Treasury Inspector General for Tax Administration Press Release

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July 31, 2017
TIGTA-2017-18
Contact: Karen Kraushaar, Director of Communications
Karen.Kraushaar@tigta.treas.gov
(202) 622-6500

Case Selection Processes Result in Billions of Dollars in Potential Employer Underreported Tax Not Being Addressed

WASHINGTON — The Internal Revenue Service (IRS) is not addressing billions of dollars of potential taxes that are underreported by employers, according to a report that the Treasury Inspector General for Tax Administration (TIGTA) published today.

The Combined Annual Wage Reporting (CAWR) Program compares the employee wage and withholding information reported to the IRS on employment tax forms to withholding documents filed with the Social Security Administration (SSA).  The purpose of the IRS-CAWR Program is to ensure that employers report the proper amount of employment taxes and Federal income tax withholding on their employment tax returns.  TIGTA initiated this audit to evaluate whether the IRS-CAWR Program’s document matching process accurately identifies and selects cases with the highest potential tax assessment amounts.  A discrepancy case is identified when the amount of wages and withholding reported by an employer on Forms W 2/W-3 submitted to the SSA or Forms 1099-R or W-2G submitted to the IRS do not agree with the amount of wages and withholding the employer reported to the IRS on its employment tax return.

TIGTA’s analysis of 137,272 Tax Year (TY) 2013 discrepancy cases found that the IRS worked only 23,184 (17 percent).  The remaining 114,088 (83 percent) discrepancy cases that it did not work had a potential underreported tax difference of more than $7 billion.

In addition, the IRS’s discrepancy case selection processes do not ensure that it gives priority to working cases with the highest potential tax assessment.  TIGTA analyzed the 114,088 discrepancy cases that the IRS did not work to identify those 23,184 with the highest potential underreported tax amounts by case type.  TIGTA found that these 23,184 cases had total potential underreported tax of more than $6.8 billion.

Furthermore, TIGTA’s analysis of the 114,088 TY 2013 discrepancy cases that it did not work showed that if the IRS selected the 23,184 cases from categories with a higher average assessment potential, rather than by random selection, it would have selected cases with more than $128 million in assessment potential.

In addition to changing its selection methodology to work case types with the highest potential tax assessment, the IRS could increase its return on investment by including prior year discrepancy cases when working current year ones for the same employer.  TIGTA’s analysis found that 3,137 of the discrepancy cases identified in TY 2013 also had discrepancy cases in TY 2012, with potential underreported tax totaling more than $448 million for TY 2012.

“The IRS’s method of allocating resources to discrepancy cases hinders its ability to reduce the billions of dollars that are owed but are not assessed or collected, known as the Tax Gap,” said J. Russell George, the Treasury Inspector General for Tax Administration.  “As such, the IRS needs to revise its case selection process to include cases with the highest potential tax assessment and expand the process to include cases that are currently excluded,” he added.

TIGTA made seven recommendations, including that the Commissioner, Small Business/Self-Employed Division, evaluate the current agreement and workload processes with the SSA, as required, to determine if it could make changes; revise its case selection criteria to include cases with the highest potential tax assessment; coordinate with the Information Technology organization to review and prioritize programming enhancements; and take actions necessary to implement the proposed upgrade to include prior year discrepancy cases when it selects current year discrepancy cases for the same employer.

The IRS agreed with six of TIGTA’s seven recommendations. IRS management did not agree to include prior year discrepancy cases when current year discrepancy cases are selected for the same employer.  However, the IRS will consider employers that have a prior year discrepancy case as part of the selection criteria for current year cases.

Read the report.

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Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.