No FICA Tax Refund for Non-U.S. Worker Who Failed to Obtain Official Certificate

(Parker Tax Publishing July 2023)

The Court of Federal Claims held that the IRS properly denied a refund of Federal Insurance Contributions Act (FICA) taxes to an Australian national whose employer collected FICA taxes while he worked temporarily in the United States but whose wages were also subject to Australian social security taxes. The taxpayer submitted an affidavit with his U.S. tax return stating the facts necessary to show that he was subject to the social security laws of Australia, but the court found that under Rev. Proc. 80-56 and other guidance from the IRS and the Social Security Administration, the taxpayer was required to obtain an official certificate of coverage either from the social security agency of Australia or the Social Security Administration in order to obtain an exemption from FICA tax. Bond v. U.S., 2023 PTC 175 (Fed. Cl. 2023).

Background

Thomas Bond is an Australian national who lived in the United States temporarily between 2017 and 2020 while he worked for Shell Australia. During that time his employer collected Federal Insurance Contributions Act (FICA) taxes on behalf of the United States from Bond's paychecks. At the same time, he was also subject to the equivalent tax charged by Australia.

To eliminate this type of double taxation, the United States has entered into numerous totalization agreements with other countries, including Australia. The Totalization Agreement between the United States and Australia governs the coverage and calculation of benefits under the social security systems of both countries. Under the agreement, an employee transferred from a related entity in Australia to a related entity in the United States for a period projected to be less than 5 years may claim an exemption from U.S. social security and Medicare taxes during their period of temporary employment in the United States.

A separate but simultaneously executed Administrative Agreement states that "the agency of the country whose coverage laws will continue to apply to a person in accordance with the various rules set forth in the totalization agreement will issue a certificate to that effect when requested to do so by an employer or a self-employed person. When presented to the appropriate agency of the other country, the certificate will establish the basis for the exemption of the person from the coverage laws of that country." In other words, Australia would issue a certificate of exemption to Bond when Shell requested it to do so, and that certificate would constitute proof of exemption to the IRS and the Social Security Administration (SSA).

Only one SSA regulation, 20 C.F.R. Section 404.1901, speaks to the role of certificates of coverage. It states that "under some agreements, proof of coverage under one social security system may be required before the individual may be exempt from coverage under the other system." It then provides that "requests for certificates of coverage under the U.S. system may be submitted by the employer, employee, or self-employed individual to [SSA]." Thus, when an American citizen is asking for proof of coverage to avoid Australian taxes, an employee as well as an employer may ask the SSA for a certificate. The Totalization Agreement, on the other hand, makes reference only to self-employed persons or the employer making such a request.

Under Code Sec. 3101, wages that are subject to a totalization agreement "shall be" exempt from FICA taxes. In Rev. Proc. 80-56, the IRS established its own procedures with respect to totalization agreements. Section 4 of Rev. Proc. 80-56 states that "In order to substantiate an exemption from the taxes imposed by the FICA . . . the employer must obtain a statement issued by a duly authorized official or agency of the foreign country involved." In addition, Rev. Proc. 84-54 addresses situations were a foreign agency does not honor employer requests for certificates of exemption. It provides that in such a case, either the employer "or an employee" should secure a statement issued by the SSA stating that the employee's wages are not covered by the U.S. social security system.

The SSA, the IRS, and the Australian Tax Office have all issued instructions that explain how each expects the Totalization Agreement to operate. An SSA instruction booklet states: "To establish an exemption from U.S. Social Security contributions ... your employer must request a certificate of coverage ... from the Australian Tax Office." A parallel provision dealing with self-employed individuals provides that they "must get a letter of exemption from [SSA]." A posting on the IRS website states that individuals in Bond's position must secure a Certificate of Coverage from the social security agency of Australia and present the certificate to his employer in the United States. It also states that "an alternate procedure is provided" in Rev. Procs. 80-56, 84-54, and Rev. Proc. 92-9, "for an alien who is unable to secure a Certificate of Coverage from his home country."

Shell Australia did not request a certificate of coverage demonstrating that Bond was subject to Australia's social security system. Nor did Bond pursue the alternative procedure provided in Rev. Proc. 84-54. Instead, he enlisted the help of a tax preparer who composed an affidavit affirming the facts necessary to show that Bond was subject to the social security laws of Australia. Bond filed an income tax return for 2017, claiming a refund prompted by the dual collection. He received that refund. The following year, Bond once again filed a refund request based on the asserted over-collection of FICA taxes. The IRS declined to honor the affidavit and partially rejected the refund request for $14,021.

Bond sued for the refund in the Court of Federal Claims. He argued that the Totalization Agreement between the United States and Australia is, with respect to taxpayers, self-enforcing and that no formality is required to establish an exemption. Bond pointed out that under the agreement, persons subject to double taxation "shall" be exempt from the other country's social security taxes. The government did not dispute Bond's entitlement to seek exemption from double taxation. It argued, however, that the Totalization Agreement, when viewed in the context of procedures and instructions adopted by the United States, establishes as a prerequisite to any exemption that an employee obtain a certificate issued by the appropriate agency in either country.

Analysis

The Court of Federal Claims held that Bond was not entitled to an exemption from FICA tax because he did not obtain an official certificate that substantiated his exemption under the Totalization Agreement.

The court noted that under the Totalization Agreement, persons subject to double taxation who can benefit from the agreement "shall" be exempt from the other country's social security taxes. However, the court also found that the SSA has authority to make rules and regulations and establish reasonable procedures to implement and administer totalization agreements. And under SSA regulations, which apply to all totalization agreements, "proof of coverage under one social security system may be required before the individual may be exempt from coverage under the other system." The court also noted that the simultaneously adopted Administrative Agreement provides that SSA will issue certificates of coverage when asked to do so by an employer or a self-employed person, and that the certificate will establish the basis for the exemption of the person from the coverage laws of that country.

The court acknowledged that 20 C.F.R. Section 404.1901 does not make explicit that the agency certificates are the exclusive means of proof, but the court noted that both the IRS and the SSA have issued interpretive guidance that makes more explicit the expectation that only the officially sanctioned certificates will serve as proof. The court reasoned that the word "must" - which appears in both Rev. Proc. 80-56 and guidance on the SSA website - limits proof to an officially generated certificate. Although not legally binding on the court, the court said that this interpretive guidance reflects the understanding of both the United States agencies with enforcement responsibility. The court also noted that this construction is shared by the corresponding Australian agency, and the court found that this shared understanding could be used as an interpretive aid. The court agreed with the IRS that the exemption from what would otherwise be the obligation to pay FICA taxes in the United States should, like all other exemptions, be narrowly construed.

For a discussion of social security totalization agreements, see Parker Tax ¶13,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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