IRS Has Trouble Identifying Resident Aliens Who Are Exempt from Social Security Taxes
The Internal Revenue Service cannot readily identify American citizens and resident aliens working in a foreign country, as well as resident aliens working in the United States, who may have improperly claimed exemption from U.S. Social Security taxes, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, noted that in an effort to eliminate dual taxation with respect to Social Security taxes, the U.S. entered into international agreements, known as Totalization Agreements, with 24 foreign countries. These 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 U.S. 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 Totalization Agreements. To evaluate the IRS’s efforts to identify taxpayers affected by Totalization Agreements and ensure their U.S. Social Security taxes are properly paid in accordance with these international 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 have not 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 seemed to have exceeded the five-year period for coverage by a foreign country’s social security system. As a result, TIGTA estimated 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 larger population. Read more on Accounting Today.