IRS Has Trouble Verifying Social Security Tax Exemptions

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The Internal Revenue Service cannot readily identify American citizens and resident aliens working in a foreign country, along with resident aliens working in the United States, who may have improperly claimed exemption from U.S. Social Security taxes, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, pointed out that the United States entered into international agreements, known as Totalization Agreements, with 24 foreign countries in an effort to eliminate dual taxation with respect to Social Security taxes. The agreements coordinated the Social Security coverage and taxation of American citizens and resident aliens who are employed in those foreign countries, along with resident aliens in the United States who may be subject to U.S. Social Security and Medicare taxes.

Section 3101(c) of the Tax Code provides relief from U.S. Social Security and Medicare taxes in cases covered by an international agreement known as a Totalization Agreement.

To evaluate the IRS’s efforts to identify taxpayers affected by Totalization Agreements, TIGTA selected a stratified statistical sample of 160 taxpayers who did not pay U.S. Social Security taxes. Based on that sample, TIGTA found 29 taxpayers who appear to not have met the Totalization Agreement criteria for exemption from U.S. Social Security taxes.

This included American citizens or resident aliens who worked overseas during tax year 2012, but did not appear to have met the five-year period for coverage by a foreign country’s social security system. It also included resident aliens who worked in the U.S. during tax year 2012, but appeared to have exceeded the five-year period for coverage by a foreign country’s social security system. As a result, TIGTA found these taxpayers potentially owe $822,367 in U.S. Social Security and Medicare taxes, or $16.9 million when the sample is projected to the population.

TIGTA also identified 23 resident aliens who appeared to either work for an American-based employer or were hired by a foreign employer while living in the United States. These taxpayers potentially owe $51,008 in U.S. Social Security and Medicare taxes, or $4.3 million when the sample is projected to the population. In addition, TIGTA determined that the Social Security Administration receives Certificates of Coverage from foreign countries, but the IRS does not have formalized procedures to obtain these certificates to identify noncompliant taxpayers.

“It is important that the IRS employs every tool available to it to ensure that money is accounted for and paid if owed,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA recommended the IRS coordinate with the Social Security Administration to periodically acquire Certificate of Coverage data, and request from Totalization Agreement countries data related to foreign social security taxes paid. TIGTA also suggested the IRS use the data it obtains to identify noncompliance with payment of U. S. Social Security and Medicare taxes.

In response to the report, IRS officials agreed with the recommendations. The IRS plans to work with the Social Security Administration to periodically obtain Certificate of Coverage data and to request data from countries with Totalization Agreements related to foreign social security taxes paid by American citizens, resident aliens, or withheld and paid by American employers. The IRS also plans to explore the use of the data obtained to identify noncompliance with payment of U.S. Social Security and Medicare taxes.

“The IRS agrees with the recommendations in the report and will work with SSA to develop a process to periodically acquire data that can be analyzed within our systems to increase employment tax compliance by both employers and individuals,” wrote Heather C. Maloy, commissioner of the IRS’s Large Business and International Division. “We note that our limited compliance resources must be broadly allocated to provide balanced support to overall tax administration, and we must evaluate the priority of these recommended improvements relative to our other risk-based compliance needs and improvements.”

However, she said the IRS does not agree with TIGTA’s outcome measures in the report, contending TIGTA’S methodology does not accurately reflect the differences between taxpayer populations and their respective compliance issues.