A funny thing happened when the Treasury Department audited the Internal Revenue Service. It discovered that the IRS was not treating all employers equally.
"Moreover," the auditors said, "the IRS did not follow the I.R.C. (the Internal Revenue Code) or its penalty policy, or meet its Strategic Goal to apply laws fairly and uniformly."
In 2002, the Treasury Inspector General for Tax Administration (TIGTA) investigated whether IRS was using a 1989 law that authorized it to penalize companies up to $50 for each "information return" they filed that included "incorrect information." This law applies both to W-2 forms, which companies use to report wages and tax withholdings of employees, and 1099 forms, which companies use to report payments to non-employees from which taxes are not withheld.
The auditors discovered the IRS uses a double standard.
"Specifically," they concluded in their September 2002 report, "the IRS ... treated employers differently. ... 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."
TIGTA said the Social Security Administration (SSA) had named for the IRS 93 employers who were the "most egregious" filers of inaccurate W-2s in 1997 and '98 who were "most egregious" in 1998. In just two years, these companies collectively filed 867,000 inaccurate W-2s. "The SSA provided the information on the employers so the IRS could determine whether penalties should be assessed."
TIGTA estimated these companies potentially could be subjected to between $18 million and $31.4 million in aggregate penalties.
As it turned out, IRS did make "penalty determinations" on 30 of the companies for 1997 and 27 for 1998 -- but not for inaccurate W-2s. According to a memo appended to the report, the penalty determinations for the 27 companies in 1998 "did not address inaccurate SSN/name combinations for Forms W-2. Rather, these determinations were most often for information return penalties for several types of Forms 1099 ..." Similarly, the 30 companies penalized for 1997 were not penalized for inaccurate W-2s.
In October 2004, responding to a request from House Immigration Subcommittee Chairman John Hostettler, the Government Accountabilty Office (GAO) released a report on the same issue. "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," said the GAO. Even employers filing thousands of inaccurate W-2s were not penalized.