United States Government Accountability Office

GAO Report to the Permanent Subcommittee 

on Investigations, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate 

MEDICARE

Thousands of 

Medicare Providers 

Abuse the Federal Tax 

System 

June 2008 

 

GAO-08-618 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2008

MEDICARE

Thousands of Medicare Providers Abuse the Federal 

Tax System 

Highlights of GAO-08-618, a report to the 

Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate 

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. 

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 GAO’s two 

recommendations. 

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 “trustees” 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. 

Examples of Abusive and Criminal Activity 

Type of 

business

Unpaid tax 

debt CMS payments

Description of Medicare health care 

provider activity 

Hospital 

$15 million $21 million 

Owners were found liable for submitting 

false claims to Medicare from another 

medical business.

Nursing 

home 

$7 million $15 million 

IRS records indicate that the owner 

purchased luxury cars and other personal 

items with money funneled through a 

charitable foundation. 

Nursing 

home $4 million $4 million 

Owner constructed multimillion-dollar home 

while business was not paying its taxes. 

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

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 

payee—for example, a Medicare hospital—until 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. 

To view the full product, including the scope 

and methodology, click on GAO-08-618. 

For more information, contact Gregory Kutz at 

(202) 512-6722 or kutzg@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 5

Magnitude of Unpaid Taxes of Medicare Providers 6 

Examples of Medicare Providers Involved in Abusive and

Potentially Criminal Activity Related to the Federal Tax System 11 

Medicare Providers with Unpaid Taxes Are Not Prohibited from 

Enrolling in or Receiving Payments from Medicare 18 

Conclusions 21

Recommendations for Executive Action 21 

Agency Comments and Our Evaluation 22 

Appendix I Scope and Methodology 24 

Appendix II Medicare Providers with Unpaid Taxes 28 

Appendix III Comments from the Internal Revenue Service 32 

Appendix IV Comments from the Centers for Medicare & Medicaid

Services 33 

Tables 

Table 1: Summary Information on 10 Medicare Providers with 

Unpaid Federal Taxes 13 

Table 2: Summary Information on 15 Medicare Providers with 

Unpaid Federal Taxes 28 

Figures 

Figure 1: Medicare Providers’ Unpaid Taxes by Tax Type 7 

Figure 2: Unpaid Taxes of Medicare Providers by Calendar Year 8 

Figure 3: Source of Unpaid Assessment 10 

Page i GAO-08-618 Medicare
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 

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

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reproduce this material separately. 

Page ii GAO-08-618 Medicare
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,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.2

 In 

November 2007, we testified and reported on Medicaid health care 

providers from seven selected states that also abused the federal tax 

 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). 

Page 1 GAO-08-618 Medicare
system.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 

 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).

Page 2 GAO-08-618 Medicare
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. 

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. 

Results in Brief 

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 

Page 3 GAO-08-618 Medicare
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.4

 However, in the 11 years 

since its passage, CMS has not incorporated most of its Medicare 

payments into the continuous levy program.5

 As a result, for calendar year 

2006, the government lost opportunities to potentially collect over 

$140 million in unpaid federal taxes.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

 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. 

Page 4 GAO-08-618 Medicare
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. 

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.7

Background 

 7

For Medicare Parts C and D, CMS processes the payment files, which are sent to Treasury 

for disbursement. 

Page 5 GAO-08-618 Medicare
Our analysis found that over 27,000 Medicare providers had over $2 billion 

in unpaid federal taxes as of September 30, 2006.8

 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. 

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. 

Magnitude of Unpaid 

Taxes of Medicare 

Providers 

Characteristics of 

Medicare Providers’

Unpaid Federal Taxes 

 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. 

Page 6 GAO-08-618 Medicare
Figure 1: Medicare Providers’ Unpaid Taxes by Tax Type

27%

29%

44%

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

Other 

$540 million

Individual income

$581 million

Payroll

$896 million

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 forwarded9

 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,10 while the failure to properly segregate payroll taxes can be a 

criminal misdemeanor offense punishable by imprisonment of up to a 

year.11

 9

26 U.S.C. § 6672. 

1026 U.S.C. § 7202. 

1126 U.S.C. § 7215 and 26 U.S.C. § 7512 (b). 

Page 7 GAO-08-618 Medicare
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 2000.12

Figure 2: Unpaid Taxes of Medicare Providers by Calendar Year 

14%

32%

54%

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

2005

$282 million

Prior to 2000

$648 million

2000-2004

$1.1 billion

 12A “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. 

Page 8 GAO-08-618 Medicare
Our previous work has shown that as unpaid taxes age, the likelihood of 

collecting all or a portion of the amounts owed decreases.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.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.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. 

 13GAO, Internal Revenue Service: Recommendations to Improve Financial and

Operational Management, GAO-01-42 (Washington D.C.: Nov. 17, 2000). 

14The 10-year time limit may be suspended and include periods during which the taxpayer 

is involved in a collection due process appeal, litigation, a pending offer-in-compromise, or

an installment agreement. As a result, fig. 2 includes taxes that are for tax periods from 

more than 10 years ago. 

15Assessments 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. 

Page 9 GAO-08-618 Medicare
Figure 3: Source of Unpaid Assessment

19%

39%

42%

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

Other

$375 million

IRS Examination/Investigation

$784 million

Self-reported

$857 million

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.16 Finally, our analysis did not attempt to identify Medicare 

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

gap. 

Page 10 GAO-08-618 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. 

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.17 All of these 

cases involved Medicare providers that had unpaid payroll taxes, many 

dating as far back as the early 1990s.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.19

Examples of Medicare 

Providers Involved in 

Abusive and 

Potentially Criminal 

Activity Related to the 

Federal Tax System 

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.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 

 17For 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. 

18The 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. 

1926 U.S.C. § 7202. 

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

Page 11 GAO-08-618 Medicare
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. 

Page 12 GAO-08-618 Medicare
Table 1: Summary Information on 10 Medicare Providers with Unpaid Federal Taxes

Case 

Nature of

work/type 

of entity 

Medicare paid

claims during 

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 1 Home health care $400,000 $600,000 • 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 2 Nursing home $1 million $6 million • 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 3 Nursing home $100,000 $800,000 • 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. 

Page 13 GAO-08-618 Medicare
Case 

Nature of

work/type 

of entity 

Medicare paid

claims during 

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 4 Nursing home $15 million $7 million • 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 5 Nursing home $1 million $11 million • 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. 

Page 14 GAO-08-618 Medicare
Case 

Nature of

work/type 

of entity 

Medicare paid

claims during 

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 6 Nursing home $4 million $4 million • 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 7 Nursing home $2 million $1 million • 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. 

Page 15 GAO-08-618 Medicare
Case 

Nature of

work/type 

of entity 

Medicare paid

claims during 

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 8 Home health care $300,000 $600,000 • 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 9 Home health care $900,000 $11 million • 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 10 Hospital $21 million $15 million • 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. 

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 

Page 16 GAO-08-618 Medicare
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. 

Page 17 GAO-08-618 Medicare
CMS does not prevent Medicare providers with tax debts from becoming 

Medicare providers or receiving payments from the Medicare program.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 2006.22

Medicare Providers 

with Unpaid Taxes 

Are Not Prohibited 

from Enrolling in or 

Receiving Payments 

from Medicare 

CMS Medicare contractors are generally responsible for screening 

Medicare providers prior to enrollment into the Medicare program.23

However, as part of the screening process, neither CMS policies nor CMS 

regulations require Medicare contractors to consider the tax debts or taxrelated abuses of prospective Medicare providers or conduct any criminal 

background checks on these individuals.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.25

 21If 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. § 424.535. 

22To 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.

23CMS screens and enrolls managed care organizations for the Medicare Advantage 

program.

24CMS 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.

25The 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. 

Page 18 GAO-08-618 Medicare
Exclusion of certain individuals and entities from participation in 

Medicare programs is made by statute.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.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.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.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.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. 

 2642 U.S.C. § 1320a-7. 

2748 C.F.R. § 9.406-2 and 48 C.F.R. § 9.407-2. 

28GAO-07-587T. 

2926 U.S.C. § 6103. 

30Under section 6321 of the Internal Revenue Code, IRS has the authority to file a lien upon 

all property and rights to property, whether real or personal, of a delinquent taxpayer. 

Page 19 GAO-08-618 Medicare
Further, CMS has not implemented a process for continuously levying 

payments made by Medicare contractors.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.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.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 

 31Payments 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. 

32GAO, Tax Administration: Millions of Dollars Could Be Collected If IRS Levied More 

Federal Payments, GAO-01-711 (Washington, D.C.: July 20, 2001).

33To 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.

Page 20 GAO-08-618 Medicare
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, 2006.34

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. 

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 

Conclusions 

Recommendations for 

Executive Action 

 34In 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. 

Page 21 GAO-08-618 Medicare
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. 

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). 

Agency Comments 

and Our Evaluation 

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 

Page 22 GAO-08-618 Medicare
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 

http://www.gao.gov. If you have any questions concerning this report, 

please contact either Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov.

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. 

Gregory D. Kutz 

Managing Director 

Forensic Audits and Special Investigations 

Page 23 GAO-08-618 Medicare
Appendix I: Scope and Methodology 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,1

• 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. 

 1

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. 

Page 24 GAO-08-618 Medicare
Appendix I: Scope and Methodology 

To identify indications of abuse or potentially criminal activity, we 

selected 25 Medicare providers for a detailed audit and investigation.2

 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 entities3

 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 

 2

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. 

3

We define related entities as entities that share common owner(s) or officer(s), a common

TIN, or a common address.

Page 25 GAO-08-618 Medicare
Appendix I: Scope and Methodology 

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). 

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. 

Data Reliability 

Assessment 

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 

Page 26 GAO-08-618 Medicare
Appendix I: Scope and Methodology 

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.

Page 27 GAO-08-618 Medicare
Appendix II: Medicare Providers with Unpaid Appendix II: Medicare Providers with Unpaid Taxes 

Taxes

This appendix presents summary information on the abusive or potentially

criminal activity associated with 15 of our 25 case studies.1

 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 

Nature of

work/type

of entity 

Medicare

paid claims during

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 11 Nursing home $800,000 $3 million • 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 12 Durable medical 

equipment 

supplier 

$400,000 $400,000 • 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 13 Home health care $200,000 $2 million • 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. 

 1

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

Page 28 GAO-08-618 Medicare
Appendix II: Medicare Providers with Unpaid 

Taxes 

Case 

Nature of

work/type

of entity 

Medicare

paid claims during

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 14 Nursing home $1 million $1 million • 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 15 Home health care $400,000 $600,000 • 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 16 Home health care $800,000 $600,000 • 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 17 Home health care $400,000 $900,000 • 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 18 Hospital $3 million $2 million • Company tax debt primarily consisted of payroll taxes. 

• Company filed for bankruptcy. 

Case 19 Home health care $1 million $100,000 • 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. 

Page 29 GAO-08-618 Medicare
Appendix II: Medicare Providers with Unpaid 

Taxes 

Case 

Nature of

work/type

of entity 

Medicare

paid claims during

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 20 Hospital $3 million $1 million • 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 21 Nursing home $7 million $13 million • 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 22 Nursing home $800,000 $1 million • 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 23 Durable medical 

equipment 

supplier 

$1 million $200,000 • 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 24 Nursing home $1 million $1 million • 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. 

Page 30 GAO-08-618 Medicare
Appendix II: Medicare Providers with Unpaid 

Taxes 

Case 

Nature of

work/type

of entity 

Medicare

paid claims during

calendar year 2006a

Unpaid 

federal taxb

Comments 

Case 25 Nursing home $1 million $600,000 • 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. 

Page 31 GAO-08-618 Medicare
Appendix III: Comments from the Internal Appendix III: Comments from the Internal Revenue Service 

Revenue Service 

Page 32 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for Appendix IV Medicare & Medicaid Services : Comments from the Centers for 

Medicare & Medicaid Services 

Note: GAO comments 

supplementing those in 

the report text appear at 

the end of this appendix. 

Page 33 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

Page 34 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

Page 35 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

See comment 1. 

See comment 2. 

See comment 3. 

See comment 4. 

See comment 5. 

See comment 6. 

Page 36 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

See comment 7. 

See comment 8. 

See comment 9. 

Page 37 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

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

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. 

GAO Comments 

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/SSA1

 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. 

 1

SSA is the Social Security Administration. 

Page 38 GAO-08-618 Medicare
Appendix IV: Comments from the Centers for 

Medicare & Medicaid Services 

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. 

(192254) Page 39 GAO-08-618 Medicare
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