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Ways and Means Presses SSA, IRS, and States to Improve Oversight of Payroll Tax Collection and Compliance for State and Local Governments

June 30, 2017

The Ways and Means Social Security and Oversight Subcommittees – chaired by Reps. Sam Johnson (R-TX) and Vern Buchanan (R-FL) – yesterday held a hearing examining how Social Security works for the nearly three-quarters of state and local workers who participate in the program. Specifically, Members examined the roles that the Social Security Administration (SSA), the Internal Revenue Service (IRS), and state Social Security administrators play in collecting the right amount of payroll taxes and accurately paying benefits when state and local workers retire.

As Chairman Johnson explained at the beginning of the hearing, because state and local governments’ participation in Social Security has changed over time and can vary between states, localities, and even within a school, it is difficult for state and local workers and their employers to fully understand and comply with the law – and difficult for the SSA and the IRS to administer the law properly.

As Chairman Buchanan said:

“Giving states flexibility on coverage decisions is important, however it often leads to complicated individual coverage situations for state and local employees. This creates unique challenges for state and local employers as well as the SSA and the IRS, who oversee the program.”

Chairman Johnson outlined some of the challenges facing the SSA, the IRS, and state Social Security administrators when it comes to Social Security coverage for state and local workers:

“Social Security doesn’t know whether state or local governments are reporting the right amount of wages and social security counts earnings towards future benefits, even if taxes weren’t paid. The IRS doesn’t know whether an employee, employer, or worker is paying the right amount of payroll tax.” 

Witnesses representing the SSA, the IRS, and state Social Security administrators all attributed these challenges to the complex coverage rules for state and local governments. Sunita Lough, Commissioner for the Tax Exempt and Government Entities Division at the IRS, said:

“If [employers] do make errors, as my colleague from the Social Security Administration said, most of the time it is because of complexities of the law and the lack of understanding.”

Rep. Jackie Walorski (R-IN) expressed concern that an audit is the only way to ensure state and local governments are complying with the law, acknowledging:

“There is not an audit on every single person … and it is a result of massive complexity of how this thing is tied together – which I think reiterates again how badly we need reform and a much more simple kind of system than we have now. Short of an audit, there is really no way to tell for sure if these records actually match.”

Rep. Carlos Curbelo (R-FL) asked Ms. Lough about how frequently the IRS conducts audits, especially given the fact that payroll taxes for Social Security and Medicare make up 32% of all collections for the IRS. Ms. Lough explained that, when it comes to the 90,000 state and local government employers the IRS oversees, only a few hundred receive audits each year.

Expressing the need for the IRS to take more action to ensure the right amount of payroll taxes are collected and Social Security benefits are going to the right people, Rep. Curbelo responded:

“We’ve heard many examples over the years of local employers being noncompliant … it does seem to me that we are leaving a significant amount of money on the table. I still wonder if there is a focus on enforcing compliance in this area, given that it represents around a third of collections for the IRS.”

As Chairman Johnson concluded at the end of the hearing:

“When errors go unnoticed for years … this has real effect on workers’ retirement security and on the trust funds. Social Security, the IRS, and states must accept responsibility for the roles they play in making this process work the way it should. Americans deserve nothing less.”

CLICK HERE to learn more about today’s hearing.