Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax System
Released: 2007-03-20T00:00:00

Letter

Magnitude of Unpaid Taxes of Medicare Part B Physicians, Health Professionals, and Suppliers

Our analysis of 2005 data found that over 21,000 physicians, health professionals, and suppliers who received Medicare Part B payments during the first 9 months of 2005 had over $1 billion in unpaid federal taxes as of September 30, 2005. This represents about 5 percent of the number of Medicare Part B physicians, health professionals, and suppliers paid during the first 9 months of calendar year 2005. Because the IRS database does not include amounts owed by taxpayers who have not filed tax returns and for which IRS has not assessed tax amounts due, the estimated amount of unpaid federal taxes is understated.

Characteristics of Medicare Part B Physicians, Health Professionals, and Suppliers’ Unpaid Federal Taxes

As shown in figure 1, about 91 percent of the over $1 billion in unpaid taxes was comprised of federal individual income and payroll taxes. The other 9 percent of taxes included corporate income, excise, unemployment, and other types of taxes. Unlike our previous reports and testimonies on contractors with tax debts, a larger percentage of taxes owed by these physicians, health professionals, and suppliers was comprised of federal individual income taxes, which are unpaid amounts that individuals owe on their personal income. These taxpayers are typically either sole proprietors or certain limited liability companies that report income through individual income tax returns.

As shown in figure 1, Medicare Part B physicians, health professionals, and suppliers, which are corporations or other kinds of businesses, owed about $430 million in federal 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 fiduciary 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 assessed a civil monetary penalty known as a trust fund recovery penalty. Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties upon an employee for the employer’s failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the federal government’s general fund. Thus, personal income taxes, corporate income taxes, and other government revenues not specifically designated for the trust funds 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 Medicare Part B physicians, health professionals, and suppliers had been outstanding for several years. As reflected in figure 2, about 85 percent of the over $1 billion in unpaid taxes were for tax periods prior to calendar year 2004, with about 41 percent of the unpaid taxes 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 we have identified does not include all tax debts owed by physicians, health professionals, and related suppliers due to statutory provisions that give IRS a finite period under which it can seek to collect on unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if these physicians, health professionals, and suppliers 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.

Unpaid Federal Taxes of Medicare Part B Physicians, Health Professionals, and Suppliers Is Understated

Although over $1 billion in unpaid federal taxes owed by Medicare Part B physicians, health professionals, and suppliers as of September 30, 2005, is a significant amount, it 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 Medicare Part B physicians, health professionals, and suppliers failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these physicians, health professionals, and suppliers 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. Consequently, the full extent of unpaid federal taxes for Medicare Part B physicians, health professionals, and suppliers is not known.

In addition to the IRS tax database not reflecting all assessed tax amounts due, our past audits have also indicated 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 from other collection actions.

While we did not evaluate the appropriateness of IRS’s exclusions for this testimony, the exclusions are only as good as the codes IRS has entered into its systems. In our previous work, we found that inaccurate coding at times prevented IRS collection action, including referral to the continuous levy program. Specifically, in November 2006, we estimated that about $2.4 billion in tax debt was erroneously excluded from the continuous levy program as of September 30, 2005. IRS did not identify and correct the coding errors we found because it did not sufficiently monitor the timely updating of the status and transaction codes or the effect of computer programming changes. In addition, we found that the design of IRS’s policies for monitoring the status of financial hardship cases was not sufficient to ensure the ongoing accuracy of such designations. Therefore, effective management of these codes is critical because if these codes are not accurately or appropriately updated to reflect changing circumstances, cases may be needlessly excluded from collection action, including the continuous levy program.

Examples of Medicare Part B Physicians, Health Professionals, and Suppliers Involved in Abusive and Potentially Criminal Activity Related to the Federal Tax System

For all 40 cases involving Medicare Part B physicians, health professionals, and suppliers with outstanding tax debt that we audited and investigated, we found abusive and/or potentially criminal activity related to the federal tax system. Of these cases, 25 involved physicians, health professionals, and suppliers that had unpaid payroll taxes dating as far back as the early 1990s. Rather than fulfill their role as “trustees” of this money and forward it to IRS as required by law, these physicians, health professionals, and suppliers diverted the money for other purposes. IRS had trust fund recovery penalties in effect for 16 of the 25 business cases at the time of our review. In addition, as discussed previously, 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 a year. The other 15 cases involved individuals who had unpaid individual income taxes dating as far back as the 1970s.

Our review of selected Medicare Part B physicians, health professionals, and suppliers revealed significant challenges that IRS faces in its enforcement of tax laws, a continuing high-risk area for IRS. Although the nation’s tax system is built upon voluntary compliance, when businesses and individuals fail to pay voluntarily, IRS has a number of enforcement tools, including the use of levies, to compel compliance or elicit payment. Our review of the 40 physicians, health professionals, and suppliers found that IRS attempts to work with the businesses and individuals to achieve voluntary compliance, pursuing enforcement actions later rather than earlier in the collection process. Our review of IRS records with respect to our 40 cases showed that IRS did not issue paper levies to the Medicare contractors to levy the payments of physicians, health professionals, and suppliers for 28 of our 40 cases. As a result, most of the physicians, health professionals, and suppliers in our case studies continued to receive Medicare Part B payments while owing their federal taxes.

Our investigations revealed that, despite owing substantial amounts of federal taxes to the IRS, some physicians, health professionals, and suppliers had substantial personal assets—including multimillion dollar homes and luxury cars. For example, one physician purchased a house for over $1 million while his business owed over $1 million in federal taxes. Another physician purchased a luxury vehicle, paid for partly with cash, and gambled millions of dollars while owing over $400,000 in taxes.

In addition to failure to pay taxes, our investigations also revealed that several physicians associated with our case studies received Medicare Part B payments even though they had significant problems related to the practice of medicine. Six physicians had been previously excluded from the Medicare program for such things as professional incompetence, financial misconduct involving a government-operated program, and failure to pay health education loans. Further, 13 physicians in our cases had also been sanctioned by their state medical boards for such things as substandard care of their patients, drug abuse, abusive prescription writing, unprofessional conduct, lack of moral character, income tax evasion, embezzlement, aiding and abetting unlicensed practice, and illegible patient records.

Table 1 highlights 15 of the 40 cases of Medicare physicians, health professionals, and suppliers with unpaid taxes. Appendix II provides details on the other 25 cases we examined. We are referring all 40 cases we examined to IRS for further collection activity and criminal investigation, if warranted.

The following provides detailed information on three of the cases we examined.

Case 1: Although in 2 recent years, the physician’s business reported a net income of over $300,000 and $100,000, respectively, the physician has not made any federal tax payments to IRS. In addition, the physician has been delinquent in child support during this time. As a result, the physician’s spouse had to sell the residence because the spouse could not afford the house. A hospital revoked the physician’s hospital privileges for substandard care and the state medical board also investigated the physician. The physician received over $100,000 in Medicare Part B payments for the first 9 months of calendar year 2005.

Case 2: A physician was convicted of money laundering through offshore accounts. In addition to owing over $600,000 in federal individual income taxes, the physician owes tens of thousands of dollars in delinquent child support and also owns a related business that owes over $300,000 in federal taxes. Even though owing significant debts, the physician owns several residential properties, including an overseas house. HHS paid the physician nearly $100,000 in Medicare Part B payments during the first 9 months of calendar year 2005.

Case 4: An ambulance business owner paid employees in cash and did not report this income to IRS. The ambulance business owner was convicted and incarcerated for defrauding the U.S. government. While the owner was in prison, a business officer used company funds to purchase property for the business officer instead of paying the federal payroll taxes to IRS. In 2004, the business negotiated and is paying on a repayment agreement of about $3,000 per month. These monthly payments are substantially less than the interest that would accrue on the debt. HHS paid the ambulance company over $100,000 in Medicare Part B payments during the first 9 months of calendar year 2005.

Physicians, Health Professionals, and Suppliers with Unpaid Taxes Are Not Prohibited from Enrolling or Receiving Payments from Medicare

HHS does not prevent physicians, health professionals, and suppliers with tax debts from enrolling in or receiving payments from the Medicare program. HHS has not developed Medicare regulations or HHS implementing policy to require HHS or their contractors to (1) screen physicians, health professionals, and suppliers for unpaid taxes and (2) require contractors to obtain consent for IRS disclosure of federal tax debts. However, because HHS has not participated in the continuous levy program, no tax debts owed by these physicians, health professionals and suppliers are being collected through the program. As a result, the federal government lost opportunities to collect between $50 million and $140 million in unpaid taxes in the first 9 months of calendar year 2005.

HHS Medicare contractors are responsible for screening physicians, health professionals, and suppliers prior to enrollment into the Medicare program. However, as part of the screening process, neither HHS policies nor HHS regulations require Medicare contractors to consider tax debts or tax-related abuses of prospective physicians, health professionals, and suppliers. Medicare contractors are also not required to conduct any criminal background checks on these individuals. Medicare contractors are required to review the HHS Office of Inspector General (OIG) exclusion list and the General Services Administration (GSA) debarment lists; however, these lists do not include all individuals or businesses who have abused the federal tax system. The basis of exclusion of certain individuals and entities from participation in Medicare programs is made by statute. The statute provides for both mandatory and permissive exclusions. Mandatory exclusions are confined to health-related criminal offenses while permissive exclusions concern primarily non-health-related offenses. The Federal Acquisition Regulation cites conviction of tax evasion as one of the causes for debarment; indictment on tax evasion charges is cited as a cause for suspension. Consequently, the deliberate failure to remit taxes, in particular payroll taxes, while a felony offense, will likely not result in an individual or business being debarred or suspended unless there is an indictment or conviction of the crime. Moreover, while a felony offense, the deliberate failure to remit taxes, in particular payroll taxes, will likely not result in an individual or entity being placed on the Medicare exclusion or GSA debarment lists unless the taxpayer is convicted.

Even if an individual or entity is convicted of tax evasion or other tax- related crime, the individual or business still may not be placed on the Medicare exclusion or GSA debarment lists. To be placed on these lists, federal agencies must identify those individuals and businesses and provide them with due process. As part of the due process, the agency must make a determination as to whether the exclusion or debarment is in the government’s interest. None of the 40 cases that we investigated, including those involving a conviction for tax-related crimes, are currently on the Medicare exclusion or GSA debarment lists.

Further complicating HHS decision making on the consideration of tax debts for Medicare, federal law does not permit IRS to disclose taxpayer information, including tax debts, to HHS or Medicare contractor officials unless the taxpayer consents. HHS has not established a policy to obtain Medicare applicants’ consent to obtain tax information from IRS to consider in its Medicare eligibility decision making process. 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 a record of conviction for tax offense is publicly available. Consequently, HHS officials and their contractors do not have ready access to information on unpaid tax debts to consider in making decisions on physicians, health professionals and suppliers.

Further, HHS has not established policy to participate in the IRS continuous levy program, thus preventing IRS from capturing at least a portion of the Medicare payments made to physicians, health professionals, and suppliers that owe tax debts. As stated earlier, federal law allows IRS to continuously levy federal vendor payments up to 100 percent until the tax debt is paid. IRS has implemented this authority by creating a continuous levy program that utilizes FMS’s Treasury Offset Program system. In July 2001, we reported that HHS did not have plans to participate in the continuous levy program and we recommended that the Commissioners of IRS and FMS work with HHS to develop plans to include Medicare payments in the continuous levy program. In July 2006, IRS began to pursue HHS participation in the continuous levy program through the Federal Contractor Tax Compliance (FCTC) Task Force, a multiagency group dedicated to improving the continuous levy process. In response to IRS’s request, HHS began to participate in the FCTC Task Force meetings in February 2007.

If HHS had previously worked with IRS to levy Medicare Part B payments, we estimate, using the conservative 15 percent rate that FMS uses to levy civilian contractors, the federal government could have collected about $50 million in unpaid federal taxes for the first 9 months of calendar year 2005. Using the 100 percent rate authorized by law, the federal government could have collected approximately $140 million. These estimates were based on debt information IRS has reported to TOP as of September 30, 2005.

Concluding Comments

Thousands of Medicare Part B physicians, health professionals, and suppliers have failed in their responsibility to pay federal taxes they owe as individuals and businesses residing and conducting business in this nation. Further our case studies demonstrate that physicians and other medical service providers with federal tax debts can receive Medicare Part B payments while engaging in abusive and potentially criminal activity. In addition, our case studies determined that some physicians who abused the federal tax system are also not providing quality care to all of their patients. Additionally, because HHS has failed to participate in the continuous levy process since its authorization in 1997, the federal government has missed the opportunity to collect hundreds of millions of dollars in unpaid taxes from Medicare Part B physicians, health professionals, and suppliers. The federal government cannot afford to leave millions of dollars in taxes uncollected each year in the current environment of federal deficits, nor can it continue to permit physicians, health professionals, and suppliers that have abused the federal tax system from participating in the Medicare program.

Mr. Chairman and Members of the Subcommittee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time.

GAO Contacts

For further information about this testimony, please contact Gregory Kutz at (202) 512-7455 or kutzg@gao.gov or Steve Sebastian at (202) 512-3406 or sebastians@gao.gov. Contacts points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony.

Appendix I: Scope and Methodology

To identify the magnitude of unpaid taxes owed by Medicare Part B physicians, health professionals and suppliers, we requested from Department of Health and Human Services (HHS) the related Medicare Part B claims data for calendar year 2005. HHS was only able to provide us these data for the first 9 months of calendar year 2005 by the end of our review. We also obtained and analyzed the Internal Revenue Service (IRS) unpaid assessment data as of September 30, 2005. We matched the Medicare claim data to the IRS unpaid assessment data using the taxpayer identification number (TIN) field. To avoid overestimating the amount owed by Medicare Part B physicians, health professionals, and suppliers 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 in the amount of tax debt and in the amount of paid claims to be considered when determining whether a tax debt is 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 2005 tax periods, and Medicare Part B physicians, health professionals, and suppliers with total unpaid taxes and Medicare Part B paid claims of less than $100.

The criteria above were used to exclude tax debts that might be under dispute or generally duplicative or invalid, and tax debts 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 tax debts from calendar year 2005 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 the current year. We further excluded tax debts and Medicare Part B paid claims of less than $100 because they are insignificant for the purpose of determining the extent of taxes owed.

To identify examples of abuse or potentially criminal activity, we selected 40 Medicare Part B physicians, health professionals, and suppliers with federal tax debts for detailed audit and investigation. The 40 cases were chosen using a nonrepresentative selection approach based on our judgment, data mining, and a number of other criteria. Specifically, we narrowed the 40 cases with unpaid taxes based on the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by Medicare Part B, and indications that owner(s) might be involved in multiple companies with tax debts.

We obtained copies of automated tax transcripts and other tax records (for example, revenue officer’s notes and certain individual tax returns) from IRS, and reviewed these records to exclude physicians and suppliers that had recently paid off their unpaid tax balances and considered other factors before reducing our number of case studies to 40. We performed additional searches of criminal, financial, and public records. In cases where record searches and IRS tax transcripts indicate that the owners or officers of a business are involved in other related entities that have unpaid federal taxes, we also reviewed records of the related entities and the owner(s) or officer(s), in addition to the original business we identified. For each related entity, we determined whether that entity had Medicare Part B payments for the first 9 months of calendar year 2005 and had unpaid federal taxes as of September 30, 2005. We updated the tax debt amount as of September 30, 2006, to reflect any additional tax assessments or collections that have occurred. In instances where we identified related parties that had both Medicare Part B payments and tax debts, our case studies included those related entities, combining unpaid taxes and combined Medicare Part B payments for the original individual/business as well as all related entities.

To determine the extent to which HHS officials and their contractors are required to consider tax debts or other criminal activities in the enrollment of physicians, health professionals, and suppliers into Medicare, we examined Medicare regulations and HHS policies and procedures for enrollment. We also discussed policies and procedures used to enroll physicians, health professionals, and suppliers into Medicare with officials from two Medicare contractors. As part of these discussions, we inquired whether HHS and their contractors specifically consider tax debts or perform background investigations to determine whether prospective physicians, health professionals, and suppliers are qualified before their enrollment to Medicare is granted.

To determine the extent to which HHS levies Medicare Part B payments to physicians, health professionals, and suppliers owing tax debts, we examined the statutory and regulatory authorities that govern the continuous levy program to determine whether any legal barriers exist. We also interviewed officials from HHS, two Medicare contractors, IRS, and Department of Treasury’s Financial Management Service (FMS) officials as to any operational impediments for the continuous levy of provider payments to pay federal tax debts.

To determine the potential levy collections on the first 9 months of calendar year 2005, we used 15 percent and 100 percent of the total paid claim or total tax debt amount reported to TOP per IRS records, whichever is less. To be conservative, we used the 15 percent rate that FMS uses to levy civilian contractors. 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) IRS may remove tax debts from the levy program because the taxpayer filed for bankruptcy, negotiated an installment agreement, or some other action which made the taxpayer ineligible for the levy program.

Data Reliability Assessment

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 HHS’s Medicare claims history and FMS’s TOP databases, we interviewed HHS 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.

Based on 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.

We conducted our audit work from June 2006 through February 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.

Appendix II: Medicare Physicians, Health Professionals, and Suppliers with Unpaid Taxes

This appendix presents summary information on the abusive or potentially criminal activity associated with 25 of our 40 case studies. Table 2 summarizes the abuse or potentially criminal activity related to the federal tax system for these 25 physicians, health professionals, and suppliers that also received Medicare Part B payments in 2005. The cases involving businesses primarily involved unpaid payroll taxes.

Appendix III: Medicare Physicians, Health Professionals, and Suppliers With Federal and State Tax Liens

This appendix summarizes the extent to which Medicare physicians, health professionals, and suppliers have federal or state liens filed against their property. As discussed previously, certain tax debt information can only be discovered from public records, such as credit reports, if IRS files a federal tax lien against the property of a tax debtor. Of the 40 cases, 31 had federal tax liens filed by the Internal Revenue Service and 23 had tax liens filed by the states. Table 3 provides a summary of the federal or state tax liens filed for all 40 cases.