SSA BEGINS SENDING NO-MATCH LETTERS TO EMPLOYERS FOR 2004
Immigrants' Rights Update, Vol. 18, No. 2, April 2, 2004

Again the time of year has arrived when the Social Security Administration (SSA) begins sending letters—commonly referred to as “no-match” letters—to certain employers and wage-earners informing them that, based on the information the employer reported on the wage-earner’s W-2 for tax year 2003, the wage-earner’s name does not match the Social Security number (SSN) under which his or her wages were reported.

Each year, employers report wages to the SSA and the Internal Revenue Service (IRS) on Forms W‑2.  Each year, the SSA processes about 240 million W‑2s sent by about 6.5 million employers either via electronic media or on paper.  These W‑2s record the wages earned by about 145 million workers annually.

When an employer submits a W-2 in which the employee’s name does not properly match the SSN, the employee’s earnings are not credited to his or her SSA account until the agency can clear up the discrepancy.  This impacts the wage-earner’s eligibility for future Social Security benefits or the amount of benefits the worker will be eligible to receive.  While the SSA is able to post about 96.4 percent of all reported earnings to the accounts of the individuals who earned them, those earnings that cannot be matched are posted to the SSA’s Earnings Suspense File (ESF), which by 2003 had grown to approximately $421 billion in wages, representing about 244 million wage items that could not be posted correctly (see www.ssa.gov/oig/communications/testimony_speeches/03102004testimony.htm.)

Another discrepancy that leads to a worker’s earnings being posted to the ESF results from the worker presenting the employer an individual taxpayer identification number (ITIN) in place of an SSN at the time of hire.  Although the ITIN, which the IRS created in 1996 for tax purposes only, is issued by a federal agency, having one does not authorize the person to whom it is issued to be employed in the U.S.  In fact, a worker presenting an ITIN to an employer actually provides the employer with constructive knowledge of the worker’s unlawful status, since only individuals who are not eligible for an SSN can apply for and obtain an ITIN.  When a worker provides the ITIN at the time of hire and it is reported by an employer on the W‑2, this results in a mismatch, because the SSA’s database does not recognize the ITIN number.  Consequently, the earnings reported under that ITIN are also posted to the ESF, and the worker does not get credit for wages reported under it until the worker’s information is corrected.

In his testimony on Mar. 10, 2004, before the Subcommittee on Oversight and the Subcommittee on Social Security of the House Ways and Means Committee that held a joint hearing on SSN and ITIN “mismatches and misuse,” SSA Deputy Commissioner James B. Lockhart explained that only a very small portion of the items in the ESF can be accounted for by this “W‑2 bearing an ITIN” situation.  He explained that a “one-time review of [SSA] records indicated that for the period 1996 (the first year ITINs were issued) through 2002, approximately 342,000 W‑2s have been reported under ITINs and remain in the suspense file.  This represents less than two-tenths of 1 percent of the W‑2s in the suspense file since its beginning through the time of the review.” 

In order to address these discrepancies, the SSA sends out notices to workers at their home address, as well as letters to employers.  In 2003, the SSA sent 126,250 no-match letters to employers that corresponded to about 7.5 million incorrect W-2s.  It also sent approximately 9.5 million letters to wage-earners, of which 1.9 million went to their employers because the SSA did not have good addresses for the wage-earners.  The SSA estimates that in 2004 it will send roughly the same number of letters to employers (i.e., about 130,000).  The employers who receive such letters are those who have reported more than 10 mismatching employee names and who file W‑2s in which mismatches account for more than one-half of one percent of all the earnings reported.  Similar to last year, the SSA will send the workers’ letters two weeks before sending the employers’ no-match letters, in order to give workers time to correct their information before their employers receive the no-match letter.

For advocates dealing with workers at risk of losing their jobs or who suffer some other adverse employment action as a result of the SSA no-match letter, a toolkit on the letters can be downloaded from NILC’s website at www.nilc.org/immsemplymnt/SSA-NM_Toolkit/index.htm.

In previous years, there has been some confusion as to whether the IRS will penalize employers based on their having received an SSA no-match letter.  During this recent joint hearing, IRS Commissioner Mark Everson clarified once again that while the IRS has the authority to impose a $50 penalty for each incorrect SSN appearing on a W‑2 form up to a maximum of $250,000, it has not issued any such penalty.  Because the SSA does not have any authority to enforce the requirement that employers report correct information, it is only when the IRS subsequently notifies an employer—not when the SSA sends the employer a no-match letter—that a penalty may be considered.  Employers are required to show that they have acted with “due diligence” to report correct information, and they may show that they relied in “good faith” on the information provided by their employees when the latter completed their W‑4 forms.

Everson further explained that if the IRS does notify an employer of a mismatch, “any employer who has retained the Form W‑4 in its records will be able to document an initial solicitation of an SSN and thus that they acted in a responsible manner.  For purposes of establishing reasonable cause in connection with the Form W‑2 penalty provisions in the tax code and applicable regulations, it is the solicitation of the employee’s Social Security number that is important, not the [employee’s] response,” Everson said.  (For more information on IRS penalties, see Brief Explanation of the IRS Fine Relating to the SSA No-Match Letter, available at www.nilc.org/immsemplymnt/SSA-NM_Pack/C10_SSA_NM_IRS,Smp,Ntc-h.pdf.)

The IRS has been working with the SSA to assess the appropriate steps the agency should take to improve reporting requirements for employers.  One such effort in which the IRS conducted compliance checks of 78 employers found that the employers had acted with due diligence.  Specifically, the IRS audited 50 large businesses in the U.S. that appear on the SSA’s list of employers with high numbers of mismatches but that have a high percentage of accurate reporting and “have an average mismatch rate of only 1.5 percent.”  All 50 companies had programs and processes in place to maintain Forms W‑2 and W‑4, as well as a process for resoliciting the required information upon receipt of a mismatch letter from the IRS.  The agency also audited 28 smaller businesses that appear on the list of employers with the highest mismatch error rates.  These employers generally issued less than 1,000 Forms W‑2 but had error rates of over 93 percent.  However, these employers appeared to have high turnover and frequently used day laborers.  They also had processes in place showing they were trying to comply.  No penalty potential was identified, and therefore no fines were assessed on any of the 78 companies.

In response to calls for increasing penalties or enforcement efforts based on the no-match letters, the IRS cautioned against raising the due diligence requirements that employers have to show they have complied with in response to a notification of discrepancies as described above, because “it could have a negative impact on the participation of employers and employees in the tax system.”  IRS staff believe that any increase in enforcement would require the agency to reallocate resources to increase compliance in an area that is already generally compliant, and would decrease tax revenue from other areas.  However, Everson admitted that the “current penalty regime is not an effective means to address the problem of SSN mismatches.”  He further raised the concern that any potential changes would first need also to amend Internal Revenue Code sec. 6103 to allow for more information-sharing between agencies or with employers, beyond what is currently allowed by law.

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