A federal grant is an award of financial assistance from a federal agency to an organization to carry out an agreed-upon public purpose. A Direct Payment for Specified Use (direct assistance) is an award of financial assistance from the federal government to individuals, private firms, and other private institutions to encourage or subsidize a particular activity by conditioning the receipt of the assistance on a particular performance by the recipient. As such, federal grants and direct assistance programs do not include solicited contracts for the procurement of goods and services for the federal government. Based on our analysis of fiscal years 2004 and 2005 data from the Federal Assistance Award Data System (FAADS), federal agencies collectively awarded grants and direct assistance of approximately $300 billion annually. Further analysis of the FAADS data indicates that approximately 80 percent of federal grants and direct assistance consist of federal funds provided to state and local governments, which, in turn, disburse funds to the ultimate recipients. Consequently, only about 20 percent of awarded funds are provided directly from the federal government to the organization that ultimately spends the money. Governmentwide policies affecting the award and administration of grants to nongovernmental entities are covered in OMB Circular No. A-110, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations. OMB Circular No. A-102, Grants and Cooperative Agreements with State and Local Governments, provides governmentwide guidance for administering grants provided to state and local governments and prescribes similar procedures as those included in Circular No. A-110. Direct assistance programs are not subject to the same governmentwide policies as grants; procedures governing the application and award processes for direct assistance are prescribed in guidance and regulations promulgated by the cognizant federal agency responsible for administering the program. Most grant applicants that apply directly to the federal government are required to complete an Application for Federal Assistance, Standard Form (SF) 424. The SF 424 provides federal agencies with entity information, such as name, employer identification number, address, and a descriptive title of the project for which the grant will be used. The applicant is required to certify that the information provided on the SF 424 is true and correct and whether the applicant is currently delinquent on any federal debt. While most federal grant and direct assistance recipients pay their federal taxes, we identified tens of thousands of grant and direct assistance recipients that collectively owed about $790 million in federal taxes as of September 2006. These tax debts were owed by entities who received federal payments directly from federal payment systems during fiscal years 2005 and 2006 and individuals who participated in HUD’s Section 8 tenant-based housing program as landlords during fiscal years 2005 and 2006. We used IRS’s September 2006 unpaid assessments file data to calculate the amount of taxes owed at or about the time the various grant recipients received their grant payments. Specifically, we found 2,000 of about 32,000 recipients (about 6 percent) who received federal grant and direct assistance benefits directly from three of the largest federal payment systems had more than $270 million of unpaid federal taxes. About $110 million of the $270 million in unpaid taxes represents unpaid payroll taxes. 37,000 of over 1 million landlords (about 4 percent) participating in the HUD Section 8 program had about $520 million of unpaid federal taxes. Most of these tax debts were unpaid individual income taxes. In our audit, we found that grant recipients had a substantial amount of unpaid payroll taxes. Employers may be 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 funds “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, 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 employed by the employer (e.g., owners or 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). 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 tax funds 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 are used to pay for these shortfalls to the Social Security and Medicare trust funds. Although grant and direct assistance recipients had about $790 million in unpaid federal taxes as of September 30, 2006, this amount likely understates the full extent of unpaid taxes for these or other organizations and individuals. For example, except for our case study involving HUD’s Section 8 tenant-based housing program, our estimate of grant and direct assistance recipients was limited to data from three of the largest government payment systems and thus did not include all federal grant and direct assistance disbursements. Further, our analysis of the three payment systems did not include recipients of payments who received their payments through state and local government entities. Based on our analysis of data from the FAADS, we estimated that payments paid by the federal government to final recipients account for only about 20 percent of the total grant and direct assistance funds awarded by the federal government. The remaining 80 percent of grant and direct assistance funds are provided to states and local governments, which, in turn, disburse them to the ultimate recipient. Further, to avoid overestimating the amount owed, we limited our scope to tax debts that were affirmed by either the taxable entity or a tax court for tax periods prior to 2006. We did not include the most current tax year because recently assessed tax debts that appear as unpaid taxes may involve matters that are routinely resolved between the taxpayer and IRS, with the taxes paid, abated, or both within a short period. We eliminated these types of debt by focusing on unpaid taxes for tax periods prior to calendar year 2006 and eliminating tax debt of $100 or less. The IRS tax database reflects only the amount of unpaid taxes either reported by the individual or organization on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by organizations and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. Further, our analysis did not attempt to account for organizations or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional 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 taxes for grant and direct assistance participants is not known. For all 20 cases of grant and direct assistance recipients we investigated for examples of abusive and criminal activity related to the federal tax system based on the large amount of tax debt and number of delinquent tax periods, we found in all cases evidence that indicated the existence of such abusive and criminal activities. Of these 20 cases, 14 cases were not- for-profit organizations that received grant payments and also had unpaid payroll taxes, some dating as far back as the 1990s. For example, one educational institution failed to submit employee payroll withholding taxes several times within a 3-year period and accumulated an unpaid tax liability of almost $4 million. For the cases of payroll tax delinquencies we investigated, officials responsible for these organizations failed to fulfill their role as “trustees” of employees’ payroll tax withholdings and forward this money to IRS as required by federal tax laws. Instead, these officials diverted the withholdings to fund the organizations’ operations or for personal benefits, such as their own salaries or extravagant vacations. The other 6 cases involved individuals who owed individual income taxes and who also received government subsidy payments through HUD’s Section 8 low-income housing program. In one of these cases, the landlord attempted to evict renters who were instructed by IRS to pay the rent directly to IRS instead of the landlord. In all 20 cases, we saw significant evidence of IRS collection activity occurring, but in only a couple of cases did we see action related to investigating these entities and individuals for criminal violations of federal tax laws. Table 1 highlights 10 cases of grant recipients we investigated with unpaid taxes. The other 10 cases are summarized in appendix II. The following provide illustrative detailed information on several of these cases: Case 4: This landlord participating in the Section 8 tenant-based housing program was involved in a fraudulent real estate transaction in addition to owing over $3 million in delinquent income taxes. The landlord was indicted on mortgage fraud and racketeering for attempting to sell real estate at an inflated price using false appraisals. Previously, the landlord’s family member was convicted of conspiracy to commit mail fraud, wire fraud, and money laundering in a scheme to sell fraudulent vacation club memberships. In addition, the landlord was charged with fraudulent conveyance of over $3 million worth of property to defraud creditors. Case 7: This grant recipient organization, which provides medical care to low-income families, has experienced financial problems throughout most of the 2000s and has several hundred thousand dollars in delinquent payroll taxes. During these years, while failing to properly fund its employee pension plan, the grant recipient paid hundreds of thousands of dollars in consulting fees to a former employee. Grant recipient could not document to other auditors over a million dollars in expenses relating to grants. Grant recipient has not made required contributions totaling tens of thousands of dollars to its pension plan. In addition, IRS assessed a TFRP against key grant recipient officials.