When employees are hired, they must complete an IRS Form W-4 (Employee’s Withholding Allowance Certificate) so that the employer can withhold the correct federal income tax from their pay. Shortly after the end of each calendar year, every employer who pays employees remuneration for services must furnish a wage statement to each employee and submit this information to SSA. Wage statements include the employee’s name, SSN, and the amount of wages earned, among other things and generally, employers use the employee names and SSNs on the Forms W-4 to prepare them. Wage statements are the critical documents used by SSA for assigning social security benefits. When an employer submits a wage statement to SSA, SSA posts the employee’s earnings to the employee’s earnings record, which is then used to determine an individual’s eligibility for, and amount of, retirement, disability, or survivor benefits administered by the agency. When the wage statement contains a name/SSN combination that does not match SSA’s records, SSA conducts a series of procedures to try and match them to its records. If these procedures do not result in a match, then SSA is unable to post the employee’s earnings to the employee’s earnings record and instead, the wage statement and the associated wages are placed in the Earnings Suspense File (ESF). The ESF represents the cumulative amount of wage statements for 1937 through 2003 for which SSA does not have a matching name/SSN. Through tax year 2001, which is the most recent year for which complete data are available, the ESF included over 244 million records involving wages of over $421 billion. Since 1990, this file has been increasing by an average of 5 million records and at least $17 billion annually. 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. 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. OBRA of 1989 increased the penalty amounts to $15 to $50 for each non- filed, 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 corrections are made. 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. 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. 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. 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. 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 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 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. 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. 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. The IRS regulations that implement the penalty provisions require employers to solicit SSNs from their employees but they are not required to verify them. 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. IRS received public comments on the draft regulations and issued final regulations in April of 1991.