Medicaid: Providers in Three States with Unpaid Federal Taxes Received Over $6 Billion in Medicaid Reimbursements
Published: 2012-07-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Recovery Act increased the federal share of Medicaid funding. Federal law does not prohibit providers with tax debt from enrolling in Medicaid, but GAOs prior work found that thousands of Medicaid providers do have unpaid federal taxes. Since any provider who received Medicaid reimbursements during 2009 received Recovery Act funds, GAO was asked to (1) determine the magnitude of unpaid federal taxes owed by Medicaid providers reimbursed during 2009 in selected states; (2) provide examples of Medicaid providers who have sizeable unpaid federal taxes; and (3) evaluate opportunities and challenges related to collecting unpaid federal taxes through a levy process designed to offset Medicaid reimbursements.
GAO compared Medicaid reimbursement information from three states to known IRS tax debts as of September 30, 2009. These states were among those that received the largest portion of Recovery Act Medicaid funding. To provide examples of Medicaid providers who have sizeable unpaid federal taxes, GAO conducted a detailed review of 40 Medicaid providers from the three states that had over $100,000 of federal tax debt. GAOs sample of three states and 40 cases cannot be generalized to all states and all Medicaid providers. GAO also reviewed relevant laws and reports and interviewed federal and state officials.
section_title: What GAO Found
paragraphs: About 7,000 Medicaid providers in three selected states (Florida, New York, and Texas) had approximately $791 million in unpaid federal taxes from calendar year 2009 or earlier. This represents about 5.6 percent of the Medicaid providers reimbursed by the selected states during 2009. These 7,000 Medicaid providers with unpaid federal taxes received a total of about $6.6 billion in Medicaid reimbursements during 2009 (including American Recovery and Reinvestment Act of 2009 [Recovery Act] funds). The amount of unpaid federal taxes GAO identified is likely understated because Internal Revenue Service (IRS) taxpayer data reflect only the amount of unpaid taxes either reported on a tax return or assessed by IRS through enforcement; it does not include entities that did not file tax returns or underreported their income.
The 40 Medicaid providers GAO reviewed received a total of $235 million in Medicaid reimbursements (including Recovery Act funds) in 2009 and had unpaid federal taxes of about $26 million through 2010. The amount of unpaid federal taxes ranged from approximately $100,000 to over $6 million. In addition, IRS records indicate that providers in two of GAOs cases are currently, or have previously been, under criminal investigation. For example, in one case a provider was caught participating in a medical billing fraud.
IRS may levy, or seize, a taxpayers property to satisfy a tax debt and, in some instances, is authorized to use an automated process to continuously levy federal payments made to delinquent taxpayers. Medicaid reimbursements have never been continuously levied using this provision of the law because the IRS determined that these reimbursements do not qualify as federal payments. However, if such a process could be used, GAO estimates that IRS could have collected between $22 million and $330 million in the selected states in 2009. States we spoke to expressed concerns about implementing continuous levies, given the challenges they encounter with processing onetime IRS levies. For example, states have had difficulty reaching IRS revenue officers and problems with IRS sending levies to the wrong address.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS explore opportunities to enhance collection of unpaid taxes from Medicaid providers, including the use of continuous levies. IRS agreed with our recommendation.

section_title: Letter
paragraphs: Individuals, businesses, and other entities owed the U.S. government  over $350 billion in total unpaid tax assessments, including interest and  penalties, as of September 30, 2011, according to the Internal Revenue  Service (IRS). Because of this and other issues, we have designated  IRS enforcement of the nation’s tax laws as a high-risk issue. In addition,  the American Recovery and Reinvestment Act of 2009 (Recovery Act)  initially provided states with an estimated $87 billion in federal funds for  Medicaid, a federal-state health financing program for certain low-income  individuals, from October 2008 through December 2010, by increasing  federal reimbursement rates for the Medicaid program. Recovery Act  funds were made available to states and the District of Columbia through  an increase to the Federal Medical Assistance Percentage (FMAP), the  rate at which the federal government matches state expenditures for most  Medicaid services. Thus, any provider that received Medicaid  reimbursements during calendar year 2009, by definition, received some  Recovery Act funds. Federal law does not prohibit providers with unpaid  federal taxes from enrolling in or receiving payments from Medicaid.  Further, although IRS can levy, or seize, Medicaid reimbursements to  satisfy a provider’s tax debt, it does not have the authority to do so  continuously using an automated process. Because of the potential that  some Medicaid providers that received Recovery Act funds have unpaid  federal taxes, you asked us to examine this issue.
This report is the third in a series of three reports in response to your  request regarding recipients of federal Recovery Act funds who have  unpaid federal taxes. benefitted from Recovery Act provisions that increased FMAP for  Medicaid. For this report, our objectives were to (1) determine the  magnitude of unpaid federal taxes owed by Medicaid providers receiving  reimbursements during 2009 in selected states; (2) provide examples of  Medicaid providers who have sizeable unpaid federal taxes; and (3)  evaluate opportunities and challenges related to collecting unpaid federal  taxes through a levy process designed to offset Medicaid  reimbursements.
The first report, GAO, Recovery Act: Thousands of Recovery Act Contract and Grant  Recipients Owe Hundreds of Millions in Federal Taxes, GAO-11-485 (Washington, D.C.:  Apr. 28, 2011), described Recovery Act contractors and grant recipients who received  federal funds while having unpaid federal taxes. The second report, GAO, Recovery Act:  Tax Debtors Have Received FHA Mortgage Insurance and First-Time Homebuyer Credits,  GAO-12-592 (Washington, D.C.: May 29, 2012), described individuals who benefitted from  the Recovery Act’s first-time homebuyer tax credit or increased FHA mortgage insurance  loan limits, or both, while having unpaid federal taxes.
To determine the magnitude of unpaid federal taxes owed by Medicaid  providers receiving reimbursements during 2009 in selected states, we  obtained and analyzed annual Medicaid reimbursement information from  the states of New York, Texas, and Florida. We attempted to obtain data  from the state of California, but determined that the data we received were  unreliable for the purposes of this report. We selected these states  because they received the largest portion of the Recovery Act Medicaid  funding. We also obtained federal tax-debt data from IRS as of September  30, 2011. Using the taxpayer identification number (TIN) as a unique  identifier, we electronically matched IRS’s tax debt data to the population of  Medicaid providers. We included only agreed-upon tax debts over $100  from tax year 2009 and earlier to ensure that the provider owed or was  accruing tax debt at the time that the provider received Medicaid funds. Our  analysis determined the magnitude of known unpaid federal taxes owed by  2009 Medicaid providers in only New York, Texas, and Florida and cannot  be generalized to other states or periods.
To provide examples of Medicaid providers who have sizeable unpaid  federal taxes, we selected 20 Medicaid providers with unpaid business taxes  and 20 Medicaid providers with unpaid individual taxes in the three selected  states for detailed examination. These nonrepresentative selections of  providers were chosen by using a random sample of the 113 Medicaid  providers with unpaid business taxes and 26 Medicaid providers with unpaid  individual taxes with at least $100,000 in Medicaid reimbursements during  2009, $100,000 in unpaid federal taxes, and five noncontinuous years of  accumulated unpaid federal taxes in or before 2010. In addition, you asked  us to determine whether the owners and principals of Medicaid providers had  unpaid federal taxes. To do so, we used open-source information to identify  the owners and other principals for 600 randomly selected known Medicaid  providers in Florida, New York, and Texas. We electronically matched these  individuals with IRS’s tax debt data to identify their known unpaid federal  taxes and to confirm their professional relationship with a nondebtor  Medicaid provider. For example, a hospital that served as a Medicaid  provider did not have unpaid federal taxes, but one of its owners or other key  principals did have unpaid federal taxes. For all examples, we reviewed IRS  and public records to develop case studies. These case studies are intended  to illustrate the sizeable amounts of unpaid federal taxes owed by some  Medicaid providers, are among the most egregious examples of Medicaid  providers with unpaid federal taxes we identified, and cannot be generalized  beyond the cases presented.
To evaluate opportunities and challenges related to collecting unpaid  federal taxes through a levy process designed to recapture unpaid taxes  by offsetting subsequent Medicaid reimbursements, we interviewed  officials from relevant federal agencies and from selected states (chosen  on the basis of size of their Medicaid programs or their participation in  federal debt collection programs, or both). We also reviewed applicable  laws and regulations related to the issues of subjecting Medicaid  reimbursements to tax levies, including the Department of the Treasury’s  Federal Payment Levy Program (FPLP). A more detailed description of  the scope and methodology related to our audit work supporting this  report is provided in appendix I.
We conducted this performance audit from July 2010 through July 2012 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  audit 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: Medicaid is a federal-state partnership that finances health care for  certain low-income individuals, including children, families, the aged, and  the disabled. More than 64 million persons were enrolled in the Medicaid  program for fiscal year 2009. The Centers for Medicare & Medicaid  Services (CMS) reported combined fiscal year 2009 and 2010 Medicaid  program spending of $744 billion, $499 billion of which was funded by the  federal government. The federal government matches most state  Medicaid expenditures for covered services according to the FMAP,  which is based on a statutory formula drawing on each state’s annual per  capita income. Because of the mechanism through which the Recovery  Act increased the federal share of funding for Medicaid through an  increased FMAP, any provider that received Medicaid reimbursements  during 2009 received Recovery Act funds. Within broad federal  requirements, each state operates and administers its Medicaid program  in accordance with a CMS-approved state Medicaid plan. These plans  detail the populations served, the services covered, and the methods  used to calculate payments to providers.
Title XIX of the Social Security Act allows considerable flexibility within  the states’ Medicaid plans. Within broad national guidelines established  by federal statutes, regulations, and policies, each state (1) establishes its  own eligibility standards; (2) determines the type, amount, duration, and  scope of services; administers its own program—including enrollment of providers. Medicaid  policies for eligibility, services, and payment are complex and vary  considerably, even among states of similar size or geographic proximity.  Thus, a person who is eligible for Medicaid in one state may not be  eligible in another state, and the services provided by one state may differ  considerably in amount, duration, or scope from services provided in a  similar or neighboring state.   (3) sets the rate of payment for services; and (4)
All states must provide certain services, such as inpatient and outpatient hospital  services, nursing facility services, and physician services, and may provide additional,  optional services, such as prescription drugs, dental care, and certain home- and  community-based services. covered under the state’s Medicaid plan. After the claim is approved by  the state, it pays the claim.
Federal reimbursement for Medicaid generally begins after a Medicaid  beneficiary receives care from a health care provider such as a hospital,  physician, or nursing home. The state pays the provider from a  combination of state funds and federal funds, the latter of which have  been advanced by CMS each quarter. The state then files a quarterly  expenditure report, in which it claims the federal share of the Medicaid  expenditure as reimbursement for its payment to providers and reconciles  its total expenditures with the federal advance. In addition to  reimbursement for medical services, the state may claim federal  reimbursement for functions it performs to administer its Medicaid  program, such as enrolling new beneficiaries; reviewing the  appropriateness of providers’ claims; and collecting payments from third  parties, which are payers other than Medicaid, such as Medicare, that  may be liable for some or all of a particular health claim.
Federal law does not prohibit providers with unpaid federal taxes from  enrolling in or receiving payments from Medicaid. Federal regulations and  policies require the states, as part of their responsibilities for determining  whether the providers meet Medicaid requirements for enrollment, to verify  basic information on potential providers, including whether the providers  meet state licensure requirements and whether the providers are prohibited  from participating in federal health care programs. However, federal  regulations and policies do not require the states to screen these providers  for federal tax delinquency nor do they explicitly authorize the states to  reject the providers that have delinquent tax debt from participation in  Medicaid. Further, federal law generally does not permit IRS to disclose  taxpayer information, including tax debts, unless the taxpayer consents.
IRS may levy a taxpayer’s property to satisfy a tax debt. For instance, IRS  could seize and sell property that a taxpayer holds (such as the  taxpayer’s car, boat, or house), or IRS could seize property that belongs  to the taxpayer but is held by someone else (such as the taxpayer’s  wages, retirement accounts, dividends, bank accounts, licenses, rental  income, accounts receivable, or commissions). Currently, IRS may issue  a onetime notice of levy to a state Medicaid agency to collect the  receivable balance immediately due to a given provider. IRS may then  issue additional successive, onetime levies if the proceeds received from  the initial levy are not sufficient to satisfy the government’s claim. A  provision of the Taxpayer Relief Act of 1997 authorizes IRS to  continuously levy (typically using an automated process) certain federal  payments made to delinquent taxpayers in order to collect tax debt, but  Medicaid reimbursements have never been collected using this provision  of the law. This is because IRS determined that Medicaid disbursements  do not qualify as federal payments and thus may not be subjected to the  continuous levy. This decision was based on the nature of the Medicaid  reimbursement as a state entitlement, and the considerable operational  discretion vested in state agencies in the administration of the Medicaid  program, including discretion to create unique eligibility standards for  enrollment of providers and to establish criteria for disbursement of funds.
section_title: About 7,000 Medicaid Providers in the Selected States Owed Approximately $791 Million in Federal Tax Debt
paragraphs: Our analysis found that, as of September 30, 2011, about 7,000 Medicaid  providers in the three selected states had approximately $791 million in  unpaid federal taxes from 2009 or earlier. These providers accumulated  an additional $59 million in unpaid federal taxes during 2010 and 2011.  These providers represent about 5.6 percent of the approximately 125,000  Medicaid providers reimbursed by the selected states during 2009. These  7,000 Medicaid providers with unpaid federal taxes received a total of  about $6.6 billion in Medicaid reimbursements during 2009, which included  Recovery Act funds. The amount of unpaid federal taxes we identified  among Medicaid providers is likely understated because the IRS taxpayer  data reflect only the amount of unpaid taxes either reported by the taxpayer  on a tax return or assessed by IRS through its various enforcement  programs, and generally the unpaid federal taxes amount does not include  entities that did not file tax returns or underreported their income.
As shown in figure 1, about 77 percent of the approximately $791 million  in unpaid federal taxes was made up of individual income taxes,  corporate income taxes, and payroll taxes. The other 23 percent of taxes  included excise taxes, miscellaneous penalties, and other types of taxes.
Over 40 percent of the unpaid federal taxes owed by Medicaid providers  in these three states were payroll taxes. Employers are subject to civil  and criminal penalties if they do not remit payroll taxes to the federal  government. When an employer withholds taxes from an employee’s  wages, the employer is deemed to have a responsibility to hold these  amounts “in trust” for the federal government until the employer makes a  federal tax deposit in that amount. To the extent these withheld amounts  are not forwarded to the federal government, the employer is liable for  these amounts, as well as the employer’s matching Federal Insurance  Contributions Act contributions for Social Security and Medicare.  Individuals within a business (e.g., corporate officers) may be held  personally liable for the withheld amounts not forwarded and they may be  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 up to 5 years, while the failure to  properly segregate payroll taxes can be a criminal misdemeanor offense  punishable by imprisonment of up to 1 year.
A substantial amount of the unpaid federal taxes shown in IRS records as  owed by Medicaid providers have been outstanding for several years. As  shown in figure 2, about 51 percent of the $791 million in unpaid federal  taxes was for tax periods from 2004 through 2007, and approximately 21  percent of the unpaid federal taxes was for tax periods prior to 2004.
Our previous work has shown that as unpaid taxes age, the likelihood of  collecting all or a portion of the amount owed decreases. This is due, in  part, to the continued accrual of interest and penalties on the outstanding  tax debt, which, over time, can dwarf the original tax obligation. The  amount of unpaid federal taxes reported above does not include all tax  debts owed by Medicaid providers due to statutory provisions that give  IRS a finite period under which it can seek to collect on unpaid taxes.  There is a 10-year statute of limitations beyond which IRS is prohibited  from attempting to collect tax debt. Consequently, if the Medicaid  providers have unpaid federal taxes from beyond the 10-year statutory  collection period, the older tax debt may have been removed from IRS’s  records. We were unable to determine whether any tax debt had been  removed for these providers on this basis, and if so, the amount that had  been removed.
subsections: section_title: Unpaid Federal Taxes of Medicaid Providers Is Likely Understated
paragraphs: Although $791 million in unpaid federal taxes owed by Medicaid providers  in the selected states as of September 30, 2011, is a significant amount, it  likely understates the full extent of unpaid taxes owed by these or other  businesses and individuals. The IRS tax database reflects only the  amount of unpaid federal taxes either reported by the individual or  business on a tax return or assessed by IRS through its various  enforcement programs. The IRS database does not reflect amounts owed  by businesses and individuals that have not filed tax returns and for which  IRS has not assessed tax amounts due. Further, our analysis did not  attempt to account for businesses or individuals that purposely  underreported income and were not specifically identified by IRS as  owing the additional federal taxes. According to IRS, underreporting of  income accounted for more than 80 percent of the estimated $450 billion  gross tax gap estimated for tax year 2006. As discussed below, some of  our case-study examples include individuals and businesses who did not  file required accurate tax returns.
Further, we did not attempt to broadly identify instances where a Medicaid  provider owed taxes under a separate TIN from the TIN under which the  provider received the Medicaid reimbursements in our calculations of the  magnitude of tax debt. For example, if a sole proprietor filed Medicaid  claims under his/her business’s Employer Identification Number (EIN), but  owed personal income taxes under his/her own Social Security Number  (SSN), we would not have been able to match the proprietor’s Medicaid  claims to his/her debt. Consequently, the extent of unpaid federal taxes  for Medicaid providers may be understated since we may not have had all  relevant TINs for each Medicaid provider that owes tax debt. However,  we were able to identify several case-study examples of this  phenomenon, as discussed below.
section_title: California Medicaid Provider Data Were Unreliable
paragraphs: When we reviewed each state’s Medicaid data, we reached the  conclusion that the data from New York, Texas, and Florida were  sufficiently reliable for the purposes of our study. However, we  determined, through data tests, interviews, and reviews of state audit  reports that the Medicaid data from California for 2009 were unreliable.  California provided us with $38.4 billion in transactional data, but reported  $41.8 billion in Net Expenditures to CMS—a difference of $3.4 billion (8.3  percent). When we asked California officials why the amounts in the data  they provided did not reconcile to externally published sources, officials  told us that they were unable to reconcile the data. We have notified the  Health and Human Services Office of Inspector General to take any  actions it deems appropriate.
section_title: Examples of Medicaid Providers with Sizeable Outstanding Federal Tax Debt
paragraphs: We reviewed 40 Medicaid providers with unpaid federal taxes (20 with  unpaid business taxes and 20 with unpaid individual taxes) and 10  additional cases where the provider did not have unpaid federal taxes, but  one of its principals had unpaid federal taxes. In each case, the provider  received significant reimbursement payments from Medicaid, including  Recovery Act funds, while having unpaid federal taxes. These case  studies are intended to illustrate the sizeable amounts of unpaid federal  taxes owed by some Medicaid providers, are among the most egregious  examples of Medicaid providers with unpaid federal taxes we identified,  and cannot be generalized beyond the cases presented.
subsections: section_title: Business and Individual Providers with Tax Debt
paragraphs: In each of these 40 cases, the provider received significant  reimbursement payments from Medicaid (which included Recovery Act  funds) while owing at least $100,000 in unpaid federal taxes. In many  cases, IRS records showed abusive or potentially criminal activity related  to the federal tax system. For example, all 20 of the business providers  we reviewed owed delinquent payroll taxes. As discussed previously,  businesses and organizations with employees are required by law to  collect, account for, and transfer income and employment taxes withheld  from employees’ wages to IRS; failure to do so may result in civil or  criminal penalties. We also found instances of providers entering into and  subsequently defaulting on installment agreements with IRS numerous  times or sending IRS bad checks. Thirty of the 40 providers did not file a  tax return or filed late at least one time in the last 10 years.
These 40 providers received a total of $235 million in Medicaid  reimbursements. The case-study providers represent a broad range of  provider types such as doctors, dentists, home care providers, hospitals,  durable medical equipment suppliers, and social services providers. The  amount of unpaid federal taxes associated with these case studies is  about $26 million in total, ranging from approximately $100,000 (the  minimum threshold used to draw our sample) to over $6 million  individually. levying assets, filing federal tax liens, assessing a TFRP) against all 40 of  these recipients. We note that at least 13 of these recipients had  scheduled Medicaid reimbursements subjected to onetime levy by IRS to  pay delinquent taxes on at least one occasion. In one case, IRS collected  hundreds of thousands of dollars from the taxpayer using these levies.
These figures include all known unpaid debts for tax periods through 2010. had actions taken against their professional licenses and have been fined  by state oversight agencies for regulatory violations.
Table 1 highlights 10 Medicaid providers with unpaid federal taxes. Thirty  additional cases can be found in appendix II. We have referred all 40  providers to IRS for further investigation, as appropriate.
We examined 10 additional cases of individuals who had unpaid federal  taxes while appearing to serve as a principal for a Medicaid provider that  did not have known tax debt. For the principals that we examined, their  known unpaid federal taxes ranged from $4,000 to $1.3 million. These  individuals reported to IRS receiving from $30,000 to $300,000 in wages  or other payments from a Medicaid provider, with 8 of the 10 cases  involving total payments exceeding $100,000. The providers they worked  for received from $1,000 to $50 million in Medicaid reimbursements.
In three of these cases, medical professionals submitted their names as  payees to the state Medicaid agency, along with a TIN other than their  personal SSN. In all three cases, this secondary TIN did not have  associated tax debt, but the doctors each had personal tax debt under  their SSNs, ranging from about $20,000 to over $60,000. These doctors  received between $15,000 and $150,000 from Medicaid through their  secondary TIN. In another case, we identified two officers with unpaid  federal taxes totaling approximately $370,000 at a nonprofit provider that  received over $6 million in Medicaid reimbursements. Each officer  reported a salary in excess of $100,000 for 2009. Finally, in one case, we  identified a doctor who, according to IRS, “had a history of noncompliance  … and avoidance of payment of taxes” resulting in over $1 million in  delinquent personal income taxes (including fines and penalties), while  the business he/she owned received under $2,000 in Medicaid  reimbursements. IRS collected a portion of the outstanding debt by  garnishing the doctor’s wages at his company after the doctor defaulted  on an installment agreement.
section_title: Increased Levy of Medicaid Reimbursements Would Likely Increase Federal Tax Debt Collection, but Further Study Is Required
paragraphs: Increased levy of Medicaid reimbursements could help IRS collect  millions of dollars of unpaid federal taxes owed by Medicaid providers.  IRS may levy a taxpayer’s property to satisfy a tax debt, but IRS currently  may only subject Medicaid reimbursements to a onetime levy instead of a  continuous levy, because Medicaid reimbursements are not considered  “federal payments.” We estimate that if IRS were able to continuously  levy Medicaid reimbursements, it could collect from $22 million to $330  million from the three selected states for 2009, depending on the  circumstances of the levy and certain provider behaviors. Alternatively,  manual continuous levies (levies that are physically mailed by IRS at its  discretion) targeted against providers that owed a significant amount of  tax debt and received large Medicaid reimbursements may represent a  lower-cost opportunity to collect unpaid federal taxes. The states that we  spoke to expressed concerns over the use of continuous levies and also  described problems related to the enforcement of onetime levies.
subsections: section_title: IRS Cannot Currently Continuously Levy Medicaid Reimbursements to Collect Unpaid Federal Taxes
paragraphs: IRS may issue a onetime notice of levy to a state Medicaid agency to  collect the receivable balance immediately due to a given provider, to the  extent the provider owes federal taxes. However, IRS can only collect  funds that are due to the provider at the moment that the levy is received  by the state Medicaid agency. To the extent the initial levy does not  collect the full amount of unpaid federal taxes due, IRS must issue  subsequent onetime levy notices to collect a provider’s Medicaid  reimbursements due from the state Medicaid agency. In comparison,  continuous levies are active until IRS agrees to release the levy and if  allowed to apply to Medicaid payments can be automatically applied to  any future requests for Medicaid reimbursement without additional levy  notices. For example, one mechanism that IRS uses to implement  continuous levies is an automated system referred to as the Federal  Payment Levy Program (FPLP). Through FPLP, IRS collected $614  million in fiscal year 2011 and has collected over $3.26 billion since it was  implemented in 2000 (including collection of Medicare payments made  after fiscal year 2008). Under the FPLP, each week IRS sends the  Department of the Treasury’s Financial Management Service (FMS) an  extract of its tax debt files. These files are uploaded into the Treasury  Offset Program. FMS sends payment data to this offset program to be  matched against unpaid federal taxes. If there is a match and IRS has  updated the weekly data sent to the offset program to reflect that it has  completed all statutory notifications, any federal payment owed to the  debtor is reduced (levied) to help satisfy the unpaid federal taxes.
Current federal law does not allow IRS to subject Medicaid  reimbursements to continuous levy. At a 2007 hearing held by the Senate  Homeland Security & Governmental Affairs Committee, IRS and  Department of the Treasury officials testified that the FPLP could not be  used to offset Medicaid reimbursements because such payments do not  meet the criteria established to be considered “federal payments.” In  addition, they noted that, unlike Medicare payments, which are disbursed  by the federal government, Medicaid reimbursements to providers are  issued by the states, introducing additional legal and operational  complexities not present under Medicare. A joint task force of IRS, CMS,  and Department of the Treasury officials studied the matter, and  concurred with the IRS assertion that since Medicaid is not a “federal  payment” it cannot be subject to continuous levy. The task force  considered, but did not conduct, a comprehensive cost-benefit analysis  considering the potential impact of a change in legislation defining  Medicaid as a “federal payment.” Since a comprehensive study was not  conducted, the full costs associated with implementing a continuous levy  program for Medicaid payments are unknown. Several bills have since  been introduced that would add Medicaid to the definition of “federal  payment,” but none have become law.
section_title: Estimates Show Implementing Continuous Levy on Medicaid Reimbursements Could Allow IRS to Collect Additional Tax Debt
paragraphs: For the 7,000 delinquent Medicaid providers we identified in three states,  if there had been such an automated continuous levy system in place, we  estimate that between $22 million and $55 million could have been  collected to offset unpaid federal taxes in 2009. These estimates  exclude providers who are identified by IRS as currently precluded from  continuous levy for statutory or policy reasons. Cases excluded from the  FPLP for statutory reasons include those with tax debt that had not  completed IRS’s notification process, or tax debtors who filed for  bankruptcy protection or other litigation, who agreed to pay their tax debt  through monthly installment payments, or who requested to pay less than  the full amount owed through an offer in compromise. Cases excluded  from the FPLP for policy reasons include those tax debtors whom IRS  has determined to be in financial hardship, those filing an amended  return, certain cases under criminal investigation, and those cases in  which IRS has determined the specific circumstances of the cases  warrant excluding it from the FPLP.
The low-end estimate presumes each Medicaid reimbursement to be  levied at a 15 percent rate; the high-end estimate presumes a 100  percent levy rate. However, this estimate does not account for potential  changes in provider participation after receipt of a notice of levy. For  instance, officials at one state we spoke to noted that it had seen  individual providers discontinue services after a levy of a large portion of  an expected reimbursement. Under ideal circumstances (i.e., 100 percent  levy with no statutory or policy exclusions and no decrease in provider  participation), the absolute maximum that IRS could have offset for these  7,000 providers in 2009 would be about $330 million. These estimates do  not account for the potential costs associated with implementing a large- scale automated continuous levy program for Medicaid reimbursements.  Because such an estimate is not currently available, while potential for  extensive collections may exist, further study would be required to  determine the feasibility of a large-scale automated collection program.
The cumulative 2009 Medicaid payments received by these 32 providers were about  $310 million and the cumulative unpaid federal taxes were about $241 million. investment by state and federal entities than a continuous levy of all  providers.
section_title: Selected States Expressed Concerns about the Effects of Continuous and Onetime Levies
paragraphs: It is not clear what effect a large-scale systematic program for  continuously levying Medicaid reimbursements would have on Medicaid  provider participation. When we asked selected states how current  onetime federal levy or continuous state levy activities affect provider  participation, four of the five states told us that they did not believe that  their current levy activities had a broad effect on Medicaid provider  participation. However, these states also noted that it would be difficult to  judge based on the infrequency with which such levies are occurring. One  state suggested that providers could begin billing in another state where  payments are not offset, or that they may change their TIN to avoid  levies. As noted previously, one state did note that it had seen individual  providers discontinue services after a levy of a large portion of an  expected reimbursement. Two of the states also mentioned that they levy  Medicaid reimbursements for the collection of state debts without seeing  a broad effect on provider participation.
Several of the states we spoke with described a trend towards using  Managed Care Organizations (MCO) to administer Medicaid benefits.Since states pay the MCO instead of the provider that performs the  services, the only entity that the state could enforce an IRS levy against  would be the MCO. This would limit the population of Medicaid providers  eligible for a levy to MCOs and to providers who are paid directly by the  state. The states expressed concern over the idea of levying Medicaid  reimbursements to pay an MCO’s debt when the reimbursement is truly  meant for services provided by treating providers that have no association  with the MCO’s tax debt.
The states also expressed concerns related to the existing process for the  enforcement of IRS onetime levies. For example, several states  experienced customer service–related challenges when working with IRS  including difficulty using the IRS customer service hotline, difficulty  reaching the IRS revenue officer, or problems with IRS sending levies to  the wrong address. Another state commented that IRS does a poor job of  releasing levies in a timely manner, especially for uncollectible levies. One  state noted that it had concerns with applying a levy when the provider  name or TIN in the state’s Medicaid provider database doesn’t exactly  match what is provided by IRS. For example, the state explained that  associating a Medicaid reimbursement with an appropriate tax debtor can  be a challenge since the state’s system may include more than one TIN for  a given provider. Should IRS expand levy collection efforts for Medicaid,  increased centralized coordination with states could ease the process.
section_title: Conclusions
paragraphs: Available data indicate that the vast majority of Medicaid providers appear  to fully pay their federal taxes. However, our work has shown that in 2009  about 7,000 Medicaid providers in three states had delinquent federal taxes  while receiving billions of dollars in Medicaid reimbursements, including  Recovery Act funds. Even though Medicaid providers are relied on to  deliver significant medical services to those most in need, payment of  billions of federal dollars to those who do not pay their fair share of federal  taxes raises questions about the integrity and fairness of the tax system.  Our cases provide illustrative examples where IRS was able to, in some  instances, collect delinquent taxes by using onetime levies on Medicaid  reimbursements, but the process is highly inefficient. While current federal  law does not permit the continuous levy of Medicaid payments, our  estimates suggest that expanded use of levies against Medicaid providers,  specifically an aggressive automated program, has the potential to help  IRS collect millions of dollars of unpaid federal taxes, though the effect on  provider participation is largely unknown. Enhanced onetime or manual  continuous levy programs targeted at high-reimbursement, high-debt  Medicaid providers could also potentially yield increased tax collections.  Given that we found over $6 billion of payments made to tax delinquent  Medicaid providers in just three states, a more rigorous review of the  potential costs and financial benefits of implementing enhanced continuous  and other levies of Medicaid payments is warranted.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of Internal Revenue do the  folllowing:
Explore further opportunities to enhance collection of unpaid federal  taxes from Medicaid providers. This should include conducting a cost- benefit analysis of the implementation of a continuous levy program  and expanded use of levies against providers with large Medicaid  payments and significant unpaid federal taxes. Where appropriate,  IRS should seek legislation to modify existing law to allow for more  efficient collection of outstanding tax debts from Medicaid providers  (i.e., consider taking steps to modify 26 U.S.C. § 6331(h)(2)). In  addition, IRS should coordinate with CMS and FMS as necessary in  exploring these opportunities.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of our report to IRS, CMS, and FMS for review and  comment. In its written comments (see app. III), IRS concurred with our  recommendation to explore opportunities to enhance collection of unpaid  federal taxes from Medicaid providers and noted that previous efforts  have revealed significant operational challenges. Similarly, in its written  comments (see app. IV), CMS noted that the structure of the Medicaid  program (wherein the federal government does not have a direct  relationship with providers or pay them directly) provides a programmatic  basis for excluding Medicaid from the levy program, and may result in  significant challenges to the implementation of an FPLP-style levy  expansion. CMS further noted that any potential legislation related to the  collection of outstanding tax debts from Medicaid providers may impact  the basic structure of the Medicaid program. FMS provided technical  comments by e-mail, which were incorporated into this report. Both CMS  and FMS noted that they are prepared to coordinate with IRS in exploring  opportunities to enhance levy collections from Medicaid providers. We  recognize the challenges expressed by IRS and CMS, and are  encouraged by the willingness of all parties to work in coordination toward  an enhanced Medicaid provider levy program that is beneficial to all  affected agencies.
As agreed with your offices, unless you publicly release this report’s  contents earlier, we plan no further distribution of it until 6 days from its  date. At that time, we will send copies of this report to interested  congressional committees, the Secretary of the Treasury, the  Commissioner of the Financial Management Service (FMS), the  Commissioner of Internal Revenue, the Acting Administrator of the Centers  for Medicare & Medicaid Services (CMS), and other interested parties.
The report is also available at no charge on the GAO website at  http://www.gao.gov. If you have any questions concerning this report,  please contact Richard J. Hillman at (202) 512-6722 or  hillmanr@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to: (1) determine the magnitude of unpaid federal  taxes owed by Medicaid providers receiving reimbursements during 2009  in selected states, (2) provide examples of Medicaid providers who have  significant unpaid federal taxes, and (3) evaluate opportunities and  challenges related to collecting unpaid federal taxes through a levy  process designed to offset Medicaid reimbursements.
To determine the magnitude of unpaid federal taxes owed by Medicaid  providers in selected states receiving reimbursements during 2009, we  obtained and analyzed annual Medicaid reimbursement information from  the states of New York, Texas, and Florida. We attempted to obtain data  from the state of California, but the data we received were determined to  be unreliable for the purposes of this report. We selected these states  because they received the most American Recovery and Reinvestment  Act of 2009 (Recovery Act)–related Medicaid money.
For the purposes of this report, the term “provider” refers to any individual, business, or  other entity that received at least one Medicaid reimbursement (e.g., doctors, hospitals,  home care providers) from at least one of the three selected states. unpaid federal taxes IRS classified as compliance assessments or  memo accounts for financial reporting, unpaid federal taxes from 2010 and 2011 tax periods, and  recipients with total unpaid federal taxes of $100 or less.
The criteria above were used to exclude unpaid federal taxes that might be  under dispute or generally duplicative or invalid, and unpaid federal taxes  that are recently incurred. Specifically, compliance assessments or memo  accounts were excluded because these taxes have neither been agreed to  by the taxpayers nor affirmed by the court, or these taxes could be invalid  or duplicative of other taxes already reported. We excluded known unpaid  federal taxes from 2010 and 2011 tax periods to both 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 time, and tax debts  accrued after the Medicaid reimbursement period under review. We  excluded tax debts of $100 or less because they are insignificant for the  purpose of determining the extent of known taxes owed by Medicaid  providers. Using these criteria, we identified about 7,000 Medicaid  providers with known unpaid federal taxes. Our final estimate of tax debt  may include some debt that is covered under an active IRS installment plan  or beyond normal statutory limits for debt collection. Our analysis  determined the magnitude of known unpaid federal taxes owed by 2009  Medicaid providers in only New York, Texas, and Florida and cannot be  generalized to other states or periods.
To provide examples of Medicaid providers who have significant unpaid  federal taxes, we selected 20 Medicaid providers with unpaid federal  taxes in the IRS Business Master File (BMF) and 20 Medicaid providers  with unpaid federal taxes listed in the IRS Individual Master File (IMF) for  a detailed review. These nonrepresentative selections of providers were  chosen by using a random sample of the 113 entities in the BMF and 26  individuals in the IMF with at least $100,000 in Medicaid reimbursements  during 2009, $100,000 in outstanding unpaid federal taxes, and 5 years of  accumulated unpaid federal taxes (noncontinuous) in or before 2010. In  addition, we also used open-source information to identify the Social  Security Number (SSN) for owners and other principals for 600 randomly  selected known Medicaid providers in the selected states (a random  selection of 200 per state for New York, Texas, and Florida). We  electronically matched these individuals with IRS’s tax debt data to  identify their outstanding tax debts and to confirm their professional  relationship with a nondebtor Medicaid provider. For these providers, we  reviewed IRS and public records to develop 10 additional case studies.  These 50 case studies serve to illustrate the sizeable amounts of taxes  owed by some Medicaid providers, are among the most egregious  examples of Medicaid providers with unpaid federal taxes, and cannot be  generalized beyond the cases presented.
To evaluate opportunities and challenges related to collecting unpaid  federal taxes through a levy process designed to offset Medicaid  reimbursements, we interviewed officials from relevant federal agencies  and from selected states (chosen based on the size of their Medicaid  programs or their participation in federal debt-collection programs, or  both). We also reviewed applicable laws, regulations, and reports related  to the issues of subjecting Medicaid reimbursements to tax levies,  including the Federal Payment Levy Program.
We conducted this audit from July 2010 through July 2012. performed this audit 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 audit 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.
Initiation of our review was delayed significantly because California did not comply with  our request for Medicaid provider payment data for over 8 months. What California  ultimately provided was not sufficiently reliable for the purposes of our report.
subsections: section_title: Data Reliability Assessment
paragraphs: For the IRS unpaid assessments data, we reviewed the work we  performed during our annual audit of IRS’s financial statements and used  a copy of the financial record file reviewed under that audit. While our  financial statement audits have identified some data reliability problems  associated with tracing IRS’s tax records to source records and including  errors and delays in recording taxpayer information and payments, these  reliability issues are not relevant to our review. On the basis of the  extensive testing for accuracy, existence, completeness, and timeliness  of relevant variables, we determined that the IRS data were sufficiently  reliable to address this report’s objectives.
For the selected states’ Medicaid reimbursement databases from New  York, Florida, and Texas, we interviewed officials in the selected states  responsible for their respective databases. In addition, we performed  electronic testing of specific data elements in the databases that we used  to perform our work. On the basis of our discussions with agency officials,  review of agency documents, and our own testing, we concluded that the  data elements used for this report were sufficiently reliable for our  purposes. We did not include data received from California because we  were unable to conclude that the data elements we intended to use were  sufficiently reliable for our purposes. We reached this conclusion because  we were unable to reconcile the total balance of Medicaid  reimbursements to the amount of reimbursements published in the state’s   When we asked California  quarterly expense report filed with CMS. officials why the amounts in the data they provided did not reconcile  externally published sources, officials told us that they were unable to  reconcile the data.
We compared the amount of total payments listed in files sent to us by California officials  to the annual Net Expenditures Reported for 2009 on the CMS-64 Quarterly Expense  Report and found a $3.4 billion difference.
section_title: Appendix II: Additional Cases of Medicaid Providers with Sizeable Outstanding Federal Tax Debt
paragraphs: The following table provides 30 additional examples of 2009 Medicaid  providers who received American Recovery and Reinvestment Act of  2009 (Recovery Act) funds, with sizeable outstanding federal tax debt.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: Comments from the Centers for Medicare & Medicaid Services
section_title: Related GAO Products
paragraphs: Recovery Act: Tax Debtors Have Received FHA Mortgage Insurance and  First-Time Homebuyer Credits. GAO-12-592. Washington, D.C.:   May 29, 2012.
Recovery Act: Thousands of Recovery Act Contract and Grant Recipients  Owe Hundreds of Millions in Federal Taxes. GAO-11-485. Washington,  D.C.: April 28, 2011.
Federal Tax Collection: Potential for Using Passport Issuance to Increase  Collection of Unpaid Taxes. GAO-11-272. Washington, D.C.:   March 10, 2011.
Medicare: Thousands of Medicare Providers Abuse the Federal Tax  System. GAO-08-618. Washington, D.C.: June 13, 2008.
Tax Compliance: Federal Grant and Direct Assistance Recipients Who  Abuse the Federal Tax System. GAO-08-31. Washington, D.C.:  November 16, 2007.
Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax  System. GAO-08-17. Washington, D.C.: November 14, 2007.
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.
Debt Collection: Barring Delinquent Taxpayers From Receiving Federal  Contracts and Loan Assistance, GAO/T-GGD/AIMD-00-167, Washington,  D.C.: May 9, 2000.
Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty  Assessments Are Owed. GAO/AIMD/GGD-99-211. Washington, D.C.:  August 2, 1999.
Tax Administration: Federal Contractor Tax Delinquencies and Status of  the 1992 Tax Return Filing Season. GAO/T-GGD-92-23. Washington,  D.C.: March 17, 1992.