Tax Administration:

Billions in Self-Employment Taxes Are Owed

GGD-99-18: Published: Feb 19, 1999. Publicly Released: Mar 23, 1999.

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Pursuant to a congressional request, GAO provided information on: (1) the number and characteristics of self-employed taxpayers who receive social security credit for self-employment earnings when they are delinquent in paying the self-employment taxes on those earnings; (2) why self-employed taxpayers who have not paid their self-employment taxes are allowed to receive social security credit; and (3) any potential actions that could enhance the collection of self-employment taxes.

GAO noted that: (1) analysis of Internal Revenue Service's (IRS) accounts receivable data showed that more than 1.9 million self-employed taxpayers were delinquent in paying $6.9 billion in self-employment taxes on 3.6 million returns; (2) these taxpayers can be generally characterized by their low income and multiple delinquencies; (3) over 70 percent of their returns reported net self-employment income of less than $20,000, and over half of the taxpayers owed delinquent taxes for more than one tax year; (4) more than 144,000 taxpayers with delinquent self-employment taxes of $487 million were receiving about $105 million in monthly social security benefits; (5) the income on which the self-employment taxes had not been paid resulted in at least an estimated $2.5 million in monthly benefits that would not have been paid if those earnings had not been included in the benefit computation; (6) self-employed taxpayers can get social security benefits based on earnings for which they did not pay taxes because the Social Security Act requires the Social Security Administration (SSA) to grant earnings credits, which are used to determine benefit eligibility and amounts, and pay benefits without regard to whether the social security taxes have been paid; (7) not all self-employed taxpayers can receive credit for their earnings; (8) under the Social Security Act, when taxpayers do not file their tax returns within 3 years, 3 months, and 15 days after the end of the year in which the income was earned, they are not to receive social security credit; (9) of the 3.6 million returns with delinquent self-employment tax, SSA did not post earnings to its records for 473,755 returns; (10) for an estimated 81.9 percent of the returns with unposted earnings, taxpayers filed the returns after the statutory time limit; (11) IRS has recently been given the option to continuously levy taxpayers' social security benefits and other federal payments to recover delinquent taxes and is in the process of developing a program to do so; (12) this levy program would affect taxpayers that are already delinquent in paying their taxes and should reduce their tax debt; (13) another way to collect taxes before taxpayers become delinquent would be to encourage more self-employed individuals to make their required estimated tax payments; and (14) GAO estimated that most self-employed delinquent taxpayers did not make required estimated tax payments, and many were assessed an estimated tax penalty.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To better inform taxpayers of the importance of filing tax returns within the statutory time limit, the Commissioner of Internal Revenue should revise IRS' self-employment publications, including those given under its Non-Filer Program, to ensure that self-employed taxpayers know about the need to file tax returns with self-employment earnings within 3 years, 3 months, and 15 days after the end of the calendar year in which the self-employment income was earned in order to get social security credit for those earnings.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: The IRS included this information in Publication 533, "Self-Employment Tax for 1998" and the 1999 version of Publication 583, "Starting a New Business and Keeping Records." It also included the recommended language in the 1999 version of Publication 334, "Tax Guide for Small Business," and in nonfiler notices.

    Recommendation: To better inform potential social security recipients of the importance of filing tax returns within the statutory time limit, the Commissioner of Social Security should revise SSA's publications for self-employed individuals to inform them about the need to file tax returns with self-employment earnings within 3 years, 3 months, and 15 days after the end of the calendar year in which their self-employment income was earned in order to get social security credit for those earnings.

    Agency Affected: Social Security Administration

    Status: Closed - Implemented

    Comments: In December 1999, SSA updated Publication 05-10022, "If You Are Self-Employed," to include the recommended language.

    Recommendation: To reduce self-employed tax delinquencies, the Commissioner of Internal Revenue should undertake a pilot project to test the feasibility of sending notices to noncompliant self-employed taxpayers who in the current year had not made estimated payments and in the previous year had filed a Schedule Self-Employed and were assessed an estimated tax penalty.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: In June 2000, the IRS conducted a test similar to what GAO recommended, but for repeat nonfilers. The IRS found that sending notices did not significantly increase return filing and as such it did not perform a test for noncompliant self employed taxpayers.

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