Tax Compliance
Businesses Owe Billions in Federal Payroll Taxes
GAO-08-617, Jul 29, 2008
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GAO previously reported that federal contractors abuse the tax system with little consequence. While performing those audits, 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, GAO was asked to review the Internal Revenue Service's (IRS) processes and procedures to prevent and collect unpaid payroll taxes. Specifically, GAO was asked to determine (1) the magnitude of unpaid federal payroll tax debt, (2) the factors affecting IRS's ability to enforce compliance or pursue collections, and (3) whether some businesses with unpaid payroll taxes are engaged in abusive or potentially criminal activities with regard to the federal tax system. To address these objectives GAO analyzed IRS's tax database, performed case study analyses of payroll tax offenders, and interviewed collection officials from IRS and several states.
IRS records show that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties. 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. Over a quarter of payroll taxes are owed by businesses with more than 3 years (12 tax quarters) of unpaid payroll taxes. Some of these business owners repeatedly accumulated tax debt from multiple businesses. For example, 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. 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. Additionally, 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. GAO 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.
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Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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Recommendations for Executive Action
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should develop a process to monitor collection actions taken by revenue officers against egregious payroll tax offenders to ensure collection actions appropriately utilize all available collection tools contained in the Internal Revenue Manual.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - Implemented
Comments: In February 1010, IRS issued instructions to field managers and revenue officers to improve both the collection of unpaid taxes from egregious tax debtors and management's monitoring of the appropriateness of their actions. The instructions included the (1) direct assignment of egregious payroll tax dewbtor cases to field managers and revenue officers and (2) the requirement that field manager conduct regular follow-up reviews of the appropriateness of revenue officers' collection actions. In June 2011, IRS implemented a Compliance Monitoring Tool to assist (1) revenue officers in monitoring compliance with tax debtors' compliance with payroll tax payments requirements and (2) managers in monitoring revenue officrs' collection efforts. IRS has also made refinements to its "potential in-business pyramider" indicator to monitor the degree to which taxpayers in active collection inventory remain in compliance with current filing and paying requirements. The taxpayer's ability to remain current is crucial to IRS's collectibility determination.
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should review current case prioritization and assignment practices to determine if IRS's enforcement and collection procedures could be enhanced by requiring, to the maximum extent feasible, businesses with egregious payroll tax debt and the responsible owners/officers with a Trust Fund Recovery Penalty (TFRP) assessment be treated as a single unified and coordinated collection effort assigned to a single revenue officer.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - Implemented
Comments: In fiscal year 2009, IRS updated its Internal Revenue Manual (IRM) to provide new guidance to collection officials responsible for assigning cases to revenue officers to assign, when feasible, the TFRP cases and the related business tax debt cases to the same revenue officers for collection. In addition, IRS's fiscal years 2010 and 2011 Collection Program Letters emphasized the that revenue officers should both investigate and develop TFRPs whil also addressing the related individual tas debt cases and that all related TFRP cases should be treated as a single unified and coordinated collection effort.
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should develop and implement procedures to expeditiously file a Notice of Federal Tax Lien against property as soon as possible after payroll tax debt is identified (including cases in the queue awaiting assignment) and ensure liens are filed on both businesses with unpaid payroll taxes and owners/officers assessed a TFRP.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - Implemented
Comments: In its response to the report, IRS stated that it has taken steps to improve the timeliness of lien filing while recognizing the decision to file a lien is influenced by the impact lien filing will have on the taxpayer's ability to pay. In October 2009, IRS updated its guidance on filing a Notice of Federal Tax Lien (NFTL)that requires collections officials to make a determination to file, defer, or not file a tax lien within certain peramaters. In addition, the guidance requires IRS's collection managers to approve any decision to either defer or not file a lien.
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should develop and implement procedures to monitor and report on revenue officers' compliance with the new TFRP assessment time frames to ensure revenue officers are making TFRP determinations and assessments in a timely manner.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - Implemented
Comments: In its response to the report, IRS stated that is has added new timeframes to the Internal Revenue Manual to improve the timeliness of the Trust Fund Recovery Penalty determination and its ultimate assessment. In May 2010, IRS issued Internal Revenue Manual procedures for monitoring Trust Fund Recovery Penalty (TFRP) case processing. This guidance established timeframes for all critical phases of TFRP processing, related performance goals, and measures; and it specific monitoring requirements for managers, including cases that are in appeal. IRS also issues monthly Automated Trust Fund Recovery reports that track compliance with the various revenue officer TFRP timeliness requirements.
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should develop performance goals and measures that specifically evaluate the accumulation of unpaid payroll taxes by businesses (especially egregious businesses with over 20 quarters of payroll tax debt), the extent and timeliness of TFRP assessments, and the effectiveness of actions taken to collect unpaid payroll taxes and TFRP assessments.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: In response to our recommendation, IRS stated that it had established special search abilities and reports to track and monitor taxpayers with multiple payroll tax liabilities, had added new timeframes to the Internal Revenue Manual to improve the timeliness of the Trust Fund Recovery Penalty determination and its ultimate assessment, and had fine-tuned the Federal Tax Deposit Alerts program. IRS stated that its reviews indicate of the alerts showed that more taxpayers benefiting from that compliance program. In October 2011 IRS began routing employment tax case with an unpaid balance of assessments less than $10,000 and less than twenty-one modules to the Automated Collection Sites (ACS). Accounts remaining open after 13 weeks are forwarded to the Queue. To ensure the most egregious accounts are available for field assignment, IRS's ENTITY system will systematically assign a risk coded of medium or greater on multi-module accounts, increasing the likelihood of Group manager selection for Revenue Officer assignment. In November 2011, IRS implement a process to systemically accelerate entities with thirty or more delinquent account modules to the ENTITY program for priority assignment to Revenue Officers. This change effectively mandates the assignment of these accounts prior to other cases, and prevents the return of the cases to the Queue, thus ensuring the cases are worked to a final resolution. IRS's Collection Policy also reiterationed guidance on effectively working these types of cases and revenue officers received skill enhancing training during the fiscal year 2011 training cycpe that focused on egregious employment tax cases.
Recommendation: To provide better monitoring and more detailed guidance on collection actions to be pursued against egregious payroll tax offenders, to strengthen existing collection tools, and to develop additional enforcement tools to effectively identify potential levy sources, the Commissioner of Internal Revenue should work with states that have developed procedures for matching financial accounts to tax debts to evaluate the potential for IRS to either develop and implement similar measures or partner with states that currently have that tool to leverage their efforts to assist revenue officers in identifying a business's leviable assets.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Closed - Implemented
Comments: IRS reviewed the results of levy matching trial programs in five states during fiscal lyear 2009. In fiscal year 2010, IRS implemented a strategy to identify new levy sources in partnership with tht state of Maryland, and as a result of matching one Maryland banks data, IRS matched over 11,000 tax identification numbers with the bank's records and identifyined almost 55,000 new levy sources. As of August 2011, IRS was in the process of systemically feeding Maryland's levy sources directly to IRS's ACS and ICS tax-collection-related systems. Also as of August 2011, IRS had plans to expand its levy source identification efforts.