Don’t Rely on IRS Accuracy for Tax Withholding

Federal law requires U.S. businesses to withhold income, Social Security, and Medicare taxes from employee paychecks. They are also required to submit the withheld monies along with their own contributions. What happens if an employer gets it wrong? Fines and penalties await, at minimum. Companies could be prosecuted if the IRS believes errors were intentional.

Knowing all of this inevitably leads to the question of whether the IRS can be relied on for accuracy. In a word, no. This is why it is vitally important for payroll departments to know what they are doing. It is why companies like BenefitMall, a Dallas-based provider of payroll and benefits management services, go to such great lengths to ensure 100% accuracy in all tax withholding and payment activities.

IRS Not Keeping Up

You would think the IRS would be incredibly accurate in their record-keeping given their mission of collecting trillions in annual revenues. It turns out that reality is far different from perception. According to a Forbes piece authored by Robert W. Wood, the IRS is notoriously behind the 8-ball when it comes to underreported withholding. Wood explained that the IRS’ inability to keep up could be costing the government upwards of $7 billion.

The underlying problem seems to be discrepancies between records filed with the IRS and those filed with the Social Security Administration. The government originally came up with the Combined Annual Wage Reporting (CAWR) system to compare data from both agencies and, although the system seems to be working well, the IRS is not following up on the vast majority cases with discrepancies.

A federal report cited by Wood indicates that the IRS only followed up on 17% of the discrepancy cases from 2013. That means 83%, or more than 114,000 cases, were never worked. Things have not improved that much over the last four years. It’s probably safe to assume that billions more have not been collected because the IRS is simply not keeping up.

It Goes Both Ways

Now, it is easy to take the information from the previous few paragraphs and consider it incentive to under report withholding and make lower payments. Before you make that assumption though, understand that the IRS’ lack of accuracy is a train that moves in both directions. Despite the many systems in place to guarantee accuracy, anyone who has been audited knows that government records leave a lot to be desired.

All it would take is a single mistake by either the IRS or the Social Security Administration to create an apparent discrepancy that could trigger an audit. Even if the discrepancy is a mistake on the government’s part, the onus is on the taxpayer to prove innocence. Failure to do so almost always results in fines and penalties.

It should be obvious that keeping meticulous records is a prerequisite for staying out of trouble with the government. But those records also have to be generated with accurate data, by a software system capable of handling the job. Staying out of harm’s way in the 21st century almost demands a state-of-the-art software solution administered through a company like BenefitMall.

Businesses still handling payroll via legacy systems based on paper and handwritten ledgers are asking for trouble. Even local computer systems that are more than seven or eight years old are vulnerable to the kinds of mistakes that can lead to a discrepancy. At the end of the day, the IRS cannot be trusted for their accuracy, so it is up to employers and their payroll departments to take responsibility in case the government comes calling.