Tax Compliance: Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System
Published: 2007-11-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since February 2004, GAO has reported that weaknesses in the federal programs and controls that allowed thousands of federal contractors, tax exempt entities, and Medicare providers to receive government money while owing taxes. GAO was asked to determine if these problems exist for entities who receive federal grants or direct assistance and (1) describe the magnitude of taxes owed, (2) provide examples of grant recipients involved in abusive and potentially criminal activity, and (3) assess efforts to prevent delinquent taxpayers from participating in such programs. To perform this work, GAO analyzed data from the Internal Revenue Service (IRS), three of the largest grant and direct assistance payment systems, representing over $460 billion in payments in fiscal years 2005 and 2006, and the Housing and Urban Development (HUD) Section 8 tenant-based housing program. GAO investigated 20 cases to provide examples of grant recipients involved in abusive activity.
section_title: What GAO Found
paragraphs: While most recipients of payments federal grant and direct assistance programs pay their federal taxes, tens of thousands of recipients collectively owed $790 million in federal taxes as of September 30, 2006. This included over 2,000 individuals and organizations that received $124 billion of payments directly from the federal government and who owed more than $270 million of unpaid taxes (almost 6 percent of such recipients) and about 37,000 landlords participating in HUD's Section 8 tenant-based housing program who owed an estimated $520 million of unpaid taxes (almost 4 percent of such landlords). The $790 million estimate is likely substantially understated because GAO's analysis excluded the 80 percent of federal grants that are directly given to state and local governments which, in turn, disburse the grants to the ultimate recipients. GAO selected 20 grant and direct assistance recipients with high tax debt for a more in-depth investigation of the extent and nature of abuse and criminal activity. For all 20 cases GAO found abusive and potential criminal activity related to the federal tax system, including failure to remit individual income taxes and/or payroll taxes to IRS. Rather than fulfill their role as ''trustees'' of payroll tax money and forward it to IRS, these grant recipients diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these recipients diverted the payroll tax money for their own benefit or to help fund their businesses. GAO referred these 20 cases to IRS for additional collection and investigation action, as appropriate. Federal law and current governmentwide policies do not prohibit individuals and organizations with unpaid taxes from receiving grants or direct assistance. Several federal agencies established policies against awarding grants to tax delinquent applicants; however, federal agencies do not verify applicants' certification that they do not owe taxes. Further, federal law generally prohibits the disclosure of taxpayer data to federal agencies. Eleven grant recipients that GAO investigated appeared to have made false statements by not disclosing their tax debt as required. Further, agencies that award grants are not required to inquire as to recipients' tax debt status prior to providing direct assistance payments.

section_title: Letter
paragraphs: This report continues a series of audits and investigations we have  performed at your request to help address the large tax gap facing our  nation. The tax gap represents the difference between what taxpayers  should pay on a timely basis and what the Internal Revenue Service (IRS)  collected through voluntary compliance and enforcement activities. To  help address the tax gap, beginning in February 2004, we have issued a  series of reports detailing how some organizations and individuals abused  the federal tax system at the same time they were doing business with or  receiving benefits from the federal government and the lack of agency  controls to prevent such abuses from occurring. We determined there are  few consequences of abusing the tax system for these organizations and  individuals, which included defense, civilian agency, and General Services  Administration (GSA) contractors; tax-exempt (not-for-profit)  organizations (including charities participating in the Federal  government’s Combined Federal Campaign); and Medicare physicians.  While we performed this work it came to our attention that some  organizations and individuals who were recipients of federal grants were  also abusing the tax system. Thus, you asked us to perform additional  work and report specifically on organizations and individuals who abuse  the federal tax system at the same time they receive federal grants or other  similar types of federal assistance known as direct payments for specified  use (direct assistance) programs.
Based on your request, we initiated a forensic audit and related  investigations to determine, to the extent practical, whether recipients of  federal grants and direct assistance have unpaid federal taxes. Because the  vast majority of federal grants and direct assistance programs, an  estimated 80 percent of awarded funds, are administered and disbursed  through state and local governments, detailed payment data on the final  recipients needed for us to perform an electronic match with IRS taxpayer  delinquency files are not available at the federal level. Thus, the specific  objectives of our work were to (1) determine to the extent practical the  magnitude of federal taxes owed by individuals and organizations  receiving grants and direct assistance administered and disbursed at the  federal level and to further determine, using a selected case study of a  federal direct assistance program that administers and disburses payments  at the state and local level, tax debts owed by state and local recipients of  such programs; (2) provide examples of grant and direct assistance  recipients involved in abusive or criminal activity related to the federal tax  system; and (3) assess efforts by awarding agencies to prevent delinquent  taxpayers from participating in federal grant and direct assistance  programs.
To determine to the extent practical the magnitude of taxes owed by  individuals and organizations receiving grants or direct assistance  administered at the federal level, we utilized disbursements data from  three of the largest federal payment systems that processed payments for  the majority of federal grant and direct assistance excluding Medicare and  Medicaid during fiscal years 2005 and 2006. For our case study of  recipients receiving federal payments at the state and local levels, we  selected the Department of Housing and Urban Development’s (HUD)  Section 8 tenant-based housing assistance program, a direct assistance  program to aid low-income families, because this program is a large  federal program that is administered at the state or local government level.  To determine the extent to which grant and direct assistance recipients  had unpaid federal taxes, we utilized IRS unpaid tax data as of September  30, 2006. Using the Taxpayer Identification Number (TIN), we  electronically matched IRS’s tax debt data to payment and other  management information that represented payments to the various grant  and direct assistance recipients we identified.
To illustrate indications of abuse or criminal activity related to the federal  tax system in grant and direct assistance programs, based on our data  mining, we performed investigative work on a nonrepresentative selection  of 20 organizations and individuals that participated in federal grant and  direct assistance programs during fiscal years 2005 and 2006. We selected  these organizations and individuals based upon factors such as the amount  of tax debt and the number of delinquent tax periods. Our investigative  work included reviewing tax records and performing additional searches  of criminal, financial, and other public records.
To determine the actions that responsible federal agencies take to prevent  individuals and organizations with significant tax delinquencies from  receiving grants and direct assistance, we examined governmentwide and  selected agency policies and procedures, reviewed selected application  files, and interviewed officials from the Office of Management and Budget  (OMB); IRS; and Departments of Agriculture, Education, Health and  Human Services (HHS), Homeland Security, and HUD. For details on our  scope and methodology, see appendix I.
We conducted our audit between January 2007 and August 2007. We  performed our work in accordance with U.S. generally accepted  government auditing standards. The investigative portion of our work was  completed in accordance with investigative standards established by the  President’s Council on Integrity and Efficiency.
subsections: section_title: Background
paragraphs: A federal grant is an award of financial assistance from a federal agency to  an organization to carry out an agreed-upon public purpose. A Direct  Payment for Specified Use (direct assistance) is an award of financial  assistance from the federal government to individuals, private firms, and  other private institutions to encourage or subsidize a particular activity by  conditioning the receipt of the assistance on a particular performance by  the recipient. As such, federal grants and direct assistance programs do  not include solicited contracts for the procurement of goods and services  for the federal government.
Based on our analysis of fiscal years 2004 and 2005 data from the Federal  Assistance Award Data System (FAADS), federal agencies collectively  awarded grants and direct assistance of approximately $300 billion  annually. Further analysis of the FAADS data indicates that  approximately 80 percent of federal grants and direct assistance consist of  federal funds provided to state and local governments, which, in turn,  disburse funds to the ultimate recipients. Consequently, only about 20  percent of awarded funds are provided directly from the federal  government to the organization that ultimately spends the money.
Governmentwide policies affecting the award and administration of grants  to nongovernmental entities are covered in OMB Circular No. A-110,  Uniform Administrative Requirements for Grants and Agreements with  Institutions of Higher Education, Hospitals, and Other Non-Profit  Organizations. OMB Circular No. A-102, Grants and Cooperative  Agreements with State and Local Governments, provides  governmentwide guidance for administering grants provided to state and  local governments and prescribes similar procedures as those included in  Circular No. A-110. Direct assistance programs are not subject to the same  governmentwide policies as grants; procedures governing the application  and award processes for direct assistance are prescribed in guidance and  regulations promulgated by the cognizant federal agency responsible for  administering the program.
Most grant applicants that apply directly to the federal government are  required to complete an Application for Federal Assistance, Standard  Form (SF) 424. The SF 424 provides federal agencies with entity  information, such as name, employer identification number, address, and a  descriptive title of the project for which the grant will be used. The  applicant is required to certify that the information provided on the SF 424  is true and correct and whether the applicant is currently delinquent on  any federal debt.
section_title: Grant and Direct Assistance Recipients Owe About $790 Million in Taxes
paragraphs: While most federal grant and direct assistance recipients pay their federal  taxes, we identified tens of thousands of grant and direct assistance  recipients that collectively owed about $790 million in federal taxes as of  September 2006. These tax debts were owed by entities who received  federal payments directly from federal payment systems during fiscal  years 2005 and 2006 and individuals who participated in HUD’s Section 8  tenant-based housing program as landlords during fiscal years 2005 and  2006. We used IRS’s September 2006 unpaid assessments file data to  calculate the amount of taxes owed at or about the time the various grant  recipients received their grant payments. Specifically, we found    2,000 of about 32,000 recipients (about 6 percent) who received federal  grant and direct assistance benefits directly from three of the largest  federal payment systems had more than $270 million of unpaid federal  taxes. About $110 million of the $270 million in unpaid taxes represents  unpaid payroll taxes.    37,000 of over 1 million landlords (about 4 percent) participating in the  HUD Section 8 program had about $520 million of unpaid federal taxes.  Most of these tax debts were unpaid individual income taxes.
In our audit, we found that grant recipients had a substantial amount of  unpaid payroll taxes. Employers may be subject to civil and criminal  penalties if they do not remit payroll taxes to the federal government.  When an employer withholds taxes from an employee’s wages, the  employer is deemed to have a fiduciary responsibility to hold these funds  “in trust” for the federal government until the employer makes a federal  tax deposit in that amount. To the extent these withheld amounts are not  forwarded, the employer is liable for these amounts, as well as the  employer’s matching Federal Insurance Contribution Act contributions for  Social Security and Medicare. Individuals employed by the employer (e.g.,  owners or officers) may be held personally liable for the withheld amounts  not forwarded and assessed a civil monetary penalty known as a trust fund  recovery penalty (TFRP). Willful failure to remit payroll taxes can also be  a criminal felony offense punishable by imprisonment of up to 5 years,  while the failure to properly segregate payroll tax funds can be a criminal  misdemeanor offense punishable by imprisonment of up to a year. The  law imposes no penalties upon an employee for the employer’s failure to  remit payroll taxes since the employer is responsible for submitting the  amounts withheld. The Social Security and Medicare trust funds are  subsidized or made whole for unpaid payroll taxes by the federal  government’s general fund. Thus, personal income taxes, corporate  income taxes, and other government revenues are used to pay for these  shortfalls to the Social Security and Medicare trust funds.
Although grant and direct assistance recipients had about $790 million in  unpaid federal taxes as of September 30, 2006, this amount likely  understates the full extent of unpaid taxes for these or other organizations  and individuals. For example, except for our case study involving HUD’s  Section 8 tenant-based housing program, our estimate of grant and direct  assistance recipients was limited to data from three of the largest  government payment systems and thus did not include all federal grant  and direct assistance disbursements. Further, our analysis of the three  payment systems did not include recipients of payments who received  their payments through state and local government entities. Based on our  analysis of data from the FAADS, we estimated that payments paid by the  federal government to final recipients account for only about 20 percent of  the total grant and direct assistance funds awarded by the federal  government. The remaining 80 percent of grant and direct assistance funds  are provided to states and local governments, which, in turn, disburse  them to the ultimate recipient.
Further, to avoid overestimating the amount owed, we limited our scope  to tax debts that were affirmed by either the taxable entity or a tax court  for tax periods prior to 2006. We did not include the most current tax year  because recently assessed tax debts that appear as unpaid taxes may  involve matters that are routinely resolved between the taxpayer and IRS,  with the taxes paid, abated, or both within a short period. We eliminated  these types of debt by focusing on unpaid taxes for tax periods prior to  calendar year 2006 and eliminating tax debt of $100 or less.
The IRS tax database reflects only the amount of unpaid taxes either  reported by the individual or organization on a tax return or assessed by  IRS through its various enforcement programs. The IRS database does not  reflect amounts owed by organizations and individuals that have not filed  tax returns and for which IRS has not assessed tax amounts due. Further,  our analysis did not attempt to account for organizations or individuals  that purposely underreported income and were not specifically identified  by IRS as owing the additional taxes. According to IRS, underreporting of  income accounted for more than 80 percent of the estimated $345 billion  annual gross tax gap. Consequently, the full extent of unpaid taxes for  grant and direct assistance participants is not known.
section_title: Examples of Selected Recipients of Grants and Direct Assistance Involved in Abusive and Criminal Activity Related to Federal Tax System
paragraphs: For all 20 cases of grant and direct assistance recipients we investigated  for examples of abusive and criminal activity related to the federal tax  system based on the large amount of tax debt and number of delinquent  tax periods, we found in all cases evidence that indicated the existence of  such abusive and criminal activities. Of these 20 cases, 14 cases were not- for-profit organizations that received grant payments and also had unpaid  payroll taxes, some dating as far back as the 1990s. For example, one  educational institution failed to submit employee payroll withholding  taxes several times within a 3-year period and accumulated an unpaid tax  liability of almost $4 million. For the cases of payroll tax delinquencies we  investigated, officials responsible for these organizations failed to fulfill  their role as “trustees” of employees’ payroll tax withholdings and forward  this money to IRS as required by federal tax laws. Instead, these officials  diverted the withholdings to fund the organizations’ operations or for  personal benefits, such as their own salaries or extravagant vacations. The  other 6 cases involved individuals who owed individual income taxes and  who also received government subsidy payments through HUD’s Section 8  low-income housing program. In one of these cases, the landlord  attempted to evict renters who were instructed by IRS to pay the rent  directly to IRS instead of the landlord. In all 20 cases, we saw significant  evidence of IRS collection activity occurring, but in only a couple of cases  did we see action related to investigating these entities and individuals for  criminal violations of federal tax laws.
Table 1 highlights 10 cases of grant recipients we investigated with unpaid  taxes. The other 10 cases are summarized in appendix II.
The following provide illustrative detailed information on several of these  cases:  Case 4: This landlord participating in the Section 8 tenant-based housing  program was involved in a fraudulent real estate transaction in addition to  owing over $3 million in delinquent income taxes. The landlord was  indicted on mortgage fraud and racketeering for attempting to sell real  estate at an inflated price using false appraisals. Previously, the landlord’s  family member was convicted of conspiracy to commit mail fraud, wire  fraud, and money laundering in a scheme to sell fraudulent vacation club  memberships. In addition, the landlord was charged with fraudulent  conveyance of over $3 million worth of property to defraud creditors.
Case 7: This grant recipient organization, which provides medical care to  low-income families, has experienced financial problems throughout most  of the 2000s and has several hundred thousand dollars in delinquent  payroll taxes. During these years, while failing to properly fund its  employee pension plan, the grant recipient paid hundreds of thousands of  dollars in consulting fees to a former employee. Grant recipient could not  document to other auditors over a million dollars in expenses relating to  grants. Grant recipient has not made required contributions totaling tens  of thousands of dollars to its pension plan. In addition, IRS assessed a  TFRP against key grant recipient officials.
Case 9: This not-for-profit grant recipient has been in operation since the  1980s to provide social services to disadvantaged individuals and families  and has another closely related not-for-profit entity that also received  federal grants. The recipient has over $1 million in unpaid payroll taxes  dating back to the early 2000s, and IRS has placed several tax liens against  the grantee’s property. The grant recipient has had recurring financial  problems and an independent audit report raised concerns about the  entity’s ability to continue operating. The recipient has also been cited for  commingling funds among related grant recipients and for not having a  functioning Board of Directors as represented to the granting agency. The  recipient has been recommended for disbarment.
Case 10: This not-for-profit grant recipient stopped making payroll tax  deposits for several years beginning mid-2000s, accumulating unpaid  payroll taxes totaling several hundreds of thousands of dollars. IRS filed  liens against grantee assets and assessed the exempt organization with  payroll tax violation penalties and interest totaling tens of thousands of  dollars. A key grant recipient officer had a prior conviction for tax evasion  and was again investigated for improperly using grant funds to purchase  expensive clothing, a luxury vehicle, and lavish vacations and to pay taxes  assessed from a prior tax evasion conviction. A key grantee officer had  numerous individual income tax delinquencies.
section_title: Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating in Federal Grant or Direct Assistance Programs
paragraphs: Neither federal law nor current governmentwide policies for administering  federal grants or direct assistance prohibit applicants with unpaid federal  taxes from receiving grants and direct assistance from the federal  government. Even if such requirements did exist, absent consent from the  taxpayer, federal law generally prohibits IRS from disclosing taxpayer data  and, consequently, federal agencies have no access to tax data directly  from IRS. Moreover, federal agencies we reviewed do not prevent  organizations and individuals with unpaid federal taxes from receiving  grants or direct assistance for the specific programs they administer.
With regard to administering federal grants, federal law and current  governmentwide policies, as reflected in OMB Circulars, do not prohibit  individuals and organizations with unpaid taxes from receiving grants.  OMB Circulars provide only general guidance with regard to considering  existing federal debt in awarding grants. Specifically, the Circulars state  that if an applicant has a history of financial instability, or other special  conditions, the federal agency may impose additional award requirements  to protect the government’s interests. However, the Circulars do not  specifically require federal agencies to take into account an applicant’s  delinquent federal debt, including federal tax debt, when assessing  applications. While they require grant applicants to self-certify in their  standard government application (SF 424) whether they are currently  delinquent on any federal debt, including federal taxes, the Circulars  contain no provision instructing the agencies to verify such certifications  or describing how such verification should be done. No assessment of tax  debt is required by OMB on a sampling or risk-based assessment.
Although current governmentwide policies do not require it, federal  agencies, such as HHS and Department of Education, have policies against  awarding grants to applicants that owe federal debts. These policies state  that a grant may not be awarded until the debt is satisfied or arrangements  are made with the agency to which the debt is owed. However, awarding  agencies rely extensively on applicants’ self-certifications that they are not  delinquent on any federal debt, including tax debt. Certain agencies, such  as HHS, stated that they check credit reports to see if the grant applicant  has any outstanding tax liens prior to award of the contract. While it is  difficult to validate the agencies’ assertions, none of these agencies could  provide us examples where grant officials denied a grant based on self- disclosed tax delinquencies or required applicants to make repayment  arrangements with the agency to which debt was owed.
Even if requirements to verify applicants’ disclosures did exist, federal law  poses a significant challenge to federal granting agencies in determining  the accuracy of representations made by organizations applying for grants.  Specifically, the law does not permit IRS to disclose taxpayer information,  including tax debts, to federal agency officials unless the taxpayer  consents. Thus, unless an applicant provides consent requesting that IRS  provide taxpayer information to federal agencies, certain tax debt  information generally can only be discovered from public records when  IRS files a tax lien against the property of a tax debtor. Further,  representatives of one federal agency that has attempted to develop an  approved consent form discovered that IRS may not accept certain signed  consent forms because a requirement for an applicant to sign a consent  form as a precondition to the agency’s acceptance of the application may  be considered a form of duress and thus raise a disclosure issue.  Notwithstanding, while information on filed tax liens is generally publicly  available, IRS does not file tax liens on all tax debtors nor does IRS have a  central repository of tax liens to which grant-awarding agencies have  access. Further, available information on tax liens may not be current or  accurate because other studies have shown that IRS has not always  released tax liens from property when the tax debt has been satisfied.
Of the 20 organizations and individuals that we selected for additional  investigation of abuse and criminal activity, 14 were grant recipients that  were required to submit an application in order to be awarded a grant. In  our review of the grant applications for the 14 grant cases, we found that  11 applicants certified in their applications that they were not currently  delinquent in any federal debt, even though IRS had current tax  assessments on file for these entities at the time the applications were  filed. As a result, these 11 cases appear to have violated the False  Statements Act because they did not declare their existing tax debt in their  applications even though they were required to do so.
Direct assistance programs are generally not subject to the same  governmentwide guidance for grants. Instead, the cognizant federal  agencies implement the necessary regulations for administering the  program. With regard to our HUD’s Section 8 tenant-based program case  study, HUD regulations do not require local housing authorities to identify  whether landlords who participate in HUD’s housing assistance program  and receive housing subsidies have outstanding federal tax delinquencies  or prohibit payments if such delinquencies are identified. HUD regulations  do permit local housing authorities to deny program participation if a  landlord has not paid state or local real estate taxes, fines, or assessments.  HUD regulations, however, do not require local housing authorities to  deny the landlord from participating in the HUD program if the landlord  owes any delinquent federal debts, including federal taxes.
section_title: Conclusion
paragraphs: Because about 80 percent of all federal grants and direct assistance are  administered and disbursed through state and local governments, the  extent to which all final recipients of these federal payments owe taxes is  not known. However, our limited audit has demonstrated that tens of  thousands of grant and direct assistance recipients have taken advantage  of the opportunity to avoid paying $790 million in federal taxes. At the  same time they failed to pay their federal taxes, these individuals and  organizations benefited by receiving billions of dollars of federal grants or  direct assistance benefits. With regard to grants, allowing individuals and  organizations to receive federal grants while not paying their federal taxes  is not fair to the vast majority of grant applicants that pay their fair share  of taxes. This practice causes a disincentive to individuals and  organizations to pay their fair share of taxes and could lead to further  erosion in compliance with the nation’s tax system.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Director, Office of Management and Budget,  assess the need to issue guidance requiring federal agencies that award  certain grants and other direct assistance, where appropriate in relation to  the potential adverse effect on potential applications, to take the following  two actions:    Conduct actions that would help determine if applicants had unpaid  federal tax debt, including obtaining applicant consent to inquire as to tax  debt status from IRS; this could be achieved through sampling or other  risk-based assessments.
Consider the result of those inquiries in the award determinations.
We also recommend that the Acting Commissioner of Internal Revenue  evaluate the 20 referred cases detailed in this report for appropriate  additional collection action or criminal investigation as warranted.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comment from IRS and oral comments from OMB on  the draft of this report. Both IRS and OMB agreed with the draft report’s  recommendations. OMB also provided technical comments on the draft  report, which we incorporated as appropriate. We have reprinted IRS’s  written comments in their entirety in Appendix III.
As agreed with your offices, unless you publicly release its contents earlier  we plan no further distribution of this report until 30 days from its date. At  that time, we will send copies of this report to the Acting Commissioner of  Internal Revenue, the Director of the Office of Management and Budget,  interested congressional committees, and other interested parties. We will  make copies available to others upon request. In addition, the report will  be available at no charge on the GAO Web site at http://www.gao.gov.  Please contact me at (202) 512-6722 or kutzg@gao.gov if you have any  questions concerning this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report.
section_title: Appendix 1: Scope and Methodology
paragraphs: To address our first objective to describe the magnitude of tax debt owed,  we obtained and analyzed federal payment databases from the Department  of the Treasury’s Automated Standard Application Payment System  (ASAP), the Department of Education’s Grant Administration and Payment  System (GAPS), and the Department of Health and Human Services’ (HHS)  Payment Management System (PMS) for fiscal years 2005 and 2006. These  three agencies process grant and other assistance program payments on  behalf of many federal agencies and, in fiscal years 2005 and 2006,  processed over $460 billion in grant and direct assistance payments,  excluding Medicare and Medicaid. Our analysis of data, however, was  limited because approximately 80 percent of federal grant and direct  assistance payments are paid to state and local governments, which then  disburse funds to final recipients. Because identifying information on the  final recipients of payments provided at the state and local level is not  available at the federal level, our analysis was limited to those payments  provided directly by the federal government to final recipients. We  estimated these direct payments to final recipients represented about 20  percent of total federal grant and direct assistance payments.
Because identifying information for final recipients of payments provided  at the state and local levels was not available at the federal level and not  practical for us to obtain, we selected one major federal program that  disburses funds at the local level for a case study analysis. For this case  study, we selected the Department of Housing and Urban Development’s  (HUD) Section 8 tenant-based low-income housing program, a program  classified as a direct assistance program, which provides rental assistance  to low-income families by providing supplemental rental payments directly  to landlords participating in the rental assistance program. We obtained  and analyzed an extract from HUD’s Public Housing Information Center  (PIC) database, which HUD represented to be the most complete data  source available on low-income assisted households in HUD’s public  housing or voucher programs, that contained identifying information on  landlords who participated in HUD’s program during fiscal years 2005 and  2006.
2006, unpaid assessments files and electronically matched these files with  the various grant and direct assistance recipients identified in the above  databases using the taxpayer identification number. To avoid overstating  the amount of unpaid taxes owed by grant recipients and to capture only  significant tax debt, we excluded tax debts meeting specific criteria. The  criteria we used to exclude tax debts are as follows:  tax debts IRS classified as compliance assessments or memo accounts for  financial reporting,  tax debts from calendar year 2006 tax periods, and   grant recipients with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under  dispute or generally duplicative or invalid and tax debts that are incurred  after the dates the entities received grant payments. Compliance  assessments or memo accounts were excluded because these taxes have  neither been agreed to by the taxpayers nor affirmed by the court, or these  taxes could be invalid or duplicative of other taxes already reported. We  excluded tax debts from calendar year 2006 tax periods to eliminate tax  debt that may involve matters that are routinely resolved between the  taxpayers and IRS, with the taxes paid or abated within a short period. We  also excluded tax debts of $100 or less because they are insignificant for  the purpose of determining the extent of taxes owed by grant recipients. personal bank data, entities established to hide assets, etc.) that the  recipient individuals or entities, including key officials, own or receive.
To determine actions federal agencies take to prevent individuals and  organizations with significant unpaid federal taxes from either being  approved for or receiving grant or direct assistance payments, we  reviewed governmentwide and agency-specific policies and procedures for  awarding grants and benefits from the respective programs. We also  interviewed officials from the Office of Management and Budget and the  Departments of Agriculture, Education, Homeland Security, HHS, and  HUD on whether tax debts are considered in their decisions to approve  award applications. In addition, to test whether grant applicants properly  disclosed their current tax delinquencies when submitting applications, we  requested and reviewed the grant applications for our 14 cases that  applied for grants.
We conducted our audit work from January 2007 through August 2007 in  accordance with U.S. generally accepted government auditing standards,  and we performed our investigative work in accordance with standards  prescribed by the President’s Council on Integrity and Efficiency.
subsections: section_title: Data Reliability Assessment
paragraphs: For IRS unpaid assessments data, we relied on the work we performed  during our annual audits of IRS’s financial statements. While our financial  statement audits have identified some data reliability problems associated  with the coding of some of the fields in IRS’s tax records, including errors  and delays in recording taxpayer information and payments, we  determined that the data were sufficiently reliable to address our report’s  objectives. Our financial audit procedures, including the reconciliation of  the value of unpaid taxes recorded in IRS’s master file to IRS’s general  ledger, identified no material differences. information for reporting on program performance under the Government  Performance and Results Act. We held discussions with HUD’s database  administrators on input controls used to maintain data integrity for the  data elements we used for our analysis and with HUD programmers to  discuss the programming code HUD used to extract the data we used. We  also performed electronic testing of the data elements we used and  performed limited verification tests.
Based on our discussions with agency officials, our review of agency  documents, and our own testing, we concluded that the data elements  used for this report were sufficiently reliable for our purposes.
section_title: Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes
paragraphs: Table 1 provides data on 10 detailed case studies. Table 2 below provides  details of the remaining 10 organizations and individuals we selected as  case studies. As with the 10 cases discussed in the body of this report, we  found evidence of abusive and potential criminal activity related to the  federal tax system during our audit and investigations of these 10 case  studies.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Erika Axelson, James Berry,  Ray Bush, Bill Cordrey, Kenneth Hill, Aaron Holling, Wil Holloway,  Mitchell Karpman, John Kelly, Rick Kusman, Tram Le, John Ledford,  Barbara Lewis, Andrew McIntosh, Eduvina Rodriguez, John Ryan, Steve  Sebastian, Robert Sharpe, Barry Shillito, Pat Tobo, and Matthew Valenta  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Tax Compliance: Thousands of Organizations Exempt from Federal  Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07- 1090T. Washington, D.C.: July 24, 2007.
Tax Compliance: Thousands of Organizations Exempt from Federal  Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07- 563. Washington, D.C.: June 29, 2007.
Tax Compliance: Thousands of Federal Contractors Abuse the Federal  Tax System. GAO-07-742T. Washington, D.C.: April 19, 2007.
Medicare: Thousands of Medicare Part B Providers Abuse the Federal  Tax System. GAO-07-587T. Washington, D.C.: March 20, 2007.
Internal Revenue Service: Procedural Changes Could Enhance Tax  Collections. GAO-07-26. Washington, D.C.: November 15, 2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and  Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and  Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006.
Financial Management: Thousands of GSA Contractors Abuse the  Federal Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006.
Financial Management: Thousands of Civilian Agency Contractors  Abuse the Federal Tax System with Little Consequence. GAO-05-683T.  Washington, D.C.: June 16, 2005.
Financial Management: Thousands of Civilian Agency Contractors  Abuse the Federal Tax System with Little Consequence. GAO-05-637.  Washington, D.C.: June 16, 2005.
Financial Management: Some DOD Contractors Abuse the Federal Tax  System with Little Consequence. GAO-04-414T. Washington, D.C.:  February 12, 2004.
Financial Management: Some DOD Contractors Abuse the Federal Tax  System with Little Consequence. GAO-04-95. Washington, D.C.: February  12, 2004.