a

GAO

United States Government Accountability Office

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

GAO-04-712
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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 

August 2004

TAX ADMINISTRATION

IRS Needs to Consider Options for 

Revising Regulations to Increase the 

Accuracy of Social Security Numbers on 

Wage Statements 

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: 

• the statutory provisions 

authorizing IRS to penalize 

employers who file wage 

statements with inaccurate 

SSNs; 

• IRS’s program to penalize such 

employers; and 

• 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. 

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. 
Page i GAO-04-712 Tax Administration

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 8

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Page 1 GAO-04-712 Tax Administration

United States Government Accountability Office

Washington, D.C. 20548

A

August 31, 2004 Letr

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: 

• the statutory provisions authorizing IRS to penalize employers who file 

wage statements with inaccurate SSNs;

• IRS’s current program for identifying and penalizing employers who file 

wage statements with inaccurate SSNs;

• 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
Page 2 GAO-04-712 Tax Administration

• 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. 
Page 3 GAO-04-712 Tax Administration

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.
Page 4 GAO-04-712 Tax Administration

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.
Page 5 GAO-04-712 Tax Administration

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-à-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 
Page 6 GAO-04-712 Tax Administration

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).
Page 7 GAO-04-712 Tax Administration

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.
Page 8 GAO-04-712 Tax Administration

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

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.

Reason for penalty

Penalty per 

failure

Small 

business

Large 

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
Page 9 GAO-04-712 Tax Administration

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 2002-30-

156 (September 2002).
Page 10 GAO-04-712 Tax Administration

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.
Page 11 GAO-04-712 Tax Administration

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.
Page 12 GAO-04-712 Tax Administration

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 
Page 13 GAO-04-712 Tax Administration

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 

Disregard

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

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.
Page 14 GAO-04-712 Tax Administration

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).
Page 15 GAO-04-712 Tax Administration

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. 
Page 16 GAO-04-712 Tax Administration

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.
Page 17 GAO-04-712 Tax Administration

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 
Page 18 GAO-04-712 Tax Administration

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.
Page 19 GAO-04-712 Tax Administration

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.
Page 20 GAO-04-712 Tax Administration

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.
Page 21 GAO-04-712 Tax Administration

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 
Page 22 GAO-04-712 Tax Administration

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.
Page 23 GAO-04-712 Tax Administration

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 kachurab@gao.gov or me at (202) 512-9110 or 

brostekm@gao.gov. Key contributors to this report were Shirley Jones, 

Jean McSween, Jay Pelkofer, and Shellee Soliday. 

Michael Brostek

Director, Tax Issues
Page 24 GAO-04-712 Tax Administration

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

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

Page 25 GAO-04-712 Tax Administration

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.

3

Internal Revenue Service Large and Mid-Size Business Division: The Form W-2 SSN/Name 

Mismatch Project (April 28, 2003).
Page 26 GAO-04-712 Tax Administration

Appendix II

Comments from the Internal Revenue Service ApendxiI
Appendix II

Comments from the Internal Revenue Service

Page 27 GAO-04-712 Tax Administration
Page 28 GAO-04-712 Tax Administration

Appendix III

Comments from the Social Security 

Administration ApendxiI
Appendix III

Comments from the Social Security 

Administration

(450272) Page 29 GAO-04-712 Tax Administration
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