Medicaid is a federal-state partnership that finances health care for certain low-income individuals, including children, families, the aged, and the disabled. More than 64 million persons were enrolled in the Medicaid program for fiscal year 2009. The Centers for Medicare & Medicaid Services (CMS) reported combined fiscal year 2009 and 2010 Medicaid program spending of $744 billion, $499 billion of which was funded by the federal government. The federal government matches most state Medicaid expenditures for covered services according to the FMAP, which is based on a statutory formula drawing on each state’s annual per capita income. Because of the mechanism through which the Recovery Act increased the federal share of funding for Medicaid through an increased FMAP, any provider that received Medicaid reimbursements during 2009 received Recovery Act funds. Within broad federal requirements, each state operates and administers its Medicaid program in accordance with a CMS-approved state Medicaid plan. These plans detail the populations served, the services covered, and the methods used to calculate payments to providers. Title XIX of the Social Security Act allows considerable flexibility within the states’ Medicaid plans. Within broad national guidelines established by federal statutes, regulations, and policies, each state (1) establishes its own eligibility standards; (2) determines the type, amount, duration, and scope of services; administers its own program—including enrollment of providers. Medicaid policies for eligibility, services, and payment are complex and vary considerably, even among states of similar size or geographic proximity. Thus, a person who is eligible for Medicaid in one state may not be eligible in another state, and the services provided by one state may differ considerably in amount, duration, or scope from services provided in a similar or neighboring state. (3) sets the rate of payment for services; and (4) All states must provide certain services, such as inpatient and outpatient hospital services, nursing facility services, and physician services, and may provide additional, optional services, such as prescription drugs, dental care, and certain home- and community-based services. covered under the state’s Medicaid plan. After the claim is approved by the state, it pays the claim. Federal reimbursement for Medicaid generally begins after a Medicaid beneficiary receives care from a health care provider such as a hospital, physician, or nursing home. The state pays the provider from a combination of state funds and federal funds, the latter of which have been advanced by CMS each quarter. The state then files a quarterly expenditure report, in which it claims the federal share of the Medicaid expenditure as reimbursement for its payment to providers and reconciles its total expenditures with the federal advance. In addition to reimbursement for medical services, the state may claim federal reimbursement for functions it performs to administer its Medicaid program, such as enrolling new beneficiaries; reviewing the appropriateness of providers’ claims; and collecting payments from third parties, which are payers other than Medicaid, such as Medicare, that may be liable for some or all of a particular health claim. Federal law does not prohibit providers with unpaid federal taxes from enrolling in or receiving payments from Medicaid. Federal regulations and policies require the states, as part of their responsibilities for determining whether the providers meet Medicaid requirements for enrollment, to verify basic information on potential providers, including whether the providers meet state licensure requirements and whether the providers are prohibited from participating in federal health care programs. However, federal regulations and policies do not require the states to screen these providers for federal tax delinquency nor do they explicitly authorize the states to reject the providers that have delinquent tax debt from participation in Medicaid. Further, federal law generally does not permit IRS to disclose taxpayer information, including tax debts, unless the taxpayer consents. IRS may levy a taxpayer’s property to satisfy a tax debt. For instance, IRS could seize and sell property that a taxpayer holds (such as the taxpayer’s car, boat, or house), or IRS could seize property that belongs to the taxpayer but is held by someone else (such as the taxpayer’s wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivable, or commissions). Currently, IRS may issue a onetime notice of levy to a state Medicaid agency to collect the receivable balance immediately due to a given provider. IRS may then issue additional successive, onetime levies if the proceeds received from the initial levy are not sufficient to satisfy the government’s claim. A provision of the Taxpayer Relief Act of 1997 authorizes IRS to continuously levy (typically using an automated process) certain federal payments made to delinquent taxpayers in order to collect tax debt, but Medicaid reimbursements have never been collected using this provision of the law. This is because IRS determined that Medicaid disbursements do not qualify as federal payments and thus may not be subjected to the continuous levy. This decision was based on the nature of the Medicaid reimbursement as a state entitlement, and the considerable operational discretion vested in state agencies in the administration of the Medicaid program, including discretion to create unique eligibility standards for enrollment of providers and to establish criteria for disbursement of funds. Our analysis found that, as of September 30, 2011, about 7,000 Medicaid providers in the three selected states had approximately $791 million in unpaid federal taxes from 2009 or earlier. These providers accumulated an additional $59 million in unpaid federal taxes during 2010 and 2011. These providers represent about 5.6 percent of the approximately 125,000 Medicaid providers reimbursed by the selected states during 2009. These 7,000 Medicaid providers with unpaid federal taxes received a total of about $6.6 billion in Medicaid reimbursements during 2009, which included Recovery Act funds. The amount of unpaid federal taxes we identified among Medicaid providers is likely understated because the IRS taxpayer data reflect only the amount of unpaid taxes either reported by the taxpayer on a tax return or assessed by IRS through its various enforcement programs, and generally the unpaid federal taxes amount does not include entities that did not file tax returns or underreported their income. As shown in figure 1, about 77 percent of the approximately $791 million in unpaid federal taxes was made up of individual income taxes, corporate income taxes, and payroll taxes. The other 23 percent of taxes included excise taxes, miscellaneous penalties, and other types of taxes. Over 40 percent of the unpaid federal taxes owed by Medicaid providers in these three states were payroll taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee’s wages, the employer is deemed to have a responsibility to hold these amounts “in trust” for the federal government until the employer makes a federal tax deposit in that amount. To the extent these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts, as well as the employer’s matching Federal Insurance Contributions Act contributions for Social Security and Medicare. Individuals within a business (e.g., corporate officers) may be held personally liable for the withheld amounts not forwarded and they may be assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to 1 year. A substantial amount of the unpaid federal taxes shown in IRS records as owed by Medicaid providers have been outstanding for several years. As shown in figure 2, about 51 percent of the $791 million in unpaid federal taxes was for tax periods from 2004 through 2007, and approximately 21 percent of the unpaid federal taxes was for tax periods prior to 2004. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amount owed decreases. This is due, in part, to the continued accrual of interest and penalties on the outstanding tax debt, which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes reported above does not include all tax debts owed by Medicaid providers due to statutory provisions that give IRS a finite period under which it can seek to collect on unpaid taxes. There is a 10-year statute of limitations beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if the Medicaid providers have unpaid federal taxes from beyond the 10-year statutory collection period, the older tax debt may have been removed from IRS’s records. We were unable to determine whether any tax debt had been removed for these providers on this basis, and if so, the amount that had been removed. Although $791 million in unpaid federal taxes owed by Medicaid providers in the selected states as of September 30, 2011, is a significant amount, it likely understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflects only the amount of unpaid federal taxes either reported by the individual or business on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. Further, our analysis did not attempt to account for businesses or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $450 billion gross tax gap estimated for tax year 2006. As discussed below, some of our case-study examples include individuals and businesses who did not file required accurate tax returns. Further, we did not attempt to broadly identify instances where a Medicaid provider owed taxes under a separate TIN from the TIN under which the provider received the Medicaid reimbursements in our calculations of the magnitude of tax debt.