THE INSPECTOR GENERAL
SOCIAL SECURITY ADMINISTRATION
THE SOCIAL SECURITY
COMPLIANCE WITH EMPLOYEE
By conducting independent and objective audits, evaluations and investigations, we inspire public confidence in the integrity and security of SSA's programs and operations and protect them against fraud, waste and abuse. We provide timely, useful and reliable information and advice to Administration officials, Congress and the public.
The Inspector General Act created independent audit and investigative units, called the Office of Inspector General (OIG). The mission of the OIG, as spelled out in the Act, is to:
Conduct and supervise independent and objective audits and investigations
relating to agency programs and operations.
Promote economy, effectiveness, and efficiency within the agency.
Prevent and detect fraud, waste, and abuse in agency programs and operations.
Review and make recommendations regarding existing and proposed legislation and regulations relating to agency programs and operations.
Keep the agency head and the Congress fully and currently informed of problems in agency programs and operations.
To ensure objectivity, the IG Act empowers the IG with:
Independence to determine what reviews to perform.
Access to all information necessary for the reviews.
Authority to publish findings and recommendations based on the reviews.
We strive for continual improvement in SSA's programs, operations and management
by proactively seeking new ways to prevent and deter fraud, waste and abuse.
We commit to integrity and excellence by supporting an environment that provides
a valuable public service while encouraging employee development and retention
and fostering diversity and innovation.
Date: April 6, 2007
To: The Commissioner
From: Inspector General
Subject: The Social Security Administration's Compliance with Employee Tax
Our objective was to determine if the Social Security Administration (SSA) is appropriately paying and reporting employment taxes to the Internal Revenue Service (IRS).
In June 2005, the IRS requested that each Federal Office of Inspector General
determine whether its parent agency is complying with Federal tax laws. Federal
agencies are subject to the same requirements as all other employers. The Internal
Revenue Code requires employers to pay employment taxes on wages and to report
wages and certain other payments on various IRS forms. Federal employment taxes
include withholdings related to Federal income, Social Security, and Medicare
taxes. Employers are required to make deposits of employment taxes on a daily,
weekly, or semi-weekly schedule depending upon the amount of tax they accumulate
Employers are also required to file Forms 941, Employer's Quarterly Federal Tax Return, reporting liability for withholdings related to Federal income, Social Security, and Medicare taxes on a quarterly basis. In addition, as part of the Annual Wage Reporting (AWR) process, employers are required to file Forms W-3, Transmittal of Wage and Tax Statement, with SSA along with copies of Forms W-2, Wage and Tax Statement, for all of their employees. Employees must complete Forms W-4, Employee's Withholding Allowance Certificate, so the employer can withhold the correct Federal income tax from their pay.
Processing SSA's Payroll
Beginning with Tax Year (TY) 1998, the Department of Interior's (DOI) National Business Center (NBC) started processing SSA's payroll through its Federal Personnel Payroll System (FPPS). For TY 2004, SSA was among 35 Federal entities receiving personnel and payroll services from NBC. As SSA's payroll provider, NBC is responsible for calculating applicable Federal, State, and local income tax withholdings as well as Social Security and Medicare taxes based on the information entered into FPPS by SSA staff. NBC is also responsible for preparing the quarterly Forms 941 and annual Forms W-3 and W-2 for all its clients and providing year-end interface files containing wage and tax data to its clients. When reporting tax information to the IRS, NBC combines wage and tax information for its clients and reports it under a single Employment Identification Number (EIN).
SCOPE AND METHODOLOGY
Our audit focused on Federal employment taxes paid to the IRS on behalf of SSA employees. We reviewed personnel, payroll, and other financial records related to SSA's employees for TY 2004 to determine whether the appropriate amount of Federal employment taxes were paid to the IRS. We provide a full description of the scope and methodology and the sampling methodology in Appendices F and G.
RESULTS OF REVIEW
In general, our review found during TY 2004 DOI appropriately withheld and deposited Federal employment taxes for SSA employees. We found DOI properly deposited approximately $856 million related to withholdings for Federal income, Social Security, and Medicare taxes to the IRS on behalf of SSA employees in TY 2004. Moreover, we reviewed 100 sample employee records to ensure correct amounts of Federal income, Social Security taxes, and Medicare taxes were withheld from the sample employees' pay. We found DOI withheld the proper amount of Federal employment taxes from employees' pay.
EMPLOYMENT TAXES ON WAGES
Our review found DOI appropriately deposited approximately $856 million in
Federal employment taxes to the IRS on behalf of SSA employees in TY 2004. As
stated previously, employers are required to deposit Federal income taxes withheld
and the employer and employee portions of the Social Security and Medicare taxes.
The deposits should be made on a daily, weekly, or semi-weekly schedule depending
on the amount of taxes the employer accumulates for deposits. Our review of
deposit confirmations for TY 2004 showed DOI deposited about $2.4 billion in
Federal employment taxes to the IRS for 35 Federal entities. In our review of
the DOI's Federal Tax Pay Period Collection Reports and supporting schedules,
used by DOI to calculate the deposit amounts, we determined SSA's portion of
the $2.4 billion tax liability totaled about $856 million, or 36 percent. A
breakout of the $856 million in Federal employment taxes is shown in the following
To determine whether the $856 million in employment taxes for SSA appeared reasonable, we reviewed the Forms W-2 data reported to SSA as part of the AWR process. Our comparison showed the tax deposits totaled approximately $855,704,000 in employment taxes while Forms W-2 totaled about $855,748,000, a difference of about $44,000. The $44,000 difference primarily related to credits received from the IRS for prior year adjustments for Social Security and Medicare taxes. As a result, we believe DOI paid the appropriate amount of employment taxes to the IRS for SSA employees later reported through the AWR process.
EMPLOYMENT TAX WITHHOLDINGS
Based on our review of personnel and payroll records for 100 sample SSA employees in TY 2004, we found DOI withheld the proper amount of Federal employment taxes from the employees' pay. We performed this test to ensure DOI accurately computed the employment tax withholdings. Our review of the personnel and payroll records for the 100 sample employees-50 employees who submitted Forms W-4 in TY 2004 and 50 employees who did not request a change to their Federal withholdings-showed the following:
Sample Employees with Forms W-4. The 50 sample employees submitted a total of 85 Forms W-4 during TY 2004 that were processed by SSA Personnel Offices or through Employee Express, which is an automated system that allows Federal employees to make discretionary changes to their payroll records. Based on our review of the Forms W-4 and the employees' FPPS records, we found SSA properly processed the 85 requests by entering the correct withholdings data into FPPS. Furthermore, to determine if DOI withheld the proper amount of employment taxes from the sample employees' pay, we calculated the withholding amounts of Federal income, Social Security, and Medicare taxes for all 50 employees and compared the calculated amounts to the employment tax withholdings shown in the employees' FPPS records. We found in all 50 cases, the amounts agreed.
Sample Employees without Forms W-4. For the 50 sample employees who did not submit Forms W-4 during TY 2004, we calculated the withholding amounts of Federal income, Social Security, and Medicare taxes for the last pay period in TY 2004 and compared the calculated amounts to the amount of employment tax withholdings shown in the employees' payroll record. Again, we found the amounts agreed.
Our review did not disclose any material discrepancies with the amount of Federal employment taxes withheld and deposited for SSA employees in TY 2004. We found DOI properly deposited approximately $856 million in employment taxes to the IRS for SSA employees during the period reviewed. Furthermore, we found DOI withheld the correct amounts of Federal income, Social Security and Medicare taxes from SSA employees' wages during the period.
SSA did not have any specific comments to the draft report. The full text of the Agency's memorandum is included in Appendix I.
Patrick P. O'Carroll, Jr.
APPENDIX A - Acronyms
APPENDIX B - Form 941 Employer's Quarterly Federal Tax Return
APPENDIX C - Form W-4 Employee's Withholding Allowance Certificate
APPENDIX D - Listing of Federal Entities
APPENDIX E - Description of SSA's Payroll Process
APPENDIX F - Scope and Methodology
APPENDIX G - Sampling Methodology
APPENDIX H - Annual Wage Reporting Reconciliation
APPENDIX I - Agency Comments
APPENDIX J - OIG Contacts and Staff Acknowledgments
AWR Annual Wage Reporting
DOI Department of Interior
EIN Employer Identification Number
FPPS Federal Personnel and Payroll System
HRMIS Human Resource Management Information System
IRS Internal Revenue Service
MTAS Mainframe Time and Attendance System
NBC National Business Center
OIG Office of the Inspector General
SSA Social Security Administration
TY Tax Year
Form 941 Employer's Quarterly Federal Tax Return
Form W-2 Wage and Tax Statement
Form W-3 Transmittal of Wage and Tax Statements
Form W-4 Employee's Withholding Allowance Certificate
SF-50 Notification of Personnel Action
SF-52 A Request for Personnel Action
Form 941 Employer's Quarterly Federal Tax Return
Form W-4 Employee's Withholding Allowance Certificate
Listing of Federal Entities
In Tax Year (TY) 1998, the Department of Interior's National Business Center (NBC) started processing Social Security Administration's (SSA) payroll through its Federal Personnel Payroll System. As shown below, SSA was among 35 Federal entities receiving personnel and payroll services from NBC in TY 2004.
1 Advisory Council Historic Preservation
2 African Development Foundation
3 Arctic Research Commission
4 Chemical Safety and Hazard Investigation Board
5 Commission of Fine Arts
6 Consumer Product Safety Commission
7 Department of Education
8 Department of the Interior
9 Department of Transportation
10 Equal Employment Opportunity Commission
11 Executive Residence/White House
12 Federal Labor Relations Authority
13 Federal Trade Commission
14 Harry S. Truman Scholarship Foundation
15 Inter-American Foundation
16 James Madison Memorial Fellowship Foundation
17 Millennium Challenge Corporation
18 National Aeronautics and Space Administration
19 National Commission on Libraries and Information Science
20 National Labor Relations Board
21 National Science Foundation
22 National Transportation Safety Board
23 Nuclear Regulatory Commission
24 Office of Navajo Hopi Indian Relocation
25 Overseas Private Investment Corporation
26 Pension Benefit Guaranty Corporation
27 Presidio Trust
28 Securities and Exchange Commission
29 Selective Service System
30 Social Security Administration
31 Trade and Development Agency
32 United States Holocaust Memorial Museum
33 United States International Trade Commission
34 Utah Reclamation Mitigation Conservation Commission
35 Valles Caldera Trust
Description of SSA's Payroll Process
When a new Social Security Administration (SSA) employee is hired, he or she must complete a Form W-4, Employee's Withholding Allowance Certificate, so the correct amount of Federal income tax can be withheld from the wages. A SSA Human Resource Specialist enters into the Department of Interior's (DOI) Federal Personnel and Payroll System (FPPS), the complete personnel record for the employee, including the job title, Social Security number, grade and salary, number of allowances (via Form W-4), and full or part-time status. A Standard Form 52, Request for Personnel Action, and Standard Form 50, Notification of Personnel Action, are processed by DOI's FPPS. DOI in turn sends SSA an electronic file to update SSA's Human Resources Management Information System (HRMIS).
At the end of each pay period, SSA enters the employee's time and leave data into its Mainframe Time and Attendance System (MTAS). The data is then electronically transmitted to FPPS to generate the employee's pay. DOI uses a commercial tax package to calculate the applicable Federal, State and local taxes. During this process the FPPS master payroll record is updated and FPPS produces an accounting feeder file for the current pay period for SSA employees as well as a Leave and Earnings Statement for each employee. The payroll data is then transmitted electronically by DOI to the Department of Treasury for disbursement. The Department of Treasury transmits direct deposit data to the Federal Reserve, which in turn transmits direct deposit data to various banks nationwide. This data serves as the basis for the issuance of payroll checks and direct deposit payments to SSA employees.
At the completion of the pay period, DOI uses FEDTAX II to deposit Federal employment taxes withheld from employee wages to the Internal Revenue Service (IRS). The Federal employment taxes include Federal income, Social Security and Medicare taxes. DOI reports this data to the IRS at the aggregate level for 35 Federal entities under a single Employer Identification Number. On a quarterly basis, DOI prepares the Form 941, Employer's Quarterly Federal Tax Return, to report the liability for the Federal employment taxes for its 35 Federal clients. The Forms 941 are transmitted electronically to the IRS via FEDTAX II. By January 31st of the following year, DOI generates from FPPS the Forms W-2, Wage and Tax Statements and sends copies of the forms to each employee and to SSA as part of the Annual Wage Reporting (AWR) process.
Each year, SSA performs the AWR reconciliation, which is a process that compares the Social Security and Medicare wage information employers report to SSA (via Forms W 2), and the IRS (via the Forms 941) to ensure the amounts balance. When more wages are reported to the IRS than to SSA, SSA is concerned that employees' earnings are not recorded correctly in the Agency's records. SSA examines these cases and attempts to resolve any difference without contacting the employer. When this effort is unsuccessful, SSA sends a notice to the employer, requesting information to resolve the case. If SSA does not receive a response within 45 days, the employer is sent a second notice. When no response is received after the second notice, the IRS is responsible for contacting the employer and may impose penalties, if necessary. When more wages are reported to SSA than to the IRS, the IRS investigates these cases because they could represent unpaid employment taxes. A flowchart of the payroll process follows:
Scope and Methodology
To accomplish our objective, we:
Reviewed prior Social Security Administration (SSA) Office of the Inspector General reports, as well as Government Accountability Office and Treasury Inspector General for Tax Administration reviews, related to reporting of employment taxes.
Reviewed applicable Internal Revenue Service (IRS) regulations and circulars.
We limited the scope of our review based on prior audit work conducted by independent auditors:
SSA's independent auditors performed internal control testing during Fiscal Year 2005 to determine whether: (1) procedures related to payroll, specifically new hires, were in place and operating effectively; and (2) SSA new hire information in the Human Resource Management Information System was reconciled to the Department of Interior's (DOI) Federal Personnel and Payroll System (FPPS).
DOI's independent auditors performed internal control testing to evaluate the reliability of the employee withholdings and employer contributions reported in DOI and SSA's Reports of Withholdings and Contributions for Retirement, Health Benefits, and Life Insurance for 3 pay periods in Tax Year (TY) 2004.
DOI's independent auditors tested controls and operational effectiveness of DOI's FPPS. The scope of the review covered October 1, 2004 to July 31, 2005.
Met with staff at SSA and DOI to gain an understanding of the payroll process.
Reviewed copies of the TY 2004 Forms 941, Employer's Quarterly Federal Tax Return, DOI submitted to the IRS.
Reviewed the Federal Tax Pay Period Collection Reports generated from FPPS and supporting schedules for SSA employees.
Reviewed copies of the TY 2004 deposit confirmations generated from the FEDTAX II system.
Reviewed the results from the TY 2004 Annual Wage Reporting reconciliation. As part of the reconciliation process, SSA compares Social Security and Medicare wage information employers report to SSA and the IRS via the Forms W-2, Wage and Tax Statements, and the Forms 941.
Obtained a listing from DOI's FPPS of SSA employees who were in pay status during TY 2004.
Obtained from DOI, a listing of SSA employees who submitted either paper or electronic Forms W-4, Employee's Withholding Allowance Certificate, during TY 2004. We requested and reviewed leave and earnings statements from FPPS for 100 sample employees and compared this information to the actual Forms W-4. The Forms W-4 were provided by the relevant SSA Servicing Personnel Office. See Appendix G for our sample methodology.
We determined the data used in our audit work was sufficiently reliable to meet the audit objectives. We conducted our audit work from April 2006 to January 2007 in Philadelphia, Pennsylvania. The SSA entity reviewed was the Center for Personnel Management Information Systems and Payroll within the office of the Deputy Commissioner for Human Resources. We conducted our audit in accordance with generally accepted government auditing standards.
For Tax Year (TY) 2004, we obtained a listing of Social Security Administration (SSA) employees from the Department of Interior's Federal Personnel Payroll System (FFPS). The listing included 70,537 SSA employees who were in active status anytime during TY 2004. To focus our analysis better, we divided the population into two groups:
The first group consisted of 12,709 employees who submitted Internal Revenue Service (IRS) Forms W-4, Employee's Withholding Allowance Certificate, during TY 2004. We randomly selected 50 employees from this group. We reviewed their FPPS records for the pay period prior to the effective date of the Form W-4 and the pay period immediately following to determine if SSA correctly processed the Forms W-4. Further, we calculated the withholding amounts of Federal income, Social Security, and Medicare taxes for the applicable pay periods to determine whether the correct amounts of Federal employment taxes were withheld from their pay.
The second group consisted of 57,828 employees who did not submit Forms W-4 during TY 2004. We randomly selected 50 sample employees from this group and reviewed their first and last payroll records during TY 2004 to determine if there were any changes in the amount of Federal income taxes withheld. Further, we calculated the withholding amounts of Federal income, Social Security, and Medicare taxes for the last pay period in TY 2004 to determine whether the correct amounts of Federal employment taxes were withheld from their pay.
Annual Wage Reporting Reconciliation
In our review of the Social Security Administration's (SSA) Tax Year (TY) 2004 Annual Wage Reporting (AWR) reconciliation, we found the Department of Interior (DOI) may have underreported Social Security and Medicare wages totaling $230,000 on the Form 941, Employer's Quarterly Tax Return. While the $230,000 represents a relatively small percentage (.001 percent) of the reported Social Security and Medicare wages reported during TY 2004 for all 35 Federal entities, we believe it is incumbent upon DOI to ensure that it accurately reports wage and tax information to both SSA and the Internal Revenue Service (IRS). Under the current AWR reconciliation process, this wage difference is a matter to be resolved between DOI and the IRS.
As part of the AWR reconciliation process, SSA compares the Social Security and Medicare wages employers report to SSA and the IRS to ensure the amounts balance. This process can identify instances where employers may have under/over-reported the amount of Social Security and Medicare wages, which could result in an under/over-reporting of employment taxes. As of January 2007, the TY 2004 reconciliation showed DOI may have underreported about $230,000 in Social Security and Medicare wages to the IRS (see table below). We determined the underreported wages could potentially represent approximately $22,500 in unpaid employment taxes. We were not able to conclude whether the underreported wages related to SSA because the amounts were reported at the aggregate level for 35 Federal entities and we did not have access to records for the other 34 entities.
TY 2004 SSA/IRS Reconciliation
Agency Social Security Wages
IRS $6,098,775,621.19 $10,297,557,229.51 $16,396,332,850.70
SSA $6,098,942,040.93 $10,297,621,193.71 $16,396,563,234.64
Difference ($166,419.74) ($63,964.20) ($230,383.94)
Taxes ($20,636.05) ($1,854.96) ($22,491.01)
The IRS investigates the discrepancy when higher Social Security and Medicare
wages are reported to SSA than to the IRS. According to DOI staff, they made
attempts to resolve the discrepancies by submitting three corrected Forms 941
to the IRS from June 2005 to October 2006. Furthermore, we found as of August
2006, DOI submitted numerous corrected Forms W-2 to SSA that adjusted the wage
Date: March 30, 2007
To: Patrick P. O'Carroll, Jr.
From: Larry W. Dye
Subject: Office of the Inspector General (OIG) Draft Report, "The Social Security Administration's (SSA) Compliance with Employee Tax Requirements" (A-03-06-16062) -- INFORMATION
We appreciate OIG's efforts in conducting this review. We are pleased that this review found our Agency to be within full compliance with regulations regarding employee tax requirements and payroll procedures. In addition, the review did not disclose any material discrepancies with the amount of taxes deposited with the Internal Revenue Service for SSA employees during the review periods and found the Department of Interior is properly withholding Federal employment taxes for Agency employees.
Please let me know if we can be of further assistance. Staff inquiries may be directed to Candace Skurnik, Director, Audit Management and Liaison Staff, on extension 54636.
OIG Contacts and Staff Acknowledgments
Walter Bayer, Director, Philadelphia Audit Division, (215) 597-4080
Cylinda McCloud-Keal, Audit Manager, (215) 597-0572
In addition to those named above:
Frank Trzaska, Auditor-in-Charge
Damon Mahoner, Auditor
Mildred Soto, Auditor
For additional copies of this report, please visit our web site at www.socialsecurity.gov/oig
or contact the Office of the Inspector General's Public Affairs Specialist at
(410) 965-3218. Refer to Common Identification Number A-03-06-16062.
Overview of the Office of the Inspector General
The Office of the Inspector General (OIG) is comprised of our Office of Investigations (OI), Office of Audit (OA), Office of the Chief Counsel to the Inspector General (OCCIG), and Office of Resource Management (ORM). To ensure compliance with policies and procedures, internal controls, and professional standards, we also have a comprehensive Professional Responsibility and Quality Assurance program.
Office of Audit
OA conducts and/or supervises financial and performance audits of the Social Security Administration's (SSA) programs and operations and makes recommendations to ensure program objectives are achieved effectively and efficiently. Financial audits assess whether SSA's financial statements fairly present SSA's financial position, results of operations, and cash flow. Performance audits review the economy, efficiency, and effectiveness of SSA's programs and operations. OA also conducts short-term management and program evaluations and projects on issues of concern to SSA, Congress, and the general public.
Office of Investigations
OI conducts and coordinates investigative activity related to fraud, waste, abuse, and mismanagement in SSA programs and operations. This includes wrongdoing by applicants, beneficiaries, contractors, third parties, or SSA employees performing their official duties. This office serves as OIG liaison to the Department of Justice on all matters relating to the investigations of SSA programs and personnel. OI also conducts joint investigations with other Federal, State, and local law enforcement agencies.
Office of the Chief Counsel to the Inspector General
OCCIG provides independent legal advice and counsel to the IG on various matters, including statutes, regulations, legislation, and policy directives. OCCIG also advises the IG on investigative procedures and techniques, as well as on legal implications and conclusions to be drawn from audit and investigative material. Finally, OCCIG administers the Civil Monetary Penalty program.
Office of Resource Management
ORM supports OIG by providing information resource management and systems security. ORM also coordinates OIG's budget, procurement, telecommunications, facilities, and human resources. In addition, ORM is the focal point for OIG's strategic planning function and the development and implementation of performance measures required by the Government Performance and Results Act of 1993.