TD P 15-71
Tax
Information Reported by Taxpayers Using an Individual Taxpayer Identification
Number Is Vulnerable to Fraud and Abuse
June 2004
Reference Number: 2004-30-105
TD P 15-71
June
29, 2004
MEMORANDUM FOR
DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Acting Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Tax Information Reported by Taxpayers Using an
Individual Taxpayer Identification Number Is Vulnerable to Fraud and Abuse
(Audit # 200330018)
This
report presents the results of our review to determine if employers submitted Wage and Tax Statement (Form W-2) information to the Social Security
Administration (SSA) that matched information on tax returns[1] filed with an Individual Taxpayer Identification
Number (ITIN). We previously reported[2] on and made recommendations to address a growing
risk for identity theft,[3] perjury,[4] and fraud[5] on the part of unauthorized resident aliens[6] using an ITIN to file their United States (U.S.)
Individual Income Tax Return (Form 1040) and attaching one or more Forms W-2
with incorrect Social Security Numbers (SSN).
This review supplements the information we reported in the prior audit.
In
summary, Federal,
social security, state, and local taxes reported as withheld by employers from
these individuals may also be vulnerable to fraud and abuse by employers. For
example, in Tax Year (TY) 2000, the Internal Revenue Service (IRS) processed an
estimated 309,000 paper Forms 1040[7] that were filed under an ITIN and had 1 or more
Forms W-2 attached with an incorrect SSN.
The individuals filing these 309,000 returns reported wages of an
estimated $6.2 billion and received an estimated $273 million in refunds.[8] To determine
the amount of reported wages and the associated withholdings that are
potentially at risk, we used the same statistical sample of 309 individual
income tax returns, out of these 309,000 returns, that we analyzed in the prior review. We found that 6.6 percent
(34 of 514) of the Forms W-2 attached to these tax returns could not be located
on the IRS’ Wage Information Retrieval System (WIRS).[9] Overall,
as many as 34,171 Forms W-2 containing an estimated $332.7 million of wages[10] may be missing from the IRS’ WIRS for TY 2000.
We believe that the percentage of missing Forms W-2 is significant[11] for tax returns filed with an ITIN as the primary identification number. ***(b)(7)(E)***
***(b)(7)(E)***.
While IRS officials have taken steps to address some
of the challenges presented with the use of the ITIN, they have not fully
considered the risks associated with the Forms W-2. When areas are at risk for fraud and abuse,
the General Accounting Office’s Standards for Internal Control in the
Federal Government[13] recommends
that agency managers conduct a comprehensive review of the area to determine
the nature and extent of the risk.
Commonly referred to as a risk assessment, the purpose of the review is
to decide how to manage the risk and to determine what actions to take in
identifying cost-effective controls.
To reduce the potential for
fraud and abuse in the withholding taxes reported by ITIN users, we recommended
that the Commissioners, Wage and Investment and Small Business/Self-Employed
(SB/SE) Divisions undertake a risk assessment to determine how best to ensure
accountability for the tax information reported by ITIN users. We also recommended that if the risk assessment
identifies the need for additional cost-effective controls, the necessary
controls be implemented accordingly.
Management’s Response: Management
disagreed with the recommendation to conduct a risk assessment. They stated that the Treasury Inspector
General for Tax Administration’s (TIGTA) review was limited to a specific group
and that their assessment does not support the TIGTA’s premise.
However, IRS management
agreed that a reevaluation of the efforts to enforce compliance with the
employment tax requirements, in general, is needed. Management stated that they are concerned
about noncompliance with the reporting, filing, and paying of employment
taxes. ***(b)(7)(E)*** and that this is an ongoing concern. To decrease the opportunity for employers to
engage in such activities, they have developed initiatives to combat employers
that abuse the tax system.
Further, the IRS stated that
addressing noncompliance is an operational priority for the SB/SE Division in
Fiscal Year 2004. They have emphasized
expanding trust fund programs with special attention to taxpayers who are
pyramiding their employment tax liabilities.
In a related strategy, they are committed to improving the accuracy of
SSN reporting. The IRS conducted a
compliance check of 78 employers with the highest volume and/or highest
percentage of Forms W-2 with mismatched Taxpayer Identification Numbers. The IRS determined that despite the appearance
of a high number of errors, the employers had acted with the due diligence
required by law.
The IRS stated that the
initiatives underway would allow the IRS to target its resources by addressing
vulnerabilities in the reporting of employment taxes across all employers. They advised that their experience is that
employers generally stop paying withheld taxes for their entire payroll. Thus, the IRS believes that it would be rare
for an employer to pick and choose amongst employees when making the willful
decision to stop remitting withheld taxes to the IRS. Also, employers are not required to validate
names and SSNs provided to them.
Lastly, management stated
their research indicated that up to 75 percent of the ITINs issued by the IRS
have shown up on tax returns. Based on
this research, the IRS has determined that ITIN holders are a highly compliant
group of taxpayers.
Office of Audit Comment: We continue
to have concerns with the potential tax compliance risk identified by the
evidence gathered in our audit. The
bases of management’s disagreement are that taxpayers filing a tax return with
an ITIN are highly compliant as a group, employers treat all employees the
same, and issues in the report are not unique to ITIN holders and their employers. We remain concerned because, at the time of
our review, the IRS had not developed any data regarding this specific risk
or any data on the risk for the overall
population of all returns filed. The
IRS’ response did not include any details in support of their assessment that
we could analyze.
In contrast, other studies
support the TIGTA’s position. For
example, a study by the SSA Office of the Inspector General[14] reported that “SSA suspects that employers in
certain high turnover industries . . . may knowingly hire illegal aliens with
fraudulent identification . . . .” Also,
a study by the
Regarding employers’
compliance, the IRS does agree that there are employers who retain withholding
taxes instead of remitting all applicable taxes. Our concern is that this position does not
recognize the fact that a new risk specific to ITIN taxpayers may be
evolving. We are encouraged that the IRS
also stated that it is developing strategies to enhance the accuracy of SSN
reporting.
While our review was limited
to ITIN filers, we believe the data we developed have identified a tax
administration risk. When the risks
associated with fraud and abuse are identified, agency managers should conduct
a risk assessment to determine the significance of this risk. We limited our recommendation to conducting a
risk assessment because of the scope of our review and to determine if this
risk can be mitigated by cost-effective actions to resolve this potential
problem.
The IRS has stated that it
plans new strategies that will address employment tax issues, including
addressing the accuracy of the SSN.
These strategies and actions need to be specifically evaluated to
determine if the risk we identified has been addressed.
While we still believe our recommendations are worthwhile, we do not intend to elevate our disagreement concerning them to the Department of the Treasury for resolution.
The TIGTA has designated
this report as Limited Official Use (LOU) pursuant to Treasury Directive TD
P-71-10, Chapter III, Section 2, “Limited Official Use Information and Other
Legends” of the Department of Treasury Security Manual. Because this document has been designated
LOU, it may only be made available to those officials who have a need to know
the information contained within this report in the performance of their
official duties. This report must be
safeguarded and protected from unauthorized disclosure; therefore, all requests
for disclosure of this report must be referred to the Disclosure Unit within
the TIGTA’s Office of Chief Counsel.
Please contact
me at (202) 622-6510 if you have questions or Philip Shropshire, Acting
Assistant Inspector General for Audit (Small Business and Corporate Programs)
at (215) 516-2341.
TD P 15-71
Assessing Risks Could Help Reduce Tax Information Vulnerabilities
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Explanation of the Term Unauthorized Resident Alien
Appendix V – Management’s Response to the Draft Report
TD P 15-71
To efficiently
and effectively process tax returns, the Internal Revenue Service (IRS) uses
Taxpayer Identification Numbers (TIN).
The TIN is a required entry on tax returns to facilitate tax
administration needs. For individuals,
the required TIN is the Social Security Number (SSN).
The Internal Revenue Code (I.R.C.) provides that any person required to file a return, statement, or other document shall include an identifying number for securing proper identification of that person. The SSN shall be used as the identifying number for such individuals for this purpose, except as otherwise specified under regulations.[16] A United States (U.S.) Individual Income Tax Return (Form 1040) is the primary tax return filed by individuals.
In general, the Social Security Administration (SSA) limits
its assignment of SSNs to individuals who are
In past years, alien individuals who could not obtain SSNs
and who had income that was taxable by the
Also,
the Treasury Regulation provides that the IRS assign the ITINs to resident
aliens who cannot obtain an SSN. The ITIN is intended for tax purposes only
and creates no inference regarding an alien individual’s right to be legally
employed in the
At the end of each year, employers send Wage and Tax Statements (Form W-2) to the SSA for each of their employees. The form identifies the employee by name, address, and SSN. It also shows the employee’s total wages, wages subject to social security tax, and amount withheld for local, state, and Federal taxes. The SSA uses the Forms W-2 to credit earnings subject to the social security tax to an employee’s individual account.
The IRS’ processing of Forms W-2 begins with receipt of a microfilm image of the documents from the SSA, which it transfers to its Wage Information Retrieval System (WIRS).[19] The IRS’ Wage and Investment (W&I) Division[20] and its Small Business/Self-Employed (SB/SE) Division[21] use the WIRS as a research tool in an effort to provide customer service and ensure the compliance of individual taxpayers and employers.
We performed our review in accordance with Government Auditing Standards between
March and June 2003 at the SB/SE
Division’s Headquarters Office in New Carrollton, Maryland, and the WIRS office
in
Assessing Risks Could Help Reduce Tax Information Vulnerabilities
We recently reported[22] and made recommendations to address the growing risk for identity theft,[23] perjury,[24] and fraud[25] on the part of unauthorized resident aliens.[26] For example, an ITIN holder could file their Form 1040 and attach one or more Forms W-2 with incorrect SSNs.
In Tax Year (TY) 2000, the IRS processed an estimated 309,000 paper Forms 1040 that were filed under an ITIN and had 1 or more Forms W-2 ***(b)(7)(E)***.[27] The individuals filing these 309,000 returns reported wages of an estimated $6.2 billion and received an estimated $273 million of refunds.[28]
To determine the amount of reported wages and the associated withholding that are potentially at risk, we used the same statistical sample[29] of 309 individual income tax returns, out of these 309,000 returns, that we analyzed in the prior review. We found that 6.6 percent (34 of 514) of the Forms W-2 attached to these tax returns could not be located on the IRS’ WIRS. Overall, as many as 34,171 Forms W-2 containing an estimated $332.7 million of wages may be missing from the IRS’ WIRS for TY 2000.[30]
The Federal, social security, state, and local taxes reported as withheld by employers from these individuals may be vulnerable to fraud and abuse by employers. This vulnerability arises because ***(b)(7)(E)***.
We believe that the percentage of missing Forms W-2 is significant[31] for tax returns filed with an ITIN as the primary identification number. ***(b)(7)(E)***.
***(b)(7)(E)***.[32] ***(b)(7)(E)***.
***(b)(3): 26 U.S.C. 6103***.
While IRS officials have taken steps to address some of the challenges presented with the use of the ITINs,[33] they have not fully considered the risks associated with fraudulent Forms W-2. When areas are at risk for fraud and abuse, the General Accounting Office’s (GAO) Standards for Internal Control in the Federal Government recommends that agency managers conduct a comprehensive review of the area to identify the nature and extent of the risks. Commonly referred to as a risk assessment, the purpose of the review is to decide how to manage the risk and to determine what actions to take in identifying cost-effective controls. To assist agency managers in undertaking such assessments, the GAO has developed various tools[34] that provide a framework for evaluating and establishing controls over areas that can be exploited by unscrupulous individuals.
To reduce the potential for fraud and abuse in the submission of Forms W-2 by employers and ITIN users, we recommend that the Commissioners, W&I and SB/SE Divisions:
1. Undertake a risk assessment to determine how best to ensure accountability for the tax information reported by ITIN users.
2. Ensure that if the risk assessment identifies the need for additional cost-effective controls, they be implemented accordingly.
Management’s Response: Management disagreed with the recommendation to conduct a risk assessment. They stated that the Treasury Inspector General for Tax Administration’s (TIGTA) review was limited to a specific group and their assessment does not support the TIGTA’s premise. However, IRS management agreed that a reevaluation of efforts to enforce compliance with the employment tax requirements, in general, is needed.
Also, management stated that they are concerned about noncompliance with the reporting, filing, and paying of employment taxes. ***(b)(7)(E)***., and that this is an ongoing concern. To decrease the opportunity for employers to engage in such activities, they have developed initiatives to combat employers that abuse the tax system.
Further, the IRS stated that addressing noncompliance is an operational priority for the SB/SE Division in Fiscal Year 2004. They have emphasized expanding trust fund programs with special attention to taxpayers who are pyramiding their employment tax liabilities. In a related strategy, they are committed to improving the accuracy of SSN reporting. The IRS conducted a compliance check of 78 employers with the highest volume and/or highest percentage of Forms W-2 with mismatched TINs. They determined that despite the appearance of a high number of errors, the employers had acted with the due diligence required by law.
The IRS stated that the initiatives underway would allow the IRS to target its resources by addressing vulnerabilities in the reporting of employment taxes across all employers. They advised that their experience is that employers generally stop paying withheld taxes for their entire payroll. Thus, the IRS believes that it would be rare for an employer to pick and choose amongst employees when making the willful decision to stop remitting withheld taxes to the IRS. Also, employers are not required to validate names and SSNs provided to them.
Lastly, management stated their research indicated that up to 75 percent of the ITINs issued by the IRS have shown up on tax returns. Based on this research, the IRS has determined that ITIN holders are a highly compliant group of taxpayers.
Office of Audit Comment: We continue to have concerns with the potential tax compliance risk identified by the evidence gathered in our audit. The bases of management’s disagreement are that taxpayers filing a tax return with an ITIN are highly compliant as a group, employers treat all employees the same, and issues in the report are not unique to ITIN holders and their employers. We remain concerned because, at the time of our review, the IRS had not developed any data regarding this specific risk or any data on this risk for the overall population of all returns filed. The IRS’ response to this report did not include any details in support of their assessment that we could analyze.
In contrast, other studies support the TIGTA position. For example, a study by the SSA Office of the
Inspector General reported that “SSA suspects that employers in certain high
turnover industries . . . may knowingly hire illegal aliens with fraudulent
identification . . . .”[35] Also, a study by the
Regarding employers’ compliance, the IRS does agree that there are employers who retain withholding taxes instead of remitting all applicable taxes. Our concern is that this position does not recognize the fact that a new risk specific to ITIN taxpayers may be evolving. We are encouraged that the IRS also stated that it is developing strategies to enhance the accuracy of SSN reporting.
While our review was limited to ITIN filers, we believe the data we developed have identified a tax administration risk. When the risks associated with fraud and abuse are identified, agency managers should conduct a risk assessment to determine the significance of this risk. We limited our recommendation to conducting a risk assessment because of the scope of our review and to determine if this risk can be mitigated by cost-effective actions to resolve this potential problem.
The IRS has stated that it plans new strategies that will address employment tax issues including addressing the accuracy of the SSN. These strategies and actions need to be specifically evaluated to determine if the risk we identified has been addressed.
TD P 15-71
Appendix I
Detailed Objective,
Scope, and Methodology
Our overall objective was to determine if employers submitted Wage and Tax Statement (Form W-2) information to the Social Security Administration (SSA) that matched information on tax returns filed with an Individual Taxpayer Identification Number (ITIN). We initiated this review based on information identified during another Treasury Inspector General for Tax Administration review.[37]
To accomplish our objective, we compared information from
Forms W-2, associated with selected tax returns, to information in the Internal
Revenue Service (IRS) Wage Information Reporting System (WIRS).[38]
1.
The tax
returns were selected through the following process:
A) Obtained a statistically valid sample of United Status Individual Income Tax Returns (Form 1040) for Tax Year (TY) 2000.
1) Identified from the Returns Transaction File[39] Forms 1040 meeting our criteria: filed for TY 2000, identified by an ITIN as the primary identification number, and filed by a resident alien.
2) Selected from the universe of 353,373 (rounded to 309,000 paper returns and 44,000 electronic returns)[40] tax returns, a statistically valid sample of 353 tax returns (309 paper and 44 electronic) for review using a confidence level of 95 percent, a precision of +/- 2.5 percent, and an expected rate of occurrence of not less than 95 percent.
B) Obtained guidance on the validity of the sampling plan from the IRS’ Office of Statistics of Income.
C) Obtained (for the sampled returns) the original Forms 1040 and records from the IRS’ Master File[41] and the Integrated Data Retrieval System.[42]
2. Requested that the IRS use the WIRS to research each Social Security Number (SSN) filed with the Forms W-2 from tax returns and provide us with the results of their research. For any information not found for an SSN, we requested the IRS to use the WIRS to research for the corresponding ITIN that was used on the tax return.
3. Analyzed the results of the WIRS research, conducted an on-site visitation to discuss the results with the manager of the WIRS function, and reviewed the procedures used to assure that in-depth research was performed for each SSN/ITIN.
4. Discussed the results of our analysis with IRS’ Small Business/Self-Employed Division to determine possible causes for why the information on the Form W-2, filed with the tax return, is not included in the WIRS.
TD P 15-71
Appendix
II
Major Contributors to This Report
Philip Shropshire,
Acting Assistant Inspector General for Audit (Small Business and Corporate
Programs)
Frank Dunleavy, Audit
Manager
Richard Turner, Senior
Auditor
Marcus Sloan, Auditor
TD P 15-71
Appendix III
Commissioner C
Office of the Commissioner - Attn: Chief of Staff C
Commissioner, Large and Mid-Size Business Division SE:LM
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Wage and Investment Division SE:W
Chief, Criminal Investigation CI
Director, Communications and Liaison, Small Business/Self-Employed Division SE:S:MS:CL
Director,
Compliance, Small Business/Self-Employed Division SE:C
Director, Taxpayer
Education and Communication, Small Business/Self-Employed Division SE:S:T
Chief Counsel CC
National Taxpayer Advocate TA
Deputy Chief Financial Officer, Department of the Treasury
Audit Liaison:
Commissioner, Small Business/Self-Employed Division SE:S
TD P 15-71
Explanation of the Term Unauthorized Resident Alien
This audit report uses the term unauthorized resident alien based on the evidence we found during this and a prior analysis of the Internal Revenue Service (IRS) Individual Taxpayer Identification Number (ITIN) process. Our conclusion is that, generally, the individuals who file a United States (U.S.) Individual Income Tax Return (Form 1040) with an ITIN as the identification number and receive wages that are identified with a Social Security Number (SSN) on the attached Wage and Tax Statement (Form W-2) are unauthorized resident aliens. This conclusion is based on the following evidence and assumptions.
Foreign individuals who
received ITINs were residing in the
The Treasury Regulation providing for the ITIN
states that, “Any individual who is not eligible to obtain a social security
number and is required to furnish a taxpayer identifying number must apply for
an IRS individual taxpayer identification number on Form W-7, Application for
IRS Individual Taxpayer Identification Number . . . .”[43] The Form W-7 states, “Do not submit this form if you
have, or are eligible to obtain, a
During our prior audits of the ITIN process,[44] we identified Forms W-7 that
were approved by the IRS and showed applicants provided
In a
related opinion,[46]
the former IRS’ Office of the Assistant Commissioner (International) stated,
“the Form W-7 is to be used only by individuals who are not eligible to obtain
an SSN, and that citizens of the
The Department of Homeland Security (DHS) is responsible for
citizenship, asylum, lawful permanent residency, employment authorization,
refugee status, intercountry adoptions, replacement immigration documents,
family and employment related immigration, and foreign student authorization. Foreign individuals who received ITINs and
declared themselves as residing in the
Forms 1040 were filed by resident aliens
The Internal Revenue Code provides that an alien individual
shall be treated for tax purposes as a resident of the
An individual who does not reside in the
Resident aliens were employed
The ITIN is
intended for tax purposes only and creates no inference regarding an alien
individual’s right to be legally employed in the
Resident aliens provided Social Security Numbers to
their employers to obtain employment
The ITIN is not valid for work purposes. Employers are responsible for obtaining from new hires their names and SSNs from their Social Security cards. Employers are also responsible for preparing Forms W-2 and submitting them to the Social Security Administration (SSA). We estimate that the 309,000[49] TY 2000 Forms 1040 that resident aliens filed on paper had 354,000 SSNs on the attached Forms W-2s, indicating that the resident aliens provided to their employers Social Security cards or SSNs for the purpose of obtaining employment.
Resident aliens would not have been able to obtain
Social Security cards valid for employment in the United States
The SSA issues three types of Social Security cards. The SSA issues Social Security cards to
The Treasury Regulation states that, “Any individual who is
duly assigned a social security number or who is entitled to a social security
number will not be issued an IRS individual taxpayer identification number.” Since the IRS
assigns ITINs to resident aliens, we concluded that these resident aliens were
not entitled to an SSN as assigned by the SSA when they applied for an ITIN. We also
concluded that if resident aliens were authorized by the DHS to reside in the
Resident aliens obtained employment using false Social
Security Numbers
The Social Security law states that, “whoever…with intent to deceive, falsely represents a number to be the social security account number assigned by the Commissioner of Social Security to him or to another person, when in fact such number is not the social security account number assigned by the Commissioner of Social Security to him or to such other person . . . shall be guilty of a felony . . . .” We estimate that all of the 354,000 SSNs[50] on Forms W-2 submitted by resident aliens on the 309,000 TY 2000 paper filed Forms 1040 with an ITIN were assigned by the SSA to an individual other that the filer (265,000)[51] or not assigned by the SSA (89,000).
Furthermore, a joint publication by the IRS and the SSA addresses the use of SSNs by individuals with ITINs. The publication summarized an employer’s responsibilities for withholding and reporting of employment taxes on wages paid to “illegal aliens.” Under the title “Illegal Use of Social Security Numbers (SSN),” the publication states that, “Since ITINs are for tax purposes only and are by no means a legal identification number for employment, individuals are utilizing erroneous or stolen SSNs when applying for employment.”[52]
TD P 15-71
Appendix V
The response was removed due to its size. To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
TD P 15-71
[1] For the purpose of this report, tax return refers to United States (U.S.) Individual Income Tax Return (Form 1040).
[2] The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration (Reference Number 2004-30-023, dated January 2004).
[3] Identity Theft and Assumption Deterrence Act of 1998, Pub. L. No. 105-318, 112 Stat. 3007 (1998).
[4] 26 U.S.C. § 6065 (2004).
[5] 26 U.S.C. § 7206 (2004).
[6] See Appendix IV for an explanation of the term unauthorized resident alien.
[7] Electronically filed returns were not included in this audit because the original Forms W-2 are not filed with the return.
[8] The precision for wages is +/- $511 million and for refunds is +/- $30 million.
[9] The WIRS program provides access to copies of Forms W-2. Forms W-2 filed via magnetic media and paper are microfilmed by the SSA and provided to the IRS to use for Federal tax-related purposes.
[10] The precision of the 34,178 Forms W-2 is +/- 14,178. The precision of the $332.7 million of wages is +/- $164.5 million.
[11] We were unable to compare the rate we identified to a comparable one from general return processing because at the time of our review the IRS had not developed any data on this type of risk.
[12] If the employer did submit the Forms W-2 in a prior year there is a possibility that, as part of the SSA’s SSN verification process, both the employee and employer would have been notified of the mismatch. This process could alert the employer of an undocumented worker, and the employer may then not submit Forms W-2 for the undocumented worker in subsequent years.
[13] Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1).
[14] The Social Security Administration’s Earnings Suspense File Tactical Plan and Efforts to Reduce the File’s Growth and Size (SSA: A-03-97-31003, dated February 2000).
[15] Social
Security Administration’s No-Match Program: Implications for Immigration
Enforcement and Worker’s Rights (
[16] 26 U.S.C. § 6109 (2004).
[17] Treas. Reg. § 301.6109.
[18] Treas.
Reg. § 301.6109-1. 26 U.S.C. § 7701
(2004) defines a resident alien as a resident of the U.S. for any
calendar year if that individual was lawfully admitted for permanent
residence. A resident alien is also a
foreign person in the
[19] The WIRS program provides access to copies of Forms W-2. Forms W-2 filed via magnetic media and paper are microfilmed by the SSA and provided to the IRS to use for Federal tax-related purposes.
[20] The W&I Division serves about 122 million taxpayers who file a Form 1040 without a Profit or Loss From Business (Sole Proprietorship) (Schedule C); Supplemental Income and Loss (Schedule E); or Profit or Loss From Farming (Schedule F) attached; without an Employee Business Expenses (Form 2106) attached; and without international activity.
[21] The SB/SE Division serves approximately 45 million taxpayers. These taxpayers include about 33 million full or partially self-employed and 7 million small businesses with assets of less than $10 million. These taxpayers have some of the most complex issues due to tax law requirements and the number of forms and schedules required.
[22] The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration (Reference Number 2004-30-023, dated January 2004).
[23] Identity Theft and Assumption Deterrence Act of 1998, Pub. L. No. 105-318, 112 Stat. 3007 (1998).
[24] 26 U.S.C. § 6065 (2004).
[25] 26 U.S.C. § 7206 (2004).
[26] See Appendix IV for an explanation of the term unauthorized resident alien.
[27] Electronically filed returns were not included in this audit because the original Forms W-2 are not filed with the return.
[28] The precision for wages is +/- $511 million and for refunds is +/- $30 million.
[29] Audit conclusions about a population of tax returns can be accomplished by examining only a sample of that population. Properly used sampling techniques can provide audit information that is reliable and the results can be accurately projected over the population. For this review, we used a confidence level of 95 percent, a precision of +/- 2.5 percent, and an expected rate of occurrence of not less than 95 percent.
[30] The precision of the 34,178 Forms W-2 is +/- 14,178. The precision of the $332.7 million of wages is +/- $164.5 million.
[31] We were unable to compare this rate to a comparable one from general return processing because at the time of our review the IRS had not developed any data on this type of risk.
[32] If the employer did submit the Forms W-2 in a prior year there is a possibility that, as part of the SSA’s SSN verification process, both the employee and employer would have been notified of the mismatch. This process could alert the employer of an undocumented worker, and the employer may then not submit Forms W-2 for the undocumented worker in subsequent years.
[33] For example, officials chartered an ITIN Task Force, accepted most of its recommendations, and established an ITIN Project Office that is implementing the accepted recommendations. In addition, the IRS established an ITIN position in the National Taxpayer Advocate Service and is initiating procedures to assist taxpayers who might have been victims of identity theft.
[34] Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1).
[35] The Social Security Administration’s Earnings Suspense File Tactical Plan and Efforts to Reduce the File’s Growth and Size (SSA: A-03-97-31003, dated February 2000).
[36] Social
Security Administration’s No-Match Program: Implications for Immigration
Enforcement and Worker’s Rights (
[37] The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration (Reference Number 2004-30-023, dated January 2004).
[38] The WIRS program provides access to copies of Forms W-2. Forms W-2 filed via magnetic media and paper are microfilmed by the SSA and provided to the IRS to use for Federal tax-related purposes.
[39] The Returns Transaction File contains all edited, transcribed, and error corrected data from the Form 1040 series returns and related forms for the current processing year and 2 prior years.
[40] Electronically filed returns were not included in this audit because the original Forms W-2 are not filed with the return.
[41] The IRS’ database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organization data.
[42] IRS computer system capable of retrieving or updating stored information; it works in conjunction with taxpayer account records.
[43] Treas. Reg. § 301.6109. All references to “Treasury Regulation” in this appendix mean Treas. Reg. § 301.6109.
[44] The Internal Revenue Service’s Individual Taxpayer Identification Number Program Was Not Implemented in Accordance with Internal Revenue Code Regulations (Reference Number 094505, dated September 1999), and The Internal Revenue Service’s Individual Taxpayer Identification Number Creates Significant Challenges for Tax Administration (Reference Number 2004-30-023, dated January 2004).
[45] The Department of Homeland Security assumed the Immigration and Naturalization Service’s responsibilities in 2003. Its U.S. Immigration and Customs Enforcement function is responsible for law enforcement. Its U.S. Citizenship and Immigration Services is responsible for customer service.
[46] Memorandum for Chief Operations Officer, re: Draft
Internal Audit Report – Review of the Individual Taxpayer Identification Number
(ITIN) Program, Internal Audit Project # 960084 (May 27, 1999). This opinion was limited to issues involving
individuals under the Privacy Act of 1974, 5 U.S.C. § 552a (2000).
[47] 26
U.S.C § 7701 (2003). The “substantial
presence” test is based on the number of days that an individual resided in the
[48] The margin of error is +/- $474,000,000.
[49] The margin of error is +/- 12,385 tax returns.
[50] The margin of error is +/- 21,348 SSNs.
[51] The margin of error is +/- 17,732 SSNs.
[52] SSA/IRS Reporter, A Newsletter for Employers, Summer 2003.