Most employers withhold the Social Security tax from employees’ wages and pay it to the IRS on the employees’ behalf. Individuals with more than one employer and whose combined Social Security tax withholding from all employers exceeds the maximum annual withholding amount may claim the excess amount of Social Security tax withheld as a refundable credit. In a report issued on March 15, the TIGTA found that, as of Dec. 28, 2017, the IRS received more than 1.5 million tax year 2016 tax returns claiming the Excess Social Security Tax Credit.  These taxpayers received credits totaling more than $3.1 billion.

The majority of the potentially erroneous claims came from returns for which tax examiners did not follow internal verification guidelines, or used incomplete verification guidelines. For instance, examiners did not disallow claims when the Social Security withholding from a single employer on multiple Forms W-2 submitted with the return exceeded the maximum withholding amount for that year. These individuals are required to seek reimbursement from their employers or to file a Form 843. 

TIGTA also pointed out that the IRS unnecessarily spent $1.1 million reviewing valid Excess Social Security Tax Credit claims. 

TIGTA recommended that the IRS update its internal procedures and ensure that employees are following the procedures to accurately determine the correct amount of Excess Social Security Tax Credit. In addition, the IRS should develop processes to ensure that the Social Security tax maximum withholding amounts are annually updated in systemic programs that select claims for review and establish a process to send and measure the success associated with soft notices that alert individuals to potential errors related to Excess Social Security Tax Credit claims.

IRS management agreed with all eight recommendations and plans to take appropriate corrective actions. These actions include implementing a review process for the 2019 filing season to ensure tax examiners correctly address potential errors. The review results will be evaluated to identify the cause of the incorrect actions. The IRS will also ensure that the maximum withholding amounts are updated annually, and agreed to determine the feasibility of sending and measuring the success of soft notices related to the excess Social Security Tax Credit.