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44–584 PDF 2008

S. Hrg. 110–623 

PAYROLL TAX ABUSE: BUSINESSES OWE BILLIONS 

AND WHAT NEEDS TO BE DONE ABOUT IT 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

OF THE

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 29, 2008 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

ELISE J. BEAN, Staff Director and Chief Counsel 

JULIE DAVIS, Counsel, Office of Senator Carl Levin 

AUDREY ELLERBEE, Congressional Fellow, Office of Senator Carl Levin 

MARK L. GREENBLATT, Staff Director and Chief Counsel to the Minority 

JAY JENNINGS, Minority Senior Investigator 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coleman .............................................................................................. 4 

Senator McCaskill ............................................................................................ 17 

WITNESSES 

TUESDAY, JULY 29, 2008 

Steve J. Sebastian, Director, Financial Management and Assurance, U.S. 

Government Accountability Office ...................................................................... 7 

Linda Stiff, Deputy Commissioner for Services and Environment, Internal 

Revenue Service, U.S. Department of the Treasury ......................................... 9 

ALPHABETICAL LIST OF WITNESSES

Sebastian, Steve J.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 27 

Stiff, Linda: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 133 

APPENDIX 

GAO Report titled ‘‘Tax Compliance, Business Owe Billions in Federal Payroll 

Taxes,’’ dated July 2008, GAO–08–617, submitted by Mr. Sebastian ............. 59 

‘‘A Comprehensive Strategy for Reducing the Tax Gap,’’ U.S. Department 

of the Treasury, Office of Tax Policy, September 26, 2006, submitted by 

Ms. Stiff ................................................................................................................ 144 

‘‘Reducing the Federal Tax Gap,’’ A Report on Improving Voluntary Compliance, Internal Revenue Service, U.S. Department of the Treasury, August 

2, 2007, submitted by Ms. Stiff ...........................................................................16200 

(1) 

PAYROLL TAX ABUSE: BUSINESSES OWE 

BILLIONS AND WHAT NEEDS TO BE 

DONE ABOUT IT 

TUESDAY, JULY 29, 2008 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:05 a.m., in Room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Coleman, and McCaskill. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; Julie Davis, Counsel to Senator 

Levin; Audrey Ellerbee, Congressional Fellow to Senator Levin; 

Mark L. Greenblatt, Chief Counsel and Staff Director to the Minority; Jay Jennings, Senior Investigator to the Minority; Erica Flint, 

Staff Assistant to the Minority; Sheldon Shoemaker (Sen. 

McCaskill); John Kim, Law Clerk; and Mark Leduc (Sen. Collins). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Today, over 1.6 million businesses owe more than $58 billion to 

Uncle Sam for unpaid Federal payroll taxes that have accumulated 

over the last 10 years. Over half of this debt is now uncollectible. 

That is the conclusion of a Government Accountability Office (GAO) 

study requested by this Subcommittee on the problem of unpaid 

payroll taxes. 

Today’s Subcommittee hearing will examine what is behind this 

staggering number and what can be done about it. Of the many tax 

schemes this Subcommittee has investigated over the years, the 

blatant cheating on the payroll tax is particularly galling because 

delinquent businesses are stashing away not only the payroll taxes 

that they owe Uncle Sam, but also stealing funds withheld from 

employee paychecks. Employers are required to withhold from their 

employees’ salaries amounts for individual Federal income taxes 

and for Social Security and Medicare taxes. These businesses have 

a fiduciary responsibility to hold the funds they withhold from employees ‘‘in trust’’ for the government. The employer must also 

match the amounts withheld for Social Security and Medicare. The 

willful failure to remit any of these types of payroll taxes is a felony. The fact that this problem is so widespread is a disgrace. 

2 

Ten years ago, in 1998, the GAO conducted another study on payroll taxes and found that unpaid payroll taxes then totaled $49 

billion. In the 10 years since, the number of businesses with unpaid 

payroll taxes declined from 1.8 million to 1.6 million, but the size 

of the tax debt got nearly $10 billion worse, not better. Part of the 

reason appears to be ineffective IRS payroll collection efforts, despite the fact that IRS has continued to deem collection of payroll 

taxes ‘‘one of its highest priorities.’’ The GAO report identifies a 

host of problems with those efforts, and here are just three of them. 

The first is the fact that many payroll tax cheats have been allowed to repeatedly violate the law for years at a time, accumulating massive payroll tax debts that cannot ultimately be collected. 

GAO’s report discloses that 70 percent of all unpaid payroll taxes 

are owed by businesses that have failed to remit payroll taxes for 

more than 1 year. This means the business has at least four violations since payroll taxes are supposed to be remitted quarterly. 

Over 25 percent have failed to remit their taxes for more than 3 

years. Nine percent have payroll violations stretching back 5 to 10 

years. In addition, thousands of businesses are involved. GAO reports that the number of firms with more than 5 years of payroll 

tax debt has nearly tripled, from 5,000 in 1998 to 14,000 in 2007. 

And those with more than 10 years of payroll tax debt went from 

68 in 1998, to 490 businesses in 2007. That is a 500-percent increase. 

One case study highlighted in GAO’s report involves a business 

with payroll violations dating back to 1994. As of July 2007, that 

business had accumulated unpaid payroll taxes totaling almost $1 

million. 

And IRS data shows that as unpaid payroll taxes get older, the 

likelihood of collecting the amounts owed declines dramatically. 

The result, according to the GAO, is that 52 percent of existing 

payroll tax debt is now uncollectible. 

But that is not all. Tax delinquent businesses allowed to operate 

for years with impunity gain an unfair advantage over honest competitors. By shirking their taxes, these businesses incur lower operating costs and may drive out honest firms. In one case study in 

the GAO report, a business used $2.5 million that should have gone 

for payroll taxes to subsidize its underbidding of contracts. 

Next, how is it that payroll tax cheats are able to continue operating with impunity for years at a time? That gets us to the second 

major problem: The IRS’ failure to make effective use of available 

enforcement tools. 

Current law provides the IRS with several powerful collection 

tools, but often the IRS has failed to make effective use of them. 

As the GAO points out, ‘‘Having a reticence to use enforcement 

tools may, over time, actually diminish voluntary compliance and 

collections.’’ In other words, when honest taxpayers see tax cheats 

getting away with blatant misconduct, it not only undermines confidence in the tax system as a whole, it could encourage cheating. 

The IRS has two primary enforcement tools to stop payroll tax 

cheats: Filing liens against the business and filing personal claims 

against the business’ officers or owners. The GAO found that tax 

liens were not filed against businesses with unpaid payroll taxes in 

3 

over 30 percent of all payroll tax cases assigned to the field for collection effort. That is nearly one-third of the payroll cases being 

‘‘worked on’’ by a revenue officer, or 140,000 delinquent businesses. 

GAO also found that the IRS often failed to assess penalties 

against the individual officers and owners of the business charged 

with collecting payroll taxes. Current law states that these individuals can be held personally liable for the portions of the payroll tax 

withheld from an employee if they willfully failed to collect or pay 

the tax. GAO describes multiple cases of business owners with payroll tax debt using business funds to pay for their own lavish lifestyles. 

To collect the missing money from individual business officers or 

owners, the IRS can file a trust fund recovery penalty (TFRP). 

GAO determined that it took the IRS an average of 40 weeks to 

determine whether a TFRP should be assessed and then an additional 40 weeks to actually assess it. Now, that adds up to nearly 

2 years, or over a year and a half, to start collection on a TFRP. 

In addition, a 2005 study by the Treasury Inspector General for 

Tax Administration revealed that 43 percent of people who received 

a TFRP never made a payment on it, and that the IRS only collected 8 percent of the amount for which the TFRPs were issued. 

In one example reported by the GAO, the IRS assessed a business 

owner with a TFRP, but failed to file an accompanying tax lien. 

Therefore, the owner was able to sell a vacation home in Florida, 

and the IRS missed the opportunity to collect any of the unpaid 

taxes from the proceeds of the sale. 

Still another problem is the IRS’ practice of assigning a new revenue officer to assess a TFRP in cases where another revenue officer has already initiated enforcement action against a business 

with unpaid taxes. GAO found that in 75 percent of the cases it reviewed, the TFRP was either not assigned or was assigned to a different revenue officer than the one already taking action against 

the business for unpaid taxes. Doubling up revenue officers on a 

single business makes little sense when there are too few revenue 

officers to go around. 

In addition to finding that the IRS made ineffective use of tax 

liens and TFRPs in many payroll cases, GAO determined that the 

IRS failed to take timely enforcement action in half of the cases in 

which tax debtors missed specific deadlines. That means one out of 

two tax cheats missed payments they were required to make with 

no immediate consequences. Now, that shocking statistic sure has 

to change. 

Finally, the Subcommittee has discovered that the majority of 

businesses with unpaid payroll taxes do not get immediate enforcement attention. Instead, following a 15-week notification process, 

many cases are assigned to a so-called queue where they languish 

until a revenue officer is assigned to them. Right now, of the $28 

billion in unpaid payroll taxes still deemed collectible, about $9 billion is sitting in the queue awaiting assignment to a revenue officer. That so many cases sit unproductively before any enforcement 

action is taken is inexcusable. 

Now, here are three actions that could be taken to strengthen enforcement action against payroll tax cheats. 

4 

First, the IRS should develop an expedited process for filing liens 

and assessing TFRPs against businesses with unpaid payroll taxes. 

These tax liens and TFRPs should be automatically imposed after 

a business has missed a specified number of quarterly payroll tax 

payments, unless a revenue officer provides written justification 

why those actions should not be taken. Also, the business tax case 

and the TFRP assessment should, when possible, be treated as a 

single, unified, and coordinated collection effort assigned to a single 

revenue officer, instead of the current practice, which most often 

has TFRP collections assigned to a different revenue officer, if they 

get assigned at all. 

Second, Congress should enact S. 1124—the Levin-Coleman Tax 

Lien Simplification Act, to streamline the tax lien system. Right 

now, tax liens have to be filed on paper in 4,000 locations across 

the country, each with its own forms and filing requirements. The 

process is wasteful, burdensome, and inefficient. Our bill would require the Treasury to establish an electronic tax lien registry at the 

Federal level, which would not only make filing liens easier and 

more transparent, but would also, according to the IRS’ own estimates, save $570 million over 10 years from improved efficiencies 

alone. 

Third, the IRS should develop payroll tax collection performance 

measures. It is baffling that, with respect to this ‘‘high-priority’’ 

issue, the IRS currently does not have a single performance measure to assess its progress in combating payroll tax cheats. When we 

asked IRS how long the average payroll tax case is open, we were 

told they do not track this data. Moreover, neither IRS managers 

nor revenue officers are currently evaluated on their efforts to collect payroll taxes or prevent the accumulation of payroll tax debt. 

These types of agency-level and personnel performance measures 

should be developed on an urgent basis. 

Finally, it is ridiculous that one of this Administration’s top tax 

enforcement efforts has been to go after the small-dollar claims 

under the Earned Income Tax Credit Program, the EITC Program, 

which is a refundable tax credit available to workers with low incomes. We should be using our limited number of revenue agents 

to catch the biggest fish—including payroll tax cheats who are misusing billions of dollars of employee and taxpayer money to benefit 

themselves. 

I commend Senator Coleman for initiating the Subcommittee’s 

request for the GAO study on this important problem, I commend 

his staff, and I now turn to him for his opening remarks. 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. Thank you, Mr. Chairman, and let me, if I 

may, return the compliment. I was reflecting on where we are with 

this hearing and the work that we did together on sham tax 

schemes, I think ‘‘Flips’’ and ‘‘Blips,’’ and looking at literally billions of dollars that were not being put into the Federal Treasury, 

and we focused on those. And you, Mr. Chairman, and your staff 

have been a champion of targeting the offshore tax havens, cleaning those up. I have joined you with full force and vigor, and it has 

been a tremendous effort. We focused on Federal contractors, and 

they are being paid Federal dollars at the same time that they owe 

5 

tax dollars. It was actually during the course of that investigation 

that we noticed a commonality of payroll taxes not being forwarded 

to IRS. These are cases in which we were actually paying Federal 

dollars to folks who owed tax dollars. 

I think we have reached a point now with payroll taxes where this is the mother of all tax gaps, $58 billion. And clearly it needs 

to be addressed. Payroll taxes are an essential part of our tax system. As the Chairman has indicated—and GAO will go through 

it—employers withhold taxes from their employees’ paychecks and 

are required to forward that money to the IRS. These funds include 

income taxes, as well as other taxes that go directly to fund Social 

Security and Medicare. The employers handle these in trust for 

their employees and, clearly, that trust is being violated, and in 

many cases has been violated for years. The loss ultimately is to 

all taxpayers. 

According to the GAO study, more than 1.6 million of those 

businesses are breaching that trust and are simply keeping their 

employees’ taxes. The amount over the past 10 years that those 

businesses have failed to pay is a whopping $58 billion of their employees’ payroll taxes. 

But, again, I think it is important to stress that they are not just 

breaching their employees’ trust; they are shortchanging all honest 

American taxpayers by forcing more of the weight on the sagging 

shoulders of hard-working Americans. This is not a theoretical exercise. As a direct result of these unpaid payroll taxes, the government must transfer up to $4 billion in taxes from the general fund 

to pay for Medicare and Social Security. The IRS estimates that, 

over the past 10 years, $44 billion has been transferred from general tax revenues to Social Security and Medicare. 

These are difficult times, as stressful as certainly any in my 32 

years of public service as I have seen. And so when we look at the 

challenge of the times that the average taxpayer is facing and we 

have these deadbeats and billions of taxpayer dollars being used to 

cover the shortfalls, clearly something must be done. 

If you look at the cases, it is enough at times to make your blood 

boil—cases in which business owners have failed to pay payroll 

taxes, while purchasing luxury cars, planes, mansions, properties 

in tropical islands and other far-flung countries. In several case 

studies, the owners made massive withdrawals from business accounts, pocketing $20,000, $50,000, and even hundreds of thousands of dollars in cash. It is clear that tax cheats are living the 

high life at the expense of hard-working American taxpayers. 

The GAO report identifies case after case in which the businesses 

owe millions upon millions in payroll taxes. Even worse, these tax 

cheats appear to be stringing the IRS along, refusing to submit 

their taxes for 8, 9, and even 10 years. And after 10 years, because 

of the statute of limitations the case falls over the edge and we lose 

any ability to proceed. Some play a shell game to avoid paying 

taxes, moving money between multiple entities, shifting assets to 

family members, and even claiming bankruptcy to avoid obligations. 

So let’s step back and put this in perspective: Our tax gap, which 

is the difference between the taxes that are owed and the amount 

that is actually paid, approaches $300 billion. And this, by the way, 

6 

is just taxes that we know of. It does not include underreported 

taxes. It does not include unreported income. And so it is actually 

understating the nature of the problem. Unpaid payroll taxes are 

the single largest business component of that gap, making up more 

than 20 percent of the tax gap itself. And to make matters worse, 

the GAO will indicate that the problem is growing and growing. 

Over the past few years, the amount of unpaid payroll taxes has 

increased just under 20 percent. 

While the problem is expanding, our ability to address the problem is shrinking. The IRS’ backlog of payroll tax cases dwarfs the 

number of cases actually being pursued. As cases languish in the 

backlog and the statute of limitations expires, billions of dollars in 

unpaid payroll taxes are written off every year. I believe more than 

$4 billion in unpaid tax debt will be completely written off this 

year. By 2012, the write-off of unpaid tax debt is expected to reach 

$5 billion each year, and within a couple of years, the write-offs of 

taxes that simply cannot be collected will grow another 20 percent 

to $6 billion. So what is clear is that we have a problem and we 

have to fix it. 

Is it a $58 billion problem? Is it a $28 billion problem if half of 

the $58 billion is uncollectible? Is it uncollectible because we did 

not move quickly enough? Whether it is $28 billion or $58 billion, 

even for government this is real money. This is big money. 

How do we move forward? The report identifies a number of concerns with the IRS’ current collection procedures and offers numerous recommendations to improve its enforcement regime. If we are 

going to make any inroads in collecting unpaid payroll taxes, we 

have to consider substantial changes to IRS’ collection policies and 

procedures. 

A specific concern here is that when we are dealing with scofflaws and egregious cases, the IRS may have overemphasized 

getting taxpayers to comply with the law voluntarily. Getting voluntary compliance is a desirable goal. I want to stress that. We understand that. And it would appear to be the right strategy in most 

circumstances. 

But GAO cites examples in which the tax cheats are simply 

stringing the IRS along for years and years, even though they show 

no inclination to comply voluntarily. The voluntary measures are 

not increasing compliance in these egregious cases. The time for 

talk in these cases, in the egregious cases, beyond-the-pale cases, 

the time for talk and voluntary compliance has passed, and it is 

time for action. 

The report is chock full of case studies in which the IRS revenue 

officers appear to treat the worst of the worst with kid gloves. Perhaps we should reconsider the broad discretion given to those revenue officers when dealing with the worst tax cheats and encourage the use of more stringent enforcement tools for these extreme 

cases. 

Mr. Chairman, I would note that I would add my voice and associate myself with your comments in terms of some of the specific 

recommendations that should be adopted. 

As a former prosecutor, I know the threat of prosecution and aggressive enforcement are powerful deterrents. I call upon the IRS 

7 

1The prepared statement of Mr. Sebastian appears in the Appendix on page 27. 

to ratchet up its efforts to recover these billions in back taxes and 

hold these tax cheats accountable. 

The good news is that there is hope. The States have been developing creative and effective mechanisms for collecting taxes, such 

as identifying tax cheats on the Internet. The State of Minnesota 

is one of those States that publishes the names of tax cheats, and 

these are not folks who are working out the problem, these are not 

folks who are in bankruptcy. So you can identify the specific class 

of folks who deserve to have their name out there, and as a result, 

it serves as a deterrent. In addition, the IRS has also acknowledged 

the problem and has indicated a positive attitude and a willingness 

to take necessary steps to address the issue. 

If the issue is more legislation, we need to know what that is. 

If the issue is a change in process, then the IRS has to do that. 

The bottom line is that the problem is real and has to be addressed, and hopefully this hearing will be a step in that direction. 

Mr. Chairman, I look forward to exploring these issues with you 

and our witnesses today. 

Senator LEVIN. Thank you very much, Senator Coleman. 

Let me now welcome our witnesses for today’s hearing: Steve Sebastian, the Director of the Financial Management and Assurance 

Unit at the Government Accountability Office; and Linda Stiff, the 

Deputy Commissioner for Services and Enforcement at the Internal 

Revenue Service. We appreciate very much both of you being with 

us today. You have appeared before this Subcommittee in the past. 

We welcome you back. 

I think you will remember that, pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be 

sworn. So at this time, I would ask you to please stand and raise 

your right hand. Do you swear that the testimony you are about 

to give will be the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Mr. SEBASTIAN. I do. 

Ms. STIFF. I do. 

Senator LEVIN. We will be using our usual timing system today 

so that about a minute before your time is up—a minute before the 

red light will come on, you will see the light change from green to 

yellow, which then gives you an opportunity to conclude your remarks, and your written testimony, for which we are grateful, will 

be printed in the record in its entirety. And we ask that you limit 

your oral testimony to no more than 5 minutes. 

Mr. Sebastian, we will have you go first, followed by Ms. Stiff, 

and then we will turn to questions. Mr. Sebastian. 

TESTIMONY OF STEVE J. SEBASTIAN,1 DIRECTOR, FINANCIAL 

MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SEBASTIAN. Mr. Chairman and Senator Coleman, thank you 

for the opportunity to discuss the results of our review of unpaid 

8 

1The GAO report entitled ‘‘Tax Compliance, Businesses Owe Billions in Federal Payroll 

Taxes,’’ July 2008, GAO–08–617, submitted by Mr. Sabastian appears in the Appendix on page 

59. 

payroll taxes. Our report,1 which is being released today, was prepared at the request of this Subcommittee and the Senate Committee on Finance in response to previous work we have done on 

Federal contractors with tax debt. The bottom line of my testimony 

this morning is that unpaid payroll taxes are substantial and represent a significant enforcement challenge for the IRS. 

Before I begin, it is important to remember that payroll taxes are 

comprised of individual income tax withholdings and employee 

withholdings for Social Security and Medicare, as well as the employer’s matching amounts. As the posterboard illustrates, employers withhold amounts from employees’ paychecks, hold them in 

trust for the Federal Government, and periodically are required to 

remit them and the matching amounts. 

My testimony this morning will discuss two main aspects from 

our review: First, the significance of unpaid payroll taxes and, second, issues impacting IRS’ ability to collect payroll taxes owed and 

to prevent the further accumulation of such taxes. 

First, our study found that, as of September 30, 2007, 1.6 million businesses owed over $58 billion in unpaid payroll taxes, including 

penalties and interest. As such, payroll taxes comprise over half of 

IRS’ inventory of delinquent business taxes. Much of this debt is 

owed by repeat offenders. In fact, the number of more egregious offenders has grown significantly since our last review in 1998. 

As the posterboard illustrates, the number of businesses with 

over 5 years of unpaid payroll taxes has increased nearly threefold, and the number with over 10 years of unpaid payroll taxes 

has increased five-fold. Equally disturbing is that over 9,000 individuals were responsible for not paying the payroll taxes at multiple businesses, over a dozen for some. 

Second, our study found that while payroll taxes are considered 

a high priority, IRS does not always utilize its existing collection 

tools to collect the payroll taxes owed and to prevent the further 

accumulation of such taxes. 

IRS has a powerful tool to hold business owners and officers personally responsible for the non-payment of payroll taxes: The trust 

fund recovery penalty (TFRP). However, IRS is not always assessing the TFPRs timely, and once assessed, the IRS is not always 

moving to take aggressive action against these TFRPs. Further, the 

TFRP is treated as a separate collection effort from the business 

case when, in essence, it is essentially the same tax debt. 

Liens are another powerful tool in IRS’ enforcement arsenal. 

However, IRS does not always file liens to protect the government’s 

interest, and when it does, it does not always do so timely. Ironically, because of certain IRS policies, lower-priority cases may actually have tax liens filed while higher-priority cases, such as payroll taxes, may not. Eighty percent of payroll tax cases in IRS’ 

queue awaiting assignment did not have a tax lien filed. 

Driving these issues is IRS’ emphasis on gaining voluntary compliance. While this approach is consistent with IRS’ mission statement and is appropriate for the vast majority of generally compliant taxpayers, such an approach for egregious payroll tax offenders 

9 

1The prepared statement of Ms. Stiff appears in the Appendix on page 133. 

appears to do little to collect what is already owed and to prevent 

businesses from further accumulating payroll tax debt. 

There is a point at which efforts to continue to work with the 

business to gain voluntary compliance may need to cease and more 

aggressive enforcement efforts commence. State collection officials 

we spoke with seemed to have recognized this. After a certain 

point, they changed their focus to one of stopping the bleeding. 

In summary, businesses that withhold money from their employees’ paychecks and fail to remit these monies to the Federal Government are breaching their fiduciary responsibility to the government and to their employees. Additionally, such businesses have a 

competitive advantage over those businesses that comply with the 

tax laws. 

There is a lot at stake. As the posterboard illustrates, the $58 

billion in unpaid payroll taxes currently on the books will expire 

over the next several years. To the extent IRS’ efforts are unsuccessful in collecting such taxes prior to their expiration, and in preventing the further accumulation of such taxes, the compliant taxpayer is left to pick up the tab. 

We believe implementation of the recommendations contained in 

our report will assist IRS in strengthening enforcement and improving the collection of payroll taxes. 

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

to answer any questions you or Senator Coleman may have at this 

time. 

Senator LEVIN. Thank you so much, Mr. Sebastian. Ms. Stiff. 

TESTIMONY OF LINDA STIFF,1 DEPUTY COMMISSIONER FOR 

SERVICES AND ENVIRONMENT, INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY 

Ms. STIFF. Chairman Levin, Ranking Member Coleman, and 

Members of the Subcommittee, thank you for the opportunity to 

testify today on the status of IRS efforts to collect Federal employment taxes. I appreciate the contribution this Subcommittee has 

made over the last 4 years with its investigations of Federal contractors who are delinquent and of efforts by unscrupulous promoters and taxpayers to avoid taxation in the United States. The 

IRS has found the opportunity to work with you and your staffs 

very valuable in each instance. 

We look forward to working with you to improve our efforts in 

the collection of Federal employment taxes. While we have made 

great progress over the last 5 years, as the GAO report released 

this morning demonstrates, we can and we must do better. 

Employment taxes represent the largest portion of total tax dollars collected by the IRS. In fiscal year 2007, of the $2.7 trillion 

that came in through taxes, $1.7 trillion was payroll taxes. Accordingly, the collection of delinquent employment taxes is a critical 

priority for us at the Service. 

In 1998, Congress passed the IRS Restructuring and Reform Act, 

which provided a sweeping realignment of the IRS workforce, particularly in the area of collection. In addition, it significantly raised 

the bar on taxpayer rights. As we at the IRS sought to respond to 

10 

these sweeping changes, our enforcement presence suffered. There 

was uncertainty over when and how certain enforcement tools 

should be applied; and as a result, over the next 4 years, there was 

an erosion in the use of those tools, including liens. 

The findings in the GAO report reflect the lingering results of 

this drop-off. As the GAO reported, more than 60 percent of the unpaid payroll taxes are owed for periods 2002 and prior. By 2003, 

the IRS had managed to reset the workforce, and we are beginning 

to restore the balance between services and enforcement. We once 

again began utilizing our full arsenal of enforcement tools, including liens, without sacrificing the gains we had made in improving 

taxpayer rights. 

For example, in fiscal year 2002, we resolved just over 3 million 

delinquent accounts. By last year, that number had grown to over 

58 percent, with more than 5.2 million delinquent accounts being 

resolved. This gain occurred despite the fact that we have been operating with a relatively flat budget and while ensuring the protection of taxpayer rights. 

Part of our success in this turnaround can be credited to research. Since 2003, 19 research projects have been conducted to 

help improve IRS employment tax efforts. These projects have focused on selecting the right cases, routing those cases to the IRS 

staff with the right skills, and enhancing our ability to choose the 

right enforcement tools to resolve cases as efficiently as possible. 

Further complicating our collection efforts is the overall environment in which many businesses operate. It is important to note 

that the Small Business Administration has found that more than 

a third of all small businesses do not survive 2 years. Sixty percent 

do not survive 6 years. Unpaid payroll taxes reflect this reality. Of 

the $58 billion in total reported unpaid employment taxes reported 

by GAO, 34 percent of that is attributable to firms in bankruptcy 

or out of business. 

I also want to note that historically the IRS succeeds in collecting 

99.8 percent of all employment taxes owed. Over the last 10 years, 

that means more than $11 trillion in payroll taxes was collected. 

Clearly, when you are dealing with net numbers this size, even a 

decimal point represents a significant amount. 

I want to report to you that, after reviewing the findings in the 

GAO report, I have charged a service-wide task force on collections 

to refocus its efforts to concentrate solely on the more effective use 

of enforcement tools in employment tax cases. 

To support that effort, we are launching a series of research 

studies to determine—and I think they go right on point to the recommendations that the two of you have made for us today—to look 

at the effective use of the Trust Fund recovery penalty; earlier consideration of the filing of liens; greater use of automated collection 

tools throughout the collection process; and to determine if there is 

a ‘‘point of no return’’ where we need to take a different position 

with the taxpayers we are dealing with. 

The task force met last week and has begun an aggressive plan 

for completing its review of these areas. We think these efforts will 

result in continued improvements. 

Mr. Chairman, Senator Coleman, let me assure you that the collection of employment taxes is a core mission of the IRS and that, 

11 

like you, we believe leaving $58 billion on the table is unacceptable. 

I pledge to you today that we can and we will do better. I look forward to working with you and other Members of the Subcommittee 

as we move forward. 

Thank you, and I will be happy to respond to any questions. 

Senator LEVIN. Thank you very much, Ms. Stiff. 

Why don’t we start with about an 8-minute round, whoever is 

keeping track of this. 

I was intrigued by the report that talked about 15 weeks of notices when there is a failure to remit the payroll tax. Is that the 

traditional period of notices that go out to businesses? 

Ms. STIFF. Actually, it is a little bit more complex than the way 

you have described it. Taxpayers receive a notice—I think you were 

talking about the application of the trust fund recovery penalty notice? 

Senator LEVIN. No, just the business—I guess you call it the 

business case. 

Ms. STIFF. OK. On a business case, taxpayers are entitled to receive two notices with an attempt to collect, and let me add that 

80 percent of taxpayers actually self-correct through that notice 

stream. And each of those notices offer up to about 45 days, so you 

quickly accrue into a period of weeks to let taxpayers resolve that 

debt. And it works because 80 percent of them participate. 

Senator LEVIN. So then it is two 45-day periods, so that is about 

12 to 13 weeks. 

Ms. STIFF. Right. 

Senator LEVIN. So at the end of the 13 weeks, about 20 percent 

typically have not responded; 80 percent have responded. That is 

worth doing, obviously. Then why not an automatic lien for the 20 

percent? 

Ms. STIFF. There are a couple of instances where our practices 

provide for, if taxpayers get to that point in the process and there 

is a dispute over whether or not the liability is correct or whether 

the amount of the liability is in question—— 

Senator LEVIN. Putting those aside. 

Ms. STIFF. OK. Taxpayers are entitled to due process. In other 

instances, there is another exception where taxpayers are actually 

in the process of securing financing to pay off the debt. 

Senator LEVIN. OK. What does that leave left? 

Ms. STIFF. I don’t know what the number is that is left—— 

Senator LEVIN. Well, 10 or 15 percent, would you guess? 

Ms. STIFF. Let me bottom-line it. I agree with you that in those 

instances, once we have exhausted those two exceptions, we should 

be looking to apply the lien. 

Senator LEVIN. And how many weeks would you estimate it 

takes to exhaust those two exceptions? A month? Two months? 

Ms. STIFF. Depending on the—— 

Senator LEVIN. What should your target be? You have got to 

have targets here? What is your target? 

Ms. STIFF. I don’t know that I could give you a number of days, 

but certainly I would expect that once we have made contact with 

the taxpayer, we make a request for financial information to help 

us make the assessment. We provide taxpayers an opportunity to 

get that information, provide it back. We work with them. In some 

12 

instances, 30 days might be adequate. In other instances, taxpayers with complex financial information may need 90 days. But 

I think the important thing is at the point where we have determined that they are no longer acting in good faith with us, that is 

the point when we need to be applying that lien. And that is sooner 

than we are doing it today in many instances. 

Senator LEVIN. All right. So at the point when you have made 

that determination, which you should begin to make that determination, would you agree immediately after those two 45-day periods are over? Is it 30 days or 45? 

Ms. STIFF. They get the notice process, and then we contact them 

and start soliciting their financial information. Once we have 

ascertained that either the information they have leads us to believe that filing the lien is correct. 

Senator LEVIN. OK. 

Ms. STIFF. We should do it. 

Senator LEVIN. And, on the average, should that take 2 months 

more? Does that sound about right on the average? Give me some 

number. 

Ms. STIFF. Sir, I don’t have a number. 

Senator LEVIN. A range. How about 30 to 90 days? 

Ms. STIFF. I will say that I would like to think that in 30 to 90 

days that taxpayers would have had an opportunity to provide the 

information to us that they need to. 

Senator LEVIN. All right. And then you agree that the lien should 

automatically be filed. 

Ms. STIFF. I don’t know that I can say in every instance because 

it will be fact and circumstance driven. But as a general rule, I 

would expect that we would take the action at that time. 

Senator LEVIN. And when you file a lien, do you have to have a 

precise number of dollars on that lien? 

Ms. STIFF. Yes. 

Senator LEVIN. There has to be a precise number of dollars 

on—— 

Ms. STIFF. No. I think the lien is on the property, and it is for 

the amount that is owed the government. 

Senator LEVIN. But it has to be for a specific amount? It cannot 

be for a range here? 

Ms. STIFF. It is a specific amount on the lien. 

Senator LEVIN. All right. GAO has found that tax liens were not 

filed at any point against these businesses with unpaid payroll 

taxes in over 30 percent of all payroll tax cases assigned to the 

field for collection effort. And we have introduced a bill called the 

Tax Lien Simplification Act, S. 1124, which would create a centralized electronic registry that would be more efficient, less burdensome. And according to estimates provided by the IRS itself, taxpayers would save about $570 million over 10 years just from the 

simplification, the efficiency of an electronic system instead of what 

you do now. 

Do you believe that the creation of that electronic system would 

help raise the percentage of cases in which liens are filed? Ms. 

Stiff, do you want to start? 

13 

Ms. STIFF. Sure. I don’t know that the creation of the system 

itself will increase the number of liens, but I think it certainly will 

enable and facilitate our ability to do it. 

Senator LEVIN. Mr. Sebastian. 

Mr. SEBASTIAN. I believe it expedites the process and could result 

in an increase in the number of lien filings. Also very important, 

it may address an issue, a longstanding issue GAO has on the back 

end of the process. When taxpayers have actually resolved their tax 

debt, it may lead to more timely release of those tax liens. So it 

really serves two purposes. 

Senator LEVIN. Now, is the Treasury aware that the IRS has es- timated that our tax lien bill would save the taxpayers $570 million just due to lower administrative costs, Commissioner Stiff? Are 

they aware of the fact that you have made that estimate? 

Ms. STIFF. I don’t know that they are, and I have to say that I 

actually have not seen all those numbers myself. I believe those 

numbers were estimates that were done sometime back when this 

was a gleam in someone’s eye. But I do believe that there is definitely cost savings to be had and would want an opportunity to update those. 

Senator LEVIN. Well, would you make the Treasury aware? 

Ms. STIFF. Yes, sir. 

Senator LEVIN. And would you let us know what you tell them 

in terms of your estimate? 

Ms. STIFF. Yes, sir. 

Senator LEVIN. The IRS has told the Subcommittee also that if 

the tax lien bill were enacted, it would free up a couple hundred 

persons from the Tax Lien Division to do other tax collection work. 

Are you familiar with that estimate that the IRS has given our 

Subcommittee? 

Ms. STIFF. No, sir, I have not seen that myself. But we do have 

a group of people that are dedicated to this full-time, and I have 

no doubt that with the implementation of new technology, those 

numbers might be less than they are today. 

Senator LEVIN. Has the IRS taken a position on our bill? 

Ms. STIFF. As you know, the IRS does not take a position on policy or on legislation. That is the role of the Treasury. 

Senator LEVIN. Do you ever make a recommendation to the 

Treasury about policy? 

Ms. STIFF. Let me say this, that we appreciate the work of your 

staff on putting forward this proposal. We find it thoughtful, and 

we actually would like the opportunity to flesh it out a little bit 

more with you and the staff, because there are a number of administrability issues, one being that it would require appropriated 

funds for funding. Second, it is going to take time to build. Three, 

there are a number of issues of State law, State rights, State revenue streams, I think security, identity theft protection issues. And 

so we welcome the opportunity to talk through with your folks how 

to address those administrability issues. 

Senator LEVIN. OK. And, Mr. Sebastian, have you looked at our 

bill? 

Mr. SEBASTIAN. We have read through the bill, and I cannot give 

you a comprehensive analysis, but on the surface, it appears to resolve several issues. As I just indicated, I think it would streamline 

14 

the lien process of assigning liens. It might also help deal with 

some problems IRS has experienced over the years on the back 

end, and that is releasing tax liens. 

Senator LEVIN. One of you—I think, Ms. Stiff, you talked about 

using electronic capability a lot more than you use now in terms 

of using your lien process, which is obviously not used to its fullest 

extent and it is complicated. You have got thousands of different 

jurisdictions that you have got to figure out. So this is a way of 

using an electronic capability that is not now being used, and I 

would hope that you could let us know within 30 days, if you 

would, what suggested changes you would make in the language to 

address any problems that you see? 

Ms. STIFF. OK. We will work with the Department to do that. 

Senator LEVIN. Thank you. Senator Coleman. 

Senator COLEMAN. Thank you, Mr. Chairman. 

Mr. Sebastian, if I can ask that question about the scope of the 

problem, we are talking about $58 billion, I think I noted in my 

opening statement. That is based on reported income. We have a 

$300 billion tax gap based on reported income. Do we have any estimates on the size of the actual tax gap? 

Mr. SEBASTIAN. You mean amounts not currently on—— 

Senator COLEMAN. Yes, is there any way to figure out what we 

are really—what the Treasury is really losing here? 

Mr. SEBASTIAN. Well, the IRS has estimated, based on a study done several years ago, that the gross tax gap is about $345 billion, 

and when all is said and done, their enforcement efforts collect 

about, I think, $55 billion of that, which leaves a net of maybe 

$290 billion. 

In looking at some of the detail behind that study, we have iden- tified a minimum of about $15 billion annually attributed to payroll 

taxes, and I am not including self-employed here because the number would grow to maybe $54 billion. But just with respect to payroll taxes, employee withholding, about $15 billion annually that is 

included in that estimate. 

Now, some portion of that may ultimately be identified by the 

IRS through its various enforcement programs, including matching 

return information with W–2s, etc., and some small portion of that 

may ultimately be collected. But roughly $15 billion is what the 

IRS would estimate annually in payroll taxes associated with the 

tax gap. 

I would also add that in looking at some of the data on IRS’ inventory over the years, it looks as though they add roughly $5 to 

$5.5 billion in new unpaid payroll taxes to the inventory of delinquent tax debt each year. 

Senator COLEMAN. Let me step back. If we did nothing, if we 

made no changes, what would happen to the outstanding payroll 

tax debt? 

Mr. SEBASTIAN. My concern is that it would ultimately grow and, 

to some extent, be offset by amounts that hit their statutory expiration date and are written off. So 9 years ago, we were looking at 

a balance of $49 billion. Now we are looking at a balance of $58 

billion, roughly $5.5 billion being added into the inventory annually, and roughly $4 billion and growing at $5 billion and even $6 

billion being written off over the next several years. 

15 

Senator COLEMAN. Are we also seeing larger amounts that have 

to be transferred from the general revenue fund into the Social Security and Medicare funds because of the failure to pay these 

taxes? 

Mr. SEBASTIAN. To the extent that the balance grows, yes, you 

would see more in the way of transfers from the general fund to 

subsidize the Social Security and Medicare trust funds. 

Senator COLEMAN. Let me turn to you, Ms. Stiff. And, by the 

way, first, I appreciate the good relationship we have had with the 

IRS on so many of these matters, and I appreciate your candor, 

both in discussing the historical perspective and some of the concerns where the IRS did step back from enforcement. We understand that. And the concern is that as we look at these egregious 

cases, is there a line that needs to be drawn? 

Let me first go back to the filing of a lien. The report indicated that $9 billion, I believe, was in the queue—in other words, there 

is $9 billion in debt that is kind of lined up awaiting action. Now, 

those cases that are assigned to revenue agents, are those past the 

point where we have sent a notice and it has been determined that 

there is some debt out there? Where does that fit in with Chairman 

Levin’s—he talked about the timeline of notice, and then you indicated that some of those cases have perhaps some specific concerns 

that would have us not move forward. When something is assigned, 

what is the determination point you assign something over to an 

agent? 

Ms. STIFF. Well, I think you have hit the nail on the head. These 

cases that are sitting there in the queue, in all candor, I would say 

are the cases, as GAO reported, that I think we have got to in the 

coming weeks identify actions. We can get those assessed and liens 

filed whether or not they end up in the hands of a RO. So that we 

can protect the government’s interest during whatever period they 

are there. We are going to be back with some steps that we are 

talking through right now as to how to address those cases in the 

queue that both you and the Chairman have brought up here 

today. 

Senator COLEMAN. I appreciate that. That is what struck me, that $9 billion in the queue, obviously these are cases in which 

folks are not making payments, they are going to be assigned to 

an agent. You have a backlog, and there are other issues that we 

have to address in terms of funding enforcement, and this Subcommittee has been very supportive of that. But I appreciate the 

candor, it would appear that the first thing you want to do is protect the government’s interest. That is what the lien does. And 

when you do that, then you have time to do some other things. So 

I appreciate the focus on that. 

I am not sure if this is for Mr. Sebastian or Ms. Stiff. Can I go 

back to other cases? One of the things we looked at was the Financial Management Service, the levying process. It appears—and this 

goes back to some earlier reports that have been done, I think perhaps in 1999, there were cases in which the government paid over 

$211 million annually to folks who owed $2 billion in outstanding 

trust fund recovery penalties. In other words, we have folks who 

are identified as having trust fund recovery penalties, but at the 

same time, they are getting Federal payments along the way. Have 

16 

we looked at that recently? Is that still a possibility to use the levying process with the FMS to ensure that we are getting a return 

from folks who have trust fund penalty obligations? 

Mr. SEBASTIAN. We did not look at that as part of this study. In 

previous work that we have done for this Subcommittee, looking at 

contractors with tax debt, we have looked into that whole issue of 

how much of IRS tax debt actually gets into the levy program and 

is turned on and is then subject to levy of Federal payments. 

I have some conflicting information, quite frankly, on whether or 

not individuals that have been assessed a trust fund recovery penalty are or are not included. But what I will point out is a significant number of businesses do not have associated trust fund recoveries. So to the extent that the IRS has not assessed responsible 

businesses and officers, those accounts would not be subject to levy 

in the first place. 

Senator COLEMAN. So we start off first with, I think, the need to 

look at moving on a more accelerated basis with the lien process, 

to at least protect the government’s interest, and then the next 

focus would be at what point can we move more aggressively on the 

trust fund recovery process. And then if you do that, there is another step to look at, and that is to say are there, in fact, payments 

being made to these folks that we could then use for the levy process. 

So, Ms. Stiff, I appreciate your forward-looking approach here to 

say you have a task force, you have identified some of the concerns 

the Chairman and I have raised. For me, it becomes pretty logical: 

Protect the government’s interest and move more effectively to be 

in a position to levy. We have not even talked about some of the 

stronger actions you could take such as the injunctive process. 

There are some very strong actions here that I would think in the 

most egregious cases may be warranted. The report indicates that 

those are very rarely used. Very rarely did you take the toughest 

steps. And we are dealing with folks who may be involved in criminal activity, 10 years of simply ignoring their tax responsibilities, 

records of using these funds for personal gain, personal use. So I 

would hope you would take another look at that. 

Perhaps this is too big a question to respond in the time I have, 

but is there a possibility of drawing a bright line about when getting voluntary compliance ceases and more aggressive action is 

needed—or is this something that requires discretion plus how do 

we get to that point where we move from voluntary to more aggressive, more forceful, more dictated, more mandated action on the 

part of the IRS? 

Ms. STIFF. I don’t think that over our history that we have arrived at a bright-light test that applies in each and every instance. 

But one of the things I commit to you is that is an area that the 

task force is going to look at, because even if you cannot have a 

broad, sweeping rule that applies to everything, it would seem that 

we can begin testing application of some rules and see where they 

work and what the outcome is for both the taxpayers and the government, and then where it works, apply it more broadly. So we 

are going to be doing some work in that area. 

Senator COLEMAN. Mr. Chairman, could I ask just Mr. Sebastian 

to respond? 

17 

Senator LEVIN. Sure. 

Senator COLEMAN. Mr. Sebastian, would you respond to that, 

please? 

Mr. SEBASTIAN. I would tend to agree with what I just heard. 

Right now, it would be hard to tell what is the fine line. Clearly, 

when we get to 40, 50 quarters of outstanding tax debt, these cases 

have gone on much too long. Whether the magic number is 10, 15, 

20 quarters, I don’t know. I think that is information that the IRS 

could actually look at through some detailed analysis and then set 

up what may be the rule with exceptions that should apply in certain cases. 

Senator COLEMAN. Thank you, Mr. Sebastian. 

Senator LEVIN. Thank you. Senator McCaskill. 

OPENING STATEMENT OF SENATOR MCCASKILL 

Senator MCCASKILL. Thank you, Mr. Chairman. 

I am going to follow up a little bit on Senator Coleman’s line of 

questioning. We have had a Treasury Inspector General for Tax 

Administration study from 8 years ago, another study in 2005 that 

basically says that voluntary compliance is not working. We are 

here today because voluntary compliance is not working. This problem is not getting better. It is getting worse. 

I understand a little bit about deterrence. There are crimes you 

can deter, and there are crimes you cannot deter. There are many 

crimes that, even if you do the toughest prosecutions imaginable, 

people are still going to go and commit those crimes. I think sometimes politicians like to think deterrence works in every instance 

if you have tough criminal penalties. 

But I will tell you where deterrence does work. It works in the 

business community. When businesspeople see other businesspeople on the courthouse steps on the evening news, it works. And 

I would like Mr. Sebastian and Ms. Stiff to discuss the failure of 

any meaningful criminal prosecution. If someone has gotten notice 

after notice after notice and they continue to engage in this behavior for years, the reason they are doing it is they know nothing is 

going to happen to them. And I don’t know why we need a task 

force, honestly. I mean, if you have gotten notice and you have not 

paid your payroll taxes and you have gotten notices every quarter 

for 2 or 3 years, we need a task force to tell us that we need to 

put people in jail for that? They are purposely not paying what 

they owe. It is so unfair to people who pay taxes. 

Mr. Sebastian, what did your report specifically say about the 

likelihood of criminal prosecution in any of these cases? 

Mr. SEBASTIAN. We did not do a detailed review of that looking 

at past cases. I do know that the IRS has prosecuted payroll tax 

cases, and the Deputy Commissioner could probably elaborate on 

that. I can tell you that in discussions that we have had with revenue officers—and this really mirrors what we found in 1998 when 

we did the earlier study. The IRS and, in particular, the Criminal 

Investigation Division and the Department of Justice are somewhat 

reluctant to pursue prosecution for employment tax offenses. They 

cite the process is very labor intensive, laborious. There is a tremendous amount of burden on the part of the IRS to actually proVerDate Aug 31 2005 13:58 Dec 04, 2008 Jkt 044584 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 P:\DOCS\44584.TXT SAFFAIRS PsN: PAT
18 

vide the Department of Justice with the information they need to 

successfully prosecute a case. 

Again, these are discussions that we had with revenue officers, 

but it has served as a deterrent to moving forward, taking more aggressive enforcement action in a number of cases. 

Senator MCCASKILL. Could you address that in terms of the likelihood of criminal prosecution for repeat offenders who have been 

noticed and noticed and noticed and obviously voluntary is not in 

their dictionary? 

Ms. STIFF. Well, first—and I know that the three of you are familiar with that—the bar for criminal prosecution is certainly a 

higher bar than what we have in the civil arena. And many of the 

cases outlined in this report actually would be very difficult for the 

Department of Justice to prosecute successfully because many of 

these taxpayers are not out—they are part in, part out. They come 

in, they make good-faith efforts for a couple of years, and then it 

recurs again. And so there are a number of difficulties, I believe, 

for the Justice Department in trying to prosecute that. 

Having said that, in the last 4 years our criminal investigations 

in the employment tax arena have increased by 55 percent. We 

made a conscious effort in 2003, after the drawdown of enforcement 

that occurred after RRA 1998 to work with the Justice Department 

and to work with our criminal investigators and our fraud specialists to reinvigorate that program and the referrals. And I think I 

outlined in my testimony several strong examples of where we have 

been effective and successful in actually getting criminal prosecutions and having offenders actually serve time. 

Senator MCCASKILL. And how many criminal prosecutions occurred last year for failure to pay payroll taxes in the whole country? 

Ms. STIFF. I do not have the number right off the top of my head. 

I want to say roughly 200. 

Senator MCCASKILL. So we are talking about an average of four 

cases per State? 

Ms. STIFF. It probably was not that, but yes. 

Senator MCCASKILL. And how many offenders do you think we 

have in the country right now? 

Ms. STIFF. I do not have that number. I know that the GAO report says that we have 1.6 million businesses known to us that we 

are talking about here today. 

Senator MCCASKILL. Well, I think the standard in the criminal 

law here is ‘‘knowingly,’’ and having a great deal of experience 

bringing criminal cases in my life, you have to convince 12 people 

beyond a reasonable doubt that somebody did not pay the money 

knowingly. And, trust me, there are going to be taxpayers on that 

jury. They are going to be offended because they are paying their 

taxes every year. A lot of small businesspeople at their own—they 

are cutting their take of the business in order to comply with the 

law. 

I just have a hard time—I run into this all the time, where people say, well, what you have to do to bring a criminal case at Justice, or maybe what we have to do is ask some questions at the 

Justice Department as to what they are requiring in order to bring 

a criminal case. But if somebody walked into my office when I was 

19 

a prosecutor and said, ‘‘Here is a stack of letters that this businessman signed for or businesswoman signed for, quarter after quarter 

after quarter—I am assuming a lot of these are return receipt requested, correct? These notifications? 

Ms. STIFF. I actually do not know the answer to that. I would 

have to check. 

Senator MCCASKILL. I am assuming bad news from the IRS is 

usually return receipt requested. Usually that green card is something that comes with it. And you have a pile of those in front of 

a jury and say how many times this employer has been notified to 

pay their payroll taxes and they failed to do it again? That is knowingly. It is not complicated. It is not hard. 

I just think that we need to really stay focused on criminal prosecution for repeat offenders. And I think you would see a miraculous turnaround in this country. I think they all know out there 

that when it comes to the end of the month and they cannot pay 

anything, the one that they can get away with is not paying the 

IRS. And I think that is why they do it. I do not think it is that 

complicated. 

This task force that you are referring to, how long do you think 

the task force is going to take to come up with recommendations? 

Ms. STIFF. Well, I suspect that within 90 days we will have a 

suite of recommendations. I suspect that sooner than that we will 

begin doing some of the more obvious and easier things to do. 

But on the criminal investigation side, I mean, we do not disagree. We believe we need to have a strong criminal investigation 

presence where the circumstances warrant that. 

Senator MCCASKILL. Well, I think repeat offenders, that is the 

circumstance. And I think the bright line is just deciding if you do 

it for longer than 2 years, you are up. And you know what is going 

to happen? These people are not going to take a chance at rolling 

the dice in front of a jury. They are going to pay for probation. That 

is what happens in the criminal justice system all the time with 

white-collar crime. They pay for probation. But that is better than 

them not paying. 

I think that the efficacy of taking a much more aggressive approach on criminal prosecution is going to make a real difference 

in this area. And I guess, Mr. Sebastian, my frustration is: How 

many times has there been a report issued about this subject? And 

how many times has something actually happened meaningful to 

change things? 

Mr. SEBASTIAN. I can only say I have been involved in multiple 

reports over the last 10 years looking at payroll taxes, either as the 

subject or peripherally. And you are absolutely right. We continue 

to see the same thing. We continue to see multiple offenders flagrantly violating the tax laws. 

Senator MCCASKILL. I guess we can go back here another 10 

years, another five or six reports, or we can get busy and try to put 

some people in jail. And I think it will work, Mr. Chairman. Thank 

you. 

Senator LEVIN. Thank you. We have focused also—in addition to 

what Senator McCaskill has talked about in terms of criminal enforcement—we have also talked about a lien system which is functional, which is easily worked, and how much money would be 

20 

1The chart referred to appears as an attachment to the GAO Statement in the Appendix on 

page 56. 

saved by doing that. And we would ask you if you would take a 

look—and I had the staff give you copies of this analysis. 

This analysis was prepared by the IRS at our request. We asked 

the IRS to take a look at an electronic system for lien filing. If you 

look at the right, the bottom at the right over the 10-year period, 

the cost of the current system is $679 million, and the cost of doing 

this electronically would be $107 million. That is where our figure 

comes from. Are you familiar with that, Ms. Stiff? 

Ms. STIFF. I cannot say that I have seen this before. 

Senator LEVIN. I am kind of surprised. 

Ms. STIFF. I have no doubt that my staff and folks worked on 

this, and I do not challenge that, but I have not personally had a 

chance to review this. 

Senator LEVIN. Well, I hope you will take a look at this. 

Ms. STIFF. I certainly will. 

Senator LEVIN. Now, there was a chart that the staff put up, increases in number of businesses with multiple payroll tax debts. I 

am wondering if somebody could put that chart up again.1

The number of businesses with unpaid payroll taxes has declined 

although the number of payroll taxes owing has increased. The decrease in the number of businesses is down from 1.8 to 1.6 million—that is not on the chart. That is the number we have received. I guess the GAO can confirm that. 

Mr. SEBASTIAN. That is correct. 

Senator LEVIN. And yet we see on this chart that there is a vast 

increase in the number of businesses with over 5 years of debt, and 

even a bigger percentage increase in the number of businesses with 

over 10 years of debt. That is a striking chart to me.1

What is the explanation for that? Why don’t we go after the ones 

that have the longest owing debt? 

Ms. STIFF. Well, I think that collection experts, private sector 

and public sector, maintain that the earlier you get to the debt, the 

greater the likelihood of recovering the amounts owed. 

Senator LEVIN. Sure. 

Ms. STIFF. Or a higher percent of it. 

Senator LEVIN. I can understand that. What I am intrigued by 

is the percentage has gone up. The numbers have gone up. Do you 

see what I am saying? 

Ms. STIFF. Yes, sir. And I do not know that I can nail the numbers, but basically, as I said in my oral statement, we had a period 

from 1998 to 2002 where the number of delinquent accounts that 

we touched decreased significantly. 

Senator LEVIN. All right. Does the GAO have the numbers for 

2002 to 2007? Do you happen to have those numbers handy? 

Mr. SEBASTIAN. In terms of? 

Senator LEVIN. If we looked at just 2002, what the numbers were 

that had over 5 years of debt, instead of 1998? 

Mr. SEBASTIAN. No, I do not. It is a snapshot of a certain point 

in time. 

Senator LEVIN. Would you just for the record give us a different 

snapshot to take care of the point that Ms. Stiff is making? 

21 

Mr. SEBASTIAN. We will do what we can, but the reason that I 

hesitate on that is because, as accounts hit their statutory expiration date and fall off, they are no longer in the inventory. So to be 

able to construct this analysis, I would need to know what the inventory was comprised of in 2002, 2003, and 2004. We may not be 

able to get that information. We will do what we can. 

Senator LEVIN. Fine. But you do know what it was in 1998. 

Mr. SEBASTIAN. Yes, and that was based on the fact we had done 

this analysis and reported out in 1998. 

Senator LEVIN. Got you. If it is not too much trouble, if you could 

get that for us, it would be helpful. 

Now, Senator Coleman read from the top of page 32 of the GAO 

report, and I want to pursue that: ‘‘Our analysis found that for the 

$9 billion of payroll tax cases in the queue awaiting assignment as 

of September 30, 2007, over 80 percent of the cases did not have 

a lien filed.’’ And I am trying to understand why it should not be 

automatic at that point. Why should not a lien be automatically 

filed if somebody is in the queue awaiting assignment? 

Ms. STIFF. Well, I think that was the question that I answered 

earlier, that we actually—I agree that queue is a weakness in the 

system and that will be one of the first areas that we are looking 

at, is to see what analysis can be done there and which cases the 

lien filing would be appropriate. 

Senator LEVIN. Automatically. If you are assigned and you are 

waiting in a queue, why would that not automatically result in a 

lien? That is my question. 

Ms. STIFF. Well, automatically, I guess it may be semantics here. 

We do not have an automatic lien-filing system, so someone has got 

to—— 

Senator LEVIN. Why should it not be automatic? 

Ms. STIFF. You mean the decision to apply the lien. 

Senator LEVIN. Yes. If someone is in a queue for enforcement, 

they have ignored all your notices. 

Ms. STIFF. I am agreeing with you. 

Senator LEVIN. All right. I want to just get back to the taxes 

owing issue. The taxes that we are talking about in terms of criminal enforcement are taxes which were withheld from the employee. 

Is that correct? Those are the ones that are put in trust. 

Ms. STIFF. Yes. 

Senator LEVIN. So that when we are talking criminal enforcement, it is for failure to send to the government the tax money of 

the employee that was withheld from the employee’s pay. Is that 

correct? 

Ms. STIFF. Yes. 

Senator LEVIN. It is not a felony for failing to pay your own 

taxes. It is a felony for withholding taxes from an employee and 

then not sending those to the government. 

Ms. STIFF. Yes, sir. 

Senator LEVIN. OK, because I think there could be some confusion. We do not throw people in jail in this country for failing to 

pay their taxes. It is only if there is fraud, if there is misrepresentation, or if there is a specified crime such as not sending to the 

government trust fund monies which do not belong to you. It is 

someone else’s money that is being stolen or cheated here. I get a 

22 

little nervous here when I hear about not paying your taxes resulting in criminal enforcement. And I think I am right on this. I hope 

I am. 

Ms. STIFF. Well, it is further compounded by the fact that in all 

too many cases, these individuals have little or nothing that the 

government can recover at that time. 

Senator LEVIN. I understand that. 

Ms. STIFF. They have exhausted all their finances. 

Senator LEVIN. Yes, but I am just talking about criminal law enforcement here. I want to have the record—if I am correct, which 

I hope I am. 

I would like to talk about this earned income tax credit (EITC). 

This Administration has put a great deal of emphasis on going 

after the poorer folks who are somehow or other not entitled to an 

earned income tax credit, which allegedly they have taken, and 

comparing that to the big fish who get away with not paying other 

people’s taxes which they have withheld and put in trust, and some 

of the other abuses that this Subcommittee has seen. 

How many IRS personnel are involved in the EITC delinquency 

program, do you know? 

Ms. STIFF. I do not have the number off the top of my head. 

Senator LEVIN. Do you know how that would compare to the 

number of personnel who are in the—— 

Ms. STIFF. In collection, we probably have between 8,000 and 

10,000 individuals working here, and I am guesstimating off the 

top of my head—I will get you a better number—a couple thousand 

working on the EITC. 

Senator LEVIN. The EITC, would you get us those numbers? 

Ms. STIFF. Sure thing. 

Senator LEVIN. Thanks. Senator Coleman. 

Senator COLEMAN. Thank you, Mr. Chairman. I want to just follow up on the trust fund recovery program, the idea that criminal 

charges were being focused on monies that you were supposed to 

forward, held in trust, and the issue I talked about earlier, monies 

from the general fund coming in at the end of the year, that is for 

the trust fund recovery program, right? In other words, we have 

got to take general fund money to pay for what employers do not 

send in. Is that correct, Mr. Sebastian? 

Mr. SEBASTIAN. That is correct. What they withhold from employees’ paychecks and do not remit to the Federal Government. 

Senator COLEMAN. And when we are talking about levy programs 

and liens, we are talking about going after the TFRP funds? What 

about the monies that you are owed? Any levies apply to that? Do 

the liens apply to that, or we are just dealing with trust fund recovery money? 

Ms. STIFF. No, levies and liens apply to individual income taxes 

as well when there is a delinquency and we believe it is appropriate. 

Senator COLEMAN. I talked before about whether we would be referring any cases to the FMS for levying. Do you know if any of 

the cases in the queue, that $9 billion, is there any referral to FMS 

for levying possibilities with those dollars? 

Ms. STIFF. All of these cases are in the FMS levy program, so if 

there is a match, the levy will be applied against them. 

23 

Senator COLEMAN. Let me just ask one question—because Senator McCaskill was talking about deterrence. One of the ways in 

which the State has found what they believe to be an effective deterrence is publishing the names of individuals who have these obligations or repeat scofflaws—again, not cases in which they are 

contesting, not cases in which there is a bankruptcy, etc., but those 

cases which establish that you have a problem here and there has 

been no response. Why doesn’t the IRS do that? 

Ms. STIFF. Any number of reasons. First of all, probably a matter 

of policy and a matter of practice, and the fact that the lien-filing 

process—I forget which one of you described earlier—is very localized and very decentralized across all States. And I do not know 

that we even have a master database. 

Senator COLEMAN. Would it be something that the IRS would 

look at, this idea of publishing names? Is that something that is 

within the realm of possibility? And if so, is it something that you 

need legislative authority to do? 

Ms. STIFF. I think we need legislation, absolutely, because we 

would probably be barred from sharing that under the current statutes. 

Senator COLEMAN. I would like you to get back to the Subcommittee with something very specific, in fact, if there is legislative authority that is needed, and also—— 

Ms. STIFF. I am confident it requires legislation. 

Senator COLEMAN. The other area where the States have been 

apparently more effective is in being able to track down dollars 

that have been shifted between financial institutions. Oftentimes, 

we see in these cases somebody emptying out one account and then 

creating another one, and it is kind of a difficult trail to follow. At 

least in the States they apparently have been able to cut that. 

Mr. Sebastian, did you track that at all? And are there specific 

things that we could be doing to be as effective on the Federal 

level? 

Mr. SEBASTIAN. Well, in fact, it is one of our recommendations 

that the IRS take a look at what some of the States are doing. I 

think we looked at maybe five States, five or six States that actually are working to better perfect their levying process, either 

through legislation or agreements with financial institutions, so 

you are not spending a tremendous amount of resources trying to 

find the bank account of a particular individual and then levying. 

That process has already been established through agreements 

with financial institutions. 

Senator COLEMAN. And, Ms. Stiff, has this been a problem for 

IRS—do you have these agreements with financial institutions? Is 

this something that the agency looks to do in order to more effectively trace where some of the dollars are? 

Ms. STIFF. We are going to be looking at everything we are doing 

and see what opportunities there are to improve. Let me just say— 

and at the risk of sounding a little bit defensive, when we characterize what the States are doing or what we are doing, I just feel 

compelled to remind that we succeed in collecting 99.8 percent of 

all employment taxes owed; over the last 10 years, IRS collected 

more than $11 trillion in payroll taxes. And so it is not as if our 

processes are not robust and rigorous in terms of getting employVerDate Aug 31 2005 13:58 Dec 04, 2008 Jkt 044584 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 P:\DOCS\44584.TXT SAFFAIRS PsN: PAT
24 

ment tax collections. I think that both the GAO and the Subcommittee have just highlighted on where the weaknesses are and 

where there is the most opportunity. 

Senator COLEMAN. And we are not arguing about that, but as 

you indicated in your testimony, when you are talking about trillions, a decimal point is a big number. 

Ms. STIFF. It is a lot. 

Senator COLEMAN. And if the States are doing something that is 

seemingly more effective, my question is simply: Is it something 

that the IRS can do? Is it something you have considered? And if 

the problem is legislative authority, we would like to know. In 

other words, if it is something that makes sense—— 

Ms. STIFF. OK. 

Senator COLEMAN [continuing]. I need to know whether you need 

more authority to do that or whether you simply refuse to do it or 

whether it is something you would like to do but you can do administratively. Again, does it make sense? Is it another tool in your arsenal? And then if it is not, you have to get back to us and say, 

Senator, we need legislative authority. If you legislate it, we are 

prepared to do it. 

Ms. STIFF. Absolutely. We will do a review of the best practices, 

look at what we are doing versus what is being done, and come 

back to you where we need assistance. 

Senator COLEMAN. And I appreciate that. Mr. Sebastian. 

Mr. SEBASTIAN. Yes, Senator Coleman, I just wanted to mention, when Ms. Stiff talks about the $1.7, $1.9 trillion, it is important 

to remember that the vast majority of taxpayers are compliant. So 

those monies, much of those monies are actually coming in almost 

on autopilot. These are compliant taxpayers. They understand. 

They make their timely tax deposits, file their returns, etc. 

I think the bigger measure would be for those that initially are 

not paying their taxes when due, how much is IRS collecting on 

those through the notice process, through its enforcement actions, 

and compare that against some of the issues that we have identified in our study. 

Senator COLEMAN. I think that is fair, and, again, I think what 

makes this so outrageous and so irritating is that the average taxpayer is doing what they should be doing. 

Mr. SEBASTIAN. Absolutely. 

Senator COLEMAN. And as a result, certainly the burden then is 

back to us to say, OK, for those scofflaws and tax cheats, we are 

going to be very aggressive to ensure that they live up to the obligations because it is an affront to the average taxpayer when they 

do not. 

Thank you, Mr. Chairman. 

Senator LEVIN. I just have a couple more questions. Going back 

to the lien issue again, in terms of the question of if the lien is 

automatic, how could some businesses then be able to pay their 

back taxes or stay in business to pay back taxes. If you made it 

automatic after a certain period of time, then it could be removed, 

obviously, if the business carries their burden of persuading one of 

your employees that removal of the lien will lead to greater collection than maintaining the lien. But at least it would create some 

pressure on that company to pay their back taxes. 

25 

Ms. STIFF. I do not disagree with that. 

Senator LEVIN. All right. Now, do you have performance measures for employees in the collection area as to how well they are 

doing that goes into their employment record? 

Ms. STIFF. OK. After RRA 1998, we were statutorily prohibited 

from the use of many of what you would consider common-sense 

kinds of collection measures in terms of how many dollars you collect, how many cases you close. But we use a variety of other types 

of measures, proxy measures to how long it takes them to do their 

cases, are they following up timely. And I think you certainly saw 

in some of these examples that was not happening as well. 

But the issue of measures in the collection arena is, frankly, very 

dicey in light of the statutory prohibitions and a risk of—I mean, 

in an area where managers particularly out in the field with revenue officers working for them, there is an abundance of caution 

and a high degree of angst. 

Senator LEVIN. Is there a clear direction as to what can be done 

and what cannot be done? 

Ms. STIFF. Yes, sir. Every year we go out and we do an annual 

reorientation, a retraining of managers and of ROs about what can 

be done. But the kinds of things that you talked about earlier are 

probably going to fall under the statutory prohibition. 

Senator LEVIN. But in terms of what can be done, clarity as to 

that, there is a clear instruction to your managers as to what performance criteria, can be used? 

Ms. STIFF. Yes, sir. 

Senator LEVIN. All right. Any other questions? 

Senator COLEMAN. I have nothing further, Mr. Chairman. 

Senator LEVIN. We appreciate again your testimony. It has been 

very helpful. 

Ms. STIFF. Thank you. 

Mr. SEBASTIAN. Thank you. 

Senator COLEMAN. Thank you. 

Senator LEVIN. The hearing is adjourned. 

[Whereupon, at 10:25 a.m., the Subcommittee was adjourned.] 

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