Why This Area Is Important
In January 2012, the Internal Revenue Service (IRS) estimated that it had a net tax gap of $385 billion. IRS’s enforcement of the tax laws promotes voluntary compliance by giving all taxpayers a sense that others are paying their fair share. Notwithstanding IRS’s activities, the net tax gap remains large. Accordingly, tax-law administration is on GAO’s high-risk list.
See GAO, High-Risk Series: An Update, GAO‑13‑283 (Washington, D.C.: Feb.14, 2013).
What GAO Found
GAO has identified several areas where the federal government can enhance its collection efforts by taking action to limit issuance of passports to applicants, levy payments to Medicaid providers, or identify security clearance applicants with unpaid federal taxes. Taking such actions could increase tax revenues by hundreds of millions of dollars over a 5-year time period. These actions are outlined below.
Limit issuance of passports to applicants with delinquent federal tax debt. Federal law permits the Secretary of State to deny or revoke the issuance of passports in certain circumstances, such as for delinquent child-support obligations. Under the Department of State’s (State) Passport Denial Program, the names of noncustodial parents certified by a state as having arrearages exceeding $2,500 are submitted by the Department of Health and Human Services to State, which denies them U.S. passports upon application or use of a passport service until the debt is satisfied. Similar legislation applied to federal tax debts could generate substantial collections of known unpaid federal taxes and increase tax compliance for millions of Americans holding passports. In March 2011, GAO reported that State issued passports to about 16 million individuals during fiscal year 2008; of these, over 224,000 individuals (over 1 percent) collectively owed over $5.8 billion in unpaid federal taxes as of September 30, 2008. In September of 2013, the House introduced a bill that would authorize State to deny the issuance of a passport or revoke a passport of any individual who has a delinquent tax debt over $50,000. As of February 2014, no action had been taken on the bill since its introduction.
Continuous levy of Medicaid reimbursements. A portion of the tax gap is owed by individuals and businesses receiving payments from the federal and state governments, including Medicaid providers. In July 2012, GAO reported that about 7,000 Medicaid providers, about 5.6 percent of those paid during fiscal year 2009, had about $791 million of unpaid federal taxes. These 7,000 Medicaid providers received a total of about $6.6 billion in Medicaid reimbursements during 2009 (including American Recovery and Reinvestment Act of 2009 funds). The amount of unpaid federal taxes owed by 40 of these individual providers ranged from approximately $100,000 to over $6 million, per provider. Current federal law does not allow the continuous levy (seizure) of Medicaid payments because Medicaid payments are not considered federal payments. In July 2012, GAO reported that IRS could have collected between $22 million and $330 million from Medicaid providers in three states (New York, Texas, and Florida) in 2009 if it had been authorized to use a continuous levy process. In contrast, this process has been used to collect unpaid federal tax debts on Medicare payments. Several bills introduced in Congress in April and July of 2013 would allow the continuous levy of Medicaid reimbursements, but none had become law as of February 2014.
Identification of delinquent federal tax debts through the security clearance process. Federal law does not expressly prohibit an individual with unpaid federal taxes from being granted a security clearance; however, delinquent tax debt does pose a potential vulnerability that must be considered in making a broader determination of whether an applicant should be granted a security clearance. Additionally, federal agencies generally do not routinely monitor individuals to identify delinquent tax debt accrued subsequent to the clearance approval. Further, there is no process to detect unpaid federal tax debts accrued after an individual has been favorably adjudicated unless the debt is self-reported, reported by a security manager due to garnishment of wages, or discovered during a clearance renewal or upgrade. Given that individuals who hold security clearances are reinvestigated every 10 years for secret clearances and every 5 years for top-secret clearances, if an individual accrues tax debt after a security clearance is granted, the unpaid federal tax debt may not be detected for up to 5 to 10 years.
In September 2013, GAO reported that about 8,400 of the 240,000 employees and contractors of civilian executive-branch agencies who had a federal security clearance or who were approved for secret and top-secret clearances owed approximately $85 million in unpaid federal taxes, as of June 2012. According to IRS data, about 4,200 of these 8,400 individuals with tax debt had a repayment plan with the IRS to pay back their debt as of June 30, 2012. The tax debt owed by those on a repayment plan was approximately $35 million. GAO’s analysis also found that 6,300 individuals (approximately 76 percent of the 8,400 that owed tax debt) accrued their tax debt after approval of the security clearance.
GAO previously reported that federal law does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal officials without consent from taxpayer. As noted in GAO’s September 2013 report, federal agencies may obtain information on federal tax debts directly from IRS if the applicant provides consent. However, obtaining consent waivers is a manual process and thus it is not conducive to the large-scale detection of unpaid federal taxes owed by security-clearance applicants. Additionally, the consent waiver generally provides limited visibility into an applicant’s overall tax-debt status because the form requires the requesting agency to identify the specific time periods for which it is requesting disclosure, and, as such, the agency may not obtain the complete tax-debt history of the individualnor would it be of use during the duration of time between reinvestigations.
In September 2013, GAO reported that additional mechanisms that provide large-scale, routine detection of federal debt could improve the ability of federal agencies to identify individuals who owe federal debts, including federal taxes. Agencies could explore whether mechanisms could be developed that allowed them to perform routine, automated checks to determine whether individuals have unpaid federal debts, without compromising statutory tax privacy protections. If developing such a mechanism proved impractical, GAO reported that the Office of the Director of National Intelligence (ODNI) could determine whether seeking an exception to federal privacy law to allow for such checks is advisable. Enhancing federal investigative agencies’ access to federal debt information, including federal taxes, for the purpose of both investigating and adjudicating security-clearance applicants, as well as ongoing monitoring of current clearance holders’ tax-debt status, would better position agencies to make fully informed decisions about eligibility for security clearances.
Tax debts less than $100 per individual were excluded from this analysis.
Savings, Accountability, Value, and Efficiency II Act, H.R. 3146, 113th Cong. (2013).
Medicaid is a federal-state partnership that finances health care for certain low-income individuals, including children, families, the aged, and the disabled.
Individuals who have been found favorably adjudicated for a clearance have been deemed eligible for a clearance by their adjudicating agency.
Individuals included in the study do not include known employees and contractors of the Department of Defense and intelligence agencies. The study only includes those individuals who had a favorable adjudication decision made from April 1, 2006, through December 31, 2011.
See GAO, Medicaid: Providers in Three States with Unpaid Federal Taxes Received over $6 Billion in Medicaid Reimbursements, GAO‑12‑857 (Washington, D.C.: July 27, 2012).
GAO suggested actions to increase tax revenue collections by identifying and taking action to limit issuance of passports to applicants, levy payments to Medicaid providers, or identify security-clearance applicants with unpaid federal taxes in three reports issued in March 2011, July 2012, and September 2013, respectively. Specifically, GAO suggested that Congress may wish to consider taking the following action:
Enable and require the Secretary of State to screen and prevent individuals who owe federal taxes from receiving passports, to include establishing criteria for specific categories of passport holders and waivers as appropriate. To do this, Congress may wish to ask the Secretary of State and Commissioner of Internal Revenue to jointly study policy and practical issues and develop options for further consideration, including developing appropriate criteria and safeguards.
In addition, GAO recommended that the Commissioner of the Internal Revenue Service take the following action:
Explore further opportunities to enhance the collection of unpaid federal taxes from Medicaid providers. This includes conducting a cost-benefit analysis of the implementation of a continuous levy program and expanded use of levies against providers with large Medicaid payments and significant unpaid federal taxes. Where appropriate, IRS should seek legislation to modify existing law to allow for more efficient collection of outstanding tax debts from Medicaid providers.
Finally, GAO recommended that the Director of National Intelligence, in consultation with the Office of Personnel Management (OPM) and the Department of the Treasury, should take the following action:
Evaluate the feasibility of federal agencies routinely obtaining federal debt information from the Department of the Treasury, or a similar automated mechanism that includes federal taxes, for the purposes of investigating and adjudicating clearance applicants, as well as for ongoing monitoring of current clearance holders’ tax-debt status. If this is found to be impractical, ODNI should consider whether an exception to federal privacy law is advisable and, if so, develop a legislative proposal, in consultation with Congress, to authorize access to tax-debt information.
These actions can increase tax revenue collections by more than $500 million over a 5-year period by identifying and taking action to deny benefits or levy payments to passport applicants, Medicaid providers, and security-clearance applicants who owe federal taxes. For example, according to a 2012 Congressional Budget Office estimate, the federal government can save about $500 million over a 5-year period on the revocation or denial of passports in cases of certain federal tax delinquencies.
How GAO Conducted Its Work
The information contained in this analysis is based on findings from the products in the related GAO products section. For all three reports, the estimated amount of unpaid federal taxes is likely understated because it excludes individuals who have not filed tax returns or who underreported income, among other reasons. Specifically,
For the March 2011 report, GAO obtained and analyzed IRS tax-debt data as of September 30, 2008, and obtained and analyzed data on passport recipients from the Department of State for fiscal year 2008. GAO matched the list of passport recipients with IRS tax debts using Social Security numbers.
For the July 2012 report, GAO compared Medicaid reimbursement information from three states to known IRS tax debts as of September 30, 2009. These states were among those that received the largest portion of American Recovery and Reinvestment Act Medicaid funding. GAO also obtained federal tax-debt data from IRS as of September 30, 2011. Using the taxpayer identification number as a unique identifier, GAO electronically matched IRS’s tax-debt data to the population of Medicaid providers. GAO’s analysis determined the magnitude of known unpaid federal taxes owed by 2009 Medicaid providers in only New York, Texas, and Florida and cannot be generalized to other states or time periods.
For the September 2013 report, GAO obtained and analyzed OPM data on individuals eligible for a secret or top-secret security clearance due to a favorable adjudication, either during an initial investigation or a reinvestigation, from April 1, 2006, through December 31, 2011. GAO also obtained and analyzed IRS tax-debt data as of June 30, 2012. GAO matched the list of individuals eligible for a security clearance with IRS tax debt data as of June 30, 2012, using the Social Security number. To determine to what extent federal agencies have mechanisms to detect unpaid tax debt during the security-clearance approval process, such as investigative and adjudication mechanisms, GAO also reviewed relevant laws and regulations and interviewed officials from ODNI, the Department of the Treasury, and OPM
GAO’s final estimate of tax debt does include some debt that is covered under an active IRS installment plan or is beyond normal statutory time limits for debt collection.
Agency Comments & GAO Contact
In commenting on the September 2013, July 2012, and March 2011 reports, the cognizant federal agencies either agreed with GAO’s recommendations or did not provide any written comments, as follows
IRS, the Department of State, and the Department of the Treasury did not comment on the findings in GAO’s March 2011 report on passport issuance to increase collection of unpaid taxes. The Department of State provided technical comments, which were incorporated into the March 2011 report as appropriate.
In commenting on the July 2012 report on unpaid tax debt among Medicaid providers, IRS concurred with GAO’s recommendation to explore opportunities to enhance the collection of unpaid federal taxes from Medicaid providers, but noted that previous efforts have revealed significant operational challenges. Similarly, the Centers for Medicare & Medicaid Services (CMS) noted that the structure of the Medicaid program (wherein the federal government does not have a direct relationship with providers or pay them directly) provides a programmatic basis for excluding Medicaid from the levy program, and may result in significant challenges to the implementation of an automated levy. CMS further noted that any potential legislation related to the collection of outstanding tax debts from Medicaid providers may affect the basic structure of the Medicaid program. CMS noted, however, that it is prepared to coordinate with IRS in exploring opportunities to enhance levy collections from Medicaid providers. GAO recognizes the challenges expressed by IRS and CMS. However, given that GAO found over $6 billion of payments made to tax-delinquent Medicaid providers in three states, a more rigorous review of the potential costs and financial benefits of implementing enhanced continuous and other levies of Medicaid payments is warranted.
ODNI agreed with the recommendation in the September 2013 report to evaluate the feasibility of federal agencies routinely obtaining delinquent federal debt information for the purposes of investigating and adjudicating clearance applicants, as well as for ongoing monitoring of current clearance holders’ tax-debt status. ODNI stated that it is collaborating with representatives from the Treasury Offset Department at the Department of the Treasury regarding the use of its automated record process to identify delinquent federal tax debt for purposes of investigating, adjudicating, and monitoring security clearance holders and applicants.
GAO provided a draft of this report section to IRS, the Department of Health and Human Services (HHS), ODNI, State, and OPMfor review and comment.
In an e-mail dated February 21, 2014, a Program Manager with IRS’s Office of Legislative Affairs provided updates on the agency’s efforts to address two of the three recommendations listed above. Specifically, the Program Manager stated that the recommendation regarding the screening and preventing of individuals who owe federal taxes from receiving passports would require a legislative change. According to the Program Manager, 26 U.S.C. § 6103 prohibits the IRS from disclosing return and return information and there is no exception to disclose such information to State for the purpose of limiting passport issuance.
Regarding the recommendation regarding exploring further opportunities to enhance the collection of unpaid federal taxes from Medicaid providers, the Program Manager stated that the agency issued interim guidance to address the one-time notice of levy to state Medicaid agencies. IRS has planned meetings with the Bureau of the Fiscal Service about adding state Medicaid payments to a continuous levy program. These discussions are in the initial stages and IRS does not expect a resolution to the issue in the near term because the discussions with the reciprocal states are in the preliminary stages. While IRS’s action is a short-term solution for our recommendation of a one-time notice levy, GAO maintains that a long-term solution to integrate Medicaid payments into a continuous levy process is still necessary. The Program Manager did not comment on the recommendation related to obtaining federal debt information.
In an e-mail dated February 20, 2014, an Oversight Analyst with HHS’s Office of the Assistant Secretary for Legislation stated that CMS continues to engage with the Department of the Treasury in exploring the feasibility of expanding the Treasury Offset Program to Medicaid.
In an e-mail received on February 7, 2014, a policy coordinator with the ODNI Office of Legislative Affairs commented on the security clearance recommendation and provided technical comments, which were incorporated as appropriate. The policy coordinator stated that ODNI is collaborating with representatives from the Department of the Treasury regarding the use of their automated record process to identify delinquent federal tax debt for purposes of investigating, adjudicating, and monitoring security-clearance holders and applicants.
State and OPM did not provide comments on this issue.
For additional information about this area, contact Steve Lord at (202) 512-6722 or firstname.lastname@example.org.
Federal Tax Collection: