[Senate Hearing 110-623]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-623
 
 PAYROLL TAX ABUSE: BUSINESSES OWE BILLIONS AND WHAT NEEDS TO BE DONE 
                                ABOUT IT

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

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 29, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

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



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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 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 WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

            Elise J. Bean, Staff Director and Chief Counsel
           Julie Davis, Counsel, Office of Senator Carl Levin
  Audrey Ellerbee, Congressional Fellow, Office of Senator Carl Levin
  Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
               Jay Jennings, Minority Senior Investigator
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Coleman..............................................     4
    Senator McCaskill............................................    17

                               WITNESSES
                         Tuesday, July 29, 2008

Steve J. Sebastian, Director, Financial Management and Assurance, 
  U.S. Government Accountability Office..........................     7
Linda Stiff, Deputy Commissioner for Services and Environment, 
  Internal Revenue Service, U.S. Department of the Treasury......     9

                     Alphabetical List of Witnesses

Sebastian, Steve J.:
    Testimony....................................................     7
    Prepared statement...........................................    27
Stiff, Linda:
    Testimony....................................................     9
    Prepared statement...........................................   133

                                APPENDIX

GAO Report titled ``Tax Compliance, Business Owe Billions in 
  Federal Payroll Taxes,'' dated July 2008, GAO-08-617, submitted 
  by Mr. Sebastian...............................................    59
``A Comprehensive Strategy for Reducing the Tax Gap,'' U.S. 
  Department of the Treasury, Office of Tax Policy, September 26, 
  2006, submitted by Ms. Stiff...................................   144
``Reducing the Federal Tax Gap,'' A Report on Improving Voluntary 
  Compliance, Internal Revenue Service, U.S. Department of the 
  Treasury, August 2, 2007, submitted by Ms. Stiff............... 16200


                   PAYROLL TAX ABUSE: BUSINESSES OWE
                     BILLIONS AND WHAT NEEDS TO BE
                             DONE ABOUT IT

                              ----------                              


                         TUESDAY, JULY 29, 2008

                                 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 9:05 a.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, Coleman, and McCaskill.
    Staff Present: Elise J. Bean, Staff Director and Chief 
Counsel; Mary D. Robertson, Chief Clerk; Julie Davis, Counsel 
to Senator Levin; Audrey Ellerbee, Congressional Fellow to 
Senator Levin; Mark L. Greenblatt, Chief Counsel and Staff 
Director to the Minority; Jay Jennings, Senior Investigator to 
the Minority; Erica Flint, Staff Assistant to the Minority; 
Sheldon Shoemaker (Sen. McCaskill); John Kim, Law Clerk; and 
Mark Leduc (Sen. Collins).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good morning, everybody.
    Today, over 1.6 million businesses owe more than $58 
billion to Uncle Sam for unpaid Federal payroll taxes that have 
accumulated over the last 10 years. Over half of this debt is 
now uncollectible. That is the conclusion of a Government 
Accountability Office (GAO) study requested by this 
Subcommittee on the problem of unpaid payroll taxes.
    Today's Subcommittee hearing will examine what is behind 
this staggering number and what can be done about it. Of the 
many tax schemes this Subcommittee has investigated over the 
years, the blatant cheating on the payroll tax is particularly 
galling because delinquent businesses are stashing away not 
only the payroll taxes that they owe Uncle Sam, but also 
stealing funds withheld from employee paychecks. Employers are 
required to withhold from their employees' salaries amounts for 
individual Federal income taxes and for Social Security and 
Medicare taxes. These businesses have a fiduciary 
responsibility to hold the funds they withhold from employees 
``in trust'' for the government. The employer must also match 
the amounts withheld for Social Security and Medicare. The 
willful failure to remit any of these types of payroll taxes is 
a felony. The fact that this problem is so widespread is a 
disgrace.
    Ten years ago, in 1998, the GAO conducted another study on 
payroll taxes and found that unpaid payroll taxes then totaled 
$49 billion. In the 10 years since, the number of businesses 
with unpaid payroll taxes declined from 1.8 million to 1.6 
million, but the size of the tax debt got nearly $10 billion 
worse, not better. Part of the reason appears to be ineffective 
IRS payroll collection efforts, despite the fact that IRS has 
continued to deem collection of payroll taxes ``one of its 
highest priorities.'' The GAO report identifies a host of 
problems with those efforts, and here are just three of them.
    The first is the fact that many payroll tax cheats have 
been allowed to repeatedly violate the law for years at a time, 
accumulating massive payroll tax debts that cannot ultimately 
be collected.
    GAO's report discloses that 70 percent of all unpaid 
payroll taxes are owed by businesses that have failed to remit 
payroll taxes for more than 1 year. This means the business has 
at least four violations since payroll taxes are supposed to be 
remitted quarterly. Over 25 percent have failed to remit their 
taxes for more than 3 years. Nine percent have payroll 
violations stretching back 5 to 10 years. In addition, 
thousands of businesses are involved. GAO reports that the 
number of firms with more than 5 years of payroll tax debt has 
nearly tripled, from 5,000 in 1998 to 14,000 in 2007. And those 
with more than 10 years of payroll tax debt went from 68 in 
1998, to 490 businesses in 2007. That is a 500-percent 
increase.
    One case study highlighted in GAO's report involves a 
business with payroll violations dating back to 1994. As of 
July 2007, that business had accumulated unpaid payroll taxes 
totaling almost $1 million.
    And IRS data shows that as unpaid payroll taxes get older, 
the likelihood of collecting the amounts owed declines 
dramatically. The result, according to the GAO, is that 52 
percent of existing payroll tax debt is now uncollectible.
    But that is not all. Tax delinquent businesses allowed to 
operate for years with impunity gain an unfair advantage over 
honest competitors. By shirking their taxes, these businesses 
incur lower operating costs and may drive out honest firms. In 
one case study in the GAO report, a business used $2.5 million 
that should have gone for payroll taxes to subsidize its 
underbidding of contracts.
    Next, how is it that payroll tax cheats are able to 
continue operating with impunity for years at a time? That gets 
us to the second major problem: The IRS' failure to make 
effective use of available enforcement tools.
    Current law provides the IRS with several powerful 
collection tools, but often the IRS has failed to make 
effective use of them. As the GAO points out, ``Having a 
reticence to use enforcement tools may, over time, actually 
diminish voluntary compliance and collections.'' In other 
words, when honest taxpayers see tax cheats getting away with 
blatant misconduct, it not only undermines confidence in the 
tax system as a whole, it could encourage cheating.
    The IRS has two primary enforcement tools to stop payroll 
tax cheats: Filing liens against the business and filing 
personal claims against the business' officers or owners. The 
GAO found that tax liens were not filed against businesses with 
unpaid payroll taxes in over 30 percent of all payroll tax 
cases assigned to the field for collection effort. That is 
nearly one-third of the payroll cases being ``worked on'' by a 
revenue officer, or 140,000 delinquent businesses.
    GAO also found that the IRS often failed to assess 
penalties against the individual officers and owners of the 
business charged with collecting payroll taxes. Current law 
states that these individuals can be held personally liable for 
the portions of the payroll tax withheld from an employee if 
they willfully failed to collect or pay the tax. GAO describes 
multiple cases of business owners with payroll tax debt using 
business funds to pay for their own lavish lifestyles.
    To collect the missing money from individual business 
officers or owners, the IRS can file a trust fund recovery 
penalty (TFRP). GAO determined that it took the IRS an average 
of 40 weeks to determine whether a TFRP should be assessed and 
then an additional 40 weeks to actually assess it. Now, that 
adds up to nearly 2 years, or over a year and a half, to start 
collection on a TFRP.
    In addition, a 2005 study by the Treasury Inspector General 
for Tax Administration revealed that 43 percent of people who 
received a TFRP never made a payment on it, and that the IRS 
only collected 8 percent of the amount for which the TFRPs were 
issued. In one example reported by the GAO, the IRS assessed a 
business owner with a TFRP, but failed to file an accompanying 
tax lien. Therefore, the owner was able to sell a vacation home 
in Florida, and the IRS missed the opportunity to collect any 
of the unpaid taxes from the proceeds of the sale.
    Still another problem is the IRS' practice of assigning a 
new revenue officer to assess a TFRP in cases where another 
revenue officer has already initiated enforcement action 
against a business with unpaid taxes. GAO found that in 75 
percent of the cases it reviewed, the TFRP was either not 
assigned or was assigned to a different revenue officer than 
the one already taking action against the business for unpaid 
taxes. Doubling up revenue officers on a single business makes 
little sense when there are too few revenue officers to go 
around.
    In addition to finding that the IRS made ineffective use of 
tax liens and TFRPs in many payroll cases, GAO determined that 
the IRS failed to take timely enforcement action in half of the 
cases in which tax debtors missed specific deadlines. That 
means one out of two tax cheats missed payments they were 
required to make with no immediate consequences. Now, that 
shocking statistic sure has to change.
    Finally, the Subcommittee has discovered that the majority 
of businesses with unpaid payroll taxes do not get immediate 
enforcement attention. Instead, following a 15-week 
notification process, many cases are assigned to a so-called 
queue where they languish until a revenue officer is assigned 
to them. Right now, of the $28 billion in unpaid payroll taxes 
still deemed collectible, about $9 billion is sitting in the 
queue awaiting assignment to a revenue officer. That so many 
cases sit unproductively before any enforcement action is taken 
is inexcusable.
    Now, here are three actions that could be taken to 
strengthen enforcement action against payroll tax cheats.
    First, the IRS should develop an expedited process for 
filing liens and assessing TFRPs against businesses with unpaid 
payroll taxes. These tax liens and TFRPs should be 
automatically imposed after a business has missed a specified 
number of quarterly payroll tax payments, unless a revenue 
officer provides written justification why those actions should 
not be taken. Also, the business tax case and the TFRP 
assessment should, when possible, be treated as a single, 
unified, and coordinated collection effort assigned to a single 
revenue officer, instead of the current practice, which most 
often has TFRP collections assigned to a different revenue 
officer, if they get assigned at all.
    Second, Congress should enact S. 1124--the Levin-Coleman 
Tax Lien Simplification Act, to streamline the tax lien system. 
Right now, tax liens have to be filed on paper in 4,000 
locations across the country, each with its own forms and 
filing requirements. The process is wasteful, burdensome, and 
inefficient. Our bill would require the Treasury to establish 
an electronic tax lien registry at the Federal level, which 
would not only make filing liens easier and more transparent, 
but would also, according to the IRS' own estimates, save $570 
million over 10 years from improved efficiencies alone.
    Third, the IRS should develop payroll tax collection 
performance measures. It is baffling that, with respect to this 
``high-priority'' issue, the IRS currently does not have a 
single performance measure to assess its progress in combating 
payroll tax cheats. When we asked IRS how long the average 
payroll tax case is open, we were told they do not track this 
data. Moreover, neither IRS managers nor revenue officers are 
currently evaluated on their efforts to collect payroll taxes 
or prevent the accumulation of payroll tax debt. These types of 
agency-level and personnel performance measures should be 
developed on an urgent basis.
    Finally, it is ridiculous that one of this Administration's 
top tax enforcement efforts has been to go after the small-
dollar claims under the Earned Income Tax Credit Program, the 
EITC Program, which is a refundable tax credit available to 
workers with low incomes. We should be using our limited number 
of revenue agents to catch the biggest fish--including payroll 
tax cheats who are misusing billions of dollars of employee and 
taxpayer money to benefit themselves.
    I commend Senator Coleman for initiating the Subcommittee's 
request for the GAO study on this important problem, I commend 
his staff, and I now turn to him for his opening remarks.

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. Thank you, Mr. Chairman, and let me, if I 
may, return the compliment. I was reflecting on where we are 
with this hearing and the work that we did together on sham tax 
schemes, I think ``Flips'' and ``Blips,'' and looking at 
literally billions of dollars that were not being put into the 
Federal Treasury, and we focused on those. And you, Mr. 
Chairman, and your staff have been a champion of targeting the 
offshore tax havens, cleaning those up. I have joined you with 
full force and vigor, and it has been a tremendous effort. We 
focused on Federal contractors, and they are being paid Federal 
dollars at the same time that they owe tax dollars. It was 
actually during the course of that investigation that we 
noticed a commonality of payroll taxes not being forwarded to 
IRS. These are cases in which we were actually paying Federal 
dollars to folks who owed tax dollars.
    I think we have reached a point now with payroll taxes 
where this is the mother of all tax gaps, $58 billion. And 
clearly it needs to be addressed. Payroll taxes are an 
essential part of our tax system. As the Chairman has 
indicated--and GAO will go through it--employers withhold taxes 
from their employees' paychecks and are required to forward 
that money to the IRS. These funds include income taxes, as 
well as other taxes that go directly to fund Social Security 
and Medicare. The employers handle these in trust for their 
employees and, clearly, that trust is being violated, and in 
many cases has been violated for years. The loss ultimately is 
to all taxpayers.
    According to the GAO study, more than 1.6 million of those 
businesses are breaching that trust and are simply keeping 
their employees' taxes. The amount over the past 10 years that 
those businesses have failed to pay is a whopping $58 billion 
of their employees' payroll taxes.
    But, again, I think it is important to stress that they are 
not just breaching their employees' trust; they are 
shortchanging all honest American taxpayers by forcing more of 
the weight on the sagging shoulders of hard-working Americans. 
This is not a theoretical exercise. As a direct result of these 
unpaid payroll taxes, the government must transfer up to $4 
billion in taxes from the general fund to pay for Medicare and 
Social Security. The IRS estimates that, over the past 10 
years, $44 billion has been transferred from general tax 
revenues to Social Security and Medicare.
    These are difficult times, as stressful as certainly any in 
my 32 years of public service as I have seen. And so when we 
look at the challenge of the times that the average taxpayer is 
facing and we have these deadbeats and billions of taxpayer 
dollars being used to cover the shortfalls, clearly something 
must be done.
    If you look at the cases, it is enough at times to make 
your blood boil--cases in which business owners have failed to 
pay payroll taxes, while purchasing luxury cars, planes, 
mansions, properties in tropical islands and other far-flung 
countries. In several case studies, the owners made massive 
withdrawals from business accounts, pocketing $20,000, $50,000, 
and even hundreds of thousands of dollars in cash. It is clear 
that tax cheats are living the high life at the expense of 
hard-working American taxpayers.
    The GAO report identifies case after case in which the 
businesses owe millions upon millions in payroll taxes. Even 
worse, these tax cheats appear to be stringing the IRS along, 
refusing to submit their taxes for 8, 9, and even 10 years. And 
after 10 years, because of the statute of limitations the case 
falls over the edge and we lose any ability to proceed. Some 
play a shell game to avoid paying taxes, moving money between 
multiple entities, shifting assets to family members, and even 
claiming bankruptcy to avoid obligations.
    So let's step back and put this in perspective: Our tax 
gap, which is the difference between the taxes that are owed 
and the amount that is actually paid, approaches $300 billion. 
And this, by the way, is just taxes that we know of. It does 
not include underreported taxes. It does not include unreported 
income. And so it is actually understating the nature of the 
problem. Unpaid payroll taxes are the single largest business 
component of that gap, making up more than 20 percent of the 
tax gap itself. And to make matters worse, the GAO will 
indicate that the problem is growing and growing. Over the past 
few years, the amount of unpaid payroll taxes has increased 
just under 20 percent.
    While the problem is expanding, our ability to address the 
problem is shrinking. The IRS' backlog of payroll tax cases 
dwarfs the number of cases actually being pursued. As cases 
languish in the backlog and the statute of limitations expires, 
billions of dollars in unpaid payroll taxes are written off 
every year. I believe more than $4 billion in unpaid tax debt 
will be completely written off this year. By 2012, the write-
off of unpaid tax debt is expected to reach $5 billion each 
year, and within a couple of years, the write-offs of taxes 
that simply cannot be collected will grow another 20 percent to 
$6 billion. So what is clear is that we have a problem and we 
have to fix it.
    Is it a $58 billion problem? Is it a $28 billion problem if 
half of the $58 billion is uncollectible? Is it uncollectible 
because we did not move quickly enough? Whether it is $28 
billion or $58 billion, even for government this is real money. 
This is big money.
    How do we move forward? The report identifies a number of 
concerns with the IRS' current collection procedures and offers 
numerous recommendations to improve its enforcement regime. If 
we are going to make any inroads in collecting unpaid payroll 
taxes, we have to consider substantial changes to IRS' 
collection policies and procedures.
    A specific concern here is that when we are dealing with 
scofflaws and egregious cases, the IRS may have overemphasized 
getting taxpayers to comply with the law voluntarily. Getting 
voluntary compliance is a desirable goal. I want to stress 
that. We understand that. And it would appear to be the right 
strategy in most circumstances.
    But GAO cites examples in which the tax cheats are simply 
stringing the IRS along for years and years, even though they 
show no inclination to comply voluntarily. The voluntary 
measures are not increasing compliance in these egregious 
cases. The time for talk in these cases, in the egregious 
cases, beyond-the-pale cases, the time for talk and voluntary 
compliance has passed, and it is time for action.
    The report is chock full of case studies in which the IRS 
revenue officers appear to treat the worst of the worst with 
kid gloves. Perhaps we should reconsider the broad discretion 
given to those revenue officers when dealing with the worst tax 
cheats and encourage the use of more stringent enforcement 
tools for these extreme cases.
    Mr. Chairman, I would note that I would add my voice and 
associate myself with your comments in terms of some of the 
specific recommendations that should be adopted.
    As a former prosecutor, I know the threat of prosecution 
and aggressive enforcement are powerful deterrents. I call upon 
the IRS to ratchet up its efforts to recover these billions in 
back taxes and hold these tax cheats accountable.
    The good news is that there is hope. The States have been 
developing creative and effective mechanisms for collecting 
taxes, such as identifying tax cheats on the Internet. The 
State of Minnesota is one of those States that publishes the 
names of tax cheats, and these are not folks who are working 
out the problem, these are not folks who are in bankruptcy. So 
you can identify the specific class of folks who deserve to 
have their name out there, and as a result, it serves as a 
deterrent. In addition, the IRS has also acknowledged the 
problem and has indicated a positive attitude and a willingness 
to take necessary steps to address the issue.
    If the issue is more legislation, we need to know what that 
is. If the issue is a change in process, then the IRS has to do 
that. The bottom line is that the problem is real and has to be 
addressed, and hopefully this hearing will be a step in that 
direction.
    Mr. Chairman, I look forward to exploring these issues with 
you and our witnesses today.
    Senator Levin. Thank you very much, Senator Coleman.
    Let me now welcome our witnesses for today's hearing: Steve 
Sebastian, the Director of the Financial Management and 
Assurance Unit at the Government Accountability Office; and 
Linda Stiff, the Deputy Commissioner for Services and 
Enforcement at the Internal Revenue Service. We appreciate very 
much both of you being with us today. You have appeared before 
this Subcommittee in the past. We welcome you back.
    I think you will remember that, pursuant to Rule VI, all 
witnesses who testify before the Subcommittee are required to 
be sworn. So at this time, I would ask you to please stand and 
raise your right hand. Do you swear that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Sebastian. I do.
    Ms. Stiff. I do.
    Senator Levin. We will be using our usual timing system 
today so that about a minute before your time is up--a minute 
before the red light will come on, you will see the light 
change from green to yellow, which then gives you an 
opportunity to conclude your remarks, and your written 
testimony, for which we are grateful, will be printed in the 
record in its entirety. And we ask that you limit your oral 
testimony to no more than 5 minutes.
    Mr. Sebastian, we will have you go first, followed by Ms. 
Stiff, and then we will turn to questions. Mr. Sebastian.

    TESTIMONY OF STEVE J. SEBASTIAN,\1\ DIRECTOR, FINANCIAL 
MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Sebastian. Mr. Chairman and Senator Coleman, thank you 
for the opportunity to discuss the results of our review of 
unpaid payroll taxes. Our report,\1\ which is being released 
today, was prepared at the request of this Subcommittee and the 
Senate Committee on Finance in response to previous work we 
have done on Federal contractors with tax debt. The bottom line 
of my testimony this morning is that unpaid payroll taxes are 
substantial and represent a significant enforcement challenge 
for the IRS.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Sebastian appears in the Appendix 
on page 27.
    \1\ The GAO report entitled ``Tax Compliance, Businesses Owe 
Billions in Federal Payroll Taxes,'' July 2008, GAO-08-617, submitted 
by Mr. Sabastian appears in the Appendix on page 59.
---------------------------------------------------------------------------
    Before I begin, it is important to remember that payroll 
taxes are comprised of individual income tax withholdings and 
employee withholdings for Social Security and Medicare, as well 
as the employer's matching amounts. As the posterboard 
illustrates, employers withhold amounts from employees' 
paychecks, hold them in trust for the Federal Government, and 
periodically are required to remit them and the matching 
amounts.
    My testimony this morning will discuss two main aspects 
from our review: First, the significance of unpaid payroll 
taxes and, second, issues impacting IRS' ability to collect 
payroll taxes owed and to prevent the further accumulation of 
such taxes.
    First, our study found that, as of September 30, 2007, 1.6 
million businesses owed over $58 billion in unpaid payroll 
taxes, including penalties and interest. As such, payroll taxes 
comprise over half of IRS' inventory of delinquent business 
taxes. Much of this debt is owed by repeat offenders. In fact, 
the number of more egregious offenders has grown significantly 
since our last review in 1998.
    As the posterboard illustrates, the number of businesses 
with over 5 years of unpaid payroll taxes has increased nearly 
three-fold, and the number with over 10 years of unpaid payroll 
taxes has increased five-fold. Equally disturbing is that over 
9,000 individuals were responsible for not paying the payroll 
taxes at multiple businesses, over a dozen for some.
    Second, our study found that while payroll taxes are 
considered a high priority, IRS does not always utilize its 
existing collection tools to collect the payroll taxes owed and 
to prevent the further accumulation of such taxes.
    IRS has a powerful tool to hold business owners and 
officers personally responsible for the non-payment of payroll 
taxes: The trust fund recovery penalty (TFRP). However, IRS is 
not always assessing the TFPRs timely, and once assessed, the 
IRS is not always moving to take aggressive action against 
these TFRPs. Further, the TFRP is treated as a separate 
collection effort from the business case when, in essence, it 
is essentially the same tax debt.
    Liens are another powerful tool in IRS' enforcement 
arsenal. However, IRS does not always file liens to protect the 
government's interest, and when it does, it does not always do 
so timely. Ironically, because of certain IRS policies, lower-
priority cases may actually have tax liens filed while higher-
priority cases, such as payroll taxes, may not. Eighty percent 
of payroll tax cases in IRS' queue awaiting assignment did not 
have a tax lien filed.
    Driving these issues is IRS' emphasis on gaining voluntary 
compliance. While this approach is consistent with IRS' mission 
statement and is appropriate for the vast majority of generally 
compliant taxpayers, such an approach for egregious payroll tax 
offenders appears to do little to collect what is already owed 
and to prevent businesses from further accumulating payroll tax 
debt.
    There is a point at which efforts to continue to work with 
the business to gain voluntary compliance may need to cease and 
more aggressive enforcement efforts commence. State collection 
officials we spoke with seemed to have recognized this. After a 
certain point, they changed their focus to one of stopping the 
bleeding.
    In summary, businesses that withhold money from their 
employees' paychecks and fail to remit these monies to the 
Federal Government are breaching their fiduciary responsibility 
to the government and to their employees. Additionally, such 
businesses have a competitive advantage over those businesses 
that comply with the tax laws.
    There is a lot at stake. As the posterboard illustrates, 
the $58 billion in unpaid payroll taxes currently on the books 
will expire over the next several years. To the extent IRS' 
efforts are unsuccessful in collecting such taxes prior to 
their expiration, and in preventing the further accumulation of 
such taxes, the compliant taxpayer is left to pick up the tab.
    We believe implementation of the recommendations contained 
in our report will assist IRS in strengthening enforcement and 
improving the collection of payroll taxes.
    Mr. Chairman, this concludes my statement. I would be 
pleased to answer any questions you or Senator Coleman may have 
at this time.
    Senator Levin. Thank you so much, Mr. Sebastian. Ms. Stiff.

 TESTIMONY OF LINDA STIFF,\1\ DEPUTY COMMISSIONER FOR SERVICES 
 AND ENVIRONMENT, INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF 
                          THE TREASURY

    Ms. Stiff. Chairman Levin, Ranking Member Coleman, and 
Members of the Subcommittee, thank you for the opportunity to 
testify today on the status of IRS efforts to collect Federal 
employment taxes. I appreciate the contribution this 
Subcommittee has made over the last 4 years with its 
investigations of Federal contractors who are delinquent and of 
efforts by unscrupulous promoters and taxpayers to avoid 
taxation in the United States. The IRS has found the 
opportunity to work with you and your staffs very valuable in 
each instance.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Stiff appears in the Appendix on 
page 133.
---------------------------------------------------------------------------
    We look forward to working with you to improve our efforts 
in the collection of Federal employment taxes. While we have 
made great progress over the last 5 years, as the GAO report 
released this morning demonstrates, we can and we must do 
better.
    Employment taxes represent the largest portion of total tax 
dollars collected by the IRS. In fiscal year 2007, of the $2.7 
trillion that came in through taxes, $1.7 trillion was payroll 
taxes. Accordingly, the collection of delinquent employment 
taxes is a critical priority for us at the Service.
    In 1998, Congress passed the IRS Restructuring and Reform 
Act, which provided a sweeping realignment of the IRS 
workforce, particularly in the area of collection. In addition, 
it significantly raised the bar on taxpayer rights. As we at 
the IRS sought to respond to these sweeping changes, our 
enforcement presence suffered. There was uncertainty over when 
and how certain enforcement tools should be applied; and as a 
result, over the next 4 years, there was an erosion in the use 
of those tools, including liens.
    The findings in the GAO report reflect the lingering 
results of this drop-off. As the GAO reported, more than 60 
percent of the unpaid payroll taxes are owed for periods 2002 
and prior. By 2003, the IRS had managed to reset the workforce, 
and we are beginning to restore the balance between services 
and enforcement. We once again began utilizing our full arsenal 
of enforcement tools, including liens, without sacrificing the 
gains we had made in improving taxpayer rights.
    For example, in fiscal year 2002, we resolved just over 3 
million delinquent accounts. By last year, that number had 
grown to over 58 percent, with more than 5.2 million delinquent 
accounts being resolved. This gain occurred despite the fact 
that we have been operating with a relatively flat budget and 
while ensuring the protection of taxpayer rights.
    Part of our success in this turnaround can be credited to 
research. Since 2003, 19 research projects have been conducted 
to help improve IRS employment tax efforts. These projects have 
focused on selecting the right cases, routing those cases to 
the IRS staff with the right skills, and enhancing our ability 
to choose the right enforcement tools to resolve cases as 
efficiently as possible.
    Further complicating our collection efforts is the overall 
environment in which many businesses operate. It is important 
to note that the Small Business Administration has found that 
more than a third of all small businesses do not survive 2 
years. Sixty percent do not survive 6 years. Unpaid payroll 
taxes reflect this reality. Of the $58 billion in total 
reported unpaid employment taxes reported by GAO, 34 percent of 
that is attributable to firms in bankruptcy or out of business.
    I also want to note that historically the IRS succeeds in 
collecting 99.8 percent of all employment taxes owed. Over the 
last 10 years, that means more than $11 trillion in payroll 
taxes was collected. Clearly, when you are dealing with net 
numbers this size, even a decimal point represents a 
significant amount.
    I want to report to you that, after reviewing the findings 
in the GAO report, I have charged a service-wide task force on 
collections to refocus its efforts to concentrate solely on the 
more effective use of enforcement tools in employment tax 
cases.
    To support that effort, we are launching a series of 
research studies to determine--and I think they go right on 
point to the recommendations that the two of you have made for 
us today--to look at the effective use of the Trust Fund 
recovery penalty; earlier consideration of the filing of liens; 
greater use of automated collection tools throughout the 
collection process; and to determine if there is a ``point of 
no return'' where we need to take a different position with the 
taxpayers we are dealing with.
    The task force met last week and has begun an aggressive 
plan for completing its review of these areas. We think these 
efforts will result in continued improvements.
    Mr. Chairman, Senator Coleman, let me assure you that the 
collection of employment taxes is a core mission of the IRS and 
that, like you, we believe leaving $58 billion on the table is 
unacceptable. I pledge to you today that we can and we will do 
better. I look forward to working with you and other Members of 
the Subcommittee as we move forward.
    Thank you, and I will be happy to respond to any questions.
    Senator Levin. Thank you very much, Ms. Stiff.
    Why don't we start with about an 8-minute round, whoever is 
keeping track of this.
    I was intrigued by the report that talked about 15 weeks of 
notices when there is a failure to remit the payroll tax. Is 
that the traditional period of notices that go out to 
businesses?
    Ms. Stiff. Actually, it is a little bit more complex than 
the way you have described it. Taxpayers receive a notice--I 
think you were talking about the application of the trust fund 
recovery penalty notice?
    Senator Levin. No, just the business--I guess you call it 
the business case.
    Ms. Stiff. OK. On a business case, taxpayers are entitled 
to receive two notices with an attempt to collect, and let me 
add that 80 percent of taxpayers actually self-correct through 
that notice stream. And each of those notices offer up to about 
45 days, so you quickly accrue into a period of weeks to let 
taxpayers resolve that debt. And it works because 80 percent of 
them participate.
    Senator Levin. So then it is two 45-day periods, so that is 
about 12 to 13 weeks.
    Ms. Stiff. Right.
    Senator Levin. So at the end of the 13 weeks, about 20 
percent typically have not responded; 80 percent have 
responded. That is worth doing, obviously. Then why not an 
automatic lien for the 20 percent?
    Ms. Stiff. There are a couple of instances where our 
practices provide for, if taxpayers get to that point in the 
process and there is a dispute over whether or not the 
liability is correct or whether the amount of the liability is 
in question----
    Senator Levin. Putting those aside.
    Ms. Stiff. OK. Taxpayers are entitled to due process. In 
other instances, there is another exception where taxpayers are 
actually in the process of securing financing to pay off the 
debt.
    Senator Levin. OK. What does that leave left?
    Ms. Stiff. I don't know what the number is that is left----
    Senator Levin. Well, 10 or 15 percent, would you guess?
    Ms. Stiff. Let me bottom-line it. I agree with you that in 
those instances, once we have exhausted those two exceptions, 
we should be looking to apply the lien.
    Senator Levin. And how many weeks would you estimate it 
takes to exhaust those two exceptions? A month? Two months?
    Ms. Stiff. Depending on the----
    Senator Levin. What should your target be? You have got to 
have targets here? What is your target?
    Ms. Stiff. I don't know that I could give you a number of 
days, but certainly I would expect that once we have made 
contact with the taxpayer, we make a request for financial 
information to help us make the assessment. We provide 
taxpayers an opportunity to get that information, provide it 
back. We work with them. In some instances, 30 days might be 
adequate. In other instances, taxpayers with complex financial 
information may need 90 days. But I think the important thing 
is at the point where we have determined that they are no 
longer acting in good faith with us, that is the point when we 
need to be applying that lien. And that is sooner than we are 
doing it today in many instances.
    Senator Levin. All right. So at the point when you have 
made that determination, which you should begin to make that 
determination, would you agree immediately after those two 45-
day periods are over? Is it 30 days or 45?
    Ms. Stiff. They get the notice process, and then we contact 
them and start soliciting their financial information. Once we 
have ascertained that either the information they have leads us 
to believe that filing the lien is correct.
    Senator Levin. OK.
    Ms. Stiff. We should do it.
    Senator Levin. And, on the average, should that take 2 
months more? Does that sound about right on the average? Give 
me some number.
    Ms. Stiff. Sir, I don't have a number.
    Senator Levin. A range. How about 30 to 90 days?
    Ms. Stiff. I will say that I would like to think that in 30 
to 90 days that taxpayers would have had an opportunity to 
provide the information to us that they need to.
    Senator Levin. All right. And then you agree that the lien 
should automatically be filed.
    Ms. Stiff. I don't know that I can say in every instance 
because it will be fact and circumstance driven. But as a 
general rule, I would expect that we would take the action at 
that time.
    Senator Levin. And when you file a lien, do you have to 
have a precise number of dollars on that lien?
    Ms. Stiff. Yes.
    Senator Levin. There has to be a precise number of dollars 
on----
    Ms. Stiff. No. I think the lien is on the property, and it 
is for the amount that is owed the government.
    Senator Levin. But it has to be for a specific amount? It 
cannot be for a range here?
    Ms. Stiff. It is a specific amount on the lien.
    Senator Levin. All right. GAO has found that tax liens were 
not filed at any point against these businesses with unpaid 
payroll taxes in over 30 percent of all payroll tax cases 
assigned to the field for collection effort. And we have 
introduced a bill called the Tax Lien Simplification Act, S. 
1124, which would create a centralized electronic registry that 
would be more efficient, less burdensome. And according to 
estimates provided by the IRS itself, taxpayers would save 
about $570 million over 10 years just from the simplification, 
the efficiency of an electronic system instead of what you do 
now.
    Do you believe that the creation of that electronic system 
would help raise the percentage of cases in which liens are 
filed? Ms. Stiff, do you want to start?
    Ms. Stiff. Sure. I don't know that the creation of the 
system itself will increase the number of liens, but I think it 
certainly will enable and facilitate our ability to do it.
    Senator Levin. Mr. Sebastian.
    Mr. Sebastian. I believe it expedites the process and could 
result in an increase in the number of lien filings. Also very 
important, it may address an issue, a longstanding issue GAO 
has on the back end of the process. When taxpayers have 
actually resolved their tax debt, it may lead to more timely 
release of those tax liens. So it really serves two purposes.
    Senator Levin. Now, is the Treasury aware that the IRS has 
estimated that our tax lien bill would save the taxpayers $570 
million just due to lower administrative costs, Commissioner 
Stiff? Are they aware of the fact that you have made that 
estimate?
    Ms. Stiff. I don't know that they are, and I have to say 
that I actually have not seen all those numbers myself. I 
believe those numbers were estimates that were done sometime 
back when this was a gleam in someone's eye. But I do believe 
that there is definitely cost savings to be had and would want 
an opportunity to update those.
    Senator Levin. Well, would you make the Treasury aware?
    Ms. Stiff. Yes, sir.
    Senator Levin. And would you let us know what you tell them 
in terms of your estimate?
    Ms. Stiff. Yes, sir.
    Senator Levin. The IRS has told the Subcommittee also that 
if the tax lien bill were enacted, it would free up a couple 
hundred persons from the Tax Lien Division to do other tax 
collection work. Are you familiar with that estimate that the 
IRS has given our Subcommittee?
    Ms. Stiff. No, sir, I have not seen that myself. But we do 
have a group of people that are dedicated to this full-time, 
and I have no doubt that with the implementation of new 
technology, those numbers might be less than they are today.
    Senator Levin. Has the IRS taken a position on our bill?
    Ms. Stiff. As you know, the IRS does not take a position on 
policy or on legislation. That is the role of the Treasury.
    Senator Levin. Do you ever make a recommendation to the 
Treasury about policy?
    Ms. Stiff. Let me say this, that we appreciate the work of 
your staff on putting forward this proposal. We find it 
thoughtful, and we actually would like the opportunity to flesh 
it out a little bit more with you and the staff, because there 
are a number of administrability issues, one being that it 
would require appropriated funds for funding. Second, it is 
going to take time to build. Three, there are a number of 
issues of State law, State rights, State revenue streams, I 
think security, identity theft protection issues. And so we 
welcome the opportunity to talk through with your folks how to 
address those administrability issues.
    Senator Levin. OK. And, Mr. Sebastian, have you looked at 
our bill?
    Mr. Sebastian. We have read through the bill, and I cannot 
give you a comprehensive analysis, but on the surface, it 
appears to resolve several issues. As I just indicated, I think 
it would streamline the lien process of assigning liens. It 
might also help deal with some problems IRS has experienced 
over the years on the back end, and that is releasing tax 
liens.
    Senator Levin. One of you--I think, Ms. Stiff, you talked 
about using electronic capability a lot more than you use now 
in terms of using your lien process, which is obviously not 
used to its fullest extent and it is complicated. You have got 
thousands of different jurisdictions that you have got to 
figure out. So this is a way of using an electronic capability 
that is not now being used, and I would hope that you could let 
us know within 30 days, if you would, what suggested changes 
you would make in the language to address any problems that you 
see?
    Ms. Stiff. OK. We will work with the Department to do that.
    Senator Levin. Thank you. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman.
    Mr. Sebastian, if I can ask that question about the scope 
of the problem, we are talking about $58 billion, I think I 
noted in my opening statement. That is based on reported 
income. We have a $300 billion tax gap based on reported 
income. Do we have any estimates on the size of the actual tax 
gap?
    Mr. Sebastian. You mean amounts not currently on----
    Senator Coleman. Yes, is there any way to figure out what 
we are really--what the Treasury is really losing here?
    Mr. Sebastian. Well, the IRS has estimated, based on a 
study done several years ago, that the gross tax gap is about 
$345 billion, and when all is said and done, their enforcement 
efforts collect about, I think, $55 billion of that, which 
leaves a net of maybe $290 billion.
    In looking at some of the detail behind that study, we have 
identified a minimum of about $15 billion annually attributed 
to payroll taxes, and I am not including self-employed here 
because the number would grow to maybe $54 billion. But just 
with respect to payroll taxes, employee withholding, about $15 
billion annually that is included in that estimate.
    Now, some portion of that may ultimately be identified by 
the IRS through its various enforcement programs, including 
matching return information with W-2s, etc., and some small 
portion of that may ultimately be collected. But roughly $15 
billion is what the IRS would estimate annually in payroll 
taxes associated with the tax gap.
    I would also add that in looking at some of the data on 
IRS' inventory over the years, it looks as though they add 
roughly $5 to $5.5 billion in new unpaid payroll taxes to the 
inventory of delinquent tax debt each year.
    Senator Coleman. Let me step back. If we did nothing, if we 
made no changes, what would happen to the outstanding payroll 
tax debt?
    Mr. Sebastian. My concern is that it would ultimately grow 
and, to some extent, be offset by amounts that hit their 
statutory expiration date and are written off. So 9 years ago, 
we were looking at a balance of $49 billion. Now we are looking 
at a balance of $58 billion, roughly $5.5 billion being added 
into the inventory annually, and roughly $4 billion and growing 
at $5 billion and even $6 billion being written off over the 
next several years.
    Senator Coleman. Are we also seeing larger amounts that 
have to be transferred from the general revenue fund into the 
Social Security and Medicare funds because of the failure to 
pay these taxes?
    Mr. Sebastian. To the extent that the balance grows, yes, 
you would see more in the way of transfers from the general 
fund to subsidize the Social Security and Medicare trust funds.
    Senator Coleman. Let me turn to you, Ms. Stiff. And, by the 
way, first, I appreciate the good relationship we have had with 
the IRS on so many of these matters, and I appreciate your 
candor, both in discussing the historical perspective and some 
of the concerns where the IRS did step back from enforcement. 
We understand that. And the concern is that as we look at these 
egregious cases, is there a line that needs to be drawn?
    Let me first go back to the filing of a lien. The report 
indicated that $9 billion, I believe, was in the queue--in 
other words, there is $9 billion in debt that is kind of lined 
up awaiting action. Now, those cases that are assigned to 
revenue agents, are those past the point where we have sent a 
notice and it has been determined that there is some debt out 
there? Where does that fit in with Chairman Levin's--he talked 
about the timeline of notice, and then you indicated that some 
of those cases have perhaps some specific concerns that would 
have us not move forward. When something is assigned, what is 
the determination point you assign something over to an agent?
    Ms. Stiff. Well, I think you have hit the nail on the head. 
These cases that are sitting there in the queue, in all candor, 
I would say are the cases, as GAO reported, that I think we 
have got to in the coming weeks identify actions. We can get 
those assessed and liens filed whether or not they end up in 
the hands of a RO. So that we can protect the government's 
interest during whatever period they are there. We are going to 
be back with some steps that we are talking through right now 
as to how to address those cases in the queue that both you and 
the Chairman have brought up here today.
    Senator Coleman. I appreciate that. That is what struck me, 
that $9 billion in the queue, obviously these are cases in 
which folks are not making payments, they are going to be 
assigned to an agent. You have a backlog, and there are other 
issues that we have to address in terms of funding enforcement, 
and this Subcommittee has been very supportive of that. But I 
appreciate the candor, it would appear that the first thing you 
want to do is protect the government's interest. That is what 
the lien does. And when you do that, then you have time to do 
some other things. So I appreciate the focus on that.
    I am not sure if this is for Mr. Sebastian or Ms. Stiff. 
Can I go back to other cases? One of the things we looked at 
was the Financial Management Service, the levying process. It 
appears--and this goes back to some earlier reports that have 
been done, I think perhaps in 1999, there were cases in which 
the government paid over $211 million annually to folks who 
owed $2 billion in outstanding trust fund recovery penalties. 
In other words, we have folks who are identified as having 
trust fund recovery penalties, but at the same time, they are 
getting Federal payments along the way. Have we looked at that 
recently? Is that still a possibility to use the levying 
process with the FMS to ensure that we are getting a return 
from folks who have trust fund penalty obligations?
    Mr. Sebastian. We did not look at that as part of this 
study. In previous work that we have done for this 
Subcommittee, looking at contractors with tax debt, we have 
looked into that whole issue of how much of IRS tax debt 
actually gets into the levy program and is turned on and is 
then subject to levy of Federal payments.
    I have some conflicting information, quite frankly, on 
whether or not individuals that have been assessed a trust fund 
recovery penalty are or are not included. But what I will point 
out is a significant number of businesses do not have 
associated trust fund recoveries. So to the extent that the IRS 
has not assessed responsible businesses and officers, those 
accounts would not be subject to levy in the first place.
    Senator Coleman. So we start off first with, I think, the 
need to look at moving on a more accelerated basis with the 
lien process, to at least protect the government's interest, 
and then the next focus would be at what point can we move more 
aggressively on the trust fund recovery process. And then if 
you do that, there is another step to look at, and that is to 
say are there, in fact, payments being made to these folks that 
we could then use for the levy process.
    So, Ms. Stiff, I appreciate your forward-looking approach 
here to say you have a task force, you have identified some of 
the concerns the Chairman and I have raised. For me, it becomes 
pretty logical: Protect the government's interest and move more 
effectively to be in a position to levy. We have not even 
talked about some of the stronger actions you could take such 
as the injunctive process. There are some very strong actions 
here that I would think in the most egregious cases may be 
warranted. The report indicates that those are very rarely 
used. Very rarely did you take the toughest steps. And we are 
dealing with folks who may be involved in criminal activity, 10 
years of simply ignoring their tax responsibilities, records of 
using these funds for personal gain, personal use. So I would 
hope you would take another look at that.
    Perhaps this is too big a question to respond in the time I 
have, but is there a possibility of drawing a bright line about 
when getting voluntary compliance ceases and more aggressive 
action is needed--or is this something that requires discretion 
plus how do we get to that point where we move from voluntary 
to more aggressive, more forceful, more dictated, more mandated 
action on the part of the IRS?
    Ms. Stiff. I don't think that over our history that we have 
arrived at a bright-light test that applies in each and every 
instance. But one of the things I commit to you is that is an 
area that the task force is going to look at, because even if 
you cannot have a broad, sweeping rule that applies to 
everything, it would seem that we can begin testing application 
of some rules and see where they work and what the outcome is 
for both the taxpayers and the government, and then where it 
works, apply it more broadly. So we are going to be doing some 
work in that area.
    Senator Coleman. Mr. Chairman, could I ask just Mr. 
Sebastian to respond?
    Senator Levin. Sure.
    Senator Coleman. Mr. Sebastian, would you respond to that, 
please?
    Mr. Sebastian. I would tend to agree with what I just 
heard. Right now, it would be hard to tell what is the fine 
line. Clearly, when we get to 40, 50 quarters of outstanding 
tax debt, these cases have gone on much too long. Whether the 
magic number is 10, 15, 20 quarters, I don't know. I think that 
is information that the IRS could actually look at through some 
detailed analysis and then set up what may be the rule with 
exceptions that should apply in certain cases.
    Senator Coleman. Thank you, Mr. Sebastian.
    Senator Levin. Thank you. Senator McCaskill.

             OPENING STATEMENT OF SENATOR MCCASKILL

    Senator McCaskill. Thank you, Mr. Chairman.
    I am going to follow up a little bit on Senator Coleman's 
line of questioning. We have had a Treasury Inspector General 
for Tax Administration study from 8 years ago, another study in 
2005 that basically says that voluntary compliance is not 
working. We are here today because voluntary compliance is not 
working. This problem is not getting better. It is getting 
worse.
    I understand a little bit about deterrence. There are 
crimes you can deter, and there are crimes you cannot deter. 
There are many crimes that, even if you do the toughest 
prosecutions imaginable, people are still going to go and 
commit those crimes. I think sometimes politicians like to 
think deterrence works in every instance if you have tough 
criminal penalties.
    But I will tell you where deterrence does work. It works in 
the business community. When businesspeople see other 
businesspeople on the courthouse steps on the evening news, it 
works. And I would like Mr. Sebastian and Ms. Stiff to discuss 
the failure of any meaningful criminal prosecution. If someone 
has gotten notice after notice after notice and they continue 
to engage in this behavior for years, the reason they are doing 
it is they know nothing is going to happen to them. And I don't 
know why we need a task force, honestly. I mean, if you have 
gotten notice and you have not paid your payroll taxes and you 
have gotten notices every quarter for 2 or 3 years, we need a 
task force to tell us that we need to put people in jail for 
that? They are purposely not paying what they owe. It is so 
unfair to people who pay taxes.
    Mr. Sebastian, what did your report specifically say about 
the likelihood of criminal prosecution in any of these cases?
    Mr. Sebastian. We did not do a detailed review of that 
looking at past cases. I do know that the IRS has prosecuted 
payroll tax cases, and the Deputy Commissioner could probably 
elaborate on that. I can tell you that in discussions that we 
have had with revenue officers--and this really mirrors what we 
found in 1998 when we did the earlier study. The IRS and, in 
particular, the Criminal Investigation Division and the 
Department of Justice are somewhat reluctant to pursue 
prosecution for employment tax offenses. They cite the process 
is very labor intensive, laborious. There is a tremendous 
amount of burden on the part of the IRS to actually provide the 
Department of Justice with the information they need to 
successfully prosecute a case.
    Again, these are discussions that we had with revenue 
officers, but it has served as a deterrent to moving forward, 
taking more aggressive enforcement action in a number of cases.
    Senator McCaskill. Could you address that in terms of the 
likelihood of criminal prosecution for repeat offenders who 
have been noticed and noticed and noticed and obviously 
voluntary is not in their dictionary?
    Ms. Stiff. Well, first--and I know that the three of you 
are familiar with that--the bar for criminal prosecution is 
certainly a higher bar than what we have in the civil arena. 
And many of the cases outlined in this report actually would be 
very difficult for the Department of Justice to prosecute 
successfully because many of these taxpayers are not out--they 
are part in, part out. They come in, they make good-faith 
efforts for a couple of years, and then it recurs again. And so 
there are a number of difficulties, I believe, for the Justice 
Department in trying to prosecute that.
    Having said that, in the last 4 years our criminal 
investigations in the employment tax arena have increased by 55 
percent. We made a conscious effort in 2003, after the drawdown 
of enforcement that occurred after RRA 1998 to work with the 
Justice Department and to work with our criminal investigators 
and our fraud specialists to reinvigorate that program and the 
referrals. And I think I outlined in my testimony several 
strong examples of where we have been effective and successful 
in actually getting criminal prosecutions and having offenders 
actually serve time.
    Senator McCaskill. And how many criminal prosecutions 
occurred last year for failure to pay payroll taxes in the 
whole country?
    Ms. Stiff. I do not have the number right off the top of my 
head. I want to say roughly 200.
    Senator McCaskill. So we are talking about an average of 
four cases per State?
    Ms. Stiff. It probably was not that, but yes.
    Senator McCaskill. And how many offenders do you think we 
have in the country right now?
    Ms. Stiff. I do not have that number. I know that the GAO 
report says that we have 1.6 million businesses known to us 
that we are talking about here today.
    Senator McCaskill. Well, I think the standard in the 
criminal law here is ``knowingly,'' and having a great deal of 
experience bringing criminal cases in my life, you have to 
convince 12 people beyond a reasonable doubt that somebody did 
not pay the money knowingly. And, trust me, there are going to 
be taxpayers on that jury. They are going to be offended 
because they are paying their taxes every year. A lot of small 
businesspeople at their own--they are cutting their take of the 
business in order to comply with the law.
    I just have a hard time--I run into this all the time, 
where people say, well, what you have to do to bring a criminal 
case at Justice, or maybe what we have to do is ask some 
questions at the Justice Department as to what they are 
requiring in order to bring a criminal case. But if somebody 
walked into my office when I was a prosecutor and said, ``Here 
is a stack of letters that this businessman signed for or 
businesswoman signed for, quarter after quarter after quarter--
I am assuming a lot of these are return receipt requested, 
correct? These notifications?
    Ms. Stiff. I actually do not know the answer to that. I 
would have to check.
    Senator McCaskill. I am assuming bad news from the IRS is 
usually return receipt requested. Usually that green card is 
something that comes with it. And you have a pile of those in 
front of a jury and say how many times this employer has been 
notified to pay their payroll taxes and they failed to do it 
again? That is knowingly. It is not complicated. It is not 
hard.
    I just think that we need to really stay focused on 
criminal prosecution for repeat offenders. And I think you 
would see a miraculous turnaround in this country. I think they 
all know out there that when it comes to the end of the month 
and they cannot pay anything, the one that they can get away 
with is not paying the IRS. And I think that is why they do it. 
I do not think it is that complicated.
    This task force that you are referring to, how long do you 
think the task force is going to take to come up with 
recommendations?
    Ms. Stiff. Well, I suspect that within 90 days we will have 
a suite of recommendations. I suspect that sooner than that we 
will begin doing some of the more obvious and easier things to 
do.
    But on the criminal investigation side, I mean, we do not 
disagree. We believe we need to have a strong criminal 
investigation presence where the circumstances warrant that.
    Senator McCaskill. Well, I think repeat offenders, that is 
the circumstance. And I think the bright line is just deciding 
if you do it for longer than 2 years, you are up. And you know 
what is going to happen? These people are not going to take a 
chance at rolling the dice in front of a jury. They are going 
to pay for probation. That is what happens in the criminal 
justice system all the time with white-collar crime. They pay 
for probation. But that is better than them not paying.
    I think that the efficacy of taking a much more aggressive 
approach on criminal prosecution is going to make a real 
difference in this area. And I guess, Mr. Sebastian, my 
frustration is: How many times has there been a report issued 
about this subject? And how many times has something actually 
happened meaningful to change things?
    Mr. Sebastian. I can only say I have been involved in 
multiple reports over the last 10 years looking at payroll 
taxes, either as the subject or peripherally. And you are 
absolutely right. We continue to see the same thing. We 
continue to see multiple offenders flagrantly violating the tax 
laws.
    Senator McCaskill. I guess we can go back here another 10 
years, another five or six reports, or we can get busy and try 
to put some people in jail. And I think it will work, Mr. 
Chairman. Thank you.
    Senator Levin. Thank you. We have focused also--in addition 
to what Senator McCaskill has talked about in terms of criminal 
enforcement--we have also talked about a lien system which is 
functional, which is easily worked, and how much money would be 
saved by doing that. And we would ask you if you would take a 
look--and I had the staff give you copies of this analysis.
    This analysis was prepared by the IRS at our request. We 
asked the IRS to take a look at an electronic system for lien 
filing. If you look at the right, the bottom at the right over 
the 10-year period, the cost of the current system is $679 
million, and the cost of doing this electronically would be 
$107 million. That is where our figure comes from. Are you 
familiar with that, Ms. Stiff?
    Ms. Stiff. I cannot say that I have seen this before.
    Senator Levin. I am kind of surprised.
    Ms. Stiff. I have no doubt that my staff and folks worked 
on this, and I do not challenge that, but I have not personally 
had a chance to review this.
    Senator Levin. Well, I hope you will take a look at this.
    Ms. Stiff. I certainly will.
    Senator Levin. Now, there was a chart that the staff put 
up, increases in number of businesses with multiple payroll tax 
debts. I am wondering if somebody could put that chart up 
again.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears as an attachment to the GAO 
Statement in the Appendix on page 56.
---------------------------------------------------------------------------
    The number of businesses with unpaid payroll taxes has 
declined although the number of payroll taxes owing has 
increased. The decrease in the number of businesses is down 
from 1.8 to 1.6 million--that is not on the chart. That is the 
number we have received. I guess the GAO can confirm that.
    Mr. Sebastian. That is correct.
    Senator Levin. And yet we see on this chart that there is a 
vast increase in the number of businesses with over 5 years of 
debt, and even a bigger percentage increase in the number of 
businesses with over 10 years of debt. That is a striking chart 
to me.\1\
    What is the explanation for that? Why don't we go after the 
ones that have the longest owing debt?
    Ms. Stiff. Well, I think that collection experts, private 
sector and public sector, maintain that the earlier you get to 
the debt, the greater the likelihood of recovering the amounts 
owed.
    Senator Levin. Sure.
    Ms. Stiff. Or a higher percent of it.
    Senator Levin. I can understand that. What I am intrigued 
by is the percentage has gone up. The numbers have gone up. Do 
you see what I am saying?
    Ms. Stiff. Yes, sir. And I do not know that I can nail the 
numbers, but basically, as I said in my oral statement, we had 
a period from 1998 to 2002 where the number of delinquent 
accounts that we touched decreased significantly.
    Senator Levin. All right. Does the GAO have the numbers for 
2002 to 2007? Do you happen to have those numbers handy?
    Mr. Sebastian. In terms of?
    Senator Levin. If we looked at just 2002, what the numbers 
were that had over 5 years of debt, instead of 1998?
    Mr. Sebastian. No, I do not. It is a snapshot of a certain 
point in time.
    Senator Levin. Would you just for the record give us a 
different snapshot to take care of the point that Ms. Stiff is 
making?
    Mr. Sebastian. We will do what we can, but the reason that 
I hesitate on that is because, as accounts hit their statutory 
expiration date and fall off, they are no longer in the 
inventory. So to be able to construct this analysis, I would 
need to know what the inventory was comprised of in 2002, 2003, 
and 2004. We may not be able to get that information. We will 
do what we can.
    Senator Levin. Fine. But you do know what it was in 1998.
    Mr. Sebastian. Yes, and that was based on the fact we had 
done this analysis and reported out in 1998.
    Senator Levin. Got you. If it is not too much trouble, if 
you could get that for us, it would be helpful.
    Now, Senator Coleman read from the top of page 32 of the 
GAO report, and I want to pursue that: ``Our analysis found 
that for the $9 billion of payroll tax cases in the queue 
awaiting assignment as of September 30, 2007, over 80 percent 
of the cases did not have a lien filed.'' And I am trying to 
understand why it should not be automatic at that point. Why 
should not a lien be automatically filed if somebody is in the 
queue awaiting assignment?
    Ms. Stiff. Well, I think that was the question that I 
answered earlier, that we actually--I agree that queue is a 
weakness in the system and that will be one of the first areas 
that we are looking at, is to see what analysis can be done 
there and which cases the lien filing would be appropriate.
    Senator Levin. Automatically. If you are assigned and you 
are waiting in a queue, why would that not automatically result 
in a lien? That is my question.
    Ms. Stiff. Well, automatically, I guess it may be semantics 
here. We do not have an automatic lien-filing system, so 
someone has got to----
    Senator Levin. Why should it not be automatic?
    Ms. Stiff. You mean the decision to apply the lien.
    Senator Levin. Yes. If someone is in a queue for 
enforcement, they have ignored all your notices.
    Ms. Stiff. I am agreeing with you.
    Senator Levin. All right. I want to just get back to the 
taxes owing issue. The taxes that we are talking about in terms 
of criminal enforcement are taxes which were withheld from the 
employee. Is that correct? Those are the ones that are put in 
trust.
    Ms. Stiff. Yes.
    Senator Levin. So that when we are talking criminal 
enforcement, it is for failure to send to the government the 
tax money of the employee that was withheld from the employee's 
pay. Is that correct?
    Ms. Stiff. Yes.
    Senator Levin. It is not a felony for failing to pay your 
own taxes. It is a felony for withholding taxes from an 
employee and then not sending those to the government.
    Ms. Stiff. Yes, sir.
    Senator Levin. OK, because I think there could be some 
confusion. We do not throw people in jail in this country for 
failing to pay their taxes. It is only if there is fraud, if 
there is misrepresentation, or if there is a specified crime 
such as not sending to the government trust fund monies which 
do not belong to you. It is someone else's money that is being 
stolen or cheated here. I get a little nervous here when I hear 
about not paying your taxes resulting in criminal enforcement. 
And I think I am right on this. I hope I am.
    Ms. Stiff. Well, it is further compounded by the fact that 
in all too many cases, these individuals have little or nothing 
that the government can recover at that time.
    Senator Levin. I understand that.
    Ms. Stiff. They have exhausted all their finances.
    Senator Levin. Yes, but I am just talking about criminal 
law enforcement here. I want to have the record--if I am 
correct, which I hope I am.
    I would like to talk about this earned income tax credit 
(EITC). This Administration has put a great deal of emphasis on 
going after the poorer folks who are somehow or other not 
entitled to an earned income tax credit, which allegedly they 
have taken, and comparing that to the big fish who get away 
with not paying other people's taxes which they have withheld 
and put in trust, and some of the other abuses that this 
Subcommittee has seen.
    How many IRS personnel are involved in the EITC delinquency 
program, do you know?
    Ms. Stiff. I do not have the number off the top of my head.
    Senator Levin. Do you know how that would compare to the 
number of personnel who are in the----
    Ms. Stiff. In collection, we probably have between 8,000 
and 10,000 individuals working here, and I am guesstimating off 
the top of my head--I will get you a better number--a couple 
thousand working on the EITC.
    Senator Levin. The EITC, would you get us those numbers?
    Ms. Stiff. Sure thing.
    Senator Levin. Thanks. Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman. I want to just 
follow up on the trust fund recovery program, the idea that 
criminal charges were being focused on monies that you were 
supposed to forward, held in trust, and the issue I talked 
about earlier, monies from the general fund coming in at the 
end of the year, that is for the trust fund recovery program, 
right? In other words, we have got to take general fund money 
to pay for what employers do not send in. Is that correct, Mr. 
Sebastian?
    Mr. Sebastian. That is correct. What they withhold from 
employees' paychecks and do not remit to the Federal 
Government.
    Senator Coleman. And when we are talking about levy 
programs and liens, we are talking about going after the TFRP 
funds? What about the monies that you are owed? Any levies 
apply to that? Do the liens apply to that, or we are just 
dealing with trust fund recovery money?
    Ms. Stiff. No, levies and liens apply to individual income 
taxes as well when there is a delinquency and we believe it is 
appropriate.
    Senator Coleman. I talked before about whether we would be 
referring any cases to the FMS for levying. Do you know if any 
of the cases in the queue, that $9 billion, is there any 
referral to FMS for levying possibilities with those dollars?
    Ms. Stiff. All of these cases are in the FMS levy program, 
so if there is a match, the levy will be applied against them.
    Senator Coleman. Let me just ask one question--because 
Senator McCaskill was talking about deterrence. One of the ways 
in which the State has found what they believe to be an 
effective deterrence is publishing the names of individuals who 
have these obligations or repeat scofflaws--again, not cases in 
which they are contesting, not cases in which there is a 
bankruptcy, etc., but those cases which establish that you have 
a problem here and there has been no response. Why doesn't the 
IRS do that?
    Ms. Stiff. Any number of reasons. First of all, probably a 
matter of policy and a matter of practice, and the fact that 
the lien-filing process--I forget which one of you described 
earlier--is very localized and very decentralized across all 
States. And I do not know that we even have a master database.
    Senator Coleman. Would it be something that the IRS would 
look at, this idea of publishing names? Is that something that 
is within the realm of possibility? And if so, is it something 
that you need legislative authority to do?
    Ms. Stiff. I think we need legislation, absolutely, because 
we would probably be barred from sharing that under the current 
statutes.
    Senator Coleman. I would like you to get back to the 
Subcommittee with something very specific, in fact, if there is 
legislative authority that is needed, and also----
    Ms. Stiff. I am confident it requires legislation.
    Senator Coleman. The other area where the States have been 
apparently more effective is in being able to track down 
dollars that have been shifted between financial institutions. 
Oftentimes, we see in these cases somebody emptying out one 
account and then creating another one, and it is kind of a 
difficult trail to follow. At least in the States they 
apparently have been able to cut that.
    Mr. Sebastian, did you track that at all? And are there 
specific things that we could be doing to be as effective on 
the Federal level?
    Mr. Sebastian. Well, in fact, it is one of our 
recommendations that the IRS take a look at what some of the 
States are doing. I think we looked at maybe five States, five 
or six States that actually are working to better perfect their 
levying process, either through legislation or agreements with 
financial institutions, so you are not spending a tremendous 
amount of resources trying to find the bank account of a 
particular individual and then levying. That process has 
already been established through agreements with financial 
institutions.
    Senator Coleman. And, Ms. Stiff, has this been a problem 
for IRS--do you have these agreements with financial 
institutions? Is this something that the agency looks to do in 
order to more effectively trace where some of the dollars are?
    Ms. Stiff. We are going to be looking at everything we are 
doing and see what opportunities there are to improve. Let me 
just say--and at the risk of sounding a little bit defensive, 
when we characterize what the States are doing or what we are 
doing, I just feel compelled to remind that we succeed in 
collecting 99.8 percent of all employment taxes owed; over the 
last 10 years, IRS collected more than $11 trillion in payroll 
taxes. And so it is not as if our processes are not robust and 
rigorous in terms of getting employment tax collections. I 
think that both the GAO and the Subcommittee have just 
highlighted on where the weaknesses are and where there is the 
most opportunity.
    Senator Coleman. And we are not arguing about that, but as 
you indicated in your testimony, when you are talking about 
trillions, a decimal point is a big number.
    Ms. Stiff. It is a lot.
    Senator Coleman. And if the States are doing something that 
is seemingly more effective, my question is simply: Is it 
something that the IRS can do? Is it something you have 
considered? And if the problem is legislative authority, we 
would like to know. In other words, if it is something that 
makes sense----
    Ms. Stiff. OK.
    Senator Coleman [continuing]. I need to know whether you 
need more authority to do that or whether you simply refuse to 
do it or whether it is something you would like to do but you 
can do administratively. Again, does it make sense? Is it 
another tool in your arsenal? And then if it is not, you have 
to get back to us and say, Senator, we need legislative 
authority. If you legislate it, we are prepared to do it.
    Ms. Stiff. Absolutely. We will do a review of the best 
practices, look at what we are doing versus what is being done, 
and come back to you where we need assistance.
    Senator Coleman. And I appreciate that. Mr. Sebastian.
    Mr. Sebastian. Yes, Senator Coleman, I just wanted to 
mention, when Ms. Stiff talks about the $1.7, $1.9 trillion, it 
is important to remember that the vast majority of taxpayers 
are compliant. So those monies, much of those monies are 
actually coming in almost on autopilot. These are compliant 
taxpayers. They understand. They make their timely tax 
deposits, file their returns, etc.
    I think the bigger measure would be for those that 
initially are not paying their taxes when due, how much is IRS 
collecting on those through the notice process, through its 
enforcement actions, and compare that against some of the 
issues that we have identified in our study.
    Senator Coleman. I think that is fair, and, again, I think 
what makes this so outrageous and so irritating is that the 
average taxpayer is doing what they should be doing.
    Mr. Sebastian. Absolutely.
    Senator Coleman. And as a result, certainly the burden then 
is back to us to say, OK, for those scofflaws and tax cheats, 
we are going to be very aggressive to ensure that they live up 
to the obligations because it is an affront to the average 
taxpayer when they do not.
    Thank you, Mr. Chairman.
    Senator Levin. I just have a couple more questions. Going 
back to the lien issue again, in terms of the question of if 
the lien is automatic, how could some businesses then be able 
to pay their back taxes or stay in business to pay back taxes. 
If you made it automatic after a certain period of time, then 
it could be removed, obviously, if the business carries their 
burden of persuading one of your employees that removal of the 
lien will lead to greater collection than maintaining the lien. 
But at least it would create some pressure on that company to 
pay their back taxes.
    Ms. Stiff. I do not disagree with that.
    Senator Levin. All right. Now, do you have performance 
measures for employees in the collection area as to how well 
they are doing that goes into their employment record?
    Ms. Stiff. OK. After RRA 1998, we were statutorily 
prohibited from the use of many of what you would consider 
common-sense kinds of collection measures in terms of how many 
dollars you collect, how many cases you close. But we use a 
variety of other types of measures, proxy measures to how long 
it takes them to do their cases, are they following up timely. 
And I think you certainly saw in some of these examples that 
was not happening as well.
    But the issue of measures in the collection arena is, 
frankly, very dicey in light of the statutory prohibitions and 
a risk of--I mean, in an area where managers particularly out 
in the field with revenue officers working for them, there is 
an abundance of caution and a high degree of angst.
    Senator Levin. Is there a clear direction as to what can be 
done and what cannot be done?
    Ms. Stiff. Yes, sir. Every year we go out and we do an 
annual reorientation, a retraining of managers and of ROs about 
what can be done. But the kinds of things that you talked about 
earlier are probably going to fall under the statutory 
prohibition.
    Senator Levin. But in terms of what can be done, clarity as 
to that, there is a clear instruction to your managers as to 
what performance criteria, can be used?
    Ms. Stiff. Yes, sir.
    Senator Levin. All right. Any other questions?
    Senator Coleman. I have nothing further, Mr. Chairman.
    Senator Levin. We appreciate again your testimony. It has 
been very helpful.
    Ms. Stiff. Thank you.
    Mr. Sebastian. Thank you.
    Senator Coleman. Thank you.
    Senator Levin. The hearing is adjourned.
    [Whereupon, at 10:25 a.m., the Subcommittee was adjourned.]


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