Medicare: Thousands of Medicare Providers Abuse the Federal Tax System
Published: 2008-06-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Under the Medicare program, the Centers for Medicare & Medicaid Services (CMS) and its contractors paid over $400 billion in Medicare benefits in calendar year 2006. GAO was asked to determine if Medicare providers have unpaid federal taxes and, if so, to (1) determine the magnitude of such debts, (2) identify examples of Medicare providers that have engaged in abusive or potentially criminal activities, and (3) determine whether CMS prevents delinquent taxpayers from enrolling in Medicare or levies payments to pay taxes. To determine amount of unpaid taxes owed by Medicare providers, GAO compared claim payment data from CMS and tax debt data from the Internal Revenue Service (IRS). In addition, GAO reviewed policies, procedures, and regulations related to Medicare. GAO also performed additional investigative activities.
section_title: What GAO Found
paragraphs: Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns. We selected 25 Medicare providers with significant tax debt for more in-depth investigation of the extent and nature of any abusive or potentially criminal activity. Our investigation found abusive and potentially criminal activity, including failure to remit to IRS payroll taxes withheld from their employees. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some providers received Medicare payments even though they had quality-of-care issues, such as losing track of a patient in their care who has not been found. CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors. IRS can continuously levy up to 15 percent of each payment made to a federal payee--for example, a Medicare hospital--until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes.

section_title: Letter
paragraphs: This report continues a body of work that has identified federal  contractors, grant recipients, and exempt organizations with unpaid  federal taxes. In hearings held by this subcommittee, we testified that  Department of Defense (DOD), federal civilian agency and General  Services Administration (GSA) contractors abused the federal tax system  with little consequence. Because of the significance of the issues raised  during these hearings, you asked us to provide additional information  about whether health care providers who were paid by the government for  Medicaid and Medicare-related services were engaged in similar tax  abuses and to provide recommendations to increase the effectiveness and  efficiency of tax revenue collections from federal contractors under the  Federal Payment Levy Program.
This is the third in a series of reports and testimonies to respond to your  request. In March 2007, we testified that Medicare physicians, health  professionals, and suppliers paid under the Supplemental Medical  Insurance program, also known as Medicare Part B, had abused the  federal tax system while doing business with the federal government. In  November 2007, we testified and reported on Medicaid health care  providers from seven selected states that also abused the federal tax  system. This report will cover all Medicare health care providers that have  abused the federal tax system, expanding on our March 2007 testimony.
The specific objectives of this forensic audit and related investigations  were to determine, to the extent possible, if Medicare providers have  unpaid federal taxes and, if so, to (1) determine the magnitude of tax debts  owed (2) identify examples of Medicare providers involved in abusive or  potentially criminal activities and (3) determine whether the Centers for  Medicare & Medicaid Services (CMS) prevents Medicare providers with  tax problems from enrolling in Medicare or levies Medicare payments to  pay tax debts.
To identify the magnitude of Medicare providers with unpaid federal taxes,  we obtained and analyzed the Internal Revenue Service (IRS) tax debt data  as of September 30, 2006, and obtained and analyzed the CMS database of  Medicare-approved claims and payments paid to Medicare providers for  calendar year 2006. We matched the list of Medicare providers with IRS  tax debts using taxpayer identification numbers (TIN). To identify specific  instances of abusive and potentially criminal activities by selected  Medicare providers and their owners, we performed investigative work on  a nonrepresentative selection of 25 Medicare providers. We selected these  25 providers using primarily the amount of tax debt and number of  delinquent tax periods as selection factors. For these 25 cases, we  reviewed copies of automated tax transcripts and other tax records (for  example, revenue officers’ notes) and performed additional searches of  criminal, financial, health care, and public records. To determine whether  CMS prevents health care providers from enrolling in Medicare or levies  Medicare payments to pay taxes, we examined the CMS regulations,  policies, and procedures for conducting determinations in the enrollment  approval process. We also interviewed officials from CMS, two large CMS  Medicare contractors, IRS, and the Department of the Treasury’s  (Treasury) Financial Management Service (FMS) concerning any barriers  to levying Medicare payments. To determine the potential levy collections  on Medicare payments during calendar year 2006, we used 15 percent of  the total paid claim or total tax debt amount reported to the continuous  levy program, whichever was less. A more detailed description of the  scope and methodology related to our audit and investigative work  supporting this report is provided in appendix I.
We conducted this forensic audit and related investigations from July 2007  to June 2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. We performed our  investigative work in accordance with standards prescribed by the  President’s Council on Integrity and Efficiency.
subsections: section_title: Background
paragraphs: Authorized by the Title XVIII of the Social Security Act, Medicare is the  nation’s largest health insurance program. In 2006, Medicare provided  medical services to 43.2 million beneficiaries and paid claims totaling   $402 billion in 2006. CMS, an operating division of the Department of  Health and Human Services (HHS), administers the Medicare program.  Medicare benefits are divided into four parts: (1) Part A consists of  inpatient hospital care, skilled nursing facility care, qualified home health  care, and hospice care; (2) Part B includes physicians’ services, outpatient  hospital services, treatment for end-stage renal disease, laboratory  services, durable medical equipment, certain elements of home health  care, and other medical services and supplies; (3) Part C, the Medicare  Advantage program, includes traditional health maintenance  organizations, preferred provider organizations, and private fee-for-service  plans; and (4) Part D offers beneficiaries an outpatient prescription drug  benefit through private plans that contract with Medicare. For Medicare  Parts A and B, also known as fee-for-service, CMS Medicare contractors  are responsible for screening Medicare providers prior to enrollment into  the Medicare program. Medicare contractors also process and pay  Medicare fee-for-service claims and are reimbursed by CMS through the  Medicare Trust Fund.
section_title: Magnitude of Unpaid Taxes of Medicare Providers
paragraphs: Our analysis found that over 27,000 Medicare providers had over $2 billion  in unpaid federal taxes as of September 30, 2006. This represented over 6  percent of the approximately 436,000 Medicare providers paid during  calendar year 2006. This represented over 6 percent of the approximately  436,000 Medicare providers paid during calendar year 2006. The amount of  unpaid federal taxes we identified among Medicare providers was  substantially understated because (1) we intentionally limited our scope to  providers with agreed-to federal tax debt for tax periods prior to 2006;   (2) the IRS taxpayer data reflected only the amount of unpaid taxes either  reported by the taxpayer on a tax return or assessed by IRS through its  various enforcement programs and thus the unpaid tax debt amount did  not include entities that did not file tax returns or underreported their  income; and (3) our analysis does not include Medicare providers that  owed taxes under separate TINs from those that received the Medicare  payments.
subsections: section_title: Characteristics of Medicare Providers’ Unpaid Federal Taxes
paragraphs: As shown in figure 1, 73 percent of the approximately $2 billion in unpaid  taxes comprised individual income and payroll taxes. The other 27 percent  of taxes included corporate income, excise, unemployment, and other  types of taxes.
As shown in figure 1, Medicare providers owed $896 million in payroll  taxes. Employers are subject to civil and criminal penalties if they do not  remit payroll taxes to the federal government. When an employer  withholds taxes from an employee’s wages, the employer is deemed to  have a responsibility to hold these amounts “in trust” for the federal  government until the employer makes a federal tax deposit in that amount.  When these withheld amounts are not forwarded to the federal  government, the employer is liable for these amounts as well as the  employer’s matching Federal Insurance Contribution Act contributions for  Social Security and Medicare. Individuals within the business (e.g.,  corporate officers) may be held personally liable for the withheld amounts  not forwarded and assessed a civil monetary penalty known as a trust  fund recovery penalty (TFRP). Failure to remit payroll taxes can also be a  criminal felony offense punishable by imprisonment of not more than 5  years, while the failure to properly segregate payroll taxes can be a  criminal misdemeanor offense punishable by imprisonment of up to a  year.
The law imposes no penalties on an employee for the employer’s failure to  remit payroll taxes since the employer is responsible for submitting the  amounts withheld. The Social Security and Medicare trust funds are  subsidized or made whole for unpaid payroll taxes by the general fund.  Thus, personal income taxes, corporate income taxes, and other  government revenues are used to pay for these shortfalls to the Social  Security and Medicare trust funds.
A substantial amount of the unpaid federal taxes shown in IRS records  owed by Medicare providers had been outstanding for several years. As  reflected in figure 2, about 54 percent of the $2 billion in unpaid taxes  were for tax periods from calendar year 2000 through calendar year 2004,  and approximately 32 percent of the unpaid taxes were for tax periods  prior to calendar year 2000.
Our previous work has shown that as unpaid taxes age, the likelihood of  collecting all or a portion of the amounts owed decreases. This is, in part,  because of the continued accrual of interest and penalties on the  outstanding tax debt, which, over time, can dwarf the original tax  obligation. The amount of unpaid federal taxes reported above does not  include all tax debts owed by Medicare providers because of statutory  provisions that give IRS a finite period under which it can seek to collect  unpaid taxes. Generally, there is a 10-year statutory collection period  beyond which IRS is prohibited from attempting to collect tax debt.  Consequently, if the Medicare providers owe federal taxes beyond the 10- year statutory collection period, the older tax debt may have been  removed from IRS’s records. We were unable to determine the amount of  tax debt that had been removed.
As shown in figure 3, Medicare providers did not disclose to IRS a  significant amount of taxes owed instead the taxes were discovered  through IRS examination or investigation. Specifically, $784 million, or  about 39 percent of the $2 billion in unpaid taxes, was assessed by an IRS  examination or investigation. Medicare providers did report about   $857 million of the tax debt amount. These amounts were generally  reported on tax returns filed but containing a balance due.
section_title: Unpaid Federal Taxes of Medicare Providers Are Understated
paragraphs: Although the over $2 billion in unpaid federal taxes owed by Medicare  providers as of September 30, 2006, is a significant amount, it likely  substantially understates the full extent of unpaid taxes owed by these or  other businesses and individuals. The IRS tax database reflected only the  amount of unpaid federal taxes either reported by the individual or  business on a tax return or assessed by IRS through its various  enforcement programs. The IRS database does not reflect amounts owed  by businesses and individuals that have not filed tax returns and for which  IRS has not assessed tax amounts due. For example, during our audit, we  identified several instances from our 25 case studies in which Medicare  providers failed to file tax returns for a particular tax period and IRS had  not assessed taxes for these tax periods. Consequently, while these  providers had unpaid federal taxes, they were listed in IRS records as  having no unpaid taxes for those periods. Further, our analysis did not  attempt to account for businesses or individuals that purposely  underreported income and were not specifically identified by IRS as owing  the additional federal taxes. According to IRS, underreporting of income  accounted for more than 80 percent of the estimated $345 billion annual  gross tax gap. Finally, our analysis did not attempt to identify Medicare  providers that owed taxes under separate TINs from those that received  the Medicare payments. For example, sole proprietors and certain LLCs  may file Medicare claims under their employer identification numbers. If  these Medicare providers owe personal income taxes the analysis will not  capture the amount of the personal income taxes owed. Consequently, the  full extent of unpaid federal taxes for Medicare providers is not known.
section_title: Examples of Medicare Providers Involved in Abusive and Potentially Criminal Activity Related to the Federal Tax System
paragraphs: For all 25 cases involving Medicare providers with outstanding tax debt  that we audited and investigated, we found abusive activity, potentially  criminal activity, or both related to the federal tax system. All of these  cases involved Medicare providers that had unpaid payroll taxes, many  dating as far back as the early 1990s. Rather than fulfill their role as  “trustees” of this money and forward it to IRS as required by law, these  Medicare providers diverted the money for other purposes. IRS had TFRPs  in effect for 11 of the 25 business cases at the time of our review. In  addition, as discussed previously, willful failure to remit payroll taxes is a  criminal felony offense punishable by imprisonment up to 5 years.
Our review of selected Medicare providers revealed significant challenges  that IRS faces in its enforcement of tax laws, a continuing high-risk area  for IRS. Although the nation’s tax system is built upon voluntary  compliance, when businesses and individuals fail to pay voluntarily, IRS  has a number of enforcement tools, including the use of levies, to compel  compliance or elicit payment. Our review of the 25 Medicare providers  found that IRS attempted to work with the businesses and individuals to  achieve voluntary compliance, pursuing enforcement actions later rather  than earlier in the collection process. Our review of IRS records with  respect to the 25 cases showed that IRS did not issue paper levies to the  Medicare contractors to levy the payments of Medicare providers for 10 of  the 25 cases. As a result, many of the Medicare providers in our case  studies continued to receive Medicare payments while failing to pay their  federal taxes.
Our investigations revealed that despite owing substantial amounts of  federal taxes to IRS, some owners of Medicare providers had substantial  personal assets—including multimillion-dollar homes and luxury cars. For  example, the auditor for one Medicare provider found that the owner  misappropriated assets for personal gain. At the same time as owing taxes,  the owner was building a multimillion-dollar residence and had over   $1.5 million in home furnishings and artwork.
In addition to failure to pay taxes, our investigations also revealed that  certain Medicare providers had significant quality-of-care and other  problems. For example, several cases involved quality-of-care problems,  including patient neglect, for example, losing track of a patient in the  provider’s care who has not been found and not taking appropriate actions  to prevent a patient’s suicide. In addition, a couple of nursing homes were  cited by regulators for violating patient health and safety regulations. In  another case, an owner of one Medicare provider was excluded from the  Medicare program for submitting false Medicare claims, and in another  case a provider continued to receive Medicare payments even though it  was barred from receiving government contracts. In yet another case, the  owner used funds from the business to fund the owner’s statewide  political campaign during the time the business was not paying its payroll  taxes.
Table 1 highlights 10 of the 25 cases of Medicare providers with unpaid  taxes. IRS has collection actions during 2007 on 18 of 25 cases. Appendix  II provides details on the other 15 cases we examined. We are referring all  25 cases we examined to IRS for further collection activity and criminal  investigation.
The following provides illustrative detailed information on four of the  cases we examined.
Case 4: The nursing home consists of several companies that received  over $15 million in Medicare payments while owing more than   $7 million in tax debts. IRS records indicated that the company owners  attempted to conceal assets through questionable business entities  such as trusts, partnerships, LLCs, and other fictitious entities. While  the nursing home owed taxes, the owner possessed a $1 million  personal residence and an additional $1 million piece of real estate. IRS  records also showed that the owner purchased luxury cars and other  personal items from money funneled through a charitable foundation.  Specifically, the company owner donated large sums of money to the  foundation then claimed the deductions on their personal tax return  while purchasing expensive personal items.
Case 5: The nursing home has a history of tax noncompliance since the  late 1990s. The nursing home received over $1 million in Medicare  payments while owing more than $11 million in tax debt. IRS records  indicated that the nursing home owner has attempted to shield income  through partnerships, tiered agreements, and leasehold agreements. In  addition, the owner has various companies using over 100 bank  accounts, wire transfers, an overseas billing company, and a large  financial transaction to an overseas bank account. The nursing home  has been sanctioned by regulators for quality-of-care deficiencies so  serious that the home was barred from accepting new admissions.
Case 6: The nursing home received over $4 million in Medicare  payments and hundreds of thousands of dollars in federal government  contracts while simultaneously owing over $4 million in tax debt.  Although the owners of the nursing home claimed an inability to pay  delinquent taxes because of lack of resources, one owner constructed a  $4 million home while the other owner lived in a multimillion-dollar  home while owing taxes. IRS records indicated that the owners also  underreported income on their personal tax returns and received  financial compensation, such as salary and bonuses, from another  company to disguise reporting of income. IRS records indicated that  one company owner may relocate overseas to avoid paying taxes.
Case 10: The company received over $21 million in Medicare payments  while simultaneously owing over $15 million in tax debt. The company  was under investigation for underreporting income, bankruptcy fraud,  and submitting false claims to Medicare. The company’s owner also  owns a multimillion-dollar residence.
section_title: Medicare Providers with Unpaid Taxes Are Not Prohibited from Enrolling in or Receiving Payments from Medicare
paragraphs: CMS does not prevent Medicare providers with tax debts from becoming  Medicare providers or receiving payments from the Medicare program.  Neither Medicare regulations nor CMS implementing guidance require  CMS or its contractors to screen Medicare providers for tax debts prior to  enrollment. Even if such requirements did exist, absent taxpayer consent,  federal law generally prohibits IRS from disclosing taxpayer data, and  consequently, CMS and its contractors have no access to tax data directly  from IRS. In addition, CMS has not fully participated in the continuous  levy program. Specifically, CMS has not incorporated Medicare fee for  service payments in the continuous levy program. As a result, the federal  government potentially lost opportunities to collect over $140 million in  unpaid taxes during calendar year 2006.
CMS Medicare contractors are generally responsible for screening  Medicare providers prior to enrollment into the Medicare program.  However, as part of the screening process, neither CMS policies nor CMS  regulations require Medicare contractors to consider the tax debts or tax- related abuses of prospective Medicare providers or conduct any criminal  background checks on these individuals. Medicare contractors are  required to review the HHS Office of Inspector General (OIG) exclusion  list and the GSA debarment list; however, these lists do not include all  individuals or businesses that have abused the federal tax system.
Exclusion of certain individuals and entities from participation in  Medicare programs is made by statute. The statute provides for both  mandatory and permissive exclusions. Mandatory exclusions are confined  to health-related criminal offenses, while permissive exclusions concern  primarily non-health-related offenses. The Federal Acquisition Regulation  cites conviction of tax evasion as one of the causes for debarment;  indictment on tax evasion charges is cited as a cause for suspension.  Moreover, while a felony offense, the deliberate failure to remit taxes, in  particular payroll taxes, will likely not result in an individual or entity  being placed on the OIG exclusion or GSA debarment lists unless the  taxpayer is convicted. Based on our work, we believe that it is unlikely  that companies will be excluded or debarred for failure to pay delinquent  payroll taxes.
Even if a taxpayer is convicted of tax evasion or other tax-related crime,  the individual or business still may not be placed on the OIG exclusion or  GSA debarment lists. To place them on these lists, federal agencies must  identify those individuals and businesses and provide them with due  process. As part of due process, the agency must determine whether the  exclusion or debarment is in the government’s interest. For example, in  our March 2007 testimony, we noted several cases involving conviction of  tax-related crimes where the providers were not reported on the OIG  exclusion or GSA debarment lists.
Further complicating CMS decision making on the consideration of tax  debts for Medicare, federal law does not permit IRS to disclose taxpayer  information, including tax debts, to CMS or Medicare contractor officials  unless the taxpayer consents, which CMS does not currently require.  Thus, certain tax debt information can only be discovered from public  records if IRS files a federal tax lien against the property of a tax debtor or  a record of conviction for tax offense is publicly available. Consequently,  CMS and its contractors do not have ready access to information on  unpaid tax debts to consider in making decisions on Medicare providers.
Further, CMS has not implemented a process for continuously levying  payments made by Medicare contractors. As a result, IRS does not  capture at least a portion of payments made to Medicare providers that  owe federal tax debts. Thus, none of the 25 providers on which we  performed a detailed review had their Medicare fee-for-service payments  subject to the continuous levy program. As stated earlier, federal law  allows IRS to continuously levy federal vendor payments until the tax debt  is paid. IRS implemented this authority by creating a continuous levy  program that utilizes FMS’s Treasury Offset Program system. In July 2001,  we reported that CMS did not have any plan to participate in the  continuous levy program and we recommended that the Commissioners of  IRS and FMS work with CMS to develop plans to include Medicare  payments in the continuous levy program. In July 2006, IRS began to  pursue HHS participation in the continuous levy program through the  Federal Contractor Tax Compliance (FCTC) Task Force, a multiagency  group dedicated to improving the continuous levy process. In response to  IRS’s request, and a month before your subcommittee’s hearing on  Medicare physicians, health professionals, and suppliers that owe federal  taxes, CMS began to participate in the FCTC Task Force meetings in  February 2007.
According to CMS officials, CMS plans to incorporate all payments made  through HIGLAS, Medicare’s central accounting system, into the levy  program by October 2008. CMS officials stated that this will cover about 60  percent of all Medicare fee-for-service payments. CMS officials said that  the remaining 40 percent will be implemented into the continuous levy  program in the next several years as the Medicare contractors convert  their systems to HIGLAS.
If there was an effective levy program in place, we estimate that CMS  through its Medicare contractors potentially could have collected over  $140 million of unpaid federal taxes during fiscal year 2006. This estimate  was based on those debts that IRS reported to the Treasury Offset  Program as of September 30, 2006.
section_title: Conclusions
paragraphs: As federal deficits continue to mount, the federal government must take all  effective measures to collect the billions of dollars of unpaid taxes.  Because payroll taxes fund the Medicare program, Medicare providers  should especially pay their fair share of taxes owed, especially payroll  taxes. However, with respect to the continuous levy program, the federal  government continues to fail to reach its potential. A substantial amount of  Medicare payments to delinquent taxpayers will continue to go  uncollected until CMS can establish a process to incorporate its payments  into the continuous levy program. The failure to enforce tax laws against  Medicare providers has a detrimental affect on compliance.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Administrator of CMS take the following two  actions:    To enhance program integrity, consider (1) issuing guidance requiring  Medicare contractors to determine to the extent feasible if prospective  Medicare providers (including any Medicare providers that reenroll  into Medicare) have delinquent federal taxes, including obtaining  applicant consent to inquire as to tax debt status from IRS, and   (2) using the results of those inquiries in determining whether to enroll  such providers into the Medicare program. In making this  determination, CMS could also build in consideration of the potential  adverse effect that this requirement may have on Medicare’s ability to  provide health care to the elderly and other Medicare beneficiaries.
Incorporate all Medicare payments into the continuous levy program as  expeditiously as possible.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of our report to FMS, CMS, and IRS for review and  comment. FMS did not have any comments on the draft. We received  written comments on a draft of this report from the Commissioner of  Internal Revenue (see app. III). We also received comments from the  Acting Administrator of CMS on our draft, who did not disagree with our  two recommendations (see app. IV).
The Commissioner of Internal Revenue stated that he understood the  importance and potential benefits of considering unpaid federal tax debt  in the Medicare screening process and will support CMS in addressing our  recommendations to CMS. Further, the Commissioner of Internal Revenue  stated that if CMS established a process by which Medicare providers  supply their TINs to IRS, IRS would be able to provide CMS a historical  record of the taxpayers’ accounts, which would indicate any periods of  unpaid taxes. The Commissioner of Internal Revenue stated that IRS is  currently working with CMS and FMS on a pilot program to levy CMS  Medicare payments through the continuous levy program.
In its response to the draft of the report, the Acting Administrator of CMS  stated that CMS has taken some actions and is planning other actions to  address our recommendations. Specifically, in response to our first  recommendation, CMS stated that it issued proposed rules that would  require prospective durable medical equipment, prosthetic, and orthotic  suppliers to be free of federal or state tax debt. CMS stated that it will  consider whether to use its authority to establish a similar requirement for  the other provider and supplier types. CMS also stated that it will carefully  consider public policy implications of balancing the interests of denying or  revoking Medicare program participation with Medicare’s responsibility  for paying for the health care needs of the Medicare beneficiaries. In  response to our second recommendation, CMS stated that it is scheduled  to begin subjecting its Medicare fee-for-service payments to the levy  program in October 2008.
We are pleased that both CMS and IRS have shown the willingness to  improve the process of utilizing available tax information to prevent  providers with tax problems from participating in Medicare and collecting  tax debts. As discussed in our draft report, we agree with CMS that in  determining whether to require the screening of prospective Medicare  providers for delinquent federal taxes, CMS should consider the potential  adverse effect that this requirement may have on Medicare’s ability to  provide health care to the elderly and other Medicare beneficiaries.  Further, as also discussed in our draft report, we also believe that the  incorporation of Medicare fee-for-service payments into the levy program  will significantly improve collections of outstanding federal taxes owed by  Medicare providers.
As agreed with your offices, unless you publicly release its contents earlier  we plan no further distribution of this report until 30 days from its date. At  that time, we will send copies of this report to the Secretary of the  Treasury, the Commissioner of the Financial Management Service, the  Commissioner of Internal Revenue, the Acting Administrator of Centers  for Medicare & Medicaid Services, and other interested parties.
The report is also available at no charge on the GAO Web site at  http://www.gao.gov. If you have any questions concerning this report,  please contact either Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the magnitude of unpaid federal taxes owed by Medicare  providers, we obtained and analyzed the Internal Revenue Service (IRS)  tax debt data as of September 30, 2006. We also obtained and analyzed  calendar year 2006 Medicare payments to providers from the Centers for  Medicare & Medicaid Services (CMS). Our analysis included all Medicare  providers (i.e., Parts A, B, C and D) that were paid during calendar year  2006. We matched the Medicare payment data to the IRS unpaid  assessment data using the taxpayer identification number (TIN) field. To  avoid overestimating the amount owed by Medicare providers with unpaid  tax debts and to capture only significant tax debts, we excluded from our  analysis tax debts and paid claims meeting specific criteria to establish a  minimum threshold in the amount of tax debt and in the amount of paid  claims to be considered when determining whether a tax debt is  significant. The criteria we used to exclude tax debts are as follows:  tax debts that IRS classified as compliance assessments or memo  accounts for financial reporting,  tax debts from calendar year 2006 tax periods, and  total unpaid taxes and Medicare paid claims of less than $100.
The criteria above were used to exclude tax debts that might be under  dispute or generally duplicative or invalid and tax debts that are recently  incurred. Specifically, compliance assessments or memo accounts were  excluded because these taxes have neither been agreed to by the  taxpayers nor affirmed by the court, or these taxes could be invalid or  duplicative of other taxes already reported. We excluded tax debts from  calendar year 2006 tax periods to eliminate tax debt that may involve  matters that are routinely resolved between the taxpayer and IRS, with the  taxes paid or abated within a short period. We excluded tax debts and  Medicare paid claims of less than $100 because they are insignificant for  the purpose of determining the extent of taxes owed by Medicare  providers.
To identify indications of abuse or potentially criminal activity, we  selected 25 Medicare providers for a detailed audit and investigation. The  25 providers were chosen using a nonrepresentative selection approach  based on our judgment, data mining, and a number of other criteria.  Specifically, we narrowed the 25 providers with unpaid taxes based on the  amount of unpaid taxes, number of unpaid tax periods, amount of  payments reported by Medicare, and indications that owner(s) might be  involved in multiple companies with tax debts. For these 25 cases, we  obtained copies of automated tax transcripts and other tax records (for  example, revenue officer’s notes) from IRS and performed additional  searches of criminal, financial, and public records. In cases where record  searches and IRS tax transcripts indicate that the owners or officers of a  business are involved in other related entities that have unpaid federal  taxes, we also reviewed the related entities and the owner(s) or officer(s),  in addition to the original business we identified. Because our  investigations were generally limited to publicly available information, our  audit of the 25 cases may not have identified all related parties, criminal  activity or significant assets (such as personal bank data, companies  established to hide assets, etc.) related to these Medicare providers.
To determine the potential levy collections on Medicare payments during  calendar year 2006, we used 15 percent of the total paid claim or total tax  debt amount reported to the TOP per IRS records, whichever was less. A  gap will exist between what could be collected and the maximum levy  amount calculated because (1) tax debts in TOP may not be eligible for  immediate levy because IRS has not completed due process notifications  and (2) tax debts may become ineligible for levy because of a change in  collection status (e.g., tax debtor filed for bankruptcy).
To determine the extent to which Medicare payments to providers are  continuously levied to pay tax debts, we examined the statutory and  regulatory authorities that govern the continuous levy program and  interviewed officials from CMS, IRS, and the Financial Management  Service (FMS) to determine whether any legal barriers exist.
To determine the potential levy collections on Medicare payments during  calendar year 2006, we used 15 percent of the total paid claim or total tax  debt amount reported to the Treasury Offset Program (TOP) per IRS  records, whichever is less. A gap will exist between what could be  collected and the maximum levy amount calculated because (1) tax debts  in TOP may not be eligible for immediate levy because IRS has not  completed due process notifications and (2) tax debts may become  ineligible for levy because of a change in collection status (e.g., tax debtor  filed for bankruptcy).
subsections: section_title: Data Reliability Assessment
paragraphs: To determine the reliability of the IRS unpaid assessments data, we relied  on the work we performed during our annual audits of IRS’s financial  statements. While our financial statement audits have identified some data  reliability problems associated with the coding of some of the fields in  IRS’s tax records, including errors and delays in recording taxpayer  information and payments, we determined that the data were sufficiently  reliable to address this report’s objectives. Our financial audit procedures,  including the reconciliation of the value of unpaid taxes recorded in IRS’s  masterfile to IRS’s general ledger, identified no material differences.
For the Medicare payment databases and FMS’s TOP databases, we  interviewed CMS and FMS officials responsible for their respective  databases. In addition, we performed electronic testing of specific data  elements in the databases that we used to perform our work. Based on our  discussions with agency officials, our review of agency documents, and  our own testing, we concluded that the data elements used for this  testimony were sufficiently reliable for our purposes.
We conducted this forensic audit from July 2007 to June 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. We performed our investigative work in  accordance with standards prescribed by the President’s Council on  Integrity and Efficiency.
section_title: Appendix II: Medicare Providers with Unpaid Taxes
paragraphs: This appendix presents summary information on the abusive or potentially  criminal activity associated with 15 of our 25 case studies. Table 2  summarizes the abuse or potentially criminal activity related to the federal  tax system for these 15 Medicare providers. The cases involving  businesses primarily involved unpaid payroll taxes.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: Comments from the Centers for Medicare & Medicaid Services
paragraphs: The following are GAO’s comments on CMS’s letter dated May 29, 2008.
subsections: section_title: GAO Comments
paragraphs: 1.  IRS Form 1099 is an annual information report of income to IRS.
However, this report cannot be used to continuously levy Medicare  payments because they reflect prior calendar year payments that have  already been made to the provider.  2.  We have revised the report to state that CMS reported that it received  970 paper levies from IRS revenue officers totaling $109 million. We  also noted that while CMS did not report the amount it actually  collected from these paper levies, we do not believe paper levies are a  significant source of revenue collection.  3.  We have revised the report to include the amount of Medicare  payments that are subject to the continuous levy program.  4.  IRS provided documentation that showed that in July 2006 IRS began  to pursue Department of Health and Human Services participation in  the continuous levy program through the Federal Contractor Tax  Compliance Task Force.  5.  The IRS/CMS/SSA data match program is not used to collect  delinquent federal taxes. Therefore, a discussion of this program is not  relevant to our report.  6.  We have revised the report to clarify that the 27,000 Medicare  providers with unpaid federal taxes encompasses all Medicare  providers that have received payments during calendar year 2006. This  includes all Medicare providers for Parts A, B, C, and D. Our analysis  only included Medicare providers that had TINs that received Medicare  payments greater than $100. As our draft report states, we believe that  our estimate is substantially understated because, among other things,  our analysis does not include Medicare providers that owed taxes  under separate TINs from those that received the Medicare payments.  7.  In our draft report, we stated that we believe that it is unlikely that  companies will be excluded or debarred for failure to pay delinquent  payroll taxes. Although we appreciate CMS’s solicitation, we are not  making any recommendations on the use of the existing debarment  system to collect unpaid taxes at this time.  8.  In our draft report, we state that to determine the potential levy  collections on Medicare payments during calendar year 2006, we used  15 percent of the total paid claim or total tax debt amount reported to  TOP per IRS records, whichever was less. A gap will exist between  what could be collected and the maximum levy amount calculated  because (1) tax debts in TOP may not be eligible for immediate levy  because IRS has not completed due process notifications and (2) tax  debts may become ineligible for levy because of a change in collection  status (e.g., tax debtor filed for bankruptcy). We plan to follow up on  our recommendation to CMS in incorporating Medicare payments into  the continuous levy program; however, we do not believe that a  revision to the estimate in this report is necessary.  9.  In our draft report, we state that our analysis only included tax debts  and Medicare paid claims of $100 or more because they are significant  for the purpose of determining the extent of taxes owed by Medicare  providers.