In a recent report, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS was not using the Combined Annual Wage Reporting (CAWR) Program to the best advantage. I will talk about the report in some detail but I took from the report that the investigation into CAWR provides a good example of what happens when you grossly underfund the IRS. Undoubtedly, finding other examples of this would prove easy. The CAWR program provides a valuable and relatively easy way to reconcile wage reporting and find discrepancies. If the IRS cannot do anything with the findings, the situation needs correction.
Employers must report wage and withholding information to both the Social Security Administration and the IRS. The reported information should reconcile; however, the IRS and SSA learned long ago that it did not and established a program to look into the cases in which it did not. SSA wants to ensure that employees receive proper credit for working and for covered earnings since the earnings have a direct impact on Social Security benefits based off each person’s highest 35 years of earnings. Employer mistakes could rob a worker of benefits or keep a worker from receiving the correct amount of benefits if the data reported to SSA does not properly report the worker’s earnings. Similarly, the IRS wants to make sure that employers report the proper amount of taxes and tax withholding. The program matches the information reported to the IRS on Forms 1099-R and W-2G (Certain Gambling Winnings) with the Forms W-3, W-2, W-3c (Transmittal of Corrected Wage and Tax Statements), and W-2c (Transmittal of Corrected Wage and Tax Statements) transmitted to SSA.
The CAWR program looks for discrepancies in the reporting information that exceed certain limits – the idea is that the IRS would take action to correct the situation which could result in substantial assessments against the employer whose data does not match. The program also identifies employers who fail to file employment tax returns with the IRS. That failure, of course, could result in substantial liabilities and should cause swift action by revenue officers assigned to those accounts.
Looking at the 2013 data (and keeping in mind that CAWRs generally runs a couple of years behind), TIGTA found that the IRS only worked 17% of the discrepancy cases identified. It estimated that the potential amount of tax underreported was $7 billion and that it would take about 55 IRS employees to work these cases. It estimated that these 55 employees would cost the government about $2.7 million (with an M not a B). How many of us would like the opportunity to invest $2.7 million to obtain a return of $7 billion. I seriously doubt the IRS could collect all of the $7 billion even if it could assess that amount and I also doubt if the 55 employee number considers all of the downstream work that might need to occur in collection and other parts of the IRS to fully recover this amount, but it still seems like an eye popping return on investment opportunity. While the IRS response gave other reasons for not addressing some of the cases or not prioritizing them as TIGTA might, the IRS pointed to limited resources as a major reason for not going after cases it identified as having discrepancies.
Interestingly, on the SSA side a lawsuit settled in 1990 causes the government to work all of the SSA cases and the IRS can only spend whatever limited resources it has left in working the IRS discrepancy cases. I suppose that should make those of us hoping for social security benefits feel good, but it also leaves me wonder if someone should bring a lawsuit on behalf of taxpayers to get the same deal for the tax cases. Here is an example of the government spending the resources necessary to ensure that the benefits side makes out but not spending the resources to ensure that the money is captured that will enable it to pay out the benefits without printing more money.
The report contains detailed statistics for anyone wanting to delve deeper into this topic and one chart shows the types of cases identified. As with many TIGTA reports, it provides an interesting glimpse into the inner workings of the IRS. In this case, a discouraging one as well.