This is the accessible text file for GAO report number GAO-08-239T 
entitled 'Medicaid: Thousands of Medicaid Providers Abuse the Federal 
Tax System' which was released on November 15, 2007. 

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GAO Highlights: 

Highlights of GAO-08-239T, a testimony before the Permanent 
Subcommittee on Investigations, Senate Committee on Homeland Security 
and Governmental Affairs, U.S. Senate 

Why GAO Did This Study: 

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 Medicare and Medicaid 
providers. Today’s testimony covers Medicaid providers who abused the 
federal tax system from 7 selected states. 

GAO was asked to (1) determine if Medicaid providers have unpaid 
federal taxes, and the magnitude of such debts; (2) identify examples 
of Medicaid providers that have engaged in abusive or related 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 and performed investigative 
activities. 

What GAO Found: 

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 
understated because some Medicaid providers may 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 related 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 related 
criminal activity, these 25 providers received Medicaid payments 
ranging from about $100,000 to about $39 million in fiscal year 2006. 

Table: Examples of Medicaid Providers with Abusive and Related Criminal 
Activity: 

Type of business: Nursing home; 
Unpaid tax debt: $2 million; 
Fiscal year 2006 Medicaid payments: $6 million; Description of 
activity: Owner fined for jeopardizing health and safety of patients. 

Type of business: Home care; 
Unpaid tax debt: $3 million; 
Fiscal year 2006 Medicaid payments: $2 million; Description of 
activity: Business did not file tax returns in late 1990s and early 
2000s. 

Type of business: Counselor; 
Unpaid tax debt: $200,000; 
Fiscal year 2006 Medicaid payments: $200,000; Description of activity: 
Owner indicted for fraud for several hundred thousand dollars relating 
to a federal program. 

Source: GAO analysis of IRS, CMS, public, and other records. 

[End of table] 

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 from 
Medicaid payments through the continuous levy program. IRS has 
determined that Medicaid payments are not considered “federal payments” 
and thus not eligible for this program. GAO estimates that for the 
seven selected states the federal government could have collected 
between $70 million to $160 million during fiscal year 2006 if an 
effective levy program was in place. 

What GAO Recommends: 

GAO’s related report (GAO-08-17), released today, recommended IRS 
determine whether Medicaid payments can be included in the continuous 
levy program and evaluate the 25 cases GAO identified for additional 
collection and criminal investigation. IRS agreed with our 
recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-239T]. For more information, contact Greg 
Kutz at (202) 512-6722 or kutzg@gao.gov. 

[End of section] 

Testimony: 

Before the Permanent Subcommittee on Investigations, Senate Committee 
on Homeland Security and Governmental Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 2:30 p.m. EST: 

Wednesday, November 14, 2007: 

Medicaid: 

Thousands of Medicaid Providers Abuse the Federal Tax System: 

Statement of Gregory D. Kutz, Managing Director Forensic Audits and 
Special Investigations: 

GAO-08-239T: 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss Medicaid health care providers 
from seven selected states and their adherence to the federal tax 
system. This testimony builds on your concern about the $290 billion 
annual federal tax gap. This testimony also builds on a large body of 
work, conducted over the past few years, much of which was requested by 
this Subcommittee, in which we investigated entities that have abused 
the federal tax system while benefiting from doing business with or 
receiving status from the federal government.[Footnote 1] Our 
testimony, and the accompanying report that we are releasing 
today,[Footnote 2] address Medicaid health care providers from seven 
selected states who also abused the federal tax system. 

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. Medicaid 
is jointly funded by the federal and state governments. In fiscal year 
2006, according to Centers for Medicare & Medicaid Services (CMS), 
total outlays for Medicaid (federal and state) were approximately $324 
billion, of which about $185 billion was paid by the federal 
government. 

Today's testimony focuses on (1) whether providers who receive Medicaid 
payments from the seven selected states have unpaid federal taxes, and 
if so, the magnitude of federal tax debts owed by these Medicaid 
providers; (2) providing examples of providers engaged in abusive and 
criminal activity related to the federal tax system; and (3) whether 
CMS and selected states prevent health care providers with tax problems 
from enrolling in Medicaid or participate in the continuous levy 
program to pay federal tax debts. 

To identify the extent to which Medicaid providers had unpaid federal 
taxes, we obtained and analyzed fiscal year 2006 Medicaid payments made 
to providers in a nonrepresentative selection of seven states:[Footnote 
3] California, Colorado, Florida, Maryland, New York, Pennsylvania, and 
Texas.[Footnote 4] We matched the lists of Medicaid providers with IRS 
tax debts as of September 30, 2006. To further analyze abuse of the 
federal tax system by selected Medicaid providers, we applied certain 
criteria--the amount of outstanding tax debt, and the number and age of 
reporting periods for which taxes were due--to select 25 providers for 
detailed audit and investigation. For these 25 providers, we reviewed 
tax records and performed additional searches of criminal, financial, 
and other public records. 

To determine whether CMS and states prevent health care providers with 
unpaid federal taxes from enrolling in Medicaid, we interviewed 
officials from CMS and selected states and examined CMS and selected 
states' regulations, policies, and procedures for making determinations 
in the enrollment approval process. We also interviewed officials from 
CMS, the Internal Revenue Service (IRS), and the Department of the 
Treasury's Financial Management Service (FMS) concerning any barriers 
for levying Medicaid payments. For further details on our scope and 
methodology, see appendix I of the accompanying report.[Footnote 5] 

We conducted our audit work from July 2006 through August 2007 in 
accordance with U.S. generally accepted government auditing standards. 
We performed our related investigative work in accordance with 
standards prescribed by the President's Council on Integrity and 
Efficiency. 

Summary: 

While the vast majority of Medicaid providers pay their fair share of 
taxes, thousands of Medicaid providers in seven selected states 
abused[Footnote 6] the federal tax system with little or no 
consequence. Our analysis of data provided by the selected states and 
IRS indicates that over 30,000 Medicaid providers, over 5 percent, had 
tax debts totaling over $1 billion as of September 30, 2006.[Footnote 
7] The unpaid taxes largely consisted of individual income and payroll 
taxes.[Footnote 8] The $1 billion estimate of tax debts owed by 
Medicaid providers is understated because IRS data do not reflect all 
amounts owed by businesses and individuals. Specifically, the $1 
billion estimate of tax debts owed does not include amounts owed by 
businesses and individuals that have not filed tax returns or that have 
failed to report the full amount of taxes due (referred to as nonfilers 
and underreporters) and for which IRS has not determined which specific 
tax debts are owed. 

Our audit and investigative work details the nature of abusive and 
criminal activity related to the federal tax system by 25 Medicaid 
providers. These 25 providers were paid by Medicaid for a variety of 
services, including hospital, nursing facility, physician, and 
ambulance services. Payments ranged from about $100,000 to 
approximately $39 million during fiscal year 2006. Many were 
established businesses that owed federal payroll taxes withheld for 
their employees. Rather than fulfill their role as "trustees" of these 
funds and forward them to IRS as required by law, these health care 
providers diverted the money for other purposes. These payroll taxes 
included amounts withheld from employee wages for Social Security, 
Medicare, and individual income taxes.[Footnote 9] 

At the same time that they were not paying their federal taxes, many 
individuals associated with our 25 cases bought or owned significant 
personal assets, including commercial properties, expensive homes, and 
luxury vehicles. One business officer withdrew over $100,000 in cash at 
casinos at the same time the business accumulated millions of dollars 
in federal taxes. Further, another case study business was sanctioned 
by its state regulator for substandard care of its patients. 

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 promulgated 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, in partnership with the states, 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. Even if CMS did want to screen health care providers with tax 
debts, federal law generally prohibits the disclosure of taxpayer data 
to CMS and states.[Footnote 10] Thus, CMS and states do not have access 
to tax data directly from IRS unless the taxpayer provides consent. 
Consequently, CMS and the selected states have no mechanism or 
requirement to prevent health care providers who have tax debts from 
enrolling in or receiving payments from Medicaid. 

A provision of the Taxpayer Relief Act of 1997 authorizes IRS to 
continuously levy certain federal payments made to delinquent 
taxpayers. In response to one of our recommendations from our 
accompanying report,[Footnote 11] IRS has determined that Medicaid 
payments are not considered federal payments, and thus are not subject 
to the continuous levy program. Thus, no tax debt owed by Medicaid 
providers can be collected through the continuous levy program. If 
there had been an effective program in place for levying Medicaid 
payments, we estimate that for fiscal year 2006, the selected seven 
states could have levied payments for the federal government and 
collected between $70 million to about $160 million of unpaid federal 
taxes. 

Magnitude of Unpaid Federal Taxes of Medicaid Providers: 

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.[Footnote 12] This represents over 5 percent of the approximately 
560,000 Medicaid providers paid by the selected states during federal 
fiscal year 2006. As shown in figure 1, 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. 

Figure 1: Medicaid Providers' Unpaid Taxes by Tax Type: 

This figure is a pie chart showing medicaid providers' unpaid taxes by 
tax type: 

Payroll: 56%; 
Individual income: 31%; 
Other: 13%. 

[See PDF for image] 

Source: GAO analysis of Medicaid and IRS data as of September 30, 2006. 

[End of figure] 

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 2, 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. [Footnote 13] 

Figure 2: Unpaid Taxes of Medicaid Providers by Calendar Year: 

This figure is a pie chart showing unpaid taxes of medicaid providers 
by calendar year: 

2000-2004: 56%; 
Prior to 2000: 29%; 
2005: 15%. 

[See PDF for image] 

Source: GAO analysis of Medicaid and IRS data as of September 30, 2006. 

[End of figure] 

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.[Footnote 14] 
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 the $1 billion in unpaid federal taxes we identified as owed 
by Medicaid providers as of September 30, 2006, is a significant 
amount, it understates the full extent of unpaid taxes. This amount 
does not include amounts due IRS from Medicaid providers that did not 
file payroll taxes (nonfilers) and that underreported their payroll tax 
liability (underreporters). Also, we did not include Medicaid provider 
tax debt from 2006 tax periods, or tax debt for entities owing less 
than $100 or paid less than $100. 

Examples of Extent and Nature of Medicaid Providers' Abusive and 
Criminal Activity Related to the Federal Tax System: 

For all 25 cases that we audited and investigated,[Footnote 15] we 
confirmed that their activities were abusive and in many instances 
found criminal activity related to the federal tax system. These 25 
providers were paid by Medicaid for a variety of services, including 
hospital, nursing facility, physician, and ambulance services. Payments 
ranged from about $100,000 to approximately $39 million during fiscal 
year 2006. In table 1, we summarize 5 of these cases. We have referred 
the 25 cases detailed in our accompanying report to IRS so that it can 
determine whether additional collection action or criminal 
investigation is warranted. In response to our report, IRS agreed to 
review our cases to determine if additional collection action or 
criminal investigation is needed. 

Table 1: Medicaid Providers with Unpaid Federal Taxes: 

Case: 1; 
Nature of work: Nursing home; 
Medicaid payments[A]: $39 million; 
Unpaid federal tax[B]: $16 million; 
Comments: 
* Business's tax debt is primarily unpaid payroll taxes; 
* Business fined for quality of care violations in early 2000s; 
* Business officer withdrew over $100,000 in cash at casinos at the 
same time he was not paying the nursing home's taxes; 
* Multimillion-dollar IRS and state tax liens filed against the 
business. 

Case: 2; 
Nature of work: Hospital; 
Medicaid payments[A]: $9 million; 
Unpaid federal tax[B]: $5 million; 
Comments: 
* Business's tax debts are primarily composed of unpaid payroll taxes 
beginning in the late 1990s; 
* IRS reported tax debts to the continuous levy program for collection 
action; 
* IRS proposed an injunction to close the business in a recent year 
because the business continued to accumulate tax debt; 
* IRS assessed a trust fund recovery penalty (TFRP) against business 
owners; 
* IRS attempted to levy a bank account but the owner closed the account 
prior to the levy; 
* Business owners had several large cash transactions in recent years; 
* Owners own two residences worth over $2 million; 
* IRS and the state filed tax liens against the business; 
* Business received over $2 million in Medicare payments in a recent 
year. 

Case: 3; 
Nature of work: Nursing home; 
Medicaid payments[A]: $6 million; 
Unpaid federal tax[B]: $2 million; 
Comments: 
* Business's federal tax debts are primarily composed of unpaid payroll 
taxes; 
* Business received nearly $2 million in Medicare payments in a recent 
year; 
* IRS reported tax debts to the continuous levy program for collection 
action; 
* Business charged with patient abuse, and business and business owner 
also fined and suspended for jeopardizing the health and safety of 
patients; 
* IRS filed tax liens against the business and business owner; 
* Related business owes over $1 million of unpaid taxes that have been 
referred to the continuous levy program. 

Case: 4; 
Nature of work: Home care; 
Medicaid payments[A]: $2 million; 
Unpaid federal tax[B]: $3 million; 
Comments: 
* Business's tax debts are primarily unpaid payroll taxes beginning in 
the late 1990s; 
* Business did not file tax returns in late 1990s and early 2000s; 
* Business owners own multiple real properties, including a million 
dollar residence, luxury vehicles, and a recreational boat; 
* IRS assessed over $1 million TFRP against one business owner; 
* Business filed bankruptcy in a recent year; 
* IRS and state filed tax liens against the business; 
* Business owners own several related health care businesses which are 
in bankruptcy status. 

Case: 5; 
Nature of work: Professional counselor; 
Medicaid payments[A]: $200,000; 
Unpaid federal tax[B]: $200,000; 
Comments: 
* Owner's tax debt is primarily individual income taxes; 
* Owner and spouse currently under investigation for mail fraud; 
* Owner has a felony conviction; 
* Owner indicted for fraud for several hundred thousand dollars 
relating to a federal program; 
* IRS filed tax liens against the owners. 

Source: GAO's analysis of IRS, FMS, Medicaid claims, public, and other 
records. 

Notes: Dollar amounts are rounded. The nature of unpaid taxes for 
businesses was primarily due to unpaid payroll taxes. A Medicaid 
provider can submit claims using either an employer identification 
number (EIN) or Social Security number (SSN). In our testimony, any 
provider submitting a claim with an EIN is referred to as a business, 
and any provider submitting a claim with an SSN is referred to as an 
individual. 

[A] Medicaid payments are Medicaid claims paid by states for fiscal 
year 2006 (October 1, 2005, to September 30, 2006). 

[B] Unpaid tax amount was as of September 30, 2006. 

[End of table] 

The above cases illustrate how some Medicaid providers abused the 
federal tax system for their own benefit. Some of these individuals 
bought or owned significant personal assets, including expensive homes, 
recreational boats and luxury vehicles. One business officer withdrew 
over $100,000 in cash at casinos at the same time the business owed 
millions of dollars in federal taxes. Further, another case study 
business was sanctioned by its state regulator for substandard care of 
its patients. 

Four of the above cases involved established businesses that owed 
federal payroll taxes withheld for their employees. Rather than fulfill 
their role as "trustees" of these funds and forward them to IRS as 
required by law, these health care providers diverted the money for 
other purposes. These payroll taxes included amounts withheld from 
employee wages for Social Security, Medicare, and individual income 
taxes.[Footnote 16] 

Providers with Unpaid Federal Taxes Are Not Prohibited from Enrolling 
or Receiving Payments from Medicaid: 

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.[Footnote 17] 

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.[Footnote 18] 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.[Footnote 19] 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.[Footnote 20] 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. In response to our recommendation to 
conduct a study to determine whether Medicaid payments can be 
incorporated in the continuous levy program, IRS has determined that 
Medicaid payments are not federal payments and thus not subject to the 
continuous levy program.[Footnote 21] 

Concluding Comments: 

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. It is also 
important that they comply with federal tax law in order for the 
federal government to collect the funds to which it is entitled to 
finance critical government priorities, and to help improve the overall 
level of compliance with the nation's tax laws. 

Mr. Chairman and Members of the Subcommittee, this concludes my 
statement. I would be pleased to answer any questions that you or other 
members of the committee may have at this time. 

For further information about this testimony, 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 testimony. 

[End of section] 

Appendix I: Related GAO Products: 

Tax Compliance: Thousands of Organizations Exempt from Federal Income 
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-1090T. 
Washington, D.C.: July 24, 2007. 

Tax Compliance: Thousands of Organizations Exempt from Federal Income 
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-563. 
Washington, D.C.: June 29, 2007. 

Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax 
System. GAO-07-742T. Washington, D.C.: April 19, 2007. 

Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax 
System. GAO-07-587T. Washington, D.C.: March 20, 2007. 

Internal Revenue Service: Procedural Changes Could Enhance Tax 
Collections. GAO-07-26. Washington, D.C.: November 15, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and 
Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and 
Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006. 

Financial Management: Thousands of GSA Contractors Abuse the Federal 
Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006. 

Financial Management: Thousands of Civilian Agency Contractors Abuse 
the Federal Tax System with Little Consequence. GAO-05-683T. 
Washington, D.C.: June 16, 2005. 

Financial Management: Thousands of Civilian Agency Contractors Abuse 
the Federal Tax System with Little Consequence. GAO-05-637. Washington, 
D.C.: June 16, 2005. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System 
with Little Consequence. GAO-04-414T. Washington, D.C.: February 12, 
2004. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System 
with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 
2004. 

[End of section] 

Footnotes:  

[1] See related GAO products at the end of this testimony. 

[2] GAO, Medicaid: Thousands of Medicaid Providers Abuse the Federal 
Tax System, GAO-08-17 (Washington, D.C.: Nov. 14, 2007). 

[3] There are 56 Medicaid programs, including one for each of the 50 
states, the District of Columbia, Puerto Rico, American Samoa, Guam, 
Northern Mariana Islands, and the Virgin Islands. Hereafter, all 56 
entities are referred to as states. 

[4] Throughout this testimony, these seven states are referred to as 
the selected states. 

[5] GAO-08-17. 

[6] We considered activity to be abusive when a Medicaid provider's 
actions or inactions, though not illegal, took advantage of the 
existing tax enforcement and administration system to avoid fulfilling 
federal tax obligations and were deficient or improper when compared 
with behavior that a prudent person would consider reasonable. 

[7] Because some Medicaid providers may do business with Medicare and 
other federal agencies, such as Veterans Affairs, some of the 
approximately 30,000 Medicaid providers described in this testimony may 
also have been included in our reports concerning the Department of 
Defense, General Services Administration, civilian federal contractors, 
Medicare Part B providers, and tax-exempt organizations that abuse the 
federal tax system. 

[8] Payroll taxes include amounts that employers withhold from 
employees' wages for federal income taxes, Social Security, and 
Medicare as well as the related employer matching contributions for 
Social Security and Medicare taxes. Employers are responsible for 
remitting payroll taxes to IRS and are liable for any outstanding 
balance. 

[9] Willful failure to remit payroll taxes is a criminal felony offense 
while the failure to properly segregate payroll taxes can be a criminal 
misdemeanor offense. 26 U.S.C. §§ 7202, 7215, and 7512 (b). 

[10] States screen health care providers prior to enrollment into the 
Medicaid program. States also process and pay Medicaid claims and are 
reimbursed for the federal share of these payments by CMS. 

[11] GAO-08-17. 

[12] Our estimate of Medicaid providers with tax debt as of September 
30, 2006, excluded (1) tax debts that have not been agreed to by the 
tax debtor or affirmed by the court, (2) tax debts from calendar year 
2006, (3) approved Medicaid claims less than $100, and (4) tax debts 
less than $100. 

[13] A "tax period" varies by tax type. For example, the tax period for 
payroll and excise taxes is generally one quarter of a year. The 
taxpayer is required to file quarterly returns with IRS for these types 
of taxes, although payment of the taxes occurs throughout the quarter. 
In contrast, for income, corporate, and unemployment taxes, a tax 
period is 1 year. 

[14] The 10-year time limit may be suspended and include periods during 
which the taxpayer is involved in a collection due process appeal, 
litigation, a pending offer-in-compromise, or an installment agreement. 
As a result, fig. 2 includes taxes that are for tax periods from more 
than 10 years ago. 

[15] 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 (i.e., entities that share 
common owner(s) or officer(s), a common TIN, or a common address) 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. 

[16] Willful failure to remit payroll taxes is a criminal felony 
offense while the failure to properly segregate payroll taxes can be a 
criminal misdemeanor offense. 26 U.S.C. §§ 7202, 7215, and 7512 (b). 

[17] Officials from California stated that they do consider federal 
debts, including tax debts, if they are self-disclosed on a Medicaid 
application. California officials said that no verification is made. 

[18] 26 U.S.C. § 6103. 

[19] Under section 6321 of the Internal Revenue Code, IRS has the 
authority to file a lien upon all property and rights to property, 
whether real or personal, of a delinquent taxpayer. 

[20] To improve the collection of unpaid taxes, IRS is authorized to 
continuously levy up to 100 percent for federal payments related to 
goods and services. To implement this levy authority, IRS, in 
coordination with the Department of the Treasury's FMS, implemented the 
Federal Levy Payment Program in July 2000. This program uses FMS's 
Treasury Offset Program (TOP) for the levy of federal payments. 

[21] In addition to the continuous levy program, IRS also has the 
authority to legally seize property either held by the taxpayer or 
owned by the taxpayer and held by a third party. This authority 
includes the seizure of Medicaid receivables held by states and owed to 
health care providers. Unlike levies from the continuous levy program, 
each levy is typically a one-time seizure of property (i.e., Medicaid 
receivables) held by states at a specific point of time and is done on 
a case-by-case basis based on the particular circumstances of the case. 
IRS officials stated that they do not know how much in tax levies were 
collected from Medicaid payments. 

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