Medicaid: Providers in Three States with Unpaid Federal Taxes Received Over $6 Billion in Medicaid Reimbursements
Released: 2012-08-02T00:00:00

Letter

Background

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.

About 7,000 Medicaid Providers in the Selected States Owed Approximately $791 Million in Federal Tax Debt

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.

Unpaid Federal Taxes of Medicaid Providers Is Likely Understated

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.

California Medicaid Provider Data Were Unreliable

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.

Examples of Medicaid Providers with Sizeable Outstanding Federal Tax Debt

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.

Business and Individual Providers with Tax Debt

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.

Increased Levy of Medicaid Reimbursements Would Likely Increase Federal Tax Debt Collection, but Further Study Is Required

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.

IRS Cannot Currently Continuously Levy Medicaid Reimbursements to Collect Unpaid Federal Taxes

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.

Estimates Show Implementing Continuous Levy on Medicaid Reimbursements Could Allow IRS to Collect Additional Tax Debt

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.

Selected States Expressed Concerns about the Effects of Continuous and Onetime Levies

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objectives, Scope, and Methodology

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.

Data Reliability Assessment

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.

Appendix II: Additional Cases of Medicaid Providers with Sizeable Outstanding Federal Tax Debt

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.

Appendix III: Comments from the Internal Revenue Service

Appendix IV: Comments from the Centers for Medicare & Medicaid Services

Related GAO Products

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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.