Employers have always feared receiving the dreaded "mismatch" letter from the Social Security Administration ("SSA") and have struggled to implement consistent and comprehensive plans to address these situations. SSA would generally send these types of letters to employers to resolve any discrepancies in matching the employee's name and social security number on wage and tax statements like the Form W-2.
While the SSA mismatch Letters made clear that it did not raise questions regarding the employment eligibility of the employee and cautioned that no adverse action should be taken on the basis of the letter alone, employers were rightfully concerned that such information could be used to show that it had constructive knowledge of unauthorized employment. In fact, the Department of Homeland Security ("DHS") at one time proposed detailed rules (since rescinded) on the specific steps employers had to take upon receipt of a no-match letter to qualify for a "safe harbor" from certain immigration liability. Employers also had to be careful not to discriminate or engage in document abuse against any employee on the basis of the mismatch letter alone which could lead to an investigation by the Department of Justice-Civil Rights Division, Office of Special Counsel ("OSC").
Fortunately for employers, SSA does not have any enforcement powers and cannot prosecute or penalize employers for failing to resolve such mismatches. In addition, SSA does not provide mismatch information to other government agencies such as DHS or ICE. This greatly diminishes the chance that an employer would be investigated on how it dealt with such situations. Due to litigation and changes to the policy priorities of the current administration, the use of SSA mismatch letters has greatly diminished and is now less of a concern to employers.
But now employers are dealing with similar issues arising from the reporting requirements under Obamacare. And unlike mismatch letters from the SSA, these issues are handled by the IRS which can impose serious penalties that have real teeth.
Under Obamacare, Applicable Large Employer Members (ALE Members) and group health plans are subject to certain IRS reporting requirements - commonly referred to as "Form 1095 filings." Such employers must supply certain identifying information to the IRS for covered employees including name, address, birth date, social security number and his or her dependents. IRS then uses this information to confirm insurance coverage for the covered individuals which is required by Obamacare.
One of the unintended consequences of Obamacare is that the IRS is now running into situations in which the employee's SSN provided by the employer does not match SSA's records. This has triggered notification letters to employers from the IRS to resolve the discrepancies (similar to a SSA mismatch letter). IRS regulations recommend certain steps that employers should take to show good faith compliance with the Obamacare's reporting requirements in response to such notices. But unlike the SSA, IRS can impose significant penalties on employers who fail to correct the discrepancies.
The penalties were recently increased so the late filing penalty is now $250 per return (e.g., per 1095-C), to a maximum of $3,000,000 per year. There is a lower cap (only $1,000,000) for smaller entities with gross receipts of not more than $5,000,000. Other penalties can be assessed for not turning in corrected forms or providing incorrect information on the Form W-2. There are certain exceptions that would act to waive these penalties if the filer can show "that such failure is due to reasonable cause and not to willful neglect." This would include events beyond the control of the employer such as the unavailability of business records (i.e. fire destroying records or employee no longer employed) or if the employee failed to provide a correct, or provided an incorrect, social security number to the employer.
IRS regulations provide specific procedures that an employer must follow to establish that it has taken reasonable steps to obtain a social security number from each employee. By following and documenting these steps, an employer can demonstrate that it has acted in a responsible manner so as to avoid IRS penalties in the event that it has the incorrect information for an employee. This includes making the initial solicitation of the employee's social security number upon hire (generally on the W-2), followed by two annual solicitations (the second solicitation is made at a reasonable time thereafter and the third solicitation is made by December 31 of the year following the initial solicitation) if the individual's social security number still has not been secured or a mismatch continues to occur.
If the annual solicitations are made by mail or telephone, the individual must be informed that he or she is subject to a $50 penalty imposed by the IRS if he or she fails to provide the correct information. Mail solicitations also must include a Form W-9 and a self-addressed return envelope (which may or may not have postage prepaid). IRS has stated that if an employer receives additional notices based on a missing social security number for the employee after making the two annual solicitations, no further solicitations are necessary and that the employer's initial and two annual solicitations demonstrate that it acted in a responsible manner.
IRS publications state that an employer is not required to solicit a social security number from an individual whose coverage has terminated and stress that employers should not use a IRS mismatch notice alone as grounds to terminate the employee. However, like the SSA mismatch letters before it, employers are rightfully concerned that these IRS notices will trigger an obligation to take reasonable steps to verify and correct the information provided by the employee or face immigration related penalties. These penalties were also recently increased so now paperwork violations on the Form I-9 range from $216 to $2,156 per violation. Penalties for the first offense of employing unauthorized workers range from $539 to $4,313 per violation.
