The Internal
Revenue Service Does Not Penalize Employers that File Wage and Tax Statements
with Inaccurate Social Security Numbers
September 2002
Reference
Number: 2002-30-156
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
September 11,
2002
MEMORANDUM
FOR THE COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - The Internal Revenue
Service Does Not Penalize Employers that File Wage and Tax Statements with
Inaccurate Social Security Numbers (Audit # 200230002)
This
report presents the results of our review to determine whether the Internal
Revenue Service (IRS) addressed the Social Security Administration’s (SSA)
concerns about the accuracy of Social Security Numbers (SSN) provided by
employers on Wage and Tax Statements (Form W-2).
In
summary, we found that the SSA proposed in November 1998 that the IRS assist it
with its compliance efforts by more strictly enforcing the “information return”
penalty against employers that filed Forms W-2 with inaccurate name/SSN combinations. Further, in August 2000 the SSA provided to
the IRS a list of the most egregious non-compliant employers for Tax Years (TY) 1997 and 1998. The SSA provided this information so the IRS
could determine whether penalties should be assessed.
However, the IRS does not
penalize employers that file Forms W-2 with inaccurate name/SSN combinations,
and the IRS has not developed a regularly scheduled program for administering
the information return penalty law for these forms. Developing an information return penalty program became possible
in approximately Calendar Year (CY) 1998.
IRS management advised us that the 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 administration, weighed against
the benefit that a program would have on tax administration.
With this perspective, the
IRS did not determine whether penalties should be assessed against the most
egregious non-compliant employers for TYs 1997 and 1998. As a result, the IRS did not propose and,
subsequently assess when justified, an estimated $26.0 to $29.7 million in
penalties against 93 employers for TY 1997 and 98 employers for TY 1998.
On February 1, 2002, we
issued a memorandum to IRS management (see Appendix VI). The memorandum stated that the IRS had not
acted on the SSA’s request and that the 3-year statute of limitations for
assessing penalties for the TY 1998 documents would soon expire. We recommended that the IRS: (1) ascertain if penalties, when justified,
could be assessed before the statute of limitations expired; (2) notify the SSA
of its decision; and (3) meet with the SSA to jointly develop a method where
the SSA can formally refer to the IRS the most egregious non-compliant
employers for penalty consideration for TYs 1999 and 2000.
Also,
during the review, we discussed with a representative of the Director, Office
of Interest and Penalty Administration, Small Business/Self-Employed (SB/SE)
Division, the need to initiate a regularly scheduled penalty program that would
include all non-compliant employers.
In
its response to our February 1, 2002 memorandum (see Appendix VII), the IRS
determined that assessing penalties so close to the statute expiration date
would be contrary to the IRS’ due process procedures and could compromise
taxpayers’ rights. However, the IRS
coordinated with the SSA to begin developing a penalty program for the most
egregious non-compliant employers. The
response also provided that the IRS will implement a separate, regularly
scheduled penalty program beginning in CY 2004.
In
addition to the recommendations already responded to, we also recommend that
the Commissioner, SB/SE Division, prepare in conjunction with the SSA a
document with the details of the joint IRS/SSA program designed for the most
egregious non-compliant employers. We
also recommend that the Director, Office of Interest and Penalty
Administration, SB/SE Division ensure that the IRS propose, when justified,
penalties against these employers following the provisions of I.R.C. § 6721, and
develop a method for monitoring and analyzing the results of the programs.
We
estimated that if the IRS proposed penalties for TYs 1999 through 2001 against
the same non-compliant employers identified for TYs 1997 and 1998, penalties of
$39 million would be proposed for up to 98 employers. (Appendix IV of this report provides a detailed description
of these benefits.) However, the IRS
did not agree that our recommendations would provide these measurable benefits
on tax administration, citing tax laws that provide for the waiver of penalties
for reasonable cause, including when errors relate to actions by the
payee.
Office
of Audit Comment: Subsequent to the
conclusion of our review, the IRS provided assessment, waiver, and collection
data for the TIN Penalty mail out for 1998.
This penalty is similar to the penalty discussed in this report. The IRS waived 45.8 percent of the dollar
amounts, but collected 16.7 percent of the assessed penalties. It should be noted that the estimate in our
report is based on only 98 of the most egregious employers provided by the SSA
– not the full universe of non-compliant employers. The number of egregious employers identified in the new program
may be higher than those identified during our review, and therefore, the
estimated amount of penalties may actually be higher than what we cited. Further, as we noted in our report, of all non-compliant employers for TYs 1997 and 1998,
the SSA considered these employers as the most
egregious, filing over 867,000 incorrect Forms W-2. While the volume of Forms W-2 involved is not the only
non-compliance indicator, it does suggest the potential that at least some
name/SSN mismatches are not "errors related to actions by the payee."
Copies of this report are also being
sent to the IRS managers who are affected by the report recommendations. Please contact me at (202) 622-6510 if you
have questions or Gordon C. Milbourn III, Assistant Inspector General for Audit
(Small Business & Corporate Programs), at (202) 622-3837.
Table of Contents
Background
The Internal Revenue Service Did Not Use Its Penalty Authority When Employers Filed Inaccurate Wage and Tax Statements
Recommendation 1:
Recommendations 2 through 4:
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
V – Statutes Referred to in this Report
Appendix
VI – Memorandum: The Statute of Limitations for Assessing Penalties Against
Employers Providing Incorrect Annual Wage Report Information to the Social
Security Administration for Tax
Year 1998 Will Expire on March 1, 2002
Appendix
VII – Management’s Response to Memorandum
Appendix
VIII – Management’s Response to the Draft Report
Both the Social Security Administration (SSA) and the Internal Revenue Service (IRS) have roles in using and ensuring the accuracy of information provided on Wage and Tax Statements (Forms W-2). The SSA is required by law to maintain records of wages employers pay to employees. Employers report these wages annually to the SSA on Forms W-2. An estimated 250 million Forms W-2 were filed in 2001.
Along with other information, the Form W-2 includes the employee’s name, Social Security number (SSN), and wages. The accurate reporting of name and SSN combinations is critical to enabling:
· The SSA to maintain accurate earnings records and calculate Social Security benefits.
· The IRS to ensure that information submitted by taxpayers is properly processed to the IRS’ Master File and to rely on the accuracy of Forms W-2 in programs to verify filing and reporting compliance with tax laws.
When a Form W-2 name/SSN combination cannot be matched to the SSA’s records, the SSA attempts to correct the information. If a correction cannot be made, the inaccurate record is controlled in a “suspense” file. As of 1999, this file included over 227 million records showing wages of over $333 billion. Since 1990, this file has been increasing by an average of 5 million records and at least $17 billion annually.
In a November 9, 1998 letter to the IRS, the SSA stated that it was undertaking a major initiative to improve the accuracy of employee name/SSN combinations. The SSA proposed that the agencies work together to develop employer incentives that could encourage improved Form W-2 compliance. These employer incentives included the IRS more strictly enforcing the existing “information return” penalty against employers that did not submit accurate name/SSN combinations. The SSA is not authorized to assess this penalty and relies on the IRS to address information reporting compliance in this manner.
Further, in August 2000, the SSA provided to the IRS information on 93 employers who did not submit accurate employee name/SSN combinations on Forms W-2 for Tax Year (TY) 1997. The SSA also identified 98 employers for TY 1998. Of all non-compliant employers for TYs 1997 and 1998, the SSA considered these employers as the most egregious, filing over 867,000 incorrect Forms W-2. The SSA provided the information on the employers so the IRS could determine whether penalties should be assessed.
We performed this audit at the Small Business/Self-Employed (SB/SE) Division Headquarters in New Carrollton, Maryland, between December 2001 and April 2002. The audit was conducted in accordance with Government Auditing Standards. Detailed information about our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
The Internal Revenue Code (I.R.C.) provides for a penalty against employers that do not file correct information returns, such as Form W-2. An inaccurate name/SSN combination is classified as an incorrect information return. The penalty is up to $50 for each inaccurate return, while the total penalty imposed on an employer for 1 year cannot exceed $250,000. The total penalty for a business with less than $5 million in gross receipts is limited to $100,000.
The IRS’ policy on assessing penalties states that penalties are used to encourage voluntary compliance by: (1) helping taxpayers understand that compliant conduct is appropriate and that non-compliant conduct is not; (2) deterring non-compliance by imposing costs on it; and (3) establishing the fairness of the tax system by justly penalizing the non-compliant taxpayer. Furthermore, an IRS Strategic Goal is to provide service to all taxpayers through fair and uniform application of the law.
However, the IRS does not penalize employers that file Forms W-2 with inaccurate name/SSN combinations. There are two main aspects of this problem.
The IRS has not developed a regularly scheduled
program for administering the information return penalty law for Forms W-2 with
incorrect name/SSN combinations
The IRS’ computer files include the SSNs from Forms W-2 and the SSNs that the SSA provided to the IRS. However, the IRS does not compare the Form W-2 data to the SSN data to identify incorrect name/SSN combinations. Consequently, employers against whom a penalty should be proposed are not identified.
IRS representatives advised us that a program was not practical before approximately 1998 because the IRS would have received the SSNs from the SSA after a critical IRS processing date had passed. The circumstances changed about 1998, and the data would have been received in time to establish a program. We did not estimate the number and dollar amount of the penalties that the IRS did not propose. This would entail developing a system to analyze millions of SSNs and Forms W-2; the universe of inaccurate wage reporting according to the SSA’s records averages approximately 5 million Forms W-2 per year.
The IRS did not determine whether penalties should be assessed against employers that the SSA identified as the most egregious non-compliers for TYs 1997 and 1998
We advised the Commissioner, SB/SE Division on December 14, 2001 that the IRS had not taken substantive actions on the SSA’s request to consider penalties against the most egregious non-compliant employers. Furthermore, the 3-year statute of limitations for assessing penalties for TY 1997 had expired, and the statute of limitations for TY 1998 was soon to expire on March 1, 2002.
We followed-up this communication with a memorandum dated February 1, 2002 (see Appendix VI). We recommended that SB/SE Division’s Acting Director, Compliance Policy immediately ascertain if penalty determinations could be made, and justified penalties assessed, before the TY 1998 statute of limitations expired. The Commissioner, SB/SE Division responded to the memorandum by stating that insufficient time remained before the statute expired to assess justified penalties. Making the assessments so close to the statute expiration date would be contrary to the IRS’ due process procedures, possibly violate law, comprise taxpayers’ rights, and create negative public relations (see Appendix VII).
The statute of limitations has now expired for TYs 1997 and 1998. Consequently, the IRS did not propose estimated penalties of between $26.0 and $29.7 million. For 1997, the IRS is legally barred from penalizing 93 employers for an estimated $12.3 to $13.6 million. The due date for TY 1997 Forms W-2 was March 2, 1998, so the 3-year statute of limitations expired March 2, 2001. The IRS made no penalty determinations on 63 (67.7 percent) of the 93 cases, but did make determinations on the remaining 30 cases. However, these determinations were not made as a result of the SSA’s request, and the determinations did not address inaccurate name/SSN combinations for Forms W-2. Rather, these determinations were most often for information return penalties for several types of Forms 1099, such as Miscellaneous Income (Form 1099-MISC) and Dividends and Distributions (Form 1099-DIV).
For 1998, the IRS is also legally barred from penalizing 98 employers
for an estimated $13.7 to $16.1 million.
The due date for these Forms W-2 was March 1, 1999, so the statute of
limitations expired on March 1, 2002.
The IRS made no penalty determinations on 72 (73.5 percent) of the 98
cases, while making determinations on the remaining 26 cases. These determinations were similar to the ones made for TY 1997.
We further recommended in the memorandum that the IRS, in conjunction with the SSA, develop a program for assessing penalties, when justified, against the most egregious non-compliant employers for TYs after 1998. The Commissioner, SB/SE Division responded by stating that the IRS will meet with the SSA to jointly develop a program, and a meeting was held in February 2002. The IRS’ management advised us that they will continue to meet and work with SSA to develop a long-range plan to address the issues that have been identified. Areas that will be addressed include methods to ensure that employers have accurate SSNs and revisiting the criteria used by each agency to initiate contact with non-compliant employers.
The IRS’ response also stated that action would be taken when the facts and circumstances show that the employer knowingly and willfully failed to comply with the requirements of I.R.C. § 6721. These actions may include correspondence with the employer, a telephone call or visit by an IRS representative, a proposed penalty assessment, and/or an examination.
We agree that the IRS should have at its disposal various tools to encourage compliance with the tax law. However, we do not agree with the standard that the IRS plans to use for taking action. I.R.C. § 6721 does not provide that an employer must “knowingly and willfully” violate the law for the penalty to be imposed. Rather, the law provides that an employer that files an incorrect information return “shall pay a penalty.”
Moreover during the review, we discussed with a
representative of the Director, Office of Interest and Penalty Administration,
SB/SE Division, the need to initiate a regularly scheduled penalty program that
would include all non-compliant employers.
The Commissioner, SB/SE Division stated in the response to the memorandum that the IRS developed a process to incorporate missing and incorrect Forms W-2 into its “Missing and Incorrect [computer] program.” Implementation is scheduled for Calendar Year 2004. Separately, the IRS advised us that this action would be the basis for a regularly scheduled compliance program, and that the 2002 tax year will be the first included in this program.
Why these problems occurred, and how they impact
employers and the SSA
There were a number of causes for the IRS not having programs to penalize employers filing Forms W-2 with incorrect name/SSN combinations. IRS management advised us that the IRS did not develop a regularly scheduled program due to concerns about the level of resources needed to administer the program and the complexity of administration, weighed against the benefit a program would have on tax administration.
The IRS did not propose penalties in response to the SSA’s request for several reasons. Upon receiving the request, the IRS advised the SSA that it was reluctant to consider penalties until the SSA provided “specific and detailed information” on the depth of educational assistance given to the non-compliant employers. Subsequently, when the IRS initiated action on the request, the process was handled “informally,” and the IRS did not establish internal controls over the request process. In addition, the Commissioner, SB/SE Division stated, in his response to our memorandum, that the penalties were not proposed due to the IRS’ ongoing reorganization and lack of program resources.
By not assessing penalties, the IRS lost an opportunity to assist the SSA in its efforts to improve the accuracy of name/SSN combinations. Moreover, the IRS did not follow the I.R.C. or its penalty policy, or meet its Strategic Goal to apply laws fairly and uniformly. Specifically, the IRS:
· Did not impose penalties in a regularly scheduled penalty program from approximately 1998 to date.
· May have adversely affected its own operations. The IRS uses SSNs provided by the SSA to ensure that information submitted by taxpayers is properly processed to the IRS’ Master File. The IRS relies on the accuracy of Forms W-2 in programs to verify filing and reporting compliance with tax laws. The primary use is the Automated Underreporter Program.
· Treated employers differently. The IRS treated non-compliant employers the same as compliant employers by not providing a consequence for non-compliance. In addition, the IRS allowed non-compliant employers who file Forms W-2 to avoid the same type of penalty proposed against employers filing inaccurate Forms 1099. For example, the IRS might hypothetically propose a $130,000 information return penalty against an employer for filing Forms 1099 with incorrect name/ SSN combinations, while allowing a different employer to file Forms W-2 with the same problems and avoid a penalty.
In conclusion, the Joint Committee on Taxation (JCT) wrote that, “in the absence of penalties, the laws would, at best, represent a suggested code of behavior. Anyone who disagreed with such code would be able to violate it without consequence.” The JCT also noted that most economic research has found that taxpayer compliance rises with the probability of enforcement, such as assessing penalties.
The SSA’s discussions with the employer community underscored the validity of the JCT’s statement. The discussions showed that there is no real incentive for the employers to improve the accuracy of the name/SSN reporting since there are no consequences that result from submitting inaccurate data.
The SSA relies on the IRS to provide consequences as an incentive to improve compliance. To this end, the IRS needs to penalize, when justified, employers that file Forms W-2 with inaccurate name/SSN combinations.
In conjunction with the IRS’ response to the memorandum dated February 1, 2002:
1. The Director, Office of Interest and Penalty Administration, SB/SE Division, should ensure that the IRS initiate, as proposed in their response to our memorandum, a regularly scheduled program for proposing penalties for Forms W-2 with inaccurate name/SSN combinations.
Management’s Response: The IRS is developing a program to incorporate missing and incorrect Forms W-2 into the Missing and Incorrect Taxpayer Identification Number Program and ensure Form W-2 compliance is integrated into the SB/SE Division’s program.
In conjunction with the recommendations addressed in the response to the memorandum:
2. The Commissioner, SB/SE Division, should prepare a document describing the objective of the joint IRS/SSA program for the most egregious non-compliant employers, as well as the tasks, responsibilities, and agreements that are needed between the two agencies to meet the objective.
Management’s Response: The SB/SE Division met with the SSA in February 2002 to jointly develop a program. The IRS will continue to meet and work with the SSA to develop a long-range objective. Also, the IRS will update an existing Memorandum of Understanding with the SSA to address the Form W-2 process and exchange of information requirements
3. The Director, Office of Interest and Penalty Administration, SB/SE Division, should ensure that the IRS propose, when justified, penalties against the most egregious non-compliant employers following the provisions of I.R.C. § 6721.
Management’s Response: The IRS is updating Internal Revenue Manual 20.1, Chapter 7, Information Reporting Program. Additionally, the IRS will develop guidelines and procedures for working the most egregious non-compliant employers.
4. The Director, Office of Interest and Penalty Administration, SB/SE Division should develop a methodology for monitoring and analyzing the results of the regularly scheduled program and the joint IRS/SSA program for the most egregious non-compliant employers. The data available for monitoring should include the number and amount of penalties proposed, assessed, waived (and the reason for waiver), and collected. The data should also include the number of corrected Forms W-2 received in response to penalty actions.
Management’s
Response:
The IRS developed a database of penalty information. This monitoring system will allow the IRS to
analyze information relating to the imposition of penalties on non-compliant
taxpayers. This system will also allow
the IRS to analyze all Form W-2 and TIN penalties.
Not connected with a specific
recommendation, but in response to our outcome measure, the IRS did not agree
that our recommendations would provide the reported measurable benefits on tax
administration. The IRS cited tax laws
that provide for the IRS waiving a penalty for reasonable cause, including when
errors relate to actions by the payee.
We estimated that if the IRS proposed penalties for TYs 1999 through
2001 against the same non-compliant employers identified for TYs 1997 and 1998,
penalties of $39 million would be proposed for up to 98 employers. (Appendix IV of this report provides a
detailed description of these benefits.)
Office of Audit Comment: Subsequent to the
conclusion of our review, the IRS provided assessment, waiver, and collection
data for the TIN Penalty mail out for 1998.
This penalty is similar to the penalty discussed in this report. The IRS waived 45.8 percent of the dollar
amount, but collected 16.7 percent of the assessed penalties. It should be noted that the estimate in our
report is based on only 98 of the most egregious employers provided by the SSA
– not the full universe of non-compliant employers. The number of egregious employers identified in the new program
may be higher than those identified during our review, and therefore, the
estimated amount of penalties may actually be higher than what we cited. Further, as we noted in our report,
of all non-compliant employers for TYs 1997 and 1998, the SSA considered these
employers as the most egregious, filing over 867,000 incorrect Forms W-2. While the volume of Forms W-2 involved is not the only
non-compliance indicator, it does suggest the potential that at least some name/SSN mismatches
are not "errors related to actions by the payee."
Appendix I
The overall objective of this
review was to determine whether the Internal Revenue Service (IRS) addressed
the Social Security Administration’s (SSA) concerns about the accuracy of
Social Security numbers (SSN) provided by employers on Wage and Tax Statements
(Form W-2). To accomplish our overall objective, we:
I. Determined whether the IRS considered proposing an information return penalty against the 93 employers for Tax Year (TY) 1997 and the 98 employers for TY 1998 that were identified by the SSA as the most egregious non-compliant employers for those years.
A.
Determined whether the IRS had an action plan for controlling the request
from the SSA.
B.
Evaluated the IRS’
actions to make penalty determinations and assess penalties.
1.
Interviewed
managers and key personnel from the Office of the Director, Compliance Policy,
Small Business/Self-Employed (SB/SE) Division and the Office of the Director,
Compliance, Large and Mid-Sized Business Division.
2.
Evaluated
correspondence between the IRS and the SSA.
3.
Determined the number
of employers against whom the IRS should have proposed penalties and estimated
the amount of the penalties by:
a)
Analyzing tax
information in the IRS’ Master File.
b)
Applying the Internal Revenue Code (I.R.C.) and the
Code of Federal Regulations (CFR) rules for computing the penalty.
4.
Reviewed reports
issued by the Office of the Inspector General, SSA.
5. Interviewed the SSA’s Senior Financial Executive.
II. Determined whether the IRS had a regularly scheduled program for assessing the information return penalty against employers filing Forms W-2 with incorrect name/SSN combinations.
A. Interviewed managers and key personnel from the Office of the Director, Compliance Policy, SB/SE Division, and the Office of Modernization, Information Technology & Security Services.
B. Evaluated penalty processing procedures included in the Internal Revenue Manual.
C. Evaluated computer Programming Requirement Packages related to the IRS information penalty program.
D. Evaluated a Request for Information Services for the IRS information return penalty program.
E. Reviewed statistics included in the Enforcement Revenue Information System, Penalty Report-National for Fiscal Year 2001.
Appendix II
Major
Contributors to This Report
Gordon C. Milbourn III, Assistant Inspector General for
Audit (Small Business and Corporate Programs)
Philip Shropshire, Director
Edmond G. Watt, Audit Manager
Robert L. Weiss, Senior Auditor
Michael
Della Ripa, Auditor
Appendix III
Commissioner N:C
Commissioner, Large and Mid-Size Business Division LM
Deputy
Commissioner, Small Business/Self-Employed Division S:DC
Director, Compliance Policy, Small Business/Self-Employed Division S:C
Director, Taxpayer Education and Communication, Small Business/Self-Employed Division S:T
Chief Counsel CC
National Taxpayer Advocate TA
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk
Analysis N:ADC:R:O
Office of Management Controls N:CFO:F:M
Audit Liaisons:
Commissioner, Small Business/Self-Employed
Division S
Commissioner, Large and Mid-Size Business Division LM
Director, Compliance Policy, Small
Business/Self-Employed Division S:C
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Increased Revenue – Potential; $39 million (see page 2).
Methodology Used to Measure the Reported Benefit:
We determined the number of employers that submitted to the Social Security Administration (SSA) incorrect Wage and Tax Statements (Forms W-2), and whom the SSA identified to the Internal Revenue Service (IRS) in August 2000. The SSA identified 93 employers for Tax Year (TY) 1997 and 98 employers for TY 1998.
We computed for each employer an initial estimate of the information return penalty by multiplying the number of incorrect Forms W-2 by the penalty amount of $50 per form. We determined the amount of any information return penalty that the IRS previously proposed and adjusted the initial estimate by this amount. The result was the maximum amount of additional penalty that could be proposed, unless this amount was greater than the maximum allowed by law.
To determine whether an employer qualified for a maximum penalty of $100,000, we computed the average amount of gross receipts for the 3 TYs, as provided by I.R.C. § 6721. For TY 1997 returns, we used TYs 1995 to 1997. For TY 1998 returns, we used TYs 1996 to 1998. The maximum penalties are:
· $100,000 for employers having an average amount of receipts equal to or less than $5 million.
· $250,000 for employers having an average amount of receipts of greater than $5 million.
· $100,000 for employers for whom the average amount of gross receipts could not be computed. We used this amount to ensure that our estimate was conservative.
We computed the value of the outcome measure by adding the potential penalties for TY 1997 and TY 1998 ($12.3 million + $13.7 million = $26.0 million). Then, we divided the sum by 2 to obtain the average penalty for the 2 TYs ($26.0 million / 2 = $13.0 million). Finally, we multiplied the average by 3, to obtain the estimate of penalties for a 3-year period ($13.0 million x 3 = $39.0 million). The 3-year period represents TYs 1999, 2000, and 2001, for which the IRS and the SSA are developing a program to identify and potentially penalize the most egregious non-compliant employers. The estimate assumes that the same employers that were identified for TY 1997 and 1998 would be identified for TYs 1999 through 2001.
Appendix V
Statutes
Referred to in this Report
I.R.C.
§ 6721
This Internal Revenue Code (I.R.C.) section provides that a person is subject to a penalty when that person fails to file an information return on or before the required filing date, and fails to include all of the information required to be shown on the return or the inclusion of incorrect information. The penalty is up to $50 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $250,000. The failures subject to penalty include any failure to file an information return with the Secretary on or before the required filing date, and any failure to include all of the information required to be shown on the return or the inclusion of incorrect information.
The I.R.C. also provides lower limitations for persons with gross receipts of not more than $5 million. If any person meets the gross receipts test with respect to any calendar year, with respect to failures during such taxable year, the limit will be $100,000 rather than $250,000. The gross receipts test is met when, for any calendar year, the average annual gross receipts of such person for the most recent 3 taxable years ending before such calendar year do not exceed $5 million. I.R.C. § 448 provides additional clarification. The gross receipts for any taxable year shall be reduced by returns and allowances made during such year. Income tax returns, such as the U.S. Corporation Income Tax Return (Form 1120), show the amount as “net receipts.” In addition, any references to an entity shall include a reference to any predecessor of such entity.
CFR 301.6721
This
Code of Federal Regulations (CFR) section provides that no more than one
penalty will be imposed with respect to a single information return even though
there may be more than one failure with respect to such return. It also states that errors or omissions that
are never inconsequential include a taxpayer identification number, a surname
of the person required to be furnished a copy of the information set forth on
an information return, and any monetary amounts. In addition, the CFR includes as examples of “information returns” Form 1099-MISC, Form
W-2, and Form 1099-INT.
I.R.C. § 6501
This
I.R.C. section provides that the amount of any tax imposed shall be assessed
within 3 years after the return was filed (whether or not such return was filed
on or after the date prescribed), and no proceeding in court without assessment
for the collection of such tax shall be begun after the expiration of such period.
I.R.C. § 6724
The I.R.C. section provides that no penalty shall be imposed under this part with respect to any failure if it is shown that such failure is due to reasonable cause and not to willful neglect. The CFR 301.6724 provides that reasonable cause occurs if the filer establishes that either (1) there are significant mitigating factors with respect to the failure or (2) the failure arose from events beyond the filer's control. Also, filers must establish that they acted in a responsible manner both before and after the failure occurred.
Appendix VI
Memorandum: The Statute of Limitations for Assessing
Penalties Against Employers Providing Incorrect Annual Wage Report Information
to the Social Security Administration for Tax Year 1998 Will Expire on March 1,
2002
The Memorandum
was removed due to its size. To see the
Memorandum, please go to the Adobe PDF version of the report on the TIGTA
Public Web Page.
Appendix VII
Management’s Response to Memorandum was removed due to its size. To see the Response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
Management’s Response to the Draft
Report
Management’s Response to the Draft Report was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.