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

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