REPORT DIGEST

OFFICE OF THE COMPTROLLER

NONFISCAL OFFICER RESPONSIBILITIES

COMPLIANCE EXAMINATION

For the Two Years Ended:

June 30, 2008

Summary of Findings:

Total this audit                   1

Total last audit                   0

Repeated from last audit    0

Release Date:

May 7, 2009

State of Illinois

Office of the Auditor General

WILLIAM G. HOLLAND

AUDITOR GENERAL

To obtain a copy of the Report contact:

Office of the Auditor General

Iles Park Plaza

740 E. Ash Street

Springfield, IL 62703

(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Report are also available on the worldwide web at

http://www.auditor.illinois.gov

SYNOPSIS

¨      Office of the Comptroller did not request refunds for incorrect payroll tax information submitted to the federal government.

{Financial Information and Activity Measures are summarized on the next page.}

Payroll tax information not filed correctly

$816,424 was reimbursed by federal government for incorrect payroll taxes submitted

No attempt to correct 2005 and 2006 payroll tax information

2007 payroll tax refund not deposited in fund that originally paid the payroll taxes

FINDINGS, CONCLUSIONS, AND

RECOMMENDATIONS

PAYROLL TAX AND SOCIAL SECURITY ADMINISTRATION FUND ISSUES

         In fulfilling duties to process payroll for various State agencies, the Office of the Comptroller (Office) has:

·          not filed corrected payroll tax information for household employees for the 2006 and 2005 tax years nor requested refunds that may result therefrom; and

·          not transferred to the General Revenue Fund a refund received for overpayment of the State’s share of 2007 Social Security and Medicare tax on household employees.

         The Office processes payroll for various State agencies. Payroll processed by the Office for the Illinois Department of Human Services (DHS) includes individuals that are deemed to be household employees by the federal government.  The Internal Revenue Code (26 USCA sec. 3121 (a)(7)(B)), states that household employee wages are subject to Social Security and Medicare tax if they exceed an annual threshold.  Once the employee has been paid an amount equal to or above the threshold, all of their wages become subject to Social Security and Medicare.  If the employee earns less than the threshold, none of the wages are subject to Social Security or Medicare for that tax year.  Because it is not possible to determine whether a household employee will exceed the threshold requiring Social Security and Medicare withholding and matching employer contribution until the employee has reached the annual threshold amount for the year, DHS withholds Social Security and Medicare from all household employee wages and contributes the employer matching share as well.  This practice averts the need to make a catch-up withholding should the employees wages become subject to Social Security and Medicare.

         Tax software used by the Office, which was provided by the United States Social Security Administration, contained an edit check for the 2007 tax year that had previously not existed in prior year software.  The edit check identified that wages reported as taxable for Social Security and Medicare tax purposes by the Office included wages that did not meet the annual threshold.  As a result of the change in the software, the Office reimbursed the household employees that did not exceed the annual threshold the amount withheld from their pay for the 2007 tax year for Social Security and Medicare.  The reimbursement was paid from the Social Security Administration Fund which is administered by the Comptroller.  The Office also requested and received a refund from the federal government for both the amount previously reported as withheld from those household employees’ pay totaling $408,219 as well as the employer matching portion totaling $408,205. 

         Although the State’s household employee withholding practice was the same for previous years, there had been no attempt by the Office to correct the reporting for Social Security and Medicare wages that did not reach the threshold for taxability for the 2006 and 2005 tax years, nor have refunds been requested for the amounts withheld from those employees’ pay and the related employer contributions made. 

         The refund from the 2007 tax year was received primarily in April 2008.  The Comptroller deposited the entire refund in the Social Security Administration Fund.  However, none of the employer matching portion originally paid to the federal government was actually paid from this fund. The Social Security and Medicare tax contribution for the DHS household employees was paid from a DHS General Revenue Fund appropriation.  (Finding 1, pages 8 and 9)

         We recommended the Office of the Comptroller work with the Internal Revenue Service and the Social Security Administration to correct its reporting of Social Security and Medicare for the 2006 and 2005 tax years and take appropriate action to obtain refunds of the related Social Security and Medicare withholdings and employer contributions.  We also recommended that the Office of the Comptroller continue in its efforts to return the 2007 and subsequent refunds to the original funding source giving rise to the refund.

         Office of the Comptroller officials accepted our finding and recommendation and stated that after re-evaluating Publication 15 in conjunction with Publication 926 IOC officials agree that the employee and employer contributions for those individuals who did not meet the household threshold should have been refunded.  The Office has completed the household employee refunds, revised W-2’s and 941C for Tax Year 2005 and has begun the analysis for Tax Year 2006 household refunds.  In addition, IOC has refunded the Tax Year 2007 employer share to the General Revenue Fund.  The Tax Years 2005, 2006, and 2008 employer shares will be returned as soon as the funds are received from the federal government.

AUDITORS’ OPINION

            We conducted a compliance examination of the Office of the Comptroller – NonFiscal Officer Responsibilities as required by the Illinois State Auditing Act.  We have not audited any financial statements of the Office of the Comptroller – NonFiscal Officer Responsibilities for the purpose of expressing an opinion because the Office of the Comptroller – NonFiscal Officer Responsibilities does not, nor is it required to, prepare financial statements.

____________________________________

WILLIAM G. HOLLAND, Auditor General

WGH:TLD:pp

SPECIAL ASSISTANT AUDITORS

            The firm of Sleeper, Disbrow, Morrison, Tarro & Lively, LLC were our special assistant auditors.