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Comments From the Department of Health

and Human Services

COMMENTS OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES
ON THE GENERAL ACCOUNTING OFFICE DRAFT REPORT, "MORE MUST
BE DONE TO CREDIT EARNINGS TO WORKERS' ACCOUNTS'

General Comments

The Social Security Administration (SSA) is acutely concerned about the growing number of unreconciled wage reports and the effects of these unreconciled wage data on individual earnings records and the trust funds. We concur with the thrust of the report that more must be done to resolve the annual wage reporting (AWR) problem. SSA has already initiated efforts to explore the causes of the problems in the reconciliation process and to negotiate needed changes with the Internal Revenue Service (IRS). Also, the Commissioner has directed the new Chief Financial Officer to be the focal point for the Agency's efforts to address these issues. His work has already begun. SSA will look into all issues raised in this report, develop a plan of action and report back to the General Accounting Office (GAO). We anticipate a 3-month time frame to complete our analysis, identify the necessary corrective action, and negotiate agreement with IRS. We are confident that these problems can be resolved. However, it is important to realize that the remedy does not rest with SSA alone. Responsibility for establishing an effective process for the reporting and recording of accurate wage data is shared statutorily with IRS, and both agencies benefit from the process. We believe that this GAO report will serve as a positive stimulus towards interagency cooperation and resolution of these problems.

Effectiveness of AWR as an Internal Control

GAO describes the current AWR system as a "...formidable challenge that will always result in a considerable workload of differences" and asserts that the dual reporting process is useful as an internal control to assure accurate wage reporting. We do not believe that the process should be viewed in that context. We are not aware of any internal control or accuracy issues that caused the need for the split in responsibility in 1978. In the instant case, we do not believe that the split responsibility adds to the accuracy of the data or facilitates the effectiveness, or potential effectiveness, of the process. In this case, due to the split in responsibility for the process, the matching of SSA and IRS data is not done as an internal control but rather as a means of making sense of different numbers over different times. Any internal control benefits are surely secondary and are not, and were not, the reasons behind the change to AWR.

To reduce the tax reporting burden of the Nation's employers,
Congress enacted Public Law 94-202 in January 1976. This law
authorized the combined reporting of detailed Federal and
Social Security tax information and employee wage data in one

Comments From the Department of Health
and Human Services

2

consolidated report. Thus, instead of requiring each employer to file five reports per year for each employee, the new law permitted employers to report pertinent data for each employee only once a year. Reporting of quarterly aggregate wage data on Form 941 (Employer's Quarterly Federal Tax Return) is still required.

AWR became effective beginning with wage reports for tax year 1978 for private and Federal employees in the United States. The new law authorized SSA and IRS to enter into a cooperative agreement to implement the provisions of the law. By law, employers are required to submit wage and tax data for each employee to SSA by February 28 of the following year to satisfy the reporting requirements of both agencies. By agreement, SSA's responsibilities include: (1) balancing all Forms W-2 (Wage and Tax Statement) with Form W-3 (Transmittal of Income and Tax Statements); (2) funding for, and annually providing IRS with, a microfilm facsimile of all paper and magnetic media returns and documents received; and (3) providing IRS with magnetic tape files of all wage and tax data received. SSA also provides IRS with weekly updates of validated Social Security number and name data. By agreement, IRS is primarily responsible for the reconciliation of data reported annually to SSA and the aggregate wage data reported quarterly to IRS on form 941. This includes the responsibility for funding and associated costs.

Who stood to benefit by the new system, and have these benefits been realized? Employers obviously benefited by reduced reporting requirements. However, there appears to be considerable confusion on the part of employers as to who gets the report, what to report, and when. SSA is faced with significant processing difficulties due to employer reporting errors and delinquent filers. IRS has benefited by increased tax enforcement capability through the information provided to it by SSA. Under AWR, SSA converts wage data (plus pension data) and tax data to an electronic media format and provides it to IRS. This greatly enhances IRS' ability to identify and collect taxes due.

The switch to AWR has done little to enhance SSA's ability to maintain accurate earnings records. To the contrary, the job has become more complicated. Large backlogs of unreconciled wage data were not part of SSA's experience prior to AWR. As the GAO report acknowledges, SSA has no real enforcement power over employers who fail to report, or who report inaccurately. Penalty authority remains with IRS. SSA has incurred significant delays in posting wage data due to AWR. Most wage data are now sent to SSA the first quarter of the year following the close of the tax year (some reporting does, however, occur throughout that second year) rather than throughout the tax year as was the case under the quarterly system. The change to AWR increased the volume of paper SSA had to process. This was due, in part, to the fact that annual wage reports permit only 3 employee items to be reported by page, as compared to 44 items

Comments From the Department of Health
and Human Services

3

Now on p. 4.
Now on p. 24.

Now on p. 24.

Now on p. 26.

to each page in the former quarterly process. SSA has also been
hampered in the correction of its earnings records because of
the time it takes IRS to provide SSA with a tape of cases IRS
has been unable to reconcile. IRS requires employers to keep
copies of W-2s for 4 years; however, IRS does not usually send
SSA a tape of unreconciled cases until approximately 3 years
after receiving data from the employers. This is a fundamental
problem in assuring the accuracy of earnings records under the
current process, as employers may not keep records long enough
to respond to questions arising from the AWR process.
These conditions have added considerably to the complexity in
effectively handling this workload. We believe that the AWR
process should be assessed in light of today's environment,
including the employers' improved capability for using automated
processes for wage reporting. At a minimum, the goal should be
to encourage employer reconciliation of annual individual wage
data reported to SSA and quarterly aggregate wage data reported
to IRS. SSA is committed to exploring these issues with the
view of improving the effectiveness of the process and modifying
the interagency agreement between IRS and SSA to assure clear
delineation of responsibilities and to clarify the commitment of
resources devoted to the reconciliation of wage data.

Retention of Monies in Trust Funds

We believe that the statements in the Executive Summary (top of
page iv) and in the text of the report (paragraph 1 on page 20)
regarding the lack of authority to retain tax monies of
$4.7 billion in the trust funds are not properly focused. We
do not believe that SSA's actions conflict with section 201(a)
of the Social Security Act so as to give rise to GAO's conclu-
sion on page 20 that "...the legal authority for SSA retaining
the tax money is questionable." Section 201(a) requires a
monthly transfer from the general fund to the trust funds based
on estimates of the Secretary of the Treasury. The statute
expressly provides that adjustments will be made after the
transfer reflecting amounts equivalent to the taxes imposed
under the Internal Revenue Code based on certification by the
Secretary of Health and Human Services of the amount of wages
and self-employment income established in his/her records
pursuant to section 201(a)(3) and (4). Until the Secretary of
Health and Human Services makes the certification, the statute
does not appear to provide for an adjustment of the $4.7 billion
to the trust funds. Hence, we do not believe that a question as
to the legality of the trust funds retaining that amount should
be raised.

On pages 22 and 23, GAO concludes that records of wages
maintained in the Nondetailed Employer Report File (NERF) should
not be used for certification purposes, because such records are
not necessarily individual employee records. It appears that GAO
arrived at these conclusions based on an incorrect reading and

Comments From the Department of Health
and Human Services

Now on pp. 25-26.

oversimplification of the SSA statement quoted on pages 21-22
of the report. In the quoted statement, we explained the
difference between the certification of wages earned before 1978
and the certification of wages for 1978 on. The former was based
primarily, but not solely, on individual records. The latter,
used for interim purposes only, is based primarily on aggregate
employee records.

While we agree in principle that SSA should return to using
primarily individual employee data for the certification process,
we believe that the trust funds are legally entitled to be funded
on the basis of the Social Security taxes that have been or
should have been paid on wages in SSA's maintained records. All
such wages---whether posted to the proper accounts in SSA's
Master Earnings File, the individual item Suspense File, or the
NERF---have the potential to be used for the payment of a Social
Security benefit. SSA has unquestionable evidence that a
liability for Social Security taxes on those wages existed and a
very strong indication that in nearly all instances such taxes
were in fact paid. Admittedly, when the wages are found in the
latter two files, there are evidentiary tests and more manually
intensive processes required before they can be posted to
individual earnings records. But it is reasonable to argue that
the very existence of such activities constitutes the maintenance
of records function which the statute requires. We believe that
the link between wages used for funding and wages used for
benefit payment purposes should be what it was before 1978.
reiterate, prior to that year, wages in the Suspense File were
used in the certification process; and they contained both
individual and aggregate amounts.

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