Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax System
Published: 2007-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2006, outlays for Medicaid were about $324 billion; about $185 billion was paid by the federal government. Because GAO previously identified abusive and criminal activity associated with government contractors owing billions of dollars in federal taxes, the subcommittee requested GAO expand our work to Medicaid providers. GAO was asked to (1) determine if Medicaid providers have unpaid federal taxes, and if so, the magnitude of such debts; (2) identify examples of Medicaid providers that have engaged in abusive or criminal activities; and (3) determine whether the Centers for Medicare & Medicaid Services (CMS) and the states prevent health care providers with tax problems from enrolling in Medicaid or participating in the continuous levy program to pay federal tax debts. To perform this work, GAO analyzed tax data from the Internal Revenue Service (IRS) and Medicaid data from seven selected states based on magnitude of Medicaid payments and geography. GAO also performed additional investigative activities.
section_title: What GAO Found
paragraphs: Over 30,000 Medicaid providers, about 5 percent of those paid in fiscal year 2006, had over $1 billion of unpaid federal taxes. These 30,000 providers were identified from a nonrepresentative selection of providers from seven states: California, Colorado, Florida, Maryland, New York, Pennsylvania, and Texas. This $1 billion estimate is likely understated because some Medicaid providers have understated their income or not filed their tax returns. We selected 25 Medicaid providers with high federal tax debt as case studies for more in-depth investigation of the extent and nature of abuse and criminal activity. For all 25 cases we found abusive and related criminal activity, including failure to remit individual income taxes or payroll taxes to IRS. Rather than fulfill their role as "trustees" of federal payroll tax funds and forward them to IRS, these providers 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 providers diverted the payroll tax money for their own benefit or to help fund their businesses. Many of these individuals accumulated substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some case studies involved businesses that were sanctioned for substandard care of their patients. Despite their abusive and criminal activity, these 25 providers received Medicaid payments ranging from about $100,000 to about $39 million in fiscal year 2006. CMS and our selected states do not prevent health care providers who have federal tax debts from enrolling in Medicaid. CMS officials stated that such a requirement for screening potential providers for unpaid taxes could adversely impact states' ability to provide health care to low income people. Further, federal law generally prohibits the disclosure of taxpayer data to CMS and states. No tax debt owed by Medicaid providers has ever been collected through the continuous levy program. During our audit, IRS had not made a determination on whether Medicaid payments are considered "federal payments" and thus eligible for its continuous levy program. For fiscal year 2006, if an effective levy was in place for the seven selected states, GAO estimates that the federal government could have collected between $70 million and $160 million.

section_title: Letter
paragraphs: The success of our tax system hinges on the public’s perception of its  fairness, including the extent to which taxpayers believe their friends,  neighbors, and businesses are complying with the tax laws and are  actually paying their taxes. The Internal Revenue Service’s (IRS) own data  in this regard are not encouraging. IRS reported that the federal  government does not receive hundreds of billions of dollars in taxes owed  annually. IRS’s most recent estimate is that the gross tax gap (the  difference between the taxes that should have been paid voluntarily and  on time and what was actually paid) was $345 billion for tax year 2001. IRS  estimated that it would eventually collect $55 billion of this amount,  leaving a net tax gap of $290 billion in unpaid taxes. IRS enforcement of  the tax laws is vital to promote compliance by giving taxpayers confidence  that others are paying their fair share. Because of the challenges that IRS  faces in its enforcement of tax laws, we continue to include it as a high- risk area for IRS.
A portion of the tax gap is owed by individuals and businesses receiving  payments from the federal government. For example, over the past several  years, we testified that federal contractors (Department of Defense,  federal civilian, and General Services Administration contractors) abused  the federal tax system with little consequence. Due to the significance of  the issues raised during those hearings, you asked us to provide additional  information about whether Medicare and Medicaid providers were  engaged in similar tax abuses.
This is the second in a series of reports and testimonies to respond to your  request. In March 2007, we testified that Medicare physicians, health  professionals, and suppliers paid under the Supplemental Medical  Insurance program, also known as Medicare Part B, had abused the  federal tax system while doing business with the federal government. This  report will cover Medicaid health care providers from seven selected  states who also abused the federal tax system.
The specific objectives of this forensic audit and related investigation  were, to the extent possible, (1) determine if providers who receive  Medicaid payments have unpaid federal taxes, and if so, the magnitude of  federal tax debts owed by these Medicaid providers; (2) identify examples  of providers engaged in abusive and criminal activity related to the federal  tax system; and (3) determine whether Centers for Medicare & Medicaid  Services (CMS) and selected states prevent health care providers with tax  problems from enrolling in Medicaid or participate in the continuous levy  program to pay federal tax debts.
To identify the extent to which Medicaid providers had unpaid federal  taxes, we obtained and analyzed fiscal year 2006 Medicaid payments made  to providers in a nonrepresentative selection of seven states: California,  Colorado, Florida, Maryland, New York, Pennsylvania, and Texas.  Payments to these states constituted about 43 percent of all Medicaid  payments made during fiscal year 2006. These states were selected based  on the magnitude of Medicaid payments and geographical location. We  also obtained and analyzed the IRS tax debt data as of September 30, 2006.
We matched the lists of Medicaid providers with IRS tax debts using the  taxpayer identification number (TIN) to identify Medicaid providers with  tax debts. To illustrate the extent and nature of tax system abuse or  potentially criminal activity, we selected 25 Medicaid providers for a  detailed audit and investigation. The 25 providers were chosen based on  the amount of unpaid taxes, number of unpaid tax periods, amount of  payments reported by Medicaid, and indications that owner(s) might be  involved in multiple companies with tax debts. For these 25 Medicaid  providers, we reviewed copies of automated tax transcripts and other tax  records (for example, revenue officer’s notes) and performed additional  searches of criminal, financial, health care, and public records.
To determine whether CMS and states prevent health care providers with  unpaid federal taxes from enrolling in Medicaid, we interviewed officials  from CMS and selected states and examined the CMS and selected states’  regulations, policies, and procedures for making determinations in the  enrollment approval process. We also interviewed officials from CMS, IRS,  and the Department of the Treasury’s Financial Management Service  (FMS) concerning any barriers for levying Medicaid payments. A more  detailed description of the scope and methodology related to our audit and  investigative work supporting this report is provided in appendix I.
We conducted our audit work from July 2006 through August 2007 in  accordance with U.S. generally accepted government auditing standards.  We performed our investigative work in accordance with standards  prescribed by the President’s Council on Integrity and Efficiency.
subsections: section_title: Background
paragraphs: Title XIX of the Social Security Act is a federal and state entitlement  program that pays for medical assistance for certain categories of low- income adults and children. This program, known as Medicaid, became  law in 1965 and is jointly funded by the federal and state governments  (including the District of Columbia and the Territories). Medicaid is the  largest source of funding for medical and health-related services for  America’s poorest people. More than 50 million persons enrolled in the  Medicaid program in fiscal year 2006. In fiscal year 2006, according to  CMS, total outlays for Medicaid (federal and state) were approximately  $324 billion, of which about $185 billion was paid by the federal  government.
Medicaid is jointly funded by the federal and state governments. The  federal government shares in a state’s Medicaid service costs through a  matching formula. The federal matching rate for the cost of services  provided to Medicaid beneficiaries is related to a state’s per capita income  and in federal fiscal year 2006 ranged from 50 percent to 76 percent.
subsections: section_title: Centers for Medicare & Medicaid Services
paragraphs: Although the federal government establishes general guidelines for the  Medicaid program, requirements are established by each state. CMS,  within the Department of Health and Human Services (HHS), is  responsible for administering federal matching funds to the states and for  legislation and regulations affecting the Medicaid program. CMS also  provides guidelines, technical assistance, and periodic assessments of  state Medicaid programs.
section_title: State Medicaid Agencies
paragraphs: 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; (3) sets the rate of payment for services; and  (4) 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. In addition, state legislatures may change  Medicaid eligibility, services, or reimbursement during the year.
To receive payment for services or goods provided to beneficiaries from  Medicaid, providers must first enroll in the Medicaid program. To enroll,  providers must submit a Medicaid enrollment application to the state or  their fiscal agents who are responsible for determining whether the  providers meet federal and state requirements for enrollment. The state or  its fiscal agents are responsible for screening the applications based on  CMS and state policies. Once an applicant is deemed eligible by the state  or its fiscal agents, Medicaid providers can submit their claims to the state  for payment. The state is responsible for claims processing and verifying  the claim is accurate, complete, medically necessary, and covered under  the state’s Medicaid plan. After the claim is approved, the state pays the  claim.
The typical Medicaid payment process is illustrated in figure 1. When a  Medicaid beneficiary receives care from a health care provider such as a  hospital, physician, or nursing home, the provider bills the state Medicaid  program for its services. The state in turn pays the provider from a  combination of state funds and federal funds, which have been advanced  by CMS each quarter. The state then files an 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.
Transaction 1: A Medicaid beneficiary receives care from  a health care provider, such as a physician; the provider  bills the state Medicaid program; and the state pays the  provider by drawing on a pool of state funds combined  with a quarterly advance on federal matching funds.
Transaction 2: The state files an expenditure report, in  which it claims the federal Medicaid matching share as  reimbursement for its payments to providers and  reconciles total quarterly expenditures with the federal  advance. States may file claims for medical services and  for administrative functions.
section_title: Magnitude of Unpaid Federal Taxes of Medicaid Providers
paragraphs: Our analysis found that over 30,000 Medicaid providers at the selected  states had over $1 billion in unpaid federal taxes as of September 30,  2006. This represents over 5 percent of the approximately 560,000  Medicaid providers paid by the selected states during federal fiscal year  2006. The amount of unpaid federal taxes we identified among Medicaid  providers is likely understated because (1) we intentionally limited our  scope to providers with agreed-to federal tax debt for tax periods prior to  2006, and (2) 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 thus the unpaid tax debt  amount does not include entities for which IRS had not identified that they  did not file tax returns or underreported their income.
subsections: section_title: Characteristics of Medicaid Providers’ Unpaid Federal Taxes
paragraphs: As shown in figure 2, 87 percent of the approximately $1 billion in unpaid  taxes was comprised of individual income and payroll taxes. The other 13  percent of taxes included corporate income, excise, unemployment, and  other types of taxes.
As shown in figure 2, over half of the unpaid taxes owed by Medicaid  providers 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  Contribution Act contributions for Social Security and Medicare.  Individuals within the business (e.g., corporate officers) may be held  personally liable for the withheld amounts not forwarded and they maybe  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.
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 general fund.  Thus, personal income taxes, corporate income taxes, and other  government revenues are used to pay for these shortfalls to the Social  Security and Medicare trust funds.
A substantial amount of the unpaid federal taxes shown in IRS records as  owed by Medicaid providers had been outstanding for several years. As  reflected in figure 3, about 56 percent of the $1 billion in unpaid taxes was  for tax periods from calendar year 2000 through calendar year 2004, and  approximately 29 percent of the unpaid taxes was for tax periods prior to  calendar year 2000.
Our previous work has shown that as unpaid taxes age, the likelihood of  collecting all or a portion of the 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 owe federal taxes beyond the 10-year statutory collection  period, the older tax debt may have been removed from IRS’s records. We  were unable to determine the amount of tax debt that had been removed.
section_title: Unpaid Federal Taxes of Medicaid Providers Is Understated
paragraphs: Although over $1 billion in unpaid federal taxes owed by Medicaid  providers as of September 30, 2006, 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. For example, during our audit, we identified  instances from our case studies in which Medicaid providers failed to file  tax returns for a particular tax period and IRS had not assessed taxes for  these tax periods. Consequently, while these providers had unpaid  federal taxes, they were listed in IRS records as having no unpaid taxes for  that period.
Further, our analysis did not attempt to account for businesses or  individuals that purposely underreported income and were not specifically  identified by IRS as owing the additional federal taxes. According to IRS,  underreporting of income accounted for more than 80 percent of the  estimated $345 billion annual gross tax gap.
Finally, our analysis did not attempt to identify Medicaid providers who  owed taxes under a separate TIN from the TIN that received the Medicaid  payments. For example, sole proprietors and certain limited liability  companies may file Medicaid claims under their Social Security numbers  (SSN). If these Medicaid providers had employees, they would typically  report the payroll taxes under an employer identification number (EIN)  and not their SSNs. Consequently, the full extent of unpaid federal taxes  for Medicaid providers is not known.
In addition to the IRS tax database not reflecting all assessed tax amounts  due, our past audits have also found that the IRS tax database contains  coding errors that adversely affect IRS’s collection activities. IRS’s  collection process is heavily dependent upon its automated computer  system and the information that resides within this system. In particular,  the codes in each taxpayer’s account in IRS’s tax database are critical to  IRS in tracking the collection actions it has taken against a tax debtor and  in determining what, if any, additional collection actions should be  pursued. For example, IRS uses these codes to identify cases it should  exclude from the continuous levy program, which is an automated  method of collecting tax debt by offsetting certain federal payments made  to individuals and businesses, as well as cases it should exclude from  other collection actions.
section_title: Examples of Extent and Nature of Medicaid Providers’ Abusive and Potentially Criminal Activity Related to the Federal Tax System
paragraphs: For all 25 cases that we audited and investigated, we confirmed that their  activities were abusive and in many instances found criminal activity  related to the federal tax system. Of these cases, 17 involved businesses  with employees who had unpaid payroll taxes, most dating as far back as  the late 1990s. However, rather than fulfill their role as “trustees” of this  money and forward it to IRS, these Medicaid providers diverted the money  for other purposes, including their own salaries. As stated earlier, willful  failure to remit payroll taxes can 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.
Table 1 highlights 10 cases of businesses and individuals with unpaid  taxes. Our investigations revealed that, despite their businesses owing  substantial amounts of taxes to IRS, some owners had substantial personal  assets—including expensive homes and luxury cars. We are referring the  25 cases detailed in our report to IRS for appropriate collection action and  criminal investigation.
The following provides illustrative detailed information on four cases we  audited and investigated.
Case 1: During the time the owners of the hospital owed over $5 million  in payroll taxes, the owners purchased a vacation home worth about $1  million. IRS assessed a trust fund recovery penalty (TFRP) of nearly $2  million against the owners, filed federal tax liens totaling nearly $8  million against the owners and hospital, attempted to levy the owners’  bank accounts, and proposed an injunction to close the hospital  because the business continued to accumulate tax debt. The hospital  received over $9 million in Medicaid payments during fiscal year 2006.
Case 2: While owing over $2 million in unpaid payroll taxes, the nursing  home owner and business were fined for jeopardizing the health and  safety of their patients. The nursing home owner attempted to sell the  business and other real estate property and promised to pay tax debts  in full. However, the owner did not sell the business or real estate and  took other actions to avoid federal tax liens. IRS fined the owner over  $400,000 in a recent year for intentionally disregarding IRS’s tax  reporting and filing requirements. The owner also has a related  business that owes over $1 million in unpaid taxes. The nursing home  received over $6 million in Medicaid payments during fiscal year 2006.
Case 4: The managing officer of a pharmacy sold off business assets  without notifying IRS while knowing that the business owed over  $800,000 in unpaid payroll taxes over 7 years. In an attempt to collect  unpaid debts from the officer, IRS assessed a TFRP of nearly $3 million  and filed federal tax liens against the officer and the business. The  officer owns a related entity that also owes a large amount of taxes,  and recently started up a new corporation using the same address as  the pharmacy. The pharmacy received nearly $100,000 in Medicaid  payments during fiscal year 2006.
Case 8: A medical clinic owner owns a house worth nearly $4 million,  several luxury vehicles, and a pleasure boat while owing taxes. The  owner also borrowed over $2 million from the business and sold  properties for about $1 million at the same time the business owed over  $1 million in unpaid payroll taxes. In addition, IRS generated a tax  return for the business in a recent year because the business owner did  not file it. The medical clinic received over $2 million in Medicaid  payments during fiscal year 2006.
In addition to the 25 cases that we identified through IRS tax records, we  separately also found a Medicaid provider that was recently convicted for  failure to pay employment taxes owed by several nursing homes. The  nursing home businesses received over $25 million in Medicaid payments  during fiscal year 2006. According to court documents, the nursing homes  owed over $14 million in unpaid taxes. At the same time the businesses  owed taxes, the owner bought a 10,000 square foot house with a current  estimated value of over $2 million. The court records indicate that the  owner spent tens of thousands of dollars furnishing the house including  crystal chandeliers, a 132-piece set of Haviland Bavarian porcelain china,  and oriental rugs. The owner used company funds to pay personal  expenses such as a housekeeper, children’s nanny, monthly pension for a  parent who never worked at the company, a sailboat, and jet-skis. While  owing taxes, the owner also went on vacations to Hawaii and gambling  trips to Las Vegas and Reno, Nevada. Court records also indicate that  while in Hawaii, the owner bought a $16,000 Rolex watch, the day before  one of the required federal tax deposits was due.
section_title: Providers with Unpaid Federal Taxes Are Not Prohibited from Enrolling or Receiving Payments from Medicaid
paragraphs: CMS and the selected states do not prevent health care providers who  have tax debts from enrolling in or receiving payments from Medicaid.  CMS has not developed regulations to require states to (1) screen health  care providers for unpaid taxes and (2) obtain consent for IRS disclosure  of federal tax debts. CMS officials stated that the primary focus of the  Medicaid program is to provide health care services for low income people  and not the administration of taxes. Further, federal law generally  prohibits the disclosure of taxpayer data to CMS and states and thus, CMS  and states do not have access to tax data directly from IRS unless the  taxpayer provides consent. Further, none of the seven states we  contacted have ever implemented a continuous federal tax levy for  Medicaid payments. Thus, Medicaid payments to providers that owe  federal taxes are not being continuously levied.
subsections: section_title: Screening for Unpaid Taxes
paragraphs: Federal law does not prohibit providers with unpaid federal taxes from  enrolling in and billing 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. CMS officials stated that the primary focus of the Medicaid  program is to provide health care services for low income people and not  the administration of taxes. CMS officials stated that such a requirement  could be a burden to the states in their enrollment of providers and could  adversely impact states’ ability to provide health care to the poor.  Consequently, the selected states’ processes generally do not consider  federal tax debts of prospective providers in the Medicaid enrollment  process.
Further, due to a statutory restriction on disclosure of taxpayer  information, even if tax debts specifically were to be considered in  enrollment in Medicaid, no coordinated or independent mechanism exists  for the states to obtain complete information on providers that have  unpaid tax debt. Federal law does not permit IRS to disclose taxpayer  information, including tax debts, to CMS or Medicaid state officials unless  the taxpayer consents, which neither CMS nor the states currently seek.  Thus, certain tax debt information can only be discovered from public  records if IRS files a federal tax lien against the property of a tax debtor or  if a record of conviction for tax offense is publicly available.  Consequently, CMS and state officials do not have ready access to  information on unpaid tax debts to consider in making decisions on  Medicaid providers.
section_title: Medicaid Payments to Providers Are Not Subject to IRS Continuous Levy
paragraphs: Although a provision of the Taxpayer Relief Act of 1997 authorizes IRS to  continuously levy certain federal payments made to delinquent taxpayers,  no tax debt owed by Medicaid providers has ever been collected using this  provision of the law. In the 10 years since its passage, IRS had not  determined whether Medicaid payments are federal payments and thus  subject to the continuous levy program or determined the feasibility of  incorporating these payments into the program.
If there had been an effective levy program in place, we estimate that the  selected states could have levied payments for the federal government and  collected between $70 million to about $160 million of unpaid federal  taxes during fiscal year 2006. This estimate was based on those debts that  IRS reported to the Treasury Offset Program (TOP) as of September 30,  2006. Officials from all these selected states stated that they have a  continuous levy program to offset Medicaid payments against their state  debts.
section_title: Conclusions
paragraphs: Available data indicate that the vast majority of Medicaid providers appear  to pay their federal taxes. However, our work has shown that over 30,000  Medicaid providers have taken advantage of the opportunity to avoid  paying their federal taxes. While Medicaid providers are relied on to  deliver significant medical services to those most in need, they must also  pay their fair share of federal taxes. Many of the individuals involved in  our cases have consistently not paid their taxes yet have received millions  of dollars in Medicaid payments and have faced no criminal consequences.
At the same time, some of these individuals are living lives of luxury,  financed in part by Medicare and Medicaid payments. Also, IRS has taken  little action to explore the continuous levy of Medicaid payments, which  over time potentially could have resulted in millions of dollars of  collections or to aggressively pursue collection and criminal investigation  of the individuals involved in our 25 case studies.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Commissioner of the Internal Revenue Service  take the following two actions:    Conduct a study to determine whether Medicaid payments can be  incorporated in the continuous levy program.
Evaluate the 25 referred cases detailed in this report for appropriate  additional aggressive collection action and criminal investigation as  warranted.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the Acting  Commissioner of Internal Revenue (see app. III) and Acting Administrator  of CMS (see app. IV). We also received an e-mail response from FMS.
IRS concurred with our recommendations. In response to our  recommendation that IRS conduct a study to determine whether Medicaid  payments can be incorporated in the continuous levy program, IRS stated  that both a subgroup of the Federal Contractors Tax Compliance (FCTC)  task force and IRS General Counsel have completed an independent study  on whether the Medicaid payments can be incorporated into the  continuous levy program. Both the FCTC task force and IRS General  Counsel concluded that Medicaid disbursements do not qualify as federal  payments and therefore cannot be incorporated in the continuous levy  program.
In response to a draft of our report, CMS expressed concern about the  tone and language we used to discuss our findings. Specifically, CMS  interpreted our finding that over 30,000 Medicaid providers had over $1  billion of unpaid federal taxes as implying that "there is some direct  correlation between owing taxes and being a Medicaid provider." Our  report clearly states that the vast majority of Medicaid providers are  paying their taxes. For the 5 percent of Medicaid providers with tax debt,  we simply reported on the facts of what we found, which do not require  additional evaluation to satisfactorily address our objective. Furthermore,  regarding our third objective, CMS interpreted our report as implying that  there is an underlying connection between the activity (preventing  providers with tax problems from participating in the Medicaid program)  and the authority and responsibility to perform such activity. Again, it  appears that CMS misinterpreted our findings. We specifically stated that  federal law does not prohibit providers with unpaid taxes from enrolling in  and billing Medicaid. Although CMS is not required to screen potential  providers for tax debts, we are concerned that CMS stated it would be  inappropriate to prevent medical providers that owe federal taxes  participating in the Medicaid program—which would presumably include  those egregious cases we identified in this report. We believe that any CMS  action to prevent medical providers who refuse to pay their taxes from  participating in the Medicaid program would help ensure the integrity of  the Medicaid program and does not necessarily conflict with CMS's role in  providing health care to low-income individuals.
Both CMS and FMS expressed concern with their agencies involvement in  the continuous levy program. CMS stated that we implied that CMS and  the Medicaid agencies should be conducting the continuous levy on these  payments. FMS stated that our report indicated that, because Medicaid  payments include funds the states receive from the federal government,  the Medicaid payment is a federal payment. Our report did not state that  CMS and the Medicaid agencies should be conducting the continuous levy  on Medicaid payments nor did we state that Medicaid payments are  federal payments. However, we did report that IRS had not determined  whether Medicaid payments are federal payments and recommended that  IRS conduct a study to determine whether Medicaid payments can be  incorporated in the continuous levy program.
CMS and FMS also provided us technical corrections to the report which  we incorporated, as appropriate.
As agreed with your office, unless you publicly release its contents earlier  we plan no further distribution of this report until 30 days from the date of  this letter. At that time, we will send copies of this report to the Secretary  of the Treasury, the Commissioner of the Financial Management Service  (FMS), the Acting Commissioner of Internal Revenue, the Acting  Administrator of Centers for Medicare & Medicaid Services (CMS) and  interested congressional committees.
The report is also available at no charge on the GAO Web site at  http://www.gao.gov. If you have any questions concerning this report,  please contact Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the magnitude of unpaid federal taxes owed by Medicaid  providers, we used a nonrepresentative selection of states. We selected the  states of California, Colorado, Florida, Maryland, New York, Pennsylvania,  and Texas based on the magnitude of payments made to Medicaid  providers and the geographical location of those states. We obtained and  analyzed Internal Revenue Service (IRS) tax debt data as of September 30,  2006. We also obtained and analyzed the selected states’ federal fiscal year  2006 approved Medicaid payments to providers. We matched the Medicaid  payment data to the IRS unpaid assessment data using the taxpayer  identification number (TIN) field. To avoid overestimating the amount  owed by Medicaid providers with unpaid tax debts and to capture only  significant tax debts, we excluded from our analysis tax debts and paid  claims meeting specific criteria to establish a minimum threshold for the  amount of tax debt and for the amount of paid claims to be considered  when determining whether a tax debt was significant. The criteria we used  to exclude tax debts are as follows:  tax debts that IRS classified as compliance assessments or memo  accounts for financial reporting, tax debts from calendar year 2006 tax periods, and   Medicaid providers with total unpaid taxes and Medicaid paid claims of  less than $100.
These criteria were used to exclude tax debts that might be under dispute  or generally duplicative or invalid, and tax debts that were recently  incurred. Specifically, compliance assessments or memo accounts were  excluded because these taxes have neither been agreed to by the  taxpayers nor affirmed by the court, or these taxes could be invalid or  duplicative of other taxes already reported. We excluded tax debts from  calendar year 2006 tax periods to eliminate tax debt that may involve  matters that are routinely resolved between the taxpayer and IRS, with the  taxes paid or abated within a short period. We further excluded tax debts  and Medicaid-paid claims of less than $100 because they are insignificant  for the purpose of determining the extent of taxes owed by Medicaid  providers. Our analysis also did not attempt to identify Medicaid providers  who owed taxes under a separate TIN from the TIN under which the  Medicaid payments were received. As a result, the full extent of unpaid  federal taxes for Medicaid providers is understated.
To identify indications of abuse or potentially criminal activity, we  selected 25 Medicaid providers for a detailed audit and investigation. The  25 providers were chosen using a nonrepresentative selection approach  based on our judgment, data mining, and a number of other criteria.  Specifically, we narrowed down providers to 25 with unpaid taxes based  on the amount of unpaid taxes, number of unpaid tax periods, amount of  payments reported by Medicaid, and indications that owner(s) might be  involved in multiple companies with tax debts. For these 25 cases, we  obtained copies of automated tax transcripts and other tax records (for  example, revenue officer’s notes) from IRS and performed additional  searches of criminal, financial, and public records. In cases where record  searches and IRS tax transcripts indicated that the owners or officers of a  business were involved in other related entities that have unpaid federal  taxes, we also reviewed the related entities and the owner(s) or officer(s),  in addition to the original business we identified. In instances where we  identified related parties that had both Medicaid payments and tax debts,  our case studies included those related entities, combining unpaid taxes  and combined Medicaid payments for the original individual/business as  well as all related entities. Because our investigations were generally  limited to publicly available information, our audit of the 25 cases may not  have identified all related parties or all significant assets (i.e., personal  bank data, companies established to hide assets) that the Medicaid  providers own.
To determine the extent to which Centers for Medicare & Medicaid  Services (CMS) officials and the states are required to consider tax debts  or other criminal activities in the enrollment of providers into Medicaid,  we examined CMS policies and procedures, Medicaid regulations, and the  selected policies for enrollment. We also discussed policies and  procedures used to enroll providers into Medicaid with officials from the  selected states. As part of these discussions, we inquired whether the  selected states specifically consider tax debts or perform background  investigations to determine whether a prospective provider is qualified  before the enrollment to Medicaid is granted. To determine the extent to  which Medicaid payments to providers are continuously levied to pay tax  debts, we examined the statutory and regulatory authorities that govern  the continuous levy program and interviewed officials from CMS, IRS, and  Department of the Treasury’s Financial Management Service (FMS) to  determine whether any legal barriers existed.
To determine the potential levy collections on Medicaid payments during  fiscal year 2006, we used 15 percent and 100 percent of the total paid claim  or total tax debt amount reported to the Treasury Offset Program (TOP),  whichever was less. A gap will exist between what could be collected and  the maximum levy amount calculated because (1) tax debts in TOP may  not be eligible for immediate levy because IRS has not completed due  process notifications and (2) tax debts may become ineligible for levy  because of a change in collection status (e.g., tax debtor filed for  bankruptcy).
We conducted our audit work from July 2006 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: To determine the reliability of the IRS unpaid assessments data, we relied  on the work we performed during our annual audits of IRS’s financial  statements. While our financial statement audits have identified some data  reliability problems associated with the coding of some of the fields in  IRS’s tax records, including errors and delays in recording taxpayer  information and payments, we determined that the data were sufficiently  reliable to address this report’s objectives. Our financial audit procedures,  including the reconciliation of the value of unpaid taxes recorded in IRS’s  masterfile to IRS’s general ledger, identified no material differences.
For the selected states’ Medicaid payment databases and FMS’s TOP  databases, we interviewed the selected states’ and FMS officials  responsible for their respective databases. In addition, we performed  electronic testing of specific data elements in the databases that we used  to perform our work. 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 testimony were sufficiently reliable for our  purposes.
section_title: Appendix II: Medicaid Providers with Unpaid Federal Taxes
paragraphs: This appendix presents summary information on the abusive or potentially  criminal activity associated with 15 of our 25 case studies. Table 2 shows  the remaining case studies that we audited and investigated. As with the 10  cases discussed in the body of this report, we also found substantial abuse  and potentially criminal activity related to the federal tax system during  our review of these 15 Medicaid providers that also received Medicaid  payments in federal fiscal year 2006. The case studies involving businesses  primarily involved unpaid payroll taxes.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, the following individuals made  major contributions to this report:   Matthew Valenta, Assistant Director;  Erika Axelson; Ray Bush; Jeremiah Cockrum; Bill Cordrey; Kenneth Hill;  John Kelly; Tram Le; Barbara Lewis; Andrew McIntosh; John Ryan; Steve  Sebastian; Robert Sharpe; Barry Shillito; Pat Tobo; and Jenniffer Wilson   made key contributions to this report.