IRS develops compliance strategy to address state and municipal employees' FICA tax.

The Office of Inspector General of the Social Security Administration (SSA) issued its audit report of the social security coverage of state and local government employees. This report indicates that there may be a sizable number of public employers not accurately reporting the social security coverage status of their employees. In fact, the potential maximum tax liability exposed to risk is $17 billion.

The review of social security coverage for state and local government employees was undertaken because of a concern by the SSA and the IRS that there were a significant number of public employers not reporting their employees' status properly. The lack of compliance was thought to be caused by a poor understanding of the SSA provisions for public employees created by major changes in the law.

The problem that results in noncompliance by public employers is that the SSA is obligated to pay retroactive coverage and benefits even though social security taxes have not been paid into the trust funds. Additionally, state employers may be liable for past taxes that should have been paid to the trust funds.

Noncompliance was determined to be caused by complexity of the law, complicated changes in the coverage provisions, and a diminished role of state social security administrators. Additionally, budget constraints reduced the amount of overview the program was receiving and the educational materials available to the public employers.

The audit report recommended the following action be taken: the SSA fund an ongoing compliance review program to ensure compliance with the program's provisions; and the SSA pursue a memorandum of understanding between the SSA and Service to specify the responsibilities of both agencies, including performing and/or funding compliance reviews, educating public employers and improving the operational and informational exchange between the two agencies to deal with compliance problems. Additionally, the report recommends a long-term solution of program simplification.

In response to the above audit report, the IRS has developed a three-part compliance strategy, including (1) education and outreach; (2) data and analysis; and (3) compliance enforcement activity.

Education and Outreach

Each IRS district makes an assessment of compliance levels of the state/local government employers in its district. If compliance levels are considered low, the outreach strategy is implemented. To ensure program consistency throughout the country, a task group has developed an outreach strategy. The outreach procedure consists of two stages. Broad outreach is the first stage, in which information is provided to all public employers. In a further targeted outreach stage, specific noncompliant employers are identified and contacted by the Service. To ensure district offices are properly implementing the outreach strategy, the Office of Government Liaison and Disclosure is monitoring the progress. In addition, a "Reference Guide for FICA Reporting by State/Local Government Employers" has been distributed to all governors, county supervisors, state social security administrators, SSA field representatives md IRS regions and districts.

Data and Analysis

Information relating to compliance levels is restricted to data on specific geographic areas and statistics among certain types of employers. Information that would allow comparisons to be made for state/local government employers between market segments is limited. The Office of Research & Analysis is currently working to expand the Service's capability to measure compliance and identify noncompliant employers.

Compliance Enforcement

The IRS expects to resolve noncompliance issues relating to social security coverage of state and local government employees by bringing employers into voluntary compliance. Examinations will only be used after outreach is unsuccessful in obtaining voluntary compliance. For fiscal year 1998, the Service has committed 41 staff years to state and local government employer examinations. Normal collection procedures are applicable to state and local government employers. Examiners have been instructed to consider the use of installment agreements and have early coordination between the Examination Division and the Collection Division. Obstacles of enforcement include government employers not having funds available to pay assessments. In addition, the involvement of charitable entities may cause complications.