United States Government Accountability Office

Washington, DC 20548 

November 16, 2007 

The Honorable Joseph I. Lieberman 

Chairman 

The Honorable Susan M. Collins 

Ranking Member 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

The Honorable Carl Levin 

Chairman 

The Honorable Norm Coleman 

Ranking Member 

Permanent Subcommittee on Investigations 

Committee on Homeland Security and Governmental Affairs 

United States Senate 

Subject: Tax Compliance: Some Hurricanes Katrina and Rita Disaster Assistance 

Recipients Have Unpaid Federal Taxes 

Since February 2004, we have issued a series of reports detailing how some 

organizations and individuals, including defense, civilian agency, and General Services 

Administration (GSA) contractors; tax-exempt (not-for-profit) organizations; and 

Medicare physicians, abused the federal tax system at the same time they were doing 

business with or receiving benefits from the federal government.1

 While we performed 

this work it came to our attention that some organizations and individuals that were 

recipients of federal grants and other direct assistance were also abusing the tax system. 

Thus, you asked us to perform additional work and report specifically on organizations 

and individuals that abuse the federal tax system at the same time they receive federal 

grants or other similar types of federal assistance, known as direct payments for 

specified use (direct assistance) programs.2

 

Based on your request, we completed a forensic audit and related investigations of 

unpaid federal taxes owed by recipients of the Federal Emergency Management Agency’s

(FEMA) Individuals and Households Program (IHP) following hurricanes Katrina and 

 1

See related GAO products at the end of this report. 2

As classified by GSA’s Catalog of Federal Domestic Assistance, published annually pursuant to 31 U.S.C. § 

6104 and OMB Circular No. A-89, Federal Domestic Assistance Program Information (Aug. 17, 1984). 

 GAO-08-101R Tax Compliance
Rita.3

 IHP is a federal direct assistance program authorized by the Robert T. Stafford 

Disaster Relief and Emergency Assistance Act (Stafford Act), as amended by the Disaster 

Mitigation Act of 2000. We conducted our audit of IHP concurrently with our broader 

audit of federal grant and direct assistance recipients that have unpaid federal taxes, 

which you also requested. We will be reporting the results of that work separately. 

 

The specific objectives of our work were to (1) determine, to the extent practical, the 

estimated magnitude of federal taxes owed by individuals receiving IHP disaster 

assistance benefit payments following hurricanes Katrina and Rita and (2) provide 

illustrative examples of abusive or criminal activity related to the federal tax system by 

IHP recipients with unpaid federal taxes. 

To estimate the magnitude of unpaid federal taxes owed by IHP disaster relief assistance 

recipients following hurricanes Katrina and Rita, we matched the Internal Revenue 

Service’s (IRS) tax debts as of September 30, 2005, with IHP disaster assistance benefit 

payments made for hurricanes Katrina and Rita maintained in FEMA’s National 

Emergency Management Information System. We used only taxes assessed for tax 

periods prior to 2005 to ensure that our analysis included only taxes owed prior to when 

the hurricanes struck. To be conservative in our estimate, we further excluded from our 

analysis tax debts that had not been agreed to by the tax debtor or affirmed by the court 

and tax debts of $100 or less. To provide examples of the extent and nature of abuse or 

potential criminal activity related to the federal tax system by IHP recipients with unpaid 

federal taxes, we performed more in-depth investigative work on a nonrepresentative 

selection of five IHP recipients. These cases were selected based on amounts owed in 

federal taxes from the top 10 percent of the IHP recipient population. For these five 

cases, we reviewed copies of automated tax transcripts and other tax records (for 

example, revenue officers’ notes) and performed additional investigative research on 

available criminal, financial, and public records. 

We conducted our work from January 2007 through August 2007. We performed our 

audit in accordance with U.S. generally accepted government auditing standards. The 

investigative portion of our work was completed in accordance with investigative 

standards established by the President’s Council on Integrity and Efficiency. 

Results in Brief 

While about 95 percent of all IHP recipients of disaster relief assistance following 

hurricanes Katrina and Rita paid their federal taxes, tens of thousands owed federal 

taxes at the time of the disaster. We identified about 80,000 of the 1.5 million individuals 

(about 5 percent) who received disaster assistance benefits for hurricanes Katrina and 

Rita and owed over $700 million combined in unpaid federal taxes prior to those 

hurricanes. However, our estimates of the taxes owed by these recipients is understated 

in that we did not include amounts owed by individuals who have not filed tax returns or 

who have failed to report the full amount of taxes due (referred to as nonfilers and 

 3

IHP provides temporary housing or financial assistance to eligible victims.

Page 2 GAO-08-101R Tax Compliance
underreporters) and for whom IRS has not determined that specific tax debts are owed. 

FEMA officials stated that they do not screen disaster applicants for tax debts. FEMA 

officials stated that there is no law or regulation that requires FEMA to screen IHP 

applicants prior to providing disaster assistance. 

The five IHP recipients with which we chose to illustrate abusive and criminal activity 

related to the federal tax system had tax debts ranging from about $400,000 to over 

$2 million. Our investigation found that a number of these individuals had a history of 

failing to file tax returns for several years prior to the hurricane disasters. We also found 

instances in which IHP recipients attempted to transfer property to avoid IRS seizure. 

For example, one IHP recipient in the oil and gas industry forged a third party’s signature 

to illegally transfer land. Another IHP recipient, a lawyer, transferred a large quantity of 

stock to a family member while IRS was taking collection actions against the lawyer. 

We received written comments on a draft of this report from the Department of 

Homeland Security (DHS). In its written comments, DHS stated that FEMA’s

administration of disaster assistance programs to victims of hurricanes Katrina and Rita 

with tax liabilities was consistent with federal law and policy. As recognized in our draft 

report, DHS is not required to screen applicants for tax debts (see the Agency Comments 

and Our Evaluation section of this report). We have reprinted DHS’s written comments 

in their entirety in the enclosure. In addition, IRS and DHS provided technical comments 

on the draft report, which we incorporated as appropriate. 

Background 

Making landfall in late August 2005, Hurricane Katrina devastated much of the Gulf 

Coast; the storm surge caused major or catastrophic damage along the coastlines of 

Alabama, Mississippi, and Louisiana. In September 2005, Hurricane Rita caused further 

devastation, making landfall on the Louisiana and Texas Gulf Coasts. These two 

hurricanes left more than 1,500 dead, affected 90,000 square miles, caused more than 

$80 billion in damage, and forced mass evacuations. An estimated 600,000 households 

were displaced, and FEMA has reported that over 50,000 households remained in 

temporary housing 2 years later. 

The Stafford Act grants the principal authority for the President to provide assistance in 

mitigating, responding to, and preparing for disasters and emergencies such as 

earthquakes, hurricanes, floods, tornadoes, and terrorist acts. The mission of FEMA, 

within DHS, which administers the Stafford Act, is to reduce loss of life and property and 

protect the nation from all types of hazards through a comprehensive, risk-based 

emergency management program. Section 408 of the Stafford Act, 42 U.S.C. § 5174, is the 

general authority for the President to provide assistance to individuals and households. 

This section encompasses housing assistance as well as “other needs” assistance, which 

includes medical, dental, funeral, personal property, transportation, and other financial 

assistance for certain needs arising from a major disaster. These two types of assistance 

are administered by FEMA under IHP. IHP provides housing and “other needs” 

Page 3 GAO-08-101R Tax Compliance
assistance in the forms of direct assistance (the provision of temporary housing units) 

and financial assistance (grant funding for temporary housing and other disaster-related 

needs) to eligible disaster victims.

Our previous forensic audits and related investigations found significant control 

weaknesses in FEMA’s disaster relief program. In several hearings, we testified that 

control weaknesses in FEMA’s IHP have left the government vulnerable to significant 

fraud, waste, and abuse. In February 2006, we testified that specific control weaknesses 

in IHP resulted in improper expedited assistance payments and nonexistent controls left 

the government vulnerable to substantial fraud and abuse related to IHP.4

 Several 

months later, in June 2006, we testified on additional work performed whereby we 

projected that the weak or nonexistent controls resulted in an estimated $600 million to 

$1.4 billion dollars in potentially fraudulent and improper IHP payments or about 16 

percent of the first $6 billion of IHP disbursements for hurricanes Katrina and Rita.5

 In 

December 2006, we again testified that FEMA made nearly $17 million in potentially 

improper rental assistance payments, fraudulent rental assistance payments, or both to 

individuals after they had moved into FEMA trailers.6

 Based on this work, we referred to 

the Katrina Fraud Task Force thousands of cases of individuals we believe received 

fraudulent and improper payments of IHP benefits. 

Magnitude of Unpaid Taxes Owed by IHP Recipients 

While about 95 percent of all IHP recipients of hurricanes Katrina and Rita assistance did 

not have unpaid federal taxes, we identified tens of thousands of IHP recipients with 

unpaid federal taxes. We identified about 80,000 of the nearly 1.5 million registrants 

(about 5 percent) who received IHP disaster assistance payments for hurricanes Katrina 

and Rita and had over $700 million in unpaid federal taxes at about the time the 

hurricanes struck. Most of the taxes owed by these IHP recipients were individual 

federal income taxes. In addition, as reflected in figure 1, about two-thirds of unpaid 

federal taxes were for tax periods through calendar year 2000.7

 4

GAO, Expedited Assistance for Victims of Hurricanes Katrina and Rita: FEMA’s Control Weaknesses 

Exposed the Government to Significant Fraud and Abuse, GAO-06-403T (Washington, D.C.: Feb. 13, 

2006). 5

GAO, Hurricanes Katrina and Rita Disaster Relief: Improper and Potentially Fraudulent Individual 

Assistance Payments Estimated to Be Between $600 Million and $1.4 Billion, GAO-06-844T 

(Washington, D.C.: June 14, 2006). 6

GAO, Hurricanes Katrina and Rita Disaster Relief: Continued Findings of Fraud, Waste, and Abuse, 

GAO-07-252T (Washington, D.C.: Dec. 6, 2006). 7

There is a 10-year statute of limitations beyond which IRS is prohibited from attempting to collect tax 

debt. The 10-year time may be suspended for a variety of reasons, including for periods during which the 

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

installment agreement. As a result, fig. 1 includes taxes that are for tax periods from more than 10 years 

ago. 

Page 4 GAO-08-101R Tax Compliance
Figure 1: IHP Recipients with Unpaid Federal Taxes (by Tax Year) as of 

September 30, 2005 

Although $700 million in unpaid taxes owed by IHP participants as of September 30, 

2005, is a substantial amount, this amount understates the full extent of unpaid federal 

taxes for these individuals. To avoid overestimating the amount owed, we limited our 

scope to federal tax debts that were affirmed by either the individual or a tax court for 

tax periods prior to 2005. We did not include any debts incurred during the most current 

tax year to avoid including any tax debts that were assessed subsequent to the 

hurricanes. We also purposely excluded recently assessed tax debts that appear as 

unpaid taxes because they may involve matters that will be routinely resolved between 

the taxpayer and IRS. We further excluded tax debts of less than $100 because they are 

insignificant for the purpose of determining the extent of taxes owed. 

Our estimate is also likely to be understated because the IRS tax database we used to 

derive our estimate reflects only the amount of unpaid taxes either reported by an 

individual or organization on a tax return or assessed by IRS through its various 

enforcement programs. The IRS database does not reflect amounts owed by 

organizations and individuals that have not filed tax returns and for which IRS has not 

assessed tax amounts due. For example, during our audit, we identified instances from 

our case studies in which individuals failed to file tax returns for a particular tax period 

and IRS had not assessed taxes for these tax periods. Consequently, while these 

individuals may have additional unpaid taxes, they were listed in IRS records as having 

no unpaid taxes for that period. Further, our analysis did not attempt to account for 

individuals who purposely underreported income and were not specifically identified by 

IRS as owing the additional taxes. According to IRS, underreporting of income 

accounted for more than 80 percent of the estimated $345 billion annual gross tax gap.8

 

 8

According to IRS, nonfilers and underpayment of taxes constituted the rest of the gross tax gap.

Page 5 GAO-08-101R Tax Compliance
Federal law and regulations do not prohibit IHP applicants that owe tax debts from 

receiving disaster assistance from the federal government. In fact, Office of Management 

and Budget (OMB) policy is to allow disaster loans to individuals with federal tax debts.9

Consistent with this policy, FEMA officials stated that they do not screen disaster 

applicants for tax debts. FEMA officials stated that there is no law or regulation that 

requires FEMA to screen IHP applicants prior to providing disaster assistance. 

Examples of IHP Recipients Involved in Abusive and 

Criminal Activity Related to Federal Tax System 

The five IHP recipients with which we chose to illustrate abusive and criminal activity 

related to the federal tax system had tax debts ranging from about $400,000 to over 

$2 million. A number of these individuals had a history of failing to file tax returns for 

several years. Two IHP recipients also attempted to transfer property to avoid IRS 

seizure. Table 1 highlights the five cases of IHP recipients we investigated with unpaid 

taxes. 

Table 1: Descriptions of Five IHP Recipients with Unpaid Federal Taxes 

Investigated for Possible Abusive and Criminal Activity 

Case 

Nature of 

work 

Unpaid 

tax 

amounta

Comments 

1 Doctor $2 

million 

• FEMA recipient received several thousand dollars in 

disaster assistance. 

• FEMA recipient has a history of repeated failures to 

pay income tax and filing late returns, spanning back 

to the 1980s. 

• FEMA recipient’s return in the early 2000s reported 

income of several hundred thousand dollars, but 

recipient did not report income in recent years. 

• Recipient had unreported gambling winnings totaling 

over a quarter of a million dollars at the same time that 

the recipient owed federal taxes. 

• FEMA recipient was charged with illegally dispensing a 

controlled substance. 

2 Doctor $2 

million 

• FEMA recipient received IHP assistance of several 

thousand dollars. 

• FEMA recipient did not file required tax returns for 

several years. 

• FEMA recipient said the reason for not filing returns 

was that the recipient was overwhelmed with the filing 

process and decided to wait for IRS to seek the 

returns. 

• IRS filed several tax liens against recipient’s property. 

 9

OMB Circular No. A-129, Policies for Federal Credit Programs and Non-Tax Receivables (Revised 

November 2000). 

Page 6 GAO-08-101R Tax Compliance
Case 

Nature of 

work 

Unpaid 

tax 

amounta Comments 

3 Contractor $500,000 • FEMA recipient received IHP assistance of several 

thousand dollars. 

• FEMA recipient has over a 10-year history of tax 

problems. 

• While owing taxes, FEMA recipient earned 

compensation up to $300,000 prior to the hurricane. 

• FEMA recipient purchased numerous vehicles, 

including a luxury vehicle. 

• IRS filed multiple tax liens against taxpayer’s assets. 

4 Attorney $400,000 • FEMA recipient received over a thousand dollars in 

disaster assistance. 

• FEMA recipient has a history of repeated 

noncompliance with paying federal individual and 

employer payroll taxes,b

spanning back to the late

1980s and did not file tax returns for several years. 

• Recipient transferred ownership of a large quantity of 

stock to a family member while IRS was taking 

collection actions against the recipient. 

• IRS filed tax liens against recipient. 

5 Oil and gas 

entrepreneur

$400,000 • FEMA recipient received several thousand dollars in 

disaster assistance. 

• FEMA recipient’s annual income prior to the hurricane 

was from $50,000 to $100,000. 

• FEMA recipient has a history of repeated federal tax 

noncompliance dating back to the early 1990s. 

• FEMA recipient forged a third party’s signature to 

illegally transfer land to avoid IRS seizure. 

Source: GAO’s analysis of IRS records, IHP assistance payments, and other records. a

Rounded dollar amount of unpaid federal taxes as of September 30, 2005. b

Payroll taxes include employee’s income taxes and Social Security and Medicare taxes withheld from an 

employee’s paycheck. Employers are to collect and remit these taxes to the federal government. 

Employers are deemed to have a fiduciary responsibility to hold withheld funds “in trust” for the federal 

government until the employer makes a federal tax deposit in that amount. The employer’s owners or 

officers may be held personally liable for these amounts and may be subject to civil and criminal penalties 

for failure to remit payroll taxes. 

Our previous forensic audits and related investigations found significant control 

weaknesses in FEMA’s disaster relief program that have left the government vulnerable 

to significant fraud, waste, and abuse. Our review of FEMA data found that in several of 

these cases, the IHP recipient received disaster assistance without FEMA inspection of 

the claimed damaged property or after the inspection actually found no damage to the 

property. As a result, FEMA was at risk of paying disaster assistance to recipients that 

were not entitled to such benefits. For these five cases, we did not make a determination 

of potential fraud related to the disaster relief program because it was not included in the 

scope of this work. 

Page 7 GAO-08-101R Tax Compliance
 

Agency Comments and Our Evaluation 

On October 26, 2007, we received written comments on a draft of this report from the 

Department of Homeland Security (DHS). In its written comments, DHS stated that 

FEMA’s administration of disaster assistance programs to victims of hurricanes Katrina 

and Rita with tax liabilities was consistent with federal law and policy. As recognized in 

our draft report, DHS is not required to screen applicants for tax debts. We have 

reprinted DHS’s written comments in their entirety in the enclosure. In addition, IRS and 

DHS provided technical comments on the draft report, which we incorporated as 

appropriate. 

- - - - - 

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 Homeland Security and the Acting Commissioner 

of Internal Revenue. We will make copies available to others upon request. In addition, 

the report will be available at no charge on the GAO Web site at http://www.gao.gov. 

Please contact me at (202) 512-6722 or kutzg@gao.gov if you have any questions 

concerning this report. Contact points for our Offices of Congressional Relations and 

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

Gregory D. Kutz 

Managing Director 

Forensic Audits and Special Investigation 

Enclosure - 1 

Page 8 GAO-08-101R Tax Compliance
Enclosure I 

Comments from the Department of Homeland Security 

Page 9 GAO-08-101R Tax Compliance
Enclosure I 

Page 10 GAO-08-101R Tax Compliance
Related GAO Products 

Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe 

Nearly $1 Billion in Payroll and Other Taxes. GAO-07-1090T. Washington, D.C.: July 24, 

2007. 

Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe 

Nearly $1 Billion in Payroll and Other Taxes. GAO-07-563. Washington, D.C.: June 29, 

2007. 

Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System. 

GAO-07-742T. Washington, D.C.: April 19, 2007. 

Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax 

System. GAO-07-587T. Washington, D.C.: March 20, 2007. 

Internal Revenue Service: Procedural Changes Could Enhance Tax Collections. GAO07-26. Washington, D.C.: November 15, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other 

Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other 

Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006. 

Financial Management: Thousands of GSA Contractors Abuse the Federal Tax System.

GAO-06-492T. Washington, D.C.: March 14, 2006. 

Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal 

Tax System with Little Consequence. GAO-05-683T. Washington, D.C.: June 16, 2005. 

Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal 

Tax System with Little Consequence. GAO-05-637. Washington, D.C.: June 16, 2005. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System with 

Little Consequence. GAO-04-414T. Washington, D.C.: February 12, 2004. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System with 

Little Consequence. GAO-04-95. Washington, D.C.: February 12, 2004. 

(192258)

Page 11 GAO-08-101R Tax Compliance
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