Medicare: Thousands of Medicare Providers Abuse the Federal Tax  
System (13-JUN-08, GAO-08-618). 				 
                                                                 
Under the Medicare program, the Centers for Medicare & Medicaid  
Services (CMS) and its contractors paid over $400 billion in	 
Medicare benefits in calendar year 2006. GAO was asked to	 
determine if Medicare providers have unpaid federal taxes and, if
so, to (1) determine the magnitude of such debts, (2) identify	 
examples of Medicare providers that have engaged in abusive or	 
potentially criminal activities, and (3) determine whether CMS	 
prevents delinquent taxpayers from enrolling in Medicare or	 
levies payments to pay taxes. To determine amount of unpaid taxes
owed by Medicare providers, GAO compared claim payment data from 
CMS and tax debt data from the Internal Revenue Service (IRS). In
addition, GAO reviewed policies, procedures, and regulations	 
related to Medicare. GAO also performed additional investigative 
activities.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-618 					        
    ACCNO:   A82349						        
  TITLE:     Medicare: Thousands of Medicare Providers Abuse the      
Federal Tax System						 
     DATE:   06/13/2008 
  SUBJECT:   Contractor payments				 
	     Debt collection					 
	     Federal debt					 
	     Federal taxes					 
	     Health care programs				 
	     Income taxes					 
	     Internal controls					 
	     Medicare						 
	     Noncompliance					 
	     Personal income taxes				 
	     Policy evaluation					 
	     Program evaluation 				 
	     Program management 				 
	     Records management 				 
	     Tax administration 				 
	     Tax administration systems 			 
	     Tax evasion					 
	     Tax information confidentiality			 
	     Tax law						 
	     Tax nonpayment					 
	     Tax violations					 
	     Taxpayers						 
	     Voluntary compliance				 
	     Standards (health care)				 
	     GAO High Risk Series				 

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GAO-08-618

   

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

United States Government Accountability Office: 

GAO: 

June 2008: 

Medicare: 

Thousands of Medicare Providers Abuse the Federal Tax System: 

GAO-08-618: 

GAO Highlights: 

Highlights of GAO-08-618, a report to the Permanent Subcommittee on 
Investigations, Committee on Homeland Security and Governmental 
Affairs, U.S. Senate. 

Why GAO Did This Study: 

Under the Medicare program, the Centers for Medicare & Medicaid 
Services (CMS) and its contractors paid over $400 billion in Medicare 
benefits in calendar year 2006. 

GAO was asked to determine if Medicare providers have unpaid federal 
taxes and, if so, to (1) determine the magnitude of such debts, (2) 
identify examples of Medicare providers that have engaged in abusive or 
potentially criminal activities, and (3) determine whether CMS prevents 
delinquent taxpayers from enrolling in Medicare or levies payments to 
pay taxes. 

To determine amount of unpaid taxes owed by Medicare providers, GAO 
compared claim payment data from CMS and tax debt data from the 
Internal Revenue Service (IRS). In addition, GAO reviewed policies, 
procedures, and regulations related to Medicare. GAO also performed 
additional investigative activities. 

GAO recommends that CMS consider issuing guidance to require Medicare 
contractors to screen prospective Medicare providers for unpaid taxes, 
including obtaining consent from these providers to disclose federal 
tax debts. GAO also recommends that CMS incorporate all Medicare 
payments into the continuous levy program as expeditiously as possible. 
CMS stated that it has taken some actions and is planning other actions 
to address GAOï¿½s two recommendations. 

What GAO Found: 

Our analysis of data provided by CMS and IRS indicates that over 27,000 
health care providers (i.e., about 6 percent of all such providers) 
paid under Medicare during calendar year 2006 had payroll and other 
agreed-to federal tax debts totaling over $2 billion. The $2 billion in 
unpaid tax debts only includes those debts reported on a tax return or 
assessed by IRS through its enforcement programs. This $2 billion 
figure is understated because some of these Medicare providers owed 
taxes under separate tax identification numbers (TIN) from the TINs 
that received the Medicare payments or they did not file their tax 
returns. 

We selected 25 Medicare providers with significant tax debt for more in-
depth investigation of the extent and nature of any abusive or 
potentially criminal activity. Our investigation found abusive and 
potentially criminal activity, including failure to remit to IRS 
payroll taxes withheld from their employees. Rather than fulfill their 
role as ï¿½trusteesï¿½ of this money and forward it to IRS as required by 
law, these Medicare providers diverted the money for other purposes. 
Willful failure to remit payroll taxes is a felony under U.S. law. 
Furthermore, individuals associated with some of these providers at the 
same time used payroll taxes withheld from employees for personal gain. 
Some of these individuals accumulated substantial wealth and assets, 
including million-dollar houses and luxury vehicles, while failing to 
pay their federal taxes. In addition, some providers received Medicare 
payments even though they had quality-of-care issues, such as losing 
track of a patient in their care who has not been found. 

Table: Examples of Abusive and Criminal Activity: 

Type of business: Hospital; 
Unpaid tax debt: $15 million; 
CMS payments: $21 million; 
Description of Medicare health care provider activity: Owners were 
found liable for submitting false claims to Medicare from another 
medical business. 

Type of business: Nursing home; 
Unpaid tax debt: $7 million ; 
CMS payments: $15 million; 
Description of Medicare health care provider activity: IRS records 
indicate that the owner purchased luxury cars and other personal items 
with money funneled through a charitable foundation. 

Type of business: Nursing home; 
Unpaid tax debt:  $4 million ; 
CMS payments:  $4 million ; 
Description of Medicare health care provider activity: Owner 
constructed multimillion-dollar home while business was not paying its 
taxes. 

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

[End of figure] 

CMS has not developed a policy to require contractors (1) to obtain 
consent for IRS disclosure of federal tax debts and (2) to screen 
providers for unpaid taxes. Further complicating this issue, absent 
consent by the taxpayer, which CMS does not require, federal law 
generally prohibits the disclosure of taxpayer data to CMS or its 
contractors. 

IRS can continuously levy up to 15 percent of each payment made to a 
federal payeeï¿½for example, a Medicare hospitalï¿½until that tax debt is 
paid. However, CMS has not incorporated most of its Medicare payments 
into the continuous levy program. As a result, for calendar year 2006, 
the government lost opportunities to potentially collect over $140 
million in unpaid taxes. 

What GAO Recommends: 

GAO recommends that CMS consider issuing guidance to require Medicare 
contractors to screen prospective Medicare providers for unpaid taxes, 
including obtaining consent from these providers to disclose federal 
tax debts. GAO also recommends that CMS incorporate all Medicare 
payments into the continuous levy program as expeditiously as possible. 
CMS stated that it has taken some actions and is planning other actions 
to address GAOï¿½s two recommendations. 

To view the full product, including the scope and methodology, click on 
[http://www.gao.gov/cgi-bin/getrpt?GAO-08-618]. For more information, 
contact Gregory Kutz at (202) 512-6722 or [email protected]. 

[End of section] 

Contents: 

Letter1: 

Results in Brief: 

Background: 

Magnitude of Unpaid Taxes of Medicare Providers: 

Examples of Medicare Providers Involved in Abusive and Potentially 
Criminal Activity Related to the Federal Tax System: 

Medicare Providers with Unpaid Taxes Are Not Prohibited from Enrolling 
in or Receiving Payments from Medicare: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Medicare Providers with Unpaid Taxes: 

Appendix III: Comments from the Internal Revenue Service: 

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

Tables: 

Table 1: Summary Information on 10 Medicare Providers with Unpaid 
Federal Taxes: 

Table 2: Summary Information on 15 Medicare Providers with Unpaid 
Federal Taxes: 

Figures: 

Figure 1: Medicare Providers' Unpaid Taxes by Tax Type: 

Figure 2: Unpaid Taxes of Medicare Providers by Calendar Year: 

Figure 3: Source of Unpaid Assessment: 

Abbreviations: 

CMS: Centers for Medicare & Medicaid Services: 

DOD: Department of Defense: 

FCTC: Federal Contractor Tax Compliance: 

FMS: Financial Management Service: 

GSA: General Services Administration: 

HHS: Department of Health and Human Services: 

HIGLAS: Healthcare Integrated General Ledger Accounting System: 

IRS: Internal Revenue Service: 

LLC: limited liability company: 

OIG: Office of Inspector General: 

TFRP: trust fund recovery penalty: 

TIN: taxpayer identification number: 

TOP: Treasury Offset Program: 

United States Government Accountability Office: 

Washington, DC 20548: 

June 13, 2008: 

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 body of work that has identified federal 
contractors, grant recipients, and exempt organizations with unpaid 
federal taxes. In hearings held by this subcommittee,[Footnote 1] we 
testified that Department of Defense (DOD), federal civilian agency and 
General Services Administration (GSA) contractors abused the federal 
tax system with little consequence. Because of the significance of the 
issues raised during these hearings, you asked us to provide additional 
information about whether health care providers who were paid by the 
government for Medicaid and Medicare-related services were engaged in 
similar tax abuses and to provide recommendations to increase the 
effectiveness and efficiency of tax revenue collections from federal 
contractors under the Federal Payment Levy Program. 

This is the third in a series of reports and testimonies to respond to 
your request. In March 2007, we testified that Medicare physicians, 
health professionals, and suppliers paid under the Supplemental Medical 
Insurance program, also known as Medicare Part B, had abused the 
federal tax system while doing business with the federal 
government.[Footnote 2] In November 2007, we testified and reported on 
Medicaid health care providers from seven selected states that also 
abused the federal tax system.[Footnote 3] This report will cover all 
Medicare health care providers that have abused the federal tax system, 
expanding on our March 2007 testimony. 

The specific objectives of this forensic audit and related 
investigations were to determine, to the extent possible, if Medicare 
providers have unpaid federal taxes and, if so, to (1) determine the 
magnitude of tax debts owed (2) identify examples of Medicare providers 
involved in abusive or potentially criminal activities and (3) 
determine whether the Centers for Medicare & Medicaid Services (CMS) 
prevents Medicare providers with tax problems from enrolling in 
Medicare or levies Medicare payments to pay tax debts. 

To identify the magnitude of Medicare providers with unpaid federal 
taxes, we obtained and analyzed the Internal Revenue Service (IRS) tax 
debt data as of September 30, 2006, and obtained and analyzed the CMS 
database of Medicare-approved claims and payments paid to Medicare 
providers for calendar year 2006. We matched the list of Medicare 
providers with IRS tax debts using taxpayer identification numbers 
(TIN). To identify specific instances of abusive and potentially 
criminal activities by selected Medicare providers and their owners, we 
performed investigative work on a nonrepresentative selection of 25 
Medicare providers. We selected these 25 providers using primarily the 
amount of tax debt and number of delinquent tax periods as selection 
factors. For these 25 cases, we reviewed copies of automated tax 
transcripts and other tax records (for example, revenue officers' 
notes) and performed additional searches of criminal, financial, health 
care, and public records. To determine whether CMS prevents health care 
providers from enrolling in Medicare or levies Medicare payments to pay 
taxes, we examined the CMS regulations, policies, and procedures for 
conducting determinations in the enrollment approval process. We also 
interviewed officials from CMS, two large CMS Medicare contractors, 
IRS, and the Department of the Treasury's (Treasury) Financial 
Management Service (FMS) concerning any barriers to levying Medicare 
payments. To determine the potential levy collections on Medicare 
payments during calendar year 2006, we used 15 percent of the total 
paid claim or total tax debt amount reported to the continuous levy 
program, whichever was less. A more detailed description of the scope 
and methodology related to our audit and investigative work supporting 
this report is provided in appendix I. 

We conducted this forensic audit and related investigations from July 
2007 to June 2008 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We performed our investigative work in accordance with standards 
prescribed by the President's Council on Integrity and Efficiency. 

Results in Brief: 

In calendar year 2006, thousands of Medicare providers abused the 
federal tax system with little consequence. Specifically, our analysis 
of data provided by CMS and IRS indicated that over 27,000 Medicare 
providers had unpaid federal taxes totaling over $2 billion. This 
represented over 6 percent of the number of all Medicare providers paid 
during calendar year 2006. The unpaid taxes largely consisted of 
individual income and payroll taxes. However, the $2 billion of tax 
debts owed by Medicare providers is substantially understated because 
IRS data do not reflect all amounts owed by businesses and individuals. 
Specifically, it 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 that specific tax 
debts are owed. Also, there are Medicare providers that owed taxes 
under separate TINs from those that received the Medicare payments and 
are not included in the $2 billion figure. For example, our analysis 
does not include federal taxes owed by individuals where payments are 
made to the limited liability companies (LLC), partnerships, or other 
businesses. These businesses then pass the income from Medicare to 
business owners to be reported on their personal tax returns. 

Our audits and investigations detail examples of abusive and criminal 
activity related to the federal tax system by 25 Medicare providers. 
These 25 providers were paid by Medicare for a variety of services, 
including hospital, hospice, and skilled nursing facility services. 
Many were established businesses (such as corporations) that owed 
payroll taxes withheld for their employees. Rather than fulfill their 
role as "trustees" of this money and forward it to IRS as required by 
law, these Medicare providers diverted the money for other purposes. In 
one case, a home health company received over $15 million in Medicare 
payments but did not pay $7 million in federal taxes. The owner of the 
company had a history of asset concealment schemes and other 
questionable dealings involving trusts, partnerships, and other 
entities. For example, the owner established a charitable foundation. 
However, the funds from this foundation were used to purchase luxury 
cars and other personal items. Our audit also identified quality of 
care problems involving our cases, including patient neglect, for 
example, losing track of a patient in the provider's care who has not 
been found and not taking appropriate actions to prevent a patient's 
suicide. 

CMS has not developed Medicare regulations or an implementing policy to 
(1) require contractors to obtain consent for IRS disclosure of federal 
tax debts and (2) require CMS or its contractors to screen providers 
for unpaid taxes. As a consequence, CMS has no mechanism to prevent 
providers with substantial unpaid federal taxes from becoming Medicare 
providers or receiving payments from Medicare. A provision of the 
Taxpayer Relief Act of 1997 authorizes IRS to continuously levy certain 
federal payments made to delinquent taxpayers.[Footnote 4] However, in 
the 11 years since its passage, CMS has not incorporated most of its 
Medicare payments into the continuous levy program.[Footnote 5] As a 
result, for calendar year 2006, the government lost opportunities to 
potentially collect over $140 million in unpaid federal taxes.[Footnote 
6] CMS officials stated that they plan to incorporate all payments made 
through the Healthcare Integrated General Ledger Accounting System 
(HIGLAS), Medicare's central accounting system, into the levy program 
by October 2008. According to CMS officials, this will cover about 60 
percent of all Medicare fee-for-service payments. CMS officials stated 
that the remaining 40 percent will be implemented into the continuous 
levy program in the next several years as the Medicare contractors 
convert their systems to HIGLAS. 

We provided a draft of our report to FMS, CMS, and IRS for review and 
comment. FMS did not have any comments on the draft. IRS stated that it 
understood the importance and potential benefits of considering unpaid 
federal tax debt in the Medicare screening process and will support the 
CMS in its efforts to address the recommendations. CMS did not disagree 
with our recommendations, and stated that it issued proposed rules that 
would require prospective durable medical equipment, prosthetic, and 
orthotic suppliers to be free of federal or state tax debt and it will 
consider whether to use its authority to establish a similar 
requirement for the other provider and supplier types. CMS also stated 
that it is scheduled to begin subjecting its Medicare fee-for-service 
payments to the levy program in October 2008. We are pleased that both 
CMS and IRS have shown the willingness to improve the process of 
utilizing available tax information to prevent providers with tax 
problems from participating in Medicare and collecting tax debts. See 
the Agency Comments and Our Evaluation section of this report for a 
more detailed discussion of the agency comments. We have reprinted 
IRS's written comments in appendix III and CMS's written comments in 
appendix IV. 

Background: 

Authorized by the Title XVIII of the Social Security Act, Medicare is 
the nation's largest health insurance program. In 2006, Medicare 
provided medical services to 43.2 million beneficiaries and paid claims 
totaling $402 billion in 2006. CMS, an operating division of the 
Department of Health and Human Services (HHS), administers the Medicare 
program. Medicare benefits are divided into four parts: (1) Part A 
consists of inpatient hospital care, skilled nursing facility care, 
qualified home health care, and hospice care; (2) Part B includes 
physicians' services, outpatient hospital services, treatment for end- 
stage renal disease, laboratory services, durable medical equipment, 
certain elements of home health care, and other medical services and 
supplies; (3) Part C, the Medicare Advantage program, includes 
traditional health maintenance organizations, preferred provider 
organizations, and private fee-for-service plans; and (4) Part D offers 
beneficiaries an outpatient prescription drug benefit through private 
plans that contract with Medicare. For Medicare Parts A and B, also 
known as fee-for-service, CMS Medicare contractors are responsible for 
screening Medicare providers prior to enrollment into the Medicare 
program. Medicare contractors also process and pay Medicare fee-for- 
service claims and are reimbursed by CMS through the Medicare Trust 
Fund.[Footnote 7] 

Magnitude of Unpaid Taxes of Medicare Providers: 

Our analysis found that over 27,000 Medicare providers had over $2 
billion in unpaid federal taxes as of September 30, 2006.[Footnote 8] 
This represented over 6 percent of the approximately 436,000 Medicare 
providers paid during calendar year 2006. This represented over 6 
percent of the approximately 436,000 Medicare providers paid during 
calendar year 2006. The amount of unpaid federal taxes we identified 
among Medicare providers was substantially understated because (1) we 
intentionally limited our scope to providers with agreed-to federal tax 
debt for tax periods prior to 2006; (2) the IRS taxpayer data reflected 
only the amount of unpaid taxes either reported by the taxpayer on a 
tax return or assessed by IRS through its various enforcement programs 
and thus the unpaid tax debt amount did not include entities that did 
not file tax returns or underreported their income; and (3) our 
analysis does not include Medicare providers that owed taxes under 
separate TINs from those that received the Medicare payments. 

Characteristics of Medicare Providers' Unpaid Federal Taxes: 

As shown in figure 1, 73 percent of the approximately $2 billion in 
unpaid taxes comprised individual income and payroll taxes. The other 
27 percent of taxes included corporate income, excise, unemployment, 
and other types of taxes. 

Figure 1: Medicare Providers' Unpaid Taxes by Tax Type: 

This figure is a pie chart showing Medicare providers' unpaid taxes by 
tax type. 

Payroll: $896 million: 44%; 
Individual: $581 million: 29%; 
Other: $540 million: 27%; 

[See PDF for image] 

Source: GAO analysis of Medicare payments data and IRS data as of 
September 30, 2006. 

[End of figure] 

As shown in figure 1, Medicare providers owed $896 million in payroll 
taxes. Employers are subject to civil and criminal penalties if they do 
not remit payroll taxes to the federal government. When an employer 
withholds taxes from an employee's wages, the employer is deemed to 
have a responsibility to hold these amounts "in trust" for the federal 
government until the employer makes a federal tax deposit in that 
amount. When these withheld amounts are not forwarded to the federal 
government, the employer is liable for these amounts as well as the 
employer's matching Federal Insurance Contribution Act contributions 
for Social Security and Medicare. Individuals within the business 
(e.g., corporate officers) may be held personally liable for the 
withheld amounts not forwarded[Footnote 9] and assessed a civil 
monetary penalty known as a trust fund recovery penalty (TFRP). Failure 
to remit payroll taxes can also be a criminal felony offense punishable 
by imprisonment of not more than 5 years,[Footnote 10] while the 
failure to properly segregate payroll taxes can be a criminal 
misdemeanor offense punishable by imprisonment of up to a 
year.[Footnote 11] 

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

A substantial amount of the unpaid federal taxes shown in IRS records 
owed by Medicare providers had been outstanding for several years. As 
reflected in figure 2, about 54 percent of the $2 billion in unpaid 
taxes were for tax periods from calendar year 2000 through calendar 
year 2004, and approximately 32 percent of the unpaid taxes were for 
tax periods prior to calendar year 2000.[Footnote 12] 

Figure 2: Unpaid Taxes of Medicare Providers by Calendar Year: 

This figure is a pie chart showing unpaid taxes of Medicare providers 
by calendar year. 

2000-2004: $1.1 billion: 54%; 
Prior to 2000: $648 million: 32%; 
2005: $282 million: 14%; 

[See PDF for image] 

Source: GAO analysis of Medicare payments data and IRS data as of 
September 30, 2006. 

[End of figure] 

Our previous work has shown that as unpaid taxes age, the likelihood of 
collecting all or a portion of the amounts owed decreases.[Footnote 13] 
This is, in part, because of the continued accrual of interest and 
penalties on the outstanding tax debt, which, over time, can dwarf the 
original tax obligation. The amount of unpaid federal taxes reported 
above does not include all tax debts owed by Medicare providers because 
of statutory provisions that give IRS a finite period under which it 
can seek to collect unpaid taxes. Generally, there is a 10-year 
statutory collection period beyond which IRS is prohibited from 
attempting to collect tax debt.[Footnote 14] Consequently, if the 
Medicare 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. 

As shown in figure 3, Medicare providers did not disclose to IRS a 
significant amount of taxes owed instead the taxes were discovered 
through IRS examination or investigation. Specifically, $784 million, 
or about 39 percent of the $2 billion in unpaid taxes, was assessed by 
an IRS examination or investigation.[Footnote 15] Medicare providers 
did report about $857 million of the tax debt amount. These amounts 
were generally reported on tax returns filed but containing a balance 
due. 

Figure 3: Source of Unpaid Assessment: 

This figure is a pie chart showing source of unpaid assessment. 

Self-reported: $857 million: 42%; 
IRS Examination: $784 million: 39%; 
Other: $375 million: 19%. 

[See PDF for image] 

Source: GAO analysis of Medicare payments data and IRS data as of 
September 30, 2006. 

[End of figure] 

Unpaid Federal Taxes of Medicare Providers Are Understated: 

Although the over $2 billion in unpaid federal taxes owed by Medicare 
providers as of September 30, 2006, is a significant amount, it likely 
substantially understates the full extent of unpaid taxes owed by these 
or other businesses and individuals. The IRS tax database reflected 
only the amount of unpaid federal taxes either reported by the 
individual or business on a tax return or assessed by IRS through its 
various enforcement programs. The IRS database does not reflect amounts 
owed by businesses and individuals that have not filed tax returns and 
for which IRS has not assessed tax amounts due. For example, during our 
audit, we identified several instances from our 25 case studies in 
which Medicare providers failed to file tax returns for a particular 
tax period and IRS had not assessed taxes for these tax periods. 
Consequently, while these providers had unpaid federal taxes, they were 
listed in IRS records as having no unpaid taxes for those periods. 
Further, our analysis did not attempt to account for businesses or 
individuals that purposely underreported income and were not 
specifically identified by IRS as owing the additional federal taxes. 
According to IRS, underreporting of income accounted for more than 80 
percent of the estimated $345 billion annual gross tax gap.[Footnote 
16] Finally, our analysis did not attempt to identify Medicare 
providers that owed taxes under separate TINs from those that received 
the Medicare payments. For example, sole proprietors and certain LLCs 
may file Medicare claims under their employer identification numbers. 
If these Medicare providers owe personal income taxes the analysis will 
not capture the amount of the personal income taxes owed. Consequently, 
the full extent of unpaid federal taxes for Medicare providers is not 
known. 

Examples of Medicare Providers Involved in Abusive and Potentially 
Criminal Activity Related to the Federal Tax System: 


For all 25 cases involving Medicare providers with outstanding tax debt 
that we audited and investigated, we found abusive activity, 
potentially criminal activity, or both related to the federal tax 
system.[Footnote 17] All of these cases involved Medicare providers 
that had unpaid payroll taxes, many dating as far back as the early 
1990s.[Footnote 18] Rather than fulfill their role as "trustees" of 
this money and forward it to IRS as required by law, these Medicare 
providers diverted the money for other purposes. IRS had TFRPs in 
effect for 11 of the 25 business cases at the time of our review. In 
addition, as discussed previously, willful failure to remit payroll 
taxes is a criminal felony offense punishable by imprisonment up to 5 
years.[Footnote 19] 

Our review of selected Medicare providers revealed significant 
challenges that IRS faces in its enforcement of tax laws, a continuing 
high-risk area for IRS.[Footnote 20] Although the nation's tax system 
is built upon voluntary compliance, when businesses and individuals 
fail to pay voluntarily, IRS has a number of enforcement tools, 
including the use of levies, to compel compliance or elicit payment. 
Our review of the 25 Medicare providers found that IRS attempted to 
work with the businesses and individuals to achieve voluntary 
compliance, pursuing enforcement actions later rather than earlier in 
the collection process. Our review of IRS records with respect to the 
25 cases showed that IRS did not issue paper levies to the Medicare 
contractors to levy the payments of Medicare providers for 10 of the 25 
cases. As a result, many of the Medicare providers in our case studies 
continued to receive Medicare payments while failing to pay their 
federal taxes. 

Our investigations revealed that despite owing substantial amounts of 
federal taxes to IRS, some owners of Medicare providers had substantial 
personal assets--including multimillion-dollar homes and luxury cars. 
For example, the auditor for one Medicare provider found that the owner 
misappropriated assets for personal gain. At the same time as owing 
taxes, the owner was building a multimillion-dollar residence and had 
over $1.5 million in home furnishings and artwork. 

In addition to failure to pay taxes, our investigations also revealed 
that certain Medicare providers had significant quality-of-care and 
other problems. For example, several cases involved quality-of-care 
problems, including patient neglect, for example, losing track of a 
patient in the provider's care who has not been found and not taking 
appropriate actions to prevent a patient's suicide. In addition, a 
couple of nursing homes were cited by regulators for violating patient 
health and safety regulations. In another case, an owner of one 
Medicare provider was excluded from the Medicare program for submitting 
false Medicare claims, and in another case a provider continued to 
receive Medicare payments even though it was barred from receiving 
government contracts. In yet another case, the owner used funds from 
the business to fund the owner's statewide political campaign during 
the time the business was not paying its payroll taxes. 

Table 1 highlights 10 of the 25 cases of Medicare providers with unpaid 
taxes. IRS has collection actions during 2007 on 18 of 25 cases. 
Appendix II provides details on the other 15 cases we examined. We are 
referring all 25 cases we examined to IRS for further collection 
activity and criminal investigation. 

Table 1: Summary Information on 10 Medicare Providers with Unpaid 
Federal Taxes: 

Case: Case 1; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $400,000; 
Unpaid federal tax[B]: $600,000; 
Comments: * Company has history of not paying all taxes owed since the 
1990s; 
* Owner has personal real estate worth over $1 million. Owner 
transferred vacation house to spouse for practically nothing during IRS 
collection efforts; 
* According to IRS records, all attempts to bring company into 
voluntary compliance have failed; 
* Owner made large cash deposits and withdrawals totaling hundreds of 
thousands of dollars during the time little payroll taxes were paid to 
IRS. 

Case: Case 2; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $6 million; 
Comments: * Company has history of not paying all taxes owed since the 
1990s; 
* Company entered into installment agreement for tens of thousands of 
dollars a month but subsequently defaulted without making any of the 
installment payments; 
* Company was investigated for tax fraud; 
* Owner transferred personal residence worth over $1 million to spouse 
in mid-2000s at same time company owed taxes; 
* Owner was convicted of diversion of funds from federally backed 
loans; 
* Owner was indicted for Medicaid fraud and patient neglect; 
* Owner recently received over $150,000 in consulting business and 
$100,000 in interest payments from several real estate entities. 

Case: Case 3; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $100,000; 
Unpaid federal tax[B]: $800,000; 
Comments: * Company has history of not paying all taxes owed since the 
1990s; 
* Company has generally not made tax payments or filed tax returns 
since the mid-2000s; 
* Owner's personal residence valued at over $1 million; 
* Owner annually received over $20,000 in Social Security disability 
payments; 
* Company received over $1.5 million in income from a real estate 
investment company in late 2000s; 
* IRS assessed a TFRP against the owner. 

Case: Case 4; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $15 million; 
Unpaid federal tax[B]: $7 million; 
Comments: * Tax debts mainly consisted of payroll taxes owed from 
several related companies in the early 2000s; 
* Owner has personal residence valued at over $1 million and owned 
another property valued at over $1 million while owing taxes; 
* IRS records indicate that owner has a history of asset concealment 
schemes and questionable dealings with trusts, partnerships, LLCs, and 
other entities; 
* Owner established charitable foundation that was used to purchase 
luxury cars and other personal items; 
* In addition to Medicare payments, company also received hundreds of 
thousands of dollars from another federal agency and millions from a 
state agency; 

* Company offered to compromise the debt for hundreds of thousands of 
dollars in the 2000s, but offer was rejected by IRS because taxpayer 
had sufficient resources to pay the tax debts; 
* Company was investigated for check kiting activity for millions of 
dollars. 

Case: Case 5; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $11 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the 1990s; 
* Regulator cited company for history of failure to maintain compliance 
with licensure rules and serious deficiencies in health and safety of 
its residents. The deficiencies were significant enough to require a 
ban on all admissions for the facility; 
* IRS records indicate that owner attempted to hide income through use 
of partnerships, tiered agreements, and leasehold interest. In 
addition, owner has business holdings in two foreign countries; 
* Owner made frequent trips out of the country at the same time 
business owed taxes; 
* In addition to Medicare payments, company also received hundreds of 
thousands of dollars from another federal agency and millions of 
dollars from a state agency; 
* Owner was investigated for underreporting income; 
* Entity owner has many assets, including timeshares, a boat, an 
unrelated business, and hundreds of thousands of dollars of decorative 
items at the owner's personal residence; 
* Company was investigated for check kiting activity of hundreds of 
thousands of dollars; 
* IRS assessed a TFRP against the owner. 

Case: Case 6; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $4 million; 
Unpaid federal tax[B]: $4 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the early 2000s, including not filing tax returns for one year 
during this time; 
* Company was sued for wrongful death and employment discrimination; 
* Owner owns real estate worth millions of dollars; 
* Owner recently built a personal residence worth over $2 million while 
claiming that the owner had no funds to repay the company's taxes. 
Building contractor claims that the house was built using overseas 
funds; 
* IRS records indicate that owner owns over $1 million in home 
furnishings and artwork; 
* Owner uses an LLC for income reporting so no income is reported in 
owner's name. Owner reports a small amount of income to IRS while 
living a lavish lifestyle; 
* IRS records indicate that owner purchased property overseas and plans 
to move there to avoid paying delinquent taxes; 
* Owner had several luxury vehicles at same time company owed taxes; 
* In addition to Medicare payments, company also received millions of 
dollars from a state agency; 
* IRS assessed a TFRP against the owner. 

Case: Case 7; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $2 million; 
Unpaid federal tax[B]: $1 million; 
Comments: * Company's tax debts primarily consisted of payroll taxes; 
* Owner's personal residence is worth over $1 million; 
* Company paid owner millions of dollars for management fees and rent; 
* Owner used company funds to augment owner's affluent lifestyle 
including purchase of luxury cars and multiple vacations; 
* Company offered to compromise tax debts for less than $100,000 but 
offer was rejected by IRS; 
* IRS records indicate that company structured cash withdrawals to 
evade reporting requirements; 
* In addition to Medicare payments, company also received millions of 
dollars from a state agency; 
* Company made multiple large cash deposits totaling tens of thousands 
of dollars. Many of these transactions appear to have been structured 
to avoid mandatory IRS reporting. 

Case: Case 8; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $300,000; 
Unpaid federal tax[B]: $600,000; 
Comments: * Company's tax debts primarily consisted of payroll taxes; 
* Owner and related trust own nearly $6 million in real estate, 
including residence valued at over $2 million; 
* Owner pays about $100,000 a year in mortgage interest and receives 
over $200,000 in investment income; 
* Owner closed company that owed taxes and started new business. 
Owner's new company still receives medical payments under the closed 
company's TIN; 
* Owner gambled tens of thousands of dollars at the same time the 
company owed taxes. 

Case: Case 9; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $900,000; 
Unpaid federal tax[B]: $11 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the 1990s; 
* Owner's personal residence is worth over $5 million; 
* Owner received millions of dollars in federal grants while company 
was incurring tax debts; 
* Owner's annual mortgage interest was about $300,000; 
* Owner sold over $100 million in real estate in the late 2000s; 
* IRS assessed a TFRP against the owner. 

Case: Case 10; 
Nature of work/type of entity: Hospital; 
Medicare paid claims during calendar year 2006[A]: $21 million; 
Unpaid federal tax[B]: $15 million; 
Comments: * Company's tax debts primarily consisted of payroll taxes; 
* An owner's personal residence is worth over $6 million; 
* Owners were found liable for millions of dollars to Medicare for 
submitting false claims from another medical business; 
* IRS assessed a TFRP against the owner. 

Source: GAO's analysis of IRS, FMS, Medicare claims, public, and other 
records. 

Note: Dollar amounts are rounded. 

[A] Medicare payments are Medicare provider claims approved by CMS for 
payment for calendar year 2006. 

[B] Unpaid tax amount as of September 30, 2006. 

[End of table] 

The following provides illustrative detailed information on four of the 
cases we examined. 

* Case 4: The nursing home consists of several companies that received 
over $15 million in Medicare payments while owing more than $7 million 
in tax debts. IRS records indicated that the company owners attempted 
to conceal assets through questionable business entities such as 
trusts, partnerships, LLCs, and other fictitious entities. While the 
nursing home owed taxes, the owner possessed a $1 million personal 
residence and an additional $1 million piece of real estate. IRS 
records also showed that the owner purchased luxury cars and other 
personal items from money funneled through a charitable foundation. 
Specifically, the company owner donated large sums of money to the 
foundation then claimed the deductions on their personal tax return 
while purchasing expensive personal items. 

* Case 5: The nursing home has a history of tax noncompliance since the 
late 1990s. The nursing home received over $1 million in Medicare 
payments while owing more than $11 million in tax debt. IRS records 
indicated that the nursing home owner has attempted to shield income 
through partnerships, tiered agreements, and leasehold agreements. In 
addition, the owner has various companies using over 100 bank accounts, 
wire transfers, an overseas billing company, and a large financial 
transaction to an overseas bank account. The nursing home has been 
sanctioned by regulators for quality-of-care deficiencies so serious 
that the home was barred from accepting new admissions. 

* Case 6: The nursing home received over $4 million in Medicare 
payments and hundreds of thousands of dollars in federal government 
contracts while simultaneously owing over $4 million in tax debt. 
Although the owners of the nursing home claimed an inability to pay 
delinquent taxes because of lack of resources, one owner constructed a 
$4 million home while the other owner lived in a multimillion-dollar 
home while owing taxes. IRS records indicated that the owners also 
underreported income on their personal tax returns and received 
financial compensation, such as salary and bonuses, from another 
company to disguise reporting of income. IRS records indicated that one 
company owner may relocate overseas to avoid paying taxes. 

* Case 10: The company received over $21 million in Medicare payments 
while simultaneously owing over $15 million in tax debt. The company 
was under investigation for underreporting income, bankruptcy fraud, 
and submitting false claims to Medicare. The company's owner also owns 
a multimillion-dollar residence. 

Medicare Providers with Unpaid Taxes Are Not Prohibited from Enrolling 
in or Receiving Payments from Medicare: 

CMS does not prevent Medicare providers with tax debts from becoming 
Medicare providers or receiving payments from the Medicare 
program.[Footnote 21] Neither Medicare regulations nor CMS implementing 
guidance require CMS or its contractors to screen Medicare providers 
for tax debts prior to enrollment. Even if such requirements did exist, 
absent taxpayer consent, federal law generally prohibits IRS from 
disclosing taxpayer data, and consequently, CMS and its contractors 
have no access to tax data directly from IRS. In addition, CMS has not 
fully participated in the continuous levy program. Specifically, CMS 
has not incorporated Medicare fee for service payments in the 
continuous levy program. As a result, the federal government 
potentially lost opportunities to collect over $140 million in unpaid 
taxes during calendar year 2006.[Footnote 22] 

CMS Medicare contractors are generally responsible for screening 
Medicare providers prior to enrollment into the Medicare 
program.[Footnote 23] However, as part of the screening process, 
neither CMS policies nor CMS regulations require Medicare contractors 
to consider the tax debts or tax-related abuses of prospective Medicare 
providers or conduct any criminal background checks on these 
individuals.[Footnote 24] Medicare contractors are required to review 
the HHS Office of Inspector General (OIG) exclusion list and the GSA 
debarment list; however, these lists do not include all individuals or 
businesses that have abused the federal tax system.[Footnote 25] 
Exclusion of certain individuals and entities from participation in 
Medicare programs is made by statute.[Footnote 26] The statute provides 
for both mandatory and permissive exclusions. Mandatory exclusions are 
confined to health-related criminal offenses, while permissive 
exclusions concern primarily non-health-related offenses. The Federal 
Acquisition Regulation cites conviction of tax evasion as one of the 
causes for debarment; indictment on tax evasion charges is cited as a 
cause for suspension.[Footnote 27] Moreover, while a felony offense, 
the deliberate failure to remit taxes, in particular payroll taxes, 
will likely not result in an individual or entity being placed on the 
OIG exclusion or GSA debarment lists unless the taxpayer is convicted. 
Based on our work, we believe that it is unlikely that companies will 
be excluded or debarred for failure to pay delinquent payroll taxes. 

Even if a taxpayer is convicted of tax evasion or other tax-related 
crime, the individual or business still may not be placed on the OIG 
exclusion or GSA debarment lists. To place them on these lists, federal 
agencies must identify those individuals and businesses and provide 
them with due process. As part of due process, the agency must 
determine whether the exclusion or debarment is in the government's 
interest. For example, in our March 2007 testimony, we noted several 
cases involving conviction of tax-related crimes where the providers 
were not reported on the OIG exclusion or GSA debarment lists.[Footnote 
28] 

Further complicating CMS decision making on the consideration of tax 
debts for Medicare, federal law does not permit IRS to disclose 
taxpayer information, including tax debts, to CMS or Medicare 
contractor officials unless the taxpayer consents, which CMS does not 
currently require.[Footnote 29] Thus, certain tax debt information can 
only be discovered from public records if IRS files a federal tax lien 
against the property of a tax debtor or a record of conviction for tax 
offense is publicly available.[Footnote 30] Consequently, CMS and its 
contractors do not have ready access to information on unpaid tax debts 
to consider in making decisions on Medicare providers. 

Further, CMS has not implemented a process for continuously levying 
payments made by Medicare contractors.[Footnote 31] As a result, IRS 
does not capture at least a portion of payments made to Medicare 
providers that owe federal tax debts. Thus, none of the 25 providers on 
which we performed a detailed review had their Medicare fee-for-service 
payments subject to the continuous levy program. As stated earlier, 
federal law allows IRS to continuously levy federal vendor payments 
until the tax debt is paid. IRS implemented this authority by creating 
a continuous levy program that utilizes FMS's Treasury Offset Program 
system. In July 2001, we reported that CMS did not have any plan to 
participate in the continuous levy program and we recommended that the 
Commissioners of IRS and FMS work with CMS to develop plans to include 
Medicare payments in the continuous levy program.[Footnote 32] In July 
2006, IRS began to pursue HHS participation in the continuous levy 
program through the Federal Contractor Tax Compliance (FCTC) Task 
Force, a multiagency group dedicated to improving the continuous levy 
process.[Footnote 33] In response to IRS's request, and a month before 
your subcommittee's hearing on Medicare physicians, health 
professionals, and suppliers that owe federal taxes, CMS began to 
participate in the FCTC Task Force meetings in February 2007. 

According to CMS officials, CMS plans to incorporate all payments made 
through HIGLAS, Medicare's central accounting system, into the levy 
program by October 2008. CMS officials stated that this will cover 
about 60 percent of all Medicare fee-for-service payments. CMS 
officials said that the remaining 40 percent will be implemented into 
the continuous levy program in the next several years as the Medicare 
contractors convert their systems to HIGLAS. 

If there was an effective levy program in place, we estimate that CMS 
through its Medicare contractors potentially could have collected over 
$140 million of unpaid federal taxes during fiscal year 2006. This 
estimate was based on those debts that IRS reported to the Treasury 
Offset Program as of September 30, 2006.[Footnote 34] 

Conclusions: 

As federal deficits continue to mount, the federal government must take 
all effective measures to collect the billions of dollars of unpaid 
taxes. Because payroll taxes fund the Medicare program, Medicare 
providers should especially pay their fair share of taxes owed, 
especially payroll taxes. However, with respect to the continuous levy 
program, the federal government continues to fail to reach its 
potential. A substantial amount of Medicare payments to delinquent 
taxpayers will continue to go uncollected until CMS can establish a 
process to incorporate its payments into the continuous levy program. 
The failure to enforce tax laws against Medicare providers has a 
detrimental affect on compliance. 

Recommendations for Executive Action: 

We recommend that the Administrator of CMS take the following two 
actions: 

* To enhance program integrity, consider (1) issuing guidance requiring 
Medicare contractors to determine to the extent feasible if prospective 
Medicare providers (including any Medicare providers that reenroll into 
Medicare) have delinquent federal taxes, including obtaining applicant 
consent to inquire as to tax debt status from IRS, and (2) using the 
results of those inquiries in determining whether to enroll such 
providers into the Medicare program. In making this determination, CMS 
could also build in consideration of the potential adverse effect that 
this requirement may have on Medicare's ability to provide health care 
to the elderly and other Medicare beneficiaries. 

* Incorporate all Medicare payments into the continuous levy program as 
expeditiously as possible. 

Agency Comments and Our Evaluation: 

We provided a draft of our report to FMS, CMS, and IRS for review and 
comment. FMS did not have any comments on the draft. We received 
written comments on a draft of this report from the Commissioner of 
Internal Revenue (see app. III). We also received comments from the 
Acting Administrator of CMS on our draft, who did not disagree with our 
two recommendations (see app. IV). 

The Commissioner of Internal Revenue stated that he understood the 
importance and potential benefits of considering unpaid federal tax 
debt in the Medicare screening process and will support CMS in 
addressing our recommendations to CMS. Further, the Commissioner of 
Internal Revenue stated that if CMS established a process by which 
Medicare providers supply their TINs to IRS, IRS would be able to 
provide CMS a historical record of the taxpayers' accounts, which would 
indicate any periods of unpaid taxes. The Commissioner of Internal 
Revenue stated that IRS is currently working with CMS and FMS on a 
pilot program to levy CMS Medicare payments through the continuous levy 
program. 

In its response to the draft of the report, the Acting Administrator of 
CMS stated that CMS has taken some actions and is planning other 
actions to address our recommendations. Specifically, in response to 
our first recommendation, CMS stated that it issued proposed rules that 

would require prospective durable medical equipment, prosthetic, and 
orthotic suppliers to be free of federal or state tax debt. CMS stated 
that it will consider whether to use its authority to establish a 
similar requirement for the other provider and supplier types. CMS also 
stated that it will carefully consider public policy implications of 
balancing the interests of denying or revoking Medicare program 
participation with Medicare's responsibility for paying for the health 
care needs of the Medicare beneficiaries. In response to our second 
recommendation, CMS stated that it is scheduled to begin subjecting its 
Medicare fee-for-service payments to the levy program in October 2008. 

We are pleased that both CMS and IRS have shown the willingness to 
improve the process of utilizing available tax information to prevent 
providers with tax problems from participating in Medicare and 
collecting tax debts. As discussed in our draft report, we agree with 
CMS that in determining whether to require the screening of prospective 
Medicare providers for delinquent federal taxes, CMS should consider 
the potential adverse effect that this requirement may have on 
Medicare's ability to provide health care to the elderly and other 
Medicare beneficiaries. Further, as also discussed in our draft report, 
we also believe that the incorporation of Medicare fee-for-service 
payments into the levy program will significantly improve collections 
of outstanding federal taxes owed by Medicare providers. 

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 
Secretary of the Treasury, the Commissioner of the Financial Management 
Service, the Commissioner of Internal Revenue, the Acting Administrator 
of Centers for Medicare & Medicaid Services, and other interested 
parties. 

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

Signed by: 

Gregory D. Kutz: 

Managing Director: 

Forensic Audits and Special Investigations: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify the magnitude of unpaid federal taxes owed by Medicare 
providers, we obtained and analyzed the Internal Revenue Service (IRS) 
tax debt data as of September 30, 2006. We also obtained and analyzed 
calendar year 2006 Medicare payments to providers from the Centers for 
Medicare & Medicaid Services (CMS). Our analysis included all Medicare 
providers (i.e., Parts A, B, C and D) that were paid during calendar 
year 2006. We matched the Medicare payment data to the IRS unpaid 
assessment data using the taxpayer identification number (TIN) field. 
To avoid overestimating the amount owed by Medicare providers with 
unpaid tax debts and to capture only significant tax debts, we excluded 
from our analysis tax debts and paid claims meeting specific criteria 
to establish a minimum threshold in the amount of tax debt and in the 
amount of paid claims to be considered when determining whether a tax 
debt is significant. The criteria we used to exclude tax debts are as 
follows: 

* tax debts that IRS classified as compliance assessments or memo 
accounts for financial reporting,[Footnote 35] 

* tax debts from calendar year 2006 tax periods, and: 

* total unpaid taxes and Medicare paid claims of less than $100. 

The criteria above were used to exclude tax debts that might be under 
dispute or generally duplicative or invalid and tax debts that are 
recently incurred. Specifically, compliance assessments or memo 
accounts were excluded because these taxes have neither been agreed to 
by the taxpayers nor affirmed by the court, or these taxes could be 
invalid or duplicative of other taxes already reported. We excluded tax 
debts from calendar year 2006 tax periods to eliminate tax debt that 
may involve matters that are routinely resolved between the taxpayer 
and IRS, with the taxes paid or abated within a short period. We 
excluded tax debts and Medicare paid claims of less than $100 because 
they are insignificant for the purpose of determining the extent of 
taxes owed by Medicare providers. 

To identify indications of abuse or potentially criminal activity, we 
selected 25 Medicare providers for a detailed audit and 
investigation.[Footnote 36] The 25 providers were chosen using a 
nonrepresentative selection approach based on our judgment, data 
mining, and a number of other criteria. Specifically, we narrowed the 
25 providers with unpaid taxes based on the amount of unpaid taxes, 
number of unpaid tax periods, amount of payments reported by Medicare, 
and indications that owner(s) might be involved in multiple companies 
with tax debts. For these 25 cases, we obtained copies of automated tax 
transcripts and other tax records (for example, revenue officer's 
notes) from IRS and performed additional searches of criminal, 
financial, and public records. In cases where record searches and IRS 
tax transcripts indicate that the owners or officers of a business are 
involved in other related entities[Footnote 37] 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. 
Because our investigations were generally limited to publicly available 
information, our audit of the 25 cases may not have identified all 
related parties, criminal activity or significant assets (such as 
personal bank data, companies established to hide assets, etc.) related 
to these Medicare providers. 

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

To determine the extent to which Medicare payments to providers are 
continuously levied to pay tax debts, we examined the statutory and 
regulatory authorities that govern the continuous levy program and 
interviewed officials from CMS, IRS, and the Financial Management 
Service (FMS) to determine whether any legal barriers exist. 

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

Data Reliability Assessment: 

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

For the Medicare payment databases and FMS's TOP databases, we 
interviewed CMS and FMS officials responsible for their respective 
databases. In addition, we performed electronic testing of specific 
data elements in the databases that we used to perform our work. 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 testimony were sufficiently reliable for our purposes. 

We conducted this forensic audit from July 2007 to June 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. We performed our 
investigative work in accordance with standards prescribed by the 
President's Council on Integrity and Efficiency. 

[End of section] 

Appendix II: Medicare Providers with Unpaid Taxes: 

This appendix presents summary information on the abusive or 
potentially criminal activity associated with 15 of our 25 case 
studies.[Footnote 38] Table 2 summarizes the abuse or potentially 
criminal activity related to the federal tax system for these 15 
Medicare providers. The cases involving businesses primarily involved 
unpaid payroll taxes. 

Table 2: Summary Information on 15 Medicare Providers with Unpaid 
Federal Taxes: 

Case: Case 11; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $800,000; 
Unpaid federal tax[B]: $3 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the 1990s; 
* Company officer owed hundreds of thousands of dollars in individual 
income taxes; 
* IRS assessed trust fund recovery penalties (TFRP) of millions of 
dollars against several company officers; 
* Company filed Chapter 11 bankruptcy; 
* Owner was associated with dozens of business entities. Several of 
these companies were closed by the state tax department; 
* IRS assessed a TFRP against the owner. 

Case: Case 12; 
Nature of work/type of entity: Durable medical equipment supplier; 
Medicare paid claims during calendar year 2006[A]: $400,000; 
Unpaid federal tax[B]: $400,000; 
Comments: * Company tax debt consisted primarily of payroll taxes; 
* Company had hundreds of thousands of dollars in suspicious bank 
activities while owing taxes; 
* Company paid to remodel an officer's personal residence from employee 
retirement contributions; 
* Company is under investigation for Medicare and Medicaid fraud; 
* Company officer owes tens of thousands of dollars in individual 
income taxes and has not filed an individual income tax return in the 
past couple of years. 

Case: Case 13; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $200,000; 
Unpaid federal tax[B]: $2 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the 1990s; 
* Company made multiple large cash deposits totaling tens of thousands 
of dollars. Many of these transactions appear to have been structured 
to avoid mandatory IRS reporting; 
* Company defaulted on installment agreement; 
* Company owner is under IRS investigation for using financial 
investments and company loans to avoid IRS levies; 
* IRS assessed a TFRP against the owner. 

Case: Case 14; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $1 million; 
Comments: * Company tax debt consisted primarily of payroll taxes; 
* Owner owns real estate worth more than $4 million including a 
personal residence valued at about $800,000; 
* Owner sold off over $2 million in real estate while company owed 
taxes; 
* Owner has a yacht and luxury vehicle; 
* Owner had numerous stock sales totaling $10 million. The largest 
transaction was hundreds of thousands of dollars from an energy 
company; 
* Owner received federal government contract worth hundreds of 
thousands of dollars while owing taxes. 

Case: Case 15; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $400,000; 
Unpaid federal tax[B]: $600,000; 
Comments: * Company has history of not paying all payroll taxes owed 
since 2002; 
* Company filed for bankruptcy and submitted an installment plan to 
emerge from bankruptcy in the 2000s; 

* Owner has personal residence valued at about $900,000 and sold 
personal real estate for about $400,000 while company owed taxes. Owner 
paid over $75,000 a year in mortgage interest; 
* Company owner owned luxury vehicle; 
* IRS assessed a TFRP against the owner. 

Case: Case 16; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $800,000; 
Unpaid federal tax[B]: $600,000; 
Comments: * Company tax debt primarily consisted of payroll taxes; 
* Company has had tax compliance issues since the 1990s and defaulted 
on multiple installment agreements; 
* Company leased a luxury vehicle for the owner and owner's spouse also 
owned a luxury vehicle; 
* IRS records indicate that the high salary of the owner contributed to 
the company's failure to pay taxes; 
* IRS assessed a TFRP against the owner. 

Case: Case 17; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $400,000; 
Unpaid federal tax[B]: $900,000; 
Comments: * Company has history of not paying all payroll taxes owed 
since the early 2000s; 
* Owner received tens of thousands of dollars in unemployment 
compensation. 

Case: Case 18; 
Nature of work/type of entity: Hospital; 
Medicare paid claims during calendar year 2006[A]: $3 million; 
Unpaid federal tax[B]: $2 million; 
Comments: * Company tax debt primarily consisted of payroll taxes; 
* Company filed for bankruptcy. 

Case: Case 19; 
Nature of work/type of entity: Home health care; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $100,000; 
Comments: * Company has history of not paying all payroll taxes owed 
since the early 2000s; 
* Owner purchased several personal properties in the 2000s worth over 
$1 million; 
* Company owner owned luxury vehicle. 

Case: Case 20; 
Nature of work/type of entity: Hospital; 
Medicare paid claims during calendar year 2006[A]: $3 million; 
Unpaid federal tax[B]: $1 million; 
Comments: * Company generally has history of not paying all payroll 
taxes owed since the early 2000s; 
* Company provided owner with luxury vehicle; 
* Owner was investigated for check fraud of tens of thousands of 
dollars; 
* IRS assessed a TFRP against the owner. 

Case: Case 21; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $7 million; 
Unpaid federal tax[B]: $13 million; 
Comments: * Company has history of not paying all payroll taxes owed 
since the early 2000s; 
* IRS investigated company related to offshore accounts; 
* Bank closed company's checking accounts because of check kiting of 
hundreds of thousands of dollars; 

* Officer owned luxury cars, boats, luxury furniture, timeshares, and 
numerous possessions; 
* Company was sued for rental housing-related issues and paid tens of 
thousands of dollars to settle the suit. 

Case: Case 22; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $800,000; 
Unpaid federal tax[B]: $1 million; 
Comments: * Company's tax debts primarily consisted of payroll taxes; 
* In addition to Medicare payments, company also received millions of 
dollars from Medicaid; 
* IRS records indicate that a company officer did not bill patients for 
their care for hundreds of thousands of dollars because officer wanted 
company to go into receivership. Company officer planned to take over 
company after it went into receivership; * IRS did not seize company 
because of significant hardship to the patients; 
* Company owns building worth about $2 million. 

Case: Case 23; 
Nature of work/type of entity: Durable medical equipment supplier; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $200,000; 
Comments: * Company's tax debts primarily consisted of payroll taxes 
from the early 2000s. Owner has generally not made any federal payroll 
tax payments for the last couple of years; 
* Owner claims slow Medicare payment processing is cause for tax 
delinquency; 
* Company submitted installment agreement of about $7,000 a month but 
was denied for failure to pay federal tax deposits; 
* Company paid for owner's luxury vehicle. 

Case: Case 24; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $1 million; 
Comments: * Company's tax debts primarily consisted of payroll taxes 
from the early 2000s; 
* Owner and related trust own about $2 million in real estate, 
including a residence valued at over $1 million; 
* Owner recently received thousands of dollars in unemployment 
compensation; 
* In addition to Medicare payments, company also received millions of 
dollars from Medicaid; 
* IRS assessed a TFRP against the owner. 

Case: Case 25; 
Nature of work/type of entity: Nursing home; 
Medicare paid claims during calendar year 2006[A]: $1 million; 
Unpaid federal tax[B]: $600,000; 
Comments: * Company's tax debts primarily consisted of payroll taxes; 
* Company pays majority of its income to company officers. Company also 
paid for the vehicles of the officers; 
* Company received thousands of dollars from another federal agency. 

Source: GAO's analysis of IRS, FMS, Medicare claims, public, and other 
records. 

Note: Dollar amounts are rounded. 

[A] Medicare payments are Medicare provider claims approved by CMS for 
payment for calendar year 2006. 

[B] Unpaid tax amount as of September 30, 2006. 

[End of table] 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Commissioner: 

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

May 19, 2008: 
 
Mr. Gregory Kutz: 
Managing Director, Forensic Audits and Special Investigations: 
Government Accountability Office: 
441 G Street, N.W.: 
Washington, D.C. 20548: 

Dear Mr. Kutz: 

Thank you for the opportunity to review your draft report titled: 
"Medicare: Thousands of Medicare Providers Abuse the Federal Tax 
System" (GAO-08-618). I understand the importance and potential 
benefits of considering unpaid federal tax debt in the Medicare 
screening process and will support the Centers for Medicare and 
Medicaid Services (CMS) in their efforts to address their 
recommendations. 

The first recommendation directs CMS to consider issuing guidance to 
require Medicare contractors to screen prospective Medicare providers 
for unpaid taxes, including obtaining consent from these providers to 
inquire as to tax debt status from IRS. The second recommends that CMS 
incorporate all Medicare payments into the continuous levy program as 
expeditiously as possible. 

If CMS established a process by which Medicare providers consent to CMS 
supplying their Taxpayer Identification Numbers to the IRS, the IRS 
would be able to provide CMS a historical record of the taxpayers' 
accounts, which would indicate any periods of unpaid taxes. 

With regard to the second recommendation, we are currently working with 
CMS and Financial Management Services on a pilot program to levy CMS 
Medicare payments through the continuous levy program. We scheduled the 
pilot for production in October 2008. 

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: 

Douglas Shulman: 

[End of section] 

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

Note: GAO comments supplementing those in the report text appear at the 
end of this appendix. 

Department Of Health & Human Services: 
Office of the Assistant Secretary for Legislation: 
Washington, D.C. 20201: 

May 29, 2008: 
Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Kutz: 

Enclosed are the Department's comments on the U.S. Government 
Accountability Office's (GAO) draft report entitled: Medicare: 
"Thousands of Medicare providers Abuse the Federal Tax System" (GAO 08-
618). 

The Department appreciates the opportunity to review and comment on 
this report before its publication. 

Sincerely, 

Jennifer R. Luong for: 

Vincent J. Ventimiglia, Jr.: 
Assistant Secretary for Legislation: 

Attachment: 

Department Of Health & Human Services: 

Centers for Medicare & Medicaid Services: 
Administrator: 
Washington, DC 20201" 

Date: MAY 29 2008

Subject: Government Accountability Office (GAO) Draft Report: MEDICARE: 
Thousands of Medicare Providers Abuse the Federal Tax System (GAO-08-
618) 

Thank you for the opportunity to review and comment on the above GAO 
draft report. GAO's study focused on Medicare providers who were 
identified as owing federal tax debt and provided recommendations for 
the Centers for Medicare & Medicaid Services (CMS) to improve the 
process of collecting tax debt and for utilizing available tax 
liability information to prevent providers with tax problems from 
participating in the Medicare program. CMS appreciates the time and 
resources that GAO invested in this study and has already taken several 
steps to implement the recommendations. 

The report recognizes that federal law does not permit the Internal 
Revenue Service (IRS) to disclose taxpayer information, including tax 
debts, to CMS or its Medicare contractors without consent. However, 
certain tax debt can be discovered from public records if IRS files a 
tax lien or if a record of a conviction for tax offense is publicly 
available. CMS and its contractors do not have ready access to 
information on unpaid tax debts to consider in making enrollment or 
other decisions related to Medicare providers. 

Despite these challenges, as your report notes, CMS is making changes 
in its processes to more efficiently assist the IRS in collecting 
unpaid taxes. Additionally, CMS complies with IRS policies on reporting 
of income, responds to paper tax levies and sends a portion of its 
Medicare payments to Treasury for the Federal Payment Levy Program 
(FPLP). We would like the final report to acknowledge that CMS has been 
working with GAO to provide ownership information from the CMS Provider 
Enrollment Chain Ownership System. We understand that GAO is using this 
information to review for tax delinquency and fraud. 

The GAO recommends that the Administrator of CMS take the following two 
actions: 

GAO Recommendation: 

To enhance program integrity, consider: (I) issuing guidance requiring 
Medicare contractors to determine to the extent feasible if prospective 
Medicare providers (including any Medicare providers that reenroll into 
Medicare) have delinquent federal taxes, including obtaining applicant 
consent to inquire as to tax debt status from IRS; and (2) using the 
results of those inquiries in determining whether to enroll such 
providers into the Medicare program. In making this determination, CMS 
could also build in consideration of the potential adverse effect that 
this requirement may have on Medicare's ability to provide health care 
to the elderly and other Medicare beneficiaries. 

CMS Response: 

As noted by GAO on page 21 of its report, CMS issued proposed rules on 
January 25, 2008 that would require prospective durable medical 
equipment, prosthetic and orthotic suppliers to be free of federal or 
state tax debt. CMS is considering whether to use its authority to 
establish a similar requirement for other provider and supplier types. 

Very importantly, as GAO suggests, Medicare must balance the interests 
of denying or revoking Medicare program participation with Medicare's 
responsibility for paying for the health care needs of the Medicare 
beneficiary. While CMS must enforce its payment safeguard role and take 
appropriate enforcement actions, public policy implications would have 
to be carefully considered. These larger issues as they relate to tax 
delinquencies might be better addressed by Congress with specific 
consideration of the merits of singling out health care reimbursement 
to enforce forfeiture of livelihood or facility closure. As we gain 
experience with FPLP, beginning in October 2008, we will continue to 
work with GAO, the health care provider industry and Congress regarding 
the ways we can safeguard the Medicare program from those individuals 
and organizations that have tax delinquencies. 

GAO Recommendation: 

Incorporate all Medicare payments into the continuous levy program as 
expeditiously as possible. 

CMS Response: 

As GAO noted on page 24 of the draft report, in October 2008, CMS is 
scheduled to begin subjecting Medicare fee-for-service payments to 
FPLP. CMS has been consistently consolidating its Medicare claims 
processing systems and will have, by this October, successfully 
migrated a number of its largest contractors to a single integrated 
financial ledgerï¿½the Healthcare Integrated General Ledger Accounting 
System (HIGLAS). This effort will result in over 60 percent of Medicare 
payments being subject to the continuous levy program. Historically, 
CMS had over 75 claims and financial processing systems that would have 
made earlier participation in FPLP difficult and costly. With the 
implementation of HIGLAS, execution of the continuous levy will be 
efficient and timely. CMS will exchange Medicare payment information 
daily with Treasury's Financial Management Service (FMS). 

In addition to the above, CMS has additional comments outlined below: 

* The draft report does not mention that CMS issues over 1 million IRS 
1099s for its Medicare payments made during the year. These are 
available for IRS to match tax debts with payments. 

(See comment 1.): 

* We would like the report to reflect that in 2006, CMS received 970 
paper levies from IRS Revenue Officers totaling $109 million. 

(See comment 2.): 

* The draft report suggests that CMS has not incorporated most of its 
debt into the FPLP since the passage of the Taxpayer Relief Act of 1997 
when it authorized the continuous levy of federal payments. Presently, 
over $11 billion in Medicare payments per month are subject to the 
FPLP, representing 30 percent of Medicare monthly payments. These are 
payments to managed care organizations, prescription drug plans, 
certified laboratories and those made under an authorized demonstration 
plan. 

(See comment 3.): 

* The CMS' Chief Financial Officer (CFO) became aware of the Federal 
Contractor Tax Compliance (FCTC) Taskforce in February 2007, and 
immediately began participating, on a biweekly basis, in the Taskforce 
in order to develop plans to bring Medicare contractor payments into 
the FPLP. We believe it is significant that CMS will be ready to send 
payments, using a new IT solution, 20 months after first meeting with 
the FCTC Taskforce. 

(See comment 4.): 

* Additionally, the draft report fails to recognize that, through the 
IRS/CMS/SSA Data Match, CMS uses IRS data from citizens tax returns, 
coupled with their SSA data and Medicare enrollment records to identify 
other health plan coverage. Annually, CMS saves over $1.2 billion in 
Medicare Trust Fund for services that are the responsibility of other 
insurers. This exchange of information since 1991 has saved billions. 

(See comment 5.): 

* On page 7 of the report, the GAO reports that over 27,000 Medicare 
providers had unpaid federal taxes. However, until reaching footnote 36 
on page 28, which says the report addresses only Part A providers, the 
report does not indicate which categories of the more than 1,000,000 
Medicare Part A and B providers and suppliers this includes. On page 4, 
the draft report says that the 27,000 providers represent 6 percent of 
all Medicare providers paid in 2006. We do not understand the basis for 
this calculation and recommend that the GAO provide more detail. There 
are approximately 1,000,000 Part B providers and suppliers alone. Of 
the 25 examples discussed, all are either a healthcare organization or 
a corporation. The majority of Medicare providers are physicians and 
over 82 percent of these physicians have assigned themselves to a 
corporation. In GAO's report of last year specifically addressing Part 
B providers, the report said that 21,000 of these had tax debts. Is the 
combined total 48,000 and what is the provider universe to which that 
total should be compared? 

(See comment 6.): 

* On page 22 of the draft report, the GAO cites the difficulty imposed 
by the existing debarment system and says that Federal agencies must 
provide potentially barred individuals and businesses with due process, 
implying that it might not be necessary or desirable. The CMS solicits 
any recommendations the GAO could offer on this issue. 

(See comment 7.): 

* The GAO says that the $2 billion owed in unpaid tax debts includes 
debts already known to and assessed by the IRS through its enforcement 
programs. As of September 2006, those tax debts remained uncollectible. 
Beginning in October 2008, CMS will be sending over 60 percent of its 
Medicare payments through the FPLP enforcement program. We recommend 
that the GAO review the results of that effort to determine actual 
collections and whether the estimate needs to be revised.

(See comment 8.): 

* The study established a minimum ($100) threshold for tax debt. The 
report does not, however, include any data on the number of providers 
or dollars of taxes owed above the $100 threshold. For example, if one 
percent (270) of the debtors owe at least $10,000 and in the aggregate 
this amounts to 99 percent of the $2 billion owed, the implications for 
enforcement are different than if the debt amounts were less skewed. 
Additionally, there is no information on tax debts by provider type. 
Enforcement efforts targeted to a few thousand high-risk corporations 
or provider types could be a strategic objective. 

(See comment 9.): 

The CMS would like to again acknowledge our appreciation to the GAO for 
its efforts and appreciates the opportunity to review and comment on 
the draft report. We look forward to any additional insights that GAO 
can provide so that CMS can strengthen its stewardship of the Medicare 
Trust Funds.

The following are GAO's comments on CMS's letter dated May 29, 2008. 

GAO Comments: 

1. IRS Form 1099 is an annual information report of income to IRS. 
However, this report cannot be used to continuously levy Medicare 
payments because they reflect prior calendar year payments that have 
already been made to the provider. 

2. We have revised the report to state that CMS reported that it 
received 970 paper levies from IRS revenue officers totaling $109 
million. We also noted that while CMS did not report the amount it 
actually collected from these paper levies, we do not believe paper 
levies are a significant source of revenue collection. 

3. We have revised the report to include the amount of Medicare 
payments that are subject to the continuous levy program. 

4. IRS provided documentation that showed that in July 2006 IRS began 
to pursue Department of Health and Human Services participation in the 
continuous levy program through the Federal Contractor Tax Compliance 
Task Force. 

5. The IRS/CMS/SSA[Footnote 39] data match program is not used to 
collect delinquent federal taxes. Therefore, a discussion of this 
program is not relevant to our report. 

6. We have revised the report to clarify that the 27,000 Medicare 
providers with unpaid federal taxes encompasses all Medicare providers 
that have received payments during calendar year 2006. This includes 
all Medicare providers for Parts A, B, C, and D. Our analysis only 
included Medicare providers that had TINs that received Medicare 
payments greater than $100. As our draft report states, we believe that 
our estimate is substantially understated because, among other things, 
our analysis does not include Medicare providers that owed taxes under 
separate TINs from those that received the Medicare payments. 

7. In our draft report, we stated that we believe that it is unlikely 
that companies will be excluded or debarred for failure to pay 
delinquent payroll taxes. Although we appreciate CMS's solicitation, we 
are not making any recommendations on the use of the existing debarment 
system to collect unpaid taxes at this time. 

8. In our draft report, we state that to determine the potential levy 
collections on Medicare payments during calendar year 2006, we used 15 
percent of the total paid claim or total tax debt amount reported to 
TOP per IRS records, whichever was less. A gap will exist between what 
could be collected and the maximum levy amount calculated because (1) 
tax debts in TOP may not be eligible for immediate levy because IRS has 
not completed due process notifications and (2) tax debts may become 
ineligible for levy because of a change in collection status (e.g., tax 
debtor filed for bankruptcy). We plan to follow up on our 
recommendation to CMS in incorporating Medicare payments into the 
continuous levy program; 
however, we do not believe that a revision to the estimate in this 
report is necessary. 

9. In our draft report, we state that our analysis only included tax 
debts and Medicare paid claims of $100 or more because they are 
significant for the purpose of determining the extent of taxes owed by 
Medicare providers. 

[End of section] 

Footnotes: 

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

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

[3] GAO, Medicaid: Thousands of Medicaid Providers Abuse the Federal 
Tax System, GAO-08-17 (Washington, D.C.: Nov. 14, 2007), and Medicaid: 
Thousands of Medicaid Providers Abuse the Federal Tax System, GAO-08-
239T (Washington, D.C.: Nov. 14, 2007). 

[4] Pub. L. No. 105-34, 111 Stat. 788 (1997). 

[5] According to CMS officials, certain Medicare payments that are 
disbursed by Treasury (such as managed care and drug benefit payments) 
do go through the continuous levy program. 

[6] To determine the potential levy collections on Medicare payments 
during calendar year 2006, we used 15 percent of the total paid claim 
or total tax debt amount reported to the continuous levy program, 
whichever was less. IRS officials stated that Medicare payments can 
only be levied at 15 percent of payments under current law. 

[7] For Medicare Parts C and D, CMS processes the payment files, which 
are sent to Treasury for disbursement. 

[8] Our analysis included all Medicare providers (i.e., Parts A, B, C, 
and D) that were paid during calendar year 2006. Our analysis of 
Medicare 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 Medicare 
claims less than $100, and (4) tax debts less than $100. 

[9] 26 U.S.C. ï¿½ 6672. 

[10] 26 U.S.C. ï¿½ 7202. 

[11] 26 U.S.C. ï¿½ 7215 and 26 U.S.C. ï¿½ 7512 (b). 

[12] A "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. A tax period may not always correspond to the age of 
the tax debt, as when a tax form is filed years after the due date or 
when IRS assesses additional taxes to earlier tax periods. 

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

[14] The 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. 

[15] Assessments from IRS examinations and investigations include 
assessments as a result of the creation of a substitute form. Other 
sources of IRS assessments include adjustments to modules, credit 
discrepancies, math errors, penalties, Underreporting Program 
assessments, drug assessments, delinquent return notice status, 
Windfall Profits program assessments, and other assessments with none 
of the other categorized conditions. 

[16] According to IRS, nonfiling and underpayment of taxes made up the 
rest of the gross tax gap. 

[17] For all cases, we performed searches of criminal, financial, tax, 
and public records to determine whether the Medicare providers are 
involved in related entities. For each related entity, we determined 
whether that entity had Medicare payments for calendar year 2006 and 
had unpaid federal taxes as of September 30, 2006. In instances where 
we identified related parties with both Medicare payments and tax 
debts, we defined a case study to include those related entities, and 
reported on the combined unpaid taxes and combined Medicare payments 
for the original individual/business and all the related entities. 

[18] The 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. 

[19] 26 U.S.C. ï¿½ 7202. 

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

[21] If a Medicare provider is convicted of a felony, including tax 
evasion, CMS and its contractors can revoke the Medicare providers' 
enrollment and billing privileges. See 42 C.F.R. ï¿½ 424.535. 

[22] To determine the potential levy collections on Medicare payments 
during calendar year 2006, we used 15 percent of the total paid claim 
or total tax debt amount reported to the continuous levy program, 
whichever is less. 

[23] CMS screens and enrolls managed care organizations for the 
Medicare Advantage program. 

[24] CMS has recently proposed a new regulation for additional 
safeguards on durable medical equipment, prosthetics, orthotics, and 
supplies. In this proposed regulation, issued on January 25, 2008, CMS 
requires that prospective providers must not have federal or state tax 
debts. 

[25] The OIG exclusion list provides information on health care 
providers that are excluded from participation in Medicare, Medicaid, 
and other federal health care programs because of criminal convictions 
related to Medicare or state health programs or other major problems 
related to health care (e.g., patient abuse or neglect). The GSA 
debarment list provides information on individuals or entities that are 
debarred, suspended, or otherwise excluded from participating in any 
other federal procurement or nonprocurement activity. Federal agencies 
can place individuals or entities on the GSA debarment list for a 
variety of reasons, including fraud, theft, bribery, and tax evasion. 

[26] 42 U.S.C. ï¿½ 1320a-7. 

[27] 48 C.F.R. ï¿½ 9.406-2 and 48 C.F.R. ï¿½ 9.407-2. 

[28] GAO-07-587T. 

[29] 26 U.S.C. ï¿½ 6103. 

[30] Under 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. 

[31] Payments processed by CMS headquarters are made through Treasury. 
These payments consist largely of payments for managed care, drug 
subsidy, and contracts. Since these payments are processed by Treasury, 
they are subject to the continuous levy program. According to CMS, 
these payments represent about 30 percent of all Medicare payments. In 
addition, CMS reported that it received 970 paper levies from IRS 
revenue officers totaling $109 million. CMS did not report the amount 
it actually collected from these paper levies. However, our discussions 
with selected Medicare contractors and review of our case studies 
indicate that paper levies are not a significant source of collection 
revenue. 

[32] GAO, Tax Administration: Millions of Dollars Could Be Collected If 
IRS Levied More Federal Payments, GAO-01-711 (Washington, D.C.: July 
20, 2001). 

[33] To address issues raised by our February 12, 2004, report and 
testimony, this multiagency task force was established to help improve 
the continuous levy program. The task force includes representatives 
from DOD, the Defense Finance and Accounting Service, IRS, FMS, GSA, 
the Office of Management and Budget, and the Department of Justice. As 
a result of the actions undertaken by the task force, IRS reported 
collecting millions in taxes through the improvements in the continuous 
levy program. 

[34] In October 2004, Congress passed the American Jobs Creation Act of 
2004, Pub. L. No. 108-357, 118 Stat 1418 codified as amended in 
scattered sections of 26 U.S.C., to increase the maximum continuous 
levy from 15 percent to up to 100 percent of payments to contractors 
with unpaid taxes. The act specifically increased the continuous levy 
on payments to vendors for "goods and services" sold or leased to the 
government. According to IRS, the legal language, which specified that 
goods and services be subject to the 100 percent levy provision, 
excludes Medicare payments from the new levy requirement. As such, 
Medicare payments will have to be levied at 15 percent. 

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

[36] We excluded physicians, health professionals, and suppliers paid 
under Medicare Part B because they were the focus of our previous March 
2007 testimony. See GAO-07-587T. Our prior investigation found Medicare 
physicians, health professionals, and suppliers with abusive and 
potentially criminal activity, including failure to remit to IRS 
individual income taxes, payroll taxes withheld from their employees, 
or both. Rather than fulfill their role as "trustees" of this money and 
forward it to IRS, they diverted the money for other purposes. Willful 
failure to remit payroll taxes is a felony under U.S. law. Further, 
individuals associated with some of these providers used payroll taxes 
withheld from employees for personal gain (e.g., to purchase new homes) 
or to help fund their businesses. Many of these individuals accumulated 
substantial wealth and assets, including million-dollar houses and 
luxury vehicles, while failing to pay their federal taxes. In addition, 
some physicians received Medicare payments even though they has serious 
quality-of-care issues, including license reprimands, prior suspensions 
from state medical boards, revocations of hospital privileges, and 
previous exclusions from the Medicare program. 

[37] We define related entities as entities that share common owner(s) 
or officer(s), a common TIN, or a common address. 

[38] Table 1 in the main portion of this testimony provides detailed 
data on 10 cases. 

[39] SSA is the Social Security Administration. 

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