Social Security

Trust Funds Can Be More Accurately Funded Gao ID: HEHS-94-48 September 2, 1994

Each year, the social security trust funds are credited with revenues derived from income taxes paid on social security benefits. But do they get the right amount? GAO reports that the social security trust fund's revenues could be increased by recognizing additional taxes identified through the Internal Revenue Service's (IRS) efforts to locate underreported taxable income and through better detection of underreported tax-exempt interest. Recognizing additional taxes identified by IRS could have boosted the trust funds by more than $200 million in tax revenue and investment income for tax years 1984 to 1989. Further, data from the Federal Reserve and the Investment Company Institute indicate that taxpayers may have underreported an estimated $7.2 billion in tax-exempt income on their 1989 tax returns.

GAO found that: (1) Treasury does not credit all revenues from taxes on social security benefits to the social security trust funds; (2) Treasury does not consider the results of IRS assessment of additional taxes on benefits when it determines the amount of revenue from taxes on social Security benefits owed to the trust funds from this revenue source; (3) the trust fund shortfall was more than $200 million for tax years 1984 through 1989; (4) limitations in the IRS accounting system make it difficult to calculate accurate amounts for trust fund shortfalls; (5) IRS cannot routinely detect underreported tax-exempt income because the payers of such income are not required to file information returns; (6) taxpayers may have understated their tax-exempt income for 1989 by about $7.2 billion; (7) the tax loss will probably increase because a greater portion of social security benefits will be subject to taxation and the number of social security beneficiaries will dramatically increase; (8) earnings information is generated and provided to most investors in tax-exempt securities, but a copy is not provided to IRS; and (9) the administrative cost and burden of processing tax-exempt information returns could be minimized by including tax-exempt income on existing information returns.


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