Tax Administration: IRS Needs to Consider Options for Revising	 
Regulations to Increase the Accuracy of Social Security Numbers  
on Wage Statements (31-AUG-04, GAO-04-712).			 
                                                                 
Inaccurate social security numbers (SSN) on wage statements	 
contribute to growth in the Social Security Administration's	 
(SSA) Earnings Suspense File, increase the Internal Revenue	 
Service's (IRS) workload to ensure that wages are properly	 
identified for those earning them, and burden individuals who	 
must work with SSA and IRS to resolve disputes that may affect	 
their social security benefits and tax obligations. IRS's ability
to penalize employers for submitting inaccurate SSNs on wage	 
statements is intended to promote SSN accuracy. Items GAO was	 
asked to describe included: (1) the statutory provisions	 
authorizing IRS to penalize employers who file wage statements	 
with inaccurate SSNs; (2) IRS's program to penalize such	 
employers; and (3) the extent IRS's program meets legislative	 
requirements, the likelihood of any penalties, and any program	 
changes being considered.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-712 					        
    ACCNO:   A11978						        
  TITLE:     Tax Administration: IRS Needs to Consider Options for    
Revising Regulations to Increase the Accuracy of Social Security 
Numbers on Wage Statements					 
     DATE:   08/31/2004 
  SUBJECT:   Data integrity					 
	     Fines (penalties)					 
	     Payroll records					 
	     Personnel records					 
	     Reporting requirements				 
	     Social security number				 
	     Tax administration 				 
	     Tax law						 
	     Tax violations					 
	     Income taxes					 
	     SSA Earnings Suspense File 			 

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GAO-04-712

United States Government Accountability Office

GAO	Report to the Chairman, Subcommittee on Immigration, Border Security
and

          Claims, Committee on the Judiciary, House of Representatives

August 2004

TAX ADMINISTRATION

IRS Needs to Consider Options for Revising Regulations to Increase the Accuracy
                 of Social Security Numbers on Wage Statements

                                       a

GAO-04-712

Highlights of GAO-04-712, a report to Chairman of the Subcommittee on
Immigration, Border Security and Claims, Committee on the Judiciary, House
of Representatives

Inaccurate social security numbers (SSN) on wage statements contribute to
growth in the Social Security Administration's (SSA) Earnings Suspense
File, increase the Internal Revenue Service's (IRS) workload to ensure
that wages are properly identified for those earning them, and burden
individuals who must work with SSA and IRS to resolve disputes that may
affect their social security benefits and tax obligations. IRS's ability
to penalize employers for submitting inaccurate SSNs on wage statements is
intended to promote SSN accuracy. Items GAO was asked to describe
included:

o  	the statutory provisions authorizing IRS to penalize employers who
file wage statements with inaccurate SSNs;

o  	IRS's program to penalize such employers; and

o  	the extent IRS's program meets legislative requirements, the
likelihood of any penalties, and any program changes being considered.

GAO recommends that IRS consider options for revising the reasonable cause
waiver and consult with other agencies that could be affected by such a
change prior to issuing any proposed regulations. IRS agreed with our
recommendations and said that IRS must proactively work with other
potentially affected agencies on possible changes.

www.gao.gov/cgi-bin/getrpt?GAO-04-712.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or [email protected].

August 2004

TAX ADMINISTRATION

IRS Needs to Consider Options for Revising Regulations to Increase the Accuracy
of Social Security Numbers on Wage Statements

IRS is authorized to penalize employers who fail to file information
returns or fail to include complete and correct information on them. Prior
to 1986, IRS was authorized to assess penalties for failure to file
information returns. The Tax Reform Act of 1986 added penalties for
failure to include complete and correct information, established penalty
amounts, and had two provisions limiting those penalties-the "reasonable
cause waiver" and a maximum of $20,000 in penalties per filer per calendar
year. The Omnibus Budget Reconciliation Act (OBRA) of 1989 increased the
penalty amounts and the maximum total penalty amounts, ranging from
$25,000 to $250,000 per filer per calendar year and added a third limit-a
"de minimis provision" limiting the number of penalties that can be
assessed. These statutes apply to employers who submit wage statements
with inaccurate SSNs. Both acts authorize penalties as a tool to help
ensure that information returns include complete and accurate information.

According to IRS officials, IRS has the capability to identify employers
who file wage statements with inaccurate SSNs but does not have a
dedicated compliance program for penalizing them. Currently employers may
be penalized based on an employment tax examination. IRS regulations
define the steps an employer needs to take to demonstrate that any filing
of wage statements with inaccurate SSNs was due to reasonable cause. If
reasonable cause exists, any potential penalty will be waived. To qualify
for the reasonable cause waiver, employers must be able to demonstrate
they solicited an SSN from each employee one to three times, depending on
the circumstances, and that they used this information to complete the
wage statements. Employers are not responsible for verifying the accuracy
of an SSN. IRS is conducting a review of 100 "egregious" employers who
filed large numbers or percentages of wage statements with inaccurate SSNs
to determine whether and how to implement a penalty program.

IRS's regulations that implement the penalty provisions meet the statutory
requirements; however, the criteria for meeting the reasonable cause
waiver is such that few if any employers are likely to be penalized for
filing inaccurate SSNs. IRS has no record of ever penalizing an employer,
including the employers who were contacted during IRS's review of
"egregious" employers.

IRS officials said they would consider changes, including requiring
employers to verify SSNs provided by employees, as part of the "egregious"
employer study. Requiring SSN verification, however, may affect employers
and other federal agencies with roles related to federal immigration
policy since some portion of inaccurate SSNs on wage statements is
attributable to illegal aliens using invalid SSNs. IRS officials said they
would likely take the views of other agencies into account after drafting
regulations.

Contents

  Letter 1

Results in Brief 2

Background 5

Legislation Authorizes IRS to Penalize Employers Who File

Inaccurate SSNs 7
IRS Does Not Have a Dedicated Compliance Program to Penalize
Employers Who File Wage Statements with Inaccurate SSNs 9
Although IRS's Regulations Meet Statutory Requirements, It Is

Unlikely Employers Will Be Penalized; IRS Will Consider

Changes 15
IRS Plans to Design an Evaluation of Its Penalty Program if a

Program Is Adopted 20
Conclusions 21
Recommendations 22
Agency Comments and Our Evaluation 22

Appendixes

                            Appendix I: Objectives, Scope, and Methodology 24
                   Appendix II: Comments from the Internal Revenue Service 26
            Appendix III: Comments from the Social Security Administration 28

Table Table 1:	Individual Penalty Amounts and Maximum Total Penalty
Amounts under OBRA of 1989

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separately.

A

United States Government Accountability Office Washington, D.C. 20548

August 31, 2004

The Honorable John N. Hostettler
Chairman,
Subcommittee on Immigration, Border Security and Claims
Committee on the Judiciary
House of Representatives

Dear Mr. Chairman:

Inaccurate social security numbers (SSN) on wage statements contribute
to growth in the Social Security Administration's (SSA) Earnings Suspense
File, increase the Internal Revenue Service's (IRS) workload to ensure
that
wages are properly identified for the individual earning them, and burden
individuals who must work with SSA and IRS to resolve disputes that may
affect their social security benefits and tax obligations. For example,
one
of SSA's goals is to ensure that individuals receive the social security
benefits to which they are entitled. To do so, SSA uses annual earnings
information recorded in each person's social security account that is
established in the individual's name with a unique social security number
to
calculate their benefits. Employers use IRS Form W-2 (Wage and Tax
Statements) to report this information to SSA. Due to name and SSN
inaccuracies on the Forms W-2 (hereafter referred to as wage statements),
SSA has been unable to assign billions of dollars of social security wages
earned each year to the individuals who earned them. The IRS, as well as
others, has responsibility for taking steps to assure information
submitted
on wage statements is accurate. One tool that IRS can use to do this,
which
is authorized by legislation, is penalizing employers who file wage
statements with inaccurate information; such penalties were established to
help ensure employers would report accurate information.

Because of your interest, this report describes:

o 	the statutory provisions authorizing IRS to penalize employers who file
wage statements with inaccurate SSNs;

o 	IRS's current program for identifying and penalizing employers who file
wage statements with inaccurate SSNs;

o 	whether the current program meets legislative requirements, the
likelihood that employers will be penalized for filing wage statements
with inaccurate SSNs, and any program changes being considered; and

o 	how IRS is evaluating or planning to evaluate the effectiveness of its
program on curtailing the filing of wage statements with inaccurate SSNs.

To address these objectives, we reviewed pertinent legislation,
regulations, legal files, penalty assessment records, and Treasury
Inspector General for Tax Administration (TIGTA) and IRS's Large and
Mid-Size Business (LMSB) Division reports. We interviewed IRS officials
including those in the Office of Chief Counsel, the National Program for
Penalties and Interest office, the Small Business/Self Employed (SBSE)
Division, and the LMSB Division. We also examined the design of IRS's
study for determining whether and how to implement a program for
penalizing employers who file wage statements with inaccurate SSNs by
reviewing documents and interviewing officials. In addition, we
interviewed SSA officials to obtain information about the number of wage
statements filed by employers with names and SSNs that do not match SSA's
records, the relationship between wage statements with inaccurate SSNs and
social security benefits, and the tools SSA makes available to employers
to verify SSNs. We also reviewed literature and reports related to the use
of SSNs by the Department of Homeland Security (DHS) and discussed this
use with knowledgeable GAO staff. We did not conduct a data reliability
assessment because IRS does not collect data on penalties related to wage
statements filed with inaccurate SSNs. We performed our work from November
2003 through June 2004 in accordance with generally accepted government
auditing standards. Our scope and methodology are discussed in greater
detail in appendix I.

Results in Brief	Internal Revenue Code Section 6721 authorizes IRS to
penalize employers for failure to file an information return by the
required filing date, failure to include complete information, and failure
to include correct information including accurate SSNs.1 The Tax Reform
Act of 1986 authorized IRS to assess penalties against employers for
failure to include complete or correct information, including correct
SSNs, on an information return filed

1 Internal Revenue Code Section 6724 lists the information returns covered
by these penalty provisions. For example, they apply to banks,
stockbrokers, and other financial institutions that pay interest and
dividends, as well as to employers. Because our focus is on wage
statements filed by employers with inaccurate SSNs, we refer only to this
issue when discussing the statutory and regulatory provisions except when
reference to other information return providers is needed for clarity.

with the IRS.2 Wage statements, which are filed by employers, are one type
of information return falling under this statutory authority. Under this
Act, the penalty was $5 for each problem information return up to a
maximum of $20,000 assessed against an employer in any calendar year. As
under prior law that authorized penalties when employers failed to file
information returns, the Act included an exception, referred to as the
"reasonable cause waiver," if the failure to include complete or correct
information was due to reasonable cause and not to willful neglect. The
Omnibus Budget Reconciliation Act (OBRA) of 1989 consolidated the penalty
for failure to include complete or correct information on an information
return with the penalty for failure to file an information return.3 This
Act also included the reasonable cause waiver and revised the amounts of
penalties that could be assessed against employers. OBRA imposed a penalty
of $15 to $50 per offense depending on the circumstances with a maximum of
$250,000 per calendar year per employer regardless of the number of
information returns that were either not filed or were filed with
incomplete or incorrect information. OBRA also reduced the penalty if
corrections were made within a specified time period and eliminated the
penalties in some cases if information returns are completed or corrected
by a specific date, referred to as the "de minimis provision." Even though
both Acts included provisions that limited or waived penalties, they
authorized the use of penalties as a tool to help ensure that employers
and others file information returns with complete and accurate
information.

According to IRS officials, IRS has the capability to identify employers
who file wage statements with inaccurate SSNs but does not have a
dedicated compliance program for penalizing them. However, at times, this
is done within the context of employment tax examinations. IRS does have
regulations for implementing the penalty provisions and has been
conducting an assessment to determine whether and how to implement a
penalty program that would create incentives for employers to improve the
accuracy of SSNs included on wage statements. The regulations include the
steps an employer must take to qualify for the reasonable cause waiver and
avoid a penalty. To comply with the regulations and avoid a penalty,
employers must request each employee to provide an SSN, use that SSN to
prepare the employee's wage statement, and if notified by IRS that the SSN

2 Public Law 99-514, October 22, 1986. 3 Public Law 101-239, December 19,
1989.

is incorrect, make up to two annual solicitations for a correct SSN from
the employee. If the employer takes these steps and still files a wage
statement with an inaccurate SSN that was provided by the employee, then
in most cases, the employer qualifies for the reasonable cause waiver and
no penalty will be assessed. Employers are not responsible for verifying
the accuracy of the SSNs. IRS is also reviewing 100 "egregious" employers
who were selected based on the number or percentage of wage statements
they filed with inaccurate SSNs for tax year 2000.4 IRS plans to use the
reviews to determine what actions, if any, it will take to best implement
a penalty program.

IRS's regulations that implement the provisions penalizing employers who
file wage statements with inaccurate SSNs meet the statutory requirements;
however under current regulations, employers are unlikely to be penalized
for filing wage statements with inaccurate SSNs. Under the legislation,
penalties are to be waived if the employers meet the reasonable cause
waiver. The criteria in IRS's regulations for meeting the waiver are such
that few, if any, employers are likely to be penalized for submitting
inaccurate SSNs. In fact, IRS has no record of ever penalizing an employer
for inaccurate SSNs on a wage statement. This is borne out, in part, by
IRS's review of the 100 "egregious" employers, i.e., employers who have
made high numbers of SSN errors on wage statements or who had high rates
of errors. After reviewing 78 of 100 employers, IRS did not identify any
who should be penalized because these employers were able to demonstrate
they made the required solicitations.

As part of their study of "egregious" employers, IRS officials said they
would consider a range of changes, including requiring employers to verify
SSNs provided by employees. This option was among draft recommendations
based on the portion of IRS's study looking at the 50 employers with high
numbers of SSN errors. Regarding the part of the review related to small
and self-employed businesses, IRS's SBSE Division concluded that for the
employers reviewed to date, many of their employees for whom inaccurate
SSNs had been filed appeared to be aliens. TIGTA has estimated that in tax
year 2000, at least 265,000 illegal aliens had wage statements with
invalid SSNs. In part because illegal aliens contribute to inaccurate
SSNs, corrective measures like requiring employers to verify SSNs provided
by employees may affect employers and other federal agencies that have
roles related to federal immigration policy.

4 As of May 2004, IRS had completed 78 of these reviews.

For example, verification requirements might lead to additional employer
responsibilities to verify employees' employment eligibility, which is in
the purview of the DHS. In addition, the Office of Special Counsel for
Immigration Related Unfair Employment Practices in the Department of
Justice could oversee employers' actions vis-`a-vis employees. Although
IRS officials said that they likely would take the views of these other
agencies into account in considering revisions to IRS's regulations, this
most likely would not occur until the agencies comment on draft
regulations.

IRS officials have indicated that if a penalty program is developed and
implemented, they do plan to evaluate its effectiveness on curtailing the
filing of wage statements with inaccurate SSNs. Officials said they would
determine the specific design for an evaluation after a program is
adopted.

Given the central role that the reasonable cause standard plays in
defining the responsibilities of employers and thereby potential progress
in improving the accuracy of SSNs on wage statements, we recommend that
the Commissioner of Internal Revenue consider options for revising this
standard. Further, because changes to this standard likely would have
consequences for other federal agencies, the Commissioner should ensure
that as IRS officials consider whether and how to modify this standard,
representatives of other potentially affected federal agencies are
consulted prior to issuing any proposed regulations. The Commissioner
agreed with our recommendations and said that IRS must proactively work
with other potentially affected agencies on possible changes.

Background	When employees are hired, they must complete an IRS Form W-4
(Employee's Withholding Allowance Certificate) so that the employer can
withhold the correct federal income tax from their pay. Shortly after the
end of each calendar year, every employer who pays employees remuneration
for services must furnish a wage statement to each employee and submit
this information to SSA. Wage statements include the employee's name, SSN,
and the amount of wages earned, among other things and generally,
employers use the employee names and SSNs on the Forms W-4 to prepare
them.

Wage statements are the critical documents used by SSA for assigning
social security benefits. When an employer submits a wage statement to
SSA, SSA posts the employee's earnings to the employee's earnings record,
which is then used to determine an individual's eligibility for, and
amount

of, retirement, disability, or survivor benefits administered by the
agency. When the wage statement contains a name/SSN combination that does
not match SSA's records, SSA conducts a series of procedures to try and
match them to its records. If these procedures do not result in a match,
then SSA is unable to post the employee's earnings to the employee's
earnings record and instead, the wage statement and the associated wages
are placed in the Earnings Suspense File (ESF).

The ESF represents the cumulative amount of wage statements for 1937
through 2003 for which SSA does not have a matching name/SSN. Through tax
year 2001, which is the most recent year for which complete data are
available, the ESF included over 244 million records involving wages of
over $421 billion. Since 1990, this file has been increasing by an average
of 5 million records and at least $17 billion annually.5 These records and
their associated earnings are only removed from the ESF when the wages can
be matched and posted to an individual's earnings record. Items can be
removed through SSA efforts to match names and SSNs or when a person
provides an accurate name/SSN combination and information that proves he
or she earned the wages. If they are not removed, employees will not
receive benefits based on these wages.

Besides affecting SSA's workload and burdening individuals with trying to
work with SSA to prove they earned certain wages, errors in SSNs on wage
statements also affect IRS and individual taxpayers. For example, an
individual may give an employer someone else's name and SSN. The employer
then files a wage statement with the SSN. The person to whom the SSN
belongs will not claim the wages on his or her tax return. IRS will then
send a notice to the individual about the unclaimed wages. IRS and the
individual must then work together to resolve the problem, adding to both
IRS's workload and the burden on the taxpayer to comply with the tax laws.
In addition, IRS must try to identify which individual actually earned the
wages.

5 The Social Security Administration's Earnings Suspense File Tactical
Plan and Efforts to Reduce the File's Growth and Size, Office of the
Inspector General, Social Security Administration A-03-97-31003 (February
2000).

  Legislation Authorizes IRS to Penalize Employers Who File Inaccurate SSNs

Internal Revenue Code Section 6721 authorizes IRS to penalize employers
for failure to file an information return by the required filing date,
failure to include complete information, and failure to include correct
information including accurate SSNs. This legislation also places limits
on the penalties including providing for the waiver of penalties if the
behavior of employers in failing to provide information or report complete
and accurate information was due to reasonable cause and not a result of
willful neglect. The penalties were authorized as a tool to help IRS
ensure that employers and others file information returns with complete
and accurate information.

Prior to the enactment of the Tax Reform Act of 1986, IRS was authorized
to assess penalties for failure to file information returns including wage
statements filed by employers. The 1986 Act authorized IRS to assess
penalties for failure to include all required information on information
returns and for failure to include correct information, including accurate
SSNs. The 1986 Act also established the amount of a penalty, $5 per
information return, limited those penalties to a maximum of $20,000 per
filer in any calendar year except in cases of intentional disregard, and
included the reasonable cause waiver.6

OBRA of 1989 increased the penalty amounts to $15 to $50 for each
nonfiled, incomplete, or inaccurate information return with the amount
depending on if and when corrections were made and included three
provisions that limit penalties assessed against employers. The first
provision, which was included in previous legislation, is the reasonable
cause waiver. IRS regulations, which are discussed later in this report,
provide guidance for determining if someone acted with reasonable cause
rather than with willful neglect.

The second provision limits total penalties assessed against an employer
to a maximum dollar amount in any calendar year. The maximums range from
$25,000 to $100,000 for small businesses and from $75,000 to $250,000 for
large businesses with the penalty amount depending on if and when

6 In cases of intentional disregard, the penalty will be $100 or greater
for each failure but there is no limit on the total amount of penalties
that can be assessed. IRS regulations, which are discussed later in this
report, provide guidance for determining if someone acted with intentional
disregard.

corrections are made.7 The maximum penalty amounts, which are presented in
table 1, are the total maximum penalty amounts that can be assessed
against an entity regardless of how many information returns it must file
and for any of the three reasons for which a penalty can be assessed. For
example, if a large business could be assessed a $200,000 penalty for
failing to file dividend information returns and a $100,000 penalty for
failing to file wage statements with accurate SSNs, the maximum penalty
that could be assessed is not $300,000 but rather $250,000. These penalty
amounts are for unintentional failures.

Table 1: Individual Penalty Amounts and Maximum Total Penalty Amounts
under OBRA of 1989

                                                Penalty per  Small      Large 
                             Reason for penalty     failure business business 
           Failure to file, to include complete                      
             information, or to include correct                      
                                    information         $50 $100,000 $250,000 
          Corrected return filed within 30 days         $15 $25,000   $75,000 
           Corrected return filed after 30 days                      
                                         but on                      
        or before August 1 of the calendar year                      
                                             in                      
          which the required filing date occurs         $30 $50,000  $150,000 

Source: OBRA of 1989.

The third provision limiting penalties is the "de minimis provision."
Under this provision, penalties will not be assessed for incomplete or
inaccurate information returns if they are corrected on or before August 1
of the calendar year in which the required filing date occurs. The number
of information returns this provision applies to shall not exceed the
greater of 10 returns or one-half of 1 percent of the total number of
returns to be filed.

7 By law, a business is defined as small if for any calendar year the
average annual gross receipts for the most recent 3 taxable years ending
before such calendar year do not exceed $5,000,000.

  IRS Does Not Have a Dedicated Compliance Program to Penalize Employers Who
  File Wage Statements with Inaccurate SSNs

According to IRS officials, IRS has the capability to identify employers
who file wage statements with inaccurate SSNs but does not have a
dedicated compliance program for penalizing them. However, at times, this
is done within the context of an employer's employment tax examination.
IRS's regulations for implementing the penalty provisions include the
steps an employer can take to demonstrate that any filing of wage
statements with inaccurate SSNs was due to reasonable cause and not
willful neglect. In addition, IRS has been conducting an assessment of 100
"egregious" employers who filed large numbers of wage statements with
inaccurate SSNs or had a high rate of such filings to determine whether
and how to implement a penalty program that would create incentives for
employers to improve the accuracy of SSNs included on wage statements.

    No Dedicated Compliance Program for Penalizing Employers

According to IRS officials, although IRS has the capability to identify
employers who file wage statements with inaccurate SSNs, it does not have
a dedicated compliance program for penalizing them. In September 2002,
TIGTA also reported that IRS did not have such a compliance program and
recommended that IRS initiate a regularly scheduled program for proposing
penalties when employers file wage statements with inaccurate SSNs.8 In
response to the TIGTA report, IRS management said that IRS did not develop
a regularly scheduled program because of concerns about the level of
resources needed to administer the program and the complexity of
administering such a program in comparison to the benefits that it would
have for tax administration. Management added that they are developing a
program for identifying and penalizing employers when warranted.

According to IRS officials, when the legislation was passed to authorize
penalties for failure to file complete and accurate information returns,
Congress was primarily concerned with Form 1099 information returns, such
as for interest income and dividends and distributions, rather than wage
statements because of the possible effect on tax revenues. IRS officials
said that the non-reporting of Form 1099 income by taxpayers had a greater
effect on tax revenues since no taxes had been withheld from income
reported on Forms 1099, whereas, in most cases, some taxes had been
withheld from income reported on wage statements. IRS started

8 The Internal Revenue Service Does Not Penalize Employers that File Wage
and Tax Statements with Inaccurate Social Security Numbers, TIGTA
Reference Number 2002-30156 (September 2002).

assessing penalties related to some Forms 1099 in the early 1990s and has
gradually added other types of Forms 1099 to the penalty program. Now IRS
believes that compliance associated with Forms 1099 has shown improvement
allowing the agency to focus on developing a penalty program for employers
that file wage statements with inaccurate SSNs.

    Employment Tax Examinations Can Be Used to Assess Penalties

Employment tax examinations may result in penalties for filing wage
statements with inaccurate SSNs. Employment tax examinations cover areas
such as determining if social security and Medicare taxes were properly
withheld, whether persons were properly classified as either employees or
as independent contractors, and whether the employers provided the
appropriate information returns to IRS and their employees.9 According to
the Director of the SBSE Office of Employment Tax, IRS staff may review
the accuracy of SSNs on wage statements to determine if penalties should
be proposed when conducting an employment tax examination. Even though the
filing of wage statements with inaccurate SSNs is not a criterion used to
select employers for an employment tax examination, if IRS has an
indication that there is a problem with inaccurate SSNs, the tax examiner
is to draw a sample of wage statements to determine if the SSNs on them
are the same as the SSNs on the Forms W-4. If they are the same, then no
penalty is proposed. If any or all are dissimilar, the employer would be
instructed to make annual solicitations as described later in this report
or face an IRS penalty.10 LMSB employment tax examination officials said
that they do not routinely compare SSNs on wage statements to the SSNs on
Forms W-4; however, an examination could result in the assessment of a
penalty.

9 IRS's SBSE Division is responsible for providing program leadership for
all IRS employment tax matters. SBSE officials conduct employment tax
examinations related to small businesses and self-employed taxpayers and
LMSB officials do the same for large and mid-size businesses.

10 An employer cannot avoid a penalty simply by making an annual
solicitation. The annual solicitation is necessary to establish reasonable
cause; and if after making an annual solicitation, an employee provides a
new SSN, the employer must use the recently provided SSN on any subsequent
wage statements.

    IRS Regulations Require Employers to Solicit Employees' SSNs

The IRS regulations that implement the penalty provisions require
employers to solicit SSNs from their employees but they are not required
to verify them. 11 Draft temporary regulations for assessing penalties for
failing to provide complete and correct information on information returns
related to the Tax Reform Act of 1986 were circulating within the IRS as
early as December 1986. IRS issued temporary regulations in September 1987
that included a solicitation for public comments.12 IRS received public
comments on the draft regulations and issued final regulations in April of
1991.13 Although OBRA of 1989 subsequently revised the penalty provisions,
these initial regulations did not reflect any revisions relative to OBRA
even though they were issued almost a year and a half after OBRA was
passed. IRS issued temporary regulations for OBRA in February 1991,14 and
after receiving public comments and holding a public hearing, issued final
regulations for the revised penalty provisions in December 1991.15

The regulations include guidance for implementing the reasonable cause
waiver included in the legislation. IRS officials said that when they
developed this guidance, they tried to balance encouraging voluntary
compliance with the law with the burden placed on filers for complying.
Under the waiver, filers of information returns will not be assessed a
penalty for any of the three types of failures included in the
legislation, including failing to file a wage statement with an accurate
SSN, if they can show that the failure was due to reasonable cause and not
willful neglect. To do so, they must demonstrate either there were
significant mitigating factors for the failure or that the failure arose
from events beyond their control. In addition, they must demonstrate they
acted in a responsible manner both before and after filing the information
returns including wage statements.

11 26 CFR 301.6721 through 301.6724.

12 52 FR 34355, September 10, 1987; employers and other information return
filers were to follow the temporary regulations from the date of their
publication.

13 56 FR 15040, April 15, 1991.

14 56 FR 6969, February 21, 1991; employers and other information return
filers were to follow the temporary regulations from the date of their
publication.

15 56 FR 67178, December 30, 1991.

Significant Mitigating Factors and Events Beyond the Filer's Control

The regulations include examples of significant mitigating factors or
events beyond the filer's control. Examples of significant mitigating
factors are that the filer was never required to file this type of
information return before or the filer has an established history of
complying with the information return reporting requirements. Examples of
events beyond the filer's control are the unavailability of business
records due to unforeseen conditions, such as a fire, that damaged
business records or actions of other parties such as IRS, the filer's
agent, or the payee of the item included in the information return. In the
case of the latter, the filer must show that the failure resulted from the
failure of the payee to provide the information to the filer or that the
payee provided incorrect information to the filer. Thus, an employer may
claim that the failure to include correct information on a wage statement
was due to the actions of the payee if the employer received an SSN from
the employee, relied on that number in good faith, and used it on a wage
statement.

Acting in a Responsible Manner	Acting in a responsible manner means that
the filer exercised the same degree of care that a reasonably prudent
person would use under the circumstances both before and after the
failure. It also includes taking steps to avoid the failure such as
attempting to prevent it if it was foreseeable, acting to remove the cause
of the failure, or correcting the failure as promptly as possible.

When a penalty is proposed for an incorrect SSN, filers must then comply
with special rules to demonstrate they acted in a responsible manner. In
the case of an employer who files wage statements, the employer needs to
make an initial solicitation for an employee's SSN at the time the
employee begins work. The employee's SSN is documented upon IRS Form W-4.
Following the initial solicitation, no additional solicitation for the SSN
is required unless the IRS notifies the employer that the employee's
reported SSN is incorrect. Following the receipt of such notice, the
employer may be required to make up to two annual solicitations for the
correct SSN.

The first annual solicitation of an employee's SSN is required only if the
IRS notifies the employer that the employee's SSN is incorrect and if the
employer's records contain that incorrect SSN at the time it receives the

notice.16 The solicitation for the SSN must be made by December 31 of the
year in which the notice was received (or by January 31 of the following
year if notified in December) and may be made in person or by mail or
telephone. The solicitation is necessary only if there will be reportable
payments to that employee in that year. A second annual solicitation would
be required if the employer receives an IRS notice of an incorrect SSN for
the employee in any subsequent year. An employer may rely on the SSN that
an employee provided in response to a solicitation, and the employer may
use that SSN in filing a wage statement for that employee. If an employer
receives an IRS notice of an incorrect SSN provided by an employee after
having made two annual solicitations and reporting the SSN provided by the
employee, the employer is not required to make further solicitations.

Acting with Intentional The rules for determining if an employer acted
responsibly do not apply if

Disregard	the employer acted with intentional disregard for the
requirement to file an accurate SSN. Intentional disregard occurs when the
employer knows, or should know, of the regulation to file accurate SSNs
and chooses to ignore the requirement. Indications of intentional
disregard include the employer did not promptly correct the error upon
discovery or the employer has a pattern of failures.

    IRS Is Reviewing 100 Employers to Determine Whether and How to Implement a
    Penalty Program

IRS is determining whether and how to develop a penalty program for
assessing penalties for filing wage statements with incorrect SSNs. The
IRS Program Director for Penalties and Interest said that the program will
likely have multiple components with the primary focus on the most
"egregious" filers; however specific details have not been developed. As
part of the process to develop the penalty program, IRS is conducting, but
has not finished, a review of 100 employers who are "egregious" filers of
wage statements with incorrect SSNs and the results of these reviews will
be used to help develop the penalty program. The intent of this review is
to gain insight and data to help IRS determine whether and how to
implement a penalty program that would create incentives for employers to
improve

16 If an employer receives a notice from IRS, the employer has 45 days to
submit an explanation as to why the penalty should be waived. In certain
cases, SSA may send employers letters indicating that the names and SSNs
for certain employees do not match SSA's records. A notice from SSA does
not trigger IRS's requirement that an employer solicit an SSN from an
employee.

the accuracy of SSNs filed on wage statements while avoiding unnecessary
burden and hardship.

IRS selected the 100 employers from two lists of the most "egregious"
filers provided by SSA for tax year 2000. SSA developed the lists from
data it maintains on the number of wage statements filed by employers with
SSNs and name combinations that did not match SSA's records. IRS selected
fifty employers from a list of the 100 employers that filed the most wage
statements with inaccurate SSNs. These employers were among the nation's
largest employers and the number of wage statements they filed with
incorrect SSNs was a function of the large numbers of wage statements they
filed. The second fifty employers were from a list of 100 employers who
filed the highest percentage of wage statements with inaccurate SSNs.
These employers generally issued fewer than 1,000 wage statements but had
error rates of 93 percent or higher.

As part of the review, IRS officials made on-site visits, interviewed
employers, and examined various documents. The objectives were to
determine the processes employers used to obtain SSNs to report on wage
statements, if the employers attempted to verify SSNs, how they dealt with
letters from SSA indicating that some employees' names and SSNs did not
match SSA's records, the barriers to obtaining correct SSNs, and whether
any penalties should be assessed. IRS's LMSB Division has completed the
review of the larger employers and summarized the results in an April
2003, report.17 As of May 2004, IRS's SBSE Division had reviewed 28 of the
50 employers who had filed the highest percentage of wage statements with
inaccurate SSNs. Of the remaining 22 employers, 21 are out of business and
one could not be located. In early 2004, IRS requested that SSA provide
another list of 50 "egregious" employers from which IRS will select 22 for
review. As of May 2004, IRS has not received the new list. When it does,
officials estimate it will take 4 to 5 months to complete the additional
reviews. At that time, SBSE officials will prepare a report documenting
the results of all 100 reviews. When the entire review has been completed,
options will be developed for the IRS Commissioner to consider which would
increase the likelihood that employers would file accurate SSNs on wage
statements.

17 Internal Revenue Service Large and Mid-Size Business Division: The Form
W-2 SSN/Name Mismatch Project (April 28, 2003).

  Although IRS's Regulations Meet Statutory Requirements, It Is Unlikely
  Employers Will Be Penalized; IRS Will Consider Changes

IRS's regulations for penalizing employers who file wage statements with
inaccurate SSNs meet the statutory requirements; however, under current
regulations, employers are unlikely to be penalized for filing wage
statements with inaccurate SSNs and IRS has no record of ever penalizing
an employer for inaccurate SSNs on wage statements. Based on its review of
the 50 large and mid-size businesses included in IRS's review of 100
"egregious" employers, LMSB officials and employers developed
recommendations intended to reduce or eliminate the filing of wage
statements with inaccurate SSNs. IRS officials then said that they would
consider a range of changes to improve the accuracy of SSNs on wage
statements. Regarding the part of the review related to small and
selfemployed businesses, IRS's SBSE Division concluded that for the
employers reviewed to date, many of their employees for whom inaccurate
SSNs had been filed appeared to be aliens. If IRS takes steps to improve
the accuracy of SSNs reported on wage statements, there could be
implications for thousands of illegal immigrants and their employers, and
in turn, on other federal programs which specifically deal with federal
immigration policy. Consequently, other federal agencies, including DHS,
could be affected by revisions to IRS's approach for ensuring that the
accuracy of SSNs on wage statements is improved.

The Internal Revenue Code requires that (1) employers be financially
penalized if they fail to file accurate SSNs on wage statements and (2)
penalties should be waived if reasonable cause exists for the failure. The
regulations that IRS has established to implement the laws contain both of
these dimensions; therefore the regulations are consistent with the
legislation. However, the criteria for meeting the reasonable cause waiver
included in the regulations are easy to meet making penalization of
employers very unlikely. This reduces or eliminates the potential
effectiveness of penalties in encouraging more accurate filing of SSNs on
wage statements.

As previously described, to qualify for a reasonable cause waiver, an
employer is responsible only for soliciting an SSN from each employee from
one to three times depending on when the employer has been contacted by
the IRS and told that the SSN provided on the wage statement is
inaccurate. The current regulations do not hold employers to more
stringent requirements, such as verifying the accuracy of an SSN provided
by an employee, or ensuring that an employee provides an alternative SSN
when their reported SSN was determined to be inaccurate.

If employers voluntarily wish to verify SSNs, their options are limited.
IRS maintains a system for verifying the taxpayer identification numbers
in its records, of which individual SSNs are one type. However, IRS is
prohibited by law from verifying SSNs for employers.18 Pending legislation
would allow IRS to do so.19 Employers can voluntarily use SSA's Employee
Verification Service (EVS) prior to filing wage statements to determine if
SSNs are valid. Under EVS, employers can call an 800 number to verify SSNs
for up to five employees, submit a paper request for up to 50 employees,
or submit requests for larger numbers using tapes or discs. Paper requests
can take up to 30 days to process. SSA is also pilot-testing another
system-the social security number verification service (SSNVS)-for
voluntary use by employers to verify SSNs and, according to SSA officials,
hopes to roll out the program nationwide in January 2005. When using
SSNVS, employers can verify up to ten SSNs via computer and receive an
instant response and for larger requests, can upload a file to SSA and
receive a response within 1 business day.

Our attempt to determine if IRS has ever penalized employers for filing a
wage statement with an inaccurate SSN found no evidence of any penalties
being assessed. IRS does not have any information documenting that any
employer has ever been assessed such a penalty.20 IRS collects data on the
number and dollar amount of penalties assessed for all information
returns, including wage statements that are filed late; filed with missing
or inaccurate taxpayer identification numbers, which include SSNs; or
which were not filed on magnetic media when required. IRS does not
separately collect the same statistics for wage statements. However,
according to the Program Director for Penalties and Interest, he has
requested that this information be collected in the future. He hopes that
changes can be made to IRS's computer systems so that IRS can begin
collecting this information for wage statements by the end of fiscal year
2005.

18 Section 6103 of the Internal Revenue Code protects the confidentiality
of SSNs and does not generally permit disclosure of these numbers or
whether these numbers match IRS records to third parties such as
employers.

19 H.R. 1528 Tax Administration and Good Government Act.

20 The Director of the SBSE Office of Employment Tax surveyed his field
managers and they said that employers had been assessed penalties for
filing wage statements with inaccurate SSNs but they did not have any
evidence of how often this occurred or of any penalties being paid.

IRS's recent review of the 100 "egregious" employers provides evidence
that under the current criteria for meeting the reasonable cause waiver,
it is improbable that employers would be penalized for filing wage
statements with inaccurate SSNs. As of May 2004, IRS concluded that none
of the 78 employers examined should be assessed a penalty. This includes
50 employers reviewed by the LMSB Division for which IRS officials could
not find any evidence that they had ever been penalized. This does not
mean, however, that the employers filed wage statements free of inaccurate
SSNs. It simply means that they solicited and used the SSNs provided by
the employees to prepare the wage statements regardless of whether the
SSNs provided by the employees were accurate. Again, under the regulations
implementing the reasonable cause waiver, as long as the employers solicit
SSNs from employees and use those SSNs to prepare wage statements, they
will meet the reasonable cause waiver and will not be penalized.

The LMSB Division prepared a report in April 2003 summarizing the results
of its review of the 50 "egregious" employers who filed large numbers of
wage statements with inaccurate SSNs. The report includes five barriers
identified by employers to filing wage statements with accurate SSNs and
13 recommendations that LMSB officials and employers think may reduce or
eliminate the filing of wage statements with inaccurate SSNs. The
recommendations fall into four general areas: legislative and regulatory
changes, SSA changes, employer changes, and IRS changes. All would
represent substantive changes to the current requirements for employers.
For example, one recommendation is that employers use SSA's EVS to verify
the SSN of all new hires. Another recommendation is to require employers
to review and obtain a copy of the employee's social security card prior
to hiring the new employee. A third recommendation is that if
re-solicitations of SSNs are required, employers would verify new SSNs
provided by employees using the SSA EVS system. These initiatives would
require legislative and regulatory changes and might result in changes to
the reasonable cause standard. The division also pointed out that several
employers have taken innovative steps to address the compliance problem.
One such initiative is using a service that will conduct a background
check on each employee, including verifying the SSNs, for a minimal fee.
Assessing the viability of these recommendations was not within the scope
of our evaluation.

Regarding the small and self-employed businesses review, after completing
the reviews of 28 employers, SBSE preliminarily concluded that (a)
employers' acceptance of an employee's information without any
verification by the employer is common practice, (b) employers have no

responsibility to verify the accuracy of an employee's SSN, and (c) many
of the employees whose SSNs were identified in the review as inaccurate
appeared to be aliens.

Although the options for improving the accuracy of SSNs on wage statements
have not yet been developed, IRS officials said they would consider a
range of changes including, as LMSB's report suggests, requiring employers
to verify SSNs provided by employees on Forms W-4. In judging how to
proceed, the officials said that a number of factors would need to be
weighed. For example, the regulations for information returns currently
apply uniformly to all providers of such returns. To the extent that
addressing the problem of inaccurate SSNs on wage statements might
adversely affect other providers of information returns, IRS may need to
consider separate regulations only applying to entities in their capacity
as employers. IRS officials indicated that one initiative they have
discussed is changing the criteria employers must meet to qualify for the
reasonable cause waiver if they file inaccurate SSNs on wage statements.
They added the Department of the Treasury would have to agree to this
change. In addition, in crafting changes to encourage more accurate wage
statements, officials said that they would need to assess any increased
burden placed upon employers, such as increases in cost. The Commissioner
of Internal Revenue, in testimony before Congress, has raised the issue of
whether a more rigorous program could drive employers into underreporting
wages paid to employees, which could result in more employees not
participating in the federal tax system. This would be contrary to what
IRS sees as part of its basic mission: to assure that all appropriate
taxpayers are part of the system. In addition, the Commissioner of IRS
recently testified that any increase in IRS's compliance activities in
this area may place an increased demand on resources and that "absent
added funding for such activities, this would likely come at the expense
of other compliance activities."21 Finally, some options for addressing
the issue of inaccurate SSNs may require legislative changes, such as
authorizing IRS to make its taxpayer identification number verification
system available to employers for purposes of verifying employees' SSNs.

Although IRS officials did not focus on them in discussing their review
with us, certain other issues likely would be relevant when considering
changes in employers' responsibilities. SBSE's preliminary conclusion that
many of

21 Individual Taxpayer Identification Numbers (ITINs) and Social Security
Number Matching: Testimony by the Commissioner of Internal Revenue; March
10, 2004.

the employees whose SSNs were identified as invalid in its review appeared
to be aliens raises the question of whether addressing the accuracy of
SSNs has immigration-related implications for employers and other federal
agencies. Even though incorrect SSNs may result from such things as
inadvertent errors on employees' or employers' part or from individuals
not reporting a name change to SSA, some portion of inaccurate SSNs likely
are due to illegal aliens using false or stolen SSNs when completing Forms
W-4 for employers. TIGTA estimated, for example, that 353,000 taxpayers
could be identified as illegal aliens from IRS tax year 2000 data and that
of these at least 265,000 had wage statements with invalid SSNs.22 Since
significant numbers of individuals with inaccurate SSNs on Forms W-4 may
be illegal aliens, some employers have raised concerns about whether being
required to verify employees' SSNs would trigger obligations to other
federal agencies, such as DHS. 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 DHS Form I9 documentation.23

An earlier pilot test of a voluntary employment verification system
illustrates other issues that may affect employers and other federal
agencies if IRS requires SSN verification. The Illegal Immigration Reform
and Immigrant Responsibility Act of 1996 directed the Attorney General to
conduct a pilot program of an employment verification system intended to
prevent employers from hiring unauthorized aliens.24 The voluntary
participants in this system agreed to electronically check newly hired
employees' SSNs against SSA's SSN records and, if the SSNs did not match
and the employees were unable to resolve the mismatch, to terminate their
employment. This pilot program includes the employer contacting DHS to
verify employment eligibility of a potential employee. The basic pilot of
the

22 This estimate is only for resident aliens who filed tax returns using
an IRS assigned individual taxpayer identification number, or ITIN, and is
not an estimate of the number of illegal aliens overall who may have filed
tax returns. Internal Revenue Service's Individual Taxpayer Identification
Number Creates Significant Challenges for Tax Administration, TIGTA,
Reference Number 2004-30-023 (January 2004).

23 The Immigration Reform and Control Act of 1986 made all United States
employers responsible to verify the employment eligibility and identity of
all employees hired to work in the United States after November 6, 1986.
To implement the law, employers are required to complete Employment
Eligibility Verification forms (DHS Form I-9) for all employees, including
United States citizens.

24 Pub. L. 104-208, Div. C, September 30, 1996.

program is operating in six states (California, Florida, Illinois,
Nebraska, New York, and Texas) and can be expanded to all 50 states by
December 2004. In evaluating the basic pilot program, researchers found
that the system confirmed that 87 percent of the employees were authorized
to work but that some employers took adverse actions against employees on
the basis of a tentative nonconfirmation (e.g., the employee's name and
SSN did not match SSA's records) although they were prohibited from doing
so under the program. Federal law protects certain individuals from unfair
immigration-related employment practices of a U.S. employer. The federal
government entity charged with oversight of the laws protecting against
unfair immigration-related employment practices is the Office of Special
Counsel for Immigration Related Unfair Employment Practices, which is part
of the Civil Rights Division of the Department of Justice.

IRS officials are aware that changes to the reasonable cause standard
could have consequences for other federal agencies. For example, when
TIGTA recommended that IRS initiate a regularly scheduled penalty program
to penalize employers for submitting inaccurate SSNs on wage statements,
IRS was contacted by the Departments of Labor, Justice and Homeland
Security, seeking information. Regarding coordinating any initiatives with
other federal agencies, IRS officials said that they would take other
agencies' views into account most likely through their formal comments on
any regulatory proposal IRS and Treasury would make.

  IRS Plans to Design an Evaluation of Its Penalty Program if a Program Is
  Adopted

If IRS implements a program to assess penalties against employers who file
wage statements with inaccurate SSNs, IRS plans to evaluate the
effectiveness of its program on curtailing the filing of such wage
statements. IRS officials said they will design the evaluation after a
penalty program is adopted. In its September 2002 report, TIGTA
recommended that the Program Director for Penalties and Interest develop a
methodology for monitoring and analyzing the results of the penalty
program and that the data collected should include the number and amount
of penalties proposed, assessed, waived (and the reason for the waiver),
and collected.25 TIGTA also said the data should include the number of
wage statements corrected in response to penalty actions. Developing and
implementing a design for evaluating whatever program IRS moves ahead with
will be important so that IRS can understand how well the new

25 TIGTA 2002-30-156.

program succeeds in increasing SSN accuracy on wage statements while
minimizing potential adverse effects like decreased participation of wage
earners in the tax system.

Conclusions	Inaccurate SSNs on wage statements contribute to growth in the
SSA Earnings Suspense File, increase IRS's workload to ensure that wages
are properly identified for the individual earning them, and burden
individuals who must work with SSA and IRS to resolve disputes that may
affect their tax obligations and social security benefits. Under the Tax
Reform Act of 1986 and OBRA of 1989, Congress provided IRS authority to
penalize employers who submit wage statements with inaccurate SSNs to help
assure the accurate reporting of wages. Both Acts emphasize the use of
penalties as a tool to help ensure that employers file information returns
with complete and accurate information but also include a reasonable cause
provision under which penalties can be waived.

However, the reasonable cause standard is not difficult for employers to
meet. IRS has no record of penalties having been levied against employers
and none have been levied to date as part of IRS's study of employers with
substantial numbers or percentages of wage statements with inaccurate
SSNs.

Because little or no likelihood exists for penalties to be levied, the
potential of the statutory penalty tool to encourage greater accuracy of
wage statements is compromised. Further, because employers have no
responsibility to verify SSNs, opportunities to detect and correct SSN
inaccuracies before SSA and IRS need to react to them and possibly
consider penalizing employers are lost. Accordingly, thoroughly exploring
options to change the reasonable cause standard, including possibly
requiring that employers take steps to verify the accuracy of SSNs
provided by employees, must be a critical part of IRS's consideration of
how to make their penalty program more effective.

Nevertheless, because a change to the reasonable cause standard could have
consequences for IRS, employers, and other federal agencies, determining
whether and how to modify the standard will require balancing numerous,
sometimes conflicting, issues. Accordingly, in considering options for
revising the standard, IRS would benefit from understanding these
potential consequences. Although IRS officials anticipate receiving formal
comments from other federal agencies on any regulatory proposal they may
publish, they do not have plans to work with representatives of

these agencies as they initially consider what options may best address
inaccurate SSNs.

Recommendations	We have two recommendations. First, given the central role
that the reasonable cause standard plays in defining the responsibilities
of employers and thereby potential progress in improving the accuracy of
SSNs on wage statements, we recommend that the Commissioner of Internal
Revenue consider options for revising this standard. Second, because
changes to this standard likely would have consequences for other federal
agencies, the Commissioner should ensure that as IRS officials consider
whether and how to modify this standard, representatives of other
potentially affected federal agencies are consulted prior to issuing any
proposed regulations.

  Agency Comments and Our Evaluation

The Commissioner of Internal Revenue provided written comments on a draft
of this report in an August 10, 2004, letter, which is reprinted in
appendix II. The Commissioner agreed with our recommendations, saying that
IRS would consider revisions to the reasonable cause standard and that IRS
must proactively work with other potentially affected agencies on possible
changes to the standard. Regarding possible changes to the reasonable
cause standard, we encourage IRS to explore options for having employers
verify the accuracy of SSNs. Then, if an employee provided an inaccurate
SSN, the employer could take timely actions to obtain a valid SSN. In
agreeing that IRS should work with other agencies, the Commissioner did
not indicate when or how IRS planned to do so. We believe it is important
for IRS to work with the other affected agencies before draft regulations
are developed so IRS has the benefit of the agencies' views when designing
the draft regulations.

The Commissioner of SSA provided written comments on a draft of this
report in an August 6, 2004, letter, which is reprinted in appendix III.
The Commissioner said that due to the possible impact on SSA, employers,
and employees, SSA should be involved in the development of any
requirement imposed on employers to verify SSNs provided by employees,
thus agreeing with our recommendation that IRS should consult other
federal agencies prior to making any changes to the reasonable cause
standard. In addition, at SSA's request, we clarified a description of a
pilot program for verifying employment eligibility.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its date. At that time, we will send copies to the Chair and Ranking and
Minority Member of the Senate Committee on Finance; the Chair and Ranking
Minority Member of the House Committee on Ways and Means and its
Subcommittees on Oversight and on Social Security; the Chair and Ranking
Minority Member of the Senate Committee on the Judiciary and the Chair and
Ranking Minority Member of its Subcommittee on Immigration, Border
Security and Citizenship; the Chair and Ranking Minority Member of the
Senate Special Committee on Aging; the Chair and Ranking Minority Member
of the House Committee on the Judiciary and the Ranking Minority Member of
its Subcommittee on Immigration, Border Security and Claims; the Chair and
Ranking Minority Member of the House Select Committee on Homeland
Security; the Chair and Ranking Minority Member of the House Committee on
Government Reform and its Subcommittee on National Security, Emerging
Threats, and International Relations; the Secretary of the Treasury; the
Commissioner of Internal Revenue; the Commissioner of Social Security; the
Director of the Office of Management and Budget; and other interested
parties. We will make copies available to others on request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

This report was prepared under the direction of Boris Kachura, Assistant
Director. If you have any questions regarding this report, please contact
him at (202) 512-3161 or [email protected] or me at (202) 512-9110 or
[email protected]. Key contributors to this report were Shirley Jones, Jean
McSween, Jay Pelkofer, and Shellee Soliday.

Michael Brostek Director, Tax Issues

Appendix I

                       Objectives, Scope, and Methodology

Our first objective was to describe the statutory provisions authorizing
the Internal Revenue Service (IRS) to penalize employers who file Forms
W-2 (Wage and Tax Statements), hereafter referred to as wage statements,
with inaccurate social security numbers (SSNs). To address the first
objective, we identified the laws that gave IRS this authority, verified
this with IRS Office of Chief Counsel staff, and researched the
legislative history of those laws.

Our second objective was to describe IRS's current program for identifying
and penalizing employers who file wage statements with inaccurate SSNs
including any changes under consideration. To address the second
objective, we reviewed IRS's current penalty program with various IRS
officials including the Program Director for Penalties and Interest and
reviewed a Treasury Inspector General for Tax Administration (TIGTA)
report addressing the same subject.1 We interviewed Small Business/Self
Employed (SBSE) Division and Large and Mid-Size Business (LMSB) Division
Employment Tax officials to determine how employment tax examinations can
be used to identify employers who should possibly be assessed a penalty
for filing wage statements with inaccurate SSNs. We also sought from the
Program Director for Penalties and Interest, the SBSE Office of Employment
Tax Director, and the LMSB National Program Manager for the Employment Tax
Program any data collected by IRS that would show the number of employers
who had been assessed penalties for filing wage statements with inaccurate
SSNs.2 We reviewed the IRS Office of Chief Counsel file related to the
regulations implementing the legislation identified under objective one as
well as the regulations themselves and interviewed Chief Counsel staff and
the National Program Director for Penalties and Interest about what
employers must do, under the regulations, to avoid a penalty for filing a
wage statement with an inaccurate SSN. We also reviewed information IRS
provided to employers about their responsibilities in relation to filing
accurate SSNs. We reviewed documents related to IRS's review of 100
"egregious" employers who filed large number of wage statements with
inaccurate SSNs including an LMSB Division report summarizing the results
of its review of 50 of those employers as well as discussed the study with
the Program Director for Penalties and Interest.3 These discussions
covered, among other things,

1 TIGTA 2002-30-156.

2 Although IRS collects data about penalties related to information
returns, it does not collect data about penalties for filing wage
statements with inaccurate SSNs.

Appendix I
Objectives, Scope, and Methodology

the objectives and methodology used for the reviews, any results to date,
and how IRS planned to use the results, including IRS's plans for
developing a penalty program.

Our third objective was to describe the extent to which IRS's program
meets legislative requirements and the likelihood that employers will be
penalized for filing wage statements with inaccurate SSNs under that
program. To address the third objective, we compared the information we
collected related to the first objective-the statutory provisions-to the
information we collected related to the second objective-specifically
IRS's program for identifying and penalizing employers who file such wage
statements. We also reviewed any data IRS collected on penalties assessed
against employers who filed such wage statements and the regulations
implementing the legislation. We reviewed IRS's examination of 100
"egregious" employers who filed large numbers of wage statements with
inaccurate SSNs, and the LMSB Division report summarizing the results of
its review of 50 of the 100 employers. We also met with Social Security
Administration (SSA) officials to obtain information about the number of
wage statements filed by employers with names and SSNs that do not match
SSA's records, the relationship between wage statements with inaccurate
SSNs and social security benefits, and the tools they make available to
employers to verify SSNs. In addition, we reviewed literature and reports
related to the use of SSNs by the Department of Homeland Security and
discussed this use with knowledgeable GAO staff.

Our fourth objective was to describe how IRS is evaluating, or planning to
evaluate, the effectiveness of its program on curtailing the filing of
wage statements with inaccurate SSNs. To address the fourth objective, we
interviewed the IRS Program Director for Penalties and Interest and
reviewed the TIGTA report referred to previously. We did not review and
analyze any documents related to an evaluation design since IRS does not
have one.

We did not conduct a data reliability assessment because IRS does not
collect data on penalties related to wage statements filed with inaccurate
SSNs. We performed our work from November 2003 through June 2004 in
accordance with generally accepted government auditing standards.

3Internal Revenue Service Large and Mid-Size Business Division: The Form
W-2 SSN/Name Mismatch Project (April 28, 2003).

                                  Appendix II

                   Comments from the Internal Revenue Service

Appendix II Comments from the Internal Revenue Service

Appendix III

Comments from the Social Security Administration

Appendix III
Comments from the Social Security
Administration

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