Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes 
(29-JUL-08, GAO-08-1034T).					 
                                                                 
GAO previously reported that federal contractors abuse the tax	 
system with little consequence. While performing those audits,	 
GAO noted that much of the tax abuse involved contractors not	 
remitting to the government payroll taxes that were withheld from
salaries. As a result, GAO was asked to review the Internal	 
Revenue Service's (IRS) processes and procedures to prevent and  
collect unpaid payroll taxes and determine (1) the magnitude of  
unpaid federal payroll tax debt, (2) the factors affecting IRS's 
ability to enforce compliance or pursue collections, and (3)	 
whether some businesses with unpaid payroll taxes are engaged in 
abusive or potentially criminal activities with regard to the	 
federal tax system. To address these objectives, GAO analyzed	 
IRS's tax database, performed case study analyses of payroll tax 
offenders, and interviewed collection officials from IRS and	 
several states. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-1034T					        
    ACCNO:   A83124						        
  TITLE:     Tax Compliance: Businesses Owe Billions in Federal       
Payroll Taxes							 
     DATE:   07/29/2008 
  SUBJECT:   Collection procedures				 
	     Cost analysis					 
	     Criminal activities				 
	     Debt						 
	     Debt collection					 
	     Federal taxes					 
	     Financial management				 
	     Income taxes					 
	     Noncompliance					 
	     Payroll systems					 
	     Program abuses					 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax law						 
	     Tax nonpayment					 
	     Tax return audits					 
	     Tax returns					 
	     Tax violations					 
	     Taxes						 
	     Taxpayers						 
	     Voluntary compliance				 
	     Payroll taxes					 
	     GAO High Risk Series				 

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GAO-08-1034T

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Testimony: 

Before the Permanent Subcommittee on Investigations, Committee on 
Homeland Security and Government Affairs, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 9:00 a.m. EDT:
Tuesday, July 29, 2008: 

Tax Compliance: 

Businesses Owe Billions in Federal Payroll Taxes: 

Statement of Steven J. Sebastian, Director: 
Financial Management and Assurance: 

GAO-08-1034T: 

GAO Highlights: 

Highlights of GAO-08-1034T, a testimony before the Permanent 
Subcommittee on Investigations, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

GAO previously reported that federal contractors abuse the tax system 
with little consequence. While performing those audits, GAO noted that 
much of the tax abuse involved contractors not remitting to the 
government payroll taxes that were withheld from salaries. As a result, 
GAO was asked to review the Internal Revenue Service's (IRS) processes 
and procedures to prevent and collect unpaid payroll taxes and 
determine (1) the magnitude of unpaid federal payroll tax debt, (2) the 
factors affecting IRSï¿½s ability to enforce compliance or pursue 
collections, and (3) whether some businesses with unpaid payroll taxes 
are engaged in abusive or potentially criminal activities with regard 
to the federal tax system. To address these objectives, GAO analyzed 
IRS's tax database, performed case study analyses of payroll tax 
offenders, and interviewed collection officials from IRS and several 
states. 

What GAO Found: 

IRS records show that, as of September 30, 2007, over 1.6 million 
businesses owed over $58 billion in unpaid federal payroll taxes, 
including interest and penalties. Some of these businesses took 
advantage of the existing tax enforcement and administration system to 
avoid fulfilling or paying federal tax obligationsï¿½thus abusing the 
federal tax system. Over a quarter of payroll taxes are owed by 
businesses with more than 3 years (12 tax quarters) of unpaid payroll 
taxes. Some of these business owners repeatedly accumulated tax debt 
from multiple businesses. For example, IRS found over 1,500 individuals 
to be responsible for non-payment of payroll taxes at three or more 
businesses, and 18 were responsible for not remitting payroll taxes for 
a dozen different businesses. 

Although IRS has powerful tools at its disposal to prevent the further 
accumulation of unpaid payroll taxes and to collect the taxes that are 
owed, IRS's current approach does not provide for their full, effective 
use. IRS's overall approach to collection focuses primarily on gaining 
voluntary complianceï¿½even for egregious payroll tax offendersï¿½a 
practice that can result in minimal or no actual collections for these 
offenders. Additionally, IRS has not always promptly filed liens 
against businesses to protect the government's interests and has not 
always taken timely action to hold responsible parties personally 
liable for unpaid payroll taxes. 

GAO selected 50 businesses with payroll tax debt as case studies and 
found extensive evidence of abuse and potential criminal activity in 
relation to the federal tax system. The business owners or officers in 
our case studies diverted payroll tax funds for their own benefit or to 
help fund business operations. 

Examples of Tax-Related Abusive and Potentially Criminal Activity: 

Business: Construction; 
Unpaid payroll taxes: Almost $2.5 million over 12 years; 
Activity: Potential illegal check kiting and money laundering. 

Business: Health care; 
Unpaid payroll taxes: Almost $2.5 million over 7 years; 
Activity: Officers took large cash withdrawals prior to filing 
bankruptcy multiple times. 

Business: Dentist; 
Unpaid payroll taxes: Over $500,000 over 10 years; 
Activity: Owner owed over $500,000 in personal taxes, put property in 
spouse's name, and sold property to children for less than market 
value. 

Sources: GAO analysis of IRS, public, and other records. 

[End of table] 

What GAO Recommends: 

In our report (GAO-08-617) being released today, GAO makes six 
recommendations to IRS to address issues identified in this report, 
including development of (1) processes and performance measures to 
monitor collection actions against egregious payroll tax offenders and 
(2) procedures to timely file tax liens and assess penalties to hold 
responsible business owners and officers personally liable for not 
remitting withheld payroll taxes. IRS agreed to all six of our 
recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1034T]. For more 
information, contact Steven J. Sebastian at (202) 512-3406 or 
[email protected]. 

[End of section] 

Mr. Chairmen and Members of the Subcommittee: 

Thank you for the opportunity to discuss unpaid federal payroll taxes. 
Our related report, released today and developed at the request of this 
subcommittee and the Senate Committee on Finance, describes issues we 
identified in the collection and prevention of unpaid payroll taxes. It 
builds on a large body of work over the last several years that 
identified tens of thousands of federal contractors with unpaid taxes, 
most often unpaid payroll taxes, who abused the federal tax system. 
[Footnote 1] This testimony also builds on your concern regarding the 
almost $300 billion annual tax gap. 

One of the elements of this tax gap is unpaid payroll taxes. Payroll 
taxes are amounts employers withhold from employee's wages for federal 
income taxes, Social Security, and Medicare, as well as the employer's 
mandatory matching contributions for Social Security and Medicare 
taxes. When businesses do not remit payroll taxes, they are using 
employees' money to fund business operations or the personal lifestyle 
of the businesses' owners/officers, and causing shortfalls in funding 
for Social Security and Hospital Insurance. If left to accumulate 
unpaid payroll taxes, businesses can gain an unfair business advantage 
over their tax-paying competitors at the expense of the government. The 
Internal Revenue Service (IRS) acknowledges that unpaid payroll taxes 
are a major compliance problem. The willful failure to remit payroll 
taxes is a felony under federal law.[Footnote 2] 

Today's testimony focuses on (1) the magnitude and composition of 
unpaid payroll taxes, (2) factors affecting IRS's ability to enforce 
compliance or pursue collection of unpaid payroll taxes, and (3) 
businesses with unpaid payroll taxes that are engaged in abusive 
[Footnote 3] or potentially criminal activities with regard to the 
federal tax system. 

To determine the magnitude and composition of unpaid payroll taxes and 
to identify owners or officers who repeatedly abused the federal tax 
system by not remitting withheld payroll taxes, we analyzed IRS's 
database of unpaid taxes as of September 30, 2007. We also performed a 
macro-analysis of IRS's overall inventory of unpaid tax debts. To 
determine IRS's procedures to prevent the accumulation of unpaid 
payroll taxes and to collect such taxes, we reviewed IRS's policies as 
laid out in its Internal Revenue Manual and discussed those policies 
and procedures with cognizant IRS officials and revenue officers. We 
reviewed a sample of 76 businesses whose owners IRS found personally 
liable for the failure to remit payroll taxes withheld from employees' 
paychecks and whom IRS assessed a Trust Fund Recovery Penalty 
(TFRP)[Footnote 4] to identify the timeliness of IRS's collection 
actions.[Footnote 5] We also interviewed tax officials from several 
states concerning collection tools and techniques they used. Finally, 
to determine whether businesses with unpaid payroll taxes were engaged 
in abusive or potentially criminal activities involving the federal tax 
system, we reviewed documentation on IRS's collection actions and 
discussed the appropriateness of those actions or the absence of 
actions with IRS revenue officers for 50 businesses selected as case 
studies. We performed a more in-depth review of 12 of those cases and 
presented the results in table 3. 

The work supporting the report on which this testimony was based was 
performed from April 2007 through May 2008 in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Summary: 

Our analysis of IRS's records showed that, as of September 30, 2007, 
over 1.6 million businesses owed over $58 billion in unpaid payroll 
taxes, including interest and penalties. As such, payroll taxes 
comprise over 20 percent of IRS's $282 billion inventory of outstanding 
taxes, penalties, and interest owed by businesses and individuals at 
September 30, 2007, and over 50 percent of the total amount owed by 
businesses in IRS's inventory. Our analysis showed that 70 percent of 
all unpaid payroll taxes are owed by businesses with more than a year 
(4 tax quarters) of unpaid federal payroll taxes. In addition, over a 
quarter of payroll taxes are owed by businesses that have tax debt for 
more than 3 years (12 quarters). Because unpaid payroll taxes include 
amounts owed for Social Security and Hospital Insurance (Medicare Part 
A) taxes,[Footnote 6] the federal government may have to transfer 
higher amounts from the General Fund to the Social Security and 
Hospital Insurance trust funds to make up for the amounts businesses 
fail to remit. IRS estimated that for the tax debt it had in its 
inventory of unpaid assessments as of November 1, 2007, the General 
Fund had transferred $44 billion to the trust funds over what IRS 
collected because employers failing to remit withheld taxes on employee 
wages. 

IRS has a number of powerful tools at its disposal to prevent the 
accumulation of unpaid taxes and to collect the taxes that are owed. 
However, IRS acknowledges that its traditional collection methods do 
not always bring taxpayers into compliance and that there is a major 
compliance problem with the large number of businesses that repeatedly 
do not remit payroll taxes. In reviewing IRS's collection actions for 
these egregious payroll tax offenders, we identified several issues 
that limit the effectiveness of IRS's current approach, including: 

* IRS's overall approach to collection focuses primarily on gaining 
voluntary compliance, which can allow egregious payroll tax offenders 
to continue to accumulate payroll tax debt for years that may never be 
collected. 

* IRS is not timely filing tax liens against the property of payroll 
tax debtors to protect the government's interest. For over a third of 
all businesses with unpaid payroll taxes assigned to the field for 
collection efforts, IRS had not filed a lien and over 80 percent of 
payroll cases in the queue awaiting assignment to a revenue officer did 
not have a lien filed. 

* IRS is not timely assessing penalties to individuals responsible for 
not remitting business's payroll tax debts. In a sample of 76 TFRP 
assessments, it took IRS over 40 weeks on average to decide to pursue 
collection against responsible owners/officers and an additional 40 
weeks to assess the TFRP. Delays in assessing a TFRP can result in lost 
opportunities to collect unpaid payroll tax debts from the owners/ 
officers while allowing them to continue to use the business to fund a 
personal lifestyle through the non-remittance of payroll taxes. 

* IRS does not place as high a priority on collection efforts against 
the responsible owners/officers as it does the related business and 
treats the TFRP as a separate collection effort unrelated to the 
business. 

* IRS actions do not always prevent egregious payroll tax offenders 
from accumulating additional unpaid payroll tax debt. 

* IRS does not have performance measures to establish goals related to 
the collection and prevention of unpaid payroll taxes and to track its 
actual performance against these goals. 

Further, some states have additional tools that help prevent the 
further accumulation of unpaid payroll taxes. These include: 

* Publishing tax debtor names: An increasing number of states-- 
currently around 19 and the District of Columbia--now publish the names 
of tax debtors on Web sites as a means of both collecting unpaid taxes 
and stopping the further accumulation of these taxes. 

* Identifying levy sources: Several states have initiated legislation 
or entered into agreements with financial institutions to match account 
information against tax debts, allowing states to more easily identify 
levy sources to aid in the collection of unpaid taxes. 

Our analysis and data mining of IRS tax records indicated that some 
businesses were involved in abusive or potentially criminal activity 
related to the tax system. Some of these business owners repeatedly 
accumulated tax debt from multiple businesses. For example, IRS found 
over 1,500 individuals responsible for non-payment of payroll taxes at 
three or more businesses. Our analysis of 50 case study businesses 
showed some owners/officers abuse the tax system, willfully diverting 
amounts withheld from their employees' salaries to fund their business 
operations or their own personal lifestyle. For example, the owner of 
one of our case study businesses owed almost $2.5 million, was under 
reporting personal income, and was involved in possible check kiting 
and money laundering. Another had accumulated $2.5 million in unpaid 
payroll taxes and made large cash withdrawals prior to filing 
bankruptcy multiple times. A third had accumulated $500,000 in unpaid 
payroll taxes over a 10-year period as well as another $500,000 in 
personal taxes. The owner had put property in a spouse's name and sold 
property to children for less than market value to avoid IRS collection 
action. 

Our companion report, released today, contains six recommendations to 
IRS to address issues identified in the report, including (1) 
developing a process and performance measures to monitor collection 
actions taken by revenue officers against egregious payroll tax 
offenders and (2) developing procedures to more timely file liens 
against egregious businesses and assess penalties to hold responsible 
parties personally liable for not remitting withheld payroll taxes. In 
commenting on a draft of the report, IRS agreed to our recommendations. 

Magnitude and Composition of Unpaid Federal Payroll Taxes: 

While the majority of businesses pay the taxes withheld from employees' 
salaries as well as the employer's matching amounts, a significant 
number of businesses do not. Our review of IRS tax records showed that 
over 1.6 million businesses owed over $58 billion in unpaid payroll 
taxes to the federal government as of September 30, 2007, and over 
100,000 businesses currently owe for more than 2 years (8 quarters) of 
payroll taxes. This total includes amounts earned by employees that 
were withheld from their salaries to satisfy their tax obligations, as 
well as the employer's matching amounts, but which the business 
diverted for other purposes. Many of these businesses repeatedly failed 
to remit amounts withheld from employees' salaries. For example, 70 
percent of all unpaid payroll taxes are owed by businesses with more 
than a year (4 tax quarters) of unpaid payroll taxes, and over a 
quarter of unpaid payroll taxes are owed by businesses that have tax 
debt for more than 3 years (12 tax quarters). Figure 1 shows the total 
dollar amount of payroll tax debt summarized by the number of unpaid 
payroll tax quarters outstanding. 

Figure 1: Summary of Payroll Tax Debt Categorized by Number of Tax 
Quarters Outstanding: 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Tax Debt Categorized by Number of Tax Quarters 
Outstanding (dollars in billions): 
1-4 quarters: $18 billion (30%); 
5-8 quarters: $15 billion (25%); 
9-12 quarters: $10 billion (17%); 
13-20 quarters: $10 billion (18%); 
21-40 quarters: $5 billion (9%); 
More than 40 quarters: less than $1 billion (1%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Using IRS's database of unpaid taxes, we were able to identify many of 
the industry types associated with businesses owing payroll taxes. 
[Footnote 7] The top industries with unpaid payroll tax debt included 
construction ($8.6 billion), professional services ($4.4 billion), and 
healthcare ($4 billion). 

Unpaid Payroll Taxes Result in the General Fund Subsidizing Social 
Security and Hospital Insurance Trust Funds: 

When businesses fail to remit taxes withheld from employees' salaries, 
the payroll tax receipts are less than the payroll taxes due, and the 
Social Security and Hospital Insurance Trust Funds have fewer financial 
resources available to cover current and future benefit payments. 
However, the trust funds are funded based on wage estimates and not 
actual payroll tax collections. Therefore, the General Fund transfers 
to the trust funds amounts that should be collected but are not 
necessarily collected, resulting in the General Fund subsidizing the 
trust funds for amounts IRS is unable to collect in payroll taxes from 
employers. As of November 1, 2007, IRS estimated that the amount of 
unpaid taxes and interest attributable to Social Security and Hospital 
Insurance taxes in IRS's $282 billion unpaid assessments balance was 
approximately $44 billion. This estimate represents a snapshot of the 
amount that needed to be provided to the Social Security and Hospital 
Insurance Trust Funds based on the outstanding payroll tax debt on 
IRS's books at the time. It does not include an estimate for tax debts 
that have been written off of IRS's tax records in previous years 
because of the expiration of the statutory collection period.[Footnote 
8] Recent IRS data indicate that the cumulative shortfall increases by 
an additional $2 billion to $4 billion annually because of uncollected 
payroll taxes.[Footnote 9] 

Collection Status of Payroll Tax Debt: 

Although IRS has taken a number of steps to improve collections by 
prioritizing cases with better potential for collectibility, the 
collection of payroll taxes remains a significant problem for IRS. From 
1998, when we performed our last in-depth review of payroll 
taxes,[Footnote 10] to September 2007, we found that while the number 
of businesses with payroll tax debt decreased from 1.8 million to 1.6 
million, the balance of outstanding payroll taxes in IRS's inventory of 
tax debt increased from about $49 billion to $58 billion. Our analysis 
of the unpaid payroll tax inventory shows that the number of businesses 
with more than 20 quarters of tax debt (5 years of unpaid payroll tax 
debt) more than doubled between 1998 and 2007. The number of businesses 
that had not paid payroll taxes for over 40 quarters (10 years or more) 
increased almost 500 percent, from 86 businesses to 490 businesses. 
These figures are shown in table 1. 

Table 1: Changes in Payroll Tax Debt, 1998 to 2007: 

Businesses with over 20 quarters of payroll tax debt; 
As of September 30, 1998: 5,367; 
As of September 30, 2007: 14,681; 
Percentage: increase: 174. 

Businesses with over 40 quarters of payroll tax debt; 
As of September 30, 1998: 86; 
As of September 30, 2007: 490; 
Percentage: increase: 470. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of table] 

Of the $58 billion in unpaid payroll taxes as of September 30, 2007, 
IRS categorized about $4 billion (7 percent) as going through IRS's 
initial notification process. Because IRS has made the collection of 
payroll taxes one of its highest priorities, once a case completes the 
notification process, it is generally sent to IRS's field collections 
staff for face-to-face collection action. However, IRS does not have 
sufficient resources to immediately begin collection actions against 
all of its high-priority cases. As a result, IRS holds a large number 
of cases in a queue awaiting assignment to a revenue officer in the 
field. About $7 billion (12 percent) of the unpaid payroll tax amount 
was being worked on by IRS revenue officers for collection, and about 
$9 billion (16 percent) was in a queue awaiting assignment for 
collection action. Most of the unpaid payroll tax inventory--$30 
billion (52 percent)--was classified as currently uncollectible by IRS. 
IRS classifies tax debt cases as currently not collectible for several 
reasons, including (1) the business owing the taxes is defunct, 
[Footnote 11] (2) the business is insolvent after bankruptcy, or (3) 
the business is experiencing financial hardship. Of those unpaid 
payroll tax cases IRS has classified as currently not collectible, 
almost 70 percent were as a result of a business being defunct. 

Much of the unpaid payroll tax debt has been outstanding for several 
years. As reflected in figure 2, our analysis of IRS records shows that 
over 60 percent of the unpaid payroll taxes was owed for tax periods 
from 2002 and prior years.[Footnote 12] 

Figure 2: Summary of Payroll Tax Debt by Tax Year (dollars in 
billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Tax Debt by Tax Year: 
Prior to 1997: $6 billion (10%); 
1997-2002: $29 billion (51%); 
2003-2006: $21 billion (35%); 
Tax year 2007: $2 billion (4%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Prompt collection action is vital because, as our previous work has 
shown, as unpaid taxes age, the likelihood of collecting all or a 
portion of the amount owed decreases.[Footnote 13] Further, the 
continued accrual of interest and penalties on the outstanding federal 
taxes can, over time, eclipse the original tax obligation. 
Additionally, as discussed previously, IRS is statutorily limited in 
the length of time it has to collect unpaid taxes--generally 10 years 
from the date the tax debt is assessed.[Footnote 14] Once that 
statutory period expires, IRS can no longer attempt to collect the tax. 
IRS records indicate that over $4 billion of unpaid payroll taxes will 
expire in each of the next several years because of the expiration of 
their statutory collection period.[Footnote 15] 

IRS's Collection Approach Does Not Always Prevent the Accumulation of 
Unpaid Payroll Taxes: 

Our audit of payroll tax cases identified several issues that adversely 
affect IRS's ability to prevent the accumulation of unpaid payroll 
taxes and to collect these taxes. Foremost is that IRS's approach 
focuses on getting businesses--even those with dozens of quarters of 
payroll tax debt--to voluntarily comply. We found that IRS often either 
did not use certain collection tools, such as liens or TFRPs, or did 
not use them timely, and that IRS's approach does not treat the 
business's unpaid payroll taxes and responsible party's penalty 
assessments as a single collection effort. Additionally, although 
unpaid payroll taxes is one of its top collection priorities, IRS did 
not have performance measures to evaluate the collection of unpaid 
payroll taxes or the related TFRP assessments. Finally, we found some 
state revenue agencies are using tools to collect or prevent the 
further accumulation of unpaid taxes that IRS is either legally 
precluded from using or that it has not yet developed. 

IRS's Approach Focuses on Voluntary Compliance, Even for Egregious 
Payroll Tax Offenders: 

We have previously reported that IRS subordinates the use of some of 
its collection tools in order to seek voluntary compliance and that 
IRS's repeated attempts to gain voluntary compliance often results in 
minimal or no actual collections.[Footnote 16] Our audit of businesses 
with payroll tax debt and our analysis of businesses with multiple 
quarters of unpaid payroll taxes again found revenue officers 
continuing to work with a business to gain voluntary compliance while 
the business continued to accumulate unpaid payroll taxes. For example, 
our analysis of IRS's inventory of unpaid payroll taxes found that over 
14,000 businesses owed payroll taxes for 20 or more quarters--5 years 
or more. 

Failing to take more aggressive collection actions against businesses 
that repeatedly fail to remit payroll taxes has a broader impact than 
on just a single business. If left to accumulate unpaid payroll taxes, 
businesses can gain an unfair business advantage over their competitors 
at the expense of the government. As we have found previously,[Footnote 
17] in at least one of our case study businesses, IRS determined that 
the non-compliant business obtained contracts through its ability to 
undercut competitors in part because the business's reduced costs 
associated with its non-payment of payroll taxes. Similarly, in another 
case the revenue officer noted that the business was underbidding on 
contracts and was using unpaid payroll taxes to offset the business's 
losses. 

Failure to take prompt actions to prevent the further accumulation of 
unpaid payroll taxes can also have a detrimental impact on the business 
and the associated owners/officers. As we have reported in the past, 
non-compliant businesses can accumulate substantial unpaid taxes as 
well as associated interest and penalties.[Footnote 18] Over time, 
these unpaid balances may compound beyond the business's ability to 
pay--ultimately placing the business and responsible officers in 
greater financial jeopardy. 

IRS is legally precluded from taking collection actions during certain 
periods, such as when a tax debtor is involved in bankruptcy 
proceedings. During those periods, even though IRS may not be able to 
take collection actions, tax debtors may continue to accumulate 
additional tax debt. However, IRS's focus on voluntary compliance has 
negatively affected IRS's collection efforts for years. Our current 
findings on IRS's focus on voluntary compliance are similar to those of 
a study performed by the Treasury Inspector General for Tax 
Administration (TIGTA) 8 years ago. In that study, TIGTA found that 
revenue officers were focused on IRS's customer service goals and 
therefore were reluctant to take enforcement actions.[Footnote 19] In 
another study performed 3 years ago, TIGTA reported that IRS allowed 
tax debtors to continue to delay taking action on their tax debt by 
failing to take aggressive collection actions.[Footnote 20] TIGTA found 
that IRS did not take timely follow-up action in half of the cases for 
which tax debtors missed specific deadlines. 

One official from a state taxing authority told us that the state 
benefited from IRS's approach because it allowed the state to collect 
its unpaid taxes from business tax debtors before IRS. In one of our 
case study businesses, although IRS successfully levied some financial 
assets, a mortgage holder and state and local officials seized the 
business's assets to satisfy the business's debts. IRS has recently 
strengthened its procedures to include some specific steps for dealing 
with businesses that repeatedly fail to remit payroll taxes and to 
stress the importance of preventing the further accumulation of such 
payroll taxes. 

IRS Does Not Always File Tax Liens Timely: 

We found that for payroll tax debt, one of IRS's highest collection 
priorities, IRS does not always file tax liens to protect the 
government's interest in property, and when IRS does so, it does not 
always do so timely. Our analysis of IRS's inventory of unpaid payroll 
taxes as of September 30, 2007, found that IRS had not filed liens on 
over one-third of all businesses with payroll tax debt cases assigned 
to the field for collection efforts--over 140,000 businesses. IRS 
guidance states that filing a lien is extremely important to protect 
the interests of the federal government, creditors, and taxpayers in 
general, and that the failure to file and properly record a federal tax 
lien may jeopardize the federal government's priority right against 
other creditors.[Footnote 21] A 2005 IRS study of TFRP cases found that 
cases where a lien had been filed had more average payments--about a 
third more--than where a lien had not been filed.[Footnote 22] Failure 
to file a lien can have a negative impact on tax collections. For 
example, IRS assessed the business owner in one of our case studies a 
TFRP to hold the owner personally liable for the withheld payroll taxes 
owed by the business. However, IRS did not assign the assessment to a 
revenue officer for collection and thus did not file a lien on the 
owner's property. Because there was no lien filed, the owner was able 
to sell a vacation home in Florida, and IRS did not collect any of the 
unpaid taxes from the proceeds of the sale. 

As in the case above, IRS's case assignment policy can delay the filing 
of liens for payroll tax cases. Because payroll tax cases are one of 
IRS's top collection priorities, once the notification process is 
complete, IRS routes these cases to revenue officers for face-to-face 
collection action instead of being routed to the Automated Collection 
System (ACS)[Footnote 23] for telephone contact. However, IRS generally 
places cases in a queue of cases awaiting assignment until a revenue 
officer is available to work the cases. Cases can be in the queue for 
extended periods of time awaiting assignment to a revenue officer. For 
the period that a case is in the queue, revenue officers are not 
assigned to file liens and take other collection actions.[Footnote 24] 
Our analysis found that for all payroll tax cases in the queue awaiting 
assignment as of September 30, 2007, over 80 percent did not have a 
lien filed. As a result, lower priority tax cases that go through the 
ACS process may have liens filed faster than the higher priority 
payroll tax cases. 

IRS Does Not Always Assess Trust Fund Recovery Penalties Timely: 

IRS has a powerful tool to hold responsible owners and officers 
personally liable for unpaid payroll taxes through assessing a TFRP. 
However, we found that IRS often takes a long time to determine whether 
to hold the owners/officers of businesses personally liable and, once 
the decision is made, to actually assess penalties against them for the 
taxes. In reviewing a sample of TFRP assessments selected as part of 
our audit of IRS's fiscal year 2007 financial statements, we found that 
from the time the tax debt was assessed against the business, IRS took 
over 2 years, on average, to assess a TFRP against the business owners/ 
officers.[Footnote 25] We found that revenue officers, once assigned to 
a payroll tax case, took an average of over 40 weeks to decide whether 
to pursue a TFRP against business owners/officers and an additional 40 
weeks on average to formally assess the TFRP.[Footnote 26] For 5 of the 
76 sampled cases, we found that IRS took over 4 years to assess the 
TFRP. We did not attempt to identify how frequently IRS assesses a TFRP 
against responsible owners/officers. However, in TIGTA's 2005 report on 
its review of IRS's collection field function, it noted that revenue 
officers did not begin the TFRP process in over a quarter of the cases 
it reviewed.[Footnote 27] 

The timely assessment of TFRPs is an important tool in IRS's ability to 
prevent the continued accumulation of unpaid payroll taxes and to 
collect these taxes. Once a TFRP is assessed, IRS can take action 
against both the owners/officers and the business to collect the 
withheld taxes. For egregious cases, such as some of those in our case 
studies, taking strong collection actions against the owners' personal 
assets may be the best way to either get the business to become tax 
compliant or to convince the owners to close the non-compliant 
business, thus preventing the further accumulation of unpaid taxes. 
Failure to timely assess a TFRP can result in businesses continuing to 
accumulate unpaid payroll taxes and lost opportunities to collect these 
taxes from the owners/officers of the businesses. For example, one 
business we reviewed had tax debt from 2000, but IRS did not assess a 
TFRP against the business's owner until the end of 2004. In the 
meantime, the owner was drawing an annual salary of about $300,000 and 
had sold property valued at over $800,000. Within 1 month of IRS's 
assessing the TFRP, the owner closed the business, which by then had 
accumulated about $3 million in unpaid taxes.[Footnote 28] 

In September 2007, IRS implemented new requirements to address the 
timeliness of TFRP assessments. Under the new policy, IRS is now 
requiring revenue officers to make the determination on whether to 
pursue a TFRP within 120 days of the case's being assigned and to 
complete the assessment within 120 days of the determination. However, 
the revised policy maintains a provision that allows the revenue 
officer to delay the TFRP determination. Additionally, the policy does 
not include a requirement for IRS to monitor the new standards for 
assessing TFRPs. 

IRS's Approach for Businesses and Responsible Parties Is Inconsistent: 

IRS assigns a higher priority to collection efforts against the 
business with unpaid payroll taxes than against the business's 
responsible owners/officers. Further, it treats the TFRP assessments as 
a separate collection effort unrelated to the business tax debt, even 
though the business payroll tax liabilities and the TFRP assessments 
are essentially the same tax debt. As a result, once the revenue 
officer assigned to the business payroll tax case decides to pursue a 
TFRP against the responsible owners/officers, the TFRP case does not 
automatically remain with this revenue officer. Accordingly, IRS often 
does not assign the TFRP assessment to a revenue officer for 
collection, and when it does, it may not assign it to the same revenue 
officer who is responsible for collecting unpaid taxes from the 
business. In reviewing the sample of TFRP assessments selected as part 
of our audit of IRS's fiscal year 2007 financial statements, we found 
that half of the TFRP assessments had not been assigned to a revenue 
officer by the time of our audit.[Footnote 29] Of those that had been 
assigned, over half of the TFRP assessments had not been assigned to 
the same revenue officer who was working the related business case. 

Assigning the collection efforts against the business and the TFRP 
assessments to different revenue officers can result in the responsible 
owners/officers being able to continue to use the business to fund a 
personal lifestyle while not remitting payroll taxes. For example, in 
one of our case studies the owner was assessed a TFRP, but continued to 
draw a six-figure income while not remitting amounts withheld from the 
salaries of the business's employees. For egregious cases, taking 
strong collection actions against the owner's personal assets may be a 
more effective means of either getting the business to be compliant or 
convincing the owner to close the non-compliant business to prevent the 
further accumulation of unpaid payroll taxes. 

IRS collection officials stated that attempting to assign the same 
revenue officer both the TFRP assessments and the business payroll tax 
case for collection would overload the revenue officers with work and 
result in fewer high-priority payroll tax cases being worked. This 
view, however, stems from separating the collection efforts of the 
business and the individual and not considering the business's unpaid 
payroll taxes and the TFRP assessment as a single case. In essence, the 
TFRP assessment is the same tax debt as the business's payroll tax 
debt; the assessment is merely another means through which IRS can 
attempt to collect the monies withheld from a business's employees for 
income, Social Security, and Hospital Insurance taxes that were not 
remitted to the government.[Footnote 30] This view that the payroll tax 
debt and the TFRP assessment are essentially the same tax debt is 
reinforced by IRS's practice of crediting all related parties' accounts 
whenever a collection is made against either assessment. 

Prior studies have found that IRS's practice of assigning TFRP 
assessments a lower priority than business cases has not been very 
successful for collecting the unpaid taxes. In its own 2005 study of 
TFRP cases, IRS reported that it had assessed over $11.9 billion in 
TFRP assessments (including interest) between 1996 and 2004, yet had 
collected only 8 percent of those assessments. 

IRS's Approach Does Not Prevent Egregious Accumulation of Unpaid 
Payroll Taxes: 

IRS policies have not resulted in effective steps being taken against 
egregious businesses to prevent the further accumulation of unpaid 
payroll taxes. Our audit found thousands of businesses that had 
accumulated more than a dozen tax quarters of unpaid payroll tax debt. 
IRS policies state that revenue officers must stop businesses from 
accumulating payroll tax debt and instructs revenue officers to use all 
appropriate remedies to bring the tax debtor into compliance and to 
immediately stop any further accumulation of unpaid taxes. IRS policies 
further state that if routine case actions have not stopped the 
continued accumulation of unpaid payroll taxes, revenue officers should 
consider seizing the business's assets or pursuing a TFRP against the 
responsible parties. However, IRS successfully pursued fewer than 700 
seizure actions in fiscal year 2007. We were unable to determine how 
many of those seizure actions were taken against payroll tax debtors. 
Regarding TFRPs, as discussed previously, IRS does not always assess 
the TFRPs timely, and IRS does not prioritize the TFRP assessment 
against the owner as highly as it does the unpaid payroll taxes of the 
business. This can result in little collection action being taken 
against the parties responsible for the failure to remit the withheld 
payroll taxes. 

When a business repeatedly fails to comply after attempts to collect, 
IRS policies state that the business should be considered an egregious 
offender and IRS should take aggressive collection actions, including 
threats of legal action that can culminate in court-ordered injunctions 
for the business to stop accumulating unpaid payroll taxes or face 
closure. However, IRS obtained less than 10 injunctions in fiscal year 
2007 to stop businesses from accumulating additional payroll taxes. 
Revenue officers we spoke to believe the injunctive relief process to 
be too cumbersome to use effectively in its present form.[Footnote 31] 
One revenue officer stated that because of the difficulty in carrying 
out the administrative and judicial process to close a business through 
injunctive relief, he had not attempted to take such action in over a 
decade. IRS is taking some action to attempt to address this issue by 
piloting a Streamline Injunctive Relief Team to identify cases and 
develop procedures to quickly move a case from administrative 
procedures to judicial actions. These procedures will be used for the 
most egregious taxpayers when the revenue officer can establish that 
additional administrative procedures would be futile. 

Similar to IRS, all of the state tax collection officials we contacted 
told us that their revenue department's primary goal was to prevent 
businesses from continuing to flaunt tax laws and to stop them from 
accumulating additional tax debt. These officials said that after a 
business had been given a period of time to comply with its current tax 
obligations and begin paying past taxes, state tax collection officials 
changed their focus to one of "stopping the bleeding." As such, some 
have made the policy decision to seek to close non-compliant 
businesses. To the extent IRS is not taking effective steps to deal 
with egregious payroll tax offenders that repeatedly fail to comply 
with the tax laws, businesses may continue to withhold taxes from 
employees' salaries but divert the funds for other purposes. 

IRS's Approach Does Not Measure Effectiveness: 

Although IRS has made the collection of unpaid payroll taxes one of its 
top priorities, IRS has not established goals or measures to assess its 
progress in collecting or preventing the accumulation of payroll tax 
debt. Performance measurement and monitoring, however, support resource 
allocation and other policy decisions to improve an agency's operations 
and the effectiveness of its approach. Performance monitoring can also 
help an agency by measuring the level of activity (process), the number 
of actions taken (outputs), or the results of the actions taken 
(outcomes). 

Although IRS does have a broad array of operational management 
information available to it, we did not identify any specific 
performance measures associated with payroll taxes or TFRP assessments. 
While IRS has caseload and other workload reports for local managers 
(to measure process and outputs), these localized reports are not 
rolled up to a national level to allow IRS managers to monitor the 
effectiveness or efficiency of its collection and enforcement efforts. 
These operational reports do contain information about unpaid payroll 
and TFRP case assignments, but they are used primarily to monitor 
workload issues, not program effectiveness. For example, IRS has 
developed some reports that identify "over-aged" cases (those that have 
not been resolved within a certain length of time) and that identify 
businesses that continue to accrue additional payroll tax debt, but 
these reports are designed for workload management. 

To report on its outcomes or the effectiveness of its operations, IRS 
reports on overall collection statistics and presents that information 
in the Management Discussion and Analysis section of its annual 
financial statement and in its IRS Data Book.[Footnote 32] However, IRS 
does not specifically address unpaid payroll taxes as a part of this 
reporting. IRS officials stated that they do not have specific lower- 
level performance measures that target collection actions or collection 
results for unpaid payroll taxes or TFRP assessments. Such performance 
measures could be useful to serve as an early warning system to 
management or as a vehicle for improving IRS's approach or actions. 

IRS's Approach Could Benefit from Additional Tools: 

In our discussions with IRS revenue officers concerning some of the 
egregious payroll tax offenders included in our case studies, the 
officers noted that having certain additional tools available to them 
could allow them to more effectively deal with recalcitrant businesses. 
In discussions with a number of state tax collection officials, we 
found that several states had already developed and were effectively 
using the types of tools IRS revenue officers said would be beneficial 
to them. 

For example, while the Internal Revenue Code prohibits IRS from 
publicly disclosing federal tax information without taxpayer consent, 
[Footnote 33]an increasing number of states--at least 19, including New 
Jersey, Connecticut, Indiana, Louisiana, and California--are seeking to 
increase tax collections by publicizing the names of those with 
delinquent tax bills. In California, a recent law mandates the state to 
annually publish the names of the top 250 personal and corporate state 
tax debtors with at least $100,000 in state tax debt.[Footnote 34] 
Public disclosure of tax debtors can be very effective. Just 
threatening to publish the names of tax offenders can bring some into 
compliance, while actually appearing on a tax offender list can bring 
about societal pressure to comply. In California, 26 tax debtors 
threatened with public disclosure stepped forward to settle their tax 
debts and thus avoided appearing on the list; in Connecticut, the state 
claims the public disclosure of tax debtors has resulted in over $100 
million in collections from the first 4 years of the program. The 
potential public disclosure of tax debtors may also encourage greater 
tax compliance among the general population of taxpayers to avoid 
potentially being on the list. 

As another example, while IRS has the authority to levy a tax debtor's 
income and assets when there is a demand for payment and there has been 
a refusal or an inability to pay by the taxpayer subject to the levy, 
[Footnote 35] IRS officials stated that they often have difficulty 
using levies to collect unpaid payroll taxes. They noted that the levy 
may be made against funds in a bank account at a certain point in time 
when little or no funds are available. They also noted, and in our case 
studies we found, that IRS sometimes has difficulty identifying which 
banks or financial institutions a tax debtor is using. This is the case 
because tax debtors will often change financial institutions to avoid 
IRS levies. However, several states use legal authorities to assist in 
identifying levy sources. States such as Kentucky, Maryland, 
Massachusetts, Indiana, and New Jersey have enacted legislation for 
matching programs or entered into agreements with financial 
institutions to participate in matching bank account information 
against state tax debts. This matching allows states to more easily 
identify potential levy sources and simplifies the financial 
institution's obligations to respond to multiple levies. IRS is working 
with at least one state to investigate the potential for this matching, 
but in our discussions with IRS collection officials they stated that 
IRS has not sought legislation or agreements with financial 
institutions. 

Businesses Engaged in Abusive and Potentially Criminal Activity Related 
to the Federal Tax System: 

Our analysis of unpaid payroll tax debt found substantial evidence of 
abusive and potentially criminal activity related to the federal tax 
system by businesses and their owners or officers. We identified tens 
of thousands of businesses that filed 10 or more tax returns 
acknowledging that the business owed payroll taxes, yet failed to remit 
those taxes to the government. While much of the tax debt may be owed 
by those with little ability to pay, some abuse the tax system, 
willfully diverting amounts withheld from their employees' salaries to 
fund their business operations or their own personal lifestyle. 

In addition to owing payroll taxes for multiple tax periods and 
accumulating tax debt for years, many of the owners and officers of 
these businesses are repeat offenders. We identified owners who were 
involved in multiple businesses, all of which failed to remit payroll 
taxes as required. In total, IRS records indicate that over 1,500 
owners/officers had been found by IRS to be responsible for non-payment 
of payroll taxes at 3 or more businesses and that 18 business owners/ 
officers were found by IRS to be responsible for not paying the payroll 
taxes for over 12 separate businesses. It should be noted that these 
numbers represent only those responsible individuals who IRS found 
acted willfully in the non-payment of the businesses' payroll taxes and 
who were assessed TFRPs--these figures do not represent the total 
number of repeat offenders with respect to non-payment of payroll 
taxes. Table 2 shows the number of individuals with TFRPs for two or 
more businesses. 

Table 2: Number of Individuals with Trust Fund Recovery Penalties for 
Two or More Businesses: 

Number of businesses associated with owner/officer: 2; 
Number of individuals: 7,716. 

Number of businesses associated with owner/officer: 3; 
Number of individuals: 1,011. 

Number of businesses associated with owner/officer: 4; 
Number of individuals: 290. 

Number of businesses associated with owner/officer: 5; 
Number of individuals: 101. 

Number of businesses associated with owner/officer: 6; 
Number of individuals: 60. 

Number of businesses associated with owner/officer: 7-12; 
Number of individuals: 72. 

Number of businesses associated with owner/officer: Over 12; 
Number of individuals: 18. 

Number of businesses associated with owner/officer: Total; 
Number of individuals: 9,268. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of table] 

Our audits and investigations of 50 case study businesses with tax debt 
found substantial evidence of abuse and potential criminal activity 
related to the tax system. All of the case studies involved businesses 
that had withheld taxes from their employees' paychecks and diverted 
the money to fund business operations or for personal gain. Table 3 
shows the results of 12 of the case studies we performed.[Footnote 36] 

Table 3: Businesses That Fail To Remit Payroll Taxes: 

Case study: 1; 
Nature of business: Automotive; 
Unpaid payroll tax: Over $3.5 million for almost 40 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* Widely advertised business with dozens of employees; 
* For last decade the business has not remitted the payroll taxes 
withheld from its employees, paying less than a quarter of the payroll 
taxes owed; 
* For the last 2 years the owner reported making about $100,000 in 
salary; 
* Owner transferred $1.5 million in property after being assessed a 
trust fund recovery penalty; 
* Recently the owner's personal residence sold for over $600,000; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 2; 
Nature of business: Health care; 
Unpaid payroll tax: Almost $2.5 million for over 30 quarters; 
Comments: 
* Business also owes almost $500,000 in non-payroll tax debt; 
* Currently in business with over 100 employees; 
* IRS stated that the officers consistently avoided IRS action by 
filing bankruptcy. Business filed for bankruptcy three times, two of 
which were dismissed; 
* Around the time of bankruptcy filings, officers made large cash 
withdraws from the business of about $700,000; 
* IRS found two officers of business were paying personal expenses 
through the business; 
* One officer purchased luxury vehicles and personal property while 
business was not remitting payroll taxes; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three officers willful and responsible for not remitting 
taxes withheld from employees and assessed them a TFRP. 

Case study: 3; 
Nature of business: Janitorial; 
Unpaid payroll tax: Almost $500,000 for almost 30 quarters; 
Comments: 
* Business also owes over $10,000 in non-payroll tax debt; 
* Business is currently in business; 
* Owner has an extensive criminal history; 
* IRS agreed to allow business to pay via an installment agreement, but 
the payments will cover only a small percentage of the payroll tax debt 
owed; 
* Owner owns multiple rental properties and a $500,000 personal 
residence; 
* IRS noted that owner had the ability to pay the tax liability; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 4; 
Nature of business: 
Legal services; Unpaid payroll tax: Over $500,000 for over 50 quarters; 
Comments: 
* Business also owes almost $10,000 in non-payroll tax debt; 
* Owner is currently in business as a lawyer, but continues to 
accumulate unpaid payroll taxes; 
* Owner owes more than $600,000 on over 10 years of personal taxes, and 
did not file most recent years' personal tax returns; 
* Owner has multiple real estate properties, including property on a 
tropical island; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS notes that owner has the ability to pay, but refuses. 

Case study: 5; 
Nature of business: Dentist; 
Unpaid payroll tax: Over $500,000 for over 40 quarters; 
Comments: 
* Business also owes over $7,000 in non payroll tax debt; 
* Business is still operating with employees, but for over 15 years it 
has not remitted all required payroll taxes to IRS; 
* Owner lives in a large home with acreage valued at over $700,000. The 
house is deeded under spouse's name, but spouse's income is 
insufficient to pay the interest on the mortgage. Owner admits to 
paying the mortgage; 
* Owner sold real estate to children for less than market value; 
* Owner drives a later model luxury vehicle registered under wife's 
name; 
* Owner stated he would pay all the business's expenses before paying 
taxes; 
* Owner is not compliant with personal taxes, owing over $500,000; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 6; 
Nature of business: Consulting; 
Unpaid payroll tax: Almost $1.5 million for over 30 quarters; 
Comments: 
* Business also owes over $500,000 in non-payroll tax debt; 
* Business gave owner cash loans; 
* IRS found that business monies flowed into owner's personal accounts; 
* Owner has not filed personal tax returns since early 1990s and owes 
$400,000 in personal taxes; 
* Owner has multiple businesses that have not filed returns since 1994; 
* According to IRS, owner kept changing legal representatives to stall 
collection efforts with repeated requests for the same information; 
* Owner sold assets to relative after receiving notice of potential 
TFRP issued by IRS; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees for this and another business and assessed a 
TFRP for this and another business. 

Case study: 7;
Nature of business: Manufacturing; 
Unpaid payroll tax: Almost $1.5 million for over 40 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* IRS revenue officer notes indicate business monies may have been 
flowing into owner's personal accounts while withheld payroll taxes 
were not being remitted; 
* IRS found owner hid business assets in personal name, keeping IRS 
from seizing them; 
* Owner is also delinquent on personal taxes; 
* IRS officials stated that owner used appeals and offers in compromise 
(OIC) to delay IRS collection efforts; 
* Owner defaulted on OIC for TFRPs; 
* IRS found owner had underreported tax liabilities for at least one 
tax quarter; 
* Business assets given to relative, who used them to start a new 
business; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees for both this business and assessed a TFRP for 
both this business and at least two previous businesses. 

Case study: 8; 
Nature of business: Construction; 
Unpaid payroll tax: Almost $2.5 million for over 20 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $10,000; 
* IRS found business was underbidding contracts while using unpaid 
payroll taxes to subsidize its losses; 
* Business claimed that if it paid payroll taxes, it would be unable to 
pay employees or other business expenses and would have to close; 
* Business has not filed taxes for all tax quarters; 
* IRS considered, but did not pursue, business for fraud charges; 
* Business/owners have received four civil judgments against it/them 
and almost 20 liens; 
* Revenue officer notes state that the owners have repeatedly taken 
steps to avoid IRS collection action including the following: filed 
bankruptcy (which was dismissed), filed appeals against liens, 
requested abatements of penalties (which were denied), appealed the 
denial (which was sustained by Appeals), submitted a request for 
installment agreement (which was denied as being insufficient), then 
appealed the denial of the installment agreement (which was upheld by 
Appeals), "and every other conceivable action to delay or hinder IRS's 
collection efforts"; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three owners willful and responsible for not remitting 
taxes withheld from employees and assessed them TFRPs. 

Case study: 9; 
Nature of business: Manufacturing; 
Unpaid payroll tax: Almost $1 million for almost 40 quarters; 
Comments: 
* Business also owes over $400,000 in non-payroll tax debt; 
* Owners and business investigated for bankruptcy fraud; 
* Revenue officer stated the business was a "sweat shop"; 
* IRS found owner had closed several businesses with tax debt when 
investigated by IRS and opened new ones; 
* Business has not filed payroll returns since late 2005; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found two owners willful and responsible for not remitting taxes 
withheld from employees and assessed them TFRPs. 

Case study: 10; 
Nature of business: Health care; 
Unpaid payroll tax: Over $8 million for nearly 30 quarters; 
Comments: 
* Business also owes almost $20,000 in non-payroll tax debt; 
* Although owner has luxury cars and a multimillion dollar home, he 
claimed inability to pay taxes due to financial hardship; 
* Owner also owed city and state government agencies for taxes; 
* One commercial creditor seized and sold some of owner's assets to 
satisfy debts; 
* Owner has pled guilty to and was incarcerated for fraud and the 
business and owner together have almost 100 judgments and liens filed 
against them; 
* Owner evaded IRS levies by using check cashing businesses and 
continued to write checks out to himself; 
* A relative purchased a commercial building that had been sold to 
satisfy owner's debts, and the owner has since set up another business 
therein; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found the owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 11; 
Nature of business: Construction; 
Unpaid payroll tax: Almost $2.5 million for over 50 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* Owners owe multimillion dollar tax debt for multiple businesses since 
the early 2000s, and IRS records indicate that the owners have also 
under reported personal income; 
* Financial records indicate business may be guilty of illegal check 
kiting and money laundering; 
* Owners have several judgments outstanding and at least 10 lawsuits 
pending or settled; 
* IRS officials indicated that the owners consistently stalled 
collection efforts through such means as using multiple representatives 
and filing for bankruptcy, which has kept IRS from seizing assets; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found two owners willful and responsible for not remitting taxes 
withheld from employees and assessed them TFRPs. 

Case study: 12; 
Nature of business: Transportation; 
Unpaid payroll tax: Almost $1.5 million for over 20 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $100,000; 
* Business has not filed taxes for all tax quarters; 
* Business has 17 judgments and state and federal tax liens, while one 
officer has over 50 such judgments and liens; 
* Another officer has unpaid personal taxes and IRS has investigated 
the officer for potential criminal activity; 
* IRS records indicate the officers commingled business and personal 
funds and that they consistently evaded personal assessment by refusing 
to cooperate; 
* Officers misrepresented tax delinquencies to a potential lender; 
* Officers investigated by IRS for establishing networks of short-lived 
corporations that accrue significant tax liabilities and then close, 
leaving a large amount of uncollectible payroll taxes; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three officers willful and responsible for not remitting 
taxes withheld from employees and assessed them TFRPs. 

Source: GAO analysis of IRS data, including unpaid federal tax debt as 
of September 30, 2007. 

[End of table] 

Concluding Comments: 

Businesses that withhold money from their employees' salaries are 
required to hold those funds in trust for the federal government. 
Willful failure to remit these funds is a breach of that fiduciary 
responsibility and is a felony offense. A business's repeated failure 
to remit payroll taxes to the government over long periods of time 
affects far more than the collection of the unpaid taxes. First, 
allowing businesses to continue to not remit payroll taxes affects the 
general public's perception regarding the fairness of the tax system, a 
perception that may result in lower overall compliance. Second, because 
of failure of businesses to remit payroll taxes, the burden of funding 
the nation's commitments, including Social Security and Hospital 
Insurance Trust Fund payments, falls more heavily on taxpayers who 
willingly and fully pay their taxes. Third, the failure to remit 
payroll taxes can give the non-compliant business an unfair competitive 
advantage because that business can use those funds that should have 
been remitted for taxes to either lower overall business costs or 
increase profits. Businesses that fail to remit payroll taxes may also 
under bid tax-compliant businesses, causing them to lose business and 
encouraging them to also become non-compliant. Fourth, allowing 
businesses to continue accumulating unpaid payroll taxes has the effect 
of subsidizing their business operations, thus enriching tax abusers or 
prolonging the demise of a failing business. Fifth and last, in an era 
of growing federal deficits and amidst reports of an increasingly 
gloomy fiscal outlook, the federal government cannot afford to allow 
businesses to continue to accumulate unpaid payroll tax debt with 
little consequence. 

For these reasons, it is vital that IRS use the full range of its 
collection tools against businesses with significant payroll tax debt 
and have performance measures in place to monitor the effectiveness of 
IRS's actions to collect and prevent the further accumulation of unpaid 
payroll taxes. Businesses that continue to accumulate unpaid payroll 
tax debt despite efforts by IRS to work with them are demonstrating 
that they are either unwilling or unable to comply with the tax laws. 
In such cases, because the decision to not file or remit payroll taxes 
is made by the owners or responsible officers of a business, IRS should 
consider strong collection action against both the business and the 
responsible owners or officers to prevent the further accumulation of 
unpaid payroll taxes and to collect those taxes for which the business 
and owners have a legal and fiduciary obligation to pay. 

IRS faces difficult challenges in balancing the use of aggressive 
collection actions against taxpayer rights and individuals' 
livelihoods. However, to the extent IRS does not pursue aggressive 
collection actions against businesses with multiple quarters of unpaid 
payroll taxes, there is a significant concern as to whether IRS is 
acting in the best interests of the federal government, the employees 
of the businesses involved, the perceived fairness of the tax system, 
or overall compliance with the tax laws. Therefore, it is incumbent 
upon IRS to revise its approach and develop performance measures that 
include the appropriate use of the full range of available enforcement 
tools against egregious offenders to prevent their businesses from 
accumulating tax debt. It is also incumbent upon IRS to proactively 
seek out and appropriately implement other tools (particularly those 
with demonstrated success at the state level) to enhance IRS's ability 
to prevent the further accumulation of unpaid payroll taxes and to 
collect those taxes that are owed. Although IRS does need to work with 
businesses to try to gain voluntary tax compliance, for businesses with 
demonstrated histories of egregious abuse of the tax system, IRS needs 
to alter its approach to include focusing on stopping the accumulation 
of additional unpaid payroll tax debt by egregious businesses. 

Our companion report being released today contains six recommendations 
to IRS to address issues regarding its ability to prevent the further 
accumulation of unpaid payroll taxes and collect such taxes. The 
recommendations include (1) developing a process and performance 
measures to monitor collection actions taken by revenue officers 
against egregious payroll tax offenders and (2) developing procedures 
to more timely file notice of federal tax liens against egregious 
businesses and assess penalties to hold responsible parties personally 
liable for not remitting withheld payroll taxes. 

Mr. Chairmen and Members of the Subcommittee, this concludes my 
statement. I would be pleased to answer any questions that you or other 
members of the committee and subcommittee have at this time. 

Contacts and Acknowledgment: 

For future contacts regarding this testimony, please contact Steven J. 
Sebastian at (202) 512-3406 or [email protected]. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this testimony. 

[End of section] 

Footnotes: 

[1] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-95] (Washington, D.C.: Feb. 12, 2004); GAO, Financial 
Management: Some DOD Contractors Abuse the Federal Tax System with 
Little Consequence, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
04-414T] (Washington, D.C.: Feb. 12, 2004); GAO, Financial Management: 
Thousands of Civilian Agency Contractors Abuse the Federal Tax System 
with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-637](Washington, D.C.: June 16, 2005); GAO, Financial 
Management: Thousands of Civilian Agency Contractors Abuse the Federal 
Tax Systems with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-683T] (Washington, D.C.: June 16, 2005); GAO, 
Financial Management: Thousands of GSA Contractors Abuse the Federal 
Tax System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-492T] 
(Washington, D.C.: Mar. 14, 2006); GAO, Medicare: Thousands of Medicare 
Part B Providers Abuse the Federal Tax System, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T] (Washington, D.C.: Mar. 
20, 2007); GAO, Tax Compliance: Thousands of Federal Contractors Abuse 
the Federal Tax System, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-742T] (Washington, D.C.: Apr. 19, 2007); and GAO, 
Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax System, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-239T] (Washington, 
D.C.: Nov. 14, 2007). 

[2] 26 U.S.C. ï¿½ 7202. 

[3] We considered activity to be abusive when a business's actions or 
inactions, though not illegal, took advantage of the existing tax 
enforcement and administration system to avoid fulfilling federal tax 
obligations and were deficient or improper when compared with behavior 
that a prudent person would consider reasonable. 

[4] Under section 6672 of the Internal Revenue Code, individuals who 
are determined by IRS to be responsible for collecting, accounting for, 
and paying over payroll taxes who willfully fail to collect or pay 
these taxes can be assessed a TFRP. This penalty, typically assessed 
against owners or officers of a corporation, such as a president or 
treasurer, is assessed for the amount of taxes the business withheld 
from its employees' salaries but did not remit to the federal 
government, the so-called trust fund portion of payroll taxes. The 
business itself is still liable for the entire amount of the unpaid 
payroll taxes, but IRS can seek collection from the responsible owner/ 
officers for the trust fund portion of the unpaid taxes when they are 
assessed this penalty. 

[5] The sample was originally selected as part of our audit of IRS's 
financial statements; see GAO, Financial Audit: IRS's Fiscal Years 2007 
and 2006 Financial Statements, GAO-08-166 (Washington, D.C.: Nov. 9, 
2007). The primary purpose of the sample was to determine whether IRS 
was properly recording payments to all related parties. However, we 
also performed other tests of IRS's controls using this same sample. 
Although we identified issues related to IRS's assignment of cases 
among revenue officers and the timeliness of certain collection actions 
based upon that sample, we are unable to project these results because 
the sampling unit used for the financial statement audit was payments 
rather than accounts. 

[6] These amounts are collected pursuant to the Federal Insurance 
Contributions Act. 26 U.S.C. ch. 21. 

[7] We analyzed IRS's database of unpaid taxes and the information on 
the North American Industry Classification (NAIC) system codes in that 
database. The NAIC system is used by federal statistical agencies in 
classifying business establishments. Using those codes, we were able to 
identify the industry type for about 70 percent of the payroll tax 
debt. 

[8] 26 U.S.C. ï¿½ 6502. IRS has a statutory limitation on the length of 
time it can pursue unpaid taxes, generally 10 years from the date of 
the assessment. The 10-year period can be extended or suspended under a 
variety of circumstances, such as agreements by the taxpayer to extend 
the collection period in connection with an installment agreement, 
bankruptcy litigation, and court appeals. 

[9] Because of the statutory limitation, this amount represents an 
estimate of the subsidy provided over an approximately 10-year period. 

[10] GAO, Unpaid Payroll Taxes: Billions in Delinquent Taxes and 
Penalty Assessments Are Owed, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/AIMD/GGD-99-211] (Washington, D.C., August 2, 1999). 

[11] IRS defines a defunct business as one that is inactive and with no 
leviable assets. 

[12] The tax period may not always correspond to the age of the tax 
debt. For example, tax debt may be fairly new even if it is for an 
earlier tax period when a taxpayer files a tax form years after the due 
date or when IRS assesses additional taxes for an earlier tax period. 

[13] GAO, Financial Management: Thousands of Civilian Agency 
Contractors Abuse the Federal Tax System with Little Consequence, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-637] (Washington, 
D.C.: June 16, 2005). 

[14] 26 U.S.C. ï¿½ 6502. 

[15] A certain percentage of unpaid payroll taxes that will expire 
include taxes due on accounts that have been investigated and 
determined to be uncollectible. Specifically, the unpaid payroll taxes 
of an out-of-business and defunct corporation will be reported as 
currently not collectible and allowed to expire as prescribed by law. 
IRS may use a TFRP to collect from the responsible individuals. 

[16] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-95] (Washington, D.C.: Feb. 12, 2004). 

[17] GAO, Financial Management: Thousands of GSA Contractors Abuse the 
Federal Tax System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
06-492T] (Washington, D.C.: Mar. 14, 2006). 

[18] GAO, Tax Administration: IRS's Efforts to Improve Compliance With 
Employment Tax Requirements Should Be Evaluated, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-02-92] (Washington, D.C.: Jan. 
15, 1992). 

[19] Treasury Inspector General for Tax Administration, Improvements 
Are Needed In Resolving In-Business Trust Fund Delinquencies to Prevent 
Tax Liabilities from Pyramiding, 2000-30-111 (Washington, D.C.: Aug. 
2000). 

[20] Treasury Inspector General for Tax Administration, The Collection 
Field Function Needs to Improve Case Actions to Prevent Employers From 
Incurring Additional Trust Fund Tax Liabilities, 2005-30-142 
(Washington D.C.: Sept. 21, 2005). 

[21] The Internal Revenue Service noted that there are a number of 
factors that serve to delay the filing of a lien, including cases being 
placed in the queue for extended periods of time. 

[22] Internal Revenue Service Small Business /Self Employed (SB/SE) 
internal research report, Research Report on the Collectibility of 
Trust Fund Recovery Penalty (TFRP) Assessments, 03.01.001.05 (Denver 
project, Aug. 31, 2005). 

[23] The ACS is a telephone contact system through which telephone 
assistors collect unpaid taxes and secure tax returns from delinquent 
taxpayers who have not complied with previous notices. 

[24] Cases may move in and out of the queue several times, so some 
cases may have liens filed even though the business or owner/officer 
case is currently in the queue. 

[25] Taxpayers have 60 days from the date of proposed assessment to 
make an appeal of the TFRP assessment. According to IRS, during the 
period July 10, 2007, through July 11, 2008, approximately 6 percent of 
individual TFRP recommendations were sent to Appeals. IRS stated that, 
on average, its process took 236 days to resolve the appeal. IRS's 
lengthy appeals process also contributes to long delays in making some 
TFRP assessments. 

[26] The results of this sample, while statistically selected, are not 
projectible to the universe because the sample was not specifically 
designed to assess the timeliness of collection actions. 

[27] TIGTA's sample included 166 businesses for which a TFRP interview 
was applicable. TIGTA 2005-30-142. 

[28] This example was originally reported in our prior report on GSA 
contractors, GAO, Financial Management: Thousands of GSA Contractors 
Abuse the Federal Tax System, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-492T] (Washington, D.C.: Mar. 14, 2006). For this 
report, we performed additional analysis of the business. 

[29] The sample consisted of 76 TFRP payments in 2007. We were able to 
obtain sufficient data to perform our analysis for 60 percent of the 
cases in the sample (45 of the 76 cases). We were unable to project 
these results because the sampling units used for the financial 
statement audit were payments rather than accounts. 

[30] Under the law, TFRP assessments, while equal to the total amount 
of the employee's withheld portion of the unpaid payroll taxes, 
constitute a separate liability from the payroll taxes. However, it is 
IRS's policy to collect only the amount of the unpaid payroll tax debt, 
whether from the business, in the form of a TFRP, or a combination of 
both. 

[31] IRS's policies place a high standard for seeking an injunction 
against a business. The policies state that the revenue officer must be 
able to show irreparable harm and that IRS has no adequate remedy at 
law other than the injunction. 

[32] IRS Data Book 2007, Publication 55B (Washington, D.C.: March 
2008). 

[33] 26 U.S.C. ï¿½ 6103. 

[34] Cal. Rev. & Tax. Code ï¿½ 19195. The listing does not include those 
who are fighting the tax bills in courts, have sought bankruptcy 
protection, or have set up payment plans with the state. 

[35] Levy is the legal seizure of the taxpayer's property to satisfy a 
tax debt. IRS may order a third party to turn over property in its 
possession that belongs to the delinquent taxpayer named in a notice of 
levy. IRS levies against bank accounts, brokerage accounts, or business 
account receivables are generally one-time levies of amounts in the 
account at the time the levy is served. However, IRS can also use a 
"continuous" levy against wages or certain federal payments. IRS 
officials stated that finding an account with money in it is often a 
"hit or miss" proposition since they are one-time levies. 

[36] IRS noted that in half of the 12 case studies presented here IRS 
was stayed from collection action for various lengths of time because 
of factors such as bankruptcy filings. IRS noted that during those 
periods in which IRS collection action was stayed, some businesses 
continued to accumulate additional unpaid payroll taxes. 

[End of section] 

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