Causes of the Problem and Attempts at Resolution Even though the combined annual wage reporting system requires employers to report separately to IRS and SSA, SSA has evidence to show that some employers are still reporting to just one agency—IRS. Even though IRS's procedures require forwarding data to SSA that should have been sent to SSA, not all such data are included in SSA's records. SSA's first study showed that for employers who said that the data were sent to IRS, only 40 percent of the data were recorded by SSA. SSA could not determine whether the original earnings reports were received from IRS or, if received, what happened to them. In April 1986, we visited IRS's Philadelphia Service Center, 1 of IRS's 10 service centers where individuals and employers send their tax returns, to determine if employers were erroneously sending 1985 earnings reports to IRS instead of SSA. We found that 16,256 employers had erroneously sent this service center 16,825 earnings reports, totalling more than $800 million. Although the data sent were mostly for 1985, we noted from IRS records that earnings reports for prior years, ranging from 1979 to 1984, were also erroneously sent to IRS. We compared employers who erroneously sent SSA data to IRS with the IRS-SSA listing for 1978-83 missing and discrepant reports. We found that 4,934 (30 percent) of these employers' reports had been missing or discrepant in prior years. Further, 2,146 (about 13 percent) of these employers had more than 1 year of missing or discrepant earnings reports. SSA officials said that because the system requires more tracking and accounting, the possibility for error increases. Employers prepare and submit five separate reports (the four quarterly reports to IRS and the more detailed annual report to SSA) at different times. This increases the number of places an error can be introduced into the system. Further, the fact that the maximum earnings amount subject to Social Security taxation increases each year also introduces another possibility for error (if an employer does not recognize a change to the higher maximum amount). In addition, an employer can change EINS during the year because of a merger or consolidation. The employer could have reported to IRS some quarterly earnings under an EIN and the remaining quarterly earnings under a different EIN, but reported employees' total earnings to SSA under only one of the two EINS. Although the agencies are aware that these reporting problems occur, the agencies have not evaluated how tracking such EIN changes could reduce the reconciliation workload. Causes of the Problem and Attempts In its first study of employers' earnings reports, in which SSA attempted to contact 1,424 employers about missing or discrepant 1980 or 1981 or both earnings, SSA recognized that certain questions needed further investigation including why some W-2s apparently sent to SSA were not credited; why some earnings reports originally listed as missing or discrepant were located at SSA (SSA said some were due to subsequent processing of IRS corrections, delinquent reports, SSA errors, and different EINS, but others were unexplainable); and why EIN changes reported to IRS are not reflected in SSA's records (making it difficult for SSA to determine whether it has processed a specific employer's earnings report). In its second study of employers' earnings reports, SSA attempted to contact 7,984 employers about missing or discrepant 1983 earnings; SSA also attempted to address the cause of the earnings reporting and recording problems. A summary of the causes for the 4,432 employers who responded is shown in table 4.1. Data gathered by SSA for employers do not distinguish or specify the type of error that constitutes the category shown. Causes of the Problem and Attempts The data in table 4.1 show that 60 percent of the causes of missing and discrepant earnings reports were not attributable to a specific reason. During its study of missing and discrepant earnings reports, SSA gathered cost data to measure the effectiveness of resolving employers' earnings reports by mail. SSA found "The total direct cost for the study (not including cost of material and mailing) was $119,943, for an average cost of $27 per employer who responded to our request for information. We were able to resolve about $2,600 for each dollar of direct cost of the study, and will be able to post about $1,000 in additional wages for each dollar of direct cost incurred. This also means a proper credit of $134 in [Social Security] taxes (1983 rates) to the trust funds for each dollar of direct cost." Internal Controls Over In 1982, the HHS Office of Inspector General identified internal control weaknesses in SSA's earnings data processing. These weaknesses have not been corrected, and SSA'S 1984, 1985, and 1986 internal control assessments' stated that controls over the system that maintains earnings records appear inadequate to ensure that individuals' earnings are completely accurate. SSA had planned to redesign its earnings system to correct system weaknesses. The planned redesign, however, was canceled in December 1985 because SSA decided that higher-than-anticipated costs and improvements already made rendered the proposed change no longer cost-effective. SSA has made improvements to the system and, at present, is planning The Federal Managers' Financial Integrity Act of 1982 (Public Law 97-255) requires annual agency assessments and reports on internal control systems. SSA's assessments, however, did not discuss the lack of reconciliation of IRS and SSA data on employer reported earnings information. This important control mechanism has been missing from SSA's earnings record system operation since 1978. It is the type of control weakness that should be identified and reported in SSA's annual internal control assessments. Causes of the Problem and Attempts SSA and IRS Have Not affected employers. This change, scheduled for implementation in October 1987, would not reduce the need for reconciliation, but would give SSA early indications of potentially missing reports and allow earlier employer contact and resolution of earnings reporting problems. However, the change would not address the causes of the discrepant reports currently identified by IRS. Although SSA and IRS have separate missions, they share the use of some vital earnings and tax information basic to their distinct missions. SSA is concerned about the proper crediting of earnings to individuals' accounts, and IRS is concerned about the proper payment of taxes on reported earnings. Employers report earnings and tax information to these agencies at different times for different purposes. SSA and IRS rely on each other to share data that were reported to each agency. Both agencies explicitly recognize their dependence on each other by enumerating, in an interagency agreement, the services that each will contribute to help the other. Although IRS initially agreed to accept responsibility for the reconciliation of employers' earnings reports, it has not completed reconciliation for any year since 1978. As a result, some employees' earnings data associated with these employers' reports and which SSA needs to determine benefits are inaccurate or incomplete. The IRS-SSA interagency agreement implementing annual wage reporting was authorized by Public Law 94-202. The major responsibilities assigned to each agency included the following: SSA would receive from each employer all employees' wage statements IRS would identify differences between the total wages each employer IRS says that it reconciles as many reports as it can in each year before moving on to the following year's work. Considering its limited Causes of the Problem and Attempts at Resolution resources, IRS emphasized reconciling those reports that had potential tax liability, an emphasis consistent with IRS's mission of assessing and collecting taxes due. Because the reconciliation workload was much larger than expected, IRS notified SSA, in July 1980, that it would not completely reconcile the 1978 workload and subsequently proposed a modification to the interagency agreement. This modification limited IRS's reconciliation effort, saying that its workload would be "Subject to normal budgetary constraints and resource restrictions imposed. . . ." In addition, this modification provided that IRS would give SSA tapes of unreconciled reports as of December 31 of the second year following the tax year in which wage documents were processed. SSA agreed to the modification in April 1981, but it did not agree to reconcile IRS's unreconciled reports. However, SSA's agreeing to accept the tapes indicates that SSA had reason to know IRS would not complete the reconciliation each year. Although IRS notified SSA that a sizable portion of the reports would not be reconciled, SSA-continuing to maintain that IRS should resolve the unreconciled workload-stored the tapes IRS Sent each year. For years SSA continued to maintain that the reconciliation was IRS's responsibility, and did little more than study the problem. IRS did not believe 100-percent reconciliation was required by law or by agreement. SSA believed that IRS Should do a complete reconciliation because it was vital to SSA's mission. SSA reasoned that since it performed complete services for IRS, such as recording and providing W-2P (Statement for Recipients of Annuities, Pensions, Retired Pay, or IRA Payments) data that were primarily for tax purposes with little or indirect benefit to SSA, IRS should do a complete reconciliation of the data SSA needed. However, SSA seemed to disregard IRS's contention that it would not be able to help SSA further, even after IRS began sending SSA the computer tapes of the unfinished reconciliation workload. Although IRS planned to reconcile 100 percent of the 1978 reports, SSA records show nearly 580,000 missing or discrepant reports and a difference of $3.8 billion in recorded earnings for that year. IRS's planned reconciliation efforts for tax years 1979-83 ranged from 20 to 50 percent of reports needing to be resolved. Another important aspect of the reconciliation issue is that IRS has legal enforcement authority concerning the submission of employers' earnings reports. Under its legal authority, IRS can impose penalties on nonreporters and late reporters. As a result, SSA was concerned about corresponding with employers and requesting earnings information since it had no enforcement authority. Without enforcement authority, SSA relies on voluntary employer reporting and cannot invoke any penalty for delinquent reporting. SSA officials told us that because (1) the agreement |