Tax Administration

A GAO analysis of the Internal Revenue Service's (IRS) accounts receivable data as of September 1997 found that more than 1.9 billion self-employed taxpayers were delinquent in paying $6.9 billion in self-employment taxes on 3.6 million returns. These taxpayers generally have low incomes and multiple delinquencies. More than 144,000 taxpayers with delinquent self-employment taxes of $487 million were receiving about $105 million in monthly Social Security benefits. The income on which the self-employment taxes had not been paid resulted in at least $2.5 million in monthly benefits that would not have been paid if those earnings had not been included in the benefits computation. Self-employed taxpayers can get Social Security benefits on the basis of earnings for which they did not pay taxes because the law 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. However, not all self-employed taxpayers can receive credit for their earnings. Under the law, when taxpayers do not file their tax returns within three years, three months, and 15 days after the end of the year in which the income was earned, they are not to receive Social Security credit. Of the 3.6 million returns with delinquent self-employment tax, SSA did not post earnings to its records for nearly 474,000 returns. For an estimated 81.9 percent of the returns with unposted earnings, taxpayers filed the returns after the statutory time limit. Many of the taxpayers may have been unaware of the statutory time limit because neither SSA's nor IRS' widely available publications discuss it. GAO notes several ways to enhance the collection of taxes from self-employed persons.

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.

Recommendations

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