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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