Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes
Published: 2008-07-25T00:00:00

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. Specifically, GAO was asked to 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 nonpayment 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: The operations of the Internal Revenue Service (IRS) potentially impact  the lives of every American and are critical to the fiscal well being of the  federal government. IRS’s taxpayer service and enforcement efforts  generate 96 percent of the federal revenue for the United States  government. In 2007, IRS processed over 230 million tax returns and  collected over $2.7 trillion in taxes. Although the majority of businesses  and individuals voluntarily comply with the nation’s tax laws, many do not.  For those that do not, IRS’s enforcement programs collected over $40  billion in taxes from businesses and individuals in 2007. In spite of these  efforts, IRS has a significant gap between what taxpayers should pay and  what IRS actually collects. IRS estimates that the annual net tax gap—the  amount of taxes that go unidentified and uncollected each year—amounts  to nearly $300 billion.
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.  In our previous reports and in related testimonies on federal contactors  with tax debt, we reported that tens of thousands of federal contractors  were not paying billions of dollars in taxes owed and that most of those  contractors had failed to remit to the government amounts they had  withheld from their employees’ salaries to satisfy their tax obligations. The  willful failure to remit payroll taxes is a felony under federal law. Due to  the continuing significance of this issue, you asked us to review IRS’s  overall approach to the prevention and collection of unpaid payroll taxes.
The specific objectives of this report were to determine (1) the magnitude  of unpaid federal payroll tax debt, (2) the factors affecting IRS’s ability to  enforce compliance or pursue collections against businesses with unpaid  payroll taxes, 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 meet our objectives, we analyzed IRS’s database of unpaid taxes as of  September 30, 2007, to determine the magnitude of unpaid payroll taxes  and to identify, to the extent possible, owners or officers who repeatedly  abused the tax system by not remitting withheld payroll taxes. 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 (IRM) 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.  Although the sample was selected as a part of our audit of IRS’s fiscal year  2007 financial statements, for the purposes of this report we reviewed  those cases to identify the timeliness of IRS’s collection actions. To  further review IRS’s collection actions, we also performed a macro- analysis of IRS’s overall inventory of unpaid tax debts. Finally, to  determine whether businesses with unpaid payroll taxes were engaged in  abusive or potentially criminal activities with regard to 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. See  appendix I for more detailed information on the scope and methodology of  our work. The results of 12 of the 50 case studies we audited are shown in  table 3. The results of the other 38 case studies are included in appendix II.
We conducted this performance audit 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: Background
paragraphs: In its role as the nation’s tax collector, IRS is responsible for collecting  taxes, processing tax returns, and enforcing the nation’s tax laws. Since  1990, we have designated IRS’s enforcement of tax laws as a  governmentwide high-risk area. In attempting to ensure that taxpayers  fulfill their obligations, IRS is challenged on virtually every front. IRS’s  enforcement workload—measured by the number of tax returns filed— has continually increased, while the number of staff dedicated to  collections has not.
As of September 30, 2007, IRS’s master file database of taxpayer accounts  reflected about $282 billion in outstanding taxes owed by businesses and  individuals. This amount understates the true cumulative amount of  unpaid taxes. For example, IRS has a statutory limitation on the length of  time it can pursue unpaid taxes, generally 10 years from the date of the  assessment. After that period, IRS removes the tax debt from its records.  Additionally, the amount of unpaid taxes is understated because many tax  debts go unidentified and unrecorded on IRS’s tax records due to non- filing or underreporting of tax liabilities. These unidentified and  uncollected taxes are part of IRS’s estimate of the annual tax gap.  Therefore, the true cumulative amount of unpaid taxes would be far higher  than $282 billion.
The amount of unpaid taxes ranges from small amounts owed by  individuals for a single tax period to millions of dollars owed by  businesses over multiple periods. For businesses, the taxes owed include  corporate income, estate, excise, and payroll taxes, as shown in figure 1.
The total amount of tax debt includes interest and penalties that are added  to or accumulate on the original taxes owed.
subsections: section_title: Payroll Taxes
paragraphs: Employers are required to withhold from their employees’ salaries  amounts for individual federal income taxes and for Federal Insurance  Contribution Act (FICA) taxes, which includes Old-Age, Survivors and  Disability Insurance (Social Security) and Hospital Insurance (Medicare  Part A) taxes. In 2007, the FICA taxes to be withheld consisted of 6.2  percent of an employee’s gross salary up to $97,500 for Social Security  taxes and an additional 1.45 percent of the gross salary for hospital  insurance. Employers are also required to match the amounts withheld  from an employee’s salary for Social Security and hospital insurance taxes.  Taken together, the amounts withheld from an employee’s salary for  federal individual income and FICA taxes, along with the employer’s  matching portion of FICA taxes, comprise the business’s payroll taxes.
Employers are generally required to remit payroll taxes periodically  through the Federal Tax Deposit system. The frequency of those deposits  depends on the amount of taxes due and the frequency of the employer’s  payroll. Employers must remit payroll taxes either (1) semiweekly if their  total tax liability is more than $50,000 during a 12-month period ending  June 30 of the prior year or (2) monthly if their total tax liability is $50,000  or less during this same 12-month period. The business tax liability is  reported to IRS either quarterly on Form 941 or annually on Form 944.  Additionally, employers are required to report employees’ earnings to the  Social Security Administration annually.
section_title: IRS’s Payroll Tax Collection Process
paragraphs: When a business files a tax return indicating that it owes more in payroll  taxes than it has deposited, IRS records or assesses the tax liability in its  systems. IRS can also identify and assess tax liabilities through its  enforcement efforts, such as its examination or nonfiler programs. Once  payroll tax debt is assessed and recorded in its database of unpaid taxes,  IRS has a number of collection tools at its disposal to attempt to collect  from tax debtors who do not voluntarily comply with the tax laws. Each  case has unique aspects and therefore may require varying collection  methods. However, for payroll tax cases, IRS generally follows a three- step collection process.
Step 1—Notification of tax debt—Once a business fails to remit taxes  owed, IRS sends the business a series of notice letters. Business tax debt  typically stays in the notification phase about 15 weeks.
Step 2—Assignment for collection—After tax debt leaves the notice  phase, it may be placed in a queue awaiting assignment to collection  personnel. If a tax debtor already has tax debt being worked on by  collections personnel, it will generally bypass the queue and be assigned  directly to the collection officer already working to collect the other tax  debt. When a case leaves the queue and is assigned to the field for  collections, it is first assigned to a manager. The manager has a waiting list  of cases held for assignment to individual revenue officers. A case may be  assigned to the field, but not be actively worked on because it is awaiting  assignment by the manager.
Step 3—Collection actions—IRS pursues collection of taxes owed either  through direct contact by revenue officers in the field (referred to as the  collection field function) or through calls and correspondence by IRS’s  Automated Collection System (ACS).
IRS’s ACS process consists primarily of telephone calls to the tax debtor  through IRS’s nationwide network of call centers. ACS generally handles  less complex and lower priority taxes. Because IRS has designated the  collection of payroll taxes as one of its top priorities, payroll tax cases  generally do not go through the ACS process. Also, although cases may  move through the steps sequentially, it is not necessary that they do so.  Cases begin in the notice phase, but they may enter the queue or field  collection repeatedly.
section_title: IRS’s Tax Collection Tools
paragraphs: IRS has numerous enforcement tools that it can use when businesses fail  to remit payroll taxes as required. IRS’s tools begin with a series of letters  sent to the business in the notice phase to encourage voluntary  compliance, which, if not accomplished, can lead to the use of increasingly  more aggressive or invasive tools, including filing liens or seizing business  assets, and filing for court-ordered injunctive relief.
Once assigned a tax debt for collection, the revenue officer will seek to get  full payment from the tax debtor. If the tax debtor is unable to pay in full,  the revenue officer will seek to get the debtor to agree to a repayment  plan, either an installment agreement or an offer-in-compromise. In  general, the revenue officer will seek to get the tax debtor to become  compliant and voluntarily pay the tax debt without IRS having to take  more intrusive collection actions. In fiscal year 2007, IRS collected over  $17 billion of all types of taxes from almost 3 million tax debtors through  installment agreements.
If, however, a tax debtor fails to agree to voluntarily pay the tax debt, the  revenue officer can increase the invasiveness of their collection efforts  and use its three primary tools to achieve compliance and tax collection:  lien, levy, or seizure. If those are not successful at bringing a tax debtor  into compliance, in certain circumstances, IRS can seek injunctive relief to  close a non-compliant business or seek criminal prosecution for failing to  pay payroll taxes, particularly if there are indications of fraud. An  overview of each of these tools follows.
subsections: section_title: Liens
paragraphs: Among IRS’s tools to collect outstanding taxes is its ability to use the  property of a taxpayer as security for an outstanding tax debt. This is  accomplished by filing a notice of federal tax lien. The lien serves to  protect the interest of the federal government and as a public notice to  current and potential creditors of the government’s interest in the  taxpayer’s property. Although the tax lien exists under the law even  before a notice is filed, the lien is perfected when IRS provides notice of  its interest by filing the lien with a designated office, such as a local  courthouse in the county where the taxpayer’s property is located. If the  Service does not file a Notice of Federal Tax Lien (NFTL) with a state or  local recording office where the taxpayer’s property is situated, the  Government will have a more junior position to other creditors who have  perfected their judgments or security.
IRS reported filing more than 680,000 tax liens in fiscal year 2007. Since a  lien encumbers taxpayer property and because federal tax liens appear on  commercial credit reports, IRS’s ability to file a lien is a powerful tool in  enforcing the tax laws. Filing a lien prevents the taxpayer from selling an  asset, with clear title, without first paying off the outstanding tax debt.
section_title: Levies and Seizures
paragraphs: Levies are legal seizures of tax debtors’ assets to satisfy tax  delinquencies. A levy is different from a lien in that a lien is a claim used  as security for the tax debt, while a levy actually takes the property to  satisfy the tax debt. Generally, IRS is authorized to levy property of the tax  debtor in the possession of a third party, such as bank accounts, federal  payments, and wages. IRS records indicate that it filed over 3.7 million  levy actions against tax debtors for property held by third parties in fiscal  year 2007. IRS also may seize and sell real or personal property held  directly by the tax debtor, such as business assets like business  equipment, cars, or paintings. However, under reforms put in place under  the Internal Revenue Service Restructuring and Reform Act of 1998  (RRA), IRS cannot seize assets before determining whether the tax  debtor has equity in the property subject to seizure. For example, if an  asset is fully encumbered with commercial loans, IRS may not seize the  asset. Although IRS records indicate that the number of actions to seize  and sell assets held by the tax debtor has been steadily rising over the past  several years, reaching 676 seizure actions in fiscal year 2007, the number  is far below the over 10,000 seizure actions taken in 1997 prior to the  enactment of RRA.
section_title: Injunctive Relief
paragraphs: In addition to actions it can take to collect unpaid taxes, IRS can also take  action to attempt to stop businesses from continuing to accumulate unpaid  taxes. One tool IRS has is injunctive relief. Injunctive relief is a court  ordered “prohibition of an act.” If the act, or practice covered under the  court order continues, the business can be found in contempt of court, and  IRS can force it to cease operations. The IRM states that injunctive relief is  an “extraordinary remedy” used only if previous actions have either been  exhausted or it would have been futile to continue. Injunctive relief can be  an important tool for IRS when businesses have no equity and therefore  are impervious to seizure actions.
To obtain an injunctive relief order, IRS must demonstrate to the court the  (1) tax debtor’s persistent failure to comply with the law despite IRS’s  repeated efforts to bring the tax debtor into compliance and (2) likelihood  of future violations (i.e., the tax debtor will continue to accumulate tax  debt). To gain an injunction, IRS first issues a letter to the tax debtor that  includes strong language, including threats of criminal prosecution for  failure to comply. The IRM notes that before seeking injunctive relief, the  revenue officer should require the business to (1) file monthly  employment tax returns (instead of quarterly), (2) establish a separate  bank account for payroll taxes withheld, and (3) make all payroll tax  deposits to that account within 2 days of paying employees.
section_title: Criminal Investigations
paragraphs: Although the willful failure to remit payroll taxes is a felony, IRS generally  does not pursue a criminal prosecution unless fraud can be determined. In  the past, we have reported that some IRS employees believe IRS and the  District Counsel are reluctant to pursue prosecution against even  egregious offenders.
section_title: Trust Fund Recovery Penalty
paragraphs: When businesses withhold funds from an employee’s salary for federal  income taxes and the employee’s FICA obligations, they are deemed to  have a fiduciary responsibility to hold these amounts “in trust” for the  federal government. To the extent that the business does not forward  withholdings to the federal government, it is liable for these amounts, as  well as its matching FICA contribution. Officials of the business can also  be held personally liable for payment of the withheld amounts.
Under section 6672 of the IRC, individuals who are determined by IRS to  be responsible for collecting, accounting for, and paying over payroll taxes  who willfully fail to collect or pay this tax can be assessed a TFRP. To  show willfulness, IRS must show that the responsible individual was  aware of the outstanding taxes and either deliberately chose not to pay the  taxes or recklessly disregarded an obvious risk that the taxes would not be  paid. It should be noted that the deliberate intent or desire to defraud the  federal government is not necessary for IRS to assess a TFRP. For  example, an individual, in a business, who is responsible for collecting  payroll taxes who decides to pay the business’s monthly rent payment  instead of remitting employee withholdings to the federal government, can  be found to be acting willfully and thus assessed a TFRP. Typically, these  responsible individuals are owners or officers of a corporation, such as a  president or treasurer.
More than one person may be a “responsible individual” under section  6672, and thus multiple people in the business may be assessed a TFRP.  The amounts assessed against each individual can vary depending on an  individual’s responsibility to collect payroll taxes and the extent of the  willful failure to pay over this tax for multiple periods; however, each  responsible individual can be assessed a TFRP for the total amount of the  withholdings not paid. Additionally, the business itself is still liable for the  entire amount of the unpaid payroll taxes. However, it has long been IRS’s  policy to only collect the unpaid tax once. For example, if, after IRS  assesses a TFRP against an officer of a corporation, the business pays the  entire balance of the unpaid payroll taxes, the officer would no longer be  liable for the TFRP assessment. Similarly, if two officers are each assessed  TFRPs related to their business covering the same period of unpaid payroll  taxes and one of the officers makes a partial payment, the liabilities of  both officers, as well as the liability of the business, are to be reduced by  the amount of the payment.
IRS uses the TFRP as a tool to hold owners and other officials associated  with a business individually liable for the business’s failure to remit  withheld payroll taxes. As such, the TFRP provides a means for IRS to  seek collection from those responsible for failing to remit the withheld  payroll taxes even if the business closes. The TFRP may also be used as a  compliance tool to deter future non-payment of taxes by the business.  TFRP assessments are also subject to the 10-year statutory collection  limitation.
section_title: A Significant Number of Businesses Are Not Paying Billions of Dollars of Payroll Taxes
paragraphs: Employers are required to withhold from their employees’ salaries  amounts for both individual federal income taxes and FICA taxes, which  include Social Security and Hospital Insurance taxes. 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. The failure by businesses to remit payroll taxes  results in the loss of revenues to the federal government. In addition, it  creates a situation in which the general revenue fund subsidizes the Social  Security and Hospital Insurance trust funds to the extent that Social  Security and Hospital Insurance taxes owed are not collected. Over time,  the amount of this shortfall, or subsidy, is significant. IRS estimated that  the General Fund has transferred to the trust funds $44 billion over what  IRS collected in self employment and payroll taxes for the inventory of   total unpaid taxes on record as of November 1, 2007. The estimate does  not include an estimate for tax debts that have been written off of IRS’s  tax records in previous years due to expiration of the statutory collection  period. As a result of the failure of these businesses to pay payroll taxes,  the compliant taxpayer bears an increased burden to fund the nation’s  commitments. Although IRS has made the collection of unpaid payroll  taxes one of its top priorities, most of the unpaid payroll tax inventory (52  percent, equal to $30 billion) was classified as currently uncollectible by  IRS. While IRS has assigned about $7 billion to revenue officers for  collection, about $9 billion of unpaid payroll taxes are in a queue awaiting  assignment. 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.  Because 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— the federal government will lose its right to collect billions of dollars in  payroll taxes each year if IRS does not obtain payment from tax debtors  before the statutory period for collection expires.
subsections: section_title: Magnitude of Unpaid Payroll Tax Debt
paragraphs: Of the $282 billion in cumulative, identified, unpaid taxes owed to the  federal government as of September 30, 2007, IRS records show that over  $58 billion (over 20 percent) is owed for unpaid payroll taxes. This total  includes amounts, earned by employees, that were withheld from their  salaries to satisfy their tax obligations, as well as the employers’ matching  amounts, but which the business diverted for other purposes. Over 1.6  million businesses have unpaid payroll tax debt. 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 2 shows the total dollar  amount of payroll tax debt summarized by the number of unpaid payroll  tax quarters outstanding.
Much of the unpaid payroll tax debt has been outstanding for several  years. As reflected in figure 3, 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. Figure 4 shows that over half of the unpaid payroll  taxes owed is for interest and penalties on the original tax debt.
Using IRS’s database of unpaid taxes, we were able to identify many of the  industry types associated with businesses owing payroll taxes. Figure 5  presents the major industries with outstanding unpaid payroll taxes  according to IRS records.
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 then less than the payroll taxes due, and the Social  Security and Hospital Insurance trust funds will have less 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. 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 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 due to  expiration of the statutory collection period. Recent IRS data indicate  that the shortfall is about $2 billion to $4 billion annually due to  uncollected payroll taxes.
section_title: Collection Status of Payroll Tax Debt
paragraphs: Of the $58 billion in unpaid payroll taxes as of September 30, 2007, IRS  categorized about $4 billion as going through IRS’s initial notification  process. The notification process results in significant collections,  particularly with respect to generally compliant taxpayers who respond to  the notices by paying off the outstanding taxes owed or entering into  installment agreements to pay off the tax debt over time. IRS records  indicate that over half of all unpaid tax collections result from the  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. Of the $54 billion in unpaid payroll taxes that had completed  the notification process, about $7 billion was being worked on by IRS  revenue officers for collection and about $9 billion was in a queue  awaiting assignment for collection action. Most of the unpaid payroll tax  inventory was classified as currently uncollectible by IRS. As shown in  figure 6, IRS considered $30 billion—52 percent of all payroll tax debt—to  be currently not collectible.
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. As shown in figure 7, of those unpaid payroll tax cases  IRS has classified as currently not collectible, almost two-thirds were as a  result of a business being defunct.
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, from just over 5,000 businesses in 1998 to over 10,000 as of  September 30, 2007. The number of businesses that had not paid payroll  taxes for over 40 quarters (10 years or more) during this period also  almost doubled, from 86 businesses to 169 businesses. These figures are  shown in table 1.
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 due to this  statutory period. Figure 8 shows the amount of unpaid payroll taxes that  will statutorily expire and be written off by IRS over the next several years  if IRS is unable to collect the taxes.
As figure 8 indicates, the federal government will lose its right to collect  billions of dollars in payroll taxes each year if IRS does not obtain  payment from tax debtors before the statutory period for collection  expires.
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 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 are one of their top collection  priorities, IRS did not have performance measures to evaluate the  collection of unpaid payroll taxes or the related TFRP assessment. 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 which it has not yet developed.
subsections: section_title: IRS’s Approach Focuses On Voluntary Compliance, Even for Egregious Payroll Tax Offenders
paragraphs: As discussed previously, IRS has a number of powerful tools at its disposal  to help prevent the accumulation of unpaid taxes and to collect the taxes  that are owed. Those tools include the ability to file liens on a tax debtor’s  property, levy available funds from bank accounts and other financial  sources, and seize and sell property owned by the tax debtor to help  satisfy the tax debt. However, even with such tools, we found that some  businesses continued to accumulate payroll tax debt for dozens of tax  quarters. This is partly because IRS’s approach to collection focuses first  on gaining voluntary compliance, even for more egregious payroll tax  offenders. IRS acknowledges that in some instances its collection methods  do not bring taxpayers into compliance.
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. As discussed earlier, 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.
One of our case studies illustrates the extent to which unpaid payroll taxes  can accumulate using a voluntary compliance approach for unpaid payroll  taxes. In this case, the business was opened in 1994, after its owner closed  a similar business that owed payroll taxes. From its inception, the case  study business was not compliant with tax laws, making some tax  payments, but not filing any of the required tax returns. In July 1999, IRS  identified that the business was not filing its required payroll tax returns  and assigned the case to a revenue officer for investigation. After working  with the business for 5 months, the revenue officer secured 22 quarters of  delinquent payroll tax returns. Those returns indicated a total tax debt,  including interest and penalties, of almost $500,000. In March 2000, the  business requested to be put on an installment agreement to repay over  time the known outstanding taxes it owed. However, the business was not  eligible for an installment agreement because it was not compliant with its  filing requirements. The revenue officer worked with the business for  another 9 months attempting to obtain the financial information needed to  initiate an installment agreement. Meanwhile, the business continued to  accumulate unpaid payroll tax debt of about $20,000 each quarter. The  revenue officer continued to work with the business to gain voluntary  compliance, but the business did not provide the needed financial  information until the revenue officer filed levies against the business’s  known bank accounts in early 2001. The levies resulted in collections of  less than $5,000 toward the unpaid tax debt. After 2-1/2 more years, in  August 2003, the revenue officer noted that, though IRS had been seeking  compliance for several years, the business was still not compliant with  filing requirements, had not provided current financial information, and  was generally unresponsive. Although the revenue officer continued to  obtain some delinquent tax returns and some payroll tax payments as a  result of the officer’s efforts, the business continued to accumulate  additional tax debt. As of July 2007, the business had accumulated payroll  taxes from over 30 quarters totaling almost $1 million, and other taxes,  including business income taxes, of almost $400,000. Those unpaid taxes  stretch back to the inception of the business in 1994. Additionally, the  business has not filed required payroll tax returns since the fourth quarter  of 2004—potentially accruing a quarter million dollars in additional unpaid  payroll tax debt.
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 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 due in part  to 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.
It should be noted that 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 the  Treasury Inspector General for Tax Administration (TIGTA) in a study  from 8 years ago. In its 2000 study, TIGTA found that revenue officers  were focused on IRS’s customer service goals and therefore were reluctant  to take enforcement actions. As a result, they continued to work with tax  debtors to gain voluntary payment rather than using more aggressive  enforcement tools such as levies or seizures. TIGTA found that in 116  cases they reviewed, revenue officers did not file a lien, issue a summons,  or levy or seize assets in almost a third of the cases. Revenue officers  considered seizing assets in just 3 of the 116 cases, but actually seized  assets in just 1 case. TIGTA also reported that as a result of IRS not  taking effective collection actions, the cases (while under review by  TIGTA) accrued more unpaid taxes while assigned to revenue officers  than the revenue officers were able to collect. Again in 2005, 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 for half of the cases for  which tax debtors missed specific deadlines.
IRS has recently strengthened its IRM 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 unpaid  payroll taxes. The revised IRM advises revenue officers to take all  appropriate remedies to bring the tax debtor into compliance and that they  should consider seizing assets and pursuing TFRP assessments against  responsible parties. It is important for IRS to support taxpayers in  remaining compliant and to facilitate businesses becoming compliant;  however, having a primary focus on voluntary compliance can lead to  delays in taking stronger actions against flagrant tax debtors who refuse to  comply with the tax laws and accumulate dozens of quarters of payroll tax  debt. Having a reticence to use enforcement tools may, over time, actually  diminish voluntary compliance and collections. IRS’s guidance states that  businesses that fail to comply with the tax law jeopardize the public  perception of tax enforcement, which has a detrimental effect both on  compliance and collections.
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. In another case, IRS did not seize assets,  but received some collections because local officials seized and sold the  business owner’s house. We noted this issue in our previous report on  DOD contractors with tax debt.
section_title: IRS’s Approach Can Result in Delayed Enforcement Actions
paragraphs: In reviewing specific collection actions taken by IRS, we found that  revenue officers often did not timely take basic steps to protect the  government’s interest in a tax debtor’s property by filing a lien or to hold  the business’s owners and officers personally responsible for willfully  failing to remit withheld payroll taxes. Our analysis indicated that IRS had  not filed a lien to protect the government’s interest in a business property  in over 30 percent of all payroll tax cases assigned to the field for  collection effort. Additionally, our review of recent IRS actions to assess  TFRPs against owners/officers of businesses with payroll tax debt found  that revenue officers took 40 weeks on average to determine that a TFRP  should be assessed and an additional 40 weeks on average to actually  assess the penalty.
Failure to take timely action to file liens or assess TFRPs has been a long- standing problem. In 2005, TIGTA reported that IRS’s revenue officers  often failed to take timely collection actions on payroll tax cases and  concluded that not taking timely and aggressive collection actions on  cases allowed businesses to continue to accumulate unpaid payroll taxes.  IRS’s own analysis of TFRP assessments, also done in 2005, found that less  than half of all TFRP cases had a lien filed to protect the interest of the  government.
subsections: section_title: IRS Does Not Always File Tax Liens Timely
paragraphs: Our audit found that for payroll tax debt, one of its highest collection  priorities, IRS does not always file liens to protect the government’s  interest in property and, when it 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.
The ability to file a tax lien in the public records is a powerful tool for IRS.  The lien appears on credit reports for both individuals and businesses and  can stay there for approximately 10 years. For an individual, the presence  of a tax lien can make it more difficult to obtain credit, in turn making it  more difficult to buy a home, rent an apartment, or buy a car. Tax debtors  that are able to get credit may have to pay higher credit rates. For  businesses, the presence of a tax lien can result in a creditor no longer  shipping inventory unless paid for by cash and banks withdrawing lines of  credit. This can ultimately cause businesses to fail. Lien filing may also  increase the likelihood of collection by IRS. The 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.
Although the IRM does not explicitly state that liens should be filed, it  does emphasize the need to do so to protect the interest of the federal  government. Because businesses may be highly leveraged or have few  tangible assets, the filing of a lien may not always be advantageous to the  government; other situations may also make it counterproductive to file a  lien. The IRM does allow revenue officers to not file a lien in order to  allow a business to obtain a loan or to otherwise continue operating so  that the business may become compliant and pay the past due tax debt.  However, 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  Notice of Federal Tax 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  bypasses its ACS process and routes these cases to revenue officers for  collection. However, IRS generally must place cases in a queue until a  revenue officer is available to work the cases. Cases can be in the queue  for extended periods of time awaiting assignment. 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 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. 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.
IRS has been aware of this issue. Its own study in 2005 found less than half  of payroll tax cases in which IRS assessed the business owner or officer a  TFRP had a lien filed to protect the interest of the government, and only 27  percent of TFRP assessments that were under a year old had a lien filed.  As the previously discussed case study illustrates, the timeliness of lien  filing is critical in such cases to protect the government’s interest in the  owner’s personal property and to encourage the owners/officers to make  the business compliant.
IRS is taking some steps to address these issues. For example, IRS is  investigating the feasibility of routing payroll tax cases that might  otherwise be sent to the queue through the ACS process to have a lien  filed. Additionally, in recent years IRS has begun to put in the IRM  timeliness guidelines for the use of certain collection tools, including lien  filings. The IRM now calls for revenue officers to make a determination to  file a lien within 10 days of initial contact. These are positive steps which  could help improve the timeliness of IRS’s lien filings in the future.  However, while not all cases warrant having a lien filed, our analysis has  shown that, overall, 60 percent of all unpaid payroll tax cases currently in  IRS’s inventory do not have a lien filed to protect the government’s interest  in tax debtors’ property.
section_title: IRS Does Not Always Assess Trust Fund Recovery Penalties Timely
paragraphs: Although IRS has a powerful tool to hold responsible owners and officers  personally liable for unpaid payroll taxes through assessing a TFRP, 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  the 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, 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 for  cases where a TFRP was applicable, revenue officers did not initiate or  conduct the interview to begin the TFRP process in over a quarter of the  cases TIGTA 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 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 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 assessing the  TFRP, the owner closed the business, which by then had accumulated  about $3 million in unpaid taxes.
Lack of timeliness in assessing TFRPs has been a long-standing problem  for IRS. Our annual audit of IRS’s financial statements in the late 1990’s  identified this problem and we made recommendations for IRS to analyze  and determine the factors causing delays in both processing and recording  TFRP assessments. Although IRS has taken many steps to improve the  timeliness of TFRP assessments, such as centralizing TFRP assessment  processing and implementing a new Web-based application, these actions  have not been fully effective in resolving this issue. During our audit of  IRS’s fiscal year 2007 financial statements, we continued to find long  delays in IRS’s processing and posting of TFRP assessments.
For most of the time our case study businesses were being worked on by  revenue officers, the IRM required them to make a determination of  whether to pursue a TFRP assessment within 180 days—about 26 weeks.  However, the IRM was silent about how long it should take to actually  assess the TFRP once revenue officers determined that the failure by the  responsible individuals to remit payroll taxes was willful. Additionally,  although IRS had a 180-day requirement to make a determination, revenue  officers could make the determination to delay the assessment, thus  making a timely determination while still not moving forward to formally  assess the TFRP against the responsible individuals.
In September 2007, IRS implemented new IRM requirements to address  the timeliness of TFRP assessments. Under the new policy, revenue  officers are now required to make the determination as to whether to  pursue a TFRP within 120 days of the case being assigned and to complete  the assessment within 120 days of the determination. However, the revised  IRM maintains the provision to allow the revenue officer, with manager  authorization, to delay the TFRP determination. Additionally, the IRM  does not include a requirement for IRS to monitor the new IRM 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 that 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 that 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.
In contrast, having either a single revenue officer assigned or coordinating  the efforts of multiple revenue officers could provide IRS with several  advantages, including the following:    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 unprofitable  business to prevent the further accumulation of unpaid payroll taxes.
Assigning a single revenue officer could expedite the assignment of TFRP  assessments and collection efforts against those cases. For example, one  of our case study businesses was assessed a TFRP, but since the TFRP had  a lower priority, it was sent to the queue. Because the case had not been  assigned, IRS did not file a tax lien on the owner of the business and thus  the assessment of the TFRP had very little impact. Additionally, since IRS  has a statutory time limitation to collect against a tax debt, this owner was  almost half-way through the statutory period before the case was ever  worked on.
Assigning a single revenue officer could help improve IRS’s ability to  ensure assessments are made, transaction codes are input, and collections  are properly posted against trust fund amounts to all related parties, a  long-standing problem identified as a part of our financial statement  audits.
IRS collection officials said the agency categorizes the unpaid payroll tax  debt of the business as a high priority to ensure that higher-level revenue  officers are assigned mainly to the more complex business cases. IRS  may also assign the business payroll tax debt and the TFRP assessment to  different collection officials because the business and the responsible  owners/officers are not located in the same zip code area. For example, if  an officer is in a different state than the business, the collection efforts  would be handled by separate officials to facilitate face-to-face collection  efforts and to allow the revenue officer to physically go to courthouses to  perform property searches. IRS collection officials also 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 on. 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 own 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 August 2005 study,  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. IRS reported that for those assessments  made in 1996, for which IRS had been attempting collection for at least 8  years, the collection rate was only 13 percent. For all responsible  owners/officers that were assessed a TFRP, 43 percent never made a  payment on their trust fund penalty. IRS reported that of those TFRP  assessments that had been resolved, almost half were resolved in the first  year of the assessment, and almost 93 percent were resolved in the first 4  years.
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.  The IRM states 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. It further  states 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 less 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 business payroll taxes. This can result in little collection  action being taken against the parties responsible for the failure to remit  withheld payroll taxes.
When a business repeatedly fails to comply after attempts to collect, the  IRM states 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 business  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. We have reported in the  past that the U.S. Attorney’s Office and the District Counsel prefer not to  seek such injunctions due to the time and expense required to prosecute  these cases. 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. They 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, as discussed in the following two  examples.
One Georgia state official we spoke to said the state had passed laws to  allow businesses to be closed through administrative procedures within  the department of revenue without judicial intervention. The procedure is  tied to the state’s ability to seize the assets of the business. The state may  seize the assets of businesses that do not comply with their tax obligations  as a means of closing the business to prevent the further accumulation of  unpaid taxes, even if the sale of those assets do not result in collections to  reduce the business’s current tax debt. The official we spoke to stated  that it is a routine part of the state’s collection arsenal and the state closed  several dozen businesses this way in 2007 to prevent the further  accumulation of unpaid trust fund taxes.
Kentucky developed a procedure to close businesses that does not involve  the seizure of the business’s assets. That state centralized the judicial  proceedings for closing a business in a single court that is experienced in  tax-related injunctions and therefore is willing and able to move through  the process quickly. One official told us the state closed about 100  businesses a month through such proceedings to prevent the further  accumulation of unpaid payroll tax debt.
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 supports 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. IRS has  caseload and other workload reports for local managers (to measure  process and outputs); however, 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. Additionally, these  operational reports do contain information about unpaid payroll tax and  TFRP case assignments, but rather 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 to identify businesses that continue to  accrue additional payroll tax debt, but those 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 accompanying its annual financial  statement and in its IRS Data Book. However, IRS does not specifically  address unpaid payroll taxes as a part of those discussions. 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  assist IRS in measuring the success of its efforts to collect or prevent the  further accumulation of unpaid payroll taxes and to formulate more  effective approaches to dealing with this compliance issue.
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, they noted  that having certain additional tools available to them could allow them to  more effectively deal with recalcitrant businesses. Those tools include (1)  the ability to publish the names of tax debtors and (2) improved methods  of identifying business assets for levy.
Revenue officers stated, and we acknowledge, that IRS faces challenges in  balancing voluntary compliance with the need to enforce the tax laws.  Many businesses have accumulated dozens of tax quarters worth of  payroll tax debt, sometimes accumulating over a million dollars in unpaid  payroll taxes. In those egregious situations, including many of our case  studies, IRS’s policy to encourage voluntary compliance and use of  available collection tools neither resulted in the collection of the unpaid  portion nor prevented the further accumulation of more unpaid payroll  taxes. As part of our audit, we spoke with a number of state revenue  department officials to identify specific collection approaches and tools  used by those states to pursue payment of unpaid taxes. 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.
subsections: section_title: IRS Cannot Publish Tax Debtor Information
paragraphs: The IRC generally prohibits IRS from publicly disclosing federal tax  information without taxpayer consent. Although IRS tax liens are public  information, IRS does not centrally publish its lien filings or otherwise  make available information about businesses or individuals with tax debt.  However, during our discussions, IRS officials told us that being able to do  so could increase IRS’s ability to collect payroll tax debts.
In contrast, an increasing number of states—at least 19 including New  Jersey, Connecticut, Indiana, and California—are seeking to increase tax  collections by publicizing the names of those with delinquent tax bills.  For example, a recent California law mandates the state to publish each  year the names of the top 250 personal and corporate state tax debtors  with at least $100,000 in state tax debt. The list does not include those  who are fighting the tax bills in courts, have sought bankruptcy protection,  or have set up payment plans with the state. 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. For example,  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.
section_title: IRS Cannot Always Identify Levy Sources
paragraphs: As discussed previously, 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.  Although IRS has this authority, IRS officials stated that they often have  difficulty using levies to collect unpaid payroll taxes because, for example,  the levy may be made against funds in a bank account at a certain point in  time when little or no funds are available. Additionally, IRS officials told  us, 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. Once a levy is served against an account, a tax debtor will  often close the account and open an account in a different financial  institution. IRS must then search for where the tax debtor is now doing  business and attempt to serve a new levy. One IRS official stated that IRS  may serve levies on multiple banks while searching for the new accounts.  Such a process of searching for accounts is very time consuming for both  the revenue officers and the financial institutions being served the levies  and is a burden to these financial institutions.
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 currently  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 to enhance its levying powers.
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. As noted, over 1.6 million  businesses owe unpaid payroll taxes. 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 lifestyles.
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. For example, in one of our case studies in which a business  owed almost $2.5 million, the owner was involved in multiple other  businesses, all of which owed unpaid payroll taxes. IRS records indicated  that the owner was also underreporting personal income to avoid paying  personal income taxes. Additionally, the owner was the subject of at least  10 lawsuits either pending or settled and was involved in possible check  kiting and money laundering. In total, IRS records indicate 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 18 business owners/officers  had been 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 IRS found acted willfully in  the non-payment of the businesses’ payroll taxes and who were assessed  TFRPs—they 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 the 50 case study businesses with tax debt  found substantial evidence of abuse and potential criminal activity related  to the tax system; 12 of these case studies follow. 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. Employers are required by law to remit withheld taxes, and  the employer’s matching contributions, to IRS or face potential civil or  criminal penalties. Although we reviewed tax records and other  information for all 50 cases, we performed a more in-depth review of 12  case study businesses for this report. IRS had filed a lien to protect the  government’s interests for all of the 12 case studies, and had filed liens for  all but 5 of the 38 cases presented in appendix II. Table 3 shows the  results of 12 of the case studies we performed.
Our audits and investigations of the 50 case study businesses with tax  debt, 12 of which are detailed in table 3, showed abuse and potential  criminal activity related to the tax system. The following provides some  illustrative examples of several of these cases.
Case 1 The owner of this automotive firm continued to draw about a six- figure income from the business and owned substantial real property  while the business accumulated more than $3.5 million in unpaid federal  payroll taxes over a 10-year period. For the last decade, this business has  withheld taxes from its employees but remitted less than a quarter of the  taxes actually owed. IRS found the owner of the company willful and  responsible for not remitting the taxes, and IRS records indicate the owner  avoided paying taxes and trust fund amounts by transferring $1.5 million  in property after being assessed the TFRP and selling a personal residence  valued at over $600,000.
Case 2 This healthcare business, which owes almost $2.5 million of  unpaid payroll taxes, repeatedly refused to remit withheld federal payroll  taxes and the officers used the business to pay personal expenses. In  addition, IRS records indicated the business’s officers attempted to avoid  paying taxes by filing Chapter 11 bankruptcy on three separate occasions,  two of which were dismissed. Around the time of the bankruptcy filings,  the officers withdrew about $700,000 of cash from the business. IRS found  three officers of the business to be willful and responsible for not  remitting payroll taxes.
Case 6 This consulting business accumulated almost $1.5 million in  unpaid federal payroll taxes beginning over 10 years ago and over a half- million dollars in other federal taxes. The owner had multiple businesses  that have not filed required tax returns. Additionally, the business owner  has not filed personal returns since the early 1990s and owes over $400,000  in personal taxes. The owner received several cash loans from the  business while not paying taxes, and business monies were diverted into  the owner’s personal bank accounts. This business owner avoided IRS by  changing representatives and attorneys, which has had the effect of  stalling IRS actions with repeated requests for the same information. To  avoid collection action, the owner sold assets to a relative after receiving  notice that IRS was about to assess a TFRP.
Case 7 This manufacturing business owes almost $1.5 million in unpaid  payroll taxes for over 40 tax quarters. The owner also underreported tax  liabilities and was found willful and responsible for not remitting payroll  taxes from two other businesses. IRS found that business monies may be  flowing into personal accounts, and that the owner has hidden business  assets in his own name in order to prevent IRS seizures. The owner also  gave business assets to a relative who has used them to start a new  business. The owner used appeals and offers in compromise as a means to  delay IRS collection efforts, and has already defaulted on an offer in  compromise for earlier TFRPs.
Case 10 This healthcare business has accumulated over $8 million in  unpaid payroll taxes for almost 30 quarters. The owner was convicted of  tax fraud. Despite living in a multi million dollar home, the taxpayer  claimed inability to pay taxes due to financial hardship, and evaded IRS  levies by using check cashing businesses and writing checks to himself,  even paying himself a salary while incarcerated. Some of the owner’s  properties were sold by creditors, and the owner set up a new business in  one of the business’s properties bought by a relative. Although other  creditors seized and sold property to settle debts, we found no evidence of  IRS taking such actions.
Case 11 The owners of this construction company accumulated almost  $2.5 million in unpaid payroll taxes from over 50 tax quarters (over 12  years of non-payment). The owners also had tax debt from other  businesses dating back to the early 2000s. IRS records indicate that the  business owners underreported their personal income. Financial records  indicate that the owners may be involved in illegal check kiting and money  laundering dating back to the late 1990s, have several judgments  outstanding, and at least 10 lawsuits pending or settled. IRS officials  indicated that the owners have consistently stalled collection efforts  through such means as filing for bankruptcy, which has kept IRS from  seizing assets.
section_title: Conclusions
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 perception regarding the  fairness of the tax system, which 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 payments to the Social  Security and Hospital Insurance trust funds, falls more heavily on  taxpayers who willingly and fully pay their taxes. Third, the failure to  remit payroll taxes gives 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 its actions to collect and  prevent the further accumulation of unpaid payroll taxes. IRS has stated that  the collection of unpaid payroll taxes is one of its highest priorities. However,  IRS’s collection philosophy focuses on gaining voluntary compliance, even for  recalcitrant businesses that repeatedly fail to remit payroll taxes and whose  actions indicate no intention to become compliant. 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 and 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 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, IRS is not 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 to provide for the effective use of the full range of  available enforcement tools against egregious offenders to prevent those  businesses from continuing to accumulate payroll 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 its 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.
section_title: Recommendations for Executive Action
paragraphs: To provide better monitoring and more detailed guidance on collection  actions to be pursued against egregious payroll tax offenders, to strengthen  existing collection tools, and to develop additional enforcement tools to  effectively identify potential levy sources, we recommend that the  Commissioner of Internal Revenue take the following six actions:    Develop a process to monitor collection actions taken by revenue officers  against egregious payroll tax offenders to ensure collection actions  appropriately utilize all available collection tools contained in the IRM.
Review current case prioritization and assignment practices to determine  if IRS’s enforcement and collection procedures could be enhanced by  requiring, to the maximum extent feasible, businesses with egregious  payroll tax debt and the responsible owners/officers with a TFRP  assessment be treated as a single unified and coordinated collection effort  assigned to a single revenue officer.
Develop and implement procedures to expeditiously file a Notice of  Federal Tax Lien against property as soon as possible after payroll tax  debt is identified (including cases in the queue awaiting assignment) and  ensure liens are filed on both businesses with unpaid payroll taxes and  owners/officers assessed a TFRP.
Develop and implement procedures to monitor and report on revenue  officers’ compliance with the new TFRP assessment time frames to ensure  revenue officers are making TFRP determinations and assessments in a  timely manner.
Develop performance goals and measures that specifically evaluate the  accumulation of unpaid payroll taxes by businesses (especially egregious  businesses with over 20 quarters of payroll tax debt), the extent and  timeliness of TFRP assessments, and the effectiveness of actions taken to  collect unpaid payroll taxes and TFRP assessments.
Work with states that have developed procedures for matching financial  accounts to tax debts to evaluate the potential for IRS to either develop  and implement similar measures or partner with states that currently have  that tool to leverage their efforts to assist revenue officers in identifying a  business’s leviable assets.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, IRS recognized that all  appropriate tools must be used to bring payroll tax offenders into  compliance and concurred with all six of our recommendations. IRS noted  that it had implemented numerous actions to improve its tax collection  processes and procedures as well as to prioritize assignment of cases. It  also noted that it continues to explore other opportunities. In particular,  IRS cited its projects to increase its focus on businesses that accumulate  multiple periods of unpaid payroll taxes and to improve the timeliness of  lien filing and TFRP determinations.
With respect to our five recommendations for IRS to review or revise its  collection policies and to strengthen its existing collection tools to be used  in dealing with egregious payroll tax offenders, IRS agreed to evaluate its  practices and develop appropriate changes. Specifically, IRS agreed to (1)  explore the value of using existing data to evaluate collection actions  taken by revenue officers, (2) assign a single revenue officer to collect  both a business’s egregious unpaid payroll tax debt and the responsible  owners/officers with a TFRP assessment when feasible, (3) evaluate its  existing practices and determine appropriate changes to its lien filing  procedures to allow liens to be filed as soon as a payroll tax liability is  identified, (4) consider ways to use its TFRP reports to monitor and report  on revenue officers’ compliance with new TFRP assessment time frames,  and (5) evaluate the effectiveness and feasibility of establishing  performance goals and measures on the timeliness of TFRP assessments.
With respect to our recommendation to work with states that have  developed procedures for matching financial accounts to tax debts to  identify levy sources, IRS agreed with our recommendation. IRS said it  would work with those states to determine the effectiveness of their  programs and whether a similar program in IRS would be cost effective  and consistent with privacy laws.
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If you or your staff have any questions concerning this report, please  contact me 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 report. GAO staff who made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the magnitude of unpaid payroll tax debt, we obtained IRS’s  database of unpaid taxes as of September 30, 2007. We extracted all  payroll tax debt from that database and performed analysis to identify  the number of businesses with tax debt and the total dollar value of tax  debt associated with those businesses. We analyzed and summarized  the overall payroll tax debt by  the number of tax quarters of payroll tax owed by businesses;  the tax period for which the debt was owed;  the amount of the tax debt associated with interest, penalties, and  assessed taxes; and  the collection status of the debt, such as whether it is awaiting  assignment, assigned in the field for collections, or coded as being  currently not collectible.
We also analyzed the tax debt to determine the date on which IRS will be  statutorily prohibited from seeking collection from tax debtors and will  remove the tax debt from its records.
We requested that IRS perform specific data analysis of its tax records to  identify amounts that should have been remitted by businesses for those  trust funds, but were not, to develop an estimate of the total amount that  the General Fund subsidizes the Social Security and Medicare Part A trust  funds due to unpaid taxes. To validate IRS’s estimate, we compared that  analysis to one prepared by IRS as of September 30, 1998, during one of  our previous audits. At that time, IRS estimated the cumulative amount of  the subsidy to be $38 billion. Because IRS removes tax debt from its  records once the debt’s statutory collection period expires (generally 10  years from the date the tax is assessed), those estimates represented  approximately a 10-year subsidy. To further validate the 10-year estimate,  we obtained from IRS the annual increase in the subsidy based on unpaid  taxes. IRS determined the subsidy to be between $2 billion to $4 billion  annually. IRS developed its estimates based on data contained in its  masterfile of tax information, which we audit as part of IRS’s annual  financial statement audit.
To identify IRS’s reports and measures to manage unpaid payroll taxes, we  discussed IRS’s tracking of cases with cognizant managers and revenue  officers. In addition, we reviewed IRS’s reported measures in both the IRS  Databook and IRS’s Management Discussion and Analysis accompanying  its annual financial statements.
To determine IRS policies and procedures in place to prevent the non- payment of payroll taxes and to collect outstanding payroll taxes, we  reviewed IRS’s policies as laid out in the Internal Revenue Manual (IRM)  and discussed those policies and procedures with cognizant IRS officials  and revenue officers. We also reviewed certain Treasury Inspector General  for Tax Administration (TIGTA) and IRS reports related to the collection  of unpaid payroll taxes. To supplement our discussions with IRS officials  on tax collection activities, we also interviewed a number of state tax  collection officials, including officials from Georgia, Kentucky, Maryland,  and North Carolina, regarding tools and procedures used by those states  to collect unpaid taxes.
Additionally, we reviewed a sample of 76 businesses whose  owners/officers IRS found personally liable for the failure to remit payroll  taxes withheld from employees’ paychecks. The sample was originally  selected as part of our audit of IRS’s fiscal year 2007 financial statements.  The primary purpose of the sample was to determine whether IRS was  properly recording payments to all related parties. However, we also  performed other tests of IRS’s controls using this same sample. Although  we identified issues related to the timeliness of certain collection actions  based upon that sample, we are unable to project these results because the  sampling units used for the financial statement audit were payments rather  than accounts. We analyzed tax transcripts and other IRS records for those  cases with assessed TFRPs to identify the dates that IRS revenue officers  (1) initiated contact with the business, (2) made the determination to  pursue the TFRP against the officers, and (3) assessed the TFRP.
To further review IRS’s collection actions, we also performed a macro- analysis of IRS’s overall inventory of unpaid payroll tax debts. We used  macro-analysis to determine such factors as the percentage of payroll tax  debt with liens. We also used macro-analysis to determine the most  common types of industries with unpaid payroll taxes. We analyzed IRS’s  database of unpaid taxes and the information using the North American  Industry Classification (NAIC) system codes in that database. Using those  codes, we were able to identify the industry type for about 70 percent of  the payroll tax debt.
To determine whether businesses with unpaid payroll taxes were engaged  in abusive or potentially criminal activities with regard to the federal tax  system, we used data mining techniques to identify 50 businesses as  illustrative case studies based on criteria such as businesses with large  dollar amounts of unpaid payroll taxes accumulated over multiple tax  quarters. For those businesses, we reviewed IRS’s collection actions and  discussed the appropriateness of those actions or lack of actions with IRS  revenue officers. We obtained copies of IRS’s automated tax transcripts  and other tax records (e.g., revenue officers’ notes) from IRS. We also  performed additional searches of financial and public records. In cases  where record searches and IRS tax transcripts indicated that the owners  or officers of a business were involved in other related businesses that had  unpaid federal taxes, we performed additional analysis of those related  businesses and the owners/officers.
We conducted this performance audit 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: Data Reliability Assessment
paragraphs: For the IRS databases we used, 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 the 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.
section_title: Appendix II: Businesses with Unpaid Payroll Taxes
paragraphs: Table 3 provided data on 12 detailed case studies. Table 4 shows the  remaining 38 case studies that we audited. As with the 12 cases, we also  found substantial evidence of abuse or potentially criminal activity related  to the federal tax system during our review of these 38 case studies.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: The following individuals made major contributions to this report: William  J. Cordrey, Sean Bell, Russell Brown, Ray Bush, Kenneth Hill, Delores Lee,  David Shoemaker, Lisa Warde, Tina Wu, and J. Mark Yoder.