IRS Advised to Improve Verification of Agency Retiree Income

Nearly $16 million of additional federal employees’ money could have been withheld from distribution if the Internal Revenue Service had better communicated errors in benefits statements to agency payroll offices, according to the Treasury Inspector General for Tax Administration.

Mistakes such as wrong Social Security numbers on 50,000 income statements were submitted by 13 agencies in fiscal 2015, according to a report released last week. But due to poor communication, the IRS notified only four of the agencies, leaving 28 percent of the faulty statements in place.

Agencies are required to “file accurate tax distribution statements listing reportable payments, including pensions and annuities, and perform required income tax withholding at the highest level when the payee SSN is missing or when notified by the IRS that the payee SSN is invalid,” TIGTA said.

Overall, in fiscal 2015, federal agencies reported more than $162 billion in retirement payments to the IRS on about 6.9 million benefit statements, which the agency reviews for accuracy.

Flaws in the execution of the IRS review process include sending error notices to the wrong address, unclear instructions for preparing the benefits statements, and a failure by the IRS to monitor receipt of the error notices. “Some agencies may be unable to extract the payee list” from agency payroll offices, the inspector general noted.

The problems seem to lie in interagency communication systems. A sample solution is for the tax service to “consider alternative forms of delivering the error notice, especially for federal agencies that receive the notice on a CD,” the report said. “First, an agency must navigate more than 10 pages of technical directions to extract the CD’s contents. In addition, officials at the Office of Personnel Management stated that they cannot process CDs because their computers do not have a CD-ROM (read-only memory) drive pre-installed, and they have internal policies that prevent them from accepting data from unapproved mass communication.”

The IG recommended that the IRS consider asking all federal agencies that file benefit statements with missing or inaccurate SSNs to explore alternative notification processes, and conduct outreach so that agencies understand their filing and withholding requirements.

The tax service agreed with two out of three recommendations. David Horton, acting commissioner of its Tax Exempt and Government Entities Division, balked partially at seeking alternative transfer methods, noting that the IRS does not yet operate a secure file sharing system to receive electronic transfers on a par with such agencies as the Defense Finance and Accounting Service and the Treasury Department’s Banking and Financial Services.