Newland's Business Notes

Invalid SSNs – What To Do? (Part 2)

Volume 11 Issue 1 -- January/February 2007

In the past issue we began looking at the problems employers face with undocumented or poorly documented workers (which we called “Podocs”).  Here, we will look at other aspects of this issue.

Department of Homeland Security (DHS) Form I-9 titled “Employment Eligibility Verification” is supposed to be completed for new or rehired Podocs as well as other employees.  As noted on the form, it is not to be used in a manner that would cause the employer to discriminate against an employee. Note that a Podoc is an employee, even if he or she is undocumented.  The notice on the I-9 states, in part, “It is illegal to discriminate against eligible individuals. . . . Employers CANNOT specify which document(s) they will accept from an employee.”

Thus, if an employer states that he will not hire any Podocs, the employer might be sued for discrimination. To further compound the problem, the employer is asked to list which documents were provided by the Podoc prior to being hired.

Even in remote parts of the country, it is clear there are numerous restaurants and service establishments employing a number of Podocs. If all of these Podocs were no longer working in the United States , it is easy to imagine a shutdown of many segments of the economy.  For some of these reasons, the U.S. probably cannot, or will not, strictly enforce the policies of DHS with regard to undocumented aliens.

As noted in the last issue, if the Social Security Administration (SSA) has an invalid number for a Podoc, it will send a “no match” letter to the employer. The employer has to get the problem resolved, or risk a $50 fine for each incorrect W-2.  Surprisingly, the “no match” information which the SSA supplies to the employer currently cannot be distributed to DHS, even though DHS is pushing for legislation which would allow it to receive such information.

According to recent guidance published by the government, an employer will not be deemed to have constructive knowledge of an invalid SSN for a Podoc, if the employer takes reasonable steps within 14 days of receiving a “no match” letter to resolve the discrepancy. Such reasonable steps would be to notify the Podoc and have him or her correct the information. The employer is supposed to ask the Podoc to resolve the matter with the SSA.

If the problem of “no match” is not resolved by the Podoc-employee within 60 days, then there is an additional 3 days within which the employer is supposed to act.  At the end of the 63-day period after notice to the Podoc-employer, the employer may choose to terminate the Podoc or take the risk that DHS may find that the employer has constructive knowledge that the Podoc is an unauthorized resident alien employee. In other words, the employer could be penalized or fined.

The “no match” guidance seems to indicate that if the employer has taken the above-mentioned notification steps with the Podoc, then the employer will not be deemed to have constructive knowledge that the Podoc is an unauthorized individual working in the United States .  Many employers will go through the procedural steps outlined above to avoid being charged by DHS with constructive knowledge, if and when contacted by DHS, even if the employers have a fairly good idea of who is a Podoc and who isn’t.

Although many independent contractors fail to file income tax returns, many still believe they will receive Social Security retirement benefits upon attaining retirement age, but this is not true.  The Podocs who fail to file tax returns are probably not aware that they may receive no or reduced Social Security retirement benefits.

We have recently learned that the IRS has apparently taken the position in two tax audits that none of the amounts paid to Podocs, as 1099 compensation, will be allowed as a deduction to the employer. Especially in the service industry, this could mean that the employers will have huge amounts of income and no corresponding deductions. This will effectively result in a tax on gross receipts, not net profits. The Internal Revenue Code is a tax system based on “income” not gross receipts.  Can or should the IRS disallow all 1099 payments made to Podocs?

We will attempt to provide additional guidance in these areas as more is learned. You may want to call Newland & Associates for advice and documentation approaches with regard to these intractable problems.

Copyright 2007

Published by the law firm of Newland & Associates, PLC
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