The Internal Revenue Service needs to have better processes in place to administer its federal unemployment tax program, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, evaluated whether the IRS’s Certification Program for the Federal Unemployment Tax Act, or FUTA, ensures the accuracy of FUTA credit claims.

FUTA requires federal and state governments to work together to establish and administer unemployment insurance programs to provide benefits to unemployed workers. The IRS is responsible for collecting the FUTA tax, which is a federal employer tax on wages paid to employees to fund State workforce agencies.

The FUTA tax accumulates as an unemployment trust fund from which funds are dispensed to state agencies. Employers who pay both the FUTA tax and state unemployment tax are allowed a credit of the FUTA tax.

TIGTA found, however, that the IRS’s validation of the state FUTA certification data files does not ensure the reliability of the data before its use in identifying discrepancy cases. TIGTA’s review of the data submitted by state agencies found that 94 percent of them submitted data that contained formatting errors in key data fields used to identify FUTA discrepancy cases. For one state, the errors caused the state’s certification data to be excluded from the FUTA certification program.

In addition, TIGTA found the IRS does not have a process to ensure that state certification data are complete. TIGTA’s comparison of the 5,064,269 single-state employers identified 3,452 employers for which no information was reported back from the state. As a result, these employers were excluded from the IRS’s FUTA Certification discrepancy analysis. TIGTA also identified that the IRS’s processes do not accurately identify multi-State employer discrepancy cases. Using the approach that the IRS should implement, TIGTA’s analysis identified 3,729 multi-state employers with potential discrepancies totaling more than $200 million.

TIGTA also found the IRS incorrectly assessed 12,171 employers more FUTA tax than the employer owed, totaling nearly $3.2 million, due to a programming error and using an incorrect FUTA tax rate to compute the amount of tax owed.

“The IRS must ensure that the data files that it receives from the State Agencies are complete and reliable prior to using this data to verify employers’ FUTA tax credit claims,” said TIGTA Deputy Inspector General for Audit Mike McKenney in a statement. “TIGTA’s review identified that IRS processes do not adequately do this.”

TIGTA recommended that the commissioner of the IRS’s Small Business/Self-Employed Division develop a process to identify errors in state FUTA certification data files, and work with state agencies to ensure that all records are returned; revise its process to accurately identify multi-state employer discrepancy cases. The IRS should also correct tax assessments made on the 12,171 employers as a result of programming errors, according to the report, and ensure that programming is updated to accurately calculate tax adjustments. 

The IRS agreed with all but one recommendation, citing the need for additional time to assess the results from a pilot study before taking appropriate action.

“It must be noted that the FUTA certification program is a shared responsibility, and we depend on the states to properly discharge their duties to provide accurate, complete and timely state employer certification information,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division.

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