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For those who don't pony up with federal payroll levies, this week's GAO report could lead to more reviews, and less nonpayment.
Stephen Taub, CFO.com | US
July 30, 2008
What does it say about Corporate America when Internal Revenue Service records show 1.6 million businesses owing over $58 billion in unpaid federal payroll taxes?
And what does it say about the IRS that such a total, which includes interest and penalties as of last Sept. 30, is known to it, but hasn't been collected?
This week's Government Accountability Office study, using IRS data, painted a picture of a minority of companies creating much of the government's loss. Of the total amount of unpaid payroll taxes, 70 percent is owed by businesses with more than a year — four tax quarters — of unpaid federal payroll taxes. And more than one quarter of payroll taxes are owed by businesses with more than three years — 12 tax quarters — of unpaid payroll taxes.
Because unpaid payroll taxes include amounts owed for Social Security and Hospital Insurance (Medicare taxes), the federal government may have to transfer higher amounts from the general fund to the Social Security and Hospital Insurance Trust Funds to make up for the amounts businesses fail to remit, the report found. It noted that the IRS has estimated that for the tax debt it had in its inventory of unpaid assessments as of Nov. 1, 2007, the general fund had transferred $44 billion to the trust funds over what the IRS collected.
"Some of these businesses took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations — thus abusing the federal tax system," said the GAO report, titled "Tax Compliance: Businesses Owe Billions in Federal Payroll Taxes."
In fact, the IRS found over 1,500 individuals to be responsible for nonpayment of payroll taxes at three or more businesses, and 18 were responsible for not remitting payroll taxes for a dozen different businesses.
"Although IRS has powerful tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use," the GAO stated.
The report noted that the IRS's overall approach to collection focuses primarily on gaining voluntary compliance — even for egregious payroll tax offenders — a practice that can result in minimal or no actual collections for these offenders. In addition, the IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes, the GAO conceded.
The GAO previously reported that federal contractors abuse the tax system with little consequence. It noted that while performing those audits, the GAO noted that much of the tax abuse involved contractors not remitting to the government payroll taxes that were withheld from salaries. As a result of that study, the government agency was asked to review the IRS's processes and procedures to prevent and collect unpaid payroll taxes.
Specifically, the GAO was asked to determine the magnitude of unpaid federal payroll tax debt, the factors affecting the IRS's ability to enforce compliance or pursue collections, and whether some businesses with unpaid payroll taxes are engaged in abusive or potentially criminal activities with regard to the federal tax system.
The GAO also selected 50 businesses with payroll tax debt as case studies and found extensive evidence of abuse and potential criminal activity in relation to the federal tax system. “The business owners or officers in our case studies diverted payroll tax funds for their own benefit or to help fund business operations,” it concluded.
In the report, the agency makes six recommendations to the IRS to address issues identified in the GAO report. Five of those recommendations call for IRS review or revision of collection policies, to provide better monitoring or to offer detailed guidance on collection actions against egregious payroll tax offenders, while strengthening existing collection tools.
The measures include development of processes and performance measures to monitor collection actions against egregious payroll tax offenders and procedures to timely file tax liens and assess penalties to hold responsible parties personally liable for not remitting withheld payroll taxes.
"Specifically, IRS agreed to evaluate its existing practices and determine appropriate changes," according to the GAO report. "IRS also said it would work with the states that are matching financial institution accounts to tax debt to identify levy sources to determine whether a similar program in IRS would be cost effective and consistent with privacy laws."