GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Government Management, 

Information and Technology, Committee on Government 

Reform, House of Representatives

For Release on Delivery

Expected at

10 a.m.

Monday,

August 2, 1999

PAYROLL TAXES

Billions in Delinquent 

Taxes and Penalties Due 

But Unlikely to Be 

Collected

Statement of Gregory D. Kutz

Associate Director, Governmentwide Accounting and 

Financial Management Issues

Accounting and Information Management Division

Statement of Cornelia M. Ashby

Associate Director, Tax Policy and Administration Issues

General Government Division

GAO/T-AIMD/GGD-99-256

Page 1 GAO/T-AIMD/GGD-99-256

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the results of our work on 

payroll taxes owed to the federal government and the associated trust fund 

recovery penalties assessed against individuals responsible for the 

nonpayment of these taxes. This work was performed in response to your 

request for information on unpaid payroll taxes and associated tax 

penalties. We are issuing our report on the results of this work today.1

In your request, you asked that we determine

• the extent to which payroll taxes are not remitted to the federal 

government,

• the magnitude of the trust fund recovery penalties (TFRP) assessed 

against individuals who withheld federal payroll taxes from employees’ 

salaries but did not forward them,

• the extent to which individuals who have not remitted payroll taxes are 

responsible for not paying these taxes at multiple businesses,

• the extent to which businesses and individuals who failed to pay payroll 

taxes are also receiving federal benefits or other federal payments, and 

• the factors that affect the Internal Revenue Service’s (IRS) ability to 

enforce compliance or pursue collections in this area. 

The report we are issuing today responds to each of these questions. This 

statement summarizes the major issues contained in our report.

In summary, at September 30, 1998, $49 billion in cumulative unpaid payroll 

taxes were owed by nearly 2 million businesses, and $15 billion in TFRPs 

had been assessed against, and remained owed by, 185,000 individuals 

responsible for the nonpayment of payroll taxes. The majority of these 

unpaid payroll taxes and associated TFRPs will unlikely be collected. 

Nearly 25,000 individuals with outstanding TFRPs were responsible for 

withholding but not forwarding payroll taxes to the government at more 

than one business. A significant number of both businesses with unpaid 

payroll taxes and individuals with outstanding TFRPs are also receiving 

billions of dollars in federal benefits and payments. Several factors, 

including financial management system deficiencies and internal control 

weaknesses, ineffective taxpayer education and early warning programs, 

1

See Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments Owed

(GAO/AIMD/GGD-99-211, August 2, 1999).

Letr
Page 2 GAO/T-AIMD/GGD-99-256

and federal and state laws, affect IRS’ ability to enforce compliance and 

pursue collection of unpaid payroll taxes.

Payroll Taxes and the 

Process for 

Distributing Monies to 

the Trust Funds

Employers are required to withhold from their employees’ salaries amounts 

for individual federal income taxes and Federal Insurance Contribution Act 

(FICA) taxes, which include taxes for Social Security and hospital 

insurance (Medicare). Employers are required to forward these withheld 

taxes, as well as the employers’ matching FICA tax amounts, to the federal 

government. The Department of the Treasury, through IRS, is responsible 

for collecting these taxes. 

The information IRS receives at the time it collects several types of tax 

payments, including those for Social Security and hospital insurance, is not 

sufficient to allow it to attribute these payments to specific trust funds. For 

this reason, initial distributions to the Social Security and hospital 

insurance trust funds are based on estimates prepared by the Social 

Security Administration’s (SSA) Office of the Chief Actuary and Treasury’s 

Office of Tax Analysis (OTA), with adjustments subsequently made as a 

result of certifications made by the Commissioner of SSA. This process is 

illustrated in detail in appendix I.

It is important to emphasize that the amounts distributed to the Social 

Security and hospital insurance trust funds are based on the wages an 

individual earns as required by law, not the amount the employer actually 

forwards to the government. This ensures that individuals who work and 

have taxes withheld to pay into the Social Security program—or their 

spouses and qualified dependents—receive the appropriate level of 

program benefits when they retire, become disabled, or die. 

However, this also creates a situation in which the general revenue fund 

subsidizes the Social Security and hospital insurance trust funds to the 

extent that Social Security and hospital insurance taxes owed are not 

actually collected. While the vast majority of businesses pay the taxes 

withheld from employees’ salaries as well as the employers’ matching 

amounts, a significant number of businesses do not. Over time, the 

cumulative amounts of unpaid payroll taxes, and thus the amount of this 

subsidy, is significant. As of September 30, 1998, the estimated amount of 

unpaid taxes and interest in IRS’ $222 billion unpaid assessments balance

Letr
Page 3 GAO/T-AIMD/GGD-99-256

was approximately $38 billion for Social Security and hospital insurance 

taxes.2

Trust Fund Recovery 

Penalties

To the extent a business withholds money from an employee’s salary for 

federal income taxes and the employee’s FICA obligation but does not 

forward these monies to the federal government, that business is liable for 

these unpaid taxes, as well as its own matching FICA contribution. Under 

statute, if determined to be “willful and responsible,” individuals can also 

be held personally liable and subject to a TFRP for federal income and 

FICA taxes withheld from employees but not forwarded to the federal 

government. It should be noted that IRS does not have to determine that 

there was a deliberate intent or desire to defraud the federal government as 

a prerequisite to assessing a TFRP. 

More than one individual can be found willful and responsible for a 

business’ failure to pay the federal government withheld payroll taxes and 

thus be assessed a TFRP. Additionally, the business itself is still liable for 

the entire amount of the unpaid payroll taxes. However, IRS policies 

require that it collect the unpaid tax only once. 

Cumulative Unpaid 

Payroll Taxes Are 

Significant

According to IRS records, as of September 30, 1998, businesses owed the 

federal government about $49 billion in payroll taxes.3

 This represents 

about 22 percent of the $222 billion in IRS’ inventory of unpaid tax 

assessments as of September 30, 1998. The $49 billion includes about

$19 billion in unpaid tax assessments and another $30 billion in penalties 

and interest.

While consisting of less than a quarter of IRS’ outstanding balance of 

unpaid assessments at September 30, 1998, unpaid payroll taxes make up 

2

This estimate includes both FICA and Self-Employment Contribution Act (SECA) taxes, but does not 

include federal income tax withholdings, which are a component of payroll taxes. SECA taxes are 

Social Security and hospital insurance taxes required to be paid by self-employed individuals. Accrued 

interest is also included in the estimate because assessments distributed to the trust funds earn interest 

at Treasury-based interest rates, similar to IRS’ interest accruals.

3

Differences between this amount and the estimated cumulative subsidy amount of $38 billion 

discussed previously are due to the following: (1) the $49 billion in unpaid payroll taxes includes 

federal income tax withholdings, which are not included in the estimate, and (2) the $38 billion 

estimated subsidy includes unpaid SECA taxes, which are not included in the $49 billion in unpaid 

payroll taxes.
Page 4 GAO/T-AIMD/GGD-99-256

over 50 percent of IRS revenue officers’ caseloads in many regions of the 

country. Consequently, they represent one of IRS’ most significant 

enforcement challenges.

The Number and Age of 

Delinquent Payroll Taxes 

Are Significant

IRS records show that over 1.8 million businesses owe the $49 billion in 

unpaid payroll taxes for more than 4.9 million separate tax periods or 

quarters (see table 1). Nearly 50 percent of the businesses with 

outstanding payroll taxes are delinquent for more than one quarter. Some 

of these businesses have in excess of 40 quarters of delinquent payroll 

taxes. 

Table 1: Businesses With Multiple Quarters of Unpaid Payroll Taxes 

a

Consists of taxes, penalties and interest.

Source: IRS Business master file.

As table 1 illustrates, a significant number of businesses have multiple tax 

periods of unpaid payroll taxes. Over 52 percent of the 4.9 million in 

delinquent quarters of payroll taxes predate 1994, as shown in table 2. 

Moreover, these multiple periods of unpaid payroll taxes can go back as 

much as 20 years or more. The outstanding balance of these delinquent 

quarters of payroll taxes totals over $34 billion, representing over 70 

percent of the total balance of unpaid payroll taxes in IRS’ inventory of 

unpaid assessments at September 30, 1998.

Unpaid payroll taxes

Number of businesses Number of quarters

Outstanding balancea

(dollars in billions)

1,702,177 1 to 6 $26.4

158,106 7 to 20 21.0

5,281 21 to 40 1.5

86 Over 40 0.1

Total 1,865,650 — $49.0
Page 5 GAO/T-AIMD/GGD-99-256

Table 2: Delinquent Quarters of Unpaid Payroll Taxes and Their Outstanding 

Balances by Age

a

Consists of taxes, penalties and interest.

Source: IRS Business master file.

Potential Collectibility of 

Unpaid Payroll Taxes Is Low

Taxpayer account status codes maintained in IRS’ systems indicate little 

potential for collection for many of the 4.9 million delinquent payroll tax 

accounts, as shown in table 3. In fact, these records would indicate that the 

majority of the unpaid payroll tax accounts are not likely to be collected.

Table 3: Delinquent Payroll Tax Accounts With Little Likelihood of Collection 

Our previous work on IRS’ unpaid assessments4 has shown that older 

delinquent taxes have little likelihood of collection. Additionally, our 

review of a statistical sample of 690 unpaid tax assessments selected as 

part of our audit of IRS’ fiscal year 1998 financial statements reinforces this 

conclusion. Of the 690 unpaid tax assessment accounts selected for 

review, 191, with outstanding balances of about $121 million, were unpaid 

Unpaid payroll taxes

Tax years Number of quarters

Outstanding balancea

(dollars in billions)

1994-1998 2,348,838 $14.4

1988-1993 2,198,493 25.4

1980-1987 407,619 9.0

Before 1980 3,491 0.2

Total 4,958,441 $49.0

Business status

Number of

accounts

Percentage of 4.9M

delinquent accounts

No longer in existence 1.4 million 28

Insolvent or IRS is unable to locate or contact 487,000 10

Does not have resources to pay amount owed 444,000 9

In bankruptcy or other litigation proceedings 189,000 4

Total 51

4

See Internal Revenue Service: Composition and Collectibility of Unpaid Assessments

(GAO/AIMD-99-12, October 29, 1998).
Page 6 GAO/T-AIMD/GGD-99-256

payroll taxes or associated TFRPs.5 In our review of these cases, both we 

and IRS determined that only about 9 percent of the outstanding balances 

would likely be collected.

Types of Businesses With 

Unpaid Payroll Taxes

There are many types of businesses with delinquent payroll taxes. IRS 

records indicate that corporations represent about 56 percent of the total 

number of businesses with unpaid payroll taxes. Sole proprietorships 

represent the second most significant category, about 29 percent of the 

total, and partnerships represent the third most significant category, about 

7 percent.

Our review of the 191 unpaid payroll tax cases and discussions with IRS 

revenue officers throughout the country identified additional 

characteristics of the businesses that have failed to forward payroll taxes 

to the federal government. These businesses are typically in wage-based 

industries, with few assets available as a potential collection source for the 

IRS. They are usually small, closely held businesses using a corporate 

structure, but this can vary by region of the country. As can be seen in 

figure 1, construction businesses make up the greatest percentage of 

industries with unpaid payroll taxes identified in our review of the

191 cases. 

5

While our sample of 690 unpaid assessment accounts is a representative sample, the 191 

unpaid payroll tax and TFRP cases selected as part of this sample cannot be considered 

statistically representative of the entire population of such cases. Thus, any analysis of these 

191 cases cannot be projected to the entire population of unpaid payroll taxes and TFRPs.
Page 7 GAO/T-AIMD/GGD-99-256

Figure 1: Most Common Businesses/Industries With Unpaid Payroll Taxes From 

Cases Reviewed

Other types of businesses noted in our review of the 191 unpaid payroll tax 

cases included (1) professional services, (2) consultants, (3) education and 

training, (4) computer software, and (5) child care.
Page 8 GAO/T-AIMD/GGD-99-256

Unpaid Penalties 

Assessed Against 

Individuals for Not 

Forwarding Payroll 

Taxes to the 

Government Are 

Significant 

According to IRS records, as of September 30, 1998, outstanding TFRPs 

assessed against individuals were about $15 billion. This amount includes 

initial assessments of about $9 billion and accumulated interest of about

$6 billion. IRS records indicate a total of about 237,000 separate TFRP 

assessments made against, and owed by, nearly 185,000 individuals. 

As discussed earlier, a TFRP assessment is only for the federal tax 

withholding and FICA taxes withheld from employees’ salaries; it does not 

include the business’ or employer’s matching FICA contributions. 

Additionally, a TFRP can be assessed against anyone found willful and 

responsible for the withholding and nonpayment of payroll taxes. If 

several individuals involved in a business are found willful and responsible, 

they can each be separately assessed a TFRP for the unpaid taxes. 

However, while TFRPs are assessed against one or more individuals and 

thus appear as separate unpaid assessments on IRS’ records, the total 

payroll taxes owed by the business are to be collected only once. This 

means that if the business responsible for the unpaid payroll taxes pays 

some or all of its delinquent taxes, or if one of several individuals assessed 

a TFRP covering the same delinquent tax period pays some or all of the 

assessment, the tax liability for all related parties should be reduced or 

eliminated from IRS’ records.

System Deficiencies Affect 

the Completeness and 

Accuracy of TFRP 

Information

In our October 1998 report6 on internal control weaknesses at IRS, which 

was based on the results of our audit of IRS’ fiscal year 1997 custodial 

financial statements,7

 we discussed serious financial management systems 

issues that affected IRS’ ability to effectively manage and accurately report 

on its unpaid assessments. One of the most serious issues we discussed 

related to IRS’s inability to link related taxpayer accounts to ensure that 

they all receive appropriate credit when a payment is made on one account. 

This is of particular concern for unpaid payroll taxes and related TFRPs. 

The unpaid payroll tax of a business and the TFRP assessed against an 

individual, or individuals, are maintained on IRS’ business and individual 

master files—the detailed databases of taxpayer information for businesses 

and individuals, respectively. These are two separate and distinct 

6

See Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial

Management (GAO/AIMD-99-16, October 30, 1998).

7

See Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998).
Page 9 GAO/T-AIMD/GGD-99-256

databases that are not integrated. Consequently, if a payment is received 

from the business, there is no automated entry to record the reduction in 

the individual, or individuals’, TFRP account or accounts. This has led to 

instances in which IRS has pursued collection against officers of a business 

for amounts that had already been paid.

IRS has attempted to correct this problem by manually entering a code on 

related taxpayer accounts to alert IRS personnel that related accounts exist 

and should be reviewed to ensure that all transactions are appropriately 

reflected on each account. However, as reflected in table 4, our audits of 

IRS’ fiscal year 1997 and 1998 financial statements have shown that the use 

of these codes, referred to as cross-references, has not been effective in 

providing the compensating link between related taxpayer accounts. In 

fact, in over half of the unpaid payroll tax cases we reviewed during both 

years, payments were not properly reflected in each related account.

Table 4: Frequency of Payments Not Properly Recorded to Related Taxpayer 

Accounts Identified in Fiscal Years 1997 and 1998

In our fiscal year 1998 audit, we also determined that this problem was not 

caused solely by the lack of an automated link between IRS’ business and 

individual master files. In 7 of the 54 cases we reviewed in which payments 

were not properly recorded, IRS failed to credit one individual’s TFRP 

liability account for payments made by another individual who had also 

been assessed a TFRP for the same business’ unpaid payroll taxes. 

Additionally, in 52 of the 104 unpaid payroll tax cases we reviewed in fiscal 

year 1998 in which a TFRP was assessed (50 percent), a cross-reference 

was not present in the master files to alert IRS personnel that the account 

was related to one or several other accounts. These problems create 

instances of unintentional taxpayer burden, such as that caused by 

inappropriate federal tax liens on taxpayers’ property, and affect the 

accuracy of reported balances of both the unpaid payroll tax and the 

associated TFRPs.

Cases reviewed in which 

payments were not reflected on 

all related taxpayer accounts

Fiscal year

Number of unpaid payroll

tax cases reviewed in which

a TFRP was assessed Number Percent

1997 83 53 64

1998 104 54 52
Page 10 GAO/T-AIMD/GGD-99-256

Significant delays in recording payments also affect the completeness and 

accuracy of the reported amounts for both unpaid payroll taxes and TFRPs. 

In one instance, we found that payments were recorded to the individual’s 

account over 8 years after they had been received. Additionally, we found 

that IRS did not always assess TFRPs against responsible individuals in a 

timely manner. Specifically, we found two cases in which IRS did not 

assess a TFRP against officers of businesses until 36 and 55 months, 

respectively, after the businesses filed their payroll tax returns and IRS 

would have become knowledgeable of the tax delinquencies. During this 

period, these officers received tax refunds. Had IRS assessed the TFRPs 

more promptly, it would have been able to retain, or offset, the refunds to 

recover a portion of the balance of unpaid payroll taxes. 

Not All Individuals 

Responsible for 

Nonpayment of Payroll 

Taxes Are Assessed TFRPs

In addition to the serious financial management deficiencies and internal 

control issues that affect the integrity of IRS’ data on unpaid payroll taxes 

and TFRPs, IRS does not track or otherwise systemically maintain 

information on the number and dollar value of potential TFRPs that are not 

assessed—the value of which could be significant. Several factors affect 

whether IRS assesses an individual a TFRP for unpaid payroll taxes.

First, IRS must be able to establish that an individual was, in fact, willful 

and responsible for the nonpayment of payroll taxes. Some businesses 

operate in a fashion that allows an individual without direct responsibility 

to nonetheless indirectly influence the nonpayment of payroll taxes. An 

example would be a corporate director who, by all established lines of 

authority, has no direct involvement in the day-to-day operations of the 

business but who, in practice, is heavily involved in the business’ 

operations. Thus, establishing that an individual was both willful and 

responsible is not always easy.

In determining whether to assess a TFRP, IRS also considers the amounts 

involved and the cost associated with pursuing collection actions against 

the individual. If IRS concludes that the amounts involved do not warrant 

the cost of pursuing collection, it typically will not assess the TFRP. 

Additionally, IRS does not assess sole proprietors and partnerships TFRPs 

for unpaid payroll taxes, believing that it can best pursue collection against 

the individuals through their individual tax return filing. Finally, IRS also 

considers the potential to collect the assessment in determining whether to 

assess the TFRP. 
Page 11 GAO/T-AIMD/GGD-99-256

Consequently, the numbers and dollar value of outstanding TFRPs 

discussed above likely significantly understate the extent to which 

individuals are responsible for not forwarding payroll taxes to the federal 

government.

Collectibility Potential on 

TFRPs Is Not Considered 

Great

IRS’ records, our discussions with revenue officers, and our work on a 

sample of unpaid assessments performed as part of our audit of IRS’ fiscal 

year 1998 financial statements indicate that the potential for significant 

collections on TFRPs is not great. Status codes in IRS’ individual master 

files for about 76,000 (32 percent) of the 237,000 TFRPs assessed against 

individuals reflect conditions suggesting minimal likelihood of collection. 

These conditions include the following:

• the individual cannot be located or contacted,

• the individual is in bankruptcy proceedings or some other form of 

litigation,

• the individual does not have the ability to pay the assessment, and

• the individual is deceased. 

Discussions with revenue officers throughout the country have reinforced 

the conclusion that TFRP assessments are not highly collectible. Many 

revenue officers we interviewed believe that less than 30 percent of 

amounts assessed as TFRPs are ultimately collected. Of the 104 unpaid 

payroll tax cases we reviewed in fiscal year 1998 in which TFRPs were 

assessed, we determined that only 8 cases had some potential for 

collectibility.

Significant Numbers of 

Individuals Are 

Responsible for 

Withholding But Not 

Paying Payroll Taxes at 

Multiple Businesses

IRS records indicate that as of September 30, 1998, nearly 25,000 

individuals, or about 13 percent of the 185,000 individuals with TFRPs, 

have been assessed such penalties for unpaid payroll taxes at more than 

one business. As shown in table 5, about three-quarters of these individuals 

have TFRP assessments for two separate businesses, and about a quarter 

have TFRP assessments at three or more businesses. 
Page 12 GAO/T-AIMD/GGD-99-256

Table 5: Number of Individuals With Trust Fund Recovery Penalties for Two or More 

Businesses

Source: IRS UNLCER files and individual master file.

In fact, IRS’ records indicate that 7 individuals have been assessed TFRPs 

at 20 or more separate and distinct businesses. However, we must reiterate 

that these data may not provide a complete and accurate assessment of the 

degree to which such “multiple offenders” exist because of the significant 

deficiencies in IRS’ financial management systems and internal controls 

and because IRS does not always assess an individual a TFRP. Additionally, 

these data cannot account for those individuals who establish new 

businesses under other names or otherwise conceal their identities.

Our review of the 191 unpaid payroll tax related cases and our discussions 

with revenue officers throughout the country confirm that a significant 

number of individuals are found liable for the nonpayment of payroll taxes 

at more than one business. Of the 104 unpaid payroll tax cases we 

reviewed in which TFRPs were assessed against individuals, we found that 

30 (29 percent) involved individuals assessed TFRPs for more than one 

business. In one case, we found that an individual had TFRP assessments 

outstanding for four separate businesses and had been determined 

responsible for the nonpayment of payroll taxes at a fifth business. In all 

instances, the individual established and operated construction-related 

(electrical) companies, in which he was both owner and president. Each 

company accumulated unpaid payroll taxes and then went out of business. 

Shortly after each company went out of business, the individual opened a 

new company in the same line of business.

Number of businesses Number of individuals

2 18,993

3 3,925

4 1,079

5 409

6 192

7-12 235

Over 12 29

Total 24,862
Page 13 GAO/T-AIMD/GGD-99-256

Reasons Individuals 

Continue to Have Unpaid 

Payroll Taxes at Multiple 

Businesses

Most of the revenue officers we interviewed believe the majority of the 

individuals responsible for not paying payroll taxes at multiple businesses 

do not flagrantly disregard their responsibility to forward such payments to 

the federal government. Most of the revenue officers stated that the 

individuals responsible for not paying these taxes lack the skills necessary 

to properly manage a business. We were told that many start up businesses 

with little capital and quickly find themselves experiencing cash flow 

problems. In their struggle to stay in business, these individuals prioritize 

and direct their payments to those recipients without which the businesses 

would quickly fail, such as employees’ net salaries, rent, and utilities. 

Eventually the businesses are unable to sustain even these payments, and 

they fail. Revenue officers further stated that, unfortunately, these 

individuals do not learn from some of the mistakes they make, and are soon 

opening and operating new businesses in much the same manner. 

However, the revenue officers acknowledged that some individuals 

intentionally disregard their responsibility to forward payroll taxes to the 

federal government. One revenue officer noted a case in which an 

individual was ultimately determined to be responsible for not paying the 

payroll taxes at three businesses. This individual used family members to 

conceal his involvement in two of the businesses. He was the president of 

the first business and had the business assets listed in his name. After this 

corporation had accrued but not paid substantial payroll tax liabilities, the 

corporation went out of business and he established a new corporation, 

listing his wife as president and placing the assets in her name. He 

subsequently established a third corporation, this time listing his daughter 

as the president and placing the assets in her name. Both of these 

subsequent corporations also accrued significant unpaid payroll tax 

liabilities.

Regardless of an individual’s intent, the failure to pay withheld payroll 

taxes has the same effect on the federal government. In either case, the 

federal government incurs costs to pursue collection of the delinquent tax 

debt and loses revenue to the extent that such taxes are not ultimately 

collected. Additionally, as discussed previously, to the extent payroll taxes 

are not paid, the general revenue fund subsidizes the Social Security and 

hospital insurance trust funds. As a result, fewer funds are available to 

finance other federal programs.
Page 14 GAO/T-AIMD/GGD-99-256

Businesses and 

Individuals 

Responsible for Not 

Paying Payroll Taxes 

Receive Significant 

Federal Benefits and 

Other Federal 

Payments

We found that businesses and individuals responsible for withholding but 

not paying payroll taxes receive substantial payments from the federal 

government, either for federal benefits or for other payment purposes, such 

as federal contracts or loans.

Specifically, based on a matching of IRS records of individuals with 

outstanding TFRPs with certain Financial Management Service (FMS) 

payment records, we estimate that about 18,800 (10 percent) of these 

individuals were receiving about $212 million in annual federal benefit 

payments while owing almost $2 billion in delinquent payroll taxes, as 

shown in table 6. 

Table 6: Delinquent Taxpayers Receiving Federal Benefits at September 30, 1998, 

and Their Tax Liability Balances (Dollars in millions)

Source: GAO analysis of FMS payments and IRS’ records for trust fund recovery penalties.

Additionally, based on a matching of FMS records of payments made to 

civilian vendors over a 3-month period to IRS’ records of businesses with 

unpaid payroll taxes and individuals with outstanding TFRPs, we found 

that about 16,700 taxpayers with payroll tax liabilities of about $507 million 

at September 30, 1998, received about $7 billion in federal payments over 

this 3-month period. 

Finally, based on our matching of IRS records of businesses with unpaid 

payroll taxes with the Small Business Administration’s (SBA) records of 

outstanding loans as of September 30, 1998, we estimate that about

12,700 taxpayers with unpaid payroll taxes estimated at more than

$295 million had received loan disbursements totaling about $3.5 billion. 

Further analysis disclosed that 38 of these taxpayers, with outstanding 

TFRPs of about $1.6 million, received SBA loans estimated at $10.6 million 

after IRS had assessed the TFRPs. In addition, 1,719 taxpayers (businesses 

and individuals) with unpaid payroll taxes of about $31.6 million received 

Payment type Taxpayers

Estimated annual

payments

Tax liabilities at

September 30, 1998

SSA 18,199 $200.4 $ 1,902.0

Civilian Retirement 271 3.9 21.5

Civilian Salary 215 6.3 14.1

Railroad Retirement 81 1.0 7.7

Total 18,766 $211.6 $1,945.3
Page 15 GAO/T-AIMD/GGD-99-256

SBA loans estimated at $448.7 million after accumulating these tax 

delinquencies.

However, any conclusions drawn from this analysis must consider the 

potential problems with the reliability and completeness of IRS data due to 

the serious financial management system deficiencies and internal control 

weaknesses discussed previously. 

Factors Affecting IRS’ 

Ability to Enforce 

Compliance or Pursue 

Collection of Unpaid 

Payroll Taxes

Several factors affect IRS’ ability to enforce compliance with respect to the 

payment of payroll taxes and to pursue collections of unpaid payroll taxes 

from businesses or responsible individuals. These factors are discussed 

briefly below. 

Financial Management 

System Deficiencies and 

Internal Control 

Weaknesses Affect Accuracy 

of Taxpayer Account Status

As discussed previously, the lack of an automated link or interface between 

IRS’ separate taxpayer databases for businesses and individuals leaves IRS 

no assurance that its records for an individual taxpayer or business are 

complete and accurate. IRS efforts to date to address this lack of linkage 

have not been fully effective in ensuring the accuracy of taxpayer accounts. 

In addition, delays in assessing individuals TFRPs result in missed 

opportunities to collect amounts through such means as retaining or 

offsetting refunds against unpaid payroll taxes.

Taxpayer Education and 

Early Warning Programs Are 

Not Considered Effective

IRS has two programs to prevent payroll tax delinquencies: the (1) Small 

Business Tax Education Program and (2) Federal Tax Deposit (FTD) Alert 

Program.

The Small Business Tax Education Program attempts to prevent payroll tax 

and income tax delinquencies by offering education programs and tax 

workshops to individuals wishing to start up businesses. Despite its 

purpose, many of the revenue officers we interviewed nationwide noted 

that this program has not been very effective in reducing or preventing 

delinquent payroll taxes. Others noted that the individuals in most need of 

attending these workshops did not appear to be present. 
Page 16 GAO/T-AIMD/GGD-99-256

The FTD Alert Program is intended to identify and prevent potential payroll 

tax payment delinquencies through early identification of required deposits 

under the FTD system that have not been made. The Alert Program targets 

larger employers who deposit semiweekly (those who reported more than 

$50,000 in payroll taxes on their quarterly Tax Form 941 filings during the 

previous 12-month period). Information regarding taxpayers who failed to 

make their deposits is transferred to tapes, which are sent to the service 

centers for printing of alert notices and mailing to the respective district 

offices. 

Some revenue officers noted that the alerts are not received in the field 

early enough to prevent employers from accumulating substantial 

delinquencies or to provide early warning of potential problems. Some of 

the revenue officers also noted that the alerts received were often invalid 

or unproductive. Often the taxpayer’s case has already been designated as 

delinquent, or the taxpayer has actually gone out of business before the 

revenue officer makes contact. In other instances, the employer has 

already paid the delinquent payroll taxes between the time the FTD alert is 

issued and received in the field and the contact is made with the taxpayer. 

Some revenue officers also stated that the FTD alerts yield few collections 

compared to the effort expended in processing the alerts.

Certain IRS Procedures 

Limit Collection and 

Prevention Efforts

According to several IRS field office representatives, another factor that 

inhibits IRS’ ability to collect delinquent payroll taxes and to prevent 

taxpayers from accumulating multiple payroll tax delinquencies is that IRS’ 

Criminal Investigation Division (CID) and District Counsel do not 

prosecute taxpayers for failing to pay payroll taxes unless fraud is clearly 

evident. Field office personnel noted that even in instances in which the 

taxpayers are multiple offenders, CID and District Counsel appear 

reluctant to pursue prosecution. A few field personnel noted that IRS 

could seek injunctions through the U.S. Attorney’s Office to prevent 

taxpayers from accumulating multiple payroll tax delinquencies and that 

the District Counsel prefer not to seek such injunctions due to the time and 

expense required to prosecute such cases.

Federal and State Laws Also 

Inhibit Compliance and 

Collection Efforts

Federal and state laws also affect IRS’ ability to enforce compliance with 

respect to payment of payroll taxes or to pursue collections on delinquent 

payroll taxes. Under section 6103 of the Internal Revenue Code, IRS is 

precluded from sharing tax information with state licensing authorities that 

have the power to grant or deny business licenses for new and existing 
Page 17 GAO/T-AIMD/GGD-99-256

businesses. Therefore, IRS is inhibited in its ability to prevent individuals 

responsible for the nonpayment of payroll taxes from starting up new 

businesses and repeating the practice. Some Collection Division field 

representatives noted that due to the same disclosure prohibitions, IRS is 

unable to publish the names of delinquent taxpayers to increase 

compliance and generate collections, a process that has been used with 

some success by a number of states and local taxing authorities.

One IRS field representative we spoke with also mentioned that in 

California, the posting of bonds by a new business for state payroll taxes is 

required as a prerequisite to the granting of a new business license. In this 

manner, the state is protected to some degree in the event of nonpayment 

of state payroll taxes. This avenue is currently not available to the federal 

government for federal payroll taxes.

According to some IRS field representatives, the agency’s ability to pursue 

collections of delinquent payroll taxes and associated TFRPs is also 

inhibited by the property laws of some states, as well as varying 

interpretations of bankruptcy laws. According to some representatives, in 

a number of states, IRS is unable to enforce collection of delinquent taxes 

and penalties because state laws preclude attaching liens to, and seizing, 

personal property. States in which Tenancy by the Entirety8

 or Marital Joint 

Property laws exist limit the assets available for IRS to attach or seize. 

Also, according to an IRS official, a business under Chapter 119

 Bankruptcy 

Reorganization can continue to operate at the bankruptcy judge’s 

discretion. This can result in the business incurring additional tax 

delinquencies.

Other Factors IRS 

Employees Cite as Affecting 

Enforcement and Collection 

of Unpaid Payroll Taxes

In addition to the factors discussed above, Collection Division field 

representatives cited other factors that, they believe, affect their ability to 

enforce compliance and pursue collections on delinquent payroll taxes and 

TFRP assessments. Several field representatives stated that the current 

level of collection staff is not sufficient to effectively prevent, collect, and 

monitor delinquent payroll taxes and TFRPs, and that revenue officers are 

increasingly being required to spend time supporting IRS’ Customer 

8

Tenancy by the Entirety is one form of jointly held property in which the property is co-owned with a 

spouse. Each spouse owns 100 percent of the property at all times.

9

In general, Chapter 11 is a reorganization proceeding for an individual or a business or other entity in 

which creditors are paid under a plan.
Page 18 GAO/T-AIMD/GGD-99-256

Service and other functional areas instead of working on collection issues. 

Field representatives also said that certain provisions of the Restructuring 

and Reform Act of 1998, which was enacted to provide fairness to 

taxpayers, could lengthen the time it takes revenue officers to work cases 

and result in fewer cases being resolved, and expressed uncertainty about 

how to operate under certain provisions that contain penalties for IRS 

personnel if the rules are not followed. 

Ability to Offset Federal 

Benefits and Other Federal 

Payments Has Yet to Be 

Achieved 

Federal law does not prevent businesses or individuals from receiving 

federal payments or loans when they are delinquent in paying payroll taxes. 

While IRS can retain, or offset, refunds otherwise due businesses or 

individuals to recover some or all of the delinquent taxes owed, up to this 

point it has not been able to systematically pursue other federal payments 

made to these taxpayers to recover delinquent taxes. 

The Debt Collection Improvement Act of 1996, enacted under the 

leadership of this Subcommittee, called for the centralization and 

aggressive pursuit of delinquent nontax federal receivables, including 

delinquent loans and other forms of payments owed the federal 

government. Treasury also intends to include the collection of federal tax 

debts as part of the mechanism it is developing to pursue collection of 

nontax federal receivables as mandated under the act. In doing so, 

Treasury is using as its legal authority a subsequently passed provision in 

the Taxpayer Relief Act of 1997. This provision grants IRS the authority to 

place a continuous levy on a delinquent taxpayer’s federal benefits to assist 

in recovering overdue taxes. Implementation of the continuous levy 

provision is expected to begin in July 2000.

Treasury’s plan has been revised on several occasions, as it and other 

affected agencies try to address complex implementation issues to avoid 

undue harm to individuals. This will be of particular concern with respect 

to Treasury’s plan to include unpaid tax assessments as part of its federal 

debt collection efforts. There will be a critical need to address IRS’ 

significant financial management systems deficiencies and internal control 

weaknesses to ensure that taxpayers are not unduly harmed through the 

levying of federal benefits and other payments to repay amounts that have 

already been collected. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 

to answer any questions you or other members of the Subcommittee may 

have. 
Page 19 GAO/T-AIMD/GGD-99-256

Contact and 

Acknowledgment

For future contacts regarding this testimony, please contact Gregory D. 

Kutz at (202) 512-3406 or Cornelia Ashby at (202) 512-9110. Individuals 

making key contributions to this testimony included Steven J. Sebastian, 

Ralph Block, Paul Caban, and Patrick McCray.
Page 20 GAO/T-AIMD/GGD-99-256

Appendix I

Overview of the Process for Distribution of 

FICA and SECA Tax Revenue to Trust Funds ApenIdxi

Taxpayera

Payment/

Filing

$

Tax payments

 a Employers and self-employed individuals

Deposit tax

payments in

general fund 

Collection/

Accounting 

IRS

FMS

SSA

Estimation

Certification

Estimation

OTA FMS

Distribution/

Adjustment

Recording/

Accounting 

BPD

Investment in Treasury

securities/payment of

benefits 

Record

FICA/SECA

taxes in 

master file

Process tax returns 

and send payroll

tax data to

SSA monthly

Chief actuary

develops 

estimate 

of 

FICA/SECA

semiannually 

Calculate 

monthly

estimates 

of

FICA/SECA 

tax 

Prepare journal

entry to 

record

estimates 

Record entries into

- Federal Hospital 

Insurance

- Federal Old Age and

Survivors Insurance

- Federal Disability

Insurance Trust 

funds

941

Employer's 

Quarterly

Federal Tax 

Return 

W2, W3

Annual Wage and

Earnings 

Statement 

Calculate 

the certified 

amounts

quarterly 

Prepare journal 

entry to adjust 

OTA estimates 

to certified 

amounts 

quarterly

(901796) Lert
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