When they audited the IRS

Terry Jeffrey
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Posted: Mar 23, 2005 12:00 AM

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.

 Why would IRS -- not deemed a softhearted bureaucracy -- show so much restraint in this area?

 First, Congress put a loophole in the law that the IRS drove a truck through. The law says employers showing "reasonable cause" for filing an inaccurate W-2 need not be fined. "However," reported GAO, "the criteria for meeting the reasonable cause waiver included in the (IRS's) regulations are easy to meet, making penalization of employers very unlikely." All employers must do is ask an employee for an SSN (typically inscribed on his W-4), use that SSN on the employee's W-2, and if the IRS notifies the employer the SSN is incorrect, ask the employee for another SSN -- then repeat the process.

 It's an honor system.

 Even though SSA runs a service to verify SSNs for employers, no employer is required to use it -- even employers who have a record of submitting multitudinous inaccurate W-2s.

 Here's the punchline: "Since significant numbers of individuals with inaccurate SSNs on Forms W-4 may be illegal aliens," reports GAO, "some employers have raised concerns about whether being required to verify employees' SSN would trigger obligations to other federal agencies, such as (the Department of Homeland Security)."

 "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," said GAO, "and in turn, on federal programs which specifically deal with federal immigration policy."

 In another report this month, GAO said: "In discussing this issue, IRS officials expressed concern that requiring the verification of names and SSNs may cause some employers to cease withholding taxes and reporting income from unauthorized workers, rather than risk losing such workers."

 The report for Hostettler cited congressional testimony from the IRS commissioner that "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 the IRS sees as part of its basic mission: to assure that all appropriate taxpayers are part of the system."

 The message from Uncle Sam seems clear: If you want to get away with filing inaccurate documents with the IRS, first hire illegal aliens.