Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax  
System (14-NOV-07, GAO-08-239T).				 
                                                                 
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 Medicare and Medicaid providers. Today's testimony covers	 
Medicaid providers who abused the federal tax system from 7	 
selected states. GAO was asked to (1) determine if Medicaid	 
providers have unpaid federal taxes, and the magnitude of such	 
debts; (2) identify examples of Medicaid providers that have	 
engaged in abusive or related 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 and performed 
investigative activities.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-239T					        
    ACCNO:   A78128						        
  TITLE:     Medicaid: Thousands of Medicaid Providers Abuse the      
Federal Tax System						 
     DATE:   11/14/2007 
  SUBJECT:   Delinquent taxes					 
	     Federal taxes					 
	     Health care fraud					 
	     Health care programs				 
	     Income taxes					 
	     Medicare						 
	     Noncompliance					 
	     Personal income taxes				 
	     Tax administration 				 
	     Tax evasion					 
	     Tax law						 
	     Tax nonpayment					 
	     Tax violations					 
	     Taxes						 
	     Withholding taxes					 
	     Payroll taxes					 
	     Waste, fraud, and abuse				 

******************************************************************
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**                                                              **
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GAO-08-239T

   

     * [1]Summary
     * [2]Magnitude of Unpaid Federal Taxes of Medicaid Providers
     * [3]Examples of Extent and Nature of Medicaid Providers' Abusive
     * [4]Providers with Unpaid Federal Taxes Are Not Prohibited from
     * [5]Concluding Comments
     * [6]GAO's Mission
     * [7]Obtaining Copies of GAO Reports and Testimony

          * [8]Order by Mail or Phone

     * [9]To Report Fraud, Waste, and Abuse in Federal Programs
     * [10]Congressional Relations
     * [11]Public Affairs

Testimony

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

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 2:30 p.m. EST
Wednesday, November 14, 2007

MEDICAID

Thousands of Medicaid Providers Abuse the Federal Tax System

Statement of Gregory D. Kutz, Managing Director Forensic Audits and
Special Investigations

GAO-08-239T

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss Medicaid health care providers
from seven selected states and their adherence to the federal tax system.
This testimony builds on your concern about the $290 billion annual
federal tax gap. This testimony also builds on a large body of work,
conducted over the past few years, much of which was requested by this
Subcommittee, in which we investigated entities that have abused the
federal tax system while benefiting from doing business with or receiving
status from the federal government.1 Our testimony, and the accompanying
report that we are releasing today,2 address Medicaid health care
providers from seven selected states who also abused the federal tax
system.

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. Medicaid is jointly
funded by the federal and state governments. In fiscal year 2006,
according to Centers for Medicare & Medicaid Services (CMS), total outlays
for Medicaid (federal and state) were approximately $324 billion, of which
about $185 billion was paid by the federal government.

Today's testimony focuses on (1) whether providers who receive Medicaid
payments from the seven selected states have unpaid federal taxes, and if
so, the magnitude of federal tax debts owed by these Medicaid providers;
(2) providing examples of providers engaged in abusive and criminal
activity related to the federal tax system; and (3) whether 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:3 California,
Colorado, Florida, Maryland, New York, Pennsylvania, and Texas.4 We
matched the lists of Medicaid providers with IRS tax debts as of September
30, 2006. To further analyze abuse of the federal tax system by selected
Medicaid providers, we applied certain criteria--the amount of outstanding
tax debt, and the number and age of reporting periods for which taxes were
due--to select 25 providers for detailed audit and investigation. For
these 25 providers, we reviewed tax records and performed additional
searches of criminal, financial, and other public records.

1See related GAO products at the end of this testimony.

2GAO, Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax
System, [12]GAO-08-17 (Washington, D.C.: Nov. 14, 2007).

3There 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.

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 CMS and selected states'
regulations, policies, and procedures for making determinations in the
enrollment approval process. We also interviewed officials from CMS, the
Internal Revenue Service (IRS), and the Department of the Treasury's
Financial Management Service (FMS) concerning any barriers for levying
Medicaid payments. For further details on our scope and methodology, see
appendix I of the accompanying report.5

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

Summary

While the vast majority of Medicaid providers pay their fair share of
taxes, thousands of Medicaid providers in seven selected states abused6
the federal tax system with little or no consequence. Our analysis of data
provided by the selected states and IRS indicates that over 30,000
Medicaid providers, over 5 percent, had tax debts totaling over $1 billion
as of September 30, 2006.7 The unpaid taxes largely consisted of
individual income and payroll taxes.8 The $1 billion estimate of tax debts
owed by Medicaid providers is understated because IRS data do not reflect
all amounts owed by businesses and individuals. Specifically, the $1
billion estimate of tax debts owed does 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.

4Throughout this testimony, these seven states are referred to as the
selected states.

5 [13]GAO-08-17 .

6We 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.

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.9

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 accumulated millions of dollars in
federal taxes. Further, another case study business was sanctioned by its
state regulator for substandard care of its patients.

7Because 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 testimony 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.

8Payroll 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.

9Willful 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).

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 promulgated 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.10 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.

A provision of the Taxpayer Relief Act of 1997 authorizes IRS to
continuously levy certain federal payments made to delinquent taxpayers.
In response to one of our recommendations from our accompanying report,11
IRS has determined that Medicaid payments are not considered federal
payments, and thus are not subject to the continuous levy program. Thus,
no tax debt owed by Medicaid providers can be collected through the
continuous levy program. If there had been an effective program in place
for levying Medicaid payments, 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.

10States 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.

11 [14]GAO-08-17 .

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,
2006.12 This represents over 5 percent of the approximately 560,000
Medicaid providers paid by the selected states during federal fiscal year
2006. As shown in figure 1, 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 1: Medicaid Providers' Unpaid Taxes by Tax Type

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 2, 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. 13

12Our 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.

Figure 2: Unpaid Taxes of Medicaid Providers by Calendar Year

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.14 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.

Although the $1 billion in unpaid federal taxes we identified as owed by
Medicaid providers as of September 30, 2006, is a significant amount, it
understates the full extent of unpaid taxes. This amount does not include
amounts due IRS from Medicaid providers that did not file payroll taxes
(nonfilers) and that underreported their payroll tax liability
(underreporters). Also, we did not include Medicaid provider tax debt from
2006 tax periods, or tax debt for entities owing less than $100 or paid
less than $100.

13A "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.

14The 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. 2 includes taxes that are for tax periods from more than 10 years
ago.

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

For all 25 cases that we audited and investigated,15 we confirmed that
their activities were abusive and in many instances found criminal
activity related to the federal tax system. 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. In table 1,
we summarize 5 of these cases. We have referred the 25 cases detailed in
our accompanying report to IRS so that it can determine whether additional
collection action or criminal investigation is warranted. In response to
our report, IRS agreed to review our cases to determine if additional
collection action or criminal investigation is needed.

15For 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 entities
(i.e., entities that share common owner(s) or officer(s), a common TIN, or
a common address) 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.

Table 1: Medicaid Providers with Unpaid Federal Taxes

                                        Unpaid                                
                          Medicaid     federal                                
Case Nature of work   paymentsa        taxb Comments                       
1    Nursing home   $39 million $16 million    o Business's tax debt 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.       
2    Hospital        $9 million  $5 million    o Business's tax debts 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 trust fund 
                                                  recovery penalty (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 in Medicare         
                                                  payments in a recent year.  
3    Nursing home    $6 million  $2 million    o Business's federal 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.               
4    Home care       $2 million  $3 million    o Business's tax debts 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.          
5    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.         

Source: GAO's 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 testimony, 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 above cases illustrate how some Medicaid providers abused the federal
tax system for their own benefit. Some of these individuals bought or
owned significant personal assets, including expensive homes, recreational
boats 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.

Four of the above cases involved 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.16

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

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.17

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.18 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.19 Consequently, CMS and state officials do not have ready
access to information on unpaid tax debts to consider in making decisions
on Medicaid providers.

16Willful 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).

17Officials from California stated that they do consider federal debts,
including tax debts, if they are self-disclosed on a Medicaid application.
California officials said that no verification is made.

1826 U.S.C. S 6103.

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.20 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. In response to
our recommendation to conduct a study to determine whether Medicaid
payments can be incorporated in the continuous levy program, IRS has
determined that Medicaid payments are not federal payments and thus not
subject to the continuous levy program.21

Concluding Comments

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. It is also important that they
comply with federal tax law in order for the federal government to collect
the funds to which it is entitled to finance critical government
priorities, and to help improve the overall level of compliance with the
nation's tax laws.

19Under 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.

20To 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.

21In 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.

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

For further information about this testimony, please contact Gregory D.
Kutz at (202) 512-6722 or [15][email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this testimony.

Appendix I: Related GAO Products

Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax
Owe Nearly $1 Billion in Payroll and Other Taxes. [16]GAO-07-1090T .
Washington, D.C.: July 24, 2007.

Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax
Owe Nearly $1 Billion in Payroll and Other Taxes. [17]GAO-07-563 .
Washington, D.C.: June 29, 2007.

Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax
System. [18]GAO-07-742T . Washington, D.C.: April 19, 2007.

Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System. [19]GAO-07-587T . Washington, D.C.: March 20, 2007.

Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections. [20]GAO-07-26 . Washington, D.C.: November 15, 2006.

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other
Federal Taxes. [21]GAO-06-887 . Washington, D.C.: July 28, 2006.

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other
Federal Taxes. [22]GAO-06-755T . Washington, D.C.: May 25, 2006.

Financial Management: Thousands of GSA Contractors Abuse the Federal Tax
System. [23]GAO-06-492T . Washington, D.C.: March 14, 2006.

Financial Management: Thousands of Civilian Agency Contractors Abuse the
Federal Tax System with Little Consequence. [24]GAO-05-683T . Washington,
D.C.: June 16, 2005.

Financial Management: Thousands of Civilian Agency Contractors Abuse the
Federal Tax System with Little Consequence. [25]GAO-05-637 . Washington,
D.C.: June 16, 2005.

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. [26]GAO-04-414T . Washington, D.C.: February 12,
2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. [27]GAO-04-95 . Washington, D.C.: February 12,
2004.

(192263)

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To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: [30]www.gao.gov/fraudnet/fraudnet.htm
E-mail: [31][email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [32][email protected] , (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, DC 20548

Public Affairs

Susan Becker, Acting Manager, [33][email protected] , (202) 512-4800 U.S.
Government Accountability Office, 441 G Street NW, Room 7149 Washington,
DC 20548

To view the full product, including the scope

and methodology, click on [34]GAO-08-239T .

For more information, contact Greg Kutz at (202) 512-6722 or
[35][email protected] .

Highlights of [36]GAO-08-239T , a testimony before the Permanent
Subcommittee on Investigations, Senate 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 Medicare and Medicaid providers. Today's
testimony covers Medicaid providers who abused the federal tax system from
7 selected states.

GAO was asked to (1) determine if Medicaid providers have unpaid federal
taxes, and the magnitude of such debts; (2) identify examples of Medicaid
providers that have engaged in abusive or related 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 and performed investigative activities.

[37]What GAO Recommends

GAO's related report (GAO-08-17), released today, recommended IRS
determine whether Medicaid payments can be included in the continuous levy
program and evaluate the 25 cases GAO identified for additional collection
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 understated because
some Medicaid providers may 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 related 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 related 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 Related 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.    
Home care                                Business did not file tax returns 
                $3 million       $2 million in late 1990s and early 2000s.    
Counselor                                Owner indicted for fraud for      
                                            several hundred thousand dollars  
                  $200,000         $200,000 relating to a federal program.    

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 from
Medicaid payments through the continuous levy program. IRS has determined
that Medicaid payments are not considered ``federal payments'' and thus
not eligible for this program. GAO estimates that for the seven selected
states the federal government could have collected between $70 million to
$160 million during fiscal year 2006 if an effective levy program was in
place.

References

Visible links
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-08-17
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-08-17
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-08-17
  15. mailto:[email protected]
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1090T
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-07-742T
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-26
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-887
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-755T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-06-492T
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-683T
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-637
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-414T
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-04-95
  28. http://www.gao.gov/
  29. http://www.gao.gov/
  30. http://www.gao.gov/fraudnet/fraudnet.htm
  31. mailto:[email protected]
  32. mailto:[email protected]
  33. mailto:[email protected]
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-08-239T
  35. mailto:[email protected]
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-08-239T
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