Authorized by the Title XVIII of the Social Security Act, Medicare is the nation’s largest health insurance program. In 2006, Medicare provided medical services to 43.2 million beneficiaries and paid claims totaling $402 billion in 2006. CMS, an operating division of the Department of Health and Human Services (HHS), administers the Medicare program. Medicare benefits are divided into four parts: (1) Part A consists of inpatient hospital care, skilled nursing facility care, qualified home health care, and hospice care; (2) Part B includes physicians’ services, outpatient hospital services, treatment for end-stage renal disease, laboratory services, durable medical equipment, certain elements of home health care, and other medical services and supplies; (3) Part C, the Medicare Advantage program, includes traditional health maintenance organizations, preferred provider organizations, and private fee-for-service plans; and (4) Part D offers beneficiaries an outpatient prescription drug benefit through private plans that contract with Medicare. For Medicare Parts A and B, also known as fee-for-service, CMS Medicare contractors are responsible for screening Medicare providers prior to enrollment into the Medicare program. Medicare contractors also process and pay Medicare fee-for-service claims and are reimbursed by CMS through the Medicare Trust Fund. Our analysis found that over 27,000 Medicare providers had over $2 billion in unpaid federal taxes as of September 30, 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. This represented over 6 percent of the approximately 436,000 Medicare providers paid during calendar year 2006. The amount of unpaid federal taxes we identified among Medicare providers was substantially understated because (1) we intentionally limited our scope to providers with agreed-to federal tax debt for tax periods prior to 2006; (2) the IRS taxpayer data reflected 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 did not include entities that did not file tax returns or underreported their income; and (3) our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. As shown in figure 1, 73 percent of the approximately $2 billion in unpaid taxes comprised individual income and payroll taxes. The other 27 percent of taxes included corporate income, excise, unemployment, and other types of taxes. As shown in figure 1, Medicare providers owed $896 million in 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. When 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 (TFRP). Failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of not more than 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 on 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 owed by Medicare providers had been outstanding for several years. As reflected in figure 2, about 54 percent of the $2 billion in unpaid taxes were for tax periods from calendar year 2000 through calendar year 2004, and approximately 32 percent of the unpaid taxes were 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 amounts owed decreases. This is, in part, because of 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 Medicare providers because of statutory provisions that give IRS a finite period under which it can seek to collect unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the Medicare 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. As shown in figure 3, Medicare providers did not disclose to IRS a significant amount of taxes owed instead the taxes were discovered through IRS examination or investigation. Specifically, $784 million, or about 39 percent of the $2 billion in unpaid taxes, was assessed by an IRS examination or investigation. Medicare providers did report about $857 million of the tax debt amount. These amounts were generally reported on tax returns filed but containing a balance due. Although the over $2 billion in unpaid federal taxes owed by Medicare providers as of September 30, 2006, is a significant amount, it likely substantially understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflected 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 several instances from our 25 case studies in which Medicare 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 those periods. 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 Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. For example, sole proprietors and certain LLCs may file Medicare claims under their employer identification numbers. If these Medicare providers owe personal income taxes the analysis will not capture the amount of the personal income taxes owed. Consequently, the full extent of unpaid federal taxes for Medicare providers is not known. For all 25 cases involving Medicare providers with outstanding tax debt that we audited and investigated, we found abusive activity, potentially criminal activity, or both related to the federal tax system. All of these cases involved Medicare providers that had unpaid payroll taxes, many 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 Medicare providers diverted the money for other purposes. IRS had TFRPs in effect for 11 of the 25 business cases at the time of our review. In addition, as discussed previously, willful failure to remit payroll taxes is a criminal felony offense punishable by imprisonment up to 5 years. Our review of selected Medicare providers 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 25 Medicare providers found that IRS attempted 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 the 25 cases showed that IRS did not issue paper levies to the Medicare contractors to levy the payments of Medicare providers for 10 of the 25 cases. As a result, many of the Medicare providers in our case studies continued to receive Medicare payments while failing to pay their federal taxes. Our investigations revealed that despite owing substantial amounts of federal taxes to IRS, some owners of Medicare providers had substantial personal assets—including multimillion-dollar homes and luxury cars. For example, the auditor for one Medicare provider found that the owner misappropriated assets for personal gain. At the same time as owing taxes, the owner was building a multimillion-dollar residence and had over $1.5 million in home furnishings and artwork. In addition to failure to pay taxes, our investigations also revealed that certain Medicare providers had significant quality-of-care and other problems. For example, several cases involved quality-of-care problems, including patient neglect, for example, losing track of a patient in the provider’s care who has not been found and not taking appropriate actions to prevent a patient’s suicide. In addition, a couple of nursing homes were cited by regulators for violating patient health and safety regulations. In another case, an owner of one Medicare provider was excluded from the Medicare program for submitting false Medicare claims, and in another case a provider continued to receive Medicare payments even though it was barred from receiving government contracts. In yet another case, the owner used funds from the business to fund the owner’s statewide political campaign during the time the business was not paying its payroll taxes. Table 1 highlights 10 of the 25 cases of Medicare providers with unpaid taxes. IRS has collection actions during 2007 on 18 of 25 cases. Appendix II provides details on the other 15 cases we examined. We are referring all 25 cases we examined to IRS for further collection activity and criminal investigation. The following provides illustrative detailed information on four of the cases we examined. Case 4: The nursing home consists of several companies that received over $15 million in Medicare payments while owing more than $7 million in tax debts. IRS records indicated that the company owners attempted to conceal assets through questionable business entities such as trusts, partnerships, LLCs, and other fictitious entities. While the nursing home owed taxes, the owner possessed a $1 million personal residence and an additional $1 million piece of real estate. IRS records also showed that the owner purchased luxury cars and other personal items from money funneled through a charitable foundation. Specifically, the company owner donated large sums of money to the foundation then claimed the deductions on their personal tax return while purchasing expensive personal items. Case 5: The nursing home has a history of tax noncompliance since the late 1990s. The nursing home received over $1 million in Medicare payments while owing more than $11 million in tax debt. IRS records indicated that the nursing home owner has attempted to shield income through partnerships, tiered agreements, and leasehold agreements. In addition, the owner has various companies using over 100 bank accounts, wire transfers, an overseas billing company, and a large financial transaction to an overseas bank account. The nursing home has been sanctioned by regulators for quality-of-care deficiencies so serious that the home was barred from accepting new admissions. Case 6: The nursing home received over $4 million in Medicare payments and hundreds of thousands of dollars in federal government contracts while simultaneously owing over $4 million in tax debt. Although the owners of the nursing home claimed an inability to pay delinquent taxes because of lack of resources, one owner constructed a $4 million home while the other owner lived in a multimillion-dollar home while owing taxes. IRS records indicated that the owners also underreported income on their personal tax returns and received financial compensation, such as salary and bonuses, from another company to disguise reporting of income. IRS records indicated that one company owner may relocate overseas to avoid paying taxes. Case 10: The company received over $21 million in Medicare payments while simultaneously owing over $15 million in tax debt. The company was under investigation for underreporting income, bankruptcy fraud, and submitting false claims to Medicare. The company’s owner also owns a multimillion-dollar residence. CMS does not prevent Medicare providers with tax debts from becoming Medicare providers or receiving payments from the Medicare program. Neither Medicare regulations nor CMS implementing guidance require CMS or its contractors to screen Medicare providers for tax debts prior to enrollment. Even if such requirements did exist, absent taxpayer consent, federal law generally prohibits IRS from disclosing taxpayer data, and consequently, CMS and its contractors have no access to tax data directly from IRS. In addition, CMS has not fully participated in the continuous levy program. Specifically, CMS has not incorporated Medicare fee for service payments in the continuous levy program. As a result, the federal government potentially lost opportunities to collect over $140 million in unpaid taxes during calendar year 2006. CMS Medicare contractors are generally responsible for screening Medicare providers prior to enrollment into the Medicare program. However, as part of the screening process, neither CMS policies nor CMS regulations require Medicare contractors to consider the tax debts or tax- related abuses of prospective Medicare providers or 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 GSA debarment list; however, these lists do not include all individuals or businesses that have abused the federal tax system. 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. 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 OIG exclusion or GSA debarment lists unless the taxpayer is convicted. Based on our work, we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Even if a taxpayer is convicted of tax evasion or other tax-related crime, the individual or business still may not be placed on the OIG exclusion or GSA debarment lists. To place them on these lists, federal agencies must identify those individuals and businesses and provide them with due process. As part of due process, the agency must determine whether the exclusion or debarment is in the government’s interest. For example, in our March 2007 testimony, we noted several cases involving conviction of tax-related crimes where the providers were not reported on the OIG exclusion or GSA debarment lists. Further complicating CMS decision making on the consideration of tax debts for Medicare, federal law does not permit IRS to disclose taxpayer information, including tax debts, to CMS or Medicare contractor officials unless the taxpayer consents, which CMS does not currently require. 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, CMS and its contractors do not have ready access to information on unpaid tax debts to consider in making decisions on Medicare providers. Further, CMS has not implemented a process for continuously levying payments made by Medicare contractors. As a result, IRS does not capture at least a portion of payments made to Medicare providers that owe federal tax debts. Thus, none of the 25 providers on which we performed a detailed review had their Medicare fee-for-service payments subject to the continuous levy program. As stated earlier, federal law allows IRS to continuously levy federal vendor payments until the tax debt is paid. IRS implemented this authority by creating a continuous levy program that utilizes FMS’s Treasury Offset Program system. In July 2001, we reported that CMS did not have any plan to participate in the continuous levy program and we recommended that the Commissioners of IRS and FMS work with CMS 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, and a month before your subcommittee’s hearing on Medicare physicians, health professionals, and suppliers that owe federal taxes, CMS began to participate in the FCTC Task Force meetings in February 2007. According to CMS officials, CMS plans to incorporate all payments made through HIGLAS, Medicare’s central accounting system, into the levy program by October 2008. CMS officials stated that this will cover about 60 percent of all Medicare fee-for-service payments. CMS officials said that the remaining 40 percent will be implemented into the continuous levy program in the next several years as the Medicare contractors convert their systems to HIGLAS. If there was an effective levy program in place, we estimate that CMS through its Medicare contractors potentially could have collected over $140 million of unpaid federal taxes during fiscal year 2006. This estimate was based on those debts that IRS reported to the Treasury Offset Program as of September 30, 2006. As federal deficits continue to mount, the federal government must take all effective measures to collect the billions of dollars of unpaid taxes. Because payroll taxes fund the Medicare program, Medicare providers should especially pay their fair share of taxes owed, especially payroll taxes. However, with respect to the continuous levy program, the federal government continues to fail to reach its potential. A substantial amount of Medicare payments to delinquent taxpayers will continue to go uncollected until CMS can establish a process to incorporate its payments into the continuous levy program. The failure to enforce tax laws against Medicare providers has a detrimental affect on compliance. We recommend that the Administrator of CMS take the following two actions: To enhance program integrity, consider (1) issuing guidance requiring Medicare contractors to determine to the extent feasible if prospective Medicare providers (including any Medicare providers that reenroll into Medicare) have delinquent federal taxes, including obtaining applicant consent to inquire as to tax debt status from IRS, and (2) using the results of those inquiries in determining whether to enroll such providers into the Medicare program. In making this determination, CMS could also build in consideration of the potential adverse effect that this requirement may have on Medicare’s ability to provide health care to the elderly and other Medicare beneficiaries. Incorporate all Medicare payments into the continuous levy program as expeditiously as possible. We provided a draft of our report to FMS, CMS, and IRS for review and comment. FMS did not have any comments on the draft. We received written comments on a draft of this report from the Commissioner of Internal Revenue (see app. III). We also received comments from the Acting Administrator of CMS on our draft, who did not disagree with our two recommendations (see app. IV). The Commissioner of Internal Revenue stated that he understood the importance and potential benefits of considering unpaid federal tax debt in the Medicare screening process and will support CMS in addressing our recommendations to CMS. Further, the Commissioner of Internal Revenue stated that if CMS established a process by which Medicare providers supply their TINs to IRS, IRS would be able to provide CMS a historical record of the taxpayers’ accounts, which would indicate any periods of unpaid taxes. The Commissioner of Internal Revenue stated that IRS is currently working with CMS and FMS on a pilot program to levy CMS Medicare payments through the continuous levy program. In its response to the draft of the report, the Acting Administrator of CMS stated that CMS has taken some actions and is planning other actions to address our recommendations. Specifically, in response to our first recommendation, CMS stated that it issued proposed rules that would require prospective durable medical equipment, prosthetic, and orthotic suppliers to be free of federal or state tax debt. CMS stated that it will consider whether to use its authority to establish a similar requirement for the other provider and supplier types. CMS also stated that it will carefully consider public policy implications of balancing the interests of denying or revoking Medicare program participation with Medicare’s responsibility for paying for the health care needs of the Medicare beneficiaries. In response to our second recommendation, CMS stated that it is scheduled to begin subjecting its Medicare fee-for-service payments to the levy program in October 2008. We are pleased that both CMS and IRS have shown the willingness to improve the process of utilizing available tax information to prevent providers with tax problems from participating in Medicare and collecting tax debts. As discussed in our draft report, we agree with CMS that in determining whether to require the screening of prospective Medicare providers for delinquent federal taxes, CMS should consider the potential adverse effect that this requirement may have on Medicare’s ability to provide health care to the elderly and other Medicare beneficiaries. Further, as also discussed in our draft report, we also believe that the incorporation of Medicare fee-for-service payments into the levy program will significantly improve collections of outstanding federal taxes owed by Medicare providers. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of the Financial Management Service, the Commissioner of Internal Revenue, the Acting Administrator of Centers for Medicare & Medicaid Services, and other interested parties. 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 either 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. To identify the magnitude of unpaid federal taxes owed by Medicare providers, we obtained and analyzed the Internal Revenue Service (IRS) tax debt data as of September 30, 2006. We also obtained and analyzed calendar year 2006 Medicare payments to providers from the Centers for Medicare & Medicaid Services (CMS). Our analysis included all Medicare providers (i.e., Parts A, B, C and D) that were paid during calendar year 2006. We matched the Medicare payment data to the IRS unpaid assessment data using the taxpayer identification number (TIN) field. To avoid overestimating the amount owed by Medicare 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 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 2006 tax periods, and total unpaid taxes and Medicare 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 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 excluded tax debts and Medicare paid claims of less than $100 because they are insignificant for the purpose of determining the extent of taxes owed by Medicare providers. To identify indications of abuse or potentially criminal activity, we selected 25 Medicare 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 the 25 providers with unpaid taxes based on the amount of unpaid taxes, number of unpaid tax periods, amount of payments reported by Medicare, 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 indicate that the owners or officers of a business are 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. Because our investigations were generally limited to publicly available information, our audit of the 25 cases may not have identified all related parties, criminal activity or significant assets (such as personal bank data, companies established to hide assets, etc.) related to these Medicare providers. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the TOP per IRS records, 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). To determine the extent to which Medicare 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 the Financial Management Service (FMS) to determine whether any legal barriers exist. To determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to the Treasury Offset Program (TOP) per IRS records, whichever is 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). 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 Medicare payment databases and FMS’s TOP databases, we interviewed CMS 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, our 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 this forensic audit from July 2007 to June 2008 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 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. We performed our investigative work in accordance with standards prescribed by the President’s Council on Integrity and Efficiency. This appendix presents summary information on the abusive or potentially criminal activity associated with 15 of our 25 case studies. Table 2 summarizes the abuse or potentially criminal activity related to the federal tax system for these 15 Medicare providers. The cases involving businesses primarily involved unpaid payroll taxes. The following are GAO’s comments on CMS’s letter dated May 29, 2008. 1. IRS Form 1099 is an annual information report of income to IRS. However, this report cannot be used to continuously levy Medicare payments because they reflect prior calendar year payments that have already been made to the provider. 2. We have revised the report to state that CMS reported that it received 970 paper levies from IRS revenue officers totaling $109 million. We also noted that while CMS did not report the amount it actually collected from these paper levies, we do not believe paper levies are a significant source of revenue collection. 3. We have revised the report to include the amount of Medicare payments that are subject to the continuous levy program. 4. IRS provided documentation that showed that in July 2006 IRS began to pursue Department of Health and Human Services participation in the continuous levy program through the Federal Contractor Tax Compliance Task Force. 5. The IRS/CMS/SSA data match program is not used to collect delinquent federal taxes. Therefore, a discussion of this program is not relevant to our report. 6. We have revised the report to clarify that the 27,000 Medicare providers with unpaid federal taxes encompasses all Medicare providers that have received payments during calendar year 2006. This includes all Medicare providers for Parts A, B, C, and D. Our analysis only included Medicare providers that had TINs that received Medicare payments greater than $100. As our draft report states, we believe that our estimate is substantially understated because, among other things, our analysis does not include Medicare providers that owed taxes under separate TINs from those that received the Medicare payments. 7. In our draft report, we stated that we believe that it is unlikely that companies will be excluded or debarred for failure to pay delinquent payroll taxes. Although we appreciate CMS’s solicitation, we are not making any recommendations on the use of the existing debarment system to collect unpaid taxes at this time. 8. In our draft report, we state that to determine the potential levy collections on Medicare payments during calendar year 2006, we used 15 percent of the total paid claim or total tax debt amount reported to TOP per IRS records, 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 plan to follow up on our recommendation to CMS in incorporating Medicare payments into the continuous levy program; however, we do not believe that a revision to the estimate in this report is necessary. 9. In our draft report, we state that our analysis only included tax debts and Medicare paid claims of $100 or more because they are significant for the purpose of determining the extent of taxes owed by Medicare providers.

Summary: Under the Medicare program, the Centers for Medicare & Medicaid Services (CMS) and its contractors paid over $400 billion in Medicare benefits in calendar year 2006. GAO was asked to determine if Medicare providers have unpaid federal taxes and, if so, to (1) determine the magnitude of such debts, (2) identify examples of Medicare providers that have engaged in abusive or potentially criminal activities, and (3) determine whether CMS prevents delinquent taxpayers from enrolling in Medicare or levies payments to pay taxes. To determine amount of unpaid taxes owed by Medicare providers, GAO compared claim payment data from CMS and tax debt data from the Internal Revenue Service (IRS). In addition, GAO reviewed policies, procedures, and regulations related to Medicare. GAO also performed additional investigative activities. Our analysis of data provided by CMS and IRS indicates that over 27,000 health care providers (i.e., about 6 percent of all such providers) paid under Medicare during calendar year 2006 had payroll and other agreed-to federal tax debts totaling over $2 billion. The $2 billion in unpaid tax debts only includes those debts reported on a tax return or assessed by IRS through its enforcement programs. This $2 billion figure is understated because some of these Medicare providers owed taxes under separate tax identification numbers (TIN) from the TINs that received the Medicare payments or they did not file their tax returns. We selected 25 Medicare providers with significant tax debt for more in-depth investigation of the extent and nature of any abusive or potentially criminal activity. Our investigation found abusive and potentially criminal activity, including failure to remit to IRS payroll taxes withheld from their employees. Rather than fulfill their role as "trustees" of this money and forward it to IRS as required by law, these Medicare providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, individuals associated with some of these providers at the same time used payroll taxes withheld from employees for personal gain. Some of these individuals accumulated substantial wealth and assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes. In addition, some providers received Medicare payments even though they had quality-of-care issues, such as losing track of a patient in their care who has not been found. CMS has not developed a policy to require contractors (1) to obtain consent for IRS disclosure of federal tax debts and (2) to screen providers for unpaid taxes. Further complicating this issue, absent consent by the taxpayer, which CMS does not require, federal law generally prohibits the disclosure of taxpayer data to CMS or its contractors. IRS can continuously levy up to 15 percent of each payment made to a federal payee--for example, a Medicare hospital--until that tax debt is paid. However, CMS has not incorporated most of its Medicare payments into the continuous levy program. As a result, for calendar year 2006, the government lost opportunities to potentially collect over $140 million in unpaid taxes.