A new audit finds that the Internal Revenue Service isn’t addressing billions of dollars in potential taxes that are underreported by employers.

The Treasury Inspector General for Tax Administration (TIGTA) looked at the Combined Annual Wage Reporting (CAWR) Program which compares an employee’s wage and withholding information that is reported to the IRS with the same information as reported by the employer to the Social Security Administration (SSA).

The IRS-CAWR Program is designed to help ensure employers report the proper amount of employment taxes and federal withholding on their employment tax returns. When the wages and withholding reported by an employer on Forms W-2 and W-3 submitted to the SSA (or Forms 1099-R or W-2G submitted to the IRS) don’t agree with the amounts reported to the IRS on the employment tax return, a discrepancy case is created.

The Audit Results

TIGTA looked at more than 137,000 TY 2013 discrepancy cases. Only 17 percent of those cases were worked by the IRS. The remaining 83 percent – 114,088 cases – had a potential underreported tax difference of more than $7 billion.

The audit also found the IRS processes don’t prioritize the cases so that those with the greatest potential tax assessments are worked first. Some $6.8 billion potentially went unreported due to this oversight, TIGTA said.

“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.”

The Inspector General made seven recommendations, including that the Commissioner of the Small Business/Self-Employed Division evaluate the current agreement and workload processes with the Social Security Administration to see if it can make changes. Other recommendations to the IRS include:

• Revise case selection criteria to include cases with the highest potential tax assessment
• Coordinate with the Information Technology organization to review and prioritize programming enhancements
• 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 with a prior-year discrepancy case as part of the selection criteria for current-year cases.