Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax  
System (14-NOV-07, GAO-08-17).					 
                                                                 
In fiscal year 2006, outlays for Medicaid were about $324	 
billion; about $185 billion was paid by the federal government.  
Because GAO previously identified abusive and criminal activity  
associated with government contractors owing billions of dollars 
in federal taxes, the subcommittee requested GAO expand our work 
to Medicaid providers. GAO was asked to (1) determine if Medicaid
providers have unpaid federal taxes, and if so, the magnitude of 
such debts; (2) identify examples of Medicaid providers that have
engaged in abusive or criminal activities; and (3) determine	 
whether the Centers for Medicare & Medicaid Services (CMS) and	 
the states prevent health care providers with tax problems from  
enrolling in Medicaid or participating in the continuous levy	 
program to pay federal tax debts. To perform this work, GAO	 
analyzed tax data from the Internal Revenue Service (IRS) and	 
Medicaid data from seven selected states based on magnitude of	 
Medicaid payments and geography. GAO also performed additional	 
investigative activities.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-17						        
    ACCNO:   A78129						        
  TITLE:     Medicaid: Thousands of Medicaid Providers Abuse the      
Federal Tax System						 
     DATE:   11/14/2007 
  SUBJECT:   Access to health care				 
	     Federal taxes					 
	     Health care programs				 
	     Income taxes					 
	     Managed health care				 
	     Medicare						 
	     Noncompliance					 
	     Personal income taxes				 
	     Program abuses					 
	     Social security taxes				 
	     Tax administration 				 
	     Tax law						 
	     Tax violations					 
	     Federal/state relations				 
	     Payroll taxes					 
	     GAO High Risk Series				 

                                                                 
Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax  
System (14-NOV-07, GAO-08-17).					 
                                                                 
In fiscal year 2006, outlays for Medicaid were about $324	 
billion; about $185 billion was paid by the federal government.  
Because GAO previously identified abusive and criminal activity  
associated with government contractors owing billions of dollars 
in federal taxes, the subcommittee requested GAO expand our work 
to Medicaid providers. GAO was asked to (1) determine if Medicaid
providers have unpaid federal taxes, and if so, the magnitude of 
such debts; (2) identify examples of Medicaid providers that have
engaged in abusive or criminal activities; and (3) determine	 
whether the Centers for Medicare & Medicaid Services (CMS) and	 
the states prevent health care providers with tax problems from  
enrolling in Medicaid or participating in the continuous levy	 
program to pay federal tax debts. To perform this work, GAO	 
analyzed tax data from the Internal Revenue Service (IRS) and	 
Medicaid data from seven selected states based on magnitude of	 
Medicaid payments and geography. GAO also performed additional	 
investigative activities.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-17						        
    ACCNO:   A78129						        
  TITLE:     Medicaid: Thousands of Medicaid Providers Abuse the      
Federal Tax System						 
     DATE:   11/14/2007 
  SUBJECT:   Access to health care				 
	     Federal taxes					 
	     Health care programs				 
	     Income taxes					 
	     Managed health care				 
	     Medicare						 
	     Noncompliance					 
	     Personal income taxes				 
	     Program abuses					 
	     Social security taxes				 
	     Tax administration 				 
	     Tax law						 
	     Tax violations					 
	     Federal/state relations				 
	     Payroll taxes					 
	     GAO High Risk Series				 

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GAO-08-17

   

     * [1]Results in Brief
     * [2]Background

          * [3]Centers for Medicare & Medicaid Services
          * [4]State Medicaid Agencies

     * [5]Magnitude of Unpaid Federal Taxes of Medicaid Providers

          * [6]Characteristics of Medicaid Providers' Unpaid Federal Taxes
          * [7]Unpaid Federal Taxes of Medicaid Providers Is Understated

     * [8]Examples of Extent and Nature of Medicaid Providers' Abusive
     * [9]Providers with Unpaid Federal Taxes Are Not Prohibited from

          * [10]Screening for Unpaid Taxes
          * [11]Medicaid Payments to Providers Are Not Subject to IRS Contin

     * [12]Conclusions
     * [13]Recommendations for Executive Action
     * [14]Agency Comments and Our Evaluation
     * [15]Data Reliability Assessment
     * [16]GAO Contact
     * [17]Acknowledgments
     * [18]GAO's Mission
     * [19]Obtaining Copies of GAO Reports and Testimony

          * [20]Order by Mail or Phone

     * [21]To Report Fraud, Waste, and Abuse in Federal Programs
     * [22]Congressional Relations
     * [23]Public Affairs

Report to the Permanent Subcommittee on Investigations, Committee on
Homeland Security and Governmental Affairs, U.S. Senate

United States Government Accountability Office

GAO

November 2007

MEDICAID

Thousands of Medicaid Providers Abuse the Federal Tax System

GAO-08-17

Contents

Letter 1

Results in Brief 3
Background 6
Magnitude of Unpaid Federal Taxes of Medicaid Providers 8
Examples of Extent and Nature of Medicaid Providers' Abusive and
Potentially Criminal Activity Related to the Federal Tax System 13
Providers with Unpaid Federal Taxes Are Not Prohibited from Enrolling or
Receiving Payments from Medicaid 17
Conclusions 19
Recommendations for Executive Action 20
Agency Comments and Our Evaluation 20
Appendix I Scope and Methodology 23
Data Reliability Assessment 25
Appendix II Medicaid Providers with Unpaid Federal Taxes 26
Appendix III Comments from the Internal Revenue Service 29
Appendix IV Comments from the Centers for Medicare & Medicaid Services 32
Appendix V GAO Contact and Staff Acknowledgments 35

Tables

Table 1: Medicaid Providers with Unpaid Federal Taxes 13
Table 2: Additional Medicaid Providers with Unpaid Federal Taxes 26

Figures

Figure 1: Typical Medicaid Payment Process 8
Figure 2: Medicaid Providers' Unpaid Taxes by Tax Type 9
Figure 3: Unpaid Taxes of Medicaid Providers by Calendar Year 10

Abbreviations

CMS Centers for Medicare & Medicaid Services
EIN employer identification number
FCTC Federal Contractors Tax Compliance
FMS Financial Management Service
HHS Department of Health and Human Services
IRS Internal Revenue Service
SSN Social Security number
TFRP trust fund recovery penalty
TIN taxpayer identification number
TOP Treasury Offset Program

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office
Washington, DC 20548

November 14, 2007

The Honorable Carl Levin: 
Chairman: 
The Honorable Norm Coleman: 
Ranking Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The success of our tax system hinges on the public's perception of its
fairness, including the extent to which taxpayers believe their friends,
neighbors, and businesses are complying with the tax laws and are actually
paying their taxes. The Internal Revenue Service's (IRS) own data in this
regard are not encouraging. IRS reported that the federal government does
not receive hundreds of billions of dollars in taxes owed annually. IRS's
most recent estimate is that the gross tax gap (the difference between the
taxes that should have been paid voluntarily and on time and what was
actually paid) was $345 billion for tax year 2001. IRS estimated that it
would eventually collect $55 billion of this amount, leaving a net tax gap
of $290 billion in unpaid taxes. IRS enforcement of the tax laws is vital
to promote compliance by giving taxpayers confidence that others are
paying their fair share. Because of the challenges that IRS faces in its
enforcement of tax laws, we continue to include it as a high-risk area for
IRS.1

A portion of the tax gap is owed by individuals and businesses receiving
payments from the federal government. For example, over the past several
years, we testified that federal contractors (Department of Defense,
federal civilian, and General Services Administration contractors) abused
the federal tax system with little consequence.2 Due to the significance
of the issues raised during those hearings, you asked us to provide
additional information about whether Medicare and Medicaid providers were
engaged in similar tax abuses.3

1GAO, High-Risk Series: An Update, [24]GAO-07-310 (Washington, D.C.: Jan.
2007).

2GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, [25]GAO-04-414T (Washington, D.C.: Feb.
12, 2004); Financial Management: Thousands of Civilian Agency Contractors
Abuse the Federal Tax System with Little Consequence, [26]GAO-05-683T
(Washington, D.C.: June 16, 2005); and Financial Management: Thousands of
GSA Contractors Abuse the Federal Tax System, [27]GAO-06-492T (Washington,
D.C.: Mar. 14, 2006).

This is the second in a series of reports and testimonies to respond to
your request. In March 2007, we testified that Medicare physicians, health
professionals, and suppliers paid under the Supplemental Medical Insurance
program, also known as Medicare Part B, had abused the federal tax system
while doing business with the federal government.4 This report will cover
Medicaid health care providers from seven selected states who also abused
the federal tax system.

The specific objectives of this forensic audit and related investigation
were, to the extent possible, (1) determine if providers who receive
Medicaid payments have unpaid federal taxes, and if so, the magnitude of
federal tax debts owed by these Medicaid providers; (2) identify examples
of providers engaged in abusive and criminal activity related to the
federal tax system; and (3) determine whether Centers for Medicare &
Medicaid Services (CMS) and selected states prevent health care providers
with tax problems from enrolling in Medicaid or participate in the
continuous levy program to pay federal tax debts.

To identify the extent to which Medicaid providers had unpaid federal
taxes, we obtained and analyzed fiscal year 2006 Medicaid payments made to
providers in a nonrepresentative selection of seven states:5 California,
Colorado, Florida, Maryland, New York, Pennsylvania, and Texas.6 Payments
to these states constituted about 43 percent of all Medicaid payments made
during fiscal year 2006. These states were selected based on the magnitude
of Medicaid payments and geographical location. We also obtained and
analyzed the IRS tax debt data as of September 30, 2006. We matched the
lists of Medicaid providers with IRS tax debts using the taxpayer
identification number (TIN) to identify Medicaid providers with tax debts.
To illustrate the extent and nature of tax system abuse or potentially
criminal activity, we selected 25 Medicaid providers for a detailed audit
and investigation. The 25 providers were chosen based on the amount of
unpaid taxes, number of unpaid tax periods, amount of payments reported by
Medicaid, and indications that owner(s) might be involved in multiple
companies with tax debts. For these 25 Medicaid providers, we reviewed
copies of automated tax transcripts and other tax records (for example,
revenue officer's notes) and performed additional searches of criminal,
financial, health care, and public records.

3In addition to our audits of federal contractors with tax debts, we also
conducted audits of combined federal campaign charities and exempt
organizations with federal tax debts. GAO, Tax Debt: Some Combined Federal
Campaign Charities Owe Payroll and Other Federal Taxes, [28]GAO-06-887
(Washington, D.C.: July 28, 2006) and Tax Compliance: Thousands of
Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in
Payroll and Other Taxes, [29]GAO-07-563 (Washington, D.C.: June 29, 2007).

4GAO, Medicare: Thousands of Medicare Part B Providers Abuse the Federal
Tax System, [30]GAO-07-587T (Washington D.C.: Mar. 20, 2007).

5There are 56 Medicaid programs, including one for each of the 50 states,
the District of Columbia, Puerto Rico, American Samoa, Guam, Northern
Mariana Islands, and the Virgin Islands. Hereafter, all 56 entities are
referred to as states.

6Throughout this report, these seven states are referred to as the
selected states.

To determine whether CMS and states prevent health care providers with
unpaid federal taxes from enrolling in Medicaid, we interviewed officials
from CMS and selected states and examined the CMS and selected states'
regulations, policies, and procedures for making determinations in the
enrollment approval process. We also interviewed officials from CMS, IRS,
and the Department of the Treasury's Financial Management Service (FMS)
concerning any barriers for levying Medicaid payments. A more detailed
description of the scope and methodology related to our audit and
investigative work supporting this report is provided in appendix I.

We conducted our audit work from July 2006 through August 2007 in
accordance with U.S. generally accepted government auditing standards. We
performed our investigative work in accordance with standards prescribed
by the President's Council on Integrity and Efficiency.

Results in Brief

In seven selected states, thousands of Medicaid providers abused7 the
federal tax system with little or no consequence. Specifically, our
analysis of data provided by the selected states and IRS indicates that
over 30,000 Medicaid providers from the selected states, over 5 percent,
had tax debts totaling over $1 billion as of September 30, 2006.8 The
unpaid taxes largely consisted of individual income and payroll taxes.9
The $1 billion estimate of tax debts owed by Medicaid providers is likely
understated because IRS data do not reflect all amounts owed by businesses
and individuals. Specifically, these do not include amounts owed by
businesses and individuals that have not filed tax returns or that have
failed to report the full amount of taxes due (referred to as nonfilers
and underreporters) and for which IRS has not determined which specific
tax debts are owed.

7We considered activity to be abusive when a Medicaid provider'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.

8Because some Medicaid providers may do business with Medicare and other
federal agencies, such as Veterans Affairs, some of the approximately
30,000 Medicaid providers described in this report may also have been
included in our reports concerning the Department of Defense, General
Services Administration, civilian federal contractors, Medicare Part B
providers, and tax-exempt organizations that abuse the federal tax system.

Our audit and investigative work details the nature of abusive and
criminal activity related to the federal tax system by 25 Medicaid
providers. These 25 providers were paid by Medicaid for a variety of
services, including hospital, nursing facility, physician, and ambulance
services. Payments ranged from about $100,000 to approximately $39 million
during fiscal year 2006. Many were established businesses that owed
federal payroll taxes withheld for their employees. Rather than fulfill
their role as "trustees" of these funds and forward them to IRS as
required by law, these health care providers diverted the money for other
purposes. These payroll taxes included amounts withheld from employee
wages for Social Security, Medicare, and individual income taxes.10

At the same time that they were not paying their federal taxes, many
individuals associated with our 25 cases bought or owned significant
personal assets, including commercial properties, expensive homes, and
luxury vehicles. One business officer withdrew over $100,000 in cash at
casinos at the same time the business owed millions of dollars in federal
taxes. Further, another case study business was sanctioned by its state
regulator for substandard care of its patients.

CMS and the selected states do not prevent health care providers who have
tax debts from enrolling in or receiving payments from Medicaid. CMS has
not developed regulations to require states to (1) screen health care
providers for unpaid taxes and (2) obtain consent for IRS disclosure of
federal tax debts. CMS officials stated that the primary focus of the
Medicaid program, in partnership with the states, is to provide health
care services for low income people and not the administration of taxes.
CMS officials stated that such a requirement could be a burden to the
states in their enrollment of providers and could adversely impact states'
ability to provide health care to the poor. Even if CMS did want to screen
health care providers with tax debts, federal law generally prohibits the
disclosure of taxpayer data to CMS and states.11 Thus, CMS and states do
not have access to tax data directly from IRS unless the taxpayer provides
consent. Consequently, CMS and the selected states have no mechanism or
requirement to prevent health care providers who have tax debts from
enrolling in or receiving payments from Medicaid.

9Payroll taxes include amounts that employers withhold from employees'
wages for federal income taxes, Social Security, and Medicare as well as
the related employer matching contributions for Social Security and
Medicare taxes. Employers are responsible for remitting payroll taxes to
IRS and are liable for any outstanding balance.

10Willful failure to remit payroll taxes is a criminal felony offense
while the failure to properly segregate payroll taxes can be a criminal
misdemeanor offense. 26 U.S.C. SS 7202, 7215 and 7512 (b).

A provision of the Taxpayer Relief Act of 1997 authorizes IRS to
continuously levy certain federal payments made to delinquent taxpayers.
However, in the 10 years since its passage, IRS had not determined whether
Medicaid payments are considered federal payments, and thus subject to the
continuous levy program, or determined the feasibility of incorporating
these payments into the program. Thus, no tax debt owed by Medicaid
providers has ever been collected from medicaid payments through the
continuous levy program. If there had been an effective levy program in
place, we estimate that for fiscal year 2006, the selected seven states
could have levied payments for the federal government and collected
between $70 million to about $160 million of unpaid federal taxes.
Officials from all seven of the selected states stated that they have a
continuous levy program to offset Medicaid payments against their state
debts.

Our report makes two recommendations to the IRS Commissioner. First, we
recommend that IRS conduct a study to determine whether Medicaid payments
can be incorporated in the continuous levy program. In responding to a
draft of our report, IRS agreed with our recommendation but stated that it
has already completed studies on whether the Medicaid payments can be
incorporated into the continuous levy program. From those studies, IRS
concluded that Medicaid disbursements do not qualify as federal payments
and therefore cannot be incorporated in the continuous levy program. We
modified our report accordingly. IRS agreed with our second
recommendation--to evaluate the 25 referred cases detailed in this report
for appropriate additional aggressive collection action and criminal
investigation as warranted. While we did not make recommendations to
either CMS or FMS, they provided technical and other comments to the
report. See the "Agency Comments and Our Evaluation" section of this
report for a more detailed discussion of agency comments from IRS, CMS,
and FMS. We have reprinted the IRS and CMS written comments in appendixes
III and IV.

11States screen health care providers prior to enrollment into the
Medicaid program. States also process and pay Medicaid claims and are
reimbursed for the federal share of these payments by CMS.

Background

Title XIX of the Social Security Act is a federal and state entitlement
program that pays for medical assistance for certain categories of
low-income adults and children. This program, known as Medicaid, became
law in 1965 and is jointly funded by the federal and state governments
(including the District of Columbia and the Territories). Medicaid is the
largest source of funding for medical and health-related services for
America's poorest people. More than 50 million persons enrolled in the
Medicaid program in fiscal year 2006. In fiscal year 2006, according to
CMS, total outlays for Medicaid (federal and state) were approximately
$324 billion, of which about $185 billion was paid by the federal
government.

Medicaid is jointly funded by the federal and state governments. The
federal government shares in a state's Medicaid service costs through a
matching formula. The federal matching rate for the cost of services
provided to Medicaid beneficiaries is related to a state's per capita
income and in federal fiscal year 2006 ranged from 50 percent to 76
percent.

Centers for Medicare & Medicaid Services

Although the federal government establishes general guidelines for the
Medicaid program, requirements are established by each state. CMS, within
the Department of Health and Human Services (HHS), is responsible for
administering federal matching funds to the states and for legislation and
regulations affecting the Medicaid program. CMS also provides guidelines,
technical assistance, and periodic assessments of state Medicaid programs.

State Medicaid Agencies

Title XIX of the Social Security Act allows considerable flexibility
within the states' Medicaid plans. Within broad national guidelines
established by federal statutes, regulations, and policies, each state (1)
establishes its own eligibility standards; (2) determines the type,
amount, duration, and scope of services; (3) sets the rate of payment for
services; and (4) administers its own program--including enrollment of
providers. Medicaid policies for eligibility, services, and payment are
complex and vary considerably, even among states of similar size or
geographic proximity. Thus, a person who is eligible for Medicaid in one
state may not be eligible in another state, and the services provided by
one state may differ considerably in amount, duration, or scope from
services provided in a similar or neighboring state. In addition, state
legislatures may change Medicaid eligibility, services, or reimbursement
during the year.

To receive payment for services or goods provided to beneficiaries from
Medicaid, providers must first enroll in the Medicaid program. To enroll,
providers must submit a Medicaid enrollment application to the state or
their fiscal agents who are responsible for determining whether the
providers meet federal and state requirements for enrollment. The state or
its fiscal agents are responsible for screening the applications based on
CMS and state policies. Once an applicant is deemed eligible by the state
or its fiscal agents, Medicaid providers can submit their claims to the
state for payment. The state is responsible for claims processing and
verifying the claim is accurate, complete, medically necessary, and
covered under the state's Medicaid plan. After the claim is approved, the
state pays the claim.

The typical Medicaid payment process is illustrated in figure 1. When a
Medicaid beneficiary receives care from a health care provider such as a
hospital, physician, or nursing home, the provider bills the state
Medicaid program for its services. The state in turn pays the provider
from a combination of state funds and federal funds, which have been
advanced by CMS each quarter. The state then files an expenditure report,
in which it claims the federal share of the Medicaid expenditure as
reimbursement for its payment to providers and reconciles its total
expenditures with the federal advance.12 In addition to reimbursement for
medical services, the state may claim federal reimbursement for functions
it performs to administer its Medicaid program, such as enrolling new
beneficiaries; reviewing the appropriateness of providers' claims; and
collecting payments from third parties, which are payers other than
Medicaid, such as Medicare, that may be liable for some or all of a
particular health claim.

12Each quarter, states submit to CMS an estimate of their Medicaid
expenditures for the upcoming quarter. CMS then authorizes the states to
draw on federal funds to pay the federal Medicaid share.

Figure 1: Typical Medicaid Payment Process

Magnitude of Unpaid Federal Taxes of Medicaid Providers

Our analysis found that over 30,000 Medicaid providers at the selected
states had over $1 billion in unpaid federal taxes as of September 30,
2006.13 This represents over 5 percent of the approximately 560,000
Medicaid providers paid by the selected states during federal fiscal year
2006. The amount of unpaid federal taxes we identified among Medicaid
providers is likely understated because (1) we intentionally limited our
scope to providers with agreed-to federal tax debt for tax periods prior
to 2006, and (2) the IRS taxpayer data reflect only the amount of unpaid
taxes either reported by the taxpayer on a tax return or assessed by IRS
through its various enforcement programs and thus the unpaid tax debt
amount does not include entities for which IRS had not identified that
they did not file tax returns or underreported their income.

13Our estimate of Medicaid providers with tax debt as of September 30,
2006, excluded (1) tax debts that have not been agreed to by the tax
debtor or affirmed by the court, (2) tax debts from calendar year 2006,
(3) approved Medicaid claims less than $100, and (4) tax debts less than
$100.

Characteristics of Medicaid Providers' Unpaid Federal Taxes

As shown in figure 2, 87 percent of the approximately $1 billion in unpaid
taxes was comprised of individual income and payroll taxes. The other 13
percent of taxes included corporate income, excise, unemployment, and
other types of taxes.

Figure 2: Medicaid Providers' Unpaid Taxes by Tax Type

As shown in figure 2, over half of the unpaid taxes owed by Medicaid
providers were payroll taxes. Employers are subject to civil and criminal
penalties if they do not remit payroll taxes to the federal government.
When an employer withholds taxes from an employee's wages, the employer is
deemed to have a responsibility to hold these amounts "in trust" for the
federal government until the employer makes a federal tax deposit in that
amount. To the extent these withheld amounts are not forwarded to the
federal government, the employer is liable for these amounts, as well as
the employer's matching Federal Insurance Contribution Act contributions
for Social Security and Medicare. Individuals within the business (e.g.,
corporate officers) may be held personally liable for the withheld amounts
not forwarded and they maybe assessed a civil monetary penalty known as a
trust fund recovery penalty (TFRP).14 Willful failure to remit payroll
taxes can also be a criminal felony offense punishable by imprisonment up
to 5 years, 15 while the failure to properly segregate payroll taxes can
be a criminal misdemeanor offense punishable by imprisonment of up to 1
year.16

1426 U.S.C. S 6672.

1526 U.S.C. S 7202.

The law imposes no penalties upon an employee for the employer's failure
to remit payroll taxes since the employer is responsible for submitting
the amounts withheld. The Social Security and Medicare trust funds are
subsidized or made whole for unpaid payroll taxes by the general fund.
Thus, personal income taxes, corporate income taxes, and other government
revenues are used to pay for these shortfalls to the Social Security and
Medicare trust funds.

A substantial amount of the unpaid federal taxes shown in IRS records as
owed by Medicaid providers had been outstanding for several years. As
reflected in figure 3, about 56 percent of the $1 billion in unpaid taxes
was for tax periods from calendar year 2000 through calendar year 2004,
and approximately 29 percent of the unpaid taxes was for tax periods prior
to calendar year 2000. 17

Figure 3: Unpaid Taxes of Medicaid Providers by Calendar Year

1626 U.S.C. S 7215 and 26 U.S.C. S 7512 (b).

17A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is generally one quarter of a year. The taxpayer
is required to file quarterly returns with IRS for these types of taxes,
although payment of the taxes occurs throughout the quarter. In contrast,
for income, corporate, and unemployment taxes, a tax period is 1 year.

Our previous work has shown that as unpaid taxes age, the likelihood of
collecting all or a portion of the amount owed decreases.18 This is due,
in part, to the continued accrual of interest and penalties on the
outstanding tax debt, which, over time, can dwarf the original tax
obligation. The amount of unpaid federal taxes reported above does not
include all tax debts owed by Medicaid providers due to statutory
provisions that give IRS a finite period under which it can seek to
collect on unpaid taxes. There is a 10-year statute of limitations beyond
which IRS is prohibited from attempting to collect tax debt.19
Consequently, if the Medicaid providers owe federal taxes beyond the
10-year statutory collection period, the older tax debt may have been
removed from IRS's records. We were unable to determine the amount of tax
debt that had been removed.

Unpaid Federal Taxes of Medicaid Providers Is Understated

Although over $1 billion in unpaid federal taxes owed by Medicaid
providers as of September 30, 2006, is a significant amount, it likely
understates the full extent of unpaid taxes owed by these or other
businesses and individuals. The IRS tax database reflects only the amount
of unpaid federal taxes either reported by the individual or business on a
tax return or assessed by IRS through its various enforcement programs.
The IRS database does not reflect amounts owed by businesses and
individuals that have not filed tax returns and for which IRS has not
assessed tax amounts due. For example, during our audit, we identified
instances from our case studies in which Medicaid providers failed to file
tax returns for a particular tax period and IRS had not assessed taxes for
these tax periods. 20 Consequently, while these providers had unpaid
federal taxes, they were listed in IRS records as having no unpaid taxes
for that period.

18GAO, Internal Revenue Service: Recommendations to Improve Financial and
Operational Management, [31]GAO-01-42 (Washington D.C.: Nov. 17, 2000).

19The 10-year time limit may be suspended and include periods during which
the taxpayer is involved in a collection due process appeal, litigation, a
pending offer-in-compromise, or an installment agreement. As a result,
fig. 3 includes taxes that are for tax periods from more than 10 years
ago.

20For example, one of the Medicaid provider case studies had not filed
personal income tax returns for the last couple of years. According to IRS
records, the Medicaid provider in question earned at least $300,000 in
revenue in the last tax year of our review. In another case example, a
Medicaid provider had not filed its tax returns for the last several
years. In fact, the IRS revenue officers indicated that the provider was
defunct. However, according to IRS records, the Medicaid provider in
question earned at least $1 million in revenue in the last tax year of our
review and after the provider was classified as defunct.

Further, our analysis did not attempt to account for businesses or
individuals that purposely underreported income and were not specifically
identified by IRS as owing the additional federal taxes. According to IRS,
underreporting of income accounted for more than 80 percent of the
estimated $345 billion annual gross tax gap.21

Finally, our analysis did not attempt to identify Medicaid providers who
owed taxes under a separate TIN from the TIN that received the Medicaid
payments. For example, sole proprietors and certain limited liability
companies may file Medicaid claims under their Social Security numbers
(SSN). If these Medicaid providers had employees, they would typically
report the payroll taxes under an employer identification number (EIN) and
not their SSNs. Consequently, the full extent of unpaid federal taxes for
Medicaid providers is not known.

In addition to the IRS tax database not reflecting all assessed tax
amounts due, our past audits22 have also found that the IRS tax database
contains coding errors that adversely affect IRS's collection activities.
IRS's collection process is heavily dependent upon its automated computer
system and the information that resides within this system. In particular,
the codes in each taxpayer's account in IRS's tax database are critical to
IRS in tracking the collection actions it has taken against a tax debtor
and in determining what, if any, additional collection actions should be
pursued. For example, IRS uses these codes to identify cases it should
exclude from the continuous levy program,23 which is an automated method
of collecting tax debt by offsetting certain federal payments made to
individuals and businesses, as well as cases it should exclude from other
collection actions.

21According to IRS, nonfilers and underpayment of taxes made up the rest
of the gross tax gap.

22GAO, Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections, [32]GAO-07-26 (Washington D.C.: Nov. 15, 2006).

23Each week IRS sends FMS an extract of its tax debt files containing
updated account balances of tax debts that are already in Treasury Offset
Program (TOP), the new tax debts that need to be added to TOP, and all
taxes in TOP that need to be removed. FMS sends payment data to TOP to be
matched against these unpaid federal taxes. If there is a match and IRS
has updated TOP to reflect that it has completed all legal notifications,
the federal payment is reduced (levied) to help satisfy the unpaid federal
taxes. In addition to federal tax debts, the TOP database also includes
federal nontax debts, state tax debts, and child support debts.

Examples of Extent and Nature of Medicaid Providers' Abusive and Potentially
Criminal Activity Related to the Federal Tax System

For all 25 cases that we audited and investigated, we confirmed that their
activities were abusive and in many instances found criminal activity
related to the federal tax system. Of these cases, 17 involved businesses
with employees who had unpaid payroll taxes, most dating as far back as
the late 1990s. However, rather than fulfill their role as "trustees" of
this money and forward it to IRS, these Medicaid providers diverted the
money for other purposes, including their own salaries. As stated earlier,
willful failure to remit payroll taxes can be a criminal felony offense
punishable by imprisonment up to 5 years,24 while the failure to properly
segregate payroll taxes can be a criminal misdemeanor offense punishable
by imprisonment of up to 1 year.25

Table 1 highlights 10 cases of businesses and individuals with unpaid
taxes. Our investigations revealed that, despite their businesses owing
substantial amounts of taxes to IRS, some owners had substantial personal
assets--including expensive homes and luxury cars. We are referring the 25
cases detailed in our report to IRS for appropriate collection action and
criminal investigation.

Table 1: Medicaid Providers with Unpaid Federal Taxes

                                    Unpaid                                    
                         Medicaid  federal                                    
Case Nature of work  paymentsa     taxb Comments                           
1    Hospital       $9 million       $5             o Business's tax debts 
                                   million             are primarily composed 
                                                       of unpaid payroll      
                                                       taxes beginning in the 
                                                       late 1990s.            
                                                       o IRS reported tax     
                                                       debts to the           
                                                       continuous levy        
                                                       program for collection 
                                                       action.                
                                                       o IRS proposed an      
                                                       injunction to close    
                                                       the business in a      
                                                       recent year because    
                                                       the business continued 
                                                       to accumulate tax      
                                                       debt.                  
                                                       o IRS assessed a TFRP  
                                                       against business       
                                                       owners.                
                                                       o IRS attempted to     
                                                       levy a bank account    
                                                       but the owner closed   
                                                       the account prior to   
                                                       the levy.              
                                                       o Business owners had  
                                                       several large cash     
                                                       transactions in recent 
                                                       years.                 
                                                       o Owners own two       
                                                       residences worth over  
                                                       $2 million.            
                                                       o IRS and the state    
                                                       filed tax liens        
                                                       against the business.  
                                                       o Business received    
                                                       over $2 million        
                                                       dollars in Medicare    
                                                       payments in a recent   
                                                       year.                  
2    Nursing home   $6 million       $2             o Business's federal   
                                   million             tax debts are          
                                                       primarily composed of  
                                                       unpaid payroll taxes.  
                                                       o Business received    
                                                       nearly $2 million in   
                                                       Medicare payments in a 
                                                       recent year.           
                                                       o IRS reported tax     
                                                       debts to the           
                                                       continuous levy        
                                                       program for collection 
                                                       action.                
                                                       o Business charged     
                                                       with patient abuse,    
                                                       and business and       
                                                       business owner also    
                                                       fined and suspended    
                                                       for jeopardizing the   
                                                       health and safety of   
                                                       patients.              
                                                       o IRS filed tax liens  
                                                       against the business   
                                                       and business owner.    
                                                       o Related business     
                                                       owes over $1 million   
                                                       of unpaid taxes that   
                                                       have been referred to  
                                                       the continuous levy    
                                                       program.               
3    Nursing        $3 million       $3             o Business's federal   
        facility                   million             tax debts are          
                                                       primarily unpaid       
                                                       payroll taxes.         
                                                       o Business officer     
                                                       owns multiple          
                                                       properties; one worth  
                                                       over $1 million.       
                                                       o IRS assessed over a  
                                                       $1 million TFRP        
                                                       against the business   
                                                       officer.               
                                                       o Business defaulted   
                                                       on an installment      
                                                       agreement with IRS.    
                                                       o Business received    
                                                       nearly $3 million in   
                                                       Medicare payments in a 
                                                       recent year.           
                                                       o IRS reported         
                                                       business's tax debts   
                                                       to the continuous levy 
                                                       program.               
                                                       o Business is involved 
                                                       in a lawsuit for       
                                                       malpractice in a       
                                                       recent year.           
                                                       o Business officers    
                                                       filed for bankruptcy   
                                                       in early 2000s.        
                                                       o IRS filed tax liens  
                                                       against the business.  
                                                       o Business officer     
                                                       owns a related         
                                                       business that owes     
                                                       over $200,000 in       
                                                       unpaid federal taxes.  
                                                       IRS reported the       
                                                       related business' tax  
                                                       debts to the           
                                                       continuous levy        
                                                       program.               
4    Pharmacy         $100,000 $800,000             o Business's tax debts 
                                                       are primarily unpaid   
                                                       payroll taxes covering 
                                                       over 7 years. For most 
                                                       of these tax periods,  
                                                       the business filed     
                                                       late and made no tax   
                                                       payments.              
                                                       o Business filed for   
                                                       bankruptcy in the      
                                                       mid-2000s.             
                                                       o Business officer     
                                                       sold assets of the     
                                                       business even though   
                                                       the officer knew the   
                                                       business owed unpaid   
                                                       taxes and also knew    
                                                       that liens were filed. 
                                                       o IRS assessed a       
                                                       nearly $3 million TFRP 
                                                       against the business   
                                                       officer.               
                                                       o IRS and state filed  
                                                       tax liens against the  
                                                       business.              
                                                       o Business officer     
                                                       owns a related         
                                                       business that owes     
                                                       unpaid federal taxes.  
5    Home health    $2 million       $1             o Business's tax debts 
        services                   million             are primarily unpaid   
                                                       payroll taxes.         
                                                       o Business filed for   
                                                       bankruptcy while a     
                                                       business officer       
                                                       continued to earn over 
                                                       $250,000 a year.       
                                                       o Business officer     
                                                       owns a luxury vehicle  
                                                       and property worth     
                                                       about $1 million       
                                                       located near a golf    
                                                       course.                
                                                       o Business received    
                                                       over $1 million in     
                                                       Medicare payments in a 
                                                       recent year.           
                                                       o IRS assessed a TFRP  
                                                       against a business     
                                                       officer.               
                                                       o IRS and state filed  
                                                       tax liens against the  
                                                       business.              
6    Dental           $200,000 $300,000             o Dentist's tax debts  
                                                       are primarily unpaid   
                                                       income taxes.          
                                                       o Dentist generally    
                                                       had not made any       
                                                       federal tax payments   
                                                       since early 1990s.     
                                                       o In a recent year,    
                                                       dentist earned over    
                                                       $300,000 and did not   
                                                       file an income tax     
                                                       return.                
                                                       o Dentist owes debts   
                                                       to other federal       
                                                       agencies, including    
                                                       delinquent student     
                                                       loan debt.             
                                                       o IRS and state filed  
                                                       tax liens against the  
                                                       dentist.               
7    Home care      $2 million       $3             o Business's tax debts 
                                   million             are primarily unpaid   
                                                       payroll taxes          
                                                       beginning in the late  
                                                       1990s.                 
                                                       o Business did not     
                                                       file tax returns in    
                                                       late 1990s and early   
                                                       2000s.                 
                                                       o Business owners own  
                                                       multiple real          
                                                       properties, including  
                                                       a million dollar       
                                                       residence, luxury      
                                                       vehicles, and a        
                                                       recreational boat.     
                                                       o IRS assessed over $1 
                                                       million TFRP against   
                                                       one business owner.    
                                                       o Business filed       
                                                       bankruptcy in a recent 
                                                       year.                  
                                                       o IRS and state filed  
                                                       tax liens against the  
                                                       business.              
                                                       o Business owners own  
                                                       several related health 
                                                       care businesses which  
                                                       are in bankruptcy      
                                                       status.                
8    Clinic         $3 million       $1             o Business's tax debts 
                                   million             are primarily unpaid   
                                                       payroll taxes.         
                                                       o Business owner       
                                                       borrowed over $2       
                                                       million from the       
                                                       business while         
                                                       business owed payroll  
                                                       taxes.                 
                                                       o Business owner owns  
                                                       residential property   
                                                       worth nearly $4        
                                                       million dollars,       
                                                       several luxury         
                                                       vehicles, and a        
                                                       recreational boat.     
                                                       o Business did not     
                                                       file required tax      
                                                       return in a recent     
                                                       year.                  
                                                       o IRS assessed a TFRP  
                                                       against owner.         
                                                       o IRS and state filed  
                                                       tax liens against the  
                                                       business.              
9    Nursing home          $39      $16             o Business's tax debt  
        facilities        million  million             is primarily unpaid    
                                                       payroll taxes.         
                                                       o Business fined for   
                                                       quality of care        
                                                       violations in early    
                                                       2000s.                 
                                                       o Business officer     
                                                       withdrew over $100,000 
                                                       in cash at casinos at  
                                                       the same time he was   
                                                       not paying the nursing 
                                                       home's taxes.          
                                                       o Multimillion-dollar  
                                                       IRS and state tax      
                                                       liens filed against    
                                                       the business.          
10   Professional     $200,000 $200,000             o Owner's tax debt is  
        counselor                                      primarily individual   
                                                       income taxes.          
                                                       o Owner and spouse     
                                                       currently under        
                                                       investigation for mail 
                                                       fraud.                 
                                                       o Owner has a felony   
                                                       conviction.            
                                                       o Owner indicted for   
                                                       fraud for several      
                                                       hundred thousand       
                                                       dollars relating to a  
                                                       federal program.       
                                                       o IRS filed tax liens  
                                                       against the owners.    

2426 U.S.C. S 7202.

2526 U.S.C. S 7215 and 26 U.S.C. S 7512 (b).

Source: GAO analysis of IRS, FMS, Medicaid claims, public, and other
records.

Notes: Dollar amounts are rounded. The nature of unpaid taxes for
businesses was primarily due to unpaid payroll taxes. A Medicaid provider
can submit claims using either an EIN or SSN. In our report, any provider
submitting a claim with an EIN is referred to as a business, and any
provider submitting a claim with an SSN is referred to as an individual.
aMedicaid payments are Medicaid claims paid by states for fiscal year 2006
(October 1, 2005, to September 30, 2006). bUnpaid tax amount was as of
September 30, 2006.

The following provides illustrative detailed information on four cases we
audited and investigated.

           o Case 1: During the time the owners of the hospital owed over $5
           million in payroll taxes, the owners purchased a vacation home
           worth about $1 million. IRS assessed a trust fund recovery penalty
           (TFRP) of nearly $2 million against the owners, filed federal tax
           liens totaling nearly $8 million against the owners and hospital,
           attempted to levy the owners' bank accounts, and proposed an
           injunction to close the hospital because the business continued to
           accumulate tax debt. The hospital received over $9 million in
           Medicaid payments during fiscal year 2006.

           o Case 2: While owing over $2 million in unpaid payroll taxes, the
           nursing home owner and business were fined for jeopardizing the
           health and safety of their patients. The nursing home owner
           attempted to sell the business and other real estate property and
           promised to pay tax debts in full. However, the owner did not sell
           the business or real estate and took other actions to avoid
           federal tax liens. IRS fined the owner over $400,000 in a recent
           year for intentionally disregarding IRS's tax reporting and filing
           requirements. The owner also has a related business that owes over
           $1 million in unpaid taxes. The nursing home received over $6
           million in Medicaid payments during fiscal year 2006.

           o Case 4: The managing officer of a pharmacy sold off business
           assets without notifying IRS while knowing that the business owed
           over $800,000 in unpaid payroll taxes over 7 years. In an attempt
           to collect unpaid debts from the officer, IRS assessed a TFRP of
           nearly $3 million and filed federal tax liens against the officer
           and the business. The officer owns a related entity that also owes
           a large amount of taxes, and recently started up a new corporation
           using the same address as the pharmacy. The pharmacy received
           nearly $100,000 in Medicaid payments during fiscal year 2006.

           o Case 8: A medical clinic owner owns a house worth nearly $4
           million, several luxury vehicles, and a pleasure boat while owing
           taxes. The owner also borrowed over $2 million from the business
           and sold properties for about $1 million at the same time the
           business owed over $1 million in unpaid payroll taxes. In
           addition, IRS generated a tax return for the business in a recent
           year because the business owner did not file it. The medical
           clinic received over $2 million in Medicaid payments during fiscal
           year 2006.

In addition to the 25 cases that we identified through IRS tax records, we
separately also found a Medicaid provider that was recently convicted for
failure to pay employment taxes owed by several nursing homes.26 The
nursing home businesses received over $25 million in Medicaid payments
during fiscal year 2006. According to court documents, the nursing homes
owed over $14 million in unpaid taxes. At the same time the businesses
owed taxes, the owner bought a 10,000 square foot house with a current
estimated value of over $2 million. The court records indicate that the
owner spent tens of thousands of dollars furnishing the house including
crystal chandeliers, a 132-piece set of Haviland Bavarian porcelain china,
and oriental rugs. The owner used company funds to pay personal expenses
such as a housekeeper, children's nanny, monthly pension for a parent who
never worked at the company, a sailboat, and jet-skis. While owing taxes,
the owner also went on vacations to Hawaii and gambling trips to Las Vegas
and Reno, Nevada. Court records also indicate that while in Hawaii, the
owner bought a $16,000 Rolex watch, the day before one of the required
federal tax deposits was due.

Providers with Unpaid Federal Taxes Are Not Prohibited from Enrolling or
Receiving Payments from Medicaid

CMS and the selected states do not prevent health care providers who have
tax debts from enrolling in or receiving payments from Medicaid. CMS has
not developed regulations to require states to (1) screen health care
providers for unpaid taxes and (2) obtain consent for IRS disclosure of
federal tax debts. CMS officials stated that the primary focus of the
Medicaid program is to provide health care services for low income people
and not the administration of taxes. Further, federal law generally
prohibits the disclosure of taxpayer data to CMS and states and thus, CMS
and states do not have access to tax data directly from IRS unless the
taxpayer provides consent.27 Further, none of the seven states we
contacted have ever implemented a continuous federal tax levy for Medicaid
payments. Thus, Medicaid payments to providers that owe federal taxes are
not being continuously levied.

Screening for Unpaid Taxes

Federal law does not prohibit providers with unpaid federal taxes from
enrolling in and billing Medicaid. Federal regulations and policies
require the states, as part of their responsibilities for determining
whether the providers meet Medicaid requirements for enrollment, to verify
basic information on potential providers, including whether the providers
meet state licensure requirements and whether the providers are prohibited
from participating in federal health care programs. However, federal
regulations and policies do not require the states to screen these
providers for federal tax delinquency nor do they explicitly authorize the
states to reject the providers that have delinquent tax debt from
participation in Medicaid. CMS officials stated that the primary focus of
the Medicaid program is to provide health care services for low income
people and not the administration of taxes. CMS officials stated that such
a requirement could be a burden to the states in their enrollment of
providers and could adversely impact states' ability to provide health
care to the poor. Consequently, the selected states' processes generally
do not consider federal tax debts of prospective providers in the Medicaid
enrollment process.28

26Taxpayer records (e.g., IRS Unpaid Assessment File, transcripts) were
not accessed for this case example. All information concerning this case
was found through court records and Medicaid claim information provided by
the state.

27States screen health care providers prior to enrollment into the
Medicaid program. States also process and pay the Medicaid claims and are
reimbursed for the federal share of such payments by CMS.

Further, due to a statutory restriction on disclosure of taxpayer
information, even if tax debts specifically were to be considered in
enrollment in Medicaid, no coordinated or independent mechanism exists for
the states to obtain complete information on providers that have unpaid
tax debt. Federal law does not permit IRS to disclose taxpayer
information, including tax debts, to CMS or Medicaid state officials
unless the taxpayer consents, which neither CMS nor the states currently
seek.29 Thus, certain tax debt information can only be discovered from
public records if IRS files a federal tax lien against the property of a
tax debtor or if a record of conviction for tax offense is publicly
available.30 Consequently, CMS and state officials do not have ready
access to information on unpaid tax debts to consider in making decisions
on Medicaid providers.

28Officials from California stated that they do consider federal debts,
including tax debts, if it is self-disclosed on the Medicaid application.
California officials said that no verification is made.

2926 U.S.C. S 6103.

30Under section 6321 of the Internal Revenue Code, IRS has the authority
to file a lien upon all property and rights to property, whether real or
personal, of a delinquent taxpayer.

Medicaid Payments to Providers Are Not Subject to IRS Continuous Levy

Although a provision of the Taxpayer Relief Act of 1997 authorizes IRS to
continuously levy certain federal payments made to delinquent taxpayers,
no tax debt owed by Medicaid providers has ever been collected using this
provision of the law.31 In the 10 years since its passage, IRS had not
determined whether Medicaid payments are federal payments and thus subject
to the continuous levy program or determined the feasibility of
incorporating these payments into the program.32

If there had been an effective levy program in place, we estimate that the
selected states could have levied payments for the federal government and
collected between $70 million to about $160 million of unpaid federal
taxes during fiscal year 2006.33 This estimate was based on those debts
that IRS reported to the Treasury Offset Program (TOP) as of September 30,
2006. Officials from all these selected states stated that they have a
continuous levy program to offset Medicaid payments against their state
debts.

Conclusions

Available data indicate that the vast majority of Medicaid providers
appear to pay their federal taxes. However, our work has shown that over
30,000 Medicaid providers have taken advantage of the opportunity to avoid
paying their federal taxes. While Medicaid providers are relied on to
deliver significant medical services to those most in need, they must also
pay their fair share of federal taxes. Many of the individuals involved in
our cases have consistently not paid their taxes yet have received
millions of dollars in Medicaid payments and have faced no criminal
consequences. At the same time, some of these individuals are living lives
of luxury, financed in part by Medicare and Medicaid payments. Also, IRS
has taken little action to explore the continuous levy of Medicaid
payments, which over time potentially could have resulted in millions of
dollars of collections or to aggressively pursue collection and criminal
investigation of the individuals involved in our 25 case studies.

31To improve the collection of unpaid taxes, IRS is authorized to
continuously levy up to 100 percent for federal payments related to goods
and services. To implement this levy authority, IRS, in coordination with
the Department of the Treasury's FMS, implemented the Federal Levy Payment
Program in July 2000. This program uses FMS's Treasury Offset Program
(TOP) for the levy of federal payments.

32In addition to the continuous levy program, IRS also has the authority
to legally seize property either held by the taxpayer or owned by the
taxpayer and held by a third party. This authority includes the seizure of
Medicaid receivables held by states and owed to health care providers.
Unlike levies from the continuous levy program, each levy is typically a
one-time seizure of property (i.e., Medicaid receivables) held by states
at a specific point of time and is done on a case-by-case basis based on
the particular circumstances of the case. IRS officials stated that they
do not know how much in tax levies were collected from Medicaid payments.

33Medicaid providers from the seven selected states had $475 million in
tax debts in TOP as of September 30, 2006. In addition, these providers
had $241 million in federal nontax debts, $202 million in delinquent child
support, and $6 million in state tax debts.

Recommendations for Executive Action

We recommend that the Commissioner of the Internal Revenue Service take
the following two actions:

           o Conduct a study to determine whether Medicaid payments can be
           incorporated in the continuous levy program.

           o Evaluate the 25 referred cases detailed in this report for
           appropriate additional aggressive collection action and criminal
           investigation as warranted.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from the Acting
Commissioner of Internal Revenue (see app. III) and Acting Administrator
of CMS (see app. IV). We also received an e-mail response from FMS.

IRS concurred with our recommendations. In response to our recommendation
that IRS conduct a study to determine whether Medicaid payments can be
incorporated in the continuous levy program, IRS stated that both a
subgroup of the Federal Contractors Tax Compliance (FCTC) task force and
IRS General Counsel have completed an independent study on whether the
Medicaid payments can be incorporated into the continuous levy program.
Both the FCTC task force and IRS General Counsel concluded that Medicaid
disbursements do not qualify as federal payments and therefore cannot be
incorporated in the continuous levy program.

In response to a draft of our report, CMS expressed concern about the tone
and language we used to discuss our findings. Specifically, CMS
interpreted our finding that over 30,000 Medicaid providers had over $1
billion of unpaid federal taxes as implying that "there is some direct
correlation between owing taxes and being a Medicaid provider." Our report
clearly states that the vast majority of Medicaid providers are paying
their taxes. For the 5 percent of Medicaid providers with tax debt, we
simply reported on the facts of what we found, which do not require
additional evaluation to satisfactorily address our objective.
Furthermore, regarding our third objective, CMS interpreted our report as
implying that there is an underlying connection between the activity
(preventing providers with tax problems from participating in the Medicaid
program) and the authority and responsibility to perform such activity.
Again, it appears that CMS misinterpreted our findings. We specifically
stated that federal law does not prohibit providers with unpaid taxes from
enrolling in and billing Medicaid. Although CMS is not required to screen
potential providers for tax debts, we are concerned that CMS stated it
would be inappropriate to prevent medical providers that owe federal taxes
participating in the Medicaid program--which would presumably include
those egregious cases we identified in this report. We believe that any
CMS action to prevent medical providers who refuse to pay their taxes from
participating in the Medicaid program would help ensure the integrity of
the Medicaid program and does not necessarily conflict with CMS's role in
providing health care to low-income individuals.

Both CMS and FMS expressed concern with their agencies involvement in the
continuous levy program. CMS stated that we implied that CMS and the
Medicaid agencies should be conducting the continuous levy on these
payments. FMS stated that our report indicated that, because Medicaid
payments include funds the states receive from the federal government, the
Medicaid payment is a federal payment. Our report did not state that CMS
and the Medicaid agencies should be conducting the continuous levy on
Medicaid payments nor did we state that Medicaid payments are federal
payments. However, we did report that IRS had not determined whether
Medicaid payments are federal payments and recommended that IRS conduct a
study to determine whether Medicaid payments can be incorporated in the
continuous levy program.

CMS and FMS also provided us technical corrections to the report which we
incorporated, as appropriate.

As agreed with your office, unless you publicly release its contents
earlier we plan no further distribution of this report until 30 days from
the date of this letter. At that time, we will send copies of this report
to the Secretary of the Treasury, the Commissioner of the Financial
Management Service (FMS), the Acting Commissioner of Internal Revenue, the
Acting Administrator of Centers for Medicare & Medicaid Services (CMS) and
interested congressional committees.

The report is also available at no charge on the GAO Web site at
[33]http://www.gao.gov . If you have any questions concerning this report,
please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact
points for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report.

Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations

Appendix I: Scope and Methodology

To identify the magnitude of unpaid federal taxes owed by Medicaid
providers, we used a nonrepresentative selection of states. We selected
the states of California, Colorado, Florida, Maryland, New York,
Pennsylvania, and Texas based on the magnitude of payments made to
Medicaid providers and the geographical location of those states. We
obtained and analyzed Internal Revenue Service (IRS) tax debt data as of
September 30, 2006. We also obtained and analyzed the selected states'
federal fiscal year 2006 approved Medicaid payments to providers. We
matched the Medicaid payment data to the IRS unpaid assessment data using
the taxpayer identification number (TIN) field. To avoid overestimating
the amount owed by Medicaid providers with unpaid tax debts and to capture
only significant tax debts, we excluded from our analysis tax debts and
paid claims meeting specific criteria to establish a minimum threshold for
the amount of tax debt and for the amount of paid claims to be considered
when determining whether a tax debt was significant. The criteria we used
to exclude tax debts are as follows:

           o tax debts that IRS classified as compliance assessments or memo
           accounts for financial reporting,1

           o tax debts from calendar year 2006 tax periods, and

           o Medicaid providers with total unpaid taxes and Medicaid paid
           claims of less than $100.

These criteria were used to exclude tax debts that might be under dispute
or generally duplicative or invalid, and tax debts that were recently
incurred. Specifically, compliance assessments or memo accounts were
excluded because these taxes have neither been agreed to by the taxpayers
nor affirmed by the court, or these taxes could be invalid or duplicative
of other taxes already reported. We excluded tax debts from calendar year
2006 tax periods to eliminate tax debt that may involve matters that are
routinely resolved between the taxpayer and IRS, with the taxes paid or
abated within a short period. We further excluded tax debts and
Medicaid-paid claims of less than $100 because they are insignificant for
the purpose of determining the extent of taxes owed by Medicaid providers.
Our analysis also did not attempt to identify Medicaid providers who owed
taxes under a separate TIN from the TIN under which the Medicaid payments
were received. As a result, the full extent of unpaid federal taxes for
Medicaid providers is understated.

1Under federal accounting standards, unpaid assessments require taxpayer
or court agreement to be considered federal taxes receivables. Compliance
assessments and memo accounts are not considered federal taxes receivable
because they are not agreed to by taxpayers or the courts.

To identify indications of abuse or potentially criminal activity, we
selected 25 Medicaid providers for a detailed audit and investigation. The
25 providers were chosen using a nonrepresentative selection approach
based on our judgment, data mining, and a number of other criteria.
Specifically, we narrowed down providers to 25 with unpaid taxes based on
the amount of unpaid taxes, number of unpaid tax periods, amount of
payments reported by Medicaid, and indications that owner(s) might be
involved in multiple companies with tax debts. For these 25 cases, we
obtained copies of automated tax transcripts and other tax records (for
example, revenue officer's notes) from IRS and performed additional
searches of criminal, financial, and public records. In cases where record
searches and IRS tax transcripts indicated that the owners or officers of
a business were involved in other related entities2 that have unpaid
federal taxes, we also reviewed the related entities and the owner(s) or
officer(s), in addition to the original business we identified. In
instances where we identified related parties that had both Medicaid
payments and tax debts, our case studies included those related entities,
combining unpaid taxes and combined Medicaid payments for the original
individual/business as well as all related entities. Because our
investigations were generally limited to publicly available information,
our audit of the 25 cases may not have identified all related parties or
all significant assets (i.e., personal bank data, companies established to
hide assets) that the Medicaid providers own.

To determine the extent to which Centers for Medicare & Medicaid Services
(CMS) officials and the states are required to consider tax debts or other
criminal activities in the enrollment of providers into Medicaid, we
examined CMS policies and procedures, Medicaid regulations, and the
selected policies for enrollment. We also discussed policies and
procedures used to enroll providers into Medicaid with officials from the
selected states. As part of these discussions, we inquired whether the
selected states specifically consider tax debts or perform background
investigations to determine whether a prospective provider is qualified
before the enrollment to Medicaid is granted. To determine the extent to
which Medicaid payments to providers are continuously levied to pay tax
debts, we examined the statutory and regulatory authorities that govern
the continuous levy program and interviewed officials from CMS, IRS, and
Department of the Treasury's Financial Management Service (FMS) to
determine whether any legal barriers existed.

2We define "related entities" as entities that share common owner(s) or
officer(s), a common TIN, or a common address.

To determine the potential levy collections on Medicaid payments during
fiscal year 2006, we used 15 percent and 100 percent of the total paid
claim or total tax debt amount reported to the Treasury Offset Program
(TOP), whichever was less. A gap will exist between what could be
collected and the maximum levy amount calculated because (1) tax debts in
TOP may not be eligible for immediate levy because IRS has not completed
due process notifications and (2) tax debts may become ineligible for levy
because of a change in collection status (e.g., tax debtor filed for
bankruptcy).

We conducted our audit work from July 2006 through August 2007 in
accordance with U.S. generally accepted government auditing standards, and
we performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.

Data Reliability Assessment

To determine the reliability of the IRS unpaid assessments data, we relied
on the work we performed during our annual audits of IRS's financial
statements. While our financial statement audits have identified some data
reliability problems associated with the coding of some of the fields in
IRS's tax records, including errors and delays in recording taxpayer
information and payments, we determined that the data were sufficiently
reliable to address this report's objectives. Our financial audit
procedures, including the reconciliation of the value of unpaid taxes
recorded in IRS's masterfile to IRS's general ledger, identified no
material differences.

For the selected states' Medicaid payment databases and FMS's TOP
databases, we interviewed the selected states' and FMS officials
responsible for their respective databases. In addition, we performed
electronic testing of specific data elements in the databases that we used
to perform our work. On the basis of our discussions with agency
officials, review of agency documents, and our own testing, we concluded
that the data elements used for this testimony were sufficiently reliable
for our purposes.

Appendix II: Medicaid Providers with Unpaid Federal Taxes

This appendix presents summary information on the abusive or potentially
criminal activity associated with 15 of our 25 case studies. Table 2 shows
the remaining case studies that we audited and investigated. As with the
10 cases discussed in the body of this report, we also found substantial
abuse and potentially criminal activity related to the federal tax system
during our review of these 15 Medicaid providers that also received
Medicaid payments in federal fiscal year 2006. The case studies involving
businesses primarily involved unpaid payroll taxes.

Table 2: Additional Medicaid Providers with Unpaid Federal Taxes

                                          Unpaid                              
                             Medicaid    federal                              
Case Nature of work      paymentsa       taxb  Comments                    
11   Physician            $100,000   $300,000     o Physician's tax debt   
                                                     is primarily individual  
                                                     income taxes.            
                                                     o Physician owns several 
                                                     luxury cars.             
                                                     o Physician defaulted on 
                                                     an installment agreement 
                                                     with IRS.                
                                                     o Physician did not file 
                                                     income tax returns in    
                                                     recent years.            
                                                     o Physician received     
                                                     tens of thousands of     
                                                     dollars from Medicare in 
                                                     a recent year.           
                                                     o IRS filed tax liens    
                                                     against the physician.   
12   Hospital          $13 million $7 million     o Hospital's tax debts   
                                                     are primarily composed   
                                                     of unpaid payroll taxes  
                                                     dating back to the late  
                                                     1990s.                   
                                                     o IRS reported tax debts 
                                                     to continuous levy       
                                                     program.                 
                                                     o Hospital received tens 
                                                     of millions of dollars   
                                                     in Medicare payments in  
                                                     a recent year.           
                                                     o IRS assessed trust     
                                                     fund recovery penalty    
                                                     (TFRP) against the       
                                                     business officer.        
                                                     o Business officer       
                                                     admitted hiding money    
                                                     from creditors in a      
                                                     recent year.             
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     hospital.                
13   Medical center     $1 million $1 million     o Business's tax debts   
                                                     are primarily composed   
                                                     of unpaid payroll taxes. 
                                                     o Business officer owns  
                                                     over $1 million property 
                                                     and a luxury vehicle.    
                                                     o IRS reported related   
                                                     business tax debts to    
                                                     the continuous levy      
                                                     program.                 
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
                                                     o Business received over 
                                                     $300,000 in Medicare     
                                                     payments in a recent     
                                                     year.                    
14   Physician            $100,000   $300,000     o Physician's tax debts  
                                                     are primarily unpaid     
                                                     individual income taxes. 
                                                     o Physician has made     
                                                     little, and in some      
                                                     instances no, federal    
                                                     tax payments to IRS      
                                                     since the late 1990s.    
                                                     o Physician claimed      
                                                     limited ability to pay   
                                                     taxes. However,          
                                                     physician owns a         
                                                     residential property     
                                                     worth over $1 million    
                                                     and also received tens   
                                                     of thousands of dollars  
                                                     from Medicare in a       
                                                     recent year.             
                                                     o Physician owes debts   
                                                     to another federal       
                                                     agency.                  
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     physician.               
15   Physician            $200,000   $200,000     o Physician's tax debts  
                                                     are primarily unpaid     
                                                     individual income taxes  
                                                     dating back to early     
                                                     2000s.                   
                                                     o Physician is being     
                                                     sued for malpractice.    
                                                     o IRS filed tax liens    
                                                     against the physician.   
                                                     o IRS reported tax debts 
                                                     to continuous levy       
                                                     program.                 
16   Business services    $600,000   $500,000     o Business tax debts are 
                                                     primarily unpaid payroll 
                                                     taxes.                   
                                                     o IRS rejected the       
                                                     business owner's offer   
                                                     to pay about 10 percent  
                                                     to settle the tax debt   
                                                     due to the owner's       
                                                     ability to pay more.     
                                                     o Business owner has an  
                                                     egregious history of not 
                                                     paying taxes.            
                                                     o Business owner filed   
                                                     late returns and did not 
                                                     make any payroll tax     
                                                     payment for over 5       
                                                     years.                   
                                                     o IRS assessed a TFRP    
                                                     against the business     
                                                     owner.                   
                                                     o Business owner was     
                                                     recently assessed a TFRP 
                                                     for another related      
                                                     business.                
17   Ambulance            $700,000   $400,000     o Owner's tax debts are  
        services                                     primarily unpaid         
                                                     individual income taxes  
                                                     for every year for a     
                                                     decade.                  
                                                     o Business owner has     
                                                     made no effort to pay    
                                                     taxes owed.              
                                                     o Owner made several     
                                                     large cash transactions  
                                                     in recent years.         
                                                     o Business owner has     
                                                     multiple real estate     
                                                     properties, including    
                                                     several investment       
                                                     properties.              
18   Dental               $200,000   $400,000     o Dentist's tax debts    
                                                     are primarily unpaid     
                                                     individual income taxes  
                                                     dating back to the late  
                                                     1990s.                   
                                                     o Dentist did not file   
                                                     tax returns in the early 
                                                     2000s.                   
                                                     o Dentist owes           
                                                     delinquent student       
                                                     loans.                   
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
19   Medical equipment    $300,000   $500,000     o Business tax debts are 
        and supplies                                 primarily unpaid payroll 
                                                     taxes dating back to the 
                                                     late 1990s.              
                                                     o Business officer owns  
                                                     a luxury vehicle.        
                                                     o IRS reported tax debts 
                                                     to continuous levy       
                                                     program.                 
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
20   Transportation       $900,000 $2 million     o Business officers own  
        services                                     multiple real estate     
                                                     properties, including a  
                                                     residential property     
                                                     worth about $1 million   
                                                     and two                  
                                                     multimillion-dollar      
                                                     commercial properties.   
                                                     o Received over $3       
                                                     million in Medicare      
                                                     payments in a recent     
                                                     year.                    
                                                     o IRS assessed a TFRP    
                                                     against the owner.       
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
21   Dental               $200,000   $200,000     o Dentist's tax debts    
                                                     are primarily unpaid     
                                                     individual income taxes  
                                                     dating back to the       
                                                     mid-1990s.               
                                                     o Dentist convicted of   
                                                     tax evasion.             
22   Family services      $500,000 $3 million     o Business tax debts are 
                                                     primarily unpaid payroll 
                                                     taxes.                   
                                                     o IRS assessed TFRP      
                                                     against business         
                                                     officers.                
                                                     o Business earned over   
                                                     $3 million in a recent   
                                                     year.                    
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
23   Nursing services   $1 million $2 million     o Business tax debts are 
                                                     primarily unpaid payroll 
                                                     taxes.                   
                                                     o Business earned over   
                                                     $1 million in a recent   
                                                     year.                    
                                                     o IRS reported business  
                                                     as being in defunct      
                                                     status.                  
                                                     o IRS reported tax debts 
                                                     to continuous levy       
                                                     program.                 
                                                     o IRS filed tax liens    
                                                     against the business.    
24   Ambulance            $300,000   $300,000     o Business tax debts are 
        services                                     primarily payroll taxes. 
                                                     o All business's assets  
                                                     were seized by law       
                                                     enforcement agency for   
                                                     money laundering.        
                                                     o Business in defunct    
                                                     status in a recent year. 
                                                     o Business received over 
                                                     $2 million in Medicare   
                                                     payments in the year     
                                                     prior to being defunct.  
                                                     o Owner arrested for     
                                                     cocaine possession.      
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                
                                                     o IRS assessed a TFRP    
                                                     against the owner.       
25   Home health        $4 million   $900,000     o Business debts are     
        services                                     primarily unpaid payroll 
                                                     taxes.                   
                                                     o Business officer owns  
                                                     a luxury vehicle.        
                                                     o IRS assessed a TFRP    
                                                     against the business     
                                                     officers.                
                                                     o IRS and state filed    
                                                     tax liens against the    
                                                     business.                

Source: GAO analysis of IRS, FMS, Medicaid claims, public, and other
records.

Notes: Dollar amounts are rounded. The nature of unpaid taxes for
businesses was primarily due to unpaid payroll taxes. A Medicaid provider
can submit claims using either an Employer Identification Number (EIN) or
Social Security Number (SSN). In our report, any provider submitting a
claim with an EIN is referred to as a business, and any provider
submitting a claim with an SSN is referred to as an individual.

aMedicaid payments are Medicaid claims paid by states for fiscal year 2006
(October 1, 2005, to September 30, 2006).

bUnpaid tax amount was as of September 30, 2006.

Appendix III: Comments from the Internal Revenue Service 

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Greg D. Kutz, (202) 512-6722, or [email protected]

Acknowledgments

In addition to the contact named above, the following individuals made
major contributions to this report: Matthew Valenta, Assistant Director;
Erika Axelson; Ray Bush; Jeremiah Cockrum; Bill Cordrey; Kenneth Hill;
John Kelly; Tram Le; Barbara Lewis; Andrew McIntosh; John Ryan; Steve
Sebastian; Robert Sharpe; Barry Shillito; Pat Tobo; and Jenniffer Wilson
made key contributions to this report.

(192223)

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Highlights of [41]GAO-08-17 , a report to the Permanent Subcommittee on
Investigations, Committee on Homeland Security and Governmental Affairs,
U.S. Senate

November 2007

MEDICAID

Thousands of Medicaid Providers Abuse the Federal Tax System

In fiscal year 2006, outlays for Medicaid were about $324 billion; about
$185 billion was paid by the federal government. Because GAO previously
identified abusive and criminal activity associated with government
contractors owing billions of dollars in federal taxes, the subcommittee
requested GAO expand our work to Medicaid providers.

GAO was asked to (1) determine if Medicaid providers have unpaid federal
taxes, and if so, the magnitude of such debts; (2) identify examples of
Medicaid providers that have engaged in abusive or criminal activities;
and (3) determine whether the Centers for Medicare & Medicaid Services
(CMS) and the states prevent health care providers with tax problems from
enrolling in Medicaid or participating in the continuous levy program to
pay federal tax debts.

To perform this work, GAO analyzed tax data from the Internal Revenue
Service (IRS) and Medicaid data from seven selected states based on
magnitude of Medicaid payments and geography. GAO also performed
additional investigative activities.

[42]What GAO Recommends

GAO is recommending that IRS conduct a study to determine whether Medicaid
payments can be incorporated in the continuous levy program and evaluate
25 cases for additional collection action and criminal investigation. IRS
agreed with our recommendations.

Over 30,000 Medicaid providers, about 5 percent of those paid in fiscal
year 2006, had over $1 billion of unpaid federal taxes. These 30,000
providers were identified from a nonrepresentative selection of providers
from seven states: California, Colorado, Florida, Maryland, New York,
Pennsylvania, and Texas. This $1 billion estimate is likely understated
because some Medicaid providers have understated their income or not filed
their tax returns.

We selected 25 Medicaid providers with high federal tax debt as case
studies for more in-depth investigation of the extent and nature of abuse
and criminal activity. For all 25 cases we found abusive and related
criminal activity, including failure to remit individual income taxes or
payroll taxes to IRS. Rather than fulfill their role as ``trustees'' of
federal payroll tax funds and forward them to IRS, these providers
diverted the money for other purposes. Willful failure to remit payroll
taxes is a felony under U.S. law. Individuals associated with some of
these providers diverted the payroll tax money for their own benefit or to
help fund their businesses. Many of these individuals accumulated
substantial assets, including million-dollar houses and luxury vehicles,
while failing to pay their federal taxes. In addition, some case studies
involved businesses that were sanctioned for substandard care of their
patients. Despite their abusive and criminal activity, these 25 providers
received Medicaid payments ranging from about $100,000 to about $39
million in fiscal year 2006.

Examples of Medicaid Providers with Abusive and Criminal Activity

                           Fiscal year 2006                                   
Type of      Unpaid tax         Medicaid                                   
business           debt         payments Description of activity           
Nursing home                             Owner fined for jeopardizing      
                $2 million       $6 million health and safety of patients.    
Counselor                                Owner indicted for fraud for      
                                            several hundred thousands of      
                                            dollars relating to a federal     
                  $200,000         $200,000 program.                          
Ambulance                                All business's assets were seized 
service                                  by a law enforcements agency for  
                  $300,000         $300,000 money laundering.                 

Source: GAO analysis of IRS, CMS, public, and other records.

CMS and our selected states do not prevent health care providers who have
federal tax debts from enrolling in Medicaid. CMS officials stated that
such a requirement for screening potential providers for unpaid taxes
could adversely impact states' ability to provide health care to low
income people. Further, federal law generally prohibits the disclosure of
taxpayer data to CMS and states.

No tax debt owed by Medicaid providers has ever been collected through the
continuous levy program. During our audit, IRS had not made a
determination on whether Medicaid payments are considered ``federal
payments'' and thus eligible for its continuous levy program. For fiscal
year 2006, if an effective levy was in place for the seven selected
states, GAO estimates that the federal government could have collected
between $70 million and $160 million.

References

Visible links
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-04-414T
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-05-683T
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-06-492T
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-887
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-01-42
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-26
  33. http://www.gao.gov/
  34. http://www.gao.gov/
  35. http://www.gao.gov/
  36. http://www.gao.gov/fraudnet/fraudnet.htm
  37. mailto:[email protected]
  38. mailto:[email protected]
  39. mailto:[email protected]
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-08-17
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-08-17
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