[Senate Hearing 110-77]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 110-77
 
                  MEDICARE DOCTORS WHO CHEAT ON THEIR
                 TAXES AND WHAT SHOULD BE DONE ABOUT IT

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2007

                               __________

        Available via http://www.access.gpo.gov/congress/senate

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs

                     U.S. GOVERNMENT PRINTING OFFICE

36-076 PDF                 WASHINGTON DC:  2006
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK PRYOR, Arkansas                 NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE MCCASKILL, Missouri           JOHN W. WARNER, Virginia
JON TESTER, Montana                  JOHN E.SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware           NORM COLEMAN, Minnesota
MARK L. PRYOR, Arkansas              TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN W. WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

            Elise J. Bean, Staff Director and Chief Counsel
  Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
                     Mary D. Robertson, Chief Clerk
      







                         C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Coleman..............................................     4

                               WITNESSES
                        Tuesday, March 20, 2007

Gregory D. Kutz, Managing Director, Forensic Audits and Special 
  Investigations Unit, accompanied by Steven J. Sebastian, 
  Director, Financial Management and Assurance, and John J. Ryan, 
  Assistant Director, Forensic Audits and Special Investigations 
  Unit, U.S. Government Accountability Office....................     8
Hon. Mark Everson, Commissioner, Internal Revenue Service, U.S. 
  Department of the Treasury.....................................    17
Hon. Kenneth R. Papaj, Commissioner, Financial Management 
  Service, U.S. Department of the Treasury.......................    19
Leslie V. Norwalk, Acting Administrator, Centers for Medicare and 
  Medicaid Services, accompanied by Timothy B. Hill, Chief 
  Financial Officer and Director, Office of Financial Management, 
  Centers for Medicare and Medicaid Services, U.S. Department of 
  Health and Human Service.......................................    21

                     Alphabetical List of Witnesses

Everson, Hon. Mark:
    Testimony....................................................    17
    Prepared statement with attachments..........................    79
Hill, Timothy B.:
    Testimony....................................................    21
Kutz, Gregory D.:
    Testimony....................................................     8
    Prepared statement...........................................    43
Norwalk, Leslie V.:
    Testimony....................................................    21
    Prepared statement...........................................   100
Papaj, Hon. Kenneth R.:
    Testimony....................................................    19
    Prepared statement with attachments..........................    90
Ryan, John J.:
    Testimony....................................................     8
    Prepared statement...........................................    43
Sebastian, Steven J.:
    Testimony....................................................     8
    Prepared statement...........................................    43

                                EXHIBITS

 1. GU.S. Government Accountability Office (GAO) Report to 
  Congressional requesters, TAX ADMINISTRATION--Millions Of 
  Dollars Could Be Collected If IRS Levied More Federal Payments, 
  July 2001, GAO-01-711..........................................   108
 2. GCorrespondence from the Permanent Subcommittee on 
  Investigations to Leslie V. Norwalk, Acting Administrator, 
  Centers for Medicare and Medicaid Services, Department of 
  Health and Human Services, dated February 1,2 007, regarding 
  the Government Accountability Office's ongoing review of 
  Medicare providers outstanding tax debt........................   142
 3. GMedicare Benefits 2005, chart prepared by the Permanent 
  Subcommittee on Investigations Minority Staff..................   144
 4. GResponses to supplemental questions for the record submitted 
  to The Honorable Mark Everson, Commissioner, Internal Revenue 
  Service, Department of the Treasury............................   145
 5. GResponses to supplemental questions for the record submitted 
  to The Honorable Kenneth R. Papaj, Commissioner, Financial 
  Management Service, Department of the Treasury.................   151
 6. GResponses to supplemental questions for the record submitted 
  to Ms. Leslie V. Norwalk, Acting Administrator, Centers for 
  Medicare and Medicare Service, Department of Health and Human 
  Services.......................................................   153


                  MEDICARE DOCTORS WHO CHEAT ON THEIR

                 TAXES AND WHAT SHOULD BE DONE ABOUT IT

                              ----------                              


                        TUESDAY, MARCH 20, 2007

                                     U.S. Senate,  
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 342, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, Coleman, and McCaskill.
    Staff Present: Mary D. Robertson, Chief Clerk; John 
McDougal, Detailee, IRS; Guy Ficco, Detailee, IRS; Peggy 
Gustafson, McCaskill staff; Mark L. Greenblatt, Staff Director 
and Chief Counsel to the Minority; Mark D. Nelson, Deputy Chief 
Counsel to the Minority; Sharon Beth Kristal, Counsel to the 
Minority; Clifford C. Stoddard, Jr., Counsel to the Minority; 
Timothy R. Terry, Counsel to the Minority; Jay Jennings, Senior 
Investigator to the Minority; Emily T. Germain, Staff Assistant 
to the Minority; and Robin Landauer (Coburn).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good afternoon, everybody. This afternoon, 
the Subcommittee will be looking at a very troubling anomaly--
one of our Nation's most important programs, Medicare, a 
program which is indispensable to the health of our citizens, 
is also a source of significant abuse.
    While the vast majority of health care providers are 
honest, tax-paying citizens, the focus of today's hearing is on 
those health care providers who are getting paid with taxpayer 
dollars under the Medicare program while at the same time 
failing to pay their taxes. While stuffing taxpayer dollars 
into their pockets, they are stiffing Uncle Sam by not paying 
their taxes.
    Federal programs exist to stop this type of abuse. One key 
program is the Federal Payment Levy Program, which was 
established about 10 years ago to enable the Federal Government 
to identify Federal payments being made to tax deadbeats and 
authorize the withholding of a portion of those taxpayers' 
dollars to apply to the person's tax debt. For the past 4 
years, under the leadership of Senator Coleman, the 
Subcommittee has been involved in an intensive effort to 
strengthen the tax levy program in order to withhold funds from 
Federal payments made to Federal contractors who don't pay 
their taxes.
    Past hearings have exposed the fact that there are 27,000 
defense contractors with $3 billion in unpaid taxes; 33,000 
contractors with other Federal agencies who owe $3.3 billion in 
unpaid tax debt; and 3,800 GSA contractors with $1.4 billion in 
unpaid tax debt. Those mind-boggling numbers represent tens of 
thousands of companies putting their hand in the taxpayers' 
wallet while dodging billions of dollars of tax obligations.
    To stop this flagrant disregard of tax fairness, the 
Subcommittee has worked hard to identify and fix the many 
technical problems and red tape that have hindered the 
government's ability to withhold money from contract payments 
to apply to the contractors' tax debt.
    Today's hearing highlights still another group of tax-
dodging Federal contractors taking advantage of honest 
taxpayers. A study prepared by the Government Accountability 
Office (GAO), at the request of the Subcommittee, shows that 
21,000 Medicare Part B health care providers, including 
doctors, ambulance companies, and medical laboratories, 
collectively owe about $1 billion in delinquent taxes. 
Together, they represent about 5 percent of all Medicare Part B 
service providers.
    One of the examples we will hear about today is a doctor 
who collected over $1 million in taxpayer dollars from Medicare 
last year while owing $1 million in back taxes. While not 
paying his taxes, he purchased a $1 million house, a pleasure 
boat, and he bought several nightclubs. In another example, a 
doctor owes more than $400,000 in back taxes but collected more 
than $100,000 in Medicare payments last year and engaged in 
millions of dollars of gambling transactions rather than 
getting right with the government. In its report, the GAO 
identifies about 40 such tax dodgers who each received $100,000 
or more in Medicare service provider payments.
    The key Federal agency that oversees Federal Medicare 
payments is the Centers for Medicare and Medicaid Services 
(CMS). CMS sends its payments on Medicare Part C and D to the 
Treasury Department for disbursement, and these payments are 
processed through the Federal Tax Levy Program. But for over 5 
years, CMS has failed to implement the levy program for 
Medicare Parts A and B, approving countless Medicare payments 
to countless medical service providers who owe taxes while 
failing to hold back money owed the government for delinquent 
taxes. When asked by the Subcommittee why it declined to 
implement the tax levy program for Part B, CMS explained that 
its lawyers thought the statute did not obligate it to 
participate.
    CMS does not make Part B Medicare payments directly to its 
service providers but to intermediaries who then make the 
actual payments. CMS apparently thought this payment system 
might be too complex, for the tax levy system to handle. It is 
not too complex and the Subcommittee is glad to see that CMS 
has now had a change of heart and apparently agreed to set up 
procedures to enable these Medicare payments to be screened for 
possible tax debt. Given the 21,000 tax delinquents on Medicare 
Part B provider roles that the GAO has identified, it is long 
past time for CMS to join the government-wide tax levy effort. 
Those 21,000 were identified without the ability to pierce the 
corporate veil, which is an essential step that needs to be 
taken if we are going to put teeth in this program.
    The tax levy program that CMS will be joining is much 
improved since the Subcommittee's first hearing in 2004. One 
key advance has been the formation of a government-wide 
interagency task force to tackle tax levy problems. Since its 
formation in 2004, this task force has worked with the 
Subcommittee to resolve a host of technical issues to improve 
tax levy collections from Federal contractors. These 
improvements include ensuring accurate Taxpayer Identification 
Numbers in the Federal contractor registration data base, 
eliminating a requirement for an IRS agent to be assigned to a 
tax-delinquent contractor before a tax levy could be imposed, 
and issuing earlier tax levy notices to Federal contractors to 
ensure their contract payments are eligible for levy.
    As a result of these and other improvements, tax levy 
collections have more than doubled over the past 3 years, going 
from $136 million in 2004 to nearly $340 million in 2006. Of 
these totals, tax levy collections from Federal contractors 
have also more than doubled, going from $28 million to $62 
million.
    With respect to the Medicare program, CMS has now agreed to 
work with the IRS to set up procedures to screen Medicare Part 
B payments. CMS needs also to screen payments made under other 
parts of the Medicare program. Now, that is just a matter of 
matching the CMS Taxpayer Identification Number, known as a 
TIN, with the IRS Taxpayer Identification Number.
    A separate problem results from the standard practice of 
doctors and other medical professionals of conducting their 
medical practices through a small corporation or a limited 
liability company. The problem arises from the fact that the 
professional typically has a personal TIN that is different 
from the TIN held by their professional corporation or limited 
liability company. Current tax rules allow individuals to treat 
the income earned by such professional corporations as either 
corporate income that gets separately taxed or as partnership 
income that is attributed to the company owners and 
individually taxed.
    Because many professionals choose to report income under 
their personal TINs, if they fail to pay taxes on the income 
received by their professional corporations, they can easily 
circumvent the tax levy process because the individual will 
appear on the IRS list of tax delinquents under one TIN while 
his or her company will appear on the CMS payment list under a 
different TIN. There won't be, then, a computer match between 
the IRS and CMS databases, and the IRS will be unable to levy 
the Medicare payments.
    To fix this problem, CMS could require the taxpayers to 
supply both their individual TINs and the TINs of the companies 
that receive Medicare payments on their behalf. CMS could also 
require companies, as a condition of participation, to agree to 
make their Medicare payments subject to tax levies for member 
physicians or company owners who accrue those payments as 
personal income. The IRS also needs to change its regulations 
to allow that type of tax levy. If that change in regulations 
isn't made, it would be necessary perhaps to change the law to 
allow this type of business income to be levied to satisfy the 
tax debt of member physicians and company owners.
    Additional work is also needed to strengthen the tax levy 
program as a whole. Right now, for a variety of legal and 
technical reasons, only 45 percent of the tax debt assessed 
that is still uncollected in 2006 was actually made subject to 
levy under the Federal program. While that percentage is up 
from 34 percent in 2004, the data shows that in 2006, over half 
of this assessed tax debt, some $67 billion, was never 
activated by the IRS, or as they put it, ``turned on'' for 
actual collection under the tax levy program. Sixty-seven 
billion dollars is a big number even by Washington standards. 
That tax debt should be subject to levy for Federal payments.
    The vast majority of Medicare providers render valuable 
services and they pay their taxes. These honest health care 
providers are put at a competitive disadvantage by the Medicare 
tax cheats. Besides hurting honest businesses, this type of tax 
dodging hurts our country by undermining the fairness of our 
tax system and by forcing honest taxpayers to make up the 
shortfall needed to pay for the basic Federal protections like 
health care. When these tax delinquents also receive large 
payments of Federal funds, it adds insult to injury. We must 
force the tax dodgers to pay their tax debt, and a key tool is 
to subject any Federal payments that they receive to an 
effective tax levy program.
    Again, I want to commend Senator Coleman. He has been the 
leader in this effort. It has been a sustained effort, whether 
he has been Chairman or Ranking Member of this Subcommittee. We 
thank him for all the energy that he has put into this effort, 
for his leadership, and we now call upon him for his opening 
statement.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. Thank you, Mr. Chairman, and thank you for 
your kind words. I have been working at the side of a master on 
this issue for a number of years and it has been your passion 
to make sure that those who have taxpayer obligations pay those 
obligations. The work that you did with folks using offshore 
companies, the super-rich avoiding taxpayer obligations, and 
the case you continually make as we look at contractors and 
others, they hurt the rest of us.
    In this investigation, we have over 600,000 physicians who 
are part of the system. The 21,000 that have been identified, 
they are hurting the rest. They are hurting those who are 
paying their obligations. As you have so wisely indicated, it 
adds insult to injury when at the same time the Federal 
Government is putting money in the pockets of tax cheats 
without having them live up to their obligations, and the 
reality is there is a system in place. It is widely used within 
the government, and once again which, you have indicated in 
your opening statement, has produced results.
    We talked about the system as a whole and the increase from 
$139 million collected to $339 million. Just the Defense 
Department, I believe, the Commissioner of the Internal Revenue 
Service will indicate that since we began the investigation, 
collections under the levy program went from $1 million to $26 
million, one narrow universe of folks and a significant 
increase.
    Again, I appreciate and thank you for the bipartisan effort 
and the way in which we have done this.
    We do turn our attention today to tax cheats in the 
Medicare system. In particular, we have found that more than 
21,000 doctors and related service providers who receive 
billions of dollars in Medicare payments every year owe an 
estimated $1.3 billion in back taxes.
    To make matters worse, $430 million of this outstanding 
debt is composed of unpaid payroll taxes, so that the average 
worker is out there working for these folks. Money is coming 
out of their paycheck. They are believing that it is being set 
aside for payroll taxes. Instead, it is going into somebody's 
pocket. These tax deadbeats then are cheating the system by 
withholding payroll taxes from employees' paychecks but failing 
to pay those taxes to the government. Instead, they keep the 
employees' taxes for their personal use. So they are not only 
cheating the government, they are, in a sense, stealing from 
their own employees, as well, to the tune of over $430 million.
    And if that is not bad enough, these tax cheats are not 
exactly paupers. To the contrary, they are living the good 
life. We will hear testimony about 50-foot yachts, multi-
million-dollar mansions, vacation homes, million-dollar 
gambling habits, and personal airplanes, all at the expense of 
the American taxpayer. Some of these tax cheats have been 
previously convicted for defrauding the government, money 
laundering, and tax evasion. Some have had hospital privileges 
revoked, been disciplined by various State medical boards, 
investigated by State Medicaid fraud boards, and some have even 
been previously excluded from Medicare, yet they continue to 
receive substantial payments from Medicare every year.
    Let me share a handful of disturbing examples to kind of 
build on the two that you mentioned in your opening statement. 
One ambulance company received more than $1 million from 
Medicare in the first 9 months of 2005 and it owed more than 
$11 million in back taxes. One doctor has refused to pay 
Federal income taxes since the 1970s and now owes more than $3 
million in unpaid Federal taxes and more than $1 million to 
another Federal agency. He was paid approximately $100,000 in 
the first 9 months of 2005 by Medicare. Apparently, he tried to 
hide his assets by attempting to transfer property to his 
children.
    Unfortunately, the list goes on and on. Were failing to pay 
their taxes not a sufficient insult to American taxpayers, 
Medicare doctors, and again I say doctors, this narrow universe 
of tax cheats, not the vast overall majority of doctors working 
in the system doing what they should do, but these tax cheats 
also owe $33 million in child support, $27 million in unpaid 
student loans, $114 million owed to other Federal agencies, and 
$22 million in unpaid State income taxes.
    All this raises some important questions. The first 
question is obvious. How did it happen? The best case scenario 
is that there is a disappointing situation of the left hand not 
knowing what the right hand is doing. On the one hand, we have 
the Centers for Medicare and Medicaid Services, which oversees 
the Medicare program, paying doctors to keep the Medicare 
program running smoothly. On the other hand, we have the IRS 
trying to recoup substantial tax debts from many of these same 
doctors.
    But that is only the best case scenario. I fear the reality 
is worse. The Federal Government created the Federal Payment 
Levy Program in 2000 to target government payments to tax 
deadbeats and levy those payments to recover the unpaid taxes. 
The levy program was designed to put an end to this very 
problem. The Government Accountability Office specifically 
recommended that CMS confer with the IRS and FMS to figure out 
how to get Medicare payments into the levy program. That 
recommendation came 6 years ago, in 2001. So it is clear that 
CMS and other agencies have been on notice about this very 
issue for years, yet CMS still isn't participating in the 
program.
    As a result, we have lost countless opportunities to levy 
Medicare payments made to tax-delinquent doctors and other 
suppliers. The GAO estimated that if CMS had participated in 
the levy program, the government could have recouped anywhere 
from $50 to $140 million from these Medicare tax cheats, and I 
stress, Mr. Chairman, that we are really dealing with, first, 
just the 9 months in 2005, so it is a narrow time period that 
we could have potentially recouped between $50 and $140 
million. You have to imagine how many hundreds of millions 
could have been recovered if CMS started participating in the 
program in 2001, 2002, 2003, 2004, and 2005.
    The other thing is that we are really dealing with just a 
small portion of Medicare, a portion of Part B. So this narrow 
slice of the Medicare program in a short time frame tells us 
that there are tens of millions, if not hundreds of millions of 
dollars. The chart being put up right now shows that we are 
dealing with Part B, the subject of the hearing, and it is only 
a small piece of the Medicare benefit pie.\1\
---------------------------------------------------------------------------
    \1\ Exhibit 3 appears in the Appendix on page 144.
---------------------------------------------------------------------------
    So why are we still struggling with this issue 7 years 
after the levy program began and 6 years after GAO's initial 
recommendation? Why did CMS wait until February 2007, just a 
few weeks before this hearing, to take an active interest in 
joining the levy program? I intend to put those very questions 
to CMS, IRS, and FMS, the Federal agencies involved, and get to 
the bottom of the problem.
    But we are not in the blame business. We are in the problem 
solving business. The Chairman did, I think, an outstanding job 
of recommending some things that should change.
    The paramount question, then, is how do we fix the mess? 
Make no mistake, these are complex problems, but I have no 
doubt, Mr. Chairman, that we can fix them. We have faced many 
similar complicated problems throughout this investigation and 
have overcome them one by one. For instance, I talked about 
when we began the DOD investigation, a mere fraction of DOD 
payments to its contractors were checked for tax debt and 
making improvements seemed daunting. Just 2 years later, I 
believe 99 percent of all DOD payments are now checked for 
levies and this has led to substantial results as collections 
from tax-delinquent DOD contractors have jumped dramatically, 
as I have indicated, for Fiscal Year 2003, from $1 million, to 
more than $26 million in 2006.
    Similarly, we are overcoming problems in getting other 
Federal agencies to participate in the Federal levy program. 
For instance, the U.S. Postal Service and the Army Corps of 
Engineers have successfully joined the program and their 
payments will be checked for levies beginning in June of this 
year.
    So we have dealt with thorny problems in the past and I am 
confident we will have similar success in addressing the 
problems now confronting Medicare payments. In fact, I 
understand that CMS has already expressed a willingness to make 
changes to lay the foundation to ensure that its payments will 
be checked for levies and we will no longer lose opportunities 
to recover unpaid tax debts. I look forward to the testimony 
from CMS, IRS, and FMS on what changes need to be made and what 
we can do to make these changes quickly.
    In closing, I should reiterate our profound appreciation of 
the hard work and dedication of GAO's Forensic Audits and 
Special Investigations Unit. They have provided this 
Subcommittee with invaluable assistance. Our first panel is 
very familiar to this Subcommittee and to the full Committee. 
They have done extraordinary work and we are appreciative of 
that.
    I also recognize the diligence and determination of the 
Commissioner of the IRS, the Administrator of GSA, the 
Secretary of Defense, and the Commissioner of the Financial 
Management Service, whose support led to the establishment of 
the Federal Contractor Compliance Task Force. The task force 
has addressed and resolved numerous problems that inhibit the 
levy process. It is painstaking work, but it has shown real 
tangible results.
    We are also grateful to the Postmaster General and the 
Commanding General of the Army Corps of Engineers, who have 
directed their respective agencies to join the Federal Payment 
Levy Program voluntarily. I appreciate all their hard work. I 
applaud their success. I am confident that we can achieve 
greater success as we move forward and I look forward to the 
testimony today.
    Thank you, Mr. Chairman.
    Senator Levin. Thank you. Senator McCaskill, do you have an 
opening comment or two that you would like to make?
    Senator McCaskill. I do not. Thank you, Mr. Chairman.
    Senator Levin. Thank you.
    Let me now welcome our first panel to this important 
hearing. Gregory Kutz is Managing Director of the Forensic 
Audits and Special Investigations Unit at the Government 
Accountability Office. Special Agent John Ryan, an Assistant 
Director with the Forensic Audits and Special Investigations 
Unit, and Steven Sebastian, Director of Financial Management 
and Assurance, we welcome each of you, I think in all cases, 
back to the Subcommittee. GAO is here to testify on the latest 
information that they have developed pursuant to our request 
for an investigation of Medicare providers who are not paying 
their taxes. We appreciate the hard work of the GAO. As Senator 
Coleman mentioned, without your work, we could not possibly be 
here and do so many things that we try to do, so we are very 
grateful for that work.
    Pursuant to Rule VI, all witness who testify before the 
Subcommittee are required to be sworn and I would ask each of 
you to please stand and raise your right hand.
    Do you solemnly swear that the testimony you are about to 
give to this Subcommittee will be the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Mr. Kutz. I do.
    Mr. Sebastian. I do.
    Mr. Ryan. I do.
    Senator Levin. Thank you. We will be using a timing system 
today, and please be aware that one minute approximately before 
the red light comes on, you will see your green light change to 
yellow, which will give you an opportunity to conclude your 
remarks. The written testimony will be made part of the record 
in its entirety.
    I believe, Mr. Kutz, that you are going to lead off and 
summarize.
    Mr. Kutz. Yes.
    Senator Levin. Thank you.

 TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC 
 AUDITS AND SPECIAL INVESTIGATIONS UNIT, ACCOMPANIED BY STEVEN 
J. SEBASTIAN, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, AND 
 JOHN J. RYAN, ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL 
   INVESTIGATIONS UNIT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Kutz. Mr. Chairman, Senator Coleman, and Senator 
McCaskill, thank you for the opportunity to discuss Medicare 
providers with tax problems.
---------------------------------------------------------------------------
    \1\ The joint prepared statement of Mr. Kutz, Mr. Sebastian, and 
Mr. Ryan appears in the Appendix on page 43.
---------------------------------------------------------------------------
    As you both mentioned, we have previously testified that 
government contractors were abusing the Federal tax system with 
little or no consequence. At your request, we have expanded our 
investigation of tax abuse to Medicare and Medicaid providers. 
Today's testimony is the first installment of our work on 
Medicare and Medicaid. My testimony has two parts: First, our 
findings related to Medicare physicians and other suppliers; 
and second, key policy and program issues.
    First, we found that over 21,000, or 5 percent, of Medicare 
Part B physicians, health professionals, and other suppliers 
had over $1 billion of unpaid Federal taxes. Note that our 
analysis was limited, as you mentioned, to 9 months of 2005 
data. The scope of our investigation was limited due to 
problems receiving accurate and reliable data from the Centers 
for Medicare and Medicaid Services. The data we did receive 
represents about 20 percent of total Medicare disbursements.
    To put a face on this issue, we investigated 40 case 
studies, including physicians and ambulance, imaging service, 
and laboratory businesses. For all 40 cases, we found abusive 
and potentially criminal activity related to the Federal tax 
system. Twenty-five of our case studies were businesses that 
had unpaid payroll taxes. Willful failure to remit payroll 
taxes to the IRS is a felony.
    For the first 9 months of 2005, these 40 providers received 
$16 million of Medicare payments while owing $59 million of 
Federal taxes. The individuals associated with these case 
studies have made a career out of failing to pay their Federal 
taxes. Some of the schemes used to avoid paying taxes include 
non-filing of tax returns and under-reporting of income, paying 
employees in cash, closing the entity with tax debt and opening 
up another entity with a similar name at the same address, and 
transferring millions of dollars of property to other family 
members and offshore accounts to avoid IRS collections.
    The individuals involved with these cases have accumulated 
substantial personal wealth while at the same time failing to 
pay their Federal taxes. The posterboard shows examples of 
luxury homes and vehicles owned by these individuals along with 
a $400,000 yacht.\1\ Other interesting assets include a tobacco 
farm, expensive paintings and antiques, a liquor store, an 
airplane, and nightclubs.
---------------------------------------------------------------------------
    \1\ Chart referred to appears in the Appendix on page 00.
---------------------------------------------------------------------------
    Our current and past investigations have shown that failure 
to pay Federal taxes isn't the only problem these individuals 
have. Let me use the posterboard to walk you through five other 
themes from our case studies.\2\
---------------------------------------------------------------------------
    \2\ Chart referred to appears in the Appendix on page 00.
---------------------------------------------------------------------------
    The first is professional practice problems. We found 
physicians denied hospital privileges due to substandard care. 
We also found many State medical board license suspensions and 
sanctions.
    Second, substantial other debt. At least 23 of our case 
studies had unpaid State taxes. Other defaulted on student and 
other Federal loans.
    Third, prior convictions, including money laundering, 
income tax evasion, and obtaining controlled substances by 
means of deception.
    Fourth, suspicious cash transactions. One physician had 
millions of dollars of gambling transactions. Another physician 
attempted to transfer large amounts of cash to a country known 
for state-sponsored terrorism.
    Fifth, deadbeat parents who had substantial delinquent 
child support payments.
    If you walked in partway through my presentation, you might 
have assumed that I was talking about America's most wanted 
criminals rather than Medicare providers, which leads to my 
second point. What is being done to address this problem?
    There are many policy and program issues here, but I will 
focus on two. The first is the one that you have spoken about 
the most here, which is the back end of the process, the 
collection of unpaid taxes through tax levy. Your oversight of 
contractors with tax problems has led to improvements in debt 
collection. We estimate that your oversight and positive 
actions by the IRS and FMS have resulted in hundreds of 
millions of dollars of increased collections through tax levy. 
Your similar oversight is needed for Medicare Part B providers 
because there is no continuous tax levy program.
    As you mentioned, we estimate that for 9 months, between 
$50 and $140 million could have been collected from these 
providers, the little sliver that Senator Coleman talked about, 
through continuous levy. Why aren't these payments being 
levied? The second panel needs to answer that question.
    The second aspect I wanted to explore was the front end of 
the process. Our work across the government has shown that 
fraud prevention is the most efficient and effective means to 
minimize fraud, waste, and abuse. We found that very little is 
being done to prevent even the most egregious Medicare 
providers from doing business with the Federal Government, 
although it is hard to believe the 40 cases I just described 
received $16 million of payments from Medicare in 2005.
    In conclusion, the good news is that the vast majority of 
Medicare physicians and providers are paying their Federal 
taxes. However, our work has shown that thousands of these 
providers have taken advantage of the opportunity to avoid 
paying over $1 billion of Federal taxes. These tax cheats have 
an unfair advantage compared to the vast majority of physicians 
and other suppliers that do pay their Federal taxes.
    With respect to our 40 case studies, the question I have is 
how bad does the behavior of Medicare providers need to be for 
them to be barred from doing business with the Federal 
Government. I find it hard to believe that the hard-earned 
money we collect from honest American taxpayers is being used 
to bankroll these tax deadbeats.
    Mr. Chairman, that ends my statement. Special Agent Ryan, 
Mr. Sebastian, and I look forward to your questions.
    Senator Levin. Thank you very much, Mr. Kutz.
    First of all, I think you have already made it clear that 
you have looked at only some of the Medicare Part B payments. 
You have not looked at other types of Medicare payments that 
have also not been made subject to tax levy, is that correct?
    Mr. Kutz. That is correct. We have looked at about 20 
percent of Medicare, it appears.
    Senator Levin. All right. And so is it fair to make an 
assumption that perhaps the other parts of the problem would be 
80 percent of the problem and you have looked at 20 percent of 
it?
    Mr. Kutz. We don't know for sure, but it could be, because 
in some of the other work we have done, for example one of the 
most egregious offenders for our civilian contractor work was 
nursing homes, and so we do believe there is going to be a lot 
of other tax problems here.
    Senator Levin. And nursing homes were not included in your 
review?
    Mr. Kutz. That is correct.
    Senator Levin. Is it also true that, for instance, people 
who sell durable medical equipment, like wheelchairs, are not 
included?
    Mr. Kutz. That was excluded from the Part B data we 
received.
    Senator Levin. All right. In matching the records of CMS 
against those of the IRS, you found 21,000 doctors, 
approximately, and other Medicare Part B providers that owed 
over $1 billion of back taxes. Now, these 21,000 cases are 
where the CMS TIN and the IRS TIN, the Taxpayer Identification 
Number, match?
    Mr. Kutz. Correct. The TIN that was being paid by CMS 
matched the unpaid assessment file at IRS.
    Senator Levin. All right. So the 21,000 providers that you 
identified where there is a match clearly understates, does it 
not, the problem or the numbers that are out there, because it 
does not include non-filers and it does not include under-
reported amounts so far, right?
    Mr. Kutz. Correct.
    Senator Levin. Now, doesn't it also omit taxes that are 
assessed against the individual doctors or physicians of 
medical corporations that have elected to be taxed as 
partnerships?
    Mr. Kutz. That would be correct, or businesses, and there 
would be hundreds of thousands of physicians that would not be 
providing billing information like that. They would be excluded 
from these numbers.
    Senator Levin. All right. So the larger part of the problem 
probably is where there is no match possible under the current 
system because different Taxpayer Identification Numbers are 
provided?
    Mr. Kutz. Yes.
    Senator Levin. All right. Now, have you talked to CMS or 
the IRS about that issue, and how they are going to correct 
that or how Congress needs to correct that?
    Mr. Kutz. Well, I think we are trying to crawl before we 
can walk and so we actually would like to see a levy program 
first, so we have not gotten to that advanced of a discussion. 
We would like to see a levy program first of all for the ones 
that match. We are not even anywhere close to having a levy 
program for what we would call the low-hanging fruit----
    Senator Levin. All right.
    Mr. Kutz [continuing]. Let alone the more sophisticated 
types of analysis needed. But you are right. There is a lot 
more money on the table than just the analysis we showed today.
    Senator Levin. Why has the low-hanging fruit not been 
picked?
    Mr. Kutz. You are going to have to ask the second panel 
that.
    Senator Levin. Well, we are going to. I am sure we are all 
looking forward to that. [Laughter.]
    But in the meantime, I am sure you talked to them about it, 
as well. What were the reasons they gave?
    Mr. Kutz. Well, as I think Senator Coleman mentioned, we 
had recommended in 2001, and probably before that also, that 
IRS and FMS work with CMS to make this happen. The Federal 
Contractor Task Force has been meeting now for several years as 
a result, I believe in many respects, of your oversight. CMS 
has not participated in that until February 2007. So I don't 
know if they were invited or whether they decided not to show 
up or what the case may be, but they have not participated in 
that until about the time you called this hearing.
    Senator Levin. But you have talked to CMS as part of your 
investigation?
    Mr. Kutz. Yes.
    Senator Levin. I am sure you have asked them what the 
reasons are. Did they give you an answer so we can get kind of 
a preview of what to expect here?
    Mr. Kutz. Well, I think they are going to talk to you in 
the second panel about technical issues. They are going to say 
they are working with IRS and FMS, but that would be a recent 
event given the fact that they just started participating in 
February.
    Senator Levin. There is no reason that they gave you for 
their delay in participating?
    Mr. Kutz. There is not a legitimate reason. We have heard 
why 5 or 6 years have passed, and that could be over a billion 
dollars of lost collection, Senator.
    Senator Levin. We fully agree with that. I am just 
wondering whether there is a non-legitimate reason which has 
been given, I mean, any reason. But they have not offered you 
an explanation?
    Mr. Kutz. No.
    Senator Levin. OK. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    Just following up on the Chairman's last question, in that 
original recommendation in 2001, was there a discussion or a 
response from CMS that they were doing some system overhaul, 
some system changes? Are you familiar with that?
    Mr. Kutz. I am not familiar with that, no. The responses I 
saw were mostly from IRS and FMS. They are doing an overhaul 
right now----
    Senator Coleman. We received comments from the Acting 
Deputy in which he stressed CMS vendor payments could not be 
included in the continuous levy program until a new CMS-
integrated accounting system is completed. That is 2001.
    Mr. Kutz. And that still is underway, that system.
    Senator Coleman. Even for government, that is an 
extraordinary pace.
    Mr. Kutz. Yes.
    Senator Coleman. You indicated in the early part of your 
testimony that in talking about why we are only looking at 20 
percent of the total disbursements that you had problems 
getting data from CMS. Can you elaborate on that?
    Mr. Kutz. Yes. The request for us to look at the Medicare 
was in 2005, actually, so we had an entrance meeting with CMS 
in 2005. We worked with them to get the physician and other 
files during 2005 and 2006. I sent a letter to them in the fall 
of 2006 saying we had a lot of data we hadn't received yet. You 
sent a letter to them February 1, 2007 asking for the same data 
we hadn't been able to get from them, and here we are today 
without the data.
    Now, I will say once again, since you have called this 
hearing, there has been a lot more activity. They have given us 
1099 information and they have tried to give us other pieces of 
data. But again, you asked us to look at Medicare, not 20 
percent of Medicare, but I think it was important to have this 
hearing to get the issue out there so that actions can start 
being taken to actually address the problems.
    Senator Coleman. I take it, then, you will continue to look 
at Medicare and go beyond just the 20 percent that we are 
talking about today?
    Mr. Kutz. We will if we get the data, and we do not have 
the data.
    Senator Coleman. We will do everything in our power to make 
sure you have the data.
    One of the issues that I have been asked about is the 
nature of the folks involved in having tax obligations and is 
this something just the average business guy could run into. It 
is clear by, and I take it that is kind of the intent for you 
to focus on some of the luxury personal goods, the yachts, the 
cars, etc. We are not talking about struggling small business 
operators, are we, here?
    Mr. Kutz. No. That is a good point. When we did the 
contractor work, some of the cases were truly businesses that 
appeared to be struggling, having cash flow problems, etc.. For 
the most part, these people--on the one hand, they are telling 
IRS that they are having financial problems and they can't pay 
the bill. On the other hand, we see an accumulation of 
substantial assets. These are fraudsters, Senator. There is no 
question.
    Senator Coleman. I don't know whether you can explain or 
perhaps I may ask the Commissioner. In one of the examples that 
you cite, you had a physician who hasn't filed a tax return in 
over 30 years. Can you explain to me how that person has 
avoided becoming a guest of the Federal prison system?
    Mr. Kutz. I can't, and that is something I think Mr. Ryan 
could probably comment to. Why there haven't been more criminal 
cases with these 40, we don't know.
    Senator Coleman. Mr. Ryan, you have done a lot of work in 
this area. Does that strike you as pretty excessive?
    Mr. Ryan. Yes, but then again, you have to ask the 
Department of Justice. I think that, overall, the agents of the 
IRS, the ones I have been talking to, are trying to do a good 
job. I think the letter that was sent to Senator Levin by the 
Justice Department opens up the door for the IRS to go in and 
ask the Department of Justice, what are you going to do and how 
are you going to help us bring these tax cheats to the table? 
They indicated that if the IRS brings the cases, they will 
consider them. If I was the IRS, I guess I would be jumping 
over at the Department of Justice and asking them to send 
letters out to all the districts and having the SACs of those 
districts work together with the Justice Department to bring 
these type of people to justice.
    Senator Coleman. Part of your testimony focused on the 
qualifications of the folks who are these tax cheats, technical 
qualifications, revoked licenses, all sorts of other tax debt, 
other kinds of criminal behavior, suspicious cash transactions. 
Did you have discussions with CMS in terms of this issue of 
standards? Is there a way to somehow tie this into quality 
medical care? I mean, the bottom line for me is are you aware 
of any standards that should be applied to these folks before 
they continue participating in the Medicare system?
    Mr. Kutz. There are extensive standards for exclusions and 
debarments and most of them are health-related ones, and some 
of these people have been excluded during various points in 
time, but during 2005, all 40 of them received Federal 
payments. But it is difficult, and we didn't look at the whole 
exclusion and debarment process at length. That wasn't really 
our objective here.
    But it does raise questions why none of these 40 most 
recently as when we looked were being debarred at this point. 
It certainly seems that some of them would have met the 
criteria, because if you look--I would just read to you a 
couple of the examples of what we have here. We have 
substandard care, drug abuse, lack of moral character, 
embezzlement, abusive prescription writing. That doesn't sound 
to me, Senator, like people we should have doing business with 
the Federal Government.
    Senator Coleman. So clearly, there is not a sufficient 
screening process here.
    Mr. Kutz. In these particular cases. We can only speak to 
the 40. I would say there are problems with that.
    Senator Coleman. Thank you. Thank you, Mr. Chairman.
    Senator Levin. Thank you very much, Senator Coleman.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    I want to follow up a little bit on what Senator Coleman 
was talking about. In reading this, my conclusion is that we 
really don't have any deterrent out there right now that would 
be effective in terms of any of these people that are 
systematically trying to avoid tax liability. Would that be a 
fair statement?
    Mr. Kutz. Well, there was a lot of collection activity with 
respect to the 40 cases, but again, when you consider that they 
have avoided paying taxes for 10, 15, or 20 years, we would 
have probably expected more aggressive action by the IRS on the 
enforcement side and the criminal side to put them out of 
business.
    Senator McCaskill. I understand that the debarment, 
according to your report, doesn't happen unless a taxpayer is 
actually convicted of a felony in regards to tax evasion.
    Mr. Kutz. That is one of the possible areas, yes. There are 
other health-related felony convictions that would require a 
Medicare exclusion, also.
    Senator McCaskill. Right. But right now, if somebody had 
consistently--let us say one of the examples you found where 
they were changing the names of their businesses but residing 
at the same address. The discovery of that, if someone was 
motivated at CMS and decided--would that even be a basis under 
the law to say, we are not going to do business with you 
anymore?
    Mr. Kutz. There is probably enough flexibility that, 
depending on how egregious the behavior, they could exclude 
them for various things like you have just described. But that 
is a matter of judgment and we certainly didn't see it with the 
40 cases we looked at.
    Senator McCaskill. Did you discover any cases where there 
had been any type of attempt to notify providers about the 
possibility of debarment if they didn't live up to their 
Federal tax liabilities, if they didn't----
    Mr. Kutz. No, not for tax liabilities.
    Senator McCaskill. None?
    Mr. Kutz. None. One thing to keep in mind, Senator, is that 
CMS doesn't know whether or not these people have tax 
liabilities. Section 6103 of the Internal Revenue Code would 
not allow IRS to share that information with them, necessarily. 
And so for them to get that information, they would have to 
have the taxpayer when they enroll or re-up consent to letting 
them check IRS's tax records. So that is one impediment right 
now that could be dealt with procedurally, or you could deal 
with it legislatively.
    Senator McCaskill. That is what I was just going to ask as 
the next question. It would appear to me that if we are going 
to do business with a contractor, whether it be a doctor or a 
major defense contractor, that they ought to be willing to 
agree to allow the government to check to make sure they have 
paid their taxes if we are going to be giving them taxpayer 
money.
    Mr. Kutz. I agree with you 100 percent, and given the vast 
majority of these people are honest tax-paying Americans, the 
vast majority would agree with you. The ones that wouldn't 
agree are the ones that aren't paying their taxes.
    Senator McCaskill. And did you get a sense from the people 
at HHS that they were reluctant to do that, that would have 
some kind of chilling effect on the willingness of these 
various providers to participate in this program?
    Mr. Kutz. We haven't gotten into that discussion with them.
    Senator McCaskill. I also notice that you have only looked 
at 20 percent. You have not included home health care, either, 
is that correct?
    Mr. Kutz. I believe that is correct.
    Senator McCaskill. That is Medicare Part A, is that right?
    Mr. Kutz. We haven't looked at any of Part A. We have only 
looked at about half of Part B and 20 percent of all Medicare 
disbursements is what was in our population.
    Senator McCaskill. I guess the problem I have here is that 
there is such an opportunity for deterrence and no one is 
availing themselves of it. Knowing in the criminal justice 
system that there are people you can deter and there are people 
you can't, and generally, the people that are medical 
professionals are going to be deterred if they believe there 
are consequences to this activity. This isn't like people who 
it doesn't work if you try to--and by the way, I would be 
willing to bet that if some of these cases were brought, they 
would be highly publicized. I would think this is the kind of 
stuff that makes the papers because people are, probably it is 
not a good thing about human nature, that people are fascinated 
by people not living up to their obligations that are in 
positions of trust, and for all the right reasons the vast 
majority of the medical community has a revered place of trust 
in our country.
    Mr. Kutz. We would certainly like to see some high-profile 
cases prosecuted and made examples of and well publicized. That 
is a deterrent, there is no question.
    Senator McCaskill. Were you able to determine if any of 
these kinds of cases had been brought at the Department of 
Justice for tax evasion by Medicare providers?
    Mr. Kutz. There were a couple of the 40 that had tax 
evasion issues in their history, but they were not barred from 
doing business during the year we looked at, 2005. So there had 
been action on tax evasion for maybe one or two of them, but 
currently, none.
    Senator McCaskill. Do you know if any of this has ever been 
covered in a single audit as it relates to single audits are 
being done in the States when we are looking--because certainly 
I know that is something we look at in a single audit as it 
relates to the Medicare program. Are you aware of whether in 
any of the single audits across the country there has been a 
look at this kind of issue?
    Mr. Kutz. I wouldn't think they could because they wouldn't 
have access to this information. So the public accounting firms 
or State auditors or whoever do those audits, I don't think 
they would have access to this. We had to work through you and 
the Joint Committee on Taxation to get access to taxpayer 
information.
    Senator McCaskill. OK. I think some could, depending on the 
State, because I think we could on a limited scope in Missouri. 
We couldn't by identifying who they were, but we could by 
number.
    Mr. Kutz. OK.
    Senator McCaskill. Thank you.
    Senator Levin. Thank you, Senator McCaskill. Senator 
Coleman.
    Senator Coleman. Thank you, Mr. Chairman. I just have a 
series of questions for Mr. Kutz that is actually going to lay 
the foundation for the next panel.
    One, did you find as part of the matching of Medicare 
payments with the outstanding tax debts that CMS has the names 
and Taxpayer Identification Numbers of physicians who were paid 
in 2005? Do they have that information?
    Mr. Kutz. They did. It took us a long time to get the 
information, but we got it.
    Senator Coleman. They don't, however, validate the TINs, do 
they?
    Mr. Kutz. I don't believe so.
    Senator Coleman. Which is, I think, something we did with 
the Defense Department after our investigation, is actually 
validate the TINs. But they have the Taxpayer Identification 
Numbers. Does CMS obtain the name and Taxpayer Identification 
Number----
    Mr. Kutz. Senator, I am sorry. I understand that they do 
validate, is that correct? I am told they do validate.
    Senator Coleman. Does CMS obtain the name and Taxpayer 
Identification Number before payment is actually made?
    Mr. Kutz. Yes.
    Senator Coleman. Then you would agree that CMS has all the 
information, the basic information, that is required for the 
Federal Payment Levy Program to identify payments that should 
be levied?
    Mr. Kutz. Under their old system and new system, I would 
say, yes, the data is there. It would be harder to do under the 
old system than the new system from what I understand.
    Senator Coleman. Just dealing with this narrow issue of 
potential participation in the Federal Payment Levy Program, 
where all you need is name and Taxpayer Identification Number 
and then compare that with the IRS data, is there any reason 
why CMS cannot participate in the Federal Payment Levy Program?
    Mr. Kutz. No. I think that it could be worked out.
    Senator Coleman. Thank you. Thank you, Mr. Chairman.
    Senator Levin. Why would it be harder under the old system 
to make the match if the numbers are there in both systems?
    Mr. Kutz. I think the old system is more decentralized. I 
think the new system is going to be more centralized where 
ultimately everybody will be on one system, so you could do one 
file match. Here, you might need to do several dozen file 
matches. But that doesn't mean it can't be done.
    Senator Levin. Is this computer generated under both 
systems?
    Mr. Kutz. Yes.
    Senator Levin. Senator McCaskill, any more questions?
    Senator McCaskill. No.
    Senator Levin. OK. Thank you very much. Thank you again for 
your good work on this and so many other projects.
    We will now call on our second panel. Let me now welcome 
our second panel of witnesses for this afternoon's hearing.
    First, we have Mark Everson, Commissioner of the Internal 
Revenue Service; Kenneth Papaj, Commissioner of the Financial 
Management Service of the Department of Treasury; Leslie 
Norwalk, the Acting Administrator for the Centers for Medicare 
and Medicaid Services at the Department of Health and Human 
Services, and accompanying Ms. Norwalk this afternoon is 
Timothy Hill, Chief Financial Officer and Director of the 
Office of Financial Management at the Centers for Medicare and 
Medicaid Services.
    I would ask you at this time if you would all please rise.
    Do you swear that the testimony that you will give before 
this Subcommittee this afternoon will be the truth, the whole 
truth, and nothing but the truth, so help you, God?
    Mr. Everson. I do.
    Mr. Papaj. I do.
    Ms. Norwalk. I do.
    Mr. Hill. I do.
    Senator Levin. I think you heard the way the lighting 
system works. A number of you have been here before, so I won't 
repeat that. Your written testimony will be made part of the 
record. We would ask that you attempt to limit your oral 
testimony to no more than 5 minutes.
    Mr. Everson, we will have you go first. Before you start, 
there are so many things that you do for the Nation and for 
this Subcommittee, and we are grateful for both.

   TESTIMONY OF HON. MARK EVERSON,\1\ COMMISSIONER, INTERNAL 
        REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Everson. Thank you, sir. Good afternoon, Chairman 
Levin, Ranking Member Coleman, and Senator McCaskill. I am 
pleased to be before you today to discuss the Government's 
Federal Payment Levy Program. I commend the Subcommittee for 
your continued interest in this subject. As you know, this is 
the fourth time we have met on this topic.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Everson appears in the Appendix 
on page 79.
---------------------------------------------------------------------------
    The government has made demonstrable progress in going 
after tax debt owed by Federal contractors. This is an instance 
of Congressional oversight at its best in that I firmly believe 
that you get a lot of the credit for our increased attention to 
this problem. As you indicate, Mr. Chairman, your predecessor 
and his staff certainly did an awful lot in this area.
    Before taking your questions, I do want to review briefly 
the overall progress the IRS has made in recent years in 
restoring levies as an important enforcement tool. As the 
Members of the Subcommittee know, restoring the credibility of 
IRS enforcement programs has been a priority during my 4 years 
as Commissioner. Levies are an important part of our 
enforcement activities. Let me just show you two charts which 
depict the recovery of levies.\1\
---------------------------------------------------------------------------
    \1\ Chart referred to appears in the Appendix on page 85.
---------------------------------------------------------------------------
    This first one shows levies issued. As you can see, the 
volume of levies now exceeds that made by the IRS before the 
precipitous decrease after the hearings in the 1990s and the 
implementation of RRA 1998. Most importantly for today's 
subject, the chart depicts the Federal payment \2\--this shows 
the growth of the Federal Payment Levy Program, this color 
which was nonexistent a few short years ago. We started talking 
about this back here. But you can see overall, the levies have 
recovered smartly, but now we have this nice increment due to 
the focus that we have brought that you have sort of obviously 
championed.
---------------------------------------------------------------------------
    \2\ Chart referred to appears in the Appendix on page 86.
---------------------------------------------------------------------------
    Let us go to the second chart.\3\ This shows that the 
dollars, as well, the dollars now exceed what we were getting 
at the end of the 1990s, and again, there is a nice piece here. 
There is a lesser amount here. As you are familiar, there are 
limitations on what we get through this program, the 15 percent 
limitation. It is not the same thing as we get in some of the 
areas, relatively more lucrative work, which is the field work, 
the yellow.
---------------------------------------------------------------------------
    \3\ Chart referred to appears in the Appendix on page 87.
---------------------------------------------------------------------------
    Before taking your questions on our efforts to continue to 
improve this program, let me make one or two points about the 
President's 2008 budget proposals. We enjoyed significant 
increases in our enforcement results in Fiscal Year 2006, and I 
am pleased to report that we are making continued strides in 
Fiscal Year 2007. One of the things that I am proudest of is 
that the IRS has ramped up its enforcement programs without 
generating a lot of noise or increased allegations of 
infringement of taxpayer rights.
    The President's 2008 budget builds on these results. I am 
pleased that the President's request provides additional monies 
for IRS systems infrastructure modernization as well as for 
enforcement and notably for increased research. There is also a 
modest increase for taxpayer services. This is the best budget 
that I have seen in my 4 years on the job.
    I ask the Members of the Subcommittee, as you have done in 
the past, to support the President's budget and to help enact 
an appropriation for the IRS before Fiscal Year 2008 starts. It 
is very important, trying to run a big operation within the 
agency to get the budget on time. These requested monies will 
help us generate continued progress in attacking the tax gap, 
but they are not the only things we need to do. The 
Administration has made 16 legislative proposals. I would 
direct your attention to four that I think are particularly 
important.
    First, reporting of credit card gross receipts.
    Second, and I think we are getting at this in the earlier 
testimony, making willful failure to file a tax return a 
felony, not a misdemeanor. That explains a great deal why DOJ 
is not terribly interested in pursuing a misdemeanor.
    Third, requiring basis reporting for sales of securities.
    And fourth, lowering the threshold for mandatory electronic 
filing for large corporations and partnerships.
    I would like to mention one other proposal. Not all the tax 
debt, as you indicated, Mr. Chairman, referred to the FPLP can 
be immediately levied. That is because we have not completed 
the notice and review process that is legally required prior to 
the activation of the levy. Of the $114 billion in tax debt 
referred to the program, $57 billion, or approximately half, is 
not currently available for levy. We continue our efforts to 
accelerate the notice process so that the debts can be levied 
as soon as legally possible.
    In that regard, there is also a provision included in the 
President's budget request that would permit the IRS to issue 
post-levy due process notices under certain circumstances. This 
change could significantly increase collections for employment 
tax liabilities prior to a collection due process hearing in a 
fashion similar to levies issued to collect a Federal tax 
liability from a State income tax refund. This gets at the 
issue you were talking about a few minutes ago. Taxpayers would 
have the right to a collection due process hearing on these 
liabilities within a reasonable time, but after the levy.
    I think these proposals are an important step and I hope 
that Congress will enact them swiftly. Thank you.
    Senator Levin. Thank you, Commissioner. Mr. Papaj.

   TESTIMONY OF KENNETH R. PAPAJ,\1\ COMMISSIONER, FINANCIAL 
      MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Papaj. Good afternoon. Chairman Levin, Ranking Member 
Coleman, and Subcommittee Members, thank you for inviting me 
here to testify today. I would like to take this opportunity to 
thank the Members of the Subcommittee and the staff for your 
ongoing support of efforts to improve and strengthen the 
Federal Payment Levy Program and your continued interest in 
ensuring that Federal contractors meet their tax obligations.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Papaj appears in the Appendix on 
page 90.
---------------------------------------------------------------------------
    I am pleased to report that as a result of your vigilance 
and initiative, our combined efforts are paying off. 
Collections of delinquent taxes through the levy program have 
increased dramatically over the last several years. As the 
first chart illustrates, the total amount of levy collections 
has more than tripled, from $89 million in Fiscal Year 2003 to 
$303 million in Fiscal Year 2006.\2\ More importantly, there 
has been continued growth in collections from every type of 
payment that is part of the levy program.
---------------------------------------------------------------------------
    \2\ Chart referred to appears in the Appendix on page 00.
---------------------------------------------------------------------------
    With regard to levy collections from Federal contractors, 
as Chart 2 illustrates, collections have increased from $7 
million in Fiscal Year 2003 to $60 million in Fiscal Year 
2006.\3\ Through future initiatives and by working closely with 
IRS and other agencies, we fully anticipate that increases in 
levy collections will continue. In fact, FMS is on track this 
year to exceed last year's record tax levy collections and we 
are approaching the billion-dollar mark for collections since 
the inception of the program.
---------------------------------------------------------------------------
    \3\ Chart referred to appears in the Appendix on page 00.
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    A major factor in the increase in levy collections is in 
the increase in the number of tax debts that IRS has made part 
of the levy program. As of December 31, 2006, FMS's systems had 
$111.9 billion in delinquent taxes that were eligible for 
matching against Federal payments. This represents an increase 
of $53.2 billion in tax debt since the end of 2003. Of the 
eligible amount, IRS had activated $55.1 billion, or 49 
percent, for collection by levy. We continue to work closely 
with IRS so that they can activate even more debts for levy.
    As Commissioner Everson said, there is an Administration 
proposal that would permit IRS to conduct past-due levy 
processes under certain circumstances and we fully support that 
initiative. In the meantime, systems have been put in place to 
identify Federal contractors who owe taxes, which enables the 
IRS to accelerate the collection due process in those cases.
    Another significant factor increasing levy collections has 
been an increase in the types of payments that are being 
matched and levied against delinquent tax debts. The first 
major expansion of the program took place in January 2002 with 
the addition of Social Security benefit payments. By April 
2005, all DOD vendor pay systems were incorporated into the 
program. In February 2003, salary payments issued by the Postal 
Service were added, and in April 2004, DOD salary payments were 
made available for levy. This June, FMS plans to add to the tax 
levy program vendor payments of the U.S. Army Corps of 
Engineers and the U.S. Postal Service.
    Additionally, FMS has been working to ensure that our 
various systems for making payments to vendors--Type A, 
Automated Clearing House-Corporate Trade Exchange, and 
Fedwire--are included in the levy program. All Type A payments 
were included in the levy program last June, and I am pleased 
to report that CTX and Fedwire payments are on schedule to be 
brought into the program by the end of December 2007.
    FMS, along with GSA and the IRS, is also in the process of 
implementing a task force recommendation that will prevent 
contractors who owe delinquent debt from being paid for 
contracts with the use of a purchase card. This will be 
accomplished by identifying and flagging in the CCR system 
those contractors that have debts and then using payment 
methods that are subject to levy. FMS's programming to 
implement this recommendation will be completed in the next 
month, and once necessary changes to the Federal Acquisition 
Regulations are finalized, use of the debt flag by contracting 
officers will begin.
    With regard to Medicare payments by CMS, as GAO 
acknowledged, due to CMS's decentralized payment process, there 
are significant operational complexities with levying these 
payments. Additional complexities arise because of the role 
CMS's fiscal intermediaries play in the payment process. 
However, as CMS moves to consolidate its processes, it is now 
feasible to address the issue of levying CMS payments.
    Working under the direction of the Federal Contractor Tax 
Compliance Task Force, a subgroup consisting of FMS, IRS, and 
CMS has been formed to determine how best to deal with tax-
delinquent Medicare providers. I join my colleagues from the 
IRS and CMS in supporting the work of the task force in 
examining various options to ensure that payments to Medicare 
providers are levied in the most efficient and effective 
manner.
    Some options that should be evaluated are improving the 
paper levy process already in place, establishing a matching 
program between CMS's fiscal intermediaries and either IRS or 
FMS to facilitate levies through the fiscal intermediaries, and 
having FMS disburse Medicare payments on behalf of CMS so that 
levies can be conducted using the existing program. Each of 
these options, however, presents logistical, operational, and 
technical issues that must be worked out. The task force will 
issue a report by the end of the year setting forth various 
options and making recommendations for levying payments to 
Medicare providers.
    While it is our view that we do not currently have the 
legal authority to offset Medicare payments to collect non-tax 
debt, concurrent with examining solutions to the complexities 
associated with levying Medicare payments we will also examine 
offset options in consultation with HHS.
    Mr. Chairman, I appreciate the invitation to discuss the 
role FMS has played and will continue to play in improving the 
Federal Payment Levy Program and helping to close the tax gap. 
FMS is proud of its accomplishments in debt collection, which 
in Fiscal Year 2006 resulted in record collections of over $3.3 
billion, and since the inception of the program has yielded 
collections of more than $29.5 billion in delinquent tax and 
non-tax debt owed to Federal agencies and States that otherwise 
would not have been collected.
    This concludes my remarks. I would be happy to take any 
questions.
    Senator Levin. Thank you, Mr. Papaj. Ms. Norwalk.

   TESTIMONY OF LESLIE V. NORWALK,\1\ ACTING ADMINISTRATOR, 
  CENTERS FOR MEDICARE AND MEDICAID SERVICES, ACCOMPANIED BY 
 TIMOTHY B. HILL, CHIEF FINANCIAL OFFICER AND DIRECTOR, OFFICE 
  OF FINANCIAL MANAGEMENT, CENTERS FOR MEDICARE AND MEDICAID 
     SERVICES, U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Ms. Norwalk. Good afternoon, Chairman Levin, Senator 
Coleman, distinguished Members of the Subcommittee. I 
appreciate the opportunity to appear before you today to 
discuss the Centers for Medicare and Medicaid Services' efforts 
to recoup unpaid tax liabilities of Medicare physicians and 
Part B suppliers.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Norwalk appears in the Appendix 
on page 100.
---------------------------------------------------------------------------
    CMS is the largest purchaser of health care in the world, 
providing coverage to nearly one in three Americans. Medicare 
alone insures over 43 million lives. In Fiscal Year 2008, 
spending on Medicare benefits will exceed $454 billion. With 
such enormous benefit expenditures, CMS is firmly committed to 
ensuring the highest measure of accountability within the 
Medicare program. Our stewardship of taxpayer dollars requires 
partnership with other Federal agencies, including the 
Department of the Treasury, the Department of Justice, and the 
Office of Inspector General in the Department of HHS.
    I am outraged that there are Medicare providers out there 
right now harming our beneficiaries. The GAO has identified 40 
of them, and perhaps more, in their statement but won't share 
the information with us. Why? Because they are not legally 
permitted to do so. I am committed to solving this problem, but 
we need Congress to give IRS the authority to share this 
critical information with CMS so we might take appropriate 
action.
    CMS does not take the loss of taxpayer dollars lightly. 
Consequently, as recommended by the GAO last year, we take a 
risk-based approach to fiduciary responsibility, allocating 
scarce resources to the highest risk/highest vulnerability 
areas.
    I also understand from the GAO's testimony today between 
approximately $50 and $160 million per year over the past 12 
years is reported in unpaid tax debt of Medicare providers, 
particularly under Part B. Let me assure you that during this 
same time period, CMS focused its scarce resources to reduce 
improper payments to providers. These efforts avoided $10.1 
billion in improper payments over the last 10 years. That is 
over $1 billion a year. That is not enough.
    For the past 2 years, CMS has been looking at innovative 
ways to go after those who defraud Medicare and Medicaid. Each 
year, unscrupulous providers fraudulently bill Medicare for 
billions of dollars in health care claims. However, 
successfully prosecuting these criminals for health care fraud 
requires more significant resources, so CMS has reached out to 
unconventional partners to help catch them for tax evasion, and 
once convicted, exclude them from the Medicare program.
    For example, CMS and the District Attorney of Los Angeles, 
have been working on a unique pilot program to try and more 
effectively go after health care fraud through the prosecution 
of health care providers, both those who don't report at all 
and those who are under-reporters for State income tax evasion, 
and the L.A. project works. As of February of this year, three 
individuals have been convicted of tax fraud, resulting in 
prison sentences and restitution. Another two physicians have 
been arrested on suspected tax and health insurance fraud, and 
roughly 300 cases are under development by the tax project.
    For 50 of these cases against Medicare providers, the 
project estimates there are over $100 million in State and 
local taxes that were not reported. Moreover, the project 
estimates that these same 50 providers may have defrauded the 
Medicare program for an additional $100 million in last year 
alone. The direct result to the Medicare program for this Al 
Capone approach to health care fraud is that bad providers are 
identified, prosecuted, and convicted of felony charges. These 
felony convictions may be used by Medicare and Medicaid 
programs to revoke the billing privileges of the Medicare 
provider and ultimately exclude them from the Medicare program. 
In addition, when restitution is ordered and collected from the 
provider, Medicare receives remuneration.
    Because of the success of the L.A. County project, CMS is 
working with the California Franchise Tax Board and the State 
of California to implement the project statewide. In addition, 
we have begun to explore similar projects with New York tax 
authorities and prosecutors. Earlier this year, CMS initiated 
discussions with the Internal Revenue Service to explore the 
possibility of expanding this project nationally to focus on 
Federal tax debt.
    We have been working steadily and successfully to meet the 
commitments we made to Congress in 2001 to address the issue of 
payments to delinquent taxpayers. Our integrated accounting 
system is on schedule. We are currently processing 50 percent 
of our financial transactions through this system. This system 
is without question the cornerstone of any effort to levy 
Medicare payments to delinquent taxpayers.
    We have also been working with the IRS and FMS on the 
Federal Contractor Tax Compliance Joint Task Force, or task 
force, for short, to identify the most efficient methods to 
levy payments in the interim. In 2006, our relationship with 
Treasury included sending more than $110 billion in Medicare 
Parts C and D payments through the Treasury Continuous Levy 
Program designed to catch delinquent tax payments. In that year 
alone, over $4.5 million in unpaid tax debts were collected.
    CMS is also collaborating with the task force to determine 
how best to address other Medicare providers delinquent in 
their tax obligations. CMS supports the work of the task force 
to examine, assess, and ultimately implement policies to ensure 
that payments to providers are levied in the most effective and 
appropriate manner.
    We are committed to exploring a deeper partnership with the 
IRS and FMS, building on current successes in applying tax 
levies and our participation in the task force. Although 
Medicare payments made to physicians currently are not 
disbursed through FMS, CMS does process paper levies received 
from the IRS. Since its inception, the Medicare program has 
used private contractors to process health care claims. Right 
now, we are in the process of reducing the number of those 
contractors and working to streamline the paper levy process.
    However, the most efficient way to address the issue of 
Medicare providers who are delinquent in their tax debts would 
be for Congress to change the statute to allow the IRS to share 
data with CMS so that we may levy their payments and write the 
IRS a check, much like we do in the paper levy process. This is 
something that our new accounting system could accommodate and 
that our old accounting system could accommodate today as well 
as our new system, and it would not jeopardize the timeliness 
or the accuracy of payments to a million law-abiding, tax-
paying providers for a billion health care claims worth nearly 
half-a-trillion dollars.
    Thank you. I would be happy to answer any questions you 
might have.
    Senator Levin. Thank you, Ms. Norwalk. Mr. Hill is 
accompanying you, so thank you so much.
    Ms. Norwalk, recently, as I understand it, you have joined 
the Federal Payment Levy Program, is that correct?
    Ms. Norwalk. Well, for a long time we have worked under 
Medicare Part C, which is now the Medicare Advantage Program. 
It has always been involved in the continuous levy program, and 
our new prescription drug benefit program also goes through the 
continuous levy program. So, we have done that for both those 
programs for quite some time, or at least for the drug benefit 
since its inception and the Medicare Advantage Program for 
quite some time. I am not sure of the first year of that.
    We have also been working with the IRS and FMS around the 
paper levy process so that as they would like us to offset or 
levy debts and pay them a check, we do that, as well.
    Senator Levin. What parts of the program have you not been 
involved in?
    Ms. Norwalk. Medicare A and B are the more traditional--the 
original Medicare program----
    Senator Levin. What are the reasons you haven't 
participated in that?
    Ms. Norwalk. Well, as I alluded to in my statement, in 
2001, we started changing our systems for payment to go into a 
general accounting system, and similarly, in 2003, after the 
Medicare Modernization Act, we began to reduce the number of 
Medicare contractors we have and streamline that process across 
the board. And it is that streamlining that will be critically 
important, to have a single point of entry that will make it 
easier for this process to go through one place within CMS.
    Now, I appreciate that this is critically important from an 
IRS perspective and don't want to do anything to diminish that. 
But from being the acting administrator of CMS, our top 
priority has to be to pay these million providers a half-a-
trillion dollars a year as appropriately as possible and do 
that in a way that does not threaten access that Medicare 
beneficiaries have to needed care. So we have taken this 
accounting system change--I appreciate, Senator Coleman, that 
you think this is slow. I want to be prudent and be sure that 
we are in no way interrupting those payments to law-abiding 
citizens.
    Senator Levin. Without this change being fully implemented, 
are you saying you could not technically have joined that 
system with Parts A and B? Is that what your answer is?
    Mr. Hill. I think, if I might jump in, technically, to join 
the system, I think there are two ways to think about joining 
the system, as we heard from FMS. One way would be to, in 
effect, have the Financial Management Service make our payments 
for us, which right now, I think, would be technically possible 
although a Herculean effort to do the systems changes that we 
would need to make a billion dollars of payments a day out of 
the FMS.
    The other way we could do it in the existing systems we 
have, or within the new system, would be to do the match that 
Ms. Norwalk discussed and was one of the options that we heard 
from the FMS.
    Senator Levin. And you decided not to make that match under 
the current system?
    Ms. Norwalk. Whatever it is that we can do to facilitate 
that----
    Senator Levin. But you haven't until now decided to make 
that match under the current system?
    Ms. Norwalk. Provided whatever ways it is that we have to 
do that. I think part of the issue has been that the IRS can't 
share data with us. Consequently, it makes it far more 
difficult for our contractors to process those claims and make 
those levies.
    Senator Levin. It has been impossible for you to make the 
match because you haven't received the TIN numbers from the 
IRS, is that what you are saying?
    Ms. Norwalk. That is my understanding.
    Senator Levin. Is that correct, Mr. Hill?
    Mr. Hill. Right.
    Senator Levin. Mr. Everson, is that correct?
    Mr. Everson. Yes. There is this limitation we discussed. As 
you know and I think I covered in my written testimony, one of 
the issues here is, with the Committee's prodding, we have done 
other things with other contractors where they are now going to 
be doing a certification as to tax compliance over the last 3 
years and in the contract, the Federal Contract Registry (FCR), 
you have to sign on and basically waive that right, I guess, to 
get onto the registry. There are some things you can do without 
changing the statute that perhaps could be considered here.
    Senator Levin. And that would be to have anyone who is 
getting a contract payment to agree that the TIN number be 
supplied to the IRS.
    Mr. Everson. That is the way we have been going, as you 
know, in other areas. I think that is a possibility.
    Senator Levin. So now, Ms. Norwalk, any reason why you 
should not have that as a condition of making a payment, that 
the people receiving the payment agree that their TIN number be 
supplied to the IRS?
    Ms. Norwalk. Well, there are a couple----
    Senator Levin. From the IRS? Is there any reason----
    Ms. Norwalk. Yes, there are a couple of things I would like 
to point out. The first is the way that the system works is 
that they aren't contractors. They are not considered 
government contractors. They don't actually sign up every year 
for a contract. It is a three-part system: You have the 
government, you have the beneficiary, and you have the 
provider. Now, the 645,000 Part B suppliers and providers don't 
sign up every year. It is not an annual process.
    Senator Levin. Can they not be notified when they receive 
payments that by cashing these checks, receiving these 
payments, that they are going to thereby be authorizing the IRS 
to supply that TIN number to you? Is there any reason why that 
can't be added?
    Ms. Norwalk. As long as it is legally permissible.
    Senator Levin. Have you checked whether it is legally 
permissible?
    Ms. Norwalk. No, I haven't. I would have to ask our General 
Counsel's Office. But the second point that I would make----
    Senator Levin. Well, before you get to the second point, it 
has been years that this has been going on. Why should that not 
be asked or have been asked before now?
    Ms. Norwalk. Someone may have asked that question. I did 
not know of it going on until recently, so I personally haven't 
asked the question.
    Senator Levin. OK. Will you let the Subcommittee know what 
the answer to that question is?
    Ms. Norwalk. Absolutely. The second point that I would make 
is this year, for 2008, physicians are scheduled to take a 10 
percent payment cut, and I am concerned that the number of 
providers that continue to serve Medicare beneficiaries in the 
future may decline simply because of that impact.
    Senator Levin. Yes.
    Ms. Norwalk. To do anything in addition, particularly for 
those who are law abiding, to get at those few, those 5 percent 
or 3.2 percent of providers who are not law abiding and 
possibly jeopardizing those rural areas of the country, whether 
it is the Upper Peninsula or elsewhere in Minnesota, for 
example, that may only have one or two providers, if they say, 
``Enough is enough, I am tired of the Medicare program,'' I 
think we also need to be cognizant of the policy change that we 
are suggesting here.
    Senator Levin. Yes, we should be cognizant of that and we 
should be cognizant of the proposed cut, because the 10 percent 
cut will have a far bigger impact than just simply notifying 
people by cashing a check that you are thereby agreeing that a 
TIN number will be supplied to HHS. In any event, check it out 
and let us know.
    Ms. Norwalk. Will do.
    Senator Levin. But it seems to me it is kind of a stretch, 
it seems to me, to be suggesting that by notifying people that 
when you accept the taxpayers' money that you are then going to 
be allowing a TIN number to be supplied by IRS to your agency, 
that somehow or other is going to be a major addition to the 
problem which is being created by a 10 percent cut. I think it 
is a little bit disingenuous myself, but so be it. Let us have 
the legal opinion when you get it.
    Did you join the interagency task force before this year?
    Ms. Norwalk. Well, we found out about it on February 8. We 
went to the first----
    Senator Levin. Of what year?
    Ms. Norwalk. This year, and we went----
    Senator Levin. That is the first time you knew about it?
    Ms. Norwalk. That is the first time that we had heard about 
it at CMS as far as I am aware. Now, they may have been talking 
to our colleagues at the Department. It is quite possible 
that----
    Senator Levin. All right. That seems to be----
    Ms. Norwalk. The first time that we were aware at CMS, 5 
days later, we attended our first meeting.
    Senator Levin. That is quite a gap. I mean, that is quite a 
crack, it seems to me, that exists. Mr. Everson, the task 
force, should not CMS have been notified before February 2007?
    Mr. Everson. Well, I think, as the Administrator is 
indicating, that there were conversations at the Department 
level, at the HHS level, and apparently those--within the 
Department, the right connections were not made.
    Senator Levin. You mean within the Department, there wasn't 
notice given?
    Mr. Everson. That is my impression. I don't know, but I am 
informed, sir, that there were some conversations at the 
Department level----
    Senator Levin. Let me just ask, do you know whether that is 
true, Ms. Norwalk?
    Ms. Norwalk. My understanding is that there may well have 
been conversations at the Department earlier than even 2006, 
maybe 2005 and so forth, but I wasn't aware of them at the 
time.
    Senator Levin. But they never filtered down to your level?
    Ms. Norwalk. Well, not as far as I am aware, and as soon as 
I became aware, we started on the task force 5 days later.
    Senator Levin. I hope you would tell the higher-ups in your 
Department that it is unacceptable that they be given notice 
which relates to your agency and collection of money which is 
owed the government that does not filter down to the right 
level.
    Ms. Norwalk. Absolutely.
    Senator Levin. Can you let them know on behalf of the 
Subcommittee?
    Ms. Norwalk. Will do.
    Senator Levin. Thank you. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    Just to have a little follow-up on the last panel, there 
was some concern about getting data from Ms. Norwalk. The 
Chairman and I sent a letter on February 1 to supply the GAO 
with the remaining 3 months of Medicare data for 2005. GAO, I 
think, has indicated they still haven't received that 
information. Would you explain to me why not and tell me what 
is being done to get them that data?
    Ms. Norwalk. A couple of points. The first is the GAO 
Health Branch has continuous access to information on claims 
data for Part A and B, so I think that is really where they got 
their first 9 months of data. For some reason, the Health 
Branch wasn't able to provide them with what they needed for 
the rest of 2005.
    We have asked them to sign a data use agreement. To my 
understanding, they have not signed one, but as soon as they 
do, we are more than happy to provide them with that 
information. I am sure you can appreciate that the 
confidentiality of Medicare information, both on beneficiaries 
and providers, is of our utmost importance, particularly given 
all that we have been hearing from the VA and other insurers 
who have lost provider data, and want to be sure that they 
appreciate the concerns that we have around data use.
    Senator Coleman. So as I understand, going back to 2001 
when the GAO recommended IRS and FMS work with the CMS to bring 
CMS into the Federal Payment Levy Program, now it has been 6 
years. If you can walk me through a little bit. You just got 
involved, I think it was in February, with the task force.
    Ms. Norwalk. Right.
    Senator Coleman. Was CMS--was this something you were aware 
of and aware you weren't participating? Were there technical 
difficulties, problems, or was it something that you were not 
aware of? Help me understand the difficulty in moving forward.
    Ms. Norwalk. I personally was not aware of it. I suspect 
that our CFO was, in fact, quite aware of what goes on more 
specifically. In looking at the 2001 report from the GAO, we 
did say actually during that report that we didn't anticipate 
actually being able to participate until our integrated 
accounting system went into place 5 years at the earliest. I 
think as it says, these payments could be included within 5 
years. So, we are about at the time frame that we initially 
projected in 2001.
    Mr. Hill, I don't know if you want to mention more 
specifics as to what you have known.
    Mr. Hill. I think it is a fair assessment that anybody in 
the financial community understands the issues that are going 
on with the levy and the need to have more payments going 
through. I mean, to the specifics of the task force and our 
involvement, I think as we have noted here, there may have been 
communications, but our direct involvement wasn't--or, I should 
say, lack of involvement wasn't for a lack of understanding or 
caring. I think it was a notion of being ready to participate 
in a meaningful way once the system was up and ready.
    Senator Coleman. So as we sit here today, are there any 
legal reasons why you couldn't participate, any legal barriers?
    Ms. Norwalk. I am not aware of any legal barriers for 
participating. In fact, as I said, we do so on a paper process 
already and I think making it more automatic makes a whole lot 
of sense.
    Senator Coleman. How many paper levies were sent out last 
year?
    Ms. Norwalk. Well, one of the things that we need to do is 
have a centralized process. I don't know the answer to that 
question because sometimes they will send the levies to our 
contractors. Sometimes they send it to us centrally. I think we 
could make this a far better process, and, in fact, starting 
through this hearing we will be doing just that, making the 
process----
    Senator Coleman. Mr. Hill, could you tell me how many were 
sent out last year----
    Mr. Hill. No, sir----
    Senator Coleman [continuing]. And approximately what 
percent of them were successfully collected?
    Mr. Hill. No. As I said, the information goes out to the 
contractors. It is decentralized on our end. It is 
decentralized on the IRS end, and that is one thing that we 
need to resolve on the paper side.
    Senator Coleman. And do you know how many of these were for 
Medicare Part B participating physicians, paper levies?
    Mr. Hill. No.
    Senator Coleman. Would it be fair to say a relatively small 
number compared to the 21,000 tax delinquents that GAO has 
identified?
    Mr. Hill. Smaller than the 21,000? Yes, I would imagine so.
    Senator Coleman. My concern is that the paper levy is a 
band-aid solution. You have a system in place that the rest of 
the government uses. It is a pretty effective system, and with 
all the technical challenges that have been laid out, and there 
were a number of them, FMS has managed to work through the 
technical challenge.
    Mr. Papaj, are you aware of any technical problems that are 
insurmountable in terms of CMS's participation?
    Mr. Papaj. Well, I think, clearly, with the number of 
financial intermediaries they have, 34 currently, and just the 
fact that their systems don't have this information in one 
system, an integrated system, makes it much more difficult 
because there would be a voluminous change of data between the 
financial intermediaries and FMS to do the matching.
    Having said that, we stand ready to work through those 
issues. I don't think it is something that can be resolved 
fairly quickly, but we have dealt with these issues before, but 
it is, I think, a complex issue, and I think that the more that 
CMS can do to centralize both their payments operation, 
perhaps, as well as the information coming to FMS, I mean, we 
would prefer a single stream of information to be able to levy 
those payments. A single stream of the payments, if they were 
to continue to make those payments, as opposed to having to 
deal with 34 different systems with all the reconciliation 
issues, if there are amounts that are levied incorrectly, we 
would have to do reversals, it just makes it more complex 
dealing with those 34 entities.
    Senator Coleman. If I may, Mr. Chairman, just two other 
areas of inquiry. One, Mr. Papaj, you talked about not having 
legal authority to offset non-tax debt in your testimony, non-
tax debt. What we are talking about here is tax debt. That non-
tax debt is child support. So there is no legal bar to FMS 
levying tax debt, is that correct?
    Mr. Papaj. No.
    Senator Coleman. The non-tax is a separate issue.
    Mr. Papaj. Right.
    Senator Coleman. I just want to say this to Ms. Norwalk. I 
appreciate your outrage, but I have to tell you, as I sit here, 
I get a sense that CMS is this very complicated system, there 
is no question about that. You have all these fraud issues. 
They are huge issues. But I get a sense that this issue has, 
for whatever reason, the outrage doesn't filter down, that 
perhaps there is a greater concern, and I understand the 
concern, that somehow getting involved with tax issues may 
scare people off from being involved if they have to supply 
data, have to supply information. I just don't sense a real 
resolve to say, watch the pennies because the dollars take care 
of themselves. My sense on this is that you see this as pennies 
and that it is not on the radar screen to the degree that it 
should be.
    Ms. Norwalk. Well, any penny overpaid on the Medicare 
program or not paid in taxes is a penny too much. So, without 
question, we are committed to making sure that the pennies are 
right.
    Senator Coleman. And these pennies are in the tens of 
millions.
    Ms. Norwalk. Correct. I mean, I appreciate that the GAO 
last year suggested to us to put our resources to going after 
those that have the highest return on investment, and given the 
amount of fraud in the Medicare program and the fact that we 
are dealing with organized crime and all sorts of things, that 
what we do on a day-to-day basis in terms of going after fraud 
is significantly greater than the dollars that we are 
discussing here today. But, that is not to diminish the 
importance of millions of dollars in payments in any way.
    The concern that I have, and perhaps the hesitancy that you 
are hearing, is the thought of putting the $454 billion of 
Medicare payments through FMS in a fairly short period of time 
which may jeopardize the access to health care by the 43 
million beneficiaries that we serve and wanting to figure out a 
solution to this problem that takes into account that we have a 
very different payment system historically that happens to work 
fairly well.
    Considering the number of fraudulent providers that we 
have, those who are abusing the tax system, and also, I might 
add, are likely abusing the Medicare program at the same time, 
we would very much like to go after them. But to do so, I think 
we need to do it in partnership in a way that CMS can have 
access to data that we currently don't have access to so that 
we don't jeopardize our regular payment systems on the one hand 
but yet can go after this tax fraud.
    And again, as I said, I do think it is something that we 
could do today under our current programs if we could do the 
match and then pay the taxes, and rather than being through 
FMS's continuous levy program, we could do it on an automated 
basis if we could have access to that information.
    Moreover, the 40 providers that the GAO mentioned, we would 
like to know who they are and go after them, too.
    Senator Coleman. Mr. Chairman, my time is up. I would like 
to get back perhaps in a second round of questions.
    Senator Levin. Thank you. Senator McCaskill.
    Senator McCaskill. Well, this is incredibly discouraging. I 
have heard that HHS didn't tell CMS about a task force whose 
primary purpose was to have an impact on how well you do your 
job of paying out taxpayer money. I have heard that you are 
afraid to give data to GAO and that the reason that you can't 
do a better job is because IRS won't give you data, but the 
reason that they won't give you data is because you are afraid 
to ask people that are providing the services for that 
permission to get those numbers because you are afraid if you 
ask for permission that they will quit the program. And you 
came to a hearing on how to collect unpaid taxes and you don't 
even know how many levies you have collected.
    I think that is pretty much in the category of the dog ate 
my homework. I don't understand, and it seems that you are 
diminishing--I agree with Senator Coleman. I have just 
listened, and it seems to me you are diminishing the enormity 
of this problem by saying, we pay so much money and this is 
just a small amount.
    What I would like to hone in on, and I will give you a 
chance to respond to all that, is the example you used as to 
the great job you are doing. And the irony in the example you 
used is an example of a local law enforcement official in the 
United States, not a Federal official, no one that gets a check 
from the Federal Government, decided they were going to do 
something about this problem and they went out and at the local 
level decided that they would focus in on this issue, and then 
you come to the hearing in the Federal Government and say, this 
is such a great program that the local people have done. We 
want to talk to people on the Federal level about doing it.
    Why is this having to come up from the bottom? Why is a 
local prosecutor in L.A. County having to come up with a--he 
has gotten people to share information. He has been able to get 
this information shared across agencies. But yet I have heard 
today in several different ways that you can't share 
information across agencies. It is stunning.
    Ms. Norwalk. In terms of the L.A. office, actually, that 
was an idea that was generated along with CMS and we actually 
have an L.A. office that does solely fraud work.
    Senator McCaskill. And so where have you started it 
anywhere else?
    Ms. Norwalk. We have moved to New York. We are actually 
looking from a State perspective. I noted in my testimony that 
we have been working with the IRS to figure out how it is that 
we can implement this nationally. From a State perspective, we 
are looking at States where there are high instances of fraud 
where they pay State taxes, where we can submit--we actually 
give information on people that we think are likely to be 
defrauding the Medicare program and consequently also not 
paying taxes. So it is our information sharing that has enabled 
this to occur.
    So in Texas, for example, last week, there were three 
convictions that involved 70 nursing homes, 6,000 patient beds, 
and they have been withholding taxes from about 4,500 
employees. So this is something that is pervasive and the GAO 
mentioned in their testimony that the under-reporting and non-
reporting issue is a big deal. I think it is absolutely a big 
deal, and we very much would like to work with the IRS and 
partners, State, local, wherever it is that we can get them to 
go after tax--not just people who defraud the tax program, but 
also those who are defrauding the Medicare program. And, if we 
can get them both and get them off the Medicare rolls, I think 
it is terrific and it is something that we thought about and, 
in fact, had been working with in concert with the folks in 
Texas, with the folks in California, different provider types, 
and we should continue that.
    Senator McCaskill. How long ago did the program in 
California begin?
    Ms. Norwalk. Two years.
    Senator McCaskill. And how many letters have been written 
to local prosecutors or States Attorney Generals about the 
program by CMS since that program began 2 years ago?
    Ms. Norwalk. We typically have been doing a lot of things 
through conferences, so I will have to get back to you as to 
the specifics of how else we have been reaching out, but I am 
delighted to have the opportunity hopefully for the law 
enforcement community here so that we can spread the word and 
do as much as possible.
    Senator McCaskill. I think you understand what I am saying.
    Ms. Norwalk. Absolutely.
    Senator McCaskill [continuing]. In terms of prioritization 
of this issue. I mean, the example that is brought to us is one 
that is a local example. Let me just briefly, because I know my 
time is about to run out, I am especially interested in you 
saying that the GAO hasn't signed a data sharing agreement.
    Ms. Norwalk. That is correct.
    Senator McCaskill. I have been frustrated, I can't tell you 
how many times as an auditor in government, when an agency that 
wanted to circle the wagons and hold on to either power or 
information wanted us to sign an agreement to get what we were 
entitled to get under the law. Do you believe GAO has the legal 
authority to get the data they have requested?
    Ms. Norwalk. Well, the Health Care Branch----
    Senator McCaskill. That is a yes or no question.
    Ms. Norwalk. The GAO Health Care Branch has automatic 
access to this data today. They have had automatic access to 
this data. That is how they got the first 9 months of this 
data. So, the GAO does have access to this data in their Health 
Care Branch.
    Senator McCaskill. So you are saying they can get the data, 
they just haven't gotten it, all the Part A data----
    Ms. Norwalk. The Health Care Branch has continuous access 
to tape Medicare Part A and Part D data.
    Senator McCaskill. What about all of Part B?
    Ms. Norwalk. Part A and B. Both A and B data.
    Senator McCaskill. OK. So you are saying, then, your 
testimony is that they have no problem getting this data and 
the fact they haven't been able to get this data and we have 
had to write letters did not occur?
    Ms. Norwalk. No, the GAO--I don't know if the GAO Health 
Care Branch talks to the GAO, the Tax Branch, whoever wrote 
this particular report, but the Health Care Branch, who we deal 
with on a regular basis, has continuous taps to Medicare Part A 
and B claims.
    Senator McCaskill. OK. So you originally said they couldn't 
get the data because they hadn't signed a data sharing 
agreement. Now you say they can get the data, they are just not 
asking the right people?
    Ms. Norwalk. No, the GAO Health Care Branch has signed a 
data use agreement and consequently has a continuous tap on any 
data they want to see for Medicare Part A and B claims. They 
look at it all the time. They use it on a regular basis.
    Senator McCaskill. Do you believe----
    Ms. Norwalk. That is, in fact, how the Tax Branch got the 
information for the first 9 months of 2005.
    Senator McCaskill. I am confused, Mr. Chairman.
    Senator Levin. Well, take an extra minute and let us see if 
we can straighten it out.
    Senator McCaskill. Go ahead.
    Mr. Hill. Let me try and clear it up. I think that the 
issue here, as best as we can understand from talking to the 
GAO, is that the tax folks have not now been able to get the 
data from within their own confines for whatever reason and 
have come to us directly, making a separate request for data. 
As I am sure you can appreciate, any time we are going to 
release disks and disks filled with beneficiary confidential 
information, we need to have the assurances in place that the 
data is going to be used the same way, just as we have those 
assurances in place with the other side of GAO.
    Now, if the Tax Branch wants to go back to the Health Care 
Branch and get the data that way, that is perfectly fine, but 
as we understand the request that is on the table now, they 
have asked for the data separately in a separate request, and 
concurrent with the rules that we have in place, they have to 
sign a data sharing agreement. I understand that you believe 
that we may be circling the wagons, but given all that is going 
on lately with the release of personally identifiable data, we 
think prudent rules to have assurances in place about how that 
data is going to be used if they are going to get it 
separately.
    Senator McCaskill. Do you believe that GAO is entitled to 
this data under the law?
    Mr. Hill. Absolutely.
    Senator McCaskill. And do you believe that they are 
required to sign any kind of agreement in order to get data 
that they are legally entitled to?
    Mr. Hill. I believe that we have an obligation to get an 
assertion about how the data is going to be treated once they 
take it out of CMS, yes, I do.
    Senator McCaskill. So you believe that you have a legal 
basis on which to deny GAO data?
    Mr. Hill. Well, I would characterize it that the process 
that we give the data to GAO is not unlike the process we use 
to give the data to VA, to OMB, to OPM, to any Federal agency. 
We don't think it is onerous. We don't particularly think it is 
unneeded.
    Senator McCaskill. Having gotten a lot of CMS data at the 
State level for audits, we didn't sign those agreements. It was 
our job under the law to look at that data and do our job, and 
the idea that--and it is particularly frustrating that the 
answer to the question is, well, they can get the data if they 
go through another part of their agency because that part of 
the agency signed an agreement, but this part of the agency 
didn't sign the agreement. Meanwhile, Senator Coleman is having 
to write a letter to try to get the data so that we can get to 
the bottom of it.
    Senator Coleman. Will my colleague yield? I am missing 
something here, too. GAO had the data for the first 9 months.
    Senator McCaskill. They got it----
    Senator Coleman. So they had the data for the purpose 
intended. They are asking now for the same kind of data for 3 
more months. What additional assurances are you requesting that 
you didn't have for the data for the first 9 months?
    Mr. Hill. They didn't get the first 9 months' worth of data 
directly from us. I understand this sounds like a 
hypertechnical distinction here, but the first 9 months of data 
that they got, they got through the data use agreement that we 
have with what we are characterizing as the Health Division, 
the health part of the GAO. My understanding is they could not 
get the last quarter's worth of data that they were looking for 
through that Health Division of GAO so they came in to us 
separately. The forensic auditors came in to us separately 
asking for that last quarter of data.
    Senator Coleman. So it was not sufficient to go to the 
health folks and say, we have already given them data for 9 
months, they need the other 3 months?
    Mr. Hill. I don't know why they couldn't get the data from 
the health folks. You would need to ask the GAO that.
    Senator Levin. Is anyone here from the GAO that could 
answer that question? Is it your own Health Division that 
denied you access to the last 3 months? Could you come to the 
microphone, please? Let us see if we can straighten this out 
right now.
    Mr. Kutz. We have been working directly with CMS after we 
had the first piece of data that we have had, and so we have 
had difficulty since then being able to get the data. Keep in 
mind, unlike our health team, we can't actually use this data 
on their system. We have to get downloads on it loaded into our 
main frame and matched against IRS information because it is 
taxpayer records. So we can't take taxpayer records to their 
database.
    Senator Levin. But Senator Coleman's question is, if you 
were able to do it for the first 9 months, what stopped you for 
the last 3 months?
    Mr. Kutz. Well, there is a whole series of stories here 
about requests from our health team to them, that the programs 
have crashed, the data hasn't come, etc. So the requests have 
been--the format has been the same. We have actually reduced 
our request to fewer data fields because the first one was such 
a large file to get. So we have reduced our request and, I 
think, sharpened it and we still don't have the data. We are 
not signing another agreement. GAO has an agreement, as they 
said, that is already in place and we are living within that 
agreement. It is a matter of getting the data that we have 
asked for.
    Senator Levin. It is a matter of getting the data from whom 
specifically?
    Mr. Kutz. Them. We are working directly with them.
    Senator Levin. ``Them'' being?
    Mr. Kutz. My team is working directly with CMS right now. I 
sent a letter last fall asking them to work directly with us to 
get the data because we had trouble getting it the other way. I 
heard nothing back about that. You sent the letter February 1, 
asking the same thing I asked them back last fall and we still 
don't have the data.
    Senator Coleman. It is clear, though, GAO has an agreement 
with CMS in terms of use of data, isn't that correct?
    Mr. Kutz. Yes, and we have lived with that agreement.
    Ms. Norwalk. A sub-branch of the GAO does, or a division or 
whatever they go by.
    Senator Coleman. But GAO is GAO, aren't they?
    Senator Levin. What is the relevance of a sub-branch?
    Ms. Norwalk. It depends on who signed the agreement and 
whether or not they have the authority for the entire GAO to--
--
    Senator Levin. Did you tell them that they didn't have 
authority?
    Ms. Norwalk. Well, when the GAO--actually, I am not sure 
who he sent the letter to, but it never actually came up to the 
Office of the Administrator as far as I am aware. We became 
aware of this issue when the Subcommittee raised it to our 
attention.
    Senator Levin. You have problems, folks. You have things 
that aren't coming up to your level. You have things that 
aren't coming down to your level, both.
    Ms. Norwalk. Yes.
    Senator Levin. I mean, that is a problem inside your 
agency.
    Ms. Norwalk. I am happy to resolve this issue now and I 
will go back. If it turns out that the GAO at large has signed 
this data request, more than happy to give it to them. If not, 
I am going to presume that he would be willing to sign it so 
that we can move on.
    Senator Levin. It is such a technicality----
    Ms. Norwalk. It is a technicality that I am not going to 
take lightly, sir.
    Senator Levin. I am not suggesting you do anything except 
respond to folks when you get a request and say, hey, you have 
got the wrong signature. Give me a different signature. But 
don't just let it languish, sit, or tell us you never got it 
because it didn't come up to you or down to you. That is what 
is unacceptable.
    Ms. Norwalk. I appreciate----
    Senator Levin. If you have to follow a technical rule----
    Ms. Norwalk. Absolutely.
    Senator Levin [continuing]. Follow the technical rule, but 
don't just ignore it.
    Ms. Norwalk. I think we have been working with them to ask 
to get them to sign the second data use agreement, so I don't 
think it is something that has been ignored.
    Senator Levin. All right. Senator McCaskill, I guess you 
are----
    Senator McCaskill. I was out of time.
    Senator Levin. Yes, you are out of time, so I will go back 
and we will start a second round.
    As I understand the problem, FMS's issue is that you would 
prefer a single stream of information in order to match the 
TINs, but that at least it is possible for FMS to do the match 
with 30 different streams of information. Your computers could 
do it. It is more work.
    Mr. Papaj. While technologically possible--it is certainly 
theoretically possible. I mean, the concern we have is that we 
have a very narrow processing time frame. When agencies submit 
their information to update our debtor database, we have a very 
narrow window to update that to make sure the database is 
accurate and current before we then turn it over to our 
payments processing where they actually do the matching against 
the payments, and we really can't allow any more time for the 
debt process because then we will be shorting the time to get 
the payments out. We make Social Security payments, tax refund 
payments, veterans payments, and we really need that time to 
get those payments out on a daily basis. Now, having said that, 
we will work with them to try to work through those issues.
    Senator Levin. All right. If you can do that, if you can 
work and let this Subcommittee know what the outcome of your 
discussions are, would you do that?
    Mr. Papaj. Sure. Yes, sir.
    Senator Levin. As to working through this issue of trying 
to get the data in one form or from one source or as few 
sources as possible so you can do that turnaround that is 
necessary for the match to be done. You, then, can do the 
matching, is that correct?
    Mr. Papaj. Correct.
    Senator Levin. You do the matching already, do you not, for 
other agencies?
    Mr. Papaj. Yes, we do.
    Senator Levin. So, Ms. Norwalk, you don't need to get IRS 
permission or get the IRS data. FMS will do it for you if you 
can work out that process where you have got one stream or a 
few streams of information, because FMS is already doing that 
match for other agencies and they are willing to do it for you 
if you can work out the system.
    Mr. Hill. Absolutely. I mean, if FMS is willing to make the 
payments. I guess the only--and this gets to the deliberations 
of the task force, which is to say what that would mean is we 
would send a billion dollars a day, because that is----
    Senator Levin. It is on a computer. I am not sure, frankly, 
once you got it done, I am not sure that it makes a difference 
whether it is a billion a day or half-a-billion a day or a 
hundred million a day. You are making matches for other 
agencies, are you not?
    Mr. Papaj. Yes, sir.
    Senator Levin. Including the Defense Department?
    Mr. Papaj. Correct.
    Senator Levin. How many billions are involved in that one?
    Mr. Papaj. I don't have the exact number, but we have about 
26 million debts in our database.
    Senator Levin. I mean, could it be billions a week for the 
DOD?
    Mr. Papaj. In terms of----
    Senator Levin. Of that match that you are making of 
people----
    Mr. Papaj. I don't think it would be billions----
    Senator Levin. Hundreds of millions?
    Mr. Papaj. Hundreds of millions, I would think.
    Senator Levin. All right. So the amount of money really 
isn't the issue, it is the number of streams of information----
    Mr. Papaj. Right.
    Senator Levin [continuing]. That you have to consolidate 
into fewer streams or figure out a system so that you can make 
these matches quickly enough----
    Mr. Papaj. Right.
    Senator Levin [continuing]. So that you can turn this 
around and not slow up the whole system, is that basically it?
    Mr. Papaj. Yes. And just to point to Mr. Hill's statement, 
and that is not if FMS makes the payments. If we make the 
payment, it would be more efficient because we would be able to 
make the match and take the levy right at the same time.
    Senator Levin. Which is what you are doing for other 
agencies?
    Mr. Papaj. For some other agencies, but for DOD under 
vendor payments, we would be using the same process with the 34 
intermediaries where we take the match, send information to 
them, they actually do the levy, send information to us. So the 
match could be done even with CMS continuing to make the 
payments.
    Senator Levin. OK. Would it be a fair request to let us 
know within 30 days what you are going to be doing in this 
area? Can we get that commitment?
    Mr. Papaj. I am not----
    Senator Levin. I am not saying, implement the system. I am 
saying if you can reach an agreement or give us a status of 
your negotiations.
    Mr. Papaj. Sure. We can give you a status report.
    Senator Levin. Would you do that. Ms. Norwalk, you are 
committed to do that?
    Ms. Norwalk. Absolutely.
    Senator Levin. OK. Let me, Mr. Everson, ask you just a 
question and then I will turn it back over to Senator Coleman 
and to Senator McCaskill.
    Much of the tax debt that is assessed against taxpayers is 
not collected because it hasn't been designated, or I guess you 
use the term ``turned on,'' or the term is used ``turned on'' 
for collection by levy. So we have about $67 billion in 
assessed but uncollected tax debt that was not subject to an 
actual levy. I think you have given a number of reasons to us 
before. We understand that there are a number of reasons that 
is true, including that a number of notices have to be sent to 
the taxpayers, there is an appeal of an IRS notice of levy, 
there is payment going on an installment plan, fair enough, the 
taxpayer has an offer in compromise which is pending, the 
taxpayer is in bankruptcy. There are a lot of reasons, 
legitimately.
    Mr. Everson. Yes, sir, there are.
    Senator Levin. That is not going to happen. But one of the 
issues has to do with the number of notices that I want to ask 
you about.
    Mr. Everson. Yes.
    Senator Levin. Part of the reason that the tax debt or part 
of it isn't ready for levy is that you have to send three 
notices.
    Mr. Everson. I think it is actually four----
    Senator Levin. Four computer-generated notices to a 
taxpayer demanding payment of the tax debt before the account 
moves into the collection enforcement. So it is four computer-
generated notices. I am going to call those demand notices. The 
IRS is also required by law when it gets to the point of a tax 
levy to send a special notice warning a taxpayer that a tax 
levy is going to be made and giving them a chance to request an 
administrative hearing and potentially a court hearing.
    Mr. Everson. This is what I was referring to before, the 
collection due process notice.
    Senator Levin. That is correct, and I am going to call it 
tax levy notice.
    Mr. Everson. I get confused----
    Senator Levin. I will call it a due process notice. 
[Laughter.]
    Join the rest of us. [Laughter.]
    Now, my question is, can the due process notice be combined 
with the second demand notice?
    Mr. Everson. I would want to carefully look at that, sir. I 
don't know whether that is possible or not. Certainly what we 
have done here, I think as I mentioned in my oral statement and 
in the written statement, what we would like to do here is get 
the same kind of rights that we have with State tax refunds to 
allow someone a collection due process hearing but still make 
the levy. We think that is the cleanest way to do this. It is 
comparable to what we already do, as I said, with the State tax 
refunds, so I think that would really help us in this instance.
    Senator Levin. What would help you?
    Mr. Everson. If we had the same authority where we could go 
ahead and make the levy and then the taxpayer would still have 
that right. This is limited for employment taxes. One of the 
larger numbers, as you know from the previous hearings we have 
had on this subject, one of the largest pieces here is in the 
employment tax area. We would like to work particularly there, 
because when companies or providers get into trouble, they keep 
not making the employment tax withholding, or they make the 
withholding but they don't make the remittances they should. If 
we can get on this, we can avoid pyramiding and that would be 
helpful.
    Senator Levin. All right. Has that request been made by the 
IRS----
    Mr. Everson. That is in one of 16 administration proposals 
that we have made this year with the budget.
    Senator Levin. Does that go to the Finance Committee on the 
Senate side?
    Mr. Everson. Yes, sir, it would.
    Senator Levin. Good. Can you look into this other question 
that I just raised----
    Mr. Everson. I certainly will, sir.
    Senator Levin [continuing]. Of the second notice, and we 
will check with the Finance Committee. Thank you.
    Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    Mr. Papaj, I just want to kind of get an understanding of 
the scope of your system, and I think the Chairman explored it 
in talking about DOD, but in your written testimony, you talk 
about the FMS system showed almost $112 billion in delinquent 
taxes that were eligible for matching against Federal payments, 
is that correct?
    Mr. Papaj. Correct.
    Senator Coleman. And in that, the activated, which is the 
``on'' tax debt, is $55 billion, so about 49 percent that is 
eligible for levy.
    Mr. Papaj. Correct.
    Senator Coleman. And then the ``off'' debt is what the 
Chairman is talking about and ways to accelerate to get more of 
that in the process. We are dealing with 112 with nine zeros 
after that is the amount of debt you deal with.
    Mr. Papaj. Yes, just on the tax side.
    Senator Coleman. And in terms of when you receive or post 
payments from agencies with their own disbursing services, then 
you match them against outstanding debt, return the payment 
information to the agency making the payments with the payments 
to be levied flagged, is that the way you do it?
    Mr. Papaj. Yes. They send us their anticipated payments and 
then we match that against the debtor database. Where there is 
a match of the TIN and the name, we send that information back 
to the agency. They actually make the levy and then send us 
information on the collections.
    Senator Coleman. And how long does it take you to send the 
information? How long does it take your part of that process?
    Mr. Papaj. Well, normally, we try to do that within the 
same day. That is why it is compressed in a very narrow time 
frame. We update the debtor database by 10:30 in the morning. 
Then we begin the matching. We try to get those files back to 
the agencies so they can make those claims.
    Senator Coleman. And how many accounts are you doing this 
for? Is there any way to estimate?
    Mr. Papaj. Well, last year, the numbers we processed was 
about 200 and--I have got a number here somewhere if I can find 
it. Bear with me. We processed about 283 million debtor 
transactions, updating our database. I mean, there is a 
significant volume going through.
    Senator Coleman. So you could handle the CMS volume. We can 
work out the other issues.
    Mr. Papaj. Well, again, I think that is what we are going 
to work with them, to work that out. I mean, the concern we 
have is that we can't allow any more time for the debt update 
process because then it goes into our payments processing time 
frame to be able to get our Social Security payments and our 
tax refund payments out.
    Senator Coleman. Great. Ms. Norwalk, I would like to 
explore the issue of screening and what is possible there. 
There were some pretty outrageous cases that the GAO reported 
about nasty characters. Can you talk a little bit about the 
screening process? Are there additional things that you think 
can be done, or do you need any legislative help to do any of 
that?
    Ms. Norwalk. By screening process, are you focusing on the 
tax piece or----
    Senator Coleman. No, I am talking about the folks 
participating in----
    Ms. Norwalk. In the Medicare----
    Senator Coleman [continuing]. The contractor folks who have 
had medical privileges revoked----
    Ms. Norwalk. Absolutely.
    Senator Coleman [continuing]. Who have other felony 
convictions, a whole range of issues.
    Ms. Norwalk. Right.
    Senator Coleman. What do you do now and what can you do to 
make it better?
    Ms. Norwalk. There are two separate ways that providers are 
excluded from the Medicare program. There are statutory 
exclusions that are listed, including things that relate to 
health care fraud. The Office of the Inspector General at HHS 
has the authority to put out permissive exclusions, and those 
include fraud. That would be like tax evasion, for example. 
Permissive exclusions are a 3-year minimum exclusion from the 
Medicare program. Statutory exclusions are a 5-year minimum. 
There are other things that are included in that which would be 
if you don't have an active medical license, for example, you 
cannot obviously participate in the Medicare program. So, a 
number of the things that the GAO mentioned in its testimony, I 
think would be things where the provider could have been 
excluded.
    A lot of the medical piece focuses on what the State board 
of medicine does. We leave it to them to determine what is the 
appropriate sanction for a provider depending on what it is 
they do. When those privileges are revoked, they also lose 
their ability to bill the Medicare program. I will note that 
many State board of medical directors, however, are often 
hesitant to actually revoke medical privileges. It is one of 
the reasons why we have something called the National 
Practitioner Databank, which is intended to share information 
between State medical boards so that people can't cross State 
lines, and if they, for example, were excluded in Minnesota, 
they couldn't move to Wisconsin and then practice in Wisconsin, 
or vice-versa.
    Senator Coleman. Explain how that system works.
    Ms. Norwalk. Well, it is a reporting system and it is 
basically if the State medical board is required to, although I 
am not sure that it always does, but is required to report to 
the National Practitioner Databank to let the databank know 
that someone has lost their medical license in a particular 
State, conceptually, what will happen then is that contractors 
will check the database to ensure that the individual hasn't 
been excluded through the National Practitioner Databank or 
still has an existing license.
    Senator Coleman. Thank you, Mr. Chairman.
    Senator Levin. Thank you. Just a couple more questions. I 
want to talk about this issue of where there is a limited 
liability company which is created and so technically the tax 
is owing by a limited liability company, but the box has been 
checked so that the owners have said that they will 
individually be responsible for paying the taxes, as I 
understand it. This is not an issue which is in any way limited 
to the medical problems we have been discussing. This is an 
across-the-board issue with the use of these limited liability 
companies. I don't know the technical name of these 
professional corporations. Do you have a section in the IRS 
Code for that?
    Mr. Everson. I am sure there is a section, but----
    Senator Levin. Is this a problem? Does it create problems 
in terms of collection?
    Mr. Everson. Well, I would step back and answer the 
question more broadly. As you know, the tax code writes in 
numerous provisions and special treatment and that is not 
necessarily consistent with either Federal law or State law as 
to organizational structures or other issues and makes it very 
complicated, obviously, to get after issues like what you are 
talking about today, where there are funds flowing through one 
vehicle but the tax obligation might be with another, yes, sir.
    Senator Levin. Have you considered amending the regulations 
clearly so as to say that companies who check the box and 
choose to be treated as partnerships are agreeing to make those 
company assets subject to levy to pay the taxes of the 
individual owners of the company that arise out of that 
business? Is that something which is the subject of discussion?
    Mr. Everson. I would want to think. I am not sure. It would 
be in the same sense that nobody has to be a Medicare provider 
but people have a tax obligation, and changing our 
interpretation of the law, which I am sure was done very 
carefully after whichever section that is was enacted, that is 
not a small matter, as you know.
    Senator Levin. Has that been a subject of discussion?
    Mr. Everson. Not that I am personally familiar with, sir.
    Senator Levin. All right. Would you take a look at that? It 
is a much broader issue.
    Mr. Everson. It is a very broad issue, you are right.
    Senator Levin. It seems to me it does create a real 
dilemma.
    Mr. Everson. We have the issue, as you know, there were 
recent hearings I know about millions of companies that were 
organized by different States without the ownership being 
disclosed. There are lots of issues that are comparable in some 
ways to this.
    Senator Levin. This is a different issue from that, 
however----
    Mr. Everson. Yes.
    Senator Levin [continuing]. Because here, you are really 
saying if you choose to be taxed as an individual but the 
question is you are not levied as an individual----
    Mr. Everson. Right.
    Senator Levin [continuing]. For taxes owing, why not be 
levied as an individual if you choose to pay taxes as an 
individual? Why should we make that distinction?
    Mr. Everson. I will certainly ask our folks to take a look 
at it, Mr. Chairman.
    Senator Levin. All right.
    Senator Coleman. Just a final line of inquiry. One of the 
things kind of dealing with the bad actors again and something 
I found disturbing, the GAO found that there was non-tax debt 
of a number of these 40 bad actors, and I presume then they are 
just a sample of others, and one area in particular of this 
non-tax debt was child support. CMS is in its very nature is 
vested in children's welfare.
    Ms. Norwalk. Absolutely.
    Senator Coleman. At this point, I think it is clear you are 
not obligated to do anything with child support, are you?
    Ms. Norwalk. I actually think that we are not permitted to. 
We don't have the statutory authority to do it at all, which I 
think was the earlier line of questioning.
    Senator Coleman. Because CMS, I think, comes under Social 
Security----
    Ms. Norwalk. Yes, that is correct. We are Social Security--
--
    Senator Coleman. Would you support a change in the Treasury 
Department offset program to provide that you could collect 
unpaid child support?
    Ms. Norwalk. I wouldn't know why not, but I am more than 
happy to take it back and ask.
    Senator Coleman. I appreciate that. Thank you.
    Senator Levin. Ms. Norwalk, you indicated, I think, in your 
opening testimony that your effort to get to an integrated 
system is on schedule, I believe.
    Ms. Norwalk. Correct.
    Senator Levin. What was the schedule for that?
    Mr. Hill. The original schedule called for us to begin 
implementing in 2006. We actually began implementing and 
transitioning transactions in Fiscal Year 2005. We are about 
halfway through our transitions now, doing this in a piecemeal 
way to mitigate our risk, and we should be done by the end of 
2010.
    Senator Levin. Two-thousand-and-ten?
    Mr. Hill. Yes, sir.
    Senator Levin. Why does it take that long?
    Mr. Hill. Well, I mean, we are doing it on schedule with 
this Medicare----
    Senator Levin. I know it is on schedule, but why does it 
take that long?
    Mr. Hill. When I say on schedule, we are doing it, I should 
say, in concert with the transition schedule that was set up 
under the MMA to get rid of the number of contractors we had, 
to convert them to Medicare administrative contractors, and so 
there are many transitions going on at one time and we are 
trying to match those up and going in lockstep. As you know, 
the MMA requires the Medicare administrative contractor phase-
out to be done by 2011, so we are trying to have this done in 
advance of that.
    Senator Levin. It is not a budget issue?
    Mr. Hill. Not per se, no. It is really a risk mitigation 
issue, I think. We don't want to sort of have this big bang 
approach where we are shoving $500 billion worth of payments 
through this system and then have it break. We want to do it in 
little chunks.
    Senator Levin. Well, it is more important, then, than ever 
with this kind of a schedule that we try to work out a way of, 
in the interim, making this match at the FMS level work.
    Ms. Norwalk. I think it is very promising.
    Senator Levin. Thank you. Mr. Everson.
    Mr. Everson. Yes. As sometimes happens in these situations, 
I have been passed a note and I understand that this matter you 
are raising is actually something we are actively looking at 
now to be able to do the levy process on the LLCs, at least in 
some way. We will send you a note for the record on what we are 
doing.
    Senator Levin. You have a lot of company, because we get 
notes from our staff every 5 minutes or so. [Laughter.]
    You only got one or two today, so you lucked out.
    We thank you all. It has been a very helpful panel, very 
lively discussion, and we will stand adjourned.
    [Whereupon, at 4:30 p.m., the Subcommittee was adjourned.]



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