Our analysis of 2005 data found that over 21,000 physicians, health professionals, and suppliers who received Medicare Part B payments during the first 9 months of 2005 had over $1 billion in unpaid federal taxes as of September 30, 2005. This represents about 5 percent of the number of Medicare Part B physicians, health professionals, and suppliers paid during the first 9 months of calendar year 2005. Because the IRS database does not include amounts owed by taxpayers who have not filed tax returns and for which IRS has not assessed tax amounts due, the estimated amount of unpaid federal taxes is understated. As shown in figure 1, about 91 percent of the over $1 billion in unpaid taxes was comprised of federal individual income and payroll taxes. The other 9 percent of taxes included corporate income, excise, unemployment, and other types of taxes. Unlike our previous reports and testimonies on contractors with tax debts, a larger percentage of taxes owed by these physicians, health professionals, and suppliers was comprised of federal individual income taxes, which are unpaid amounts that individuals owe on their personal income. These taxpayers are typically either sole proprietors or certain limited liability companies that report income through individual income tax returns. As shown in figure 1, Medicare Part B physicians, health professionals, and suppliers, which are corporations or other kinds of businesses, owed about $430 million in federal payroll taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee’s wages, the employer is deemed to have a fiduciary responsibility to hold these amounts “in trust” for the federal government until the employer makes a federal tax deposit in that amount. To the extent these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts, as well as the employer’s matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals within the business (e.g., corporate officers) may be held personally liable for the withheld amounts not forwarded and assessed a civil monetary penalty known as a trust fund recovery penalty. Willful failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The law imposes no penalties upon an employee for the employer’s failure to remit payroll taxes since the employer is responsible for submitting the amounts withheld. The Social Security and Medicare trust funds are subsidized or made whole for unpaid payroll taxes by the federal government’s general fund. Thus, personal income taxes, corporate income taxes, and other government revenues not specifically designated for the trust funds are used to pay for these shortfalls to the Social Security and Medicare trust funds. A substantial amount of the unpaid federal taxes shown in IRS records as owed by Medicare Part B physicians, health professionals, and suppliers had been outstanding for several years. As reflected in figure 2, about 85 percent of the over $1 billion in unpaid taxes were for tax periods prior to calendar year 2004, with about 41 percent of the unpaid taxes for tax periods prior to calendar year 2000. Our previous work has shown that as unpaid taxes age, the likelihood of collecting all or a portion of the amount owed decreases. This is due, in part, to the continued accrual of interest and penalties on the outstanding tax debt which, over time, can dwarf the original tax obligation. The amount of unpaid federal taxes we have identified does not include all tax debts owed by physicians, health professionals, and related suppliers due to statutory provisions that give IRS a finite period under which it can seek to collect on unpaid taxes. Generally, there is a 10-year statutory collection period beyond which IRS is prohibited from attempting to collect tax debt. Consequently, if these physicians, health professionals, and suppliers owe federal taxes beyond the 10-year statutory collection period, the older tax debt may have been removed from IRS’s records. We were unable to determine the amount of tax debt that had been removed. Although over $1 billion in unpaid federal taxes owed by Medicare Part B physicians, health professionals, and suppliers as of September 30, 2005, is a significant amount, it understates the full extent of unpaid taxes owed by these or other businesses and individuals. The IRS tax database reflects only the amount of unpaid federal taxes either reported by the individual or business on a tax return or assessed by IRS through its various enforcement programs. The IRS database does not reflect amounts owed by businesses and individuals that have not filed tax returns and for which IRS has not assessed tax amounts due. For example, during our audit, we identified instances from our case studies in which Medicare Part B physicians, health professionals, and suppliers failed to file tax returns for a particular tax period and IRS had not assessed taxes for these tax periods. Consequently, while these physicians, health professionals, and suppliers had unpaid federal taxes, they were listed in IRS records as having no unpaid taxes for that period. Further, our analysis did not attempt to account for businesses or individuals that purposely underreported income and were not specifically identified by IRS as owing the additional federal taxes. According to IRS, underreporting of income accounted for more than 80 percent of the estimated $345 billion annual gross tax gap. Consequently, the full extent of unpaid federal taxes for Medicare Part B physicians, health professionals, and suppliers is not known. In addition to the IRS tax database not reflecting all assessed tax amounts due, our past audits have also indicated that the IRS tax database contains coding errors that adversely affect IRS’s collection activities. IRS’s collection process is heavily dependent upon its automated computer system and the information that resides within this system. In particular, the codes in each taxpayer’s account in IRS’s tax database are critical to IRS in tracking the collection actions it has taken against a tax debtor and in determining what, if any, additional collection actions should be pursued. For example, IRS uses these codes to identify cases it should exclude from the continuous levy program, which is an automated method of collecting tax debt by offsetting certain federal payments made to individuals and businesses, as well as from other collection actions. While we did not evaluate the appropriateness of IRS’s exclusions for this testimony, the exclusions are only as good as the codes IRS has entered into its systems. In our previous work, we found that inaccurate coding at times prevented IRS collection action, including referral to the continuous levy program. Specifically, in November 2006, we estimated that about $2.4 billion in tax debt was erroneously excluded from the continuous levy program as of September 30, 2005. IRS did not identify and correct the coding errors we found because it did not sufficiently monitor the timely updating of the status and transaction codes or the effect of computer programming changes. In addition, we found that the design of IRS’s policies for monitoring the status of financial hardship cases was not sufficient to ensure the ongoing accuracy of such designations. Therefore, effective management of these codes is critical because if these codes are not accurately or appropriately updated to reflect changing circumstances, cases may be needlessly excluded from collection action, including the continuous levy program. For all 40 cases involving Medicare Part B physicians, health professionals, and suppliers with outstanding tax debt that we audited and investigated, we found abusive and/or potentially criminal activity related to the federal tax system. Of these cases, 25 involved physicians, health professionals, and suppliers that had unpaid payroll taxes dating as far back as the early 1990s. Rather than fulfill their role as “trustees” of this money and forward it to IRS as required by law, these physicians, health professionals, and suppliers diverted the money for other purposes. IRS had trust fund recovery penalties in effect for 16 of the 25 business cases at the time of our review. In addition, as discussed previously, willful failure to remit payroll taxes can be a criminal felony offense punishable by imprisonment up to 5 years, while the failure to properly segregate payroll taxes can be a criminal misdemeanor offense punishable by imprisonment of up to a year. The other 15 cases involved individuals who had unpaid individual income taxes dating as far back as the 1970s. Our review of selected Medicare Part B physicians, health professionals, and suppliers revealed significant challenges that IRS faces in its enforcement of tax laws, a continuing high-risk area for IRS. Although the nation’s tax system is built upon voluntary compliance, when businesses and individuals fail to pay voluntarily, IRS has a number of enforcement tools, including the use of levies, to compel compliance or elicit payment. Our review of the 40 physicians, health professionals, and suppliers found that IRS attempts to work with the businesses and individuals to achieve voluntary compliance, pursuing enforcement actions later rather than earlier in the collection process. Our review of IRS records with respect to our 40 cases showed that IRS did not issue paper levies to the Medicare contractors to levy the payments of physicians, health professionals, and suppliers for 28 of our 40 cases. As a result, most of the physicians, health professionals, and suppliers in our case studies continued to receive Medicare Part B payments while owing their federal taxes. Our investigations revealed that, despite owing substantial amounts of federal taxes to the IRS, some physicians, health professionals, and suppliers had substantial personal assets—including multimillion dollar homes and luxury cars. For example, one physician purchased a house for over $1 million while his business owed over $1 million in federal taxes. Another physician purchased a luxury vehicle, paid for partly with cash, and gambled millions of dollars while owing over $400,000 in taxes. In addition to failure to pay taxes, our investigations also revealed that several physicians associated with our case studies received Medicare Part B payments even though they had significant problems related to the practice of medicine. Six physicians had been previously excluded from the Medicare program for such things as professional incompetence, financial misconduct involving a government-operated program, and failure to pay health education loans.