Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty
Assessments Are Owed (Letter Report, 08/02/1999, GAO/AIMD/GGD-99-211).

Nearly 2 million businesses owed nearly $50 billion in payroll taxes as
of September 1998, or about 22 percent of the Internal Revenue Service's
(IRS) $222 billion total outstanding balance of unpaid tax assessments.
The businesses that failed to remit withheld payroll taxes were
typically in wage-based industries and had few available assets from
which IRS could recover these taxes. They were usually small, closely
held businesses using a corporate structure, but this varied throughout
the country. GAO found that the most common types of businesses with
unpaid payroll taxes were construction companies and restaurants,
although other types of business--computer software; child care; and
such professional services as legal, medical, and accounting firms--also
have unpaid payroll taxes. Most unpaid payroll taxes are not fully
collectible, and there is often no recovery potential because many of
the businesses are insolvent, defunct, or otherwise unable to pay.
Penalties of about $15 billion had been assessed against, and continue
to be owed by, about 185,000 persons--typically corporation
officers--found responsible for the nonpayment of payroll taxes withheld
from employees. Individuals responsible for the nonpayment of payroll
taxes and businesses that owe payroll taxes receive significant federal
benefits and other federal payments. Several factors affect IRS' ability
to enforce compliance and pursue collections of unpaid payroll taxes.
For example, financial management system shortcomings and other internal
control weaknesses affect the completeness and the accuracy of
taxpayers' accounts, making it difficult for IRS to manage its unpaid
assessments. Also, federal law does not prevent businesses or
individuals from receiving federal payments or loans when they are
delinquent in paying federal taxes. GAO summarized this report in
testimony before Congress; see: Payroll Taxes: Billions in Delinquent
Taxes and Penalties Due but Unlikely to Be Collected, by Gregory D.
Kutz, Associate Director for Governmentwide Accounting and Financial
Management Issues, and Cornelia M. Ashby, Associate Director for Tax
Policy and Administration Issues, before the Subcommittee on Government
Management, Information and Technology, House Committee on Government
Reform. GAO/T-AIMD/GGD-99-256, Aug. 2 (29 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD/GGD-99-211
     TITLE:  Unpaid Payroll Taxes: Billions in Delinquent Taxes and
	     Penalty Assessments Are Owed
      DATE:  08/02/1999
   SUBJECT:  Federal aid programs
	     Tax nonpayment
	     Tax violations
	     Tax administration
	     Debt collection
	     Federal taxes
	     Noncompliance
	     Delinquent taxes
	     Fines (penalties)
	     Trust funds
IDENTIFIER:  IRS Federal Tax Deposit Alert Program
	     Social Security Disability Insurance Trust Fund
	     Old Age and Survivors Insurance Trust Fund
	     Medicare Hospital Insurance Trust Fund
	     IRS Automated Trust Fund Recovery System
	     Civil Service Retirement and Disability Trust Fund
	     Railroad Retirement Trust Fund

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    United States General Accounting Office GAO
    Report to the Subcommittee on Government Management, Information
    and Technology, Committee on Government Reform, House of
    Representatives August 1999            UNPAID PAYROLL TAXES
    Billions in Delinquent Taxes and Penalty Assessments Are Owed
    GAO/AIMD/GGD-99-211 United States General Accounting Office
    Accounting and Information Washington, D.C. 20548
    Management Division B-281574
    Letter August 2, 1999 The Honorable Stephen Horn Chairman The
    Honorable James Turner Ranking Minority Member Subcommittee on
    Government Management, Information and Technology Committee on
    Government Reform House of Representatives The Honorable Dennis
    Kucinich House of Representatives This report responds to your
    request for information on payroll taxes owed to the federal
    government and the associated trust fund recovery penalties1
    assessed individuals responsible for the nonpayment of these
    taxes. You asked that we determine (1) the extent to which payroll
    taxes are not remitted to the federal government, (2) the
    magnitude of the trust fund recovery penalties assessed against
    individuals of organizations that withheld federal payroll taxes
    from employees' salaries but did not forward them, (3) the extent
    to which individuals who have not remitted payroll taxes are
    responsible for not paying these taxes at multiple businesses, (4)
    the extent to which businesses and individuals who failed to pay
    payroll taxes are also receiving federal benefits or other federal
    payments, and (5) the factors that affect the Internal Revenue
    Service's (IRS) ability to enforce compliance or pursue
    collections in this area. Results in Brief
    According to IRS records, at September 30, 1998, nearly 2 million
    businesses owed about $49 billion in payroll taxes, or about 22
    percent of IRS' $222 billion total outstanding balance of unpaid
    tax assessments.  The businesses that failed to remit withheld
    payroll taxes were typically in wage-based industries and had few
    available assets from which IRS could recover these taxes.  They
    were usually small, closely held businesses using 1The IRS can
    assess a trust fund recovery penalty against an individual, such
    as a corporate officer, whom it determines was willful and
    responsible for not forwarding to the government federal payroll
    taxes withheld from employees' salaries. Letter           Page 1
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 a corporate
    structure, but this varied throughout the country.  Our review of
    about 200 unpaid payroll tax cases and interviews with IRS revenue
    officers throughout the country indicated that the most common
    types of businesses or industries with unpaid payroll taxes
    included construction companies and restaurants, although other
    types of businesses (including computer software, child care, and
    professional services such as legal, medical, and accounting
    firms) also have unpaid payroll taxes.  Most unpaid payroll taxes
    are not fully collectible, and there is often no recovery
    potential as many of the businesses are insolvent, defunct, or
    otherwise unable to pay. According to IRS records, as of September
    30, 1998, trust fund recovery penalties of about $15 billion had
    been assessed against, and continue to be owed by, approximately
    185,000 individuals found to be willful and responsible for the
    nonpayment of payroll taxes withheld from employees. These
    individuals are typically officers of a corporation, such as the
    president or treasurer.  IRS records do not include data on the
    frequency of cases in which IRS does not assess a trust fund
    recovery penalty against such individuals.  Additionally, long-
    standing deficiencies in IRS systems, particularly the failure to
    link related taxpayer and business accounts, result in errors in
    IRS records that have led to the collection of amounts that have
    already been paid.  As with unpaid payroll taxes, most trust fund
    recovery penalty assessments are not fully collectible and there
    is often no recovery potential.  Many of the individuals assessed
    these penalties are in bankruptcy, have no available assets, are
    unable or unwilling to pay, or cannot be located. IRS records
    indicate that nearly 25,000 individuals, or over 13 percent of the
    individuals assessed trust fund recovery penalties, were
    responsible for the nonpayment of payroll taxes at more than one
    business. These records also indicate 29 cases in which the same
    individual was assessed a trust fund recovery penalty for more
    than 12 separate businesses. Individuals responsible for the
    nonpayment of payroll taxes and businesses that owe payroll taxes
    receive significant federal benefits and other federal payments.
    We estimate that about 16,700 businesses and individuals with
    unpaid payroll taxes and trust fund recovery penalty assessments,
    respectively, received an estimated $7 billion in federal payments
    over a 3 month period.  We also estimate that 12,700 businesses
    with unpaid payroll taxes and individuals with outstanding trust
    fund recovery penalties had about $3.5 billion in outstanding
    Small Business Administration guaranteed loans at September 30,
    1998.  Finally, we estimate that about 18,800 Letter    Page 2
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 individuals
    with outstanding trust fund recovery penalty assessments at
    September 30, 1998, were receiving $212 million annually in Social
    Security, Railroad Retirement, federal retirement, and federal
    civilian salaries. Several factors affect IRS' ability to enforce
    compliance and pursue collections of unpaid payroll taxes.
    Financial management system deficiencies and other internal
    control weaknesses affect the completeness and accuracy of
    taxpayer accounts, making it difficult for IRS to manage its
    unpaid assessments.  While IRS has a Federal Tax Deposit (FTD)
    Alert Program designed to identify early potential tax
    delinquencies, IRS field representatives noted that the alerts (1)
    typically are not received in the field early enough to prevent
    employers from accumulating substantial tax delinquencies or (2)
    resulted in revenue officers unnecessarily contacting taxpayers
    who had already made their required payments.  IRS field
    representatives also noted that certain IRS procedures, limited
    resources, and federal and state laws limit enforcement and
    collection efforts.  For example, IRS is prohibited by law from
    sharing information on delinquent taxpayers with state licensing
    authorities responsible for granting licenses for new and existing
    businesses. Additionally, federal law does not prevent businesses
    or individuals from receiving federal payments or loans when they
    are delinquent in paying federal taxes. The Debt Collection
    Improvement Act specifically excluded unpaid tax assessments from
    its provisions for pursuing collections on outstanding federal
    receivables.  The Department of the Treasury is developing a
    mechanism to pursue collection of outstanding federal receivables
    as mandated by the Debt Collection Improvement Act through various
    collection efforts and the use of offsets against tax refunds,
    federal benefits, and other federal payments.  Treasury also
    intends to include the collection of unpaid tax assessments in
    these efforts under the authority of the Taxpayer Relief Act of
    1997.  However, Treasury and other affected agencies are trying to
    address complex implementation issues in order to avoid undue harm
    to individuals.  Most importantly, there is the need to address
    IRS' significant financial management system deficiencies and
    internal control weaknesses to ensure that taxpayers are not
    unduly harmed by inappropriate levies of federal benefits and
    other payments to repay taxes that have already been collected.
    The IRS stated that it concurred with the issues raised in this
    report. Page 3                                 GAO/AIMD/GGD-99-211
    Unpaid Payroll Taxes B-281574 Background    Employers are required
    to withhold from their employees' salaries amounts for individual
    federal income taxes and for Federal Insurance Contribution Act
    (FICA) taxes, which include Social Security and hospital insurance
    (Medicare) taxes.  In 1998, the FICA taxes withheld consisted of
    6.2 percent of the employee's gross salary up to $68,400 for
    Social Security taxes and an additional 1.45 percent of the gross
    salary for hospital insurance. Employers are also required to
    match the amounts withheld from the employee's salary for Social
    Security and hospital insurance taxes.  The amounts withheld from
    the employee's salary for federal individual income and FICA
    taxes, along with the employer's matching portion of FICA taxes,
    comprise business payroll taxes.2 Employers are generally required
    to remit payroll taxes periodically through the FTD system.  The
    frequency of these deposits depends on the amount of taxes due and
    the frequency of the employer's payroll. Employers must deposit
    payroll taxes either (1) semiweekly if their total tax liability
    is more than $50,000 during a 12-month period ending June 30 of
    the prior year or (2) monthly if their total tax liability is
    $50,000 or less during this same 12-month period.  Employers are
    generally required to file a quarterly tax return (Tax Form 941)
    to report federal payroll taxes. Additionally, employers are
    required to report employees' earnings to the Social Security
    Administration (SSA) annually. The Federal Old Age and Survivors
    Insurance and Federal Disability Insurance trust funds were
    established to fund the various Social Security benefit programs,
    and the Federal Hospital Insurance trust fund was established to
    partially fund the Medicare program.  By law, these trust funds
    receive amounts for FICA and Self-Employment Contribution Act
    (SECA) withholdings.3  The Department of the Treasury has
    statutory responsibility for maintaining these trust funds and,
    through the IRS, is responsible for collecting the money that is
    dedicated to these trust funds. Most business payroll tax payments
    are made directly to Treasury through 2Federal unemployment taxes
    are also paid by employers.  However, these taxes are not included
    in the unpaid payroll taxes discussed in this report. 3SECA taxes
    are Social Security and hospital insurance taxes required to be
    paid by self-employed individuals.  Self-employed individuals were
    required to pay 12.4 percent on net earnings from self-employment
    up to $68,400 in 1998 if their earnings were more than $400 for
    the year and 2.9 percent of net earnings for hospital insurance
    taxes.  Payments are generally required to be remitted quarterly.
    Issues related to self-employment taxes were addressed in the
    report Tax Administration:  Billions in Self-Employment Taxes Are
    Owed (GAO/GGD-99-18, February 19, 1999) and are outside the scope
    of this report. Page 4
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 financial
    institutions and are deposited into the general revenue fund,
    where they are then distributed to the various trust funds.  IRS
    receives the related payment data submitted by taxpayers and is
    responsible for maintaining records of both tax assessments, based
    primarily on tax returns, and taxes collected. The information IRS
    receives at the time it collects several types of tax payments,
    including those for Social Security and hospital insurance, is not
    sufficient to allow IRS to attribute these payments to specific
    trust funds, nor could IRS' current systems accept and process
    such data if it were received.  Additionally, under Title 42
    U.S.C. sections 401 and 1395i, amounts to be transferred by
    Treasury to the Social Security and hospital insurance trust funds
    are determined by applying the applicable FICA and/or SECA tax
    rate to wage amounts certified by the Commissioner of Social
    Security.  Because wage information is provided only quarterly to
    IRS and only annually to SSA, initial distributions to the trust
    funds are based on estimates prepared by Treasury's Office of Tax
    Analysis (OTA) and SSA's Office of the Chief Actuary, with
    adjustments subsequently made as a result of the SSA
    Commissioner's certifications. SSA's Office of the Chief Actuary
    develops estimates of total fiscal year employment tax revenue to
    be distributed to the Social Security and hospital insurance trust
    funds.  SSA sends these estimates to OTA twice each year for use
    in the federal government's budget process and to determine
    monthly estimates of FICA and SECA taxes to be transferred from
    the general revenue fund to the trust funds.  Monthly, OTA
    prepares and submits to Treasury's Financial Management Service
    (FMS) a document instructing FMS on the amounts to be transferred
    from the general revenue fund to the trust funds.  FMS uses this
    document to process the initial distributions to the trust funds
    daily.  Treasury's Bureau of Public Debt (BPD) records these
    distributions on the books and records of the trust funds.
    Subsequent to this initial distribution, the SSA Commissioner
    certifies quarterly the amounts that should ultimately be
    distributed to the trust funds.  In making this certification, SSA
    uses two sources of wage data: (1) the wage and earnings
    statements (W-2s and W-3s) filed by employers and self-employed
    individuals annually with SSA and (2) payroll tax return
    information (Tax Form 941, quarterly information IRS transmits on
    tape to SSA).  The certification is sent to FMS, which uses it to
    prepare adjustments for the difference between the initial
    distributions and the SSA Page 5
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Commissioner's
    subsequent certification.  BPD records these adjustments on the
    books and records of the trust funds. Figure 1 provides an
    overview of the process of collecting, distributing, and
    certifying payroll tax revenue for the Social Security and
    hospital insurance trust funds. Figure 1:  Overview of the Process
    for Distribution of FICA and SECA Tax Revenue to Trust Funds
    Taxpayera                             IRS
    SSA              OTA             FMS                        BPD
    Payment/                          Collection/
    Estimation        Estimation     Distribution/
    Recording/ Filing                         Accounting
    Adjustment             Accounting $
    Chief actuary      Calculate     Prepare journal Tax payments
    develops          monthly          entry to FMS
    estimate         estimates         record of               of
    estimates FICA/SECA         FICA/SECA semiannually          tax
    Record entries into Record
    - Federal Hospital Deposit tax FICA/SECA
    Insurance payments in taxes in
    -  Federal Old Age and general fund master file
    Survivors Insurance - Federal Disability Insurance Trust 941
    funds Employer's Quarterly Federal Tax               Process tax
    returns Return                   and send payroll
    Certification tax data to
    Prepare journal SSA monthly
    entry to adjust Calculate                      OTA estimates the
    certified                     to certified       Investment in
    Treasury amounts                          amounts
    securities/payment of W2, W3
    quarterly                         quarterly
    benefits Annual Wage and Earnings Statement a Employers and self-
    employed individuals As discussed above, the amounts distributed
    to the trust funds through both the initial distribution of
    payroll taxes and the subsequent certification/adjustment process
    are not based on actual amounts of tax revenue collected but
    rather on estimates of total tax liability derived from wage
    information.  This ensures that individuals who work and have
    taxes withheld to pay into the Social Security program-or their
    spouses and qualified dependents-receive the appropriate level of
    program benefits when the individuals retire, become disabled, or
    die.  Consequently, the Page 6
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 amounts
    distributed to the Social Security and hospital insurance trust
    funds are based on the wages an individual earns, not the amount
    the employer actually forwards to the government. While the
    majority of businesses pay the taxes withheld from employees'
    salaries as well as the employers' matching amounts, a significant
    number of businesses do not.  This creates a situation in which
    the general revenue fund subsidizes the Social Security and
    hospital insurance trust funds to the extent that Social Security
    and hospital insurance taxes owed are not collected.  Over time,
    the amount of this shortfall, or subsidy, is significant. As of
    September 30, 1998, the estimated amount of unpaid taxes and
    interest in IRS' $222 billion unpaid assessments balance was
    approximately $38 billion for Social Security and hospital
    insurance taxes.4 While this amount excludes unpaid payroll taxes
    no longer in the unpaid assessments balance due to the expiration
    of the statutory collection period,5 it nevertheless provides an
    indication of the cumulative amount of the subsidy provided from
    the general fund. When businesses withhold money from an
    employee's salary for federal income taxes and the employee's FICA
    obligation, they are deemed to have a responsibility to hold these
    amounts "in trust" for the federal government. To the extent that
    withholdings are not forwarded to the federal government, the
    business is liable for these amounts, as well as its matching FICA
    contribution.  Individuals can also be held personally liable for
    the amounts withheld from an employee's salary for federal income
    taxes and the employee's FICA obligation.  Under Section 6672 of
    the Internal Revenue Code, such individuals who are determined by
    IRS to be "willful and responsible" for the nonpayment of these
    amounts can be assessed a "trust fund recovery penalty" (TFRP).
    To be found willful and responsible, the individual would have to
    be proven to be in a position to (1) directly or indirectly
    prevent the payment of these withheld taxes to the federal
    government or (2) divert the payment of these withheld monies for
    other means, such as paying other creditors.  It should be noted
    that the 4This estimate includes both FICA and SECA taxes but does
    not include federal income tax withholdings, which are a component
    of the reported $49 billion in unpaid payroll taxes at September
    30, 1998.  Accrued interest is included in this amount because
    assessments distributed to the trust funds earn interest at
    Treasury-based interest rates, similar to IRS' interest accruals.
    5The statutory collection period for collecting taxes is generally
    10 years from the date of the assessment.  However, this period
    can be extended or suspended under a variety of circumstances,
    such as agreements by the taxpayer to extend the collection
    period, bankruptcy litigation, and court appeals.  Consequently,
    some tax assessments can and do remain on IRS' records for
    decades. Page 7
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 deliberate
    intent or desire to defraud the federal government is not
    necessary for IRS to assess a TFRP.  For example, an individual in
    a business who decides to pay the business' monthly rent payment
    instead of remitting employee withholdings to the federal
    government can be found to be willful and responsible and thus
    assessed a TFRP.  Typically, these individuals are officers of a
    corporation, such as a president or treasurer. More than one
    individual can be found willful and responsible for a business'
    failure to pay the federal government withheld payroll taxes and
    thus be assessed a TFRP.  The amounts assessed against each
    individual can vary depending on the extent to which each
    individual was determined to be willful and responsible for
    multiple periods of unpaid taxes. Additionally, the business
    itself is still liable for the entire amount of the unpaid payroll
    taxes.  However, IRS policies require that it only collect the
    unpaid tax once.  For example, if, after the IRS assesses a TFRP
    against an officer of a corporation, the business pays the entire
    balance of the unpaid payroll taxes, the officer would no longer
    be liable for the TFRP assessment.  Similarly, if two officers are
    each assessed TFRPs related to their business covering the same
    period of unpaid payroll taxes and one of the officers makes a
    partial payment, the liabilities of both officers, as well as the
    liability of the business, are to be reduced by the amount of the
    payment. Objectives, Scope and  The objectives of our review were
    to address the issues raised by the Methodology
    Subcommittee on Government Management, Information and Technology,
    House Committee on Government Reform, and through subsequent
    discussions with the requesters' offices, regarding unpaid payroll
    taxes and trust fund recovery penalties.  To address these issues,
    we identified the following questions we needed to answer: * To
    what extent are payroll taxes not remitted to the federal
    government? * What is the magnitude of the trust fund recovery
    penalties assessed against individuals who withheld but did not
    forward payroll taxes to the government? * To what extent are
    individuals found responsible for withholding but not paying
    payroll taxes at more than one business? * To what extent do
    businesses and individuals responsible for withholding but not
    paying payroll taxes receive federal benefits or other federal
    payments? Page 8                                   GAO/AIMD/GGD-
    99-211  Unpaid Payroll Taxes B-281574 * What factors affect IRS'
    ability to enforce compliance or pursue collections in this area?
    To answer these questions, we used a combination of (1) analyses6
    of data maintained on IRS' automated systems, (2) detailed reviews
    of about 200 unpaid payroll tax and trust fund recovery penalty
    case files, (3) automated comparisons of IRS records of unpaid
    payroll taxes and trust fund recovery penalties with disbursement
    and loan records of FMS and the Small Business Administration
    (SBA), and (4) structured interviews with IRS revenue officers and
    Collection Division group managers throughout the country.
    Additionally, we interviewed IRS personnel at the National Office,
    obtained and reviewed available IRS information on employment tax
    programs and initiatives, reviewed IRS' statistical information
    from our prior reports on employment tax issues, and reviewed IRS'
    collection policies and procedures and the laws that affect IRS'
    use of enforcement tools. We did not assess the controls,
    completeness, and accuracy of IRS, FMS, and SBA records.
    Furthermore, assessing the effectiveness of the IRS, FMS, and SBA
    practices for verifying and correcting erroneous Taxpayer
    Identification Number (TIN), Employer Identification Number (EIN),
    and name data was beyond the scope of this assignment.  Nor did we
    attempt to identify and correct all problems relating to
    duplicate, misused, or erroneous TIN, EIN, and name data.
    Finally, we did not specifically audit the data in IRS' systems
    used in our various macro analyses. We performed our work from
    November 1998 through May 1999 in accordance with generally
    accepted government auditing standards.  We requested comments on
    a draft of this report from the Commissioner of Internal Revenue.
    The Commissioner provided us with written comments which are
    discussed in the "Agency Comments" section and are reprinted in
    appendix II. For more details on the scope and methodology of the
    assignment, see appendix I. 6See appendix I for a discussion of
    the types of analyses performed and the IRS data sources used.
    Page 9                                             GAO/AIMD/GGD-
    99-211  Unpaid Payroll Taxes B-281574 To What Extent Are
    According to IRS records, as of September 30, 1998, businesses
    owed the Payroll Taxes Not            federal government about $49
    billion in payroll taxes.  This represents about 22 percent of the
    $222 billion in IRS' inventory of unpaid tax Remitted to the
    assessments as of September 30, 1998.  The $49 billion includes
    about $19 Federal Government?          billion in unpaid tax
    assessments and another $30 billion in penalties and interest.
    Although unpaid payroll taxes are less than a quarter of IRS'
    outstanding balance of unpaid assessments at September 30, 1998,
    they comprise over 50 percent of IRS revenue officers' caseloads
    in many regions of the country.  Consequently, they represent one
    of IRS' most significant enforcement challenges. The Number and
    Age of        IRS records show that over 1.8 million businesses
    owe the total unpaid Delinquent Payroll Taxes     payroll taxes
    for more than 4.9 million separate tax periods or quarters. Are
    Significant              Nearly 50 percent of the businesses with
    outstanding payroll taxes are delinquent for more than one
    quarter.  While some of these businesses have only one or two
    quarters of unpaid payroll taxes owed the government, others have
    in excess of 40 quarters of delinquent payroll taxes.  Table 1
    profiles the number of businesses with multiple quarters of
    delinquent unpaid payroll taxes. Table 1:  Businesses With
    Multiple Quarters of Unpaid Payroll Taxes Unpaid payroll taxes
    Outstanding balancea Number of businesses
    Number of quarters        (Dollars in  billions) 1,702,177
    1 to 6                       $26.4 158,106
    7 to 20                         21.0 5,281
    21 to 40                           1.5 86
    Over 40                            0.1 Total
    --                       $49.0 aConsists of taxes, penalties and
    interest. Source:  IRS business master file. As the table
    illustrates, a significant number of businesses have multiple tax
    periods of unpaid payroll taxes.  These multiple periods of unpaid
    payroll taxes go back a number of years, as shown in the following
    figure. Page 10
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Figure 2:
    Percent of Delinquent Quarters of Unpaid Payroll Taxes by Age
    Before 1980 0%                                              1980-
    1987 8% 48%                       44%
    1988-1993 1994-1998 The age of these quarters of unpaid payroll
    taxes and their outstanding balances are further illustrated in
    table 2. Table 2:  Delinquent Quarters of Unpaid Payroll Taxes and
    Their Outstanding Balances by Age Unpaid payroll taxes Outstanding
    balancea Tax years                                        Number
    of quarters          (Dollars in  billions) 1994-1998
    2,348,838                          $14.4 1988-1993
    2,198,493                            25.4 1980-1987
    407,619                             9.0 Before 1980
    3,491                           0.2 Total
    4,958,441                          $49.0 aConsists of taxes,
    penalties and interest. Source:  IRS business master file. Over 52
    percent of the 4.9 million in delinquent quarters of payroll taxes
    predate 1994.  The outstanding balance of these delinquent
    quarters of Page 11
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 payroll taxes
    totals over $34 billion and represents over 70 percent of the
    total balance of unpaid payroll taxes in IRS' inventory of unpaid
    assessments at September 30, 1998.  Additionally, over 8 percent
    of the delinquent quarters of payroll taxes predate 1988.  The
    outstanding balance of these delinquent quarters of payroll taxes,
    about $9 billion, represents over 18 percent of the total balance
    of unpaid payroll taxes at September 30, 1998. Potential
    Collectibility of        Our previous work on IRS' unpaid
    assessments7 has shown that older Unpaid Payroll Taxes Is Low
    delinquent taxes have little likelihood of collection.
    Furthermore, because IRS continues to accrue significant amounts
    of interest and penalties on these delinquent taxes as they age,
    additional amounts that will not be collected are added to IRS'
    balance of unpaid assessments.  IRS records indicate that over 60
    percent of the $49 billion outstanding balance of unpaid payroll
    taxes at September 30, 1998, consists of interest and penalties.
    IRS' business master file-its detailed record of business taxpayer
    accounts-contains codes reflecting the status of each given
    taxpayer's account by tax period.  These codes provide some
    insight into the potential for collecting on a given taxpayer
    account.  Codes in many of the 4.9 million delinquent payroll tax
    accounts indicate little potential for collection.  For example,
    nearly 1.4 million of the delinquent payroll tax accounts (28
    percent) have codes indicating that the businesses which owe these
    taxes are no longer in existence.  Similarly, for 487,000
    delinquent payroll tax accounts (10 percent), IRS records indicate
    that the businesses that owe these taxes are insolvent or IRS has
    been unable to locate or contact them.  For 444,000 delinquent
    payroll tax accounts (9 percent), IRS records indicate the
    businesses do not have the resources to pay the amounts owed, and
    189,000 (4 percent) are owed by businesses in bankruptcy or other
    litigation proceedings.  Consequently, these records would
    indicate that the majority of the unpaid payroll taxes owed the
    federal government are not likely to be collected. Our review of a
    statistical sample of 690 unpaid tax assessments selected as part
    of our audit of IRS' fiscal year 1998 financial statements
    reinforces this conclusion.  Of the 690 unpaid tax assessment
    accounts selected for 7See Internal Revenue Service:  Composition
    and Collectibility of Unpaid Assessments (GAO/AIMD-99-12, October
    29, 1998). Page 12
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 review, 191 of
    these cases, with outstanding balances of about $121 million, were
    unpaid payroll taxes or associated TFRPs.8  In our review of these
    cases, both we and IRS determined that about 9 percent of the
    outstanding balances would likely be collected. Types of
    Businesses With     There are many types of businesses with
    delinquent payroll taxes.  IRS Unpaid Payroll Taxes
    records break out these unpaid payroll taxes into broad categories
    by business type.  For example, IRS' business master file includes
    the following categories:  exempt organizations, partnerships,
    corporations, federal filers, state or local governments, and sole
    proprietorships.  Within these broad categories, corporations
    represent about 56 percent of the total number of unique
    businesses with unpaid payroll taxes.  Sole proprietorships
    represent the second most significant category, about 29 percent
    of the total, and partnerships represent the third most
    significant category, about 7 percent. Our review of the 191
    unpaid payroll tax cases and discussions with IRS revenue officers
    throughout the country identified additional characteristics of
    the businesses that have failed to forward payroll taxes to the
    federal government.  These businesses are typically in wage-based
    industries, with few assets available as a potential collection
    source for the IRS.  They are usually small, closely held
    businesses using a corporate structure, but this can vary by
    region of the country.  For example, revenue officers in the New
    England area informed us that 80 to 95 percent of the businesses
    comprising their unpaid payroll tax caseloads were corporations.
    Conversely, revenue officers in Arkansas and Oklahoma told us that
    corporate forms of business comprise only 20 to 30 percent of
    their unpaid payroll tax caseloads. Many of the revenue officers
    we interviewed noted that construction and restaurants were the
    most common types of industries that give rise to unpaid payroll
    taxes.  However, in areas such as Dallas, Fort Worth, Tampa, and
    Central California, we were told that computer software and other
    high technology industries comprise a significant portion of the
    revenue officers' unpaid payroll tax caseloads.  Revenue officers
    also cited child 8While our sample of 690 unpaid assessment
    accounts is a representative sample, the 191 unpaid payroll tax
    and TFRP cases selected as part of this sample cannot be
    considered statistically representative of the entire population
    of such cases.  Thus any analysis of these 191 cases cannot be
    projected to the entire population of unpaid payroll taxes and
    TFRPs.  See appendix I of this report for additional details. Page
    13                                             GAO/AIMD/GGD-99-211
    Unpaid Payroll Taxes B-281574 care and professional services, such
    as legal, medical, and accounting firms, as other types of
    businesses that give rise to unpaid payroll taxes. Figure 3
    presents the most common business/industries with unpaid payroll
    taxes identified in our review of the 191 cases. Figure 3:  Most
    Common Businesses/Industries With Unpaid Payroll Taxes From Cases
    Reviewed Other types of businesses noted in our review of the 191
    unpaid payroll tax cases included (1) professional services, (2)
    consultants, (3) education and training, (4) computer software,
    and (5) child care. A majority of the revenue officers indicated
    that the businesses with unpaid payroll taxes typically had
    quarterly payroll tax liabilities of between $10,000 and $50,000,
    were undercapitalized, and experienced serious cash Page 14
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 flow problems.
    A number of the revenue officers told us they believed that the
    lack of sound business management skills also contributed to
    businesses' inability to pay their payroll taxes. What Is the
    Magnitude  According to IRS records, as of September 30, 1998,
    outstanding TFRPs of the Trust Fund                 assessed
    against individuals were about $15 billion.  This amount includes
    initial assessments of about $9 billion and accumulated interest
    of about Recovery Penalties                $6 billion.  IRS
    records indicate a total of about 237,000 separate TFRP Assessed
    Against                  assessments made against nearly 185,000
    distinct individuals. Individuals Who                   To
    understand the relationship between the $49 billion in unpaid
    payroll Withheld But Did Not              taxes per IRS records at
    September 30, 1998, and the outstanding TFRP Forward Payroll Taxes
    balance of $15 billion, it is important to note several points,
    some of which were discussed earlier.  First, a TFRP assessment is
    only for the federal tax to the Government?
    withholding and FICA taxes withheld from employees' salaries; it
    does not include the business' or employer's matching FICA
    contributions.  Second, a TFRP can be assessed against anyone
    found willful and responsible for the withholding and nonpayment
    of payroll taxes.  If several individuals involved in a business
    are found willful and responsible, they can each be separately
    assessed a TFRP for the unpaid taxes.  However, while TFRPs are
    assessed against one or more individuals and thus appear as
    separate unpaid assessments on IRS' records, the total payroll
    taxes owed by the business are to be collected only once.  This
    means that if the business responsible for the unpaid payroll
    taxes pays some or all of its delinquent taxes, or if one of
    several individuals assessed a TFRP covering the same delinquent
    tax period pays some or all of the assessment, the tax liability
    for all related parties should be reduced or eliminated from IRS'
    records. It is also important to note that the number and
    outstanding balance of TFRPs discussed above do not provide a
    complete picture of their magnitude or the individuals who
    withheld but did not forward payroll taxes to the government.
    Serious financial management deficiencies and internal control
    weaknesses, as well as policy decisions regarding when to assess
    TFRPs, affect the completeness and reliability of these amounts.
    Page 15                                 GAO/AIMD/GGD-99-211
    Unpaid Payroll Taxes B-281574 System Deficiencies Affect     In
    our October 1998 report9 on internal control weaknesses at IRS,
    which the Completeness and           was based on the results of
    our audit of IRS' fiscal year 1997 custodial Accuracy of TFRP
    financial statements,10 we discussed serious financial management
    systems Information                    issues that affected IRS'
    ability to effectively manage and accurately report on its unpaid
    assessments.  One of the most serious issues we discussed related
    to the inability of IRS to link related taxpayer accounts to
    ensure that they all receive appropriate credit when a payment is
    made on one account.  This is of particular concern with respect
    to unpaid payroll taxes and related TFRPs.  The unpaid payroll tax
    of a business is maintained on IRS' business master files  while
    the TFRP assessed against an individual, or individuals, is
    maintained on IRS' individual master files  a detailed record of
    individual taxpayer accounts.  These two separate and distinct
    databases are not integrated.  Consequently, if a payment is
    received from the business, there is no automated entry to record
    the reduction in the individual, or individuals', TFRP account or
    accounts.  This has led to instances where IRS has pursued
    collection against officers of a corporation for amounts that had
    already been paid. IRS has attempted to correct this problem by
    manually entering a code on related taxpayer accounts to alert IRS
    personnel that related accounts exist and should be reviewed to
    ensure all transactions are appropriately reflected on each
    account.  However, the use of these codes, referred to as "cross-
    references," has not been effective in providing the compensating
    link between related taxpayer accounts.  As shown in table 3, both
    our fiscal years 1997 and 1998 financial audits identified a high
    incidence of unpaid payroll tax cases with TFRPs assessed against
    individuals in which payments were not accurately recorded in all
    related accounts to reflect each responsible party's tax liability
    reduction. 9See Internal Revenue Service:  Immediate and Long-Term
    Actions Needed to Improve Financial Management (GAO/AIMD-99-16,
    October 30, 1998). 10See Financial Audit:  Examination of IRS'
    Fiscal Year 1997 Custodial Financial Statements (GAO/AIMD-98-77,
    February 26, 1998). Page 16
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Table 3:
    Frequency of Payments Improperly Recorded to Related Taxpayer
    Accounts Identified in Fiscal Years 1997 and 1998 Cases reviewed
    where payments were not reflected on all related taxpayer accounts
    Number of unpaid payroll tax cases  reviewed where Fiscal year
    a TFRP was assessed              Number          Percent 1997
    83                 53                64 1998
    104                 54                52 In our fiscal year 1998
    audit, we also determined that this problem was not caused solely
    by the lack of an automated link between IRS' business and
    individual master files.  In 7 of the 54 cases we reviewed where
    payments were not properly recorded, IRS failed to credit one
    individual's TFRP liability account for payments made by another
    individual who had also been assessed a TFRP for the same
    business' unpaid payroll taxes. Additionally, in 52 cases where a
    TFRP was assessed (50 percent), a "cross reference" was not
    present in the master files to alert IRS personnel that the
    account was related to one or several other accounts.  These
    problems have resulted in instances of unintentional taxpayer
    burden, such as inappropriate federal tax liens on taxpayers'
    property, and affect the accuracy of reported balances of both the
    unpaid payroll tax and the associated TFRP. Significant delays in
    recording payments also affect the completeness and accuracy of
    the reported amounts for both unpaid payroll taxes and TFRPs. In
    one instance, we found that payments were recorded to the
    individual's account over 8 years after they had been received.
    Additionally, we found that IRS did not always assess responsible
    individuals TFRPs in a timely manner.  Specifically, we found two
    cases in which IRS did not assess a TFRP against officers of
    businesses until 36 and 55 months, respectively, after the
    businesses filed their payroll tax returns.  During this period,
    these officers received tax refunds.  Had IRS assessed the TFRPs
    more promptly, it would have been able to retain, or offset, the
    refunds to recover a portion of the balance of the unpaid payroll
    taxes. IRS is developing an automated system application to
    eliminate some of these deficiencies.  This system application,
    called the Automated Trust Fund Recovery (ATFR) system, is being
    designed to automate the assessment and monitoring of TFRPs.  The
    application is to divide the Page 17
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 TFRP process
    into two distinct but interactive parts, the district office and
    service center functions.  The district office application, which
    is being developed first, is to include case inventory control,
    monitoring of assessment determination dates, and the calculation
    of the TFRP.  An IRS National Office official we spoke with
    estimated that the system application will be implemented
    nationwide during fiscal year 2000. Not All Individuals         In
    addition to the serious financial management deficiencies and
    internal Responsible for             control issues that affect
    the integrity of IRS' data on unpaid payroll taxes Nonpayment of
    Payroll      and TFRPs, IRS does not track or otherwise
    systemically maintain Taxes Are Assessed TFRPs    information on
    the number and dollar value of potential TFRPs that are not
    assessed.   The number and dollar value of these unassessed
    penalties could be significant. In determining whether to assess
    an individual a TFRP for unpaid payroll taxes, IRS considers a
    number of factors.  First, IRS must be able to establish that an
    individual was, in fact, willful and responsible for the
    nonpayment of payroll taxes.  Typically, individuals responsible
    for the nonpayment of payroll taxes are officers of a corporation,
    such as the president, treasurer, or controller.  However, this is
    not always the case. For example, payroll clerks at businesses
    have been found liable for the nonpayment of payroll taxes and
    consequently assessed a TFRP. Some businesses operate in a fashion
    which allows an individual without direct responsibility to
    nonetheless indirectly influence the nonpayment of payroll taxes.
    Thus, establishing that an individual was both willful and
    responsible is not always easy.  An example of this would be a
    corporate director who, by all established lines of authority, has
    no direct involvement in the day-to-day operations of the business
    but who, in practice, is heavily involved in the business'
    operations.  In one case we reviewed involving a technical school,
    the president and two chief financial officers of the school were
    each initially assessed TFRPs for the unpaid payroll taxes owed by
    the school.  However, these officers appealed the assessments,
    arguing that a parent corporation, which was a firm based outside
    the United States, actually controlled how the school's cash was
    spent.  The appeals were successful and the TFRP assessments were
    subsequently removed. In determining whether to assess a TFRP, IRS
    also considers the amounts involved and the cost associated with
    pursuing collection actions against the individual.  If IRS
    concludes the amounts involved do not warrant the Page 18
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 cost of
    pursuing collection, it typically will not assess the TFRP.
    Additionally, IRS does not assess sole proprietors and
    partnerships TFRPs for unpaid payroll taxes.  The IRS instead
    believes it can best pursue collection against the individual
    through his or her individual tax return filing.  Finally, IRS
    also considers the potential to collect the assessment in
    determining whether to assess the TFRP.  If the individual has few
    or no assets, low earnings, and no other visible means of paying
    the assessment, IRS may decide not to assess the TFRP.
    Consequently, the numbers and dollar value of outstanding TFRPs
    discussed above likely significantly understate the extent to
    which individuals are responsible for not forwarding payroll taxes
    to the federal government. Collectibility Potential on     While
    IRS considers the potential for collection in determining whether
    to TFRPs Is Not Considered         assess a TFRP, IRS' records,
    our discussions with revenue officers, and our Great
    work on a sample of unpaid assessments performed as part of our
    audit of IRS' fiscal year 1998 financial statements indicate that
    the potential for significant collections on TFRPs is not great.
    Status codes in IRS' individual master files for about 76,000 (32
    percent) of the 237,000 TFRPs assessed against individuals reflect
    conditions that minimize the likelihood of collection.  These
    conditions include the following: (1) the individual cannot be
    located or contacted, (2) the individual is in bankruptcy
    proceedings or some other form of litigation, (3) the individual
    does not have the ability to pay the assessment, and (4) the
    individual is deceased. Discussions with revenue officers
    throughout the country have reinforced the conclusion that TFRP
    assessments are not highly collectible.  Many revenue officers we
    interviewed believe that less than 30 percent of amounts assessed
    as TFRPs are ultimately collected.  Of the 104 unpaid payroll tax
    cases we reviewed where TFRPs were assessed, we determined that
    only 8 cases had some potential for collectibility. Page 19
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 To What Extent
    Are               IRS records indicate that, as of September 30,
    1998, nearly 25,000 Individuals Found                individuals,
    or about 13 percent of the 185,000 individuals with TFRPs, have
    been assessed such penalties for unpaid payroll taxes at more than
    Responsible for                  one business.  As shown in table
    4, about three-quarters of these individuals Withholding But Not
    have TFRP assessments for two separate businesses, and about a
    quarter Paying Payroll Taxes at  have been found responsible for
    the nonpayment of payroll taxes at three or more businesses. More
    Than One Business? Table 4:  Number of Individuals With Trust Fund
    Recovery Penalties for Two or More Businesses Number of businesses
    Number of individuals 2
    18,993 3
    3,925 4
    1,079 5
    409 6
    192 7-12
    235 Over 12
    29 Total
    24,862 Source:  IRS UNLCER files and individual master file. As
    table 4 illustrates, a significant number of individuals have been
    found willful and responsible for the nonpayment of payroll taxes
    at multiple businesses.  In fact, IRS' records indicate that seven
    individuals have been assessed TFRPs at 20 or more separate and
    distinct businesses.  It is important to reiterate that these data
    may not provide a complete and accurate assessment of the degree
    to which such "multiple offenders" exist, due to the significant
    deficiencies in IRS' financial management systems and internal
    controls discussed above, and the fact that IRS does not always
    assess an individual a TFRP.  Additionally, these data cannot take
    into consideration those individuals who establish new businesses
    under other names or otherwise conceal their identity. Our review
    of the 191 unpaid payroll tax-related cases and our discussions
    with revenue officers throughout the country confirm that a
    significant number of individuals have been found liable for the
    nonpayment of payroll taxes at more than one business.  Of the 104
    unpaid payroll tax cases we reviewed in which TFRPs were assessed
    against individuals, we found that Page 20
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 30 (29 percent)
    involved individuals assessed TFRPs for more than one business.
    In one case, we found that an individual had TFRP assessments
    outstanding for four separate businesses and had been determined
    responsible for the nonpayment of payroll taxes at a fifth
    business.  In all instances, the individual established and
    operated construction-related (electrical) companies in which he
    was both owner and president.  Each company accumulated unpaid
    payroll taxes and then went out of business. Shortly after each
    company went out of business, the individual opened a new company
    in the same line of business.  For the most recent business, the
    company has an installment agreement in effect with the IRS to pay
    the amounts of unpaid payroll taxes for that business; however, at
    the time of our review, IRS records showed that the company was
    substantially behind in its payments. Most of the revenue officers
    we interviewed also noted that their caseloads included
    individuals with multiple TFRPs assessed against them.  These
    individuals represented 1 percent to 60 percent of their
    caseloads.  Several of the revenue officers included as "multiple
    offenders" individuals who had multiple TFRPs assessed against
    them for the same business.  For example, a business may have been
    delinquent in paying payroll taxes throughout 1995, and an officer
    may have been assessed a TFRP for the unpaid taxes for that year.
    Subsequently, the business may have failed to remit withheld
    payroll taxes for 1997, and the same officer may have been
    assessed an additional TFRP for the 1997 unpaid taxes. Reasons
    Individuals         Most of the revenue officers we interviewed
    believe the majority of the Continue to Have Unpaid
    individuals responsible for not paying payroll taxes at multiple
    businesses Payroll Taxes               do not flagrantly disregard
    their responsibility to forward such payments to the federal
    government.  Most of the revenue officers stated that these
    individuals lack the skills necessary to properly manage a
    business.  Many start up a business with little capital and
    quickly find themselves experiencing cash flow problems.  In their
    struggle to stay in business, these individuals prioritize and
    direct their payments to those recipients without which the
    business would quickly fail, such as employee salaries, rent, and
    utilities.  Eventually the business is unable to sustain even
    these payments, and it fails.  Unfortunately, these individuals do
    not learn from some of the mistakes they make, and are soon
    opening and operating a new business in much the same manner. The
    revenue officers acknowledged, however, that some individuals
    intentionally disregard their responsibility to forward payroll
    taxes to the Page 21                                GAO/AIMD/GGD-
    99-211  Unpaid Payroll Taxes B-281574 federal government.  One
    revenue officer noted a case in which an individual was ultimately
    determined to be responsible for not paying the payroll taxes at
    three businesses.  This individual used family members to conceal
    his involvement in two of the businesses.  He was the president of
    the first business and had the business assets listed in his name.
    After this corporation had accrued but not paid substantial
    payroll tax liabilities, the corporation went out of business and
    he established a new corporation, listing his wife as president
    and placing the assets in her name.  He subsequently established a
    third corporation, this time listing his daughter as the president
    and placing the assets in her name.  Both of these subsequent
    corporations also accrued significant unpaid payroll tax
    liabilities.  The revenue officer ultimately determined that the
    individual was heavily involved in these two businesses through
    discussions with the individual's wife and daughter, who
    identified him as having the day-to-day responsibilities for
    operating the businesses. Regardless of an individual's intent,
    the failure to pay withheld payroll taxes has the same effect on
    the federal government.  Whether an individual continues to
    exercise poor business judgment or flagrantly disregards his or
    her responsibility for paying withheld payroll taxes, the federal
    government incurs costs to pursue collection of the delinquent tax
    debt and loses revenue to the extent such taxes are not ultimately
    collected.  Additionally, as discussed previously, to the extent
    payroll taxes are not paid, the general revenue fund subsidizes
    the Social Security and hospital insurance trust funds.  As a
    result, less funds are available to finance other federal
    programs. To What Extent Do        We found that businesses and
    individuals responsible for withholding but Businesses and
    not paying payroll taxes receive substantial payments from the
    federal government, either for federal benefits or for other
    payment purposes, such Individuals              as federal
    contracts or loans.  We based this conclusion primarily on
    Responsible for          comparisons of IRS records of business
    unpaid payroll taxes and Withholding But Not      individuals
    assessed TFRPs with the Financial Management Service (FMS) payment
    and the Small Business Administration's (SBA) loan records.  We
    Paying Payroll Taxes     also found examples of such benefits and
    payments from our review of the Receive Federal          191
    unpaid payroll tax-related assessment cases from our fiscal year
    1998 financial audit. Benefits or Other Federal Payments? Page 22
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Federal
    Disbursement                We matched IRS records of individuals
    with outstanding TFRPs with FMS Records Indicate Delinquent
    payment records for Social Security benefits, federal civilian
    retirement Taxpayers Are Receiving             benefits, federal
    civilian salaries, and Railroad Retirement Board (RRB) Significant
    Federal                 pension benefits.  Based on this match, we
    estimate that about 18,800 of these individuals were receiving
    about $212 million in annual federal Payments
    benefit payments while owing almost $2 billion in delinquent
    payroll taxes. Table 5 presents the benefits, the number of
    taxpayer matches, the estimated annual payments made to the
    taxpayers, and the taxpayers' tax liabilities as of September 30,
    1998. Table 5:   Delinquent Taxpayers Receiving Federal Benefits
    at September 30, 1998 Dollars in millions Estimated annual
    Tax liabilities at Payment type                     Taxpayers
    payments September 30, 1998 SSA
    18,199                    $ 200.4                 $ 1,902.0
    Civilian Retirement                      271
    3.9                         21.5 Civilian Salary
    215                         6.3                        14.1 RRB
    81                         1.0                          7.7 Total
    18,766                    $ 211.6                      $1,945.3
    Source:  GAO analysis of FMS payments and IRS' records for trust
    fund recovery penalties. We also matched FMS records of payments
    made to civilian vendors over a 3-month period to IRS' records of
    businesses with unpaid payroll taxes and individuals with
    outstanding TFRPs.  Based on this match, we found that about
    16,700 taxpayers with payroll tax liabilities of about $507
    million at September 30, 1998, received about $7 billion in
    federal payments over this 3-month period.  Because of the
    sporadic nature of these payments, we did not attempt to estimate
    an annual amount for these payments. Additionally, based on our
    matching of IRS records of businesses with unpaid payroll taxes
    with SBA's records of outstanding loans as of September 30, 1998,
    we estimate that about 12,700 taxpayers with unpaid payroll taxes
    estimated at more than $295 million had received loan
    disbursements totaling about $3.5 billion.  Further analysis
    disclosed that 38 of these taxpayers, with outstanding TFRPs of
    about $1.6 million, received SBA loans estimated at $10.6 million
    after IRS had assessed the TFRPs.  In addition, 1,719 taxpayers
    (businesses and individuals) with unpaid payroll taxes of about
    $31.6 million received SBA loans estimated at $448.7 million after
    accumulating these tax delinquencies. Page 23
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 However, any
    conclusions drawn from this analysis must take into consideration
    the potential problems with the reliability and completeness of
    IRS data.  As discussed earlier, serious deficiencies in IRS'
    financial management systems and internal control weaknesses have
    resulted in IRS' records not always portraying an accurate picture
    of taxpayers' account status.  To the extent that payments or
    credits for payments have not been recorded in a taxpayer's
    account, the account may reflect an outstanding balance that no
    longer exists, possibly overstating the level of actual matches
    between IRS records and FMS payment records or SBA's records of
    outstanding loans.  Additionally, to the extent assessments have
    not been promptly recorded in IRS systems, the number of matches
    of taxpayer delinquencies to either the various FMS disbursement
    listings or SBA's records of outstanding loans may be understated.
    Finally, the number of matches between IRS records and various FMS
    disbursement listings does not include those individuals
    responsible for not paying payroll taxes who were not assessed a
    TFRP.  Consequently, there could be a significant number of
    individuals who were responsible for not paying a business'
    payroll taxes and who have received, or are currently receiving,
    federal benefits or other federal payments that are not reflected
    in the above data. Cases Reviewed Also       In our review of the
    191 unpaid payroll tax-related assessment cases Identified
    Delinquent     selected as part of our unpaid assessments sample,
    we identified instances Taxpayers Receiving       where either
    businesses with outstanding unpaid payroll taxes or Federal
    Benefits and      individuals responsible for the nonpayment of
    these taxes were also Payments                  receiving federal
    benefits or other federal payments.  These included six cases in
    which businesses and individuals were receiving federal contract
    payments, three cases in which individuals were receiving Earned
    Income Tax Credit refunds, one case in which an individual was
    receiving Social Security benefits, and one case in which an
    individual received an SBA loan.  In fact, in one case we reviewed
    involving a computer services consulting corporation, all of the
    company's business involved contracts with the federal government,
    specifically the Health Care Financing Administration.  Because
    the underlying case file documentation did not always include
    information on federal benefits or other federal payments, we were
    unable to determine the actual number of instances in which such
    benefits or payments were being received. Revenue officers
    informed us that they had instances in their caseloads of
    businesses that had received or were receiving some form of
    federal benefit or payments, most notably SBA loans and federal
    contracts.  Most of the revenue officers stated that the
    percentage of such cases was Page 24
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 relatively low,
    typically less than 10 percent.  However, a few of the revenue
    officers indicated that the percentage of their cases involving
    businesses receiving SBA loans or federal contract payments was
    substantially higher. For example, several revenue officers noted
    that between 30 and 40 percent of these cases involved businesses
    which received SBA loans. This reinforces the fact that federal
    benefits and other federal payments are being made to businesses
    and individuals who have unpaid payroll taxes. What Factors Affect
    Several factors affect IRS' ability to enforce compliance with
    respect to the IRS' Ability to Enforce  payment of payroll taxes
    and to pursue collections of unpaid payroll taxes from the
    businesses or the responsible individuals.  These factors include
    Compliance or Pursue  (1) serious financial management system
    deficiencies and internal control Collections in This
    weaknesses, (2) ineffective early warning and taxpayer education
    Area?                             programs, (3) procedural
    limitations, (4) federal and state laws, (5) staffing resources
    and other factors IRS employees perceive as affecting enforcement
    and collections, and (6) the capability to offset federal benefits
    and other federal payments against the unpaid tax assessments.
    Financial Management              As discussed previously, IRS'
    financial management systems and internal System Deficiencies and
    controls do not provide timely, accurate, and complete information
    on the Internal Control                  status of taxpayers'
    accounts.  The lack of an automated link or interface Weaknesses
    Affect                 between IRS' business and individual master
    files prevents IRS from having a complete record of related
    taxpayer accounts to ensure that all activity, Accuracy of
    Taxpayer              such as collections, are properly recorded
    in all related accounts.  Without Account Status
    this information, IRS has no assurance that its records for an
    individual taxpayer or business are complete and accurate.  As
    discussed earlier, this has resulted in instances where IRS has
    pursued and collected amounts that were no longer owed.  While IRS
    has made some progress in attempting to compensate for the lack of
    an automated interface between the two taxpayer databases, these
    efforts to date have not been fully effective in ensuring the
    accuracy of taxpayer accounts.  Until adequate automated systems
    are implemented, significant ongoing resources will be required to
    compensate for these systems deficiencies.  In addition, delays in
    assessing individuals TFRPs result in missed opportunities to
    collect amounts through such means as retaining or offsetting
    refunds against unpaid payroll taxes. Page 25
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Taxpayer
    Education and           IRS has two programs to prevent payroll
    tax delinquencies:  the (1) Small Early Warning Programs Are
    Business Tax Education Program and (2) Federal Tax Deposit (FTD)
    Alert Not Considered Effective         Program. The Small Business
    Tax Education Program attempts to prevent payroll tax and income
    tax delinquencies by offering education programs and tax workshops
    to individuals wishing to start up a business.  IRS started the
    small business tax workshop-a part of the Small Business Tax
    Education Program-in the early 1980s.  According to IRS officials,
    during fiscal year 1998, 1,912 workshops and education programs
    serving over 46,000 individuals were held nationwide.  IRS is also
    working to enhance the program through several other initiatives,
    including developing various workshops in coordination with SBA.
    Many of the revenue officers we interviewed nationwide noted that
    this program has not been very effective in reducing or preventing
    delinquent payroll taxes.  Others noted that there has been little
    demand for taxpayer education, that the attendance at these
    workshops has been low, and that the individuals in most need of
    attending these workshops did not appear to be present. The FTD
    Alert Program, which was initiated in 1972, is intended to
    identify and prevent potential payroll tax payment delinquencies
    through early identification of required deposits under the FTD
    system that have not been made.  Before the end of each quarter,
    IRS systems identify employers making semiweekly tax deposits who
    have failed to deposit their taxes during the quarter.  The Alert
    Program targets larger employers (those who reported more than
    $50,000 in payroll taxes on their quarterly Tax Form 941 filings
    during the previous 12-month period) who deposit semiweekly.
    Information regarding taxpayers who failed to make their deposits
    is transferred to tapes, which are sent to the service centers for
    printing of the alert notices and mailing to the respective
    district offices. IRS designates FTD alerts as mandatory or
    optional.  Mandatory FTD alerts are generated for semiweekly
    depositors who have not made deposits during the current quarter
    or who have made them in substantially reduced amounts and were
    assessed an FTD penalty11 of at least $100 in each of the four
    prior quarters.  IRS policy requires revenue officers to contact
    taxpayers as soon as possible after receipt of a mandatory alert.
    Optional FTD alerts are issued for taxpayers who have been
    assessed an FTD 11Taxpayers are assessed a late penalty for
    failure to make timely FTD deposits. Page 26
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 penalty of at
    least $100 in two of the four quarters or in only one of the four
    prior quarters if the amount owed for that quarter remains
    outstanding. According to IRS records, over 44,000 FTD alerts were
    issued from July 1, 1997, through June 30, 1998.  About 38 percent
    of these alerts were mandatory, meaning IRS revenue officers were
    required to contact the taxpayer.  The other 62 percent were
    optional FTD alerts and did not require contact with the taxpayer.
    Some of the revenue officers we interviewed stated that FTD alerts
    were only marginally effective in preventing delinquencies.  Some
    others noted that the alerts are not received in the field early
    enough to prevent employers from accumulating substantial
    delinquencies or to provide early warning of potential problems.
    For example, the criteria for issuing a mandatory FTD alert is
    that the taxpayer has been late in making required deposits in
    each of the prior four quarters.  The repeated late payments are
    an indication of potential problems that revenue officers might be
    able to identify early if they are made aware of the late
    payments.  Additionally, the time it takes to produce the alerts
    and send them to the district offices for assignment to revenue
    officers for follow up also adds to the delays in making contact
    with the taxpayer.  By the time the FTD alerts are received and
    acted on, employers have fallen behind on current quarter tax
    deposits and are not likely to have the resources available to pay
    the previous tax delinquencies that precipitated the FTD alert.
    Some of the revenue officers also noted that the alerts received
    were often invalid or unproductive.  Often the taxpayer's case has
    already been designated as delinquent, or the taxpayer has
    actually gone out of business before the revenue officer makes
    contact.  In other instances, the employer has already paid the
    delinquent payroll taxes between the time the FTD alert is issued
    and received in the field and the contact is made with the
    taxpayer.  Some revenue officers also stated that the FTD alerts
    yield few collections compared to the effort expended in
    processing the alerts. The revenue officers stated that IRS has no
    established procedures for early detection and prevention of
    delinquent payroll taxes other than the Small Business Tax
    Education Program and the FTD Alert Program.  They noted that some
    district offices have used other early intervention techniques in
    the past to identify and prevent delinquencies, including
    contacting the employer after the initial delinquency has been
    identified or following up directly with the taxpayer immediately
    after the first notice of tax deficiency is sent to the taxpayer.
    However, at most districts, revenue Page 27
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 officers
    informed us that these types of early intervention techniques were
    no longer being used due to resource considerations. Certain IRS
    Procedures             According to various IRS Collection
    Division field personnel, another Limit Collection and
    problem that inhibits IRS' ability to collect delinquent payroll
    taxes and to Prevention Efforts                 prevent taxpayers
    from accumulating multiple payroll tax delinquencies is that the
    IRS' Criminal Investigation Division (CID) and District Counsel do
    not prosecute taxpayers for failing to pay payroll taxes unless
    fraud is clearly evident.  Some of these field personnel noted
    that even in instances where the taxpayers have multiple tax
    delinquencies, CID and the District Counsel appear reluctant to
    pursue prosecution.  A few field personnel noted that IRS could
    seek injunctions through the U.S. Attorney's Office to prevent
    taxpayers from accumulating multiple payroll tax delinquencies and
    that the District Counsel prefers not to seek such injunctions due
    to the time and expense required to prosecute such cases. Federal
    and State Laws Also  Federal and state laws also affect IRS'
    ability to enforce compliance with Inhibit Compliance and
    respect to payment of payroll taxes or to pursue collections on
    delinquent Collection Efforts                 payroll taxes.
    States, not the federal government, govern the incorporation of
    businesses, and state licensing authorities have the power to
    grant or deny business licenses for new and existing businesses.
    State licensing authorities can deny business licenses or license
    renewals for businesses which fail to pay state taxes, but they do
    not consider federal payroll tax delinquencies.  This is in part
    because, in accordance with section 6103 of the Internal Revenue
    Code, disclosure of federal tax information without taxpayer
    consent is generally prohibited.  IRS is precluded from sharing
    information such as the status of taxpayers' federal tax accounts
    with the state licensing authorities.  Consequently, the licensing
    authorities cannot consider, and do not have available to them,
    information on federal tax delinquencies in determining whether to
    grant, renew, deny, or suspend business licenses.  This inhibits
    IRS' ability to prevent individuals responsible for the nonpayment
    of payroll taxes from starting up a new business and repeating the
    practice. According to some Collection Division field
    representatives, these legal disclosure prohibitions also limit
    IRS' ability to use other options available to some state and
    local taxing authorities to bring delinquent taxpayers back into
    compliance with their tax obligations.  Specifically, these
    representatives noted IRS' inability to publish the names of
    delinquent taxpayers to increase compliance and generate
    collections, a process that Page 28
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 has been used
    with some success by a number of states and local taxing
    authorities.  For example, Connecticut, Montana, and the District
    of Columbia publish information on delinquent taxpayers on
    Internet web sites.  The type of information disclosed varies
    somewhat but can include the name of the taxpayer, responsible
    corporate officers, location, the types of state and/or local
    taxes owed (i.e., withholding or income), and the amounts owed.  A
    Connecticut official, in particular, indicated that the delinquent
    taxpayer disclosure program instituted by the state has been quite
    successful, generating collections of about $25 million in
    delinquent state taxes between January 1997 and February 1998. One
    IRS field representative we spoke with also mentioned that in
    California, new businesses are required to post bonds for state
    payroll taxes as a prerequisite to the granting of a new business
    license.  In this manner, the state is protected to some degree in
    the event of nonpayment of state payroll taxes.  Other field
    representatives we spoke with noted that such a requirement with
    respect to federal payroll taxes prior to granting a business an
    employer identification number could provide similar protection to
    the federal government.  This avenue is currently not available to
    the federal government. According to some IRS field
    representatives, the agency's ability to pursue collections of
    delinquent payroll taxes and associated TFRPs is also inhibited by
    the property laws of some states, as well as varying
    interpretations of bankruptcy laws.  According to some
    representatives, IRS is unable to enforce collection of delinquent
    taxes and penalties in a number of states because state laws
    preclude attaching liens to, and seizing, personal property.  In
    states where Tenancy by the Entirety12 laws exist, IRS is
    prohibited from attaching liens or seizing any personal property
    that is jointly owned by married couples when only one of the
    spouses is liable for the delinquent taxes.  Currently, at least
    Alaska, Indiana, Missouri, New Jersey, New York, North Carolina,
    Ohio, Oregon, and Utah recognize Tenancy by the Entirety laws.
    Additionally, in states with Marital Joint Property laws, IRS can
    only apply a lien against, or seize, the delinquent taxpayer's
    portion of jointly owned assets.  Also, according to an IRS
    official, some businesses in bankruptcy can continue to accumulate
    additional delinquent payroll taxes.  When a business is in
    12Tenancy by the Entirety is one form of jointly held property
    where the property is co-owned with a spouse.  Each spouse owns
    100-percent of the property at all times. Page 29
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Chapter 1113
    Bankruptcy Reorganization, the business can continue to operate at
    the bankruptcy judge's discretion.  This can result in the
    business incurring additional tax delinquencies. Other Factors IRS
    In addition to the factors discussed above, Collection Division
    field Employees Cited As                 representatives cited
    other factors which, they believe, have or may have Affecting
    Enforcement and  an effect on their ability to enforce compliance
    and pursue collections on Collections of Unpaid
    delinquent payroll taxes and TFRP assessments. Payroll Taxes
    Several Collection Division field representatives stated that the
    current level of collection staff is not sufficient to effectively
    prevent, collect, and monitor delinquent payroll taxes and TFRPs.
    These representatives noted that due to high attrition and
    requirements to support other functions within the agency, an
    increasing number of payroll tax and TFRP cases are currently
    awaiting assignment to a revenue officer.  Over the past two
    fiscal years, IRS has experienced a revenue officer attrition rate
    of about 10 percent, translating into a net loss of 715 revenue
    officers. Some field representatives noted that revenue officers
    are increasingly being required to spend time supporting IRS'
    Customer Service and other functional areas instead of working on
    collection issues.  According to these representatives, revenue
    officers are required to provide assistance to taxpayers who walk
    into or phone the office with an inquiry or problem. An IRS
    National Office official we spoke with stated that the Collection
    Division spent about 410 full-time equivalents supporting Customer
    Service, collateral duties, walk-ins, automated data processing
    support, and other activities unrelated to collections during
    fiscal year 1998. Collection Division field office representatives
    stated that they believe implementation of certain provisions of
    the IRS Restructuring and Reform Act of 1998 could also affect the
    agency's enforcement and collection efforts.  The act was enacted
    in July 1998 to, among other things, change the agency culture
    from one which emphasizes maximizing collections to one which
    provides service and assistance to taxpayers to meet their tax
    obligations. The IRS has publicly noted that, in the long run, the
    act should go a long way in improving the agency's image with
    taxpayers and should actually result in improved taxpayer
    compliance.  Nonetheless, Collection 13In general, Chapter 11 is a
    reorganization proceeding of an individual, business, or other
    entity where creditors are paid under a plan. Page 30
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Division field
    office representatives stated that certain provisions in the act
    may impact IRS' efforts to collect unpaid taxes.  They said that
    certain provisions could lengthen the time it takes revenue
    officers to work cases and result in fewer cases being resolved.
    They also expressed uncertainty about how to operate under certain
    other provisions that, while intended to provide fairness to
    taxpayers, also contain penalties for not following the rules in
    these procedures. We did not assess or otherwise verify the issues
    the IRS field representatives raised with respect to the act.
    Additionally, as this report points out, significant financial
    management system deficiencies and internal control weaknesses
    have and continue to seriously impact IRS' ability to effectively
    manage unpaid tax assessments. Ability to Offset Federal
    As discussed previously, a significant number of businesses with
    unpaid Benefits and Other Federal  payroll taxes and individuals
    assessed TFRPs receive federal benefits and Payments Has Yet to Be
    other federal payments that amount to billions of dollars
    annually.  Federal Achieved                           law does not
    prevent businesses or individuals from receiving federal payments
    or loans when they are delinquent in paying payroll taxes.  While
    IRS can retain, or offset, refunds otherwise due businesses or
    individuals to recover some or all of the delinquent taxes owed,
    up to this point it has not been able to systemically pursue other
    federal payments made to these taxpayers to recover the delinquent
    taxes. The Debt Collection Improvement Act (DCIA) of 1996 called
    for the centralization and aggressive pursuit of delinquent
    federal receivables, including delinquent loans and other forms of
    payments owed the federal government.  The Department of the
    Treasury is developing a mechanism to pursue collection of
    outstanding federal receivables as mandated by DCIA.  This
    includes establishing various collection strategies and efforts
    and using offsetting tax refunds owed businesses and individuals
    to recover the delinquent receivables.  As part of this effort,
    the debtor offset program-which IRS had  administered to offset
    certain nontax receivables such as student loans and child support
    against tax refunds-was shifted to FMS in January 1999. DCIA
    specifically excluded federal taxes receivable and other unpaid
    tax assessments from its provisions.  However, Treasury intends to
    include the collection of such amounts as part of the mechanism it
    is developing. Treasury intends to use as its legal authority a
    subsequently passed provision in the Taxpayer Relief Act of 1997,
    which grants IRS the authority Page 31
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 to place a
    continuous levy on a delinquent taxpayer's federal benefits to
    assist in recovering overdue taxes.  This continuous levy has
    certain provisions to protect the taxpayer, such as limiting the
    levy to no more than 15 percent of each benefit payment.
    Treasury's plan has been revised on several occasions, as it and
    other affected agencies try to address complex implementation
    issues to avoid undue harm to individuals.  This will be of
    particular concern with respect to Treasury's plan to include
    unpaid tax assessments as part of its federal payment offset
    efforts.  There will be a critical need to address IRS'
    significant financial management systems deficiencies and internal
    control weaknesses to ensure that taxpayers are not unduly harmed
    through the levying of federal benefits and other payments to
    repay amounts that have already been collected. Agency Comments
    IRS stated that it concurred with the issues raised in this report
    and noted that it would use the report to assist in its efforts to
    correct system deficiencies affecting unpaid payroll taxes and
    associated trust fund recovery penalties.  IRS stated that to
    correct these system deficiencies, it would need to replace its
    computer systems and underlying databases.  In the shorter term,
    however, IRS stated that it is working to implement an automated
    process to reduce or eliminate delays in posting trust fund
    recovery penalty assessments and that these efforts will provide
    its service centers with the information needed to more promptly
    and accurately establish linkages to related accounts.  IRS also
    stated it was developing a new process to better assist taxpayers
    in meeting their tax obligations. We are sending copies of this
    report to Senator Ted Stevens, Senator Robert C. Byrd, Senator
    Orrin G. Hatch, Senator Max S. Baucus, Senator Fred Thompson,
    Senator Joseph I. Lieberman, Senator William V. Roth, Senator
    Daniel P. Moynihan, Representative Bill Archer, Representative
    Charles B. Rangle, Representative C.W. Bill Young, Representative
    David R. Obey, Representative Amo Houghton, Representative William
    J. Coyne, Representative Dan Burton, and Representative Henry A.
    Waxman, in their capacities as Chair or Ranking Minority Member of
    Senate and House Committees and Subcommittees.  We are also
    sending copies of this report to the Honorable Charles O.
    Rossotti, Commissioner of Internal Revenue; the Honorable Jacob J.
    Lew, Director, Office of Management and Budget; and the Honorable
    Lawrence Summers, Secretary of the Treasury. Copies will be made
    available to others upon request. Page 32
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes B-281574 Please contact
    us at (202) 512-3406 or (202) 512-9110, respectively, if you or
    your staffs have any questions concerning this report.  Other
    contacts and key contributors to this report are listed in
    appendix III. Gregory D. Kutz Associate Director Governmentwide
    Accounting and Financial Management Issues Accounting and
    Information Management Division James R. White Director Tax Policy
    and Administrative Issues General Government Division Page 33
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Contents Letter
    1 Appendix I
    36 Scope and Methodology Appendix II
    40 Comments From the Internal Revenue Service Appendix III
    42 GAO Contacts and Staff Acknowledgements Tables
    Table 1:  Businesses With Multiple Quarters of Unpaid Payroll
    Taxes        10 Table 2:  Delinquent Quarters of Unpaid Payroll
    Taxes and Their Outstanding Balances by Age
    11 Table 3:  Frequency of Payments Improperly Recorded to Related
    Taxpayer Accounts Identified in Fiscal Years 1997 and 1998
    17 Table 4:  Number of Individuals With Trust Fund Recovery
    Penalties for Two or More Businesses
    20 Table 5:   Delinquent Taxpayers Receiving Federal Benefits at
    September 30, 1998
    23 Table I.1:  FMS/SBA Record Matches by Benefits, Payment, and
    Loans  38 Table I.2:  SSA, Vendor, and SBA Sampled Matches,
    Payments, and Liabilities
    39 Figures               Figure 1:  Overview of the Process for
    Distribution of FICA and SECA Tax Revenue to Trust Funds
    6 Figure 2:  Percent of Delinquent Quarters of Unpaid Payroll
    Taxes by Age
    11 Figure 3:  Most Common Businesses/Industries With Unpaid
    Payroll Taxes From Cases Reviewed
    14 Page 34                              GAO/AIMD/GGD-99-211
    Unpaid Payroll Taxes Contents Abbreviations ARDI        accounts
    receivable dollar inventory ATFR        Automated Trust Fund
    Recovery BPD         Bureau of the Public Debt CID
    Criminal Investigation Division DCIA        Debt Collection
    Improvement Act EIN         Employer Identification Number FICA
    Federal Insurance Contribution Act FMS         Financial
    Management Service FTD         Federal Tax Deposit IRS
    Internal Revenue Service OTA         Office of Tax Analysis RRB
    Railroad Retirement Board SBA         Small Business
    Administration SECA        Self-Employment Contribution Act SSA
    Social Security Administration TIN         Taxpayer Identification
    Number TFRP        trust fund recovery penalty Page 35
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix I Scope and
    Methodology
    Appendix I To determine the extent to which payroll taxes are not
    remitted to the federal government, we analyzed data from IRS'
    business master file and accounts receivable dollar inventory
    (ARDI) system as of September 30, 1998, to identify (1) the total
    number of delinquent business tax periods involving unpaid payroll
    taxes, (2) the total number of unique businesses with unpaid
    payroll taxes, (3) the total dollar amount of unpaid payroll taxes
    (tax assessment, interest, and penalties), (4) the age of the
    unpaid payroll taxes in IRS' balance of unpaid tax assessments,
    (5) the types of businesses that comprise the balance of unpaid
    payroll taxes, and (6) the current status of these businesses.  We
    did not specifically audit the data in IRS' systems used in our
    various macro analyses.  We supplemented these analyses by
    developing a profile of the types of businesses with unpaid
    payroll taxes that were selected as part of a statistical sample
    of unpaid tax assessments in conjunction with our audit of IRS'
    fiscal year 1998 financial statements.  While the sample of unpaid
    tax assessments was a representative sample, the 191 unpaid
    payroll taxes and trust fund recovery penalties selected as part
    of this sample cannot be considered statistically representative
    of the entire population of such cases. They were selected from
    the total population of unpaid tax assessments and not from a
    separate population of unpaid payroll taxes and trust fund
    recovery penalties.  This approach was agreed to at the outset of
    the assignment with the requesters. To determine the magnitude of
    the trust fund recovery penalties assessed against individuals
    that withheld but did not forward payroll taxes to the government,
    we analyzed data from IRS' individual master file and ARDI as of
    September 30, 1998, to identify (1) the total number of
    outstanding TFRPs, (2) the total dollar amount of the outstanding
    TFRPs (penalty assessment and interest), (3) the total number of
    unique individuals with outstanding TFRPs, and (4) the current
    status of these individuals as reflected in IRS' systems.   Again,
    we did not audit the data used in our analyses. To determine the
    extent to which individuals are responsible for withholding but
    not paying payroll taxes at more than one business, we analyzed
    information from IRS' individual master file ARDI and UNLCER
    systems to determine the number of unique business identification
    numbers representing different businesses associated with each
    individual assessed a TFRP.  We did not audit the data used in our
    analyses. To determine the extent to which businesses with
    delinquent payroll taxes and individuals assessed TFRPs are
    receiving federal benefits, payments, Page 36
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix I Scope and
    Methodology or loans, we performed a match of data records from
    IRS' ARDI with data records from FMS and SBA.  The ARDI extract
    was as of September 30, 1998.  The FMS and SBA record extracts
    were as of May 1998 and September 1998, respectively. IRS' ARDI
    extract was selected from taxpayer accounts that met its criteria
    of delinquent payroll tax and trust fund recovery penalties in
    fiscal year 1998.  It consisted of over 1.8 million taxpayers
    (businesses) that owed payroll taxes.  The taxpayer records were
    extracted from IRS' business master file, with a total outstanding
    balance of about $49 billion.  The extract also contained about
    185,000 trust fund recovery penalty taxpayer records from IRS'
    individual master file with a total outstanding balance of about
    $15 billion. The FMS extract contains records from several federal
    agency sources including SSA, civilian retirement annuity, RRB,
    civilian salaries, and vendor payments.  FMS provided one month of
    records for SSA, federal retirement annuity, and RRB benefits.
    Civilian salary records and vendor payments contain 1 semi-weekly
    period and a 3-month period of data, respectively.  We excluded
    from the FMS match any SSA payments made to dependent children; a
    surviving spouse, age 60 and older; a surviving divorced spouse,
    age 60 and older; a disabled surviving spouse; and a survivor
    receiving lump-sum death benefits.  We completed the matching
    exercise using only the primary taxpayer identification number or
    employer identification number. The SBA records we received were
    from three loan programs--the 7(a) Business Loan program and both
    Home and Business Disaster Loan programs--and represented loans in
    SBA's inventory as of September 30, 1998.  SBA provided a total of
    about 457,000 records with a total disbursed loan value of about
    $48.2 billion.  For our analysis, we used only the 7(a) Business
    Loans, which consisted of about 182,000 records with a total
    disbursed loan value of $39.3 billion. Because the SSA, vendor
    payment, and SBA analyses were the results of samples, the
    estimates used in the report are subject to sampling errors.
    Sampling errors measure the extent to which estimates from samples
    of these sizes and structures can be expected to differ from the
    total population values.  From the sample estimates, together with
    estimates of their sampling errors, interval estimates can be
    constructed with prescribed confidence that they each include
    actual population values. Each of our estimates is surrounded by a
    95-percent confidence interval. Page 37
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix I Scope and
    Methodology To evaluate the accuracy of our matches, we validated
    the Social Security numbers and employer identification numbers in
    all data matches (IRS, FMS, and SBA records).  To check the
    accuracy of the civilian retirement, RRB, and civilian salary
    records, as well as the individual master file-matched SBA and
    vendor records, we performed a 100-percent verification of their
    entire universe. Table I.1 shows the results of the 100-percent
    verification test of the matched universe, the estimated
    payments/loan amounts, and the associated tax liability balances.
    Table I.1:  FMS/SBA Record Matches by Benefits, Payment, and Loans
    Dollars in millions Payments and          Taxpayers' tax Benefits,
    payments,              Record Taxpayer            loans paid to
    liabilities at and loan sources                   count matches
    taxpayers     September 30, 1998 Civilian Retirement
    2,324,200             271           $0.329
    $21.5 Civilian Salary               2,026,150             215
    $0.242                    $14.1 RRB
    745,546              81           $0.081                     $7.7
    Vendor (individual            2,543,732             176
    $0.441                    $18.7 master file) SBA (individual
    182,008             228          $16.500                    $96.4
    master file) Source:  Our analysis of FMS benefits and payments,
    SBA loan records, and IRS records for unpaid payroll taxes and
    trust fund recovery penalties. To validate the accuracy of the SSA
    records, as well as the business master file-matched SBA and
    vendor records, we calculated the 95-percent confidence level,
    using a representative sample of matched records from these
    universes.  The vendor records were not estimated annually because
    of the sporadic nature of these payments. Table I.2 shows the
    number of estimated taxpayer matches, the estimated payment/loan
    amounts, and the estimated outstanding tax liabilities associated
    with these matches. Page 38
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix I Scope and
    Methodology Table I.2:  SSA, Vendor, and SBA Sampled Matches,
    Payments, and Liabilities Dollars in millions Payments and
    Taxpayers' tax Record Taxpayer        loans paid to
    liabilities at Payment source                        count
    matchesa           taxpayers     September 30, 1998 SSA
    40,108,592      18,199b            $16.7e                  $1,902h
    Vendor (business                   2,543,732    16,533c
    $7,007f                       $488i master file) SBA (business
    182,008    12,463d          $3,355g                        $279j
    master file) Note: Upper and lower bounds for matched items as
    indicated in the footnotes are 95 percent confidence intervals.
    aEstimated matches by TIN and name. b17,941 to 18,456. c15,860 to
    17,207. d11,841 to 13,084. e16.6 million to $16.9 million. f6,901
    million to $7,113 million. g3,091 million to $3,620 million.
    h1,882 million to $1,922 million. i160 million to $734 million j
    $171 million to $386 million. Source:  GAO analysis of FMS
    benefits and payments, SBA loan records, and IRS records for
    unpaid payroll taxes and trust fund recovery penalties. To
    determine the factors affecting IRS' ability to enforce compliance
    or pursue collections of payroll taxes and TFRPs, we conducted
    structured interviews at all 33 IRS district office locations.
    These interviews were with revenue officers and group managers
    from IRS' Collection Division. We also interviewed IRS personnel
    at the National Office.  Additionally, we obtained and reviewed
    available IRS information on employment tax programs and
    initiatives.  We also reviewed IRS' statistical information from
    our prior reports on employment tax issues.  Finally, we reviewed
    IRS' collection procedures and policies and the laws that affect
    IRS' use of enforcement tools. Page 39
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix II Comments
    From the Internal Revenue ServiceAppendix II Page 40
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix II Comments
    From the Internal Revenue Service Page 41
    GAO/AIMD/GGD-99-211  Unpaid Payroll Taxes Appendix III GAO
    Contacts and Staff Acknowledgements Appendix III GAO Contacts
    Steven J. Sebastian, (202) 512-3406 Ralph Block, (415) 904-2150
    Acknowledgements          In addition to those named above, the
    following individuals made key contributions to this report: Paul
    Caban, West Coile, Marvin McGill, James Douglas, Patrick McCray,
    Arthur Davis, James Loschiavo, James J. Ungvarsky, Yong Meador,
    Darryl Meador, Julianne Hartman Cutts, Alvin Finegold, Pat Seaton,
    Catherine Arnold, Gloria Cano, Laurie King, Ellen Rominger, Rachel
    DeMarcus, Thomas Armstrong, Shirley Jones, and Andrea Levine.
    (901781)        Letter    Page 42
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