The Internal Revenue Service does not always penalize employers who fail to respond to requests to resolve discrepancies in the wage information reported to the federal government, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that each year, the Social Security Administration matches the wage and withholding information sent by employers to the SSA against the tax returns filed by those employers with the IRS in order to identify discrepancies between the information submitted to both agencies. During the process, known as Annual Wage Reporting, the SSA’s main goal is to identify any discrepancies in which the earnings and tax withholdings that employers reported to the IRS on their tax returns differ from the amounts that employers submitted to the SSA on Forms W-2, Wage and Tax Statement.

The SSA refers any unresolved discrepancy cases to the IRS because the IRS has the authority to penalize an employer, if the employer fails to file complete and accurate Forms W-2 and W-3, Transmittal of Wage and Tax Statements.

TIGTA evaluated the IRS’s processes and procedures for working on SSA Combined Annual Wage Reporting discrepancy cases, and found the IRS did not always assess penalties against employers who did not reply to the IRS’s requests to resolve such discrepancies, as required by law.

TIGTA’s analysis of discrepancy cases for tax year 2011 found the IRS did not correctly assess more than $200 million in penalties on 32 cases. A comparison of the wages and withholding reported by the 32 employers on their tax returns against the Forms W-2 they submitted to the SSA identified underreported Form W-2 wages totaling more than $2 billion. The IRS has not established a process to identify these cases and, as a result, the penalties were not assessed as required.

In addition, TIGTA’s analysis of discrepancy cases found the IRS excluded 22,814 of the 134,937 cases referred from the SSA. Of the 22,814 cases, 608 were excluded because of computer programming errors. As a result, the IRS did not assess more than $22 million in penalties. A comparison of wages and withholding reported by these 608 employers identified underreported Forms W-2 wages totaling more than $225 million. As part of a settlement agreement from a lawsuit to force prompt resolution of the backlog of unreconciled cases, the IRS is required to work on all the cases referred to it by the SSA. IRS management indicated that the 608 cases were erroneously excluded because of computer programming errors.

“It is important that the IRS hold employers accountable for filing complete and accurate wage information,” said TIGTA Inspector General J. Russell George in a statement. “Discrepancies in the wages credited to an individual’s Social Security account may affect the amount of Social Security benefits available to the employee upon retirement.”

TIGTA recommended the IRS develop a process to identify and ensure the penalties are assessed as required on those employers who do not reply to the IRS’s requests for missing Forms W-2, and correct any computer programming errors to ensure cases are accurately reflected as needing to be worked on and the penalties assessed when appropriate. The IRS agreed with TIGTA’s recommendations and plans to take action.

“We agreed that we should identify and ensure penalties are assessed, as required, on those employers that do not reply to the IRS’s requests for missing Forms W-2,” wrote Karen Schiller, commissioner of the IRS’s Small Business-Self-Employed Division, in a statement. “Our ‘no-reply process’ systematically assesses penalties on accounts when a response to the notice of proposed penalties is not received timely. As we are reviewing the computer programming to ensure proper exclusion criteria are being used, we will also review the programming to ensure penalties are assessed when appropriate.”

However, she disagreed with TIGTA’s estimate of the total amount of overlooked penalties, pointing out that while TIGTA assumed that all non-abated penalty cases would receive the higher 10 percent penalty for intentional disregard, some cases would probably qualify for the lower $100 penalty for a non-intentional late-filed return.

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