Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes
Published: 2008-07-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO previously reported that federal contractors abuse the tax system with little consequence. While performing those audits, GAO noted that much of the tax abuse involved contractors not remitting to the government payroll taxes that were withheld from salaries. As a result, GAO was asked to review the Internal Revenue Service's (IRS) processes and procedures to prevent and collect unpaid payroll taxes and determine (1) the magnitude of unpaid federal payroll tax debt, (2) the factors affecting IRS's ability to enforce compliance or pursue collections, and (3) whether some businesses with unpaid payroll taxes are engaged in abusive or potentially criminal activities with regard to the federal tax system. To address these objectives, GAO analyzed IRS's tax database, performed case study analyses of payroll tax offenders, and interviewed collection officials from IRS and several states.
section_title: What GAO Found
paragraphs: IRS records show that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties. Some of these businesses took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations--thus abusing the federal tax system. Over a quarter of payroll taxes are owed by businesses with more than 3 years (12 tax quarters) of unpaid payroll taxes. Some of these business owners repeatedly accumulated tax debt from multiple businesses. For example, IRS found over 1,500 individuals to be responsible for non-payment of payroll taxes at three or more businesses, and 18 were responsible for not remitting payroll taxes for a dozen different businesses. Although IRS has powerful tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use. IRS's overall approach to collection focuses primarily on gaining voluntary compliance--even for egregious payroll tax offenders--a practice that can result in minimal or no actual collections for these offenders. Additionally, IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes. GAO selected 50 businesses with payroll tax debt as case studies and found extensive evidence of abuse and potential criminal activity in relation to the federal tax system. The business owners or officers in our case studies diverted payroll tax funds for their own benefit or to help fund business operations.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss unpaid federal payroll taxes. Our  related report, released today and developed at the request of this  subcommittee and the Senate Committee on Finance, describes issues we  identified in the collection and prevention of unpaid payroll taxes. It builds  on a large body of work over the last several years that identified tens of  thousands of federal contractors with unpaid taxes, most often unpaid  payroll taxes, who abused the federal tax system. This testimony also  builds on your concern regarding the almost $300 billion annual tax gap.
One of the elements of this tax gap is unpaid payroll taxes. Payroll taxes  are amounts employers withhold from employee’s wages for federal  income taxes, Social Security, and Medicare, as well as the employer’s  mandatory matching contributions for Social Security and Medicare taxes.  When businesses do not remit payroll taxes, they are using employees’  money to fund business operations or the personal lifestyle of the  businesses’ owners/officers, and causing shortfalls in funding for Social  Security and Hospital Insurance. If left to accumulate unpaid payroll taxes,  businesses can gain an unfair business advantage over their tax-paying  competitors at the expense of the government. The Internal Revenue  Service (IRS) acknowledges that unpaid payroll taxes are a major  compliance problem. The willful failure to remit payroll taxes is a felony  under federal law.
Today’s testimony focuses on (1) the magnitude and composition of  unpaid payroll taxes, (2) factors affecting IRS’s ability to enforce  compliance or pursue collection of unpaid payroll taxes, and (3)  businesses with unpaid payroll taxes that are engaged in abusive or  potentially criminal activities with regard to the federal tax system.
To determine the magnitude and composition of unpaid payroll taxes and  to identify owners or officers who repeatedly abused the federal tax  system by not remitting withheld payroll taxes, we analyzed IRS’s  database of unpaid taxes as of September 30, 2007. We also performed a  macro-analysis of IRS’s overall inventory of unpaid tax debts. To  determine IRS’s procedures to prevent the accumulation of unpaid payroll  taxes and to collect such taxes, we reviewed IRS’s policies as laid out in its  Internal Revenue Manual and discussed those policies and procedures  with cognizant IRS officials and revenue officers. We reviewed a sample of  76 businesses whose owners IRS found personally liable for the failure to  remit payroll taxes withheld from employees’ paychecks and whom IRS  assessed a Trust Fund Recovery Penalty (TFRP) to identify the timeliness  of IRS’s collection actions. We also interviewed tax officials from several  states concerning collection tools and techniques they used. Finally, to  determine whether businesses with unpaid payroll taxes were engaged in  abusive or potentially criminal activities involving the federal tax system,  we reviewed documentation on IRS’s collection actions and discussed the  appropriateness of those actions or the absence of actions with IRS  revenue officers for 50 businesses selected as case studies. We performed  a more in-depth review of 12 of those cases and presented the results in  table 3.
The work supporting the report on which this testimony was based was  performed from April 2007 through May 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.
subsections: section_title: Magnitude and Composition of Unpaid Federal Payroll Taxes
paragraphs: While the majority of businesses pay the taxes withheld from employees’  salaries as well as the employer’s matching amounts, a significant number  of businesses do not. Our review of IRS tax records showed that over 1.6  million businesses owed over $58 billion in unpaid payroll taxes to the  federal government as of September 30, 2007, and over 100,000 businesses  currently owe for more than 2 years (8 quarters) of payroll taxes. This total  includes amounts earned by employees that were withheld from their  salaries to satisfy their tax obligations, as well as the employer’s matching  amounts, but which the business diverted for other purposes. Many of  these businesses repeatedly failed to remit amounts withheld from  employees’ salaries. For example, 70 percent of all unpaid payroll taxes  are owed by businesses with more than a year (4 tax quarters) of unpaid  payroll taxes, and over a quarter of unpaid payroll taxes are owed by  businesses that have tax debt for more than 3 years (12 tax quarters).  Figure 1 shows the total dollar amount of payroll tax debt summarized by  the number of unpaid payroll tax quarters outstanding.
Using IRS’s database of unpaid taxes, we were able to identify many of the  industry types associated with businesses owing payroll taxes.  The top  industries with unpaid payroll tax debt included construction ($8.6  billion), professional services ($4.4 billion), and healthcare ($4 billion).
subsections: section_title: Unpaid Payroll Taxes Result in the General Fund Subsidizing Social Security and Hospital Insurance Trust Funds
paragraphs: When businesses fail to remit taxes withheld from employees’ salaries, the  payroll tax receipts are less than the payroll taxes due, and the Social  Security and Hospital Insurance Trust Funds have fewer financial  resources available to cover current and future benefit payments.  However, the trust funds are funded based on wage estimates and not  actual payroll tax collections. Therefore, the General Fund transfers to the  trust funds amounts that should be collected but are not necessarily  collected, resulting in the General Fund subsidizing the trust funds for  amounts IRS is unable to collect in payroll taxes from employers. As of  November 1, 2007, IRS estimated that the amount of unpaid taxes and  interest attributable to Social Security and Hospital Insurance taxes in  IRS’s $282 billion unpaid assessments balance was approximately $44  billion. This estimate represents a snapshot of the amount that needed to  be provided to the Social Security and Hospital Insurance Trust Funds  based on the outstanding payroll tax debt on IRS’s books at the time. It  does not include an estimate for tax debts that have been written off of  IRS’s tax records in previous years because of the expiration of the  statutory collection period. Recent IRS data indicate that the cumulative  shortfall increases by an additional $2 billion to $4 billion annually  because of uncollected payroll taxes.
section_title: Collection Status of Payroll Tax Debt
paragraphs: Although IRS has taken a number of steps to improve collections by  prioritizing cases with better potential for collectibility, the collection of  payroll taxes remains a significant problem for IRS. From 1998, when we  performed our last in-depth review of payroll taxes, to September 2007,  we found that while the number of businesses with payroll tax debt  decreased from 1.8 million to 1.6 million, the balance of outstanding  payroll taxes in IRS’s inventory of tax debt increased from about $49  billion to $58 billion. Our analysis of the unpaid payroll tax inventory  shows that the number of businesses with more than 20 quarters of tax  debt (5 years of unpaid payroll tax debt) almost doubled between 1998 and  2007. The number of businesses that had not paid payroll taxes for over 40  quarters (10 years or more) also almost doubled, from 86 businesses to 169  businesses. These figures are shown in table 1.
Of the $58 billion in unpaid payroll taxes as of September 30, 2007, IRS  categorized about $4 billion (7 percent) as going through IRS’s initial  notification process. Because IRS has made the collection of payroll taxes  one of its highest priorities, once a case completes the notification  process, it is generally sent to IRS’s field collections staff for face-to-face  collection action. However, IRS does not have sufficient resources to  immediately begin collection actions against all of its high-priority cases.  As a result, IRS holds a large number of cases in a queue awaiting  assignment to a revenue officer in the field. About $7 billion (12 percent)  of the unpaid payroll tax amount was being worked on by IRS revenue  officers for collection, and about $9 billion (16 percent) was in a queue  awaiting assignment for collection action. Most of the unpaid payroll tax  inventory—$30 billion (52 percent)—was classified as currently  uncollectible by IRS. IRS classifies tax debt cases as currently not  collectible for several reasons, including (1) the business owing the taxes  is defunct, (2) the business is insolvent after bankruptcy, or (3) the  business is experiencing financial hardship. Of those unpaid payroll tax  cases IRS has classified as currently not collectible, almost 70 percent  were as a result of a business being defunct.
Much of the unpaid payroll tax debt has been outstanding for several  years. As reflected in figure 2, our analysis of IRS records shows that over  60 percent of the unpaid payroll taxes was owed for tax periods from 2002  and prior years.
Prompt collection action is vital because, as our previous work has shown,  as unpaid taxes age, the likelihood of collecting all or a portion of the  amount owed decreases. Further, the continued accrual of interest and  penalties on the outstanding federal taxes can, over time, eclipse the  original tax obligation. Additionally, as discussed previously, IRS is  statutorily limited in the length of time it has to collect unpaid taxes— generally 10 years from the date the tax debt is assessed. Once that  statutory period expires, IRS can no longer attempt to collect the tax. IRS  records indicate that over $4 billion of unpaid payroll taxes will expire in  each of the next several years because of the expiration of their statutory  collection period.
section_title: IRS’s Collection Approach Does Not Always Prevent the Accumulation of Unpaid Payroll Taxes
paragraphs: Our audit of payroll tax cases identified several issues that adversely affect  IRS’s ability to prevent the accumulation of unpaid payroll taxes and to  collect these taxes. Foremost is that IRS’s approach focuses on getting  businesses—even those with dozens of quarters of payroll tax debt—to  voluntarily comply. We found that IRS often either did not use certain  collection tools, such as liens or TFRPs, or did not use them timely, and  that IRS’s approach does not treat the business’s unpaid payroll taxes and  responsible party’s penalty assessments as a single collection effort.  Additionally, although unpaid payroll taxes is one of its top collection  priorities, IRS did not have performance measures to evaluate the  collection of unpaid payroll taxes or the related TFRP assessments.  Finally, we found some state revenue agencies are using tools to collect or  prevent the further accumulation of unpaid taxes that IRS is either legally  precluded from using or that it has not yet developed.
subsections: section_title: IRS’s Approach Focuses on Voluntary Compliance, Even for Egregious Payroll Tax Offenders
paragraphs: We have previously reported that IRS subordinates the use of some of its  collection tools in order to seek voluntary compliance and that IRS’s  repeated attempts to gain voluntary compliance often results in minimal or  no actual collections. Our audit of businesses with payroll tax debt and  our analysis of businesses with multiple quarters of unpaid payroll taxes  again found revenue officers continuing to work with a business to gain  voluntary compliance while the business continued to accumulate unpaid  payroll taxes. For example, our analysis of IRS’s inventory of unpaid  payroll taxes found that over 10,000 businesses owed payroll taxes for 20  or more quarters—5 years or more.
Failing to take more aggressive collection actions against businesses that  repeatedly fail to remit payroll taxes has a broader impact than on just a  single business. If left to accumulate unpaid payroll taxes, businesses can  gain an unfair business advantage over their competitors at the expense of  the government. As we have found previously, in at least one of our case  study businesses, IRS determined that the non-compliant business  obtained contracts through its ability to undercut competitors in part  because the business’s reduced costs associated with its non-payment of  payroll taxes. Similarly, in another case the revenue officer noted that the  business was underbidding on contracts and was using unpaid payroll  taxes to offset the business’s losses.
Failure to take prompt actions to prevent the further accumulation of  unpaid payroll taxes can also have a detrimental impact on the business  and the associated owners/officers. As we have reported in the past, non- compliant businesses can accumulate substantial unpaid taxes as well as  associated interest and penalties. Over time, these unpaid balances may  compound beyond the business’s ability to pay—ultimately placing the  business and responsible officers in greater financial jeopardy.
IRS is legally precluded from taking collection actions during certain  periods, such as when a tax debtor is involved in bankruptcy proceedings.  During those periods, even though IRS may not be able to take collection  actions, tax debtors may continue to accumulate additional tax debt.  However, IRS’s focus on voluntary compliance has negatively affected  IRS’s collection efforts for years. Our current findings on IRS’s focus on  voluntary compliance are similar to those of a study performed by the  Treasury Inspector General for Tax Administration (TIGTA) 8 years ago.  In that study, TIGTA found that revenue officers were focused on IRS’s  customer service goals and therefore were reluctant to take enforcement  actions. In another study performed 3 years ago, TIGTA reported that IRS  allowed tax debtors to continue to delay taking action on their tax debt by  failing to take aggressive collection actions. TIGTA found that IRS did not  take timely follow-up action in half of the cases for which tax debtors  missed specific deadlines.
One official from a state taxing authority told us that the state benefited  from IRS’s approach because it allowed the state to collect its unpaid  taxes from business tax debtors before IRS. In one of our case study  businesses, although IRS successfully levied some financial assets, a  mortgage holder and state and local officials seized the business’s assets  to satisfy the business’s debts. IRS has recently strengthened its  procedures to include some specific steps for dealing with businesses that  repeatedly fail to remit payroll taxes and to stress the importance of  preventing the further accumulation of such payroll taxes.
section_title: IRS Does Not Always File Tax Liens Timely
paragraphs: We found that for payroll tax debt, one of IRS’s highest collection  priorities, IRS does not always file tax liens to protect the government’s  interest in property, and when IRS does so, it does not always do so  timely. Our analysis of IRS’s inventory of unpaid payroll taxes as of  September 30, 2007, found that IRS had not filed liens on over one-third of  all businesses with payroll tax debt cases assigned to the field for  collection efforts—over 140,000 businesses. IRS guidance states that filing  a lien is extremely important to protect the interests of the federal  government, creditors, and taxpayers in general, and that the failure to file  and properly record a federal tax lien may jeopardize the federal  government’s priority right against other creditors. A 2005 IRS study of  TFRP cases found that cases where a lien had been filed had more average  payments—about a third more—than where a lien had not been filed.
Failure to file a lien can have a negative impact on tax collections. For  example, IRS assessed the business owner in one of our case studies a  TFRP to hold the owner personally liable for the withheld payroll taxes  owed by the business. However, IRS did not assign the assessment to a  revenue officer for collection and thus did not file a lien on the owner’s  property. Because there was no lien filed, the owner was able to sell a  vacation home in Florida, and IRS did not collect any of the unpaid taxes  from the proceeds of the sale.
As in the case above, IRS’s case assignment policy can delay the filing of  liens for payroll tax cases. Because payroll tax cases are one of IRS’s top  collection priorities, once the notification process is complete, IRS routes  these cases to revenue officers for face-to-face collection action instead of  being routed to the Automated Collection System (ACS) for telephone  contact. However, IRS generally places cases in a queue of cases awaiting  assignment until a revenue officer is available to work the cases. Cases  can be in the queue for extended periods of time awaiting assignment to a  revenue officer. For the period that a case is in the queue, revenue officers  are not assigned to file liens and take other collection actions. Our  analysis found that for all payroll tax cases in the queue awaiting  assignment as of September 30, 2007, over 80 percent did not have a lien  filed. As a result, lower priority tax cases that go through the ACS process  may have liens filed faster than the higher priority payroll tax cases.
section_title: IRS Does Not Always Assess Trust Fund Recovery Penalties Timely
paragraphs: IRS has a powerful tool to hold responsible owners and officers personally  liable for unpaid payroll taxes through assessing a TFRP. However, we  found that IRS often takes a long time to determine whether to hold the  owners/officers of businesses personally liable and, once the decision is  made, to actually assess penalties against them for the taxes. In reviewing  a sample of TFRP assessments selected as part of our audit of IRS’s fiscal  year 2007 financial statements, we found that from the time the tax debt  was assessed against the business, IRS took over 2 years, on average, to  assess a TFRP against the business owners/officers. We found that  revenue officers, once assigned to a payroll tax case, took an average of  over 40 weeks to decide whether to pursue a TFRP against business  owners/officers and an additional 40 weeks on average to formally assess  the TFRP. For 5 of the 76 sampled cases, we found that IRS took over 4  years to assess the TFRP. We did not attempt to identify how frequently  IRS assesses a TFRP against responsible owners/officers. However, in  TIGTA’s 2005 report on its review of IRS’s collection field function, it  noted that revenue officers did not begin the TFRP process in over a  quarter of the cases it reviewed.
The timely assessment of TFRPs is an important tool in IRS’s ability to  prevent the continued accumulation of unpaid payroll taxes and to collect  these taxes. Once a TFRP is assessed, IRS can take action against both the  owners/officers and the business to collect the withheld taxes. For  egregious cases, such as some of those in our case studies, taking strong  collection actions against the owners’ personal assets may be the best way  to either get the business to become tax compliant or to convince the  owners to close the non-compliant business, thus preventing the further  accumulation of unpaid taxes. Failure to timely assess a TFRP can result  in businesses continuing to accumulate unpaid payroll taxes and lost  opportunities to collect these taxes from the owners/officers of the  businesses. For example, one business we reviewed had tax debt from  2000, but IRS did not assess a TFRP against the business’s owner until the  end of 2004. In the meantime, the owner was drawing an annual salary of  about $300,000 and had sold property valued at over $800,000. Within 1  month of IRS’s assessing the TFRP, the owner closed the business, which  by then had accumulated about $3 million in unpaid taxes.
In September 2007, IRS implemented new requirements to address the  timeliness of TFRP assessments. Under the new policy, IRS is now  requiring revenue officers to make the determination on whether to  pursue a TFRP within 120 days of the case’s being assigned and to  complete the assessment within 120 days of the determination. However,  the revised policy maintains a provision that allows the revenue officer to  delay the TFRP determination. Additionally, the policy does not include a  requirement for IRS to monitor the new standards for assessing TFRPs.
section_title: IRS’s Approach for Businesses and Responsible Parties Is Inconsistent
paragraphs: IRS assigns a higher priority to collection efforts against the business with  unpaid payroll taxes than against the business’s responsible  owners/officers. Further, it treats the TFRP assessments as a separate  collection effort unrelated to the business tax debt, even though the  business payroll tax liabilities and the TFRP assessments are essentially  the same tax debt. As a result, once the revenue officer assigned to the  business payroll tax case decides to pursue a TFRP against the responsible  owners/officers, the TFRP case does not automatically remain with this  revenue officer. Accordingly, IRS often does not assign the TFRP  assessment to a revenue officer for collection, and when it does, it may not  assign it to the same revenue officer who is responsible for collecting  unpaid taxes from the business. In reviewing the sample of TFRP  assessments selected as part of our audit of IRS’s fiscal year 2007 financial  statements, we found that half of the TFRP assessments had not been  assigned to a revenue officer by the time of our audit. Of those that had  been assigned, over half of the TFRP assessments had not been assigned  to the same revenue officer who was working the related business case.
Assigning the collection efforts against the business and the TFRP  assessments to different revenue officers can result in the responsible  owners/officers being able to continue to use the business to fund a  personal lifestyle while not remitting payroll taxes. For example, in one of  our case studies the owner was assessed a TFRP, but continued to draw a  six-figure income while not remitting amounts withheld from the salaries  of the business’s employees. For egregious cases, taking strong collection  actions against the owner’s personal assets may be a more effective means  of either getting the business to be compliant or convincing the owner to  close the non-compliant business to prevent the further accumulation of  unpaid payroll taxes.
IRS collection officials stated that attempting to assign the same revenue  officer both the TFRP assessments and the business payroll tax case for  collection would overload the revenue officers with work and result in  fewer high-priority payroll tax cases being worked. This view, however,  stems from separating the collection efforts of the business and the  individual and not considering the business’s unpaid payroll taxes and the  TFRP assessment as a single case. In essence, the TFRP assessment is the  same tax debt as the business’s payroll tax debt; the assessment is merely  another means through which IRS can attempt to collect the monies  withheld from a business’s employees for income, Social Security, and  Hospital Insurance taxes that were not remitted to the government. This  view that the payroll tax debt and the TFRP assessment are essentially the  same tax debt is reinforced by IRS’s practice of crediting all related  parties’ accounts whenever a collection is made against either assessment.
Prior studies have found that IRS’s practice of assigning TFRP  assessments a lower priority than business cases has not been very  successful for collecting the unpaid taxes. In its own 2005 study of TFRP  cases, IRS reported that it had assessed over $11.9 billion in TFRP  assessments (including interest) between 1996 and 2004, yet had collected  only 8 percent of those assessments.
section_title: IRS’s Approach Does Not Prevent Egregious Accumulation of Unpaid Payroll Taxes
paragraphs: IRS policies have not resulted in effective steps being taken against  egregious businesses to prevent the further accumulation of unpaid  payroll taxes. Our audit found thousands of businesses that had  accumulated more than a dozen tax quarters of unpaid payroll tax debt.  IRS policies state that revenue officers must stop businesses from  accumulating payroll tax debt and instructs revenue officers to use all  appropriate remedies to bring the tax debtor into compliance and to  immediately stop any further accumulation of unpaid taxes. IRS policies  further state that if routine case actions have not stopped the continued  accumulation of unpaid payroll taxes, revenue officers should consider  seizing the business’s assets or pursuing a TFRP against the responsible  parties. However, IRS successfully pursued fewer than 700 seizure actions  in fiscal year 2007. We were unable to determine how many of those  seizure actions were taken against payroll tax debtors. Regarding TFRPs,  as discussed previously, IRS does not always assess the TFRPs timely, and  IRS does not prioritize the TFRP assessment against the owner as highly  as it does the unpaid payroll taxes of the business. This can result in little  collection action being taken against the parties responsible for the failure  to remit the withheld payroll taxes.
When a business repeatedly fails to comply after attempts to collect, IRS  policies state that the business should be considered an egregious  offender and IRS should take aggressive collection actions, including  threats of legal action that can culminate in court-ordered injunctions for  the business to stop accumulating unpaid payroll taxes or face closure.  However, IRS obtained less than 10 injunctions in fiscal year 2007 to stop  businesses from accumulating additional payroll taxes. Revenue officers  we spoke to believe the injunctive relief process to be too cumbersome to  use effectively in its present form. One revenue officer stated that  because of the difficulty in carrying out the administrative and judicial  process to close a business through injunctive relief, he had not attempted  to take such action in over a decade. IRS is taking some action to attempt  to address this issue by piloting a Streamline Injunctive Relief Team to  identify cases and develop procedures to quickly move a case from  administrative procedures to judicial actions. These procedures will be  used for the most egregious taxpayers when the revenue officer can  establish that additional administrative procedures would be futile.
Similar to IRS, all of the state tax collection officials we contacted told us  that their revenue department’s primary goal was to prevent businesses  from continuing to flaunt tax laws and to stop them from accumulating  additional tax debt. These officials said that after a business had been  given a period of time to comply with its current tax obligations and begin  paying past taxes, state tax collection officials changed their focus to one  of “stopping the bleeding.” As such, some have made the policy decision to  seek to close non-compliant businesses. To the extent IRS is not taking  effective steps to deal with egregious payroll tax offenders that repeatedly  fail to comply with the tax laws, businesses may continue to withhold  taxes from employees’ salaries but divert the funds for other purposes.
section_title: IRS’s Approach Does Not Measure Effectiveness
paragraphs: Although IRS has made the collection of unpaid payroll taxes one of its top  priorities, IRS has not established goals or measures to assess its progress  in collecting or preventing the accumulation of payroll tax debt.  Performance measurement and monitoring, however, support resource  allocation and other policy decisions to improve an agency’s operations  and the effectiveness of its approach. Performance monitoring can also  help an agency by measuring the level of activity (process), the number of  actions taken (outputs), or the results of the actions taken (outcomes).
Although IRS does have a broad array of operational management  information available to it, we did not identify any specific performance  measures associated with payroll taxes or TFRP assessments. While IRS  has caseload and other workload reports for local managers (to measure  process and outputs), these localized reports are not rolled up to a  national level to allow IRS managers to monitor the effectiveness or  efficiency of its collection and enforcement efforts. These operational  reports do contain information about unpaid payroll and TFRP case  assignments, but they are used primarily to monitor workload issues, not  program effectiveness. For example, IRS has developed some reports that  identify “over-aged” cases (those that have not been resolved within a  certain length of time) and that identify businesses that continue to accrue  additional payroll tax debt, but these reports are designed for workload  management.
To report on its outcomes or the effectiveness of its operations, IRS  reports on overall collection statistics and presents that information in the  Management Discussion and Analysis section of its annual financial  statement and in its IRS Data Book. However, IRS does not specifically  address unpaid payroll taxes as a part of this reporting. IRS officials stated  that they do not have specific lower-level performance measures that  target collection actions or collection results for unpaid payroll taxes or  TFRP assessments. Such performance measures could be useful to serve  as an early warning system to management or as a vehicle for improving  IRS’s approach or actions.
section_title: IRS’s Approach Could Benefit from Additional Tools
paragraphs: In our discussions with IRS revenue officers concerning some of the  egregious payroll tax offenders included in our case studies, the officers  noted that having certain additional tools available to them could allow  them to more effectively deal with recalcitrant businesses. In discussions  with a number of state tax collection officials, we found that several states  had already developed and were effectively using the types of tools IRS  revenue officers said would be beneficial to them.
For example, while the Internal Revenue Code prohibits IRS from publicly  disclosing federal tax information without taxpayer consent,an  increasing number of states—at least 19, including New Jersey,  Connecticut, Indiana, Louisiana, and California—are seeking to increase  tax collections by publicizing the names of those with delinquent tax bills.  In California, a recent law mandates the state to annually publish the  names of the top 250 personal and corporate state tax debtors with at least  $100,000 in state tax debt. Public disclosure of tax debtors can be very  effective. Just threatening to publish the names of tax offenders can bring  some into compliance, while actually appearing on a tax offender list can  bring about societal pressure to comply. In California, 26 tax debtors  threatened with public disclosure stepped forward to settle their tax debts  and thus avoided appearing on the list; in Connecticut, the state claims the  public disclosure of tax debtors has resulted in over $100 million in  collections from the first 4 years of the program. The potential public  disclosure of tax debtors may also encourage greater tax compliance  among the general population of taxpayers to avoid potentially being on  the list.
As another example, while IRS has the authority to levy a tax debtor’s  income and assets when there is a demand for payment and there has been  a refusal or an inability to pay by the taxpayer subject to the levy, IRS  officials stated that they often have difficulty using levies to collect unpaid  payroll taxes. They noted that the levy may be made against funds in a  bank account at a certain point in time when little or no funds are  available. They also noted, and in our case studies we found, that IRS  sometimes has difficulty identifying which banks or financial institutions a  tax debtor is using. This is the case because tax debtors will often change  financial institutions to avoid IRS levies. However, several states use legal  authorities to assist in identifying levy sources. States such as Kentucky,  Maryland, Massachusetts, Indiana, and New Jersey have enacted  legislation for matching programs or entered into agreements with  financial institutions to participate in matching bank account information  against state tax debts. This matching allows states to more easily identify  potential levy sources and simplifies the financial institution’s obligations  to respond to multiple levies. IRS is working with at least one state to  investigate the potential for this matching, but in our discussions with IRS  collection officials they stated that IRS has not sought legislation or  agreements with financial institutions.
section_title: Businesses Engaged in Abusive and Potentially Criminal Activity Related to the Federal Tax System
paragraphs: Our analysis of unpaid payroll tax debt found substantial evidence of  abusive and potentially criminal activity related to the federal tax system  by businesses and their owners or officers. We identified tens of thousands  of businesses that filed 10 or more tax returns acknowledging that the  business owed payroll taxes, yet failed to remit those taxes to the  government. While much of the tax debt may be owed by those with little  ability to pay, some abuse the tax system, willfully diverting amounts  withheld from their employees’ salaries to fund their business operations  or their own personal lifestyle.
In addition to owing payroll taxes for multiple tax periods and  accumulating tax debt for years, many of the owners and officers of these  businesses are repeat offenders. We identified owners who were involved  in multiple businesses, all of which failed to remit payroll taxes as  required. In total, IRS records indicate that over 1,500 owners/officers had  been found by IRS to be responsible for non-payment of payroll taxes at 3  or more businesses and that 18 business owners/officers were found by  IRS to be responsible for not paying the payroll taxes for over 12 separate  businesses. It should be noted that these numbers represent only those  responsible individuals who IRS found acted willfully in the non-payment  of the businesses’ payroll taxes and who were assessed TFRPs—these  figures do not represent the total number of repeat offenders with respect  to non-payment of payroll taxes. Table 2 shows the number of individuals  with TFRPs for two or more businesses.
Our audits and investigations of 50 case study businesses with tax debt  found substantial evidence of abuse and potential criminal activity related  to the tax system. All of the case studies involved businesses that had  withheld taxes from their employees’ paychecks and diverted the money  to fund business operations or for personal gain. Table 3 shows the results  of 12 of the case studies we performed.
section_title: Concluding Comments
paragraphs: Businesses that withhold money from their employees’ salaries are  required to hold those funds in trust for the federal government. Willful  failure to remit these funds is a breach of that fiduciary responsibility and  is a felony offense. A business’s repeated failure to remit payroll taxes to  the government over long periods of time affects far more than the  collection of the unpaid taxes. First, allowing businesses to continue to  not remit payroll taxes affects the general public’s perception regarding  the fairness of the tax system, a perception that may result in lower overall  compliance. Second, because of failure of businesses to remit payroll  taxes, the burden of funding the nation’s commitments, including Social  Security and Hospital Insurance Trust Fund payments, falls more heavily  on taxpayers who willingly and fully pay their taxes. Third, the failure to  remit payroll taxes can give the non-compliant business an unfair  competitive advantage because that business can use those funds that  should have been remitted for taxes to either lower overall business costs  or increase profits. Businesses that fail to remit payroll taxes may also  under bid tax-compliant businesses, causing them to lose business and  encouraging them to also become non-compliant. Fourth, allowing  businesses to continue accumulating unpaid payroll taxes has the effect of  subsidizing their business operations, thus enriching tax abusers or  prolonging the demise of a failing business. Fifth and last, in an era of  growing federal deficits and amidst reports of an increasingly gloomy  fiscal outlook, the federal government cannot afford to allow businesses to  continue to accumulate unpaid payroll tax debt with little consequence.
For these reasons, it is vital that IRS use the full range of its collection  tools against businesses with significant payroll tax debt and have  performance measures in place to monitor the effectiveness of IRS’s  actions to collect and prevent the further accumulation of unpaid payroll  taxes. Businesses that continue to accumulate unpaid payroll tax debt  despite efforts by IRS to work with them are demonstrating that they are  either unwilling or unable to comply with the tax laws. In such cases,  because the decision to not file or remit payroll taxes is made by the  owners or responsible officers of a business, IRS should consider strong  collection action against both the business and the responsible owners or  officers to prevent the further accumulation of unpaid payroll taxes and to  collect those taxes for which the business and owners have a legal and  fiduciary obligation to pay.
IRS faces difficult challenges in balancing the use of aggressive collection  actions against taxpayer rights and individuals’ livelihoods. However, to  the extent IRS does not pursue aggressive collection actions against  businesses with multiple quarters of unpaid payroll taxes, there is a  significant concern as to whether IRS is acting in the best interests of the  federal government, the employees of the businesses involved, the  perceived fairness of the tax system, or overall compliance with the tax  laws. Therefore, it is incumbent upon IRS to revise its approach and  develop performance measures that include the appropriate use of the full  range of available enforcement tools against egregious offenders to  prevent their businesses from accumulating tax debt. It is also incumbent  upon IRS to proactively seek out and appropriately implement other tools  (particularly those with demonstrated success at the state level) to  enhance IRS’s ability to prevent the further accumulation of unpaid payroll  taxes and to collect those taxes that are owed. Although IRS does need to  work with businesses to try to gain voluntary tax compliance, for  businesses with demonstrated histories of egregious abuse of the tax  system, IRS needs to alter its approach to include focusing on stopping the  accumulation of additional unpaid payroll tax debt by egregious  businesses.
Our companion report being released today contains six recommendations  to IRS to address issues regarding its ability to prevent the further  accumulation of unpaid payroll taxes and collect such taxes. The  recommendations include (1) developing a process and performance  measures to monitor collection actions taken by revenue officers against  egregious payroll tax offenders and (2) developing procedures to more  timely file notice of federal tax liens against egregious businesses and  assess penalties to hold responsible parties personally liable for not  remitting withheld payroll taxes.
Mr. Chairmen and Members of the Subcommittee, this concludes my  statement. I would be pleased to answer any questions that you or other  members of the committee and subcommittee have at this time.
section_title: Contacts and Acknowledgment
paragraphs: For future contacts regarding this testimony, please contact Steven J.  Sebastian at (202) 512-3406 or sebastians@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this testimony.
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