When there is a mismatch in the employee name and/or Social Security number as reported on Forms W-2, compared to records at the Social Security Administration, the wages reported with the mismatched name or SSN are placed in a suspense file. Because FICA taxes were paid and withheld from wages posted to suspense, employees with a non-matching SSN on their Forms W-2(s) lose benefits to which they are entitled.

To reduce the size of the swelling suspense fund, the Internal Revenue Service and the Social Security Administration have been conducting a joint campaign to reduce invalid SSN/name reporting. In the latest initiative in this campaign, the IRS has decided to begin penalizing employers for filing Forms W-2 with mismatched names and Social Security numbers.

Unresolved is the definition of conditions employers will be able to cite in defense of their actions (or inaction). As the IRS describes it, there is no clear definition of "reasonable cause" for failure to provide a matching name and number. Reasonable cause for a reporting error exists if the failure was due to an event beyond the employer's control or there were mitigating factors the employer can show that it took reasonable steps to avoid the error.

In the case of information returns, such as Form 1099-MISC, under present rules the employer can establish "reasonable cause" for failure to match names and tax identification numbers (TINS), by presenting a properly completed Form W-9 (Request for Taxpayer Identification Number and Certification). However, employers do not have an equivalent document to prove due diligence for Form W-2 reporting. Form W-4 has been suggested for this purpose, but there is no current requirement that every employee must file Form W-4 with the employer.

The maximum penalty is $50 for each incorrect information return up to a maximum penalty of $100,000 for the tax year.

The IRS began the penalty program with mismatches on tax year 2008 Forms W-2, filed in February-March 2009. Now may be a good time for employers to check for payroll or human resources process issues that might be producing or allowing this type of reporting error.

  Nancy