BY STEVE GRAFF
People who work for themselves and failed to pay their self-employment taxes may soon be hearing from the Internal Revenue Service.
The agency has launched a new auditing campaign focusing on self-employed residents living on Guam, the Northern Mariana Islands and the other U.S. territories who haven’t paid their 15.3% self-employment tax. The campaign was posted on the IRS website on Dec. 2, said IRS spokesperson Cecilia Barreda.
It’s one of over 50 “compliance campaigns” from the IRS’ Large Business and International Division that date back to 2017 when the agency first reported it was working to “address significant compliance and resource challenges” to claim unpaid or underpaid taxes.
“This campaign addresses residents of U.S. territories — Puerto Rico, U.S. Virgin Islands, Guam, American Samoa and Commonwealth of Northern Mariana Islands — who either failed to pay, or underpaid, self-employment tax to the Internal Revenue Service,” according to an IRS campaign site.
Self-employed residents on Guam are subject to file a 1040 form and a pay self-employment tax to the IRS, not the government of Guam. It amounts to 15.3% of total earned wages — which represents what both an employee and employer would pay in social security and Medicare taxes.
“It’s not unusual for the IRS to launch enforcement ‘campaigns’ when they have evidence of significant non-compliance. They typically do not announce them, and they only reach public ears when notified by those taxpayers who have been a recipient of an IRS visit,” said Joe M. Arnett, tax advisor with Deloitte & Touche LLP. “I am not surprised by their focus on the [self-employment] tax in the territories. There is some confusion about who is subject to the tax in the territories and [it’s] probably not an insignificant non-compliance issue.”
This isn’t the first IRS campaign effort around self-employed workers in U.S. territories.
Six months ago, on July 19, the IRS announced plans on its site to home in those who are “erroneously claiming refundable tax credits.” Those credits may include the Child Tax Credit or the American Opportunity Tax Credit, which can give a student up to a 40% refund on college expenses.
Residents of U.S. territories with a self-employment income of $400 or more must pay the U.S. self-employment tax, according to the IRS.
The tax does not fall under the Guam tax code, a law laid out in the Organic Act of 1950, and is therefore owed to the IRS under the U.S. Code Chapter 2, said Edmund E. Brobesong, a senior manager of the tax group at Ernst & Young.
How aggressively the IRS will pursue these auditing ventures remains to be seen, but, historically, audits — any audits, not just for the self-employment tax — have been rare on Guam, local tax experts have said.
According to the latest data available from the IRS, 0.5% of all tax returns in the United States were audited in 2017, with nearly 75% of them conducted via correspondence. The rest were conducted in the field by IRS agents.
Auditing rates on Guam “are no higher than the auditing rates on the mainland,” Brobesong said. And an audit on Guam, if the IRS pursued it, would be conducted through similar measures as the U.S., he added, and likely coordinated with the Guam Department of Revenue and Taxation.
The number of people these new campaigns pertain to on Guam could be as high as 9,000. According to the International Labour Organization, as of September 2019, 15.1% of the workforce on Guam is self-employed. Today, there are nearly 65,000 people in the workforce on Guam, according to the U.S. Bureau of Labor Statistics.
The IRS campaigns came into question in September when the Treasury Inspector General For Tax Administration, a government agency established to provide oversight of the IRS, released a report on Sept. 27 that found that the auditing effort “as a whole has not met initial expectations” since it began. The report, published before this latest territories’ campaign, questioned its processes for choosing the campaigns.
“TIGTA found that issues for campaigns were not selected or prioritized based on past compliance results or potential impact on compliance,” the report reads. “While it is early to assess the overall results of campaigns, the limited results available suggest that the LB&I Division’s limited resources would be better utilized working issues selected based on compliance risk.”
Resources at the IRS have diminished in recent time, according to the report. Examination personnel decreased 38%, from fiscal 2010 to fiscal 2017. The number of audits also decreased by 31%, from 1.6 million in fiscal 2013 to 1.1 million in fiscal 2017, according to the report.
LB&I commissioner Douglas W. O’Donnell responded to the report in a letter dated Sept. 18, defending the division’s areas of focus but also welcoming the agency’s feedback and agreeing to incorporate changes based on recommendations. He indicated the campaigns would continue through fiscal 2020.
“The campaign program is still relatively new, and refinements will continue to be made based on lessons learned, results of campaigns, and feedback from our employees and our external stakeholders,” he wrote.
The amount of unpaid self-employment taxes on Guam and in the Northern Mariana Islands for the last fiscal year wasn’t immediately available. The IRS didn’t respond to a request for the information. A 2017 report from TIGTA identified potential unreported self-employment tax of approximately $30 million for tax years 2012 and 2013 for the island of Puerto Rico. mbj