The Catholic University of America

This article is reproduced with the permission of the Maryland Bar Journal, published by the Maryland State Bar Association. The article appeared in the March-April 2004 issue of the MBJ.

Social Security Mismatch Letters

By Christopher A. Weals

Mr. Weals is a partner in the Washington, DC office of Seyfarth Shaw LLP.

Individuals who are lawfully permitted to work in the United States are entitled to Social Security benefits based on the number of "credits" they earn while working in jobs covered by Social Security. The Social Security Administration ("SSA") keeps track of a worker's credits (job earnings) through his or her Social Security number ("SSN"), the nine-digit identification number that the SSA first created in 1936 for that purpose.

Employers, in turn, use a worker's SSN to report job earnings to the Internal Revenue Service ("IRS") for income tax purposes, typically by way of the IRS's Form W-2 (Wage and Tax Statement). The same form is used by the SSA to compute an employee's Social Security credits. If, however, an employee's name and SSN do not match up in the SSA's records, the SSA cannot give a worker credit for his or her wages for that year. As a consequence, the worker's earnings are placed in a "suspense account" until such time as it can be determined to which SSN the earnings should be credited.

Over the last decade, much to its consternation, the SSA each year has placed an average of $5 million dollars in workers' earnings in suspension accounts. This figure represents the earnings of between 6 and 7 million workers. Currently, approximately $280 billion dollars are stored in the SSA's earnings suspense file. Aside from the frustration of not being able to properly credit a worker's earnings, it is administratively much more burdensome to place earnings in suspension than to post a worker's wages to his or her earnings record.

In an effort to address this problem, in 1993 the SSA started sending out "mismatch letters" to employers, notifying them that the information on the W-2s (name and SSN) they submitted did not match SSA's database and asking employers to rectify the discrepancies. Prior to 2002, such letters were only issued to employers who had a10% or greater mismatch rate. Between 1993 and 2000, the SSA sent out an average of 40,000 mismatch letters a year. In 2001, that number jumped to 110,000 letters, with an average of 1 in 60 employers receiving a mismatch letter. In 2002, the SSA sent mismatch letters to every employer who had at least one employee whose information did not match its records. This policy change resulted in the issuance of roughly 900,000 letters, affecting 7 million workers; approximately 1 in 8 employers received a letter from the SSA in 2002.

The sheer volume of mismatch letters SSA sent out, along with the threat that employers could be subject to IRS fines for incorrectly reporting employee SSNs, resulted in panic and uncertainty among both employers and employees. An unintended consequence of the SSA's mass mailing was that employees were fired or voluntarily resigned due to the mistaken assumption that the mismatch letter was notice of an immigration violation. As a result, thousands of workers lost or quit their jobs.

Current Policy on Issuing Mismatch Letters

To avoid a replay of 2002, in 2003 the SSA redesigned its policy regarding which employers would receive mismatch letters. Under the current policy, only employers with more than 10 employees with mismatched information or for whom mismatched employees represent 1/2 of 1% of the W-2s filed will receive a mismatch letter. The SSA estimates that it will only issue approximately 130,000 letters under the revised policy. In addition to sending a letter to the employer, the SSA will also send a letter to the employee. The employee is supposed to receive his or her copy of the letter two to three weeks before the employer receives its copy. The SSA has tried to eliminate any language in the letter that would be viewed as threatening so that employers would be less likely to fire or suspend employees covered by mismatch letters. The letter also cautions employers that taking adverse action against an employee could violate state and/or federal law and subject the employer to legal consequences. Finally, the letter clearly states that it does not contain information relating to an employee's immigration status.

IRS Penalties: Idle Threat?

While the IRS, not the SSA, has the authority to fine employers who submit incorrect or false Social Security information, to date, the IRS has not acted on its authority to levy fines. The IRS is authorized to fine employers $50 for each incorrectly reported SSN (contained in W-2 form) up to a maximum of $250,000 per year for large employers and $100,000 per year for small employers. A large employer is defined as having gross receipts that exceed $5 million in a calendar year. A small employer is defined as having averaged no more than $5 million in gross receipts during the three years immediately preceding the tax year in question. 26 U.S.C. §6721(a), (d). The IRS had planned to begin issuing fines in 2004 for inaccuracies that arose in 2002. However, it now appears that the IRS may delay levying fines for another year.

Even where an employer has submitted inaccurate Social Security information, it will not automatically be subject to a fine. There are several exceptions or waivers: 1) if less than 1/2 of 1% (less than 10) of the employer's W-2 forms fail to match SSA records, or 2) if the employer's Social Security information is based on a duly executed W-4 form and the employer has shown due diligence in trying to obtain correct information after being placed on notice that the information is incorrect. Due diligence may be shown if the employer solicits correct information from an employee by requesting that s/he fill out a new W-4 form.

Responding to a Mismatch Letter

Under the current process, with employees now receiving a copy of the mismatch letter in advance of the employer, some employees may take the initiative and resolve the SSN discrepancy even before the employer receives its copy of the mismatch letter. If the problem remains unresolved when the employer receives its copy, the employer may consider taking some or all of the following steps to address the situation.

Employees are not obligated to respond to mismatch letters by a fixed deadline. However, the SSA does request that employers respond to the letter within 60 days. To facilitate the process, employers should use the 60-day time frame to notify employees and urge them to respond promptly to the problem. Before contacting an employee, employers should double check their records to make sure that the discrepancy was not caused by their own clerical or transcription error.

Once an employer determines that the discrepancy is not the result of a clerical error, the next step should be to contact the employee. To the extent possible, the employer should communicate in writing with the employee so that there is a written record of what measures were taken by the employer to rectify the error. This paper trail will be useful to establish that the employer exercised due diligence. The memo to the employee should set forth the problem, recommend that the employee contact the SSA in an effort to correct the problem, and include a specific date by which the employee should report back to the employer that the matter has been resolved or, if not resolved by that date, provide an explanation to the employer why the matter has not been resolved. If the employee provides corrected information to the employer, the employee should be given a new W-4 form to complete to reflect the corrected information. In addition to completing a new W-4 form, an employer must complete and submit W-2c (Corrected Wage and Tax Statement) and W-3c forms (Transmittal of Corrected Wage and Tax Statement).

What Employers Should Not Do in Response to a Mismatch Letter

In responding to a mismatch letter, an employer should not automatically assume that the mismatched number is evidence of employee fraud, since there are many lawful reasons for mismatches, such as a name change or a data entry error. An employer should not take any adverse action against the employee unless the circumstances identified in the following section are present. Nor should an employer demand that the employee produce his or her Social Security card. However, an employer may look at the card for comparison purposes if the employee volunteers to produce it. ***See note below for clarification in tax context.

Under What Circumstances May Employers Take Adverse Action Against Employees?

If, during the process of resolving the discrepancy, an employer learns that the employee is an illegal alien, the employer has a duty to terminate the employee or risk violating federal law. If, however, the employer learns that at the time of hire the employee was illegal but has since obtained lawful status, the employer must consider what action, if any, should be taken against the employee for having presented false documents to obtain employment. Most companies have a policy that falsification of employment application materials and other documents is grounds for termination, so the employer must ensure that its policy is enforced uniformly. Last, if the employee fails to explain or reconcile the Social Security discrepancy after being given an opportunity to do so, the employer may have no option but to terminate the employee pending receipt of valid Social Security information. Because each situation is different, it is recommended that the employer consult with legal counsel before taking such action.

In a recent Seventh Circuit decision, the court of appeals rejected a retaliation claim filed by a human resources administrator who was fired after she refused to process corrections that were submitted by employees after the SSA notified the plaintiff's employer that 10% of its W-2s contained Social Security information that did not agree with its records. Arres v. IMI Cornelius Remcor, Inc., 333 F.3d 812 (7th Cir. 2003). The plaintiff concluded that the employees were illegal immigrants after she found no inconsistencies in the company's records that could have led to the discrepancies. The company rejected Arres's advice to fire the employees and, instead, sent letters to the employees asking them to correct the reported errors. Believing that the company's approach to the problem was unlawful -- even though the company had been advised by legal counsel how to proceed -- Arres refused to process the corrections and was subsequently fired. Arres contended that her firing was in retaliation for her attempting to comply with federal immigration law.

The Seventh Circuit disagreed, holding that Arres's refusal to process the employees' paperwork was not protected by the immigration law's retaliation provision, which only protected against complaints of discrimination based on national origin and citizenship. The appeals court further found that the plaintiff's public policy argument was flawed because she was not free to follow "an idiosyncratic view of the law's demands" and engage in insubordinate conduct.

What Measures Can Employers put into Place to Identify Social Security Inaccuracies Before They are Reported?

Depending on the extent to which Social Security errors have been a problem, an employer may want to consider adopting a written policy outlining the steps it will take to verify Social Security information before the data is reported to the IRS and the SSA.

As part of the hiring process, an employer may demand that a job applicant present a valid SSN as a condition of hire. An employer should specify that it is requesting the number for payroll tax purposes, not for employment authorization (I-9) purposes. In reviewing employee Social Security information, an employer should be aware that some SSNs are suspect on their face. For example, no SSNs have been issued by the SSA where the first three digits (referred to as the "area") consist of the following: "000," "800" or "900." No SSNs have been issued with "00" in the two-digit section (referred to as the "group") or with "0000" in the four-digit section (referred to as the "serial number"). While an individual's name may change, his or her SSN never changes. Thus, a claimed change in one's SSN should raise an immediate red flag that something is awry.

The SSA offers a system by which employers can verify an employee's SSN. The system, which is called the Employee Verification Service ("EVS"), matches an employer's records of employee names and SSNs with the SSA's records. The system can be used at no cost to the employer and can be used to verify the information at the time the employee is hired up to just before the employer submits its W-2 forms. The EVS, however, should not be used to screen job applicants. SSA cautions that a negative EVS response makes no representation with respect to an employee's immigration status.

In September 2002, the SSA implemented a nationwide policy change with respect to the processing of SSN applications submitted by all foreign nationals. Under the current system, the SSA verifies a foreign national's immigration documents and status with the Systematic Alien Verification for Entitlements ("SAVE") system. SAVE, an information service and database, must be consulted before a foreign national's SSN application or request for replacement card can be processed. If a foreign national has been in the country less than 30 days, his or her application can be processed, even if SAVE cannot verify the individual's INS documentation. However, if the individual submits the application more than 30 days after his or her arrival in the United States, s/he will have to wait for positive verification from SAVE before obtaining a SSN. The review process is even more rigorous for foreign nationals who were born in, or who most recently resided in, the countries of Iran, Iraq, Sudan or Libya.

In the future, employers also will be able to verify employee SSNs through the internet-based Social Security Number Verification System ("SSNVS"). Currently, SSNVS is only available to a small group of employers as part of a pilot program. The SSA has proposed making SSNVS available to more employers but no decision has been made yet about expanding its availability. It still remains unclear how SSNVS will comply with the anti-discrimination provisions of the Immigration Reform and Control Act of 1986, which is supposed to safeguard employee information from unauthorized verifications and prohibit employers from targeting selected groups of individuals.

Conclusion

While there is no foolproof method to avoid reporting incorrect SSNs, as this article illustrates, there are checks and balances that can be put into place that will reduce an employer's risk of reporting faulty data. As important as it is for employers to strive to obtain accurate Social Security information, it is just as important that employers not jump to conclusions about an employee's immigration status when a mismatch letter is received. Over time, the problem of Social Security mismatches should diminish if employers adopt systematic verification procedures like the ones described in this article.

 
*** While this may be the case in the immigration context, tax law generally requires an employer to ask an employee for the social security card upon commencement of employment. See 26 CFR Sec. 31.6011 (b) -2 .








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