Tax Compliance: Federal Grant and Direct Assistance Recipients	 
Who Abuse the Federal Tax System (16-NOV-07, GAO-08-31).	 
                                                                 
Since February 2004, GAO has reported that weaknesses in the	 
federal programs and controls that allowed thousands of federal  
contractors, tax exempt entities, and Medicare providers to	 
receive government money while owing taxes. GAO was asked to	 
determine if these problems exist for entities who receive	 
federal grants or direct assistance and (1) describe the	 
magnitude of taxes owed, (2) provide examples of grant recipients
involved in abusive and potentially criminal activity, and (3)	 
assess efforts to prevent delinquent taxpayers from participating
in such programs. To perform this work, GAO analyzed data from	 
the Internal Revenue Service (IRS), three of the largest grant	 
and direct assistance payment systems, representing over $460	 
billion in payments in fiscal years 2005 and 2006, and the	 
Housing and Urban Development (HUD) Section 8 tenant-based	 
housing program. GAO investigated 20 cases to provide examples of
grant recipients involved in abusive activity.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-31						        
    ACCNO:   A78210						        
  TITLE:     Tax Compliance: Federal Grant and Direct Assistance      
Recipients Who Abuse the Federal Tax System			 
     DATE:   11/16/2007 
  SUBJECT:   Contractors					 
	     Federal aid to states				 
	     Federal funds					 
	     Federal grants					 
	     Federal law					 
	     Federal taxes					 
	     Housing programs					 
	     Internal controls					 
	     Noncompliance					 
	     Personal income taxes				 
	     Program management 				 
	     Tax exempt status					 
	     Tax law						 
	     Tax nonpayment					 
	     HUD Section 8 Tenant-Based Program 		 

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GAO-08-31

   

     * [1]Results in Brief
     * [2]Background
     * [3]Grant and Direct Assistance Recipients Owe About $790 Millio
     * [4]Examples of Selected Recipients of Grants and Direct Assista
     * [5]Federal Agencies Do Not Prevent Delinquent Taxpayers from Pa
     * [6]Conclusion
     * [7]Recommendations for Executive Action
     * [8]Agency Comments and Our Evaluation

          * [9]Data Reliability Assessment

     * [10]GAO Contact
     * [11]Staff Acknowledgments
     * [12]GAO's Mission
     * [13]Obtaining Copies of GAO Reports and Testimony

          * [14]Order by Mail or Phone

     * [15]To Report Fraud, Waste, and Abuse in Federal Programs
     * [16]Congressional Relations
     * [17]Public Affairs
     * [18]PDF6-Ordering Information-Young-10-25-07.pdf

          * [19]GAO's Mission
          * [20]Obtaining Copies of GAO Reports and Testimony

               * [21]Order by Mail or Phone

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

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

United States Government Accountability Office

GAO

November 2007

TAX COMPLIANCE

Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax
System

GAO-08-31

Contents

Letter 1

Results in Brief 4
Background 7
Grant and Direct Assistance Recipients Owe About $790 Million in Taxes 8
Examples of Selected Recipients of Grants and Direct Assistance Involved
in Abusive and Criminal Activity Related to Federal Tax System 11
Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating in
Federal Grant or Direct Assistance Programs 15
Conclusion 18
Recommendations for Executive Action 18
Agency Comments and Our Evaluation 19
Appendix 1 Scope and Methodology 20
Appendix II Grant and Direct Assistance Recipients with Unpaid Taxes 24
Appendix III Comments from the Internal Revenue Service 27
Appendix IV GAO Contact and Staff Acknowledgments 29
Related GAO Products 30

Tables

Table 1: Examples of Grant and Direct Assistance Recipient Entities with
Unpaid Federal Taxes 11
Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal
Taxes 24

This is a work of the U.S. government and is not subject to copyright
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separately.

Abbreviations

ASAP Automated Standard Application Payment System
CFDA Catalog of Federal Domestic Assistance
FAADS Federal Assistance Awards Data System
GAPS Grant Administration and Payment System
GSA General Services Administration
HHS Department of Health and Human Services
HUD Department of Housing and Urban Development
IRS Internal Revenue Service
OMB Office of Management and Budget
PIC Public Housing Information Center
PMS Payment Management System
SF Standard Form
TIN Taxpayer Identification Number
TFRP Trust Fund Recovery

United States Government Accountability Office
Washington, DC 20548

November 16, 2007

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

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: 

This report continues a series of audits and investigations we have
performed at your request to help address the large tax gap facing our
nation. The tax gap represents the difference between what taxpayers
should pay on a timely basis and what the Internal Revenue Service (IRS)
collected through voluntary compliance and enforcement activities. To help
address the tax gap, beginning in February 2004, we have issued a series
of reports detailing how some organizations and individuals abused the
federal tax system at the same time they were doing business with or
receiving benefits from the federal government and the lack of agency
controls to prevent such abuses from occurring.^1 We determined there are
few consequences of abusing the tax system for these organizations and
individuals, which included defense, civilian agency, and General Services
Administration (GSA) contractors; tax-exempt (not-for-profit)
organizations (including charities participating in the Federal
government's Combined Federal Campaign); and Medicare physicians. While we
performed this work it came to our attention that some organizations and
individuals who were recipients of federal grants were also abusing the
tax system. Thus, you asked us to perform additional work and report
specifically on organizations and individuals who abuse the federal tax
system at the same time they receive federal grants or other similar types
of federal assistance known as direct payments for specified use^2 (direct
assistance) programs.

^1See related GAO products at the end of this report.

Based on your request, we initiated a forensic audit and related
investigations to determine, to the extent practical, whether recipients
of federal grants and direct assistance have unpaid federal taxes. Because
the vast majority of federal grants and direct assistance programs, an
estimated 80 percent of awarded funds, are administered and disbursed
through state and local governments,^3 detailed payment data on the final
recipients needed for us to perform an electronic match with IRS taxpayer
delinquency files are not available at the federal level.^4 Thus, the
specific objectives of our work were to (1) determine to the extent
practical the magnitude of federal taxes owed by individuals and
organizations receiving grants and direct assistance administered and
disbursed at the federal level and to further determine, using a selected
case study of a federal direct assistance program that administers and
disburses payments at the state and local level, tax debts owed by state
and local recipients of such programs; (2) provide examples of grant and
direct assistance recipients involved in abusive or criminal activity
related to the federal tax system; and (3) assess efforts by awarding
agencies to prevent delinquent taxpayers from participating in federal
grant and direct assistance programs.^5

To determine to the extent practical the magnitude of taxes owed by
individuals and organizations receiving grants or direct assistance
administered at the federal level, we utilized disbursements data from
three of the largest federal payment systems^6 that processed payments for
the majority of federal grant and direct assistance excluding Medicare and
Medicaid during fiscal years 2005 and 2006. For our case study of
recipients receiving federal payments at the state and local levels, we
selected the Department of Housing and Urban Development's (HUD) Section 8
tenant-based housing assistance program, a direct assistance program to
aid low-income families, because this program is a large federal program
that is administered at the state or local government level. To determine
the extent to which grant and direct assistance recipients had unpaid
federal taxes, we utilized IRS unpaid tax data as of September 30, 2006.
Using the Taxpayer Identification Number (TIN), we electronically matched
IRS's tax debt data to payment and other management information that
represented payments to the various grant and direct assistance recipients
we identified.

^2As classified by the General Services Administration's Catalog of
Federal Domestic Assistance (CFDA), published annually pursuant to 31
U.S.C. 6104 and OMB Circular No. A-89, Federal Domestic Assistance Program
Information (Aug. 17, 1984). We excluded Medicaid and Medicare programs
from this audit because we are conducting separate reviews on Medicare and
Medicaid program providers owing delinquent taxes.

^3They are defined as state, county, city, or township governments;
special district governments (e.g., public housing authorities and local
transit authorities); independent school districts; and state-controlled
institutions of higher education.

^4Detailed information on payments, including social security and taxpayer
identification numbers, for the ultimate recipients of grants and direct
payments administered at subfederal levels is maintained by thousands of
state and local governmental entities throughout the country.

^5Our audit also included a detailed assessment of tax debts owed by
recipients who received hurricane disaster assistance under the Federal
Emergency Management Agency's Individual and Households Disaster
Assistance Program (IHP), but we will be reporting the results from this
work separately.

To illustrate indications of abuse or criminal activity related to the
federal tax system in grant and direct assistance programs, based on our
data mining, we performed investigative work on a nonrepresentative
selection of 20 organizations and individuals that participated in federal
grant and direct assistance programs during fiscal years 2005 and 2006. We
selected these organizations and individuals based upon factors such as
the amount of tax debt and the number of delinquent tax periods. Our
investigative work included reviewing tax records and performing
additional searches of criminal, financial, and other public records.

To determine the actions that responsible federal agencies take to prevent
individuals and organizations with significant tax delinquencies from
receiving grants and direct assistance, we examined governmentwide and
selected agency policies and procedures, reviewed selected application
files, and interviewed officials from the Office of Management and Budget
(OMB); IRS; and Departments of Agriculture, Education, Health and Human
Services (HHS), Homeland Security, and HUD. For details on our scope and
methodology, see appendix I.

We conducted our audit between January 2007 and August 2007. We performed
our work in accordance with U.S. generally accepted government auditing
standards. The investigative portion of our work was completed in
accordance with investigative standards established by the President's
Council on Integrity and Efficiency.

^6Data we analyzed represented grant and direct assistance payments from
the Department of Education's Grant Administration and Payment System, the
Department of the Treasury's Automated Standard Application Payment
System, and the Department of Health and Human Services' Payment
Management System.

Results in Brief

While most recipients of payments from federal grant and direct assistance
programs pay their federal taxes, our comparison of IRS unpaid assessments
with disbursements made from three of the largest federal grant and direct
assistance payment systems and disbursement-related data for the HUD
Section 8 tenant-based housing assistance program found that tens of
thousands of recipients collectively owed about $790 million in federal
taxes as of September 30, 2006:

           o Over 2,000 grant and direct assistance recipients who received
           certain payments directly from three of the major federal grant
           and direct assistance payment systems during fiscal years 2005 and
           2006 (almost 6 percent of such recipients) owed more than $270
           million of unpaid taxes.

           o About 37,000 landlords who participated in HUD's Section 8
           tenant-based housing direct assistance program during fiscal years
           2005 and 2006 (almost 4 percent of landlords participating in
           HUD's tenant-based program) had an estimated $520 million of
           unpaid federal taxes as of September 30, 2006.

           Our estimates of the taxes owed by grant and direct assistance
           participants are likely substantially understated for a number of
           reasons. For example, most federal grant and direct assistance
           programs whose funds are disbursed through the three federal
           payment systems we reviewed are provided to state and local
           governments who disburse funds to the ultimate recipient (an
           estimated 80 percent of awarded funds) and were thus excluded from
           our analysis. Except for our case study involving the HUD Section
           8 tenant-based program that provides direct assistance through
           public housing agencies to landlords who make available housing
           units to approved low-income families who select dwelling units
           (landlords to rent from) in the private market,^7 our audit did
           not include disbursements made to state and local governments
           because detailed information on the ultimate recipients was not
           practical to obtain. In addition, our estimate does not include
           amounts owed by organizations 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 that specific tax debts are owed. According
           to IRS, underreporting of income accounts for more than 80 percent
           of the more than $345 billion annual gross tax gap.

           We found numerous cases of abusive and criminal activity related
           to the federal tax system in our audit and investigation of 20
           organizations and individuals that we selected based on the large
           amount of federal taxes owed and other factors. Of these 20 cases,
           14 involved organizations that received federal grants. All 14
           grant recipient organizations failed to properly remit to IRS
           payroll taxes withheld from employees. Rather than fulfill their
           role as "trustees" of this money and forward it to IRS as required
           by law, these case study entities and their executives diverted
           the money for other purposes. In one example, a nonprofit
           organization that provides social services received over 1 million
           dollars in grants while owing hundreds of thousands of dollars of
           unpaid payroll taxes. Instead of paying payroll taxes, executives
           misappropriated grant funds for expensive clothing, luxury
           vehicles, and lavish trips to the Caribbean.

           We also found tax abuse in the other six cases that involved
           landlords who benefited from federal housing subsidies provided
           under HUD's Section 8 tenant-based housing program. For example,
           we identified one participating landlord who was delinquent in
           paying federal income tax and had also not properly maintained
           rental housing to acceptable living standards. This landlord has
           been delinquent in paying federal income taxes since the mid-1990s
           and owed over a million dollars of federal taxes. Another
           participating landlord was convicted of money laundering and other
           criminal activities.
			  
^7In the HUD Section 8 tenant-based program (also referred to as the
Housing Choice Voucher Program), HUD pays rental subsidies so eligible
families can afford decent, safe, and sanitary housing. The program is
generally administered by state or local governmental entities called
public housing agencies (PHAs). Families select and rent units that meet
program housing quality standards. PHAs then review the lease arrangement
for purposes such as determining whether the rent is reasonable; the
housing unit meets HUD's housing quality standards; and the landlord is
approvable, which includes, among other things, whether the landlord has
been debarred, suspended, or otherwise disqualified from participating in
HUD programs. If the PHA approves a family's unit and tenancy, the PHA
contracts with the landlord to make rent subsidy payments on behalf of the
family. HUD provides housing assistance funds to the PHA who then pays the
landlord.

           Federal agencies do not prevent individuals and organizations with
           tax debts from receiving federal grant payments. Federal law and
           current governmentwide policies for administering grants, as
           reflected in OMB Circulars, do not prohibit individuals and
           organizations with unpaid taxes from receiving grants, nor do they
           require awarding agencies to verify applicants' disclosures of
           existing federal debt delinquencies in grant applications.
           Although several federal grant-awarding agencies had policies
           against awarding grants to tax delinquent applicants, we found no
           evidence that agencies enforce their policies. Specifically, those
           agencies that told us they would not award a grant to an applicant
           with unpaid taxes could not provide any examples where grant
           officials denied a grant based on an applicant's self-disclosed
           tax delinquencies or required applicants to make repayment
           arrangements. Even if requirements to verify applicant disclosures
           did exist, absent consent from the taxpayer, federal law generally
           prohibits IRS from disclosing taxpayer data and, consequently,
           federal agencies have no access to tax data directly from IRS. For
           example, as we stated earlier, 14 cases that we investigated for
           indications of abuse and potential criminal activity were grant
           recipients and were required to submit applications prior to award
           of the grant.^8 Of these 14 cases, 11 grant recipients submitted
           grant applications at the same time they were delinquent in paying
           their taxes. Our review of those grant applications found that
           these 11 grant recipients appear to have made false statements by
           not disclosing their tax debts in their applications even though
           they were required to do so.

           Based on our review of landlords participating in HUD's Section 8
           tenant-based housing program, a direct assistance program to aid
           low-income families obtain affordable housing, our audit found
           that HUD and its local housing authorities are neither required
           nor do they attempt to prevent individuals and organizations with
           federal tax debts from participating as landlords in the
           tenant-based housing program or receiving federal rental
           subsidies. Specifically, HUD regulations do not prohibit landlords
           with federal tax debts from receiving HUD subsidized rental
           payments. Agency regulations do, however, permit local housing
           authorities to reject landlords who have not paid state or local
           real estate taxes, fines, or assessments.
			  
^8The other six cases involve HUD landlords. These six cases were not
required to submit a similar application that required the applicant to
disclose whether they were delinquent on any federal debt or not.

           We are recommending that the Director, Office of Management and
           Budget, assess the need to require federal agencies that award
           certain grants and other direct assistance, where appropriate, to
           conduct proactive inquiries that would help determine if
           applicants had unpaid federal tax debt, including obtaining
           applicant consent to inquire as to tax debt status from the IRS,
           and consider the result of those inquiries in the award
           determinations. We are also recommending that the Acting
           Commissioner of Internal Revenue evaluate the 20 referred cases
           detailed in this report with high tax debts and potential abusive
           and criminal activity for appropriate additional collection action
           and criminal investigation as warranted.

           IRS provided written comments to a draft of this report and OMB
           provided oral comments. Both IRS and OMB agreed with our
           recommendations. See the Agency Comments and Our Evaluation
           section of this report for a discussion of agency comments from
           OMB and IRS. We have reprinted the IRS written comments in
           appendix III.
			  
			  Background

           A federal grant is an award of financial assistance from a federal
           agency to an organization to carry out an agreed-upon public
           purpose. A Direct Payment for Specified Use (direct assistance) is
           an award of financial assistance from the federal government to
           individuals, private firms, and other private institutions to
           encourage or subsidize a particular activity by conditioning the
           receipt of the assistance on a particular performance by the
           recipient. As such, federal grants and direct assistance programs
           do not include solicited contracts for the procurement of goods
           and services for the federal government.

           Based on our analysis of fiscal years 2004 and 2005 data from the
           Federal Assistance Award Data System (FAADS),^9 federal agencies
           collectively awarded grants and direct assistance of approximately
           $300 billion annually.^10 Further analysis of the FAADS data
           indicates that approximately 80 percent of federal grants and
           direct assistance consist of federal funds provided to state and
           local governments, which, in turn, disburse funds to the ultimate
           recipients. Consequently, only about 20 percent of awarded funds
           are provided directly from the federal government to the
           organization that ultimately spends the money.
			  
^9The FAADS is a central collection of federal financial assistance award
transactions data compiled by the Bureau of the Census.

^10Estimated annual awards exclusive of Medicare and Medicaid.

           Governmentwide policies affecting the award and administration of
           grants to nongovernmental entities are covered in OMB Circular No.
           A-110, Uniform Administrative Requirements for Grants and
           Agreements with Institutions of Higher Education, Hospitals, and
           Other Non-Profit Organizations. OMB Circular No. A-102, Grants and
           Cooperative Agreements with State and Local Governments, provides
           governmentwide guidance for administering grants provided to state
           and local governments and prescribes similar procedures as those
           included in Circular No. A-110. Direct assistance programs are not
           subject to the same governmentwide policies as grants; procedures
           governing the application and award processes for direct
           assistance are prescribed in guidance and regulations promulgated
           by the cognizant federal agency responsible for administering the
           program.

           Most grant applicants that apply directly to the federal
           government are required to complete an Application for Federal
           Assistance, Standard Form (SF) 424. The SF 424 provides federal
           agencies with entity information, such as name, employer
           identification number, address, and a descriptive title of the
           project for which the grant will be used. The applicant is
           required to certify that the information provided on the SF 424 is
           true and correct and whether the applicant is currently delinquent
           on any federal debt.
			  
			  Grant and Direct Assistance Recipients Owe About $790 Million in Taxes

           While most federal grant and direct assistance recipients pay
           their federal taxes, we identified tens of thousands of grant and
           direct assistance recipients that collectively owed about $790
           million in federal taxes as of September 2006. These tax debts
           were owed by entities who received federal payments directly from
           federal payment systems during fiscal years 2005 and 2006 and
           individuals who participated in HUD's Section 8 tenant-based
           housing program as landlords during fiscal years 2005 and 2006. We
           used IRS's September 2006 unpaid assessments file data to
           calculate the amount of taxes owed at or about the time the
           various grant recipients received their grant payments.
           Specifically, we found

           o 2,000 of about 32,000 recipients (about 6 percent) who received
           federal grant and direct assistance benefits directly from three
           of the largest federal payment systems had more than $270 million
           of unpaid federal taxes. About $110 million of the $270 million in
           unpaid taxes represents unpaid payroll taxes.

           o 37,000 of over 1 million landlords (about 4 percent)
           participating in the HUD Section 8 program had about $520 million
           of unpaid federal taxes. Most of these tax debts were unpaid
           individual income taxes.

           In our audit, we found that grant recipients had a substantial
           amount of unpaid payroll taxes.^11 Employers may be 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 fiduciary
           responsibility to hold these funds "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,
           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
           employed by the employer (e.g., owners or officers) may be held
           personally liable for the withheld amounts not forwarded and
           assessed a civil monetary penalty known as a trust fund recovery
           penalty (TFRP).^12 Willful failure to remit payroll taxes can also
           be a criminal felony offense punishable by imprisonment of up to 5
           years,^13 while the failure to properly segregate payroll tax
           funds can be a criminal misdemeanor offense punishable by
           imprisonment of up to a year.^14 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 federal
           government's 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.
			  
^11Payroll taxes include income taxes, Social Security and Medicare taxes,
and the employer's matching share of Social Security and Medicare,
withheld from an employee's paycheck. Employers are to collect and remit
these taxes to the federal government. Even though a grant-receiving
entity may be exempt from paying income taxes, it still is required to
collect and submit payroll taxes for all employees.

^1226 U.S.C. S 6672.

^1326 U.S.C. S 7202.

^1426 U.S.C. S 7215 and 26 U.S.C. S 7512 (b).

^15According to IRS, nonfilers and underpayment of taxes comprised the
rest of the gross tax gap.			  

           Although grant and direct assistance recipients had about $790
           million in unpaid federal taxes as of September 30, 2006, this
           amount likely understates the full extent of unpaid taxes for
           these or other organizations and individuals. For example, except
           for our case study involving HUD's Section 8 tenant-based housing
           program, our estimate of grant and direct assistance recipients
           was limited to data from three of the largest government payment
           systems and thus did not include all federal grant and direct
           assistance disbursements. Further, our analysis of the three
           payment systems did not include recipients of payments who
           received their payments through state and local government
           entities. Based on our analysis of data from the FAADS, we
           estimated that payments paid by the federal government to final
           recipients account for only about 20 percent of the total grant
           and direct assistance funds awarded by the federal government. The
           remaining 80 percent of grant and direct assistance funds are
           provided to states and local governments, which, in turn, disburse
           them to the ultimate recipient.

           Further, to avoid overestimating the amount owed, we limited our
           scope to tax debts that were affirmed by either the taxable entity
           or a tax court for tax periods prior to 2006. We did not include
           the most current tax year because recently assessed tax debts that
           appear as unpaid taxes may involve matters that are routinely
           resolved between the taxpayer and IRS, with the taxes paid,
           abated, or both within a short period. We eliminated these types
           of debt by focusing on unpaid taxes for tax periods prior to
           calendar year 2006 and eliminating tax debt of $100 or less.

           The IRS tax database reflects only the amount of unpaid taxes
           either reported by the individual or organization on a tax return
           or assessed by IRS through its various enforcement programs. The
           IRS database does not reflect amounts owed by organizations and
           individuals that have not filed tax returns and for which IRS has
           not assessed tax amounts due. Further, our analysis did not
           attempt to account for organizations or individuals that purposely
           underreported income and were not specifically identified by IRS
           as owing the additional taxes. According to IRS, underreporting of
           income accounted for more than 80 percent of the estimated $345
           billion annual gross tax gap.^15 Consequently, the full extent of
           unpaid taxes for grant and direct assistance participants is not
           known.
			  
			  Examples of Selected Recipients of Grants and Direct Assistance
			  Involved in Abusive and Criminal Activity Related to Federal Tax
			  System

           For all 20 cases of grant and direct assistance recipients we
           investigated for examples of abusive and criminal activity related
           to the federal tax system based on the large amount of tax debt
           and number of delinquent tax periods, we found in all cases
           evidence that indicated the existence of such abusive and criminal
           activities. Of these 20 cases, 14 cases were not-for-profit
           organizations that received grant payments and also had unpaid
           payroll taxes, some dating as far back as the 1990s. For example,
           one educational institution failed to submit employee payroll
           withholding taxes several times within a 3-year period and
           accumulated an unpaid tax liability of almost $4 million. For the
           cases of payroll tax delinquencies we investigated, officials
           responsible for these organizations failed to fulfill their role
           as "trustees" of employees' payroll tax withholdings and forward
           this money to IRS as required by federal tax laws. Instead, these
           officials diverted the withholdings to fund the organizations'
           operations or for personal benefits, such as their own salaries or
           extravagant vacations. The other 6 cases involved individuals who
           owed individual income taxes and who also received government
           subsidy payments through HUD's Section 8 low-income housing
           program. In one of these cases, the landlord attempted to evict
           renters who were instructed by IRS to pay the rent directly to IRS
           instead of the landlord. In all 20 cases, we saw significant
           evidence of IRS collection activity occurring, but in only a
           couple of cases did we see action related to investigating these
           entities and individuals for criminal violations of federal tax
           laws.

           Table 1 highlights 10 cases of grant recipients we investigated
           with unpaid taxes. The other 10 cases are summarized in appendix
           II.

Table 1: Examples of Grant and Direct Assistance Recipient Entities with
Unpaid Federal Taxes

Case: 1; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid tax amount[A]: Nearly $1 million; 
Comments: 
* Tax debt is mostly unpaid payroll taxes from the early 2000s; 
* Grant recipient received tens of thousands of dollars in grants; 
* Officials of grant recipient claimed payroll taxes were embezzled by 
an agency contracted to provide services to the grant recipient; 
* Grant recipient acquired a million-dollar building when it had a 
similar amount of tax liability; 
* Grant recipient offered to repay 50 percent of the debt in 
installments over several years; 
* Officer owned several luxury vehicles; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 2; 
Type of case: Grant; 
Nature of work: Health education; 
Unpaid tax amount[A]: Over $300,000; 
Comments: 
* Tax debts consist of unpaid payroll taxes; 
* Grant recipient received about $1 million in grants; 
* Officer's salary at over $100,000 is almost double the average of 
service organizations in the area. In addition, officer has generous 
travel expenses and other perks; 
* Grant recipient owns property with fair market value over $2 million; 
* Grant recipient offered compromise for two-thirds of the debt to be 
paid over a period of more than a decade; 
* During appeal of TFRP, officer refinanced residence and used proceeds 
to pay credit card debts; 
* Officer owns luxury vehicle; 
* IRS assessed penalties against entity officials for willful failure 
to pay payroll taxes. 

Case: 3; 
Type of case: Grant; 
Nature of work: Health services; 
Unpaid tax amount[A]: Nearly $1 million; 
Comments: 
* Grant recipient has incurred continuing payroll tax deposit 
deficiencies since early 2000s; 
* Grant recipient received tens of thousands of dollars in grant funds; 
* Grant recipient owns commercial property with an appraised value over 
$1 million; 
* IRS filed numerous tax liens against grant recipient's property; 
* IRS assessed penalties against one officer for willful failure to pay 
payroll taxes. 

Case: 4; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $3 million; 
Comments: 
* Landlord investigated for mortgage fraud; 
* Landlord was convicted for illegally transferring property to defraud 
creditors; 
* Landlord owns luxury vehicles, multiple real estate properties, and 
an extensive investment portfolio. 

Case: 5; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $1 million; 
Comments: 
* Landlord has not filed required tax returns for over a decade; 
* Landlord has never made estimated tax payments; 
* Landlord did not report income information forms to IRS; 
* Rental property is in extreme disrepair and has poor sanitation 
conditions including piles of trash, beer cans, and human waste 
throughout the yard. 

Case: 6; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $500,000; 
Comments: 
* Landlord has a related business owing hundreds of thousands of 
dollars in payroll taxes; 
* Landlord has attempted to avoid collection of IRS levies; 
* Landlord owns luxury vehicle. 

Case: 7; 
Type of case: Grant; 
Nature of work: Medical care; 
Unpaid tax amount[A]: Over $500,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes from the early 
2000s; 
* Grant recipient received about $1 million in grants; 
* Grant recipient could not provide to other auditors documentation for 
over $1 million in program costs; 
* Grant recipient did not fund its pension plan; 
* Official of grant recipient received hundreds of thousands of dollars 
in consulting fees from grantee; 
* Official owes tens of thousands in individual income taxes; 
* IRS assessed penalties against grant recipient officials for willful 
failure to pay payroll taxes; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 8; 
Type of case: Grant; 
Nature of work: Medical care; 
Unpaid tax amount[A]: Nearly $100,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Grant recipient received about $1 million in grants; 
* Recipient official was convicted of theft; 
* Auditor found questionable costs totaling tens of thousands of 
dollars; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 9; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid tax amount[A]: Over; 
$1 million; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Not-for-profit grant recipient received over $3 million of grant 
funds; 
* While failing to pay payroll taxes, the grant recipient organization 
paid a relative of an entity official hundreds of thousands of dollars 
for service contract; 
* Key official's salary exceeded $100,000 a year; 
* Grant recipient did not fully fund its pension plan; 
* IRS previously assessed penalties against one officer for willful 
failure to pay payroll taxes while employed at a previous not-for-
profit entity; 
* An independent auditor's report stated there is substantial doubt 
regarding the entity's ability to continue operating; 
* Federal grant agency sought sanctions against grantee and its 
officials for improper funds control and ineffective program oversight; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 10; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid tax amount[A]: Over $400,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Grant recipient received over $1 million in federal grants; 
* Grant recipient official had prior conviction for tax evasion; 
* Official received an annual salary in excess of $100,000 yet reported 
tens of thousands of dollars less to IRS; 
* Grant recipient official was investigated for using grant funds to 
purchase expensive clothing, luxury vehicle, lakefront property, 
private school tuition, and lavish trips to the Caribbean and 
elsewhere; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Source: GAO's analysis of IRS, grant and direct assistance payments, and
other records.

[a]Rounded dollar amount of unpaid federal taxes as of September 30, 2006.

The following provide illustrative detailed information on several of
these cases:

Case 4: This landlord participating in the Section 8 tenant-based housing
program was involved in a fraudulent real estate transaction in addition
to owing over $3 million in delinquent income taxes. The landlord was
indicted on mortgage fraud and racketeering for attempting to sell real
estate at an inflated price using false appraisals. Previously, the
landlord's family member was convicted of conspiracy to commit mail fraud,
wire fraud, and money laundering in a scheme to sell fraudulent vacation
club memberships. In addition, the landlord was charged with fraudulent
conveyance of over $3 million worth of property to defraud creditors.

Case 7: This grant recipient organization, which provides medical care to
low-income families, has experienced financial problems throughout most of
the 2000s and has several hundred thousand dollars in delinquent payroll
taxes. During these years, while failing to properly fund its employee
pension plan, the grant recipient paid hundreds of thousands of dollars in
consulting fees to a former employee. Grant recipient could not document
to other auditors over a million dollars in expenses relating to grants.
Grant recipient has not made required contributions totaling tens of
thousands of dollars to its pension plan. In addition, IRS assessed a TFRP
against key grant recipient officials.

Case 9: This not-for-profit grant recipient has been in operation since
the 1980s to provide social services to disadvantaged individuals and
families and has another closely related not-for-profit entity that also
received federal grants. The recipient has over $1 million in unpaid
payroll taxes dating back to the early 2000s, and IRS has placed several
tax liens against the grantee's property. The grant recipient has had
recurring financial problems and an independent audit report raised
concerns about the entity's ability to continue operating. The recipient
has also been cited for commingling funds among related grant recipients
and for not having a functioning Board of Directors as represented to the
granting agency. The recipient has been recommended for disbarment.

Case 10: This not-for-profit grant recipient stopped making payroll tax
deposits for several years beginning mid-2000s, accumulating unpaid
payroll taxes totaling several hundreds of thousands of dollars. IRS filed
liens against grantee assets and assessed the exempt organization with
payroll tax violation penalties and interest totaling tens of thousands of
dollars. A key grant recipient officer had a prior conviction for tax
evasion and was again investigated for improperly using grant funds to
purchase expensive clothing, a luxury vehicle, and lavish vacations and to
pay taxes assessed from a prior tax evasion conviction. A key grantee
officer had numerous individual income tax delinquencies.

Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating in
Federal Grant or Direct Assistance Programs

Neither federal law nor current governmentwide policies for administering
federal grants or direct assistance prohibit applicants with unpaid
federal taxes from receiving grants and direct assistance from the federal
government. Even if such requirements did exist, absent consent from the
taxpayer, federal law generally prohibits IRS from disclosing taxpayer
data and, consequently, federal agencies have no access to tax data
directly from IRS. Moreover, federal agencies we reviewed do not prevent
organizations and individuals with unpaid federal taxes from receiving
grants or direct assistance for the specific programs they administer.

With regard to administering federal grants, federal law and current
governmentwide policies, as reflected in OMB Circulars, do not prohibit
individuals and organizations with unpaid taxes from receiving grants.^16
OMB Circulars provide only general guidance with regard to considering
existing federal debt in awarding grants. Specifically, the Circulars
state that if an applicant has a history of financial instability, or
other special conditions, the federal agency may impose additional award
requirements to protect the government's interests.^17 However, the
Circulars do not specifically require federal agencies to take into
account an applicant's delinquent federal debt, including federal tax
debt, when assessing applications. While they require grant applicants to
self-certify in their standard government application (SF 424) whether
they are currently delinquent on any federal debt, including federal
taxes, the Circulars contain no provision instructing the agencies to
verify such certifications or describing how such verification should be
done. No assessment of tax debt is required by OMB on a sampling or
risk-based assessment.

^16The OMB Circulars are OMB Circular No. A-110, Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Non-Profit Organizations (Amended
September 30, 1999) and OMB Circular No. A-102, Grants and Cooperative
Agreements with State and Local Governments (Amended August 29, 1997).

Although current governmentwide policies do not require it, federal
agencies, such as HHS and Department of Education, have policies against
awarding grants to applicants that owe federal debts. These policies state
that a grant may not be awarded until the debt is satisfied or
arrangements are made with the agency to which the debt is owed. However,
awarding agencies rely extensively on applicants' self-certifications that
they are not delinquent on any federal debt, including tax debt. Certain
agencies, such as HHS, stated that they check credit reports to see if the
grant applicant has any outstanding tax liens prior to award of the
contract. While it is difficult to validate the agencies' assertions, none
of these agencies could provide us examples where grant officials denied a
grant based on self-disclosed tax delinquencies or required applicants to
make repayment arrangements with the agency to which debt was owed.

Even if requirements to verify applicants' disclosures did exist, federal
law poses a significant challenge to federal granting agencies in
determining the accuracy of representations made by organizations applying
for grants. Specifically, the law does not permit IRS to disclose taxpayer
information, including tax debts, to federal agency officials unless the
taxpayer consents.^18 Thus, unless an applicant provides consent
requesting that IRS provide taxpayer information to federal agencies,
certain tax debt information generally can only be discovered from public
records when IRS files a tax lien against the property of a tax debtor.
Further, representatives of one federal agency that has attempted to
develop an approved consent form discovered that IRS may not accept
certain signed consent forms because a requirement for an applicant to
sign a consent form as a precondition to the agency's acceptance of the
application may be considered a form of duress and thus raise a disclosure
issue. Notwithstanding, while information on filed tax liens is generally
publicly available, IRS does not file tax liens on all tax debtors nor
does IRS have a central repository of tax liens to which grant-awarding
agencies have access. Further, available information on tax liens may not
be current or accurate because other studies have shown that IRS has not
always released tax liens from property when the tax debt has been
satisfied.^19

^17In contrast, governmentwide policies for managing federal loan, loan
guarantees, and other credit programs promulgated in OMB Circular No.
A-129, Policies for Federal Credit Programs and Non-Tax Receivables
(November 2000) specifically require agencies to determine if an applicant
is delinquent on any federal debt, including tax debt, and specifies using
credit bureaus as a screening tool.

^1826 U.S.C. S 6103.

Of the 20 organizations and individuals that we selected for additional
investigation of abuse and criminal activity, 14 were grant recipients
that were required to submit an application in order to be awarded a
grant.^20 In our review of the grant applications for the 14 grant cases,
we found that 11 applicants certified in their applications that they were
not currently delinquent in any federal debt, even though IRS had current
tax assessments on file for these entities at the time the applications
were filed.^21 As a result, these 11 cases appear to have violated the
False Statements Act because they did not declare their existing tax debt
in their applications even though they were required to do so.^22

Direct assistance programs are generally not subject to the same
governmentwide guidance for grants. Instead, the cognizant federal
agencies implement the necessary regulations for administering the
program. With regard to our HUD's Section 8 tenant-based program case
study, HUD regulations do not require local housing authorities to
identify whether landlords who participate in HUD's housing assistance
program and receive housing subsidies have outstanding federal tax
delinquencies or prohibit payments if such delinquencies are identified.
HUD regulations do permit local housing authorities to deny program
participation if a landlord has not paid state or local real estate taxes,
fines, or assessments. HUD regulations, however, do not require local
housing authorities to deny the landlord from participating in the HUD
program if the landlord owes any delinquent federal debts, including
federal taxes.

^19GAO, IRS Lien Management Report: Opportunities to Improve Timeliness of
IRS Lien Releases, [25]GAO-05-26R (Washington, D.C.: Jan. 10, 2005) and
GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 Financial
Statements, [26]GAO-07-136 (Washington, D.C.: Nov. 9, 2006).

^20The other six cases involve HUD landlords. These six cases were not
required to submit a similar application that required the landlords to
disclose whether they were delinquent on any federal tax debts or not.

^21For the other three applicants, IRS did not levy tax assessments until
after applications were filed for two applicants and available information
did not permit us to determine the debt status for the other applicant.

^2218 U.S.C. S 1001.

Conclusion

Because about 80 percent of all federal grants and direct assistance are
administered and disbursed through state and local governments, the extent
to which all final recipients of these federal payments owe taxes is not
known. However, our limited audit has demonstrated that tens of thousands
of grant and direct assistance recipients have taken advantage of the
opportunity to avoid paying $790 million in federal taxes. At the same
time they failed to pay their federal taxes, these individuals and
organizations benefited by receiving billions of dollars of federal grants
or direct assistance benefits. With regard to grants, allowing individuals
and organizations to receive federal grants while not paying their federal
taxes is not fair to the vast majority of grant applicants that pay their
fair share of taxes. This practice causes a disincentive to individuals
and organizations to pay their fair share of taxes and could lead to
further erosion in compliance with the nation's tax system.

Recommendations for Executive Action

We recommend that the Director, Office of Management and Budget, assess
the need to issue guidance requiring federal agencies that award certain
grants and other direct assistance, where appropriate in relation to the
potential adverse effect on potential applications, to take the following
two actions:

           o Conduct actions that would help determine if applicants had
           unpaid federal tax debt, including obtaining applicant consent to
           inquire as to tax debt status from IRS; this could be achieved
           through sampling or other risk-based assessments.

           o Consider the result of those inquiries in the award
           determinations.

           We also recommend that the Acting Commissioner of Internal Revenue
           evaluate the 20 referred cases detailed in this report for
           appropriate additional collection action or criminal investigation
           as warranted.
			  
			  Agency Comments and Our Evaluation

           We received written comment from IRS and oral comments from OMB on
           the draft of this report. Both IRS and OMB agreed with the draft
           report's recommendations. OMB also provided technical comments on
           the draft report, which we incorporated as appropriate. We have
           reprinted IRS's written comments in their entirety in Appendix
           III.

           As agreed with your offices, unless you publicly release its
           contents earlier we plan no further distribution of this report
           until 30 days from its date. At that time, we will send copies of
           this report to the Acting Commissioner of Internal Revenue, the
           Director of the Office of Management and Budget, interested
           congressional committees, and other interested parties. We will
           make copies available to others upon request. In addition, the
           report will be available at no charge on the GAO Web site at
           [27]http://www.gao.gov . Please contact me at (202) 512-6722 or
           [28][email protected] if you have any questions concerning this
           report. 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 1: Scope and Methodology

           To address our first objective to describe the magnitude of tax
           debt owed, we obtained and analyzed federal payment databases from
           the Department of the Treasury's Automated Standard Application
           Payment System (ASAP), the Department of Education's Grant
           Administration and Payment System (GAPS), and the Department of
           Health and Human Services' (HHS) Payment Management System (PMS)
           for fiscal years 2005 and 2006. These three agencies process grant
           and other assistance program payments on behalf of many federal
           agencies and, in fiscal years 2005 and 2006, processed over $460
           billion in grant and direct assistance payments, excluding
           Medicare and Medicaid. Our analysis of data, however, was limited
           because approximately 80 percent of federal grant and direct
           assistance payments are paid to state and local governments,^1
           which then disburse funds to final recipients. Because identifying
           information on the final recipients of payments provided at the
           state and local level is not available at the federal level, our
           analysis was limited to those payments provided directly by the
           federal government to final recipients. We estimated these direct
           payments to final recipients represented about 20 percent of total
           federal grant and direct assistance payments.

           Because identifying information for final recipients of payments
           provided at the state and local levels was not available at the
           federal level and not practical for us to obtain, we selected one
           major federal program that disburses funds at the local level for
           a case study analysis. For this case study, we selected the
           Department of Housing and Urban Development's (HUD) Section 8
           tenant-based low-income housing program, a program classified as a
           direct assistance program, which provides rental assistance to
           low-income families by providing supplemental rental payments
           directly to landlords participating in the rental assistance
           program. We obtained and analyzed an extract from HUD's Public
           Housing Information Center (PIC) database, which HUD represented
           to be the most complete data source available on low-income
           assisted households in HUD's public housing or voucher programs,
           that contained identifying information on landlords who
           participated in HUD's program during fiscal years 2005 and 2006.

           To identify recipients of grants and direct assistance with unpaid
           federal taxes, we obtained the Internal Revenue Service's (IRS)
           September 30, 2006, unpaid assessments files and electronically
           matched these files with the various grant and direct assistance
           recipients identified in the above databases using the taxpayer
           identification number. To avoid overstating the amount of unpaid
           taxes owed by grant recipients and to capture only significant tax
           debt, we excluded tax debts meeting specific criteria. The
           criteria we used to exclude tax debts are as follows:

           o tax debts IRS classified as compliance assessments or memo
           accounts for financial reporting,^2

           o tax debts from calendar year 2006 tax periods, and

           o grant recipients with total unpaid taxes of $100 or less.
			  
^1As defined as state, county, city, or township governments; special
district governments (e.g., public housing authorities and local transit
authorities); independent school districts; and state-controlled
institutions of higher education.

^2Under federal accounting standards, unpaid assessments require taxpayer
or court agreements to be considered federal taxes receivable. Compliance
assessments and memo accounts are not considered federal taxes receivable
because they are not agreed to by the taxpayers or the courts.

           The criteria above were used to exclude tax debts that might be
           under dispute or generally duplicative or invalid and tax debts
           that are incurred after the dates the entities received grant
           payments. 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 taxpayers
           and IRS, with the taxes paid or abated within a short period. We
           also excluded tax debts of $100 or less because they are
           insignificant for the purpose of determining the extent of taxes
           owed by grant recipients.

           To identify examples of grant and direct assistance recipients
           involved in abusive or potential criminal activity related to the
           federal tax system, we selected 20 recipients using a
           nonrepresentative selection approach based on data-mining results,
           our judgment, and a number of other criteria, including the amount
           of unpaid taxes and the number of unpaid tax periods. We obtained
           and reviewed copies of automated tax transcripts and other tax
           records (for example, revenue officers' notes) from IRS. For the
           selected cases, we performed searches of criminal, financial, and
           public records. Because our investigations were generally limited
           to publicly available information, our audit of the 20 cases may
           not have identified all related parties or all significant assets
           or income (such as personal bank data, entities established to
           hide assets, etc.) that the recipient individuals or entities,
           including key officials, own or receive.

           To determine actions federal agencies take to prevent individuals
           and organizations with significant unpaid federal taxes from
           either being approved for or receiving grant or direct assistance
           payments, we reviewed governmentwide and agency-specific policies
           and procedures for awarding grants and benefits from the
           respective programs. We also interviewed officials from the Office
           of Management and Budget and the Departments of Agriculture,
           Education, Homeland Security, HHS, and HUD on whether tax debts
           are considered in their decisions to approve award applications.
           In addition, to test whether grant applicants properly disclosed
           their current tax delinquencies when submitting applications, we
           requested and reviewed the grant applications for our 14 cases
           that applied for grants.^3

           We conducted our audit work from January 2007 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

           For 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 our report's
           objectives. Our financial audit procedures, including the
           reconciliation of the value of unpaid taxes recorded in IRS's
           master file to IRS's general ledger, identified no material
           differences.

           For the GAPS, ASAP, and PMS data, we interviewed officials from
           Education, Treasury, and HHS responsible for the databases. In
           addition, we performed electronic testing of specific data
           elements that we used to perform our work. HUD's PIC database has
           undergone several audits and quality improvements in recent years
           and was certified in fiscal year 2004 under HUD's Data Quality
           Improvement Program as providing accurate information for
           reporting on program performance under the Government Performance
           and Results Act. We held discussions with HUD's database
           administrators on input controls used to maintain data integrity
           for the data elements we used for our analysis and with HUD
           programmers to discuss the programming code HUD used to extract
           the data we used. We also performed electronic testing of the data
           elements we used and performed limited verification tests.
			  
^3The other six cases were private landlords participating in HUD's
Section 8 tenant-based housing program.

           Based on our discussions with agency officials, our review of
           agency documents, and our own testing, we concluded that the data
           elements used for this report were sufficiently reliable for our
           purposes.
			  
           Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes

           Table 1 provides data on 10 detailed case studies. Table 2 below
           provides details of the remaining 10 organizations and individuals
           we selected as case studies. As with the 10 cases discussed in the
           body of this report, we found evidence of abusive and potential
           criminal activity related to the federal tax system during our
           audit and investigations of these 10 case studies.

Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal
Taxes

Case: 11; 
Type of case: Grant; 
Nature of work: Children's services; 
Unpaid federal tax amount: Over $2 million; 
Comments: 
* While failing to remit payroll taxes dating back to the early 2000s,; 
* grant recipient received over $2 million in federal grants in recent 
years,; 
* key official received compensation of over $100,000, and; 
* grant recipient entered into multiple payment plans with the IRS and 
was out of compliance on at least one; 
* IRS assessed large penalties against key officers for willful failure 
to pay payroll taxes; 
* Federal tax liens were filed against the grant recipient; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. ï¿½ 1001). 

Case: 12; 
Type of case: Grant; 
Nature of work: Community services; 
Unpaid federal tax amount: Over $1 million; 
Comments: 
* Grant recipient received nearly $3 million in federal grants during a 
recent 2-year period; 
* Grant recipient officials claim they were unaware they had not paid 
payroll taxes for several years; 
* A top official received compensation of about $100,000; 
* Federal tax liens were filed against the grant recipient; 
* Grant recipient officials recently chose to close the entity rather 
than pay the tax; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. ï¿½ 1001). 

Case: 13; 
Type of case: Grant; 
Nature of work: Community services; 
Unpaid federal tax amount: Over $300,000; 
Comments: 
* Grant recipient received over $2 million in federal grants; 
* Grant recipient pays an annual salary over $70,000 to a relative of a 
key official; 
* Despite owing taxes, this grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 14; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Nearly $4 million; 
Comments: 
* Grant recipient received over $3 million in grants; 
* Grant recipient failed to submit payroll deposits several times over 
a 3-year period; 
* Former key employee investigated for fraud allegations; 
* Evidence that officials of grant recipient were removing assets to 
avoid foreclosure and erasing computer memories to avoid prosecution; 
* IRS assessed penalties against entity officials for willful failure 
to pay payroll taxes; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. ï¿½ 1001). 

Case: 15; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Over $3 million; 
Comments: 
* Grant recipient received several million dollars in federal grants in 
a recent year; 
* Grant recipient owes mostly payroll taxes dating back to the early 
2000s; 
* IRS seized some of the grant recipient's assets; 
* IRS assessed large penalties against several officials for willful 
failure to pay payroll taxes; 
* IRS filed federal tax liens against the entity; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. ï¿½ 1001). 

Case: 16; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Over $300,000; 
Comments: 
* Grant recipient received over $2 million in federal grants during a 
recent 2- year period while owing payroll taxes dating back to the late 
1990s; 
* Grant recipient did not file payroll tax returns for several years, 
although it made payments for some periods. IRS is considering a 
request from the grant recipient for an offer in compromise in which 
the grantee would pay only a portion of the unpaid payroll taxes; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. ï¿½ 1001). 

Case: 17; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Nearly $2 million; 
Comments: 
* Landlord did not file required tax returns for several years; 
* During the same time the landlord failed to file tax returns, a 
brokerage firm reported over $3 million in sales of securities; 
* Landlord was involved in multiple real estate transactions during the 
time the landlord failed to file tax returns; 
* While owing taxes, the landlord transferred ownership of real 
property to a third party who mortgaged the property to pay off 
landlord's nontax debt. 

Case: 18; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Over $1 million; 
Comments: 
* Landlord did not file required tax returns for several years; 
* Landlord made several hundred thousand dollars in cash withdrawals 
during a period while not filing taxes; 
* Landlord was convicted of willful failure to file tax returns and 
sentenced to 3 years probation; 
* Landlord violated HUD rental property standards; 
* Landlord's property that had significant environmental violations was 
foreclosed on and sold. 

Case: 19; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Over $500,000; 
Comments: 
* Landlord has not paid withholding, estimated payments, or filed tax 
returns the majority of years since early 1990s; 
* Landlord's spouse had not filed a personal tax return since early 
2000s; 
* IRS has placed several hundreds of thousands in liens on landlord 
property. 

Case: 20; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid federal tax amount: Over $800,000; 
Comments: 
* Grant recipient received nearly $400,000 in federal grants during a 
recent 2-year period while owing payroll tax dating back to the early 
2000s; 
* Previous top official responsible for incurring the debt was 
convicted of a felony; 
* IRS assessed penalties on the previous top officer for willful 
failure to pay payroll taxes; 
* Federal tax liens were filed against the grant recipient. 

Source: GAO's analysis of IRS, grant and direct assistance payments, and
other records.

[a]Rounded dollar amount of unpaid federal taxes as of September 30, 2006.

Appendix III: Comments from the Internal Revenue Service

Commissioner: 
Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

October 23, 2007: 

Mr. Gregory Kutz: 

Managing Director, Forensic Audits and Special Investigations: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, D.C. 20548: 

Dear Mr. Kutz: 

I have reviewed the draft Government Accountability Office (GAO) report 
titled: "Tax Compliance: Federal Grant and Direct Assistance Recipients 
Who Abuse the Federal Tax System" (GAO-08-31). 

Your report offers two recommendations. The first recommendation is 
directed solely to the Office of Management and Budget (OMB). You 
recommend the Director, OMB assess the need to require federal agencies 
to conduct proactive inquiries into the tax debt status of award 
applicants where appropriate. We realize the importance and potential 
benefits of considering unpaid federal tax debt in the award 
determinations, and will support OMB's assessment efforts. With regard 
to your second recommendation, we agree to evaluate the 20 referred 
cases detailed in the report for appropriate additional collection 
action or criminal investigation as warranted. We will work with your 
staff to secure additional information on the 20 cases. 

If you have any questions, or if you would like to discuss this 
response in more detail, please contact Frederick W. Schindler, 
Director, Collection Policy at (202) 283-7650. 

Sincerely, 

Signed by: 

Linda E. Stiff: 
Acting Commissioner: 

Enclosure: 

Recommendation: 

Evaluate the 20 referred cases detailed in this report for appropriate 
additional aggressive collection action and criminal investigation as 
warranted. 

Response: 

The IRS will work with your office to secure additional information on 
the 20 cases identified in your audit with indications of abuse or 
potential criminal activity. We plan to review each of these case files 
and refer them for additional action as appropriate.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

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

Staff Acknowledgments

In addition to the individual named above, Erika Axelson, James Berry, Ray
Bush, Bill Cordrey, Kenneth Hill, Aaron Holling, Wil Holloway, Mitchell
Karpman, John Kelly, Rick Kusman, Tram Le, John Ledford, Barbara Lewis,
Andrew McIntosh, Eduvina Rodriguez, John Ryan, Steve Sebastian, Robert
Sharpe, Barry Shillito, Pat Tobo, and Matthew Valenta made key
contributions to this report.

Related GAO Products

Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax
Owe Nearly $1 Billion in Payroll and Other Taxes. [29]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. [30]GAO-07-563 .
Washington, D.C.: June 29, 2007.

Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax
System. [31]GAO-07-742T . Washington, D.C.: April 19, 2007.

Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System. [32]GAO-07-587T . Washington, D.C.: March 20, 2007.

Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections. [33]GAO-07-26 . Washington, D.C.: November 15, 2006.

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other
Federal Taxes. [34]GAO-06-887 . Washington, D.C.: July 28, 2006.

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other
Federal Taxes. [35]GAO-06-755T . Washington, D.C.: May 25, 2006.

Financial Management: Thousands of GSA Contractors Abuse the Federal Tax
System. [36]GAO-06-492T . Washington, D.C.: March 14, 2006.

Financial Management: Thousands of Civilian Agency Contractors Abuse the
Federal Tax System with Little Consequence. [37]GAO-05-683T . Washington,
D.C.: June 16, 2005.

Financial Management: Thousands of Civilian Agency Contractors Abuse the
Federal Tax System with Little Consequence. [38]GAO-05-637 . Washington,
D.C.: June 16, 2005.

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. [39]GAO-04-414T . Washington, D.C.: February 12,
2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. [40]GAO-04-95 . Washington, D.C.: February 12,
2004.

(192238)

To view the full product, including the scope
and methodology, click on [41]GAO-08-31 .

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

Highlights of [43]GAO-08-31 , a report to the Committee on Homeland
Security and Governmental Affairs, U.S. Senate

November 2007

TAX COMPLIANCE

Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax
System

Since February 2004, GAO has reported that weaknesses in the federal
programs and controls that allowed thousands of federal contractors, tax
exempt entities, and Medicare providers to receive government money while
owing taxes. GAO was asked to determine if these problems exist for
entities who receive federal grants or direct assistance and (1) describe
the magnitude of taxes owed, (2) provide examples of grant recipients
involved in abusive and potentially criminal activity, and (3) assess
efforts to prevent delinquent taxpayers from participating in such
programs.

To perform this work, GAO analyzed data from the Internal Revenue Service
(IRS), three of the largest grant and direct assistance payment systems,
representing over $460 billion in payments in fiscal years 2005 and 2006,
and the Housing and Urban Development (HUD) Section 8 tenant-based housing
program. GAO investigated 20 cases to provide examples of grant recipients
involved in abusive activity.

[44]What GAO Recommends

GAO recommends that the Office of Management and Budget (OMB) assess the
need to require federal agencies to conduct inquiries into the tax debt
status of applicants where appropriate. GAO also recommends IRS evaluate
the 20 referred cases with high tax debts and abusive and potential
criminal activity for appropriate additional collection and investigation
action. IRS and OMB agreed with our recommendations.

While most recipients of payments federal grant and direct assistance
programs pay their federal taxes, tens of thousands of recipients
collectively owed $790 million in federal taxes as of September 30, 2006.
This included over 2,000 individuals and organizations that received $124
billion of payments directly from the federal government and who owed more
than $270 million of unpaid taxes (almost 6 percent of such recipients)
and about 37,000 landlords participating in HUD's Section 8 tenant-based
housing program who owed an estimated $520 million of unpaid taxes (almost
4 percent of such landlords). The $790 million estimate is likely
substantially understated because GAO's analysis excluded the 80 percent
of federal grants that are directly given to state and local governments
which, in turn, disburse the grants to the ultimate recipients.

GAO selected 20 grant and direct assistance recipients with high tax debt
for a more in-depth investigation of the extent and nature of abuse and
criminal activity. For all 20 cases GAO found abusive and potential
criminal activity related to the federal tax system, including failure to
remit individual income taxes and/or payroll taxes to IRS. Rather than
fulfill their role as ``trustees'' of payroll tax money and forward it to
IRS, these grant recipients 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 recipients diverted the payroll tax money
for their own benefit or to help fund their businesses. GAO referred these
20 cases to IRS for additional collection and investigation action, as
appropriate.

Examples of Abusive and Potentially Criminal Activity by Grant and Direct
Assistance Recipients
                    Unpaid tax amount as                                      
Nature of work   of September 2006    Activity                             
                                         Landlord was convicted of illegally  
                                         transferring property to defraud     
Housing          Over $3 million      creditors.                           
                                         While failing to pay its taxes, the  
                                         grant recipient paid hundreds of     
                                         thousand of dollars to a relative    
Social Services  Over $1 million      for services contracts.              
                                         Recipient investigated for using     
                                         grant funds to purchase luxury car,  
                                         lakefront condominium, and Caribbean 
Social Services  Over $400,000        trips.                               

Source: GAO analysis of IRS data and available public records.

Federal law and current governmentwide policies do not prohibit
individuals and organizations with unpaid taxes from receiving grants or
direct assistance. Several federal agencies established policies against
awarding grants to tax delinquent applicants; however, federal agencies do
not verify applicants' certification that they do not owe taxes. Further,
federal law generally prohibits the disclosure of taxpayer data to federal
agencies. Eleven grant recipients that GAO investigated appeared to have
made false statements by not disclosing their tax debt as required.
Further, agencies that award grants are not required to inquire as to
recipients' tax debt status prior to providing direct assistance payments.

GAO's Mission

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References

Visible links
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-26R
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-136
  27. http://www.gao.gov/
  28. mailto:[email protected]
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1090T
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-563
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-742T
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-07-26
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-06-887
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-755T
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-06-492T
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-05-683T
  38. http://www.gao.gov/cgi-bin/getrpt?GAO-05-637
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-04-414T
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-04-95
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-08-31
  42. mailto:[email protected]
  43. http://www.gao.gov/cgi-bin/getrpt?GAO-08-31
  45. http://www.gao.gov/
  46. http://www.gao.gov/
  47. http://www.gao.gov/fraudnet/fraudnet.htm
  48. mailto:[email protected]
  49. mailto:[email protected]
  50. mailto:[email protected]
*** End of document. ***