fear within the 
immigrant community that information contained on tax returns will be 
unilaterally disclosed to other agencies if the information on a tax 
return indicates that the taxpayer provided his employer with a false 
social security number, or that the taxpayer will be prosecuted for 
filing a tax return that uses an ITIN as a taxpayer identification 
number. To date, neither the IRS nor TIGTA has issued a clear statement 
to dispel these concerns. We request both the IRS and TIGTA to publish 
independent statements that will dispel fears of taxpayers and tax 
professionals. The testimony at the hearing was clear. Most tax 
preparers and undocumented workers will not base their conclusions upon 
testimony at the hearing. Absent a clear statement from the IRS and 
TIGTA, the undocumented population will base their decision to file a 
tax return upon rumors and press reports that they will be prosecuted 
if they file a tax return with an ITIN.
    3. Prospective Tax Compliance Initiatives
    a. W-4
    Many of our clients present wage statements with an inflated amount 
of exemptions. The IRS might consider printing this form in Spanish to 
enable workers, undocumented and documented, to properly claim tax 
exemptions with their employers.
    b. Additional Child Tax Credit Worksheet
    U.S. tax residents may be eligible to claim as dependents 
individuals residing in Mexico or Canada. IRC  152(b)(3). However, 
Congress specifically limits the application of the Child Tax Credit to 
minor dependents who are Citizens or nationals of the US. The taxpayer 
cannot claim the Child Tax Credit for minor dependents residing in 
Mexico or Canada if the children are not U.S. Citizens or nationals. 
IRC  24(c). We believe many taxpayers are claiming minor dependents 
living in Mexico or Canada, who do not otherwise qualify as U.S. 
Citizens or nationals, for purposes of the Child Tax Credit. Many tax 
preparers do not recognize that that most minor dependents living in 
Mexico or Canada will not qualify for the Child Tax Credit, even though 
they can be claimed as dependents. A worksheet similar to the Earned 
Income Credit Worksheet, form 8867, could enable tax preparers to more 
efficiently apply this provision of the tax code.
    c. EITC Qualifications for New SSN Holders
    We believe that Congress, the IRS, and the SSA should consider the 
repercussions of a scenario in which individuals retroactively claim 
and receive the Earned Income Credit in years when the person was not 
entitled to have a Social Security Number for employment. This 
situation arises when an undocumented alien becomes eligible to 
``adjust status'' after years of working unlawfully in the United 
States. This issue will become more prevalent as undocumented workers 
become lawful permanent residents pursuant to applications filed under 
Section 245(i) of the Immigration and Nationality Act in 2001 or if the 
United States passes significant immigration legislation for 
undocumented workers. Due to significant backlogs with the Department 
of Homeland Security, many of the applicants are now becoming legal. 
Furthermore, if Congress passes legalization for illegal workers, an 
estimated 9 million workers will be eligible to legalize and obtain 
Social Security Numbers. Essentially, undocumented aliens might apply 
for large tax refunds, mainly consisting of retroactive EITC credit.
    This is an important financial cost that must be considered and 
documented in any discussions about large-scale immigration legislation 
that involves undocumented workers. In 2001, Congress required 
undocumented aliens to pay a $1,000 penalty to adjust status under 
245(i). However, the aliens could have recouped the

EITC for all years that they were still eligible to file an amended 
return.\7\ Thus they would pay a penalty to the Department of Homeland 
Security (formerly Immigration and Naturalization Service), but could 
claim a substantial return from the IRS.
---------------------------------------------------------------------------
    \7\ IRS, Publication 596, pg. 5.
---------------------------------------------------------------------------
    4. Address Louisville, Kentucky TIGTA Investigation
    We request the IRS and TIGTA to specifically address the well 
publicized situation that occurred in Louisville, Kentucky, in which a 
TIGTA officer disclosed information contained on a tax return to the 
Justice Department and/or Department of Homeland Security.\8\ The 
disclosure of the taxpayer information allegedly caused the taxpayers 
to be charged and arrested with non-tax crimes. This situation has 
caused many pro bono and private tax preparers to refuse to file tax 
returns for aliens who must use an ITIN to file a tax return. The 
continued spread of this story, if not appropriately addressed by TIGTA 
and IRS, will undermine IRS's policy to require tax compliance for all 
U.S. wage earners regardless of their immigration status. This 
situation has caused many leaders in the immigrant communities to 
advise undocumented aliens not to file taxes.
---------------------------------------------------------------------------
    \8\ TAX NOTES, January 23, 2004, 455-39; TAX NOTES, January 26, 
2004, 955-97; TAX NOTES, March 1, 2004, 1058-62.
---------------------------------------------------------------------------
    The December 17, 2003 changes to the ITIN program application 
process require all applicants for an ITIN to demonstrate a need for 
such number by providing a legitimate tax purpose. An application for 
an ITIN is made on IRS Form W-7. Ordinarily, the ITIN applicants 
include a tax return to establish their tax purpose with their W-7 
application(s). The IRS will not prepare the W-7's for the aliens. The 
responsibility to prepare the W-7's and explain the policies and risks 
is shouldered by pro bono preparers or private entities. These entities 
are assisting undocumented workers to become tax compliant. It is 
imperative for the tax preparation industry to be absolutely certain 
that both TIGTA and the IRS are committed to the principles and rules 
of law contained in IRC  6103. Therefore, we request IRS and TIGTA to 
issue a statement that discloses the result of any internal 
investigation arising out of the Louisville TIGTA officer's alleged 
disclosure.
    5. Conclusion
    Undocumented workers and tax professionals need a clear message 
about the disclosure policies of the IRS and TIGTA. We have a 
burgeoning undocumented population. As stated by Commissioner Everson, 
many of these individuals come from countries that do not have the same 
respect for their tax program as we have in the United States. The ITIN 
program may be the alien's first legitimate contact with the government 
of the United States. We must make sure that their experience creates a 
sense of trust and pride in the United States. As these aliens adjust 
status to lawful permanent residents or simply remain undocumented in 
the United States, we want them to develop respect for the laws of the 
United States. We appreciate the opportunity to present our position. 
Please contact us with any questions.
            Respectfully Submitted,
                                            Samuel C. Rock, Esq.\9\
---------------------------------------------------------------------------
    \9\ Samuel C. Rock, Esq. is an owner of and serves as General 
Counsel for Patriot Tax International, LLC. He served as an Assistant 
Commonwealth Attorney for the 14th Judicial District, Commonwealth of 
Kentucky, between 1997 and 1999, where he prosecuted felony criminal 
cases. He currently practices immigration law and civil litigation, as 
well as counsel for Patriot Tax International, LLC. He is a member of 
the Kentucky Bar Association, American Trial Lawyers Association, and 
American Immigration Lawyers Association.
---------------------------------------------------------------------------
                                                  Nathan Brown \10\
---------------------------------------------------------------------------
    \10\ Nathan S. Brown is a partner in Patriot Tax International, 
LLC. Mr. Brown holds a M.A. in Diplomacy and Management from the 
Patterson School of Diplomacy and International Commerce, University of 
Kentucky. He is member of the Migrant Network Coalition in Kentucky. 
Mr. Brown is a Certified Court Interpreter for the Administrative 
Office of the Courts in Kentucky, also practicing as an interpreter in 
Federal Court.
---------------------------------------------------------------------------
                                        Michael Yonosko, C.P.A.\11\
---------------------------------------------------------------------------
    \11\ Michael Yonosko is employed by Patriot Tax International, 
LLC., as a C.P.A and Area Developer. Mr. Yonosko holds a B.A. in 
Accounting from Asbury College. Mr. Yonosko was admitted to the 
Kentucky State Board of Accountancy in 2000. Michael was employed by 
Chilton and Medley, PLC from 1999-2000.
---------------------------------------------------------------------------
                                          Juan Marcelo Juliano \12\
---------------------------------------------------------------------------
    \12\ Patriot Tax International, LLC employs Juan Marcelo Juliano, 
as an engineer and Technical Systems Manager. Mr. Juliano assists is 
compliance with the ITIN and ERO programs for the company. He holds a 
B.S. in Computer Engineering from Florida International University in 
Miami.

                                 
  Statement of Eric J. Oxfeld, Strategic Services on Unemployment and 
                         Workers' Compensation
    As the Subcommittees on Oversight and on Social Security consider 
how best to address Mismatches and Misuse of Social Security Numbers 
(SSN's) and Individual Taxpayer Identification Numbers (ITINs), we want 
to make you aware of how SSN's are used in the unemployment insurance 
(UI) system and urge that you preserve the ability of states and 
employers to continue using SSN's to track UI claims.
    UWC is the only national organization exclusively devoted to 
providing legislative/regulatory representation for the business 
community in connection with unemployment insurance (UI) and workers' 
compensation (WC) programs. UWC's members include employers, national 
and state business associations, third party claims and tax 
administrators, accounting and law firms, and other service providers, 
all of whom advocate maintenance of sound, cost-effective UI and WC 
programs. UWC members, and their clients, policyholders and members, 
collectively represent a major share of the business community in the 
United States. UWC is intimately acquainted with unemployment insurance 
law and best practices. In addition to UWC's advocacy efforts on behalf 
of business, we manage the National Foundation for Unemployment 
Compensation & Workers' Compensation, which conducts educational 
activities such as the annual National UI Issues Conference, as well as 
reference materials on UI, including the annual Highlights of State 
Unemployment Compensation Laws book, the annual RESEARCH BULLETIN: 
Fiscal Data for State Unemployment Insurance Systems, and the 
EMPLOYER'S UNEMPLOYMENT COMPENSATION COST CONTROL HANDBOOK.
    As the release announcing the hearings states, SSNs were created in 
1936 to keep track of the earnings of people who worked in jobs subject 
to Social Security taxes, in order to assure proper payment of taxes 
and crediting of wages toward Social Security benefits. We want to be 
sure that Congress and federal and state officials understand that 
SSN's also serve the same purpose in the UI program by assuring the 
proper payment of taxes and crediting of wages toward UI benefits, as 
well as UI claim determinations and their dissemination to employers 
who are charged for these benefits. As you know, the UI system was 
originally established as a component of the Social Security system, 
and Titles III, IX, and XII of the Social Security Act govern the 
administration of UI benefits, the organization of the Unemployment 
Trust Fund, and advances to state UI benefit trust accounts, 
respectively.
    SSN's are an integral part of the UI system. The UI system is 
financed out of federal and state payroll taxes paid by employers, and 
employers must use SSN's to keep their payroll records and to be sure 
they are accurately filing their UI taxes. Federal and state laws 
require employers to report all newly hired employees, including SSNs, 
to state ``New Hire Directories,'' which helps child support 
enforcement dramatically and enables states to detect and prevent UI 
fraud. Federal law also requires employers to report all wages 
quarterly, using SSN's. SSN's are used by state UI administrative 
agencies to track UI benefit claims, which require a showing that the 
claimant had earnings sufficient to qualify for benefits (in most 
cases, states use information received from the quarterly wage reports 
for this purpose). States also typically use SSN's when they report 
claim determinations and decisions on appeals to the employer, as well 
as periodic benefit charge statements that each employer verifies 
(because its unemployment tax rate is based on its claims experience 
and tax contributions). As a practical matter, employers who receive a 
claim determination and statements of UI benefits charged to their 
account rely on the SSN to verify the identity of the employee to which 
the reports refer and the accuracy of the agency determination. Large 
employers commonly have many workers who have the same or similar 
names, as do even small and medium size employers. Further complicating 
the need to track UI claims by SSN is the fact that UI benefits may be 
charged in part to a former employer where qualifying wages were 
earned. And now that States take initial UI claims by telephone or over 
the internet, the importance of giving employers the information needed 
to verify claims is greater than ever.
    Recently, employers and State UI agencies have become more aware of 
the importance of protecting payroll information from identity theft. 
For example, last year a UI fraud ring, using purloined payroll 
records, successfully filed phony claims costing the now bankrupt 
California UI trust fund $53 million. Because UI is an

insurance system, these charges must be made up through higher taxes on 
employers.
    The business community thus has a clear stake in both the 
efficiency of the UI system (including the reporting of wages, taxes, 
and claim determinations) as well as protecting against identity theft 
using SSN's.
    The broader societal debate over protecting personal privacy, 
including the abuse of SSN's, has affected the UI system, as well. 
Several states have discontinued or are considering discontinuing the 
use of SSN's in reporting UI claims to employers. In January 2004, for 
example, the Utah UI agency stopped using SSN's on claim determinations 
reported to employers, but later resumed their use after businesses and 
UI advisory services voiced concern.
    If some or all State UI programs discontinue using SSN's, the 
result will be a very chaotic system of tracking UI claims, especially 
for employers and service providers with multi-state operations, who 
may be subject to inefficient, inconsistent, and perhaps conflicting 
requirements. Employers and claims and payroll advisory organizations 
have substantial monetary investments in computerized systems that 
track payroll records for UI purposes. Changes in state or federal 
policy that require modification of these systems, especially on a 
piecemeal basis, should be discouraged because they will be disruptive 
and expensive. For this reason, UWC and the National Association of 
State Workforce Agencies have agreed to establish a joint task force to 
explore mutually acceptable ways of tracking workers and UI claims 
while providing appropriate privacy protections.
    Because much of the impetus for States to discontinue use of SSN's 
for tracking UI claim determinations and appeals is the perception that 
such use may be inappropriate, we respectfully urge Congress to adopt a 
strong statement of policy acknowledging that the use of SSN's in the 
UI system, as described in these comments, is in fact legitimate and in 
no way constitutes a ``misuse.'' We also urge that efforts to 
coordinate SSN protections among the Social Security Administration, 
Internal Revenue Service, and Department of Homeland Security also 
include representation from the UI system and an opportunity for 
employer input on policy decisions that may affect legitimate uses of 
SSN's to track UI claims.
    We appreciate your inclusion of these comments in the hearings 
record. We would be pleased to answer any questions or provide 
additional information. Please feel free to contact me by telephone at 
202-637-3463 or by email at [email protected].

                                 

                                                   Tustin, CA 92780
                                                     March 24, 2004
Subcommittee on Oversight
Room 1136
Longworth House Office Building
Washington, DC 20515

Dear Honorable Committee Members:

    This email is in response to the March 3, 2004, request (release 
OV-11) for written comments due March 24, 2004, by the House Ways and 
Means Subcommittee on Oversight Subcommittee on Social Security 
concerning Social Security number (SSN) and Individual Taxpayer 
Identification Number (ITIN) mismatches and misuse.
    The Committee's March 10, 2004, hearing focused on focus on the 
respective responsibilities of the Social Security Administration, 
(SSA) Internal Revenue Service, (IRS), and Department of Homeland 
Security (DHS) in ensuring accurate earnings reporting and tax 
payments. I would like to compliment the committee for its attention to 
this very important area and also bear witness to some of the issues 
raised in release OV-11.
    My name is George Willis. I am an attorney and for the past five 
years have also been the program administrator of the Low Income 
Taxpayer Clinic at Chapman University School of Law in Orange, 
California. I am also a victim of identity theft.
    I submit my comments to the committee as a person who has seen, 
first hand, both proper and improper use of SSNs and ITINs. .
    There is no need to reiterate the scope of the issues raised by the 
Committee, especially the concerns with national security. It is 
sufficient to say that there is a mismatch and misuse problem.
    I would like to outline three important considerations and my 
rationale for them. I respectfully submit these considerations for the 
committee to use, or if needed, to redistribute to a Committee or 
agency more appropriate for each task being outlined.

 I.  Forbid the use of Social Security Numbers as personal identifiers 
        any reason that does not involve the extension of consumer 
        credit.

    The Committee has already taken notice of the proliferation of the 
use of SSN's as a form of identification by private entities. This has 
been done as a matter of convenience by private entities, and must be 
stopped using the existing powers and purview of Congress.
    I implore the Committee to ask ``Why has it become necessary to 
provide a SSN in order to rent a video movie?'' This is just one of 
hundreds of non-authorized uses of an SSN all done by private entities 
for convenience sake. The reason is obvious; it is cheaper and easier 
to use the government's de-facto identifier than to create ones own--
especially in the area of negative credit reporting.
    Unfortunately, this cheap and easy way to do business allows for 
the propagation of abuse of SSN's by rogue employees, mishandling of 
data, security breaches, etc. Currently, there are insufficient federal 
penalties for the misuse of SSN's by private entities.
    Instead of creating a bureaucratic maze of regulations, I recommend 
that the clock simply be ``reset'' and that Congress (1) ban the use of 
SSN's by private entities as identifiers and (2) further ban the 
collection of SSN's in any situation where credit is not being extended 
to the consumer. (And credit needs to be defined to mean payment over 
time, not temporary credit as the case may be in the rental of a 
video!)
    Business interests will certainly complain, and maybe even cry like 
Chicken Little that this will bankrupt them; however, Business has 
survived long before its unilateral and unauthorized adoption of the 
SSN as a universal identifier, and I suspect that after a period of 
detoxification, it will survive the separation of use. Of its own 
accord, Business is using SSN's in an unauthorized manner, and 
therefore can't complain when it is asked to cease this use.
    In the alternative to an outright ban, severe fines must be imposed 
on private entities, who whether knowingly or not, allow misuse of 
SSN's through improper or negligent handling.
II.  Better enumerate, codify, and increase penalties for the crime of 
        identification theft, even in cases where there is no actual 
        ``out-of-pocket'' economic harm.

    When I became the victim of ID theft through the misuse of my 
federally issued social security number, I looked to federal law for a 
remedy. Because I was fortunate enough to catch the misuse in time, I 
had no ``out-of-pocket'' economic damages. Unfortunately, my good 
fortune left me with no viable federal remedy against the person who 
assumed my identity, nor the rogue corporate employee who initially 
stole my SSN. Additionally, any civil remedy would have culminated in a 
pyrrhic victory, at best. I spoke with federal Departments of Social 
Security and Treasury, including the Secret Service, whom all 
concurred.
    I will provide an example below that better illustrates that there 
is harm to the economy of the nation even in situations where there is 
no out-of-pocket-harm to an individual.
    The committee must recommend that the existing relevant federal 
laws be updated to reflect the problems of identity theft in the new 
millennium. Existing federal laws are archaic and provide hollow 
protection as well as ineffective remedies against this modern crime.

III.  Require that employers better screen and verify identification 
        documents.

    I would like to shift my comments away from SSN's to ITIN. My 
personal example above pales in comparison to the level of identity 
theft that I see in dealing with low income taxpayers at Chapman 
University School of Law's tax law clinic.
    In order to keep these comments brief, let me simply relate the 
most common problem that I encounter in this area, and recommend 
possible alternatives for the committee to consider.
    The typical scenario is this:
    A potential worker in State X is unable to obtain a valid SSN. An 
employer tells the worker that they must have a SSN in order to work. 
The employer proposes that the worker use a SSN or ITIN that the 
employer happens to ``have available'' or in the alternative directs 
the taxpayer to some place where, for a price, they can ``get one.'' 
The worker uses this SSN or ITIN and may or may not file a tax return.
    A year later, the valid SSN or ITIN holder in State Y is sent a 
bill by the Internal Revenue Service (IRS) for not reporting the wages 
earned in State X. The taxpayer in State Y comes to me, and we resolve 
the case over the course of one to two years.
    The employer claims ignorance to the whole thing and does not 
cooperate with the valid SSN holder, nor our clinic's requests as there 
are no penalties for not cooperating.
    At the end of the case:
    The IRS and the SSA have not received monies owed to them. The 
valid SSN holder has negative marks on their credit report due to tax 
liens, etc. Our clinic expends hundreds of staff hours in this process. 
The invalid SSN holder continues to use the SSN and maybe even share it 
with others, and the cycle continues year after year for the valid SSN 
holder.
    The illustration that I have provided certainly demonstrates that 
there is actual harm to the economy of the nation even in situations 
where there is no out-of-pocket-harm to the consumer.
    Congress must be aggressive in requiring that employers obtain 
valid SSN's and right to work documents. As part of this, businesses 
must be provided with an easy method to validate the SSN's being 
provided to them by employees.
    At the same time, draconian federal penalties must be imposed on 
those entities that refuse to comply with; or worse yet, actively 
promote, SSN misuse, theft, falsification or general abuse. This will 
have to be part of the cost of doing business, and is much less 
intrusive than many other already codified forms of federal regulation.
    Respected Committee members, I could provide many more comments and 
specific examples, however, at this time, I hope that the three broad, 
macro considerations that I have outlined will serve to assist you in 
your goals to resolve the SSN and ITIN mismatch and misuse problem that 
this nation faces.
            Sincerely,
                                     George L. Willis, Esq.

                                 
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