This is the accessible text file for GAO report number GAO-08-31 
entitled 'Tax Compliance: Federal Grant and Direct Assistance 
Recipients Who Abuse the Federal Tax System' which was released on 
December 17, 2007. 

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Report to the Committee on Homeland Security and Governmental Affairs, 
U.S. Senate: 

United States Government Accountability Office: 

GAO: 

November 2007: 

Tax Compliance: 

Federal Grant and Direct Assistance Recipients Who Abuse the Federal 
Tax System: 

Tax Compliances: 

GAO-08-31: 

GAO Highlights: 

Highlights of GAO-08-31, a report to the Committee on Homeland Security 
and Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

Since February 2004, GAO has reported that weaknesses in the federal 
programs and controls that allowed thousands of federal contractors, 
tax exempt entities, and Medicare providers to receive government money 
while owing taxes. GAO was asked to determine if these problems exist 
for entities who receive federal grants or direct assistance and (1) 
describe the magnitude of taxes owed, (2) provide examples of grant 
recipients involved in abusive and potentially criminal activity, and 
(3) assess efforts to prevent delinquent taxpayers from participating 
in such programs. 

To perform this work, GAO analyzed data from the Internal Revenue 
Service (IRS), three of the largest grant and direct assistance payment 
systems, representing over $460 billion in payments in fiscal years 
2005 and 2006, and the Housing and Urban Development (HUD) Section 8 
tenant-based housing program. GAO investigated 20 cases to provide 
examples of grant recipients involved in abusive activity 

What GAO Found: 

While most recipients of payments federal grant and direct assistance 
programs pay their federal taxes, tens of thousands of recipients 
collectively owed $790 million in federal taxes as of September 30, 
2006. This included over 2,000 individuals and organizations that 
received $124 billion of payments directly from the federal government 
and who owed more than $270 million of unpaid taxes (almost 6 percent 
of such recipients) and about 37,000 landlords participating in HUD’s 
Section 8 tenant-based housing program who owed an estimated $520 
million of unpaid taxes (almost 4 percent of such landlords). The $790 
million estimate is likely substantially understated because GAO’s 
analysis excluded the 80 percent of federal grants that are directly 
given to state and local governments which, in turn, disburse the 
grants to the ultimate recipients. 

GAO selected 20 grant and direct assistance recipients with high tax 
debt for a more in-depth investigation of the extent and nature of 
abuse and criminal activity. For all 20 cases GAO found abusive and 
potential criminal activity related to the federal tax system, 
including failure to remit individual income taxes and/or payroll taxes 
to IRS. Rather than fulfill their role as “trustees” of payroll tax 
money and forward it to IRS, these grant recipients 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 recipients 
diverted the payroll tax money for their own benefit or to help fund 
their businesses. GAO referred these 20 cases to IRS for additional 
collection and investigation action, as appropriate. 

Table: Examples of Abusive and Potentially Criminal Activity by Grant 
and Direct Assistance Recipients: 

Nature of work: Housing; 
Unpaid tax amount as of September 2006: Over $3 million; 
Activity: Landlord was convicted of illegally transferring property to 
defraud creditors. 

Nature of work: Social Services; 
Unpaid tax amount as of September 2006: Over $1 million; 
Activity: While failing to pay its taxes, the grant recipient paid 
hundreds of thousand of dollars to a relative for services contracts. 

Nature of work: Social Services; 
Unpaid tax amount as of September 2006: Over $400,000; 
Activity: Recipient investigated for using grant funds to purchase 
luxury car, lakefront condominium, and Caribbean trips. 

Source: GAO analysis of IRS data and available public records. 

[End of table] 

Federal law and current governmentwide policies do not prohibit 
individuals and organizations with unpaid taxes from receiving grants 
or direct assistance. Several federal agencies established policies 
against awarding grants to tax delinquent applicants; however, federal 
agencies do not verify applicants’ certification that they do not owe 
taxes. Further, federal law generally prohibits the disclosure of 
taxpayer data to federal agencies. Eleven grant recipients that GAO 
investigated appeared to have made false statements by not disclosing 
their tax debt as required. Further, agencies that award grants are not 
required to inquire as to recipients’ tax debt status prior to 
providing direct assistance payments. 

What GAO Recommends: 

GAO recommends that the Office of Management and Budget (OMB) assess 
the need to require federal agencies to conduct inquiries into the tax 
debt status of applicants where appropriate. GAO also recommends IRS 
evaluate the 20 referred cases with high tax debts and abusive and 
potential criminal activity for appropriate additional collection and 
investigation action. IRS and OMB agreed with our recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-31]. For more information, contact Greg 
Kutz at (202) 512-6722 or kutzg@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Grant and Direct Assistance Recipients Owe About $790 Million in Taxes: 

Examples of Selected Recipients of Grants and Direct Assistance 
Involved in Abusive and Criminal Activity Related to Federal Tax 
System: 

Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating 
in Federal Grant or Direct Assistance Programs: 

Conclusion: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Examples of Grant and Direct Assistance Recipient Entities 
with Unpaid Federal Taxes: 

Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal 
Taxes: 

Abbreviations: 

ASAP: Automated Standard Application Payment System: 

CFDA: Catalog of Federal Domestic Assistance: 

FAADS: Federal Assistance Awards Data System: 

GAPS: Grant Administration and Payment System: 

GSA :General Services Administration: 

HHS :Department of Health and Human Services: 

HUD Department of Housing and Urban Development: 

IRS: Internal Revenue Service: 

OMB: Office of Management and Budget: 

PIC: Public Housing Information Center: 

PMS: Payment Management System: 

SF: Standard Form: 

TIN: Taxpayer Identification Number: 

TFRP: Trust Fund Recovery: 

United States Government Accountability Office: 

Washington, DC 20548: 

November 16, 2007: 

The Honorable Joseph I. Lieberman: 
Chairman: 
The Honorable Susan M. Collins: 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Carl Levin: 
Chairman: 
The Honorable Norm Coleman: 
Ranking Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

This report continues a series of audits and investigations we have 
performed at your request to help address the large tax gap facing our 
nation. The tax gap represents the difference between what taxpayers 
should pay on a timely basis and what the Internal Revenue Service 
(IRS) collected through voluntary compliance and enforcement 
activities. To help address the tax gap, beginning in February 2004, we 
have issued a series of reports detailing how some organizations and 
individuals abused the federal tax system at the same time they were 
doing business with or receiving benefits from the federal government 
and the lack of agency controls to prevent such abuses from 
occurring.[Footnote 1] We determined there are few consequences of 
abusing the tax system for these organizations and individuals, which 
included defense, civilian agency, and General Services Administration 
(GSA) contractors; tax-exempt (not-for-profit) organizations (including 
charities participating in the Federal government's Combined Federal 
Campaign); and Medicare physicians. While we performed this work it 
came to our attention that some organizations and individuals who were 
recipients of federal grants were also abusing the tax system. Thus, 
you asked us to perform additional work and report specifically on 
organizations and individuals who abuse the federal tax system at the 
same time they receive federal grants or other similar types of federal 
assistance known as direct payments for specified use[Footnote 2] 
(direct assistance) programs. 

Based on your request, we initiated a forensic audit and related 
investigations to determine, to the extent practical, whether 
recipients of federal grants and direct assistance have unpaid federal 
taxes. Because the vast majority of federal grants and direct 
assistance programs, an estimated 80 percent of awarded funds, are 
administered and disbursed through state and local 
governments,[Footnote 3] detailed payment data on the final recipients 
needed for us to perform an electronic match with IRS taxpayer 
delinquency files are not available at the federal level.[Footnote 4] 
Thus, the specific objectives of our work were to (1) determine to the 
extent practical the magnitude of federal taxes owed by individuals and 
organizations receiving grants and direct assistance administered and 
disbursed at the federal level and to further determine, using a 
selected case study of a federal direct assistance program that 
administers and disburses payments at the state and local level, tax 
debts owed by state and local recipients of such programs; (2) provide 
examples of grant and direct assistance recipients involved in abusive 
or criminal activity related to the federal tax system; and (3) assess 
efforts by awarding agencies to prevent delinquent taxpayers from 
participating in federal grant and direct assistance programs.[Footnote 
5] 

To determine to the extent practical the magnitude of taxes owed by 
individuals and organizations receiving grants or direct assistance 
administered at the federal level, we utilized disbursements data from 
three of the largest federal payment systems[Footnote 6] that processed 
payments for the majority of federal grant and direct assistance 
excluding Medicare and Medicaid during fiscal years 2005 and 2006. For 
our case study of recipients receiving federal payments at the state 
and local levels, we selected the Department of Housing and Urban 
Development's (HUD) Section 8 tenant-based housing assistance program, 
a direct assistance program to aid low-income families, because this 
program is a large federal program that is administered at the state or 
local government level. To determine the extent to which grant and 
direct assistance recipients had unpaid federal taxes, we utilized IRS 
unpaid tax data as of September 30, 2006. Using the Taxpayer 
Identification Number (TIN), we electronically matched IRS's tax debt 
data to payment and other management information that represented 
payments to the various grant and direct assistance recipients we 
identified. 

To illustrate indications of abuse or criminal activity related to the 
federal tax system in grant and direct assistance programs, based on 
our data mining, we performed investigative work on a nonrepresentative 
selection of 20 organizations and individuals that participated in 
federal grant and direct assistance programs during fiscal years 2005 
and 2006. We selected these organizations and individuals based upon 
factors such as the amount of tax debt and the number of delinquent tax 
periods. Our investigative work included reviewing tax records and 
performing additional searches of criminal, financial, and other public 
records. 

To determine the actions that responsible federal agencies take to 
prevent individuals and organizations with significant tax 
delinquencies from receiving grants and direct assistance, we examined 
governmentwide and selected agency policies and procedures, reviewed 
selected application files, and interviewed officials from the Office 
of Management and Budget (OMB); IRS; and Departments of Agriculture, 
Education, Health and Human Services (HHS), Homeland Security, and HUD. 
For details on our scope and methodology, see appendix I. 

We conducted our audit between January 2007 and August 2007. We 
performed our work in accordance with U.S. generally accepted 
government auditing standards. The investigative portion of our work 
was completed in accordance with investigative standards established by 
the President's Council on Integrity and Efficiency. 

Results in Brief: 

While most recipients of payments from federal grant and direct 
assistance programs pay their federal taxes, our comparison of IRS 
unpaid assessments with disbursements made from three of the largest 
federal grant and direct assistance payment systems and disbursement- 
related data for the HUD Section 8 tenant-based housing assistance 
program found that tens of thousands of recipients collectively owed 
about $790 million in federal taxes as of September 30, 2006: 

* Over 2,000 grant and direct assistance recipients who received 
certain payments directly from three of the major federal grant and 
direct assistance payment systems during fiscal years 2005 and 2006 
(almost 6 percent of such recipients) owed more than $270 million of 
unpaid taxes. 

* About 37,000 landlords who participated in HUD's Section 8 tenant- 
based housing direct assistance program during fiscal years 2005 and 
2006 (almost 4 percent of landlords participating in HUD's tenant-based 
program) had an estimated $520 million of unpaid federal taxes as of 
September 30, 2006. 

Our estimates of the taxes owed by grant and direct assistance 
participants are likely substantially understated for a number of 
reasons. For example, most federal grant and direct assistance programs 
whose funds are disbursed through the three federal payment systems we 
reviewed are provided to state and local governments who disburse funds 
to the ultimate recipient (an estimated 80 percent of awarded funds) 
and were thus excluded from our analysis. Except for our case study 
involving the HUD Section 8 tenant-based program that provides direct 
assistance through public housing agencies to landlords who make 
available housing units to approved low-income families who select 
dwelling units (landlords to rent from) in the private market,[Footnote 
7] our audit did not include disbursements made to state and local 
governments because detailed information on the ultimate recipients was 
not practical to obtain. In addition, our estimate does not include 
amounts owed by organizations 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 that specific tax debts are owed. According to IRS, 
underreporting of income accounts for more than 80 percent of the more 
than $345 billion annual gross tax gap. 

We found numerous cases of abusive and criminal activity related to the 
federal tax system in our audit and investigation of 20 organizations 
and individuals that we selected based on the large amount of federal 
taxes owed and other factors. Of these 20 cases, 14 involved 
organizations that received federal grants. All 14 grant recipient 
organizations failed to properly remit to IRS payroll taxes withheld 
from employees. Rather than fulfill their role as "trustees" of this 
money and forward it to IRS as required by law, these case study 
entities and their executives diverted the money for other purposes. In 
one example, a nonprofit organization that provides social services 
received over 1 million dollars in grants while owing hundreds of 
thousands of dollars of unpaid payroll taxes. Instead of paying payroll 
taxes, executives misappropriated grant funds for expensive clothing, 
luxury vehicles, and lavish trips to the Caribbean. 

We also found tax abuse in the other six cases that involved landlords 
who benefited from federal housing subsidies provided under HUD's 
Section 8 tenant-based housing program. For example, we identified one 
participating landlord who was delinquent in paying federal income tax 
and had also not properly maintained rental housing to acceptable 
living standards. This landlord has been delinquent in paying federal 
income taxes since the mid-1990s and owed over a million dollars of 
federal taxes. Another participating landlord was convicted of money 
laundering and other criminal activities. 

Federal agencies do not prevent individuals and organizations with tax 
debts from receiving federal grant payments. Federal law and current 
governmentwide policies for administering grants, as reflected in OMB 
Circulars, do not prohibit individuals and organizations with unpaid 
taxes from receiving grants, nor do they require awarding agencies to 
verify applicants' disclosures of existing federal debt delinquencies 
in grant applications. Although several federal grant-awarding agencies 
had policies against awarding grants to tax delinquent applicants, we 
found no evidence that agencies enforce their policies. Specifically, 
those agencies that told us they would not award a grant to an 
applicant with unpaid taxes could not provide any examples where grant 
officials denied a grant based on an applicant's self-disclosed tax 
delinquencies or required applicants to make repayment arrangements. 
Even if requirements to verify applicant disclosures did exist, absent 
consent from the taxpayer, federal law generally prohibits IRS from 
disclosing taxpayer data and, consequently, federal agencies have no 
access to tax data directly from IRS. For example, as we stated 
earlier, 14 cases that we investigated for indications of abuse and 
potential criminal activity were grant recipients and were required to 
submit applications prior to award of the grant.[Footnote 8] Of these 
14 cases, 11 grant recipients submitted grant applications at the same 
time they were delinquent in paying their taxes. Our review of those 
grant applications found that these 11 grant recipients appear to have 
made false statements by not disclosing their tax debts in their 
applications even though they were required to do so. 

Based on our review of landlords participating in HUD's Section 8 
tenant-based housing program, a direct assistance program to aid low- 
income families obtain affordable housing, our audit found that HUD and 
its local housing authorities are neither required nor do they attempt 
to prevent individuals and organizations with federal tax debts from 
participating as landlords in the tenant-based housing program or 
receiving federal rental subsidies. Specifically, HUD regulations do 
not prohibit landlords with federal tax debts from receiving HUD 
subsidized rental payments. Agency regulations do, however, permit 
local housing authorities to reject landlords who have not paid state 
or local real estate taxes, fines, or assessments. 

We are recommending that the Director, Office of Management and Budget, 
assess the need to require federal agencies that award certain grants 
and other direct assistance, where appropriate, to conduct proactive 
inquiries that would help determine if applicants had unpaid federal 
tax debt, including obtaining applicant consent to inquire as to tax 
debt status from the IRS, and consider the result of those inquiries in 
the award determinations. We are also recommending that the Acting 
Commissioner of Internal Revenue evaluate the 20 referred cases 
detailed in this report with high tax debts and potential abusive and 
criminal activity for appropriate additional collection action and 
criminal investigation as warranted. 

IRS provided written comments to a draft of this report and OMB 
provided oral comments. Both IRS and OMB agreed with our 
recommendations. See the Agency Comments and Our Evaluation section of 
this report for a discussion of agency comments from OMB and IRS. We 
have reprinted the IRS written comments in appendix III. 

Background: 

A federal grant is an award of financial assistance from a federal 
agency to an organization to carry out an agreed-upon public purpose. A 
Direct Payment for Specified Use (direct assistance) is an award of 
financial assistance from the federal government to individuals, 
private firms, and other private institutions to encourage or subsidize 
a particular activity by conditioning the receipt of the assistance on 
a particular performance by the recipient. As such, federal grants and 
direct assistance programs do not include solicited contracts for the 
procurement of goods and services for the federal government. 

Based on our analysis of fiscal years 2004 and 2005 data from the 
Federal Assistance Award Data System (FAADS),[Footnote 9] federal 
agencies collectively awarded grants and direct assistance of 
approximately $300 billion annually.[Footnote 10] Further analysis of 
the FAADS data indicates that approximately 80 percent of federal 
grants and direct assistance consist of federal funds provided to state 
and local governments, which, in turn, disburse funds to the ultimate 
recipients. Consequently, only about 20 percent of awarded funds are 
provided directly from the federal government to the organization that 
ultimately spends the money. 

Governmentwide policies affecting the award and administration of 
grants to nongovernmental entities are covered in OMB Circular No. A- 
110, Uniform Administrative Requirements for Grants and Agreements with 
Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations. OMB Circular No. A-102, Grants and Cooperative 
Agreements with State and Local Governments, provides governmentwide 
guidance for administering grants provided to state and local 
governments and prescribes similar procedures as those included in 
Circular No. A-110. Direct assistance programs are not subject to the 
same governmentwide policies as grants; procedures governing the 
application and award processes for direct assistance are prescribed in 
guidance and regulations promulgated by the cognizant federal agency 
responsible for administering the program. 

Most grant applicants that apply directly to the federal government are 
required to complete an Application for Federal Assistance, Standard 
Form (SF) 424. The SF 424 provides federal agencies with entity 
information, such as name, employer identification number, address, and 
a descriptive title of the project for which the grant will be used. 
The applicant is required to certify that the information provided on 
the SF 424 is true and correct and whether the applicant is currently 
delinquent on any federal debt. 

Grant and Direct Assistance Recipients Owe About $790 Million in Taxes: 

While most federal grant and direct assistance recipients pay their 
federal taxes, we identified tens of thousands of grant and direct 
assistance recipients that collectively owed about $790 million in 
federal taxes as of September 2006. These tax debts were owed by 
entities who received federal payments directly from federal payment 
systems during fiscal years 2005 and 2006 and individuals who 
participated in HUD's Section 8 tenant-based housing program as 
landlords during fiscal years 2005 and 2006. We used IRS's September 
2006 unpaid assessments file data to calculate the amount of taxes owed 
at or about the time the various grant recipients received their grant 
payments. Specifically, we found: 

* 2,000 of about 32,000 recipients (about 6 percent) who received 
federal grant and direct assistance benefits directly from three of the 
largest federal payment systems had more than $270 million of unpaid 
federal taxes. About $110 million of the $270 million in unpaid taxes 
represents unpaid payroll taxes. 

* 37,000 of over 1 million landlords (about 4 percent) participating in 
the HUD Section 8 program had about $520 million of unpaid federal 
taxes. Most of these tax debts were unpaid individual income taxes. 

In our audit, we found that grant recipients had a substantial amount 
of unpaid payroll taxes.[Footnote 11] Employers may be 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 funds "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, 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 employed by the employer (e.g., owners or 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 (TFRP).[Footnote 12] Willful failure to remit payroll taxes can 
also be a criminal felony offense punishable by imprisonment of up to 5 
years,[Footnote 13] while the failure to properly segregate payroll tax 
funds can be a criminal misdemeanor offense punishable by imprisonment 
of up to a year.[Footnote 14] 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 are used to pay for these shortfalls to the Social Security 
and Medicare trust funds. 

Although grant and direct assistance recipients had about $790 million 
in unpaid federal taxes as of September 30, 2006, this amount likely 
understates the full extent of unpaid taxes for these or other 
organizations and individuals. For example, except for our case study 
involving HUD's Section 8 tenant-based housing program, our estimate of 
grant and direct assistance recipients was limited to data from three 
of the largest government payment systems and thus did not include all 
federal grant and direct assistance disbursements. Further, our 
analysis of the three payment systems did not include recipients of 
payments who received their payments through state and local government 
entities. Based on our analysis of data from the FAADS, we estimated 
that payments paid by the federal government to final recipients 
account for only about 20 percent of the total grant and direct 
assistance funds awarded by the federal government. The remaining 80 
percent of grant and direct assistance funds are provided to states and 
local governments, which, in turn, disburse them to the ultimate 
recipient. 

Further, to avoid overestimating the amount owed, we limited our scope 
to tax debts that were affirmed by either the taxable entity or a tax 
court for tax periods prior to 2006. We did not include the most 
current tax year because recently assessed tax debts that appear as 
unpaid taxes may involve matters that are routinely resolved between 
the taxpayer and IRS, with the taxes paid, abated, or both within a 
short period. We eliminated these types of debt by focusing on unpaid 
taxes for tax periods prior to calendar year 2006 and eliminating tax 
debt of $100 or less. 

The IRS tax database reflects only the amount of unpaid taxes either 
reported by the individual or organization on a tax return or assessed 
by IRS through its various enforcement programs. The IRS database does 
not reflect amounts owed by organizations and individuals that have not 
filed tax returns and for which IRS has not assessed tax amounts due. 
Further, our analysis did not attempt to account for organizations or 
individuals that purposely underreported income and were not 
specifically identified by IRS as owing the additional taxes. According 
to IRS, underreporting of income accounted for more than 80 percent of 
the estimated $345 billion annual gross tax gap.[Footnote 15] 
Consequently, the full extent of unpaid taxes for grant and direct 
assistance participants is not known. 

Examples of Selected Recipients of Grants and Direct Assistance 
Involved in Abusive and Criminal Activity Related to Federal Tax 
System: 

For all 20 cases of grant and direct assistance recipients we 
investigated for examples of abusive and criminal activity related to 
the federal tax system based on the large amount of tax debt and number 
of delinquent tax periods, we found in all cases evidence that 
indicated the existence of such abusive and criminal activities. Of 
these 20 cases, 14 cases were not-for-profit organizations that 
received grant payments and also had unpaid payroll taxes, some dating 
as far back as the 1990s. For example, one educational institution 
failed to submit employee payroll withholding taxes several times 
within a 3-year period and accumulated an unpaid tax liability of 
almost $4 million. For the cases of payroll tax delinquencies we 
investigated, officials responsible for these organizations failed to 
fulfill their role as "trustees" of employees' payroll tax withholdings 
and forward this money to IRS as required by federal tax laws. Instead, 
these officials diverted the withholdings to fund the organizations' 
operations or for personal benefits, such as their own salaries or 
extravagant vacations. The other 6 cases involved individuals who owed 
individual income taxes and who also received government subsidy 
payments through HUD's Section 8 low-income housing program. In one of 
these cases, the landlord attempted to evict renters who were 
instructed by IRS to pay the rent directly to IRS instead of the 
landlord. In all 20 cases, we saw significant evidence of IRS 
collection activity occurring, but in only a couple of cases did we see 
action related to investigating these entities and individuals for 
criminal violations of federal tax laws. 

Table 1 highlights 10 cases of grant recipients we investigated with 
unpaid taxes. The other 10 cases are summarized in appendix II. 

Table 1: Examples of Grant and Direct Assistance Recipient Entities 
with Unpaid Federal Taxes: 

Case: 1; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid tax amount[A]: Nearly $1 million; 
Comments: 
* Tax debt is mostly unpaid payroll taxes from the early 2000s; 
* Grant recipient received tens of thousands of dollars in grants; 
* Officials of grant recipient claimed payroll taxes were embezzled by 
an agency contracted to provide services to the grant recipient; 
* Grant recipient acquired a million-dollar building when it had a 
similar amount of tax liability; 
* Grant recipient offered to repay 50 percent of the debt in 
installments over several years; 
* Officer owned several luxury vehicles; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 2; 
Type of case: Grant; 
Nature of work: Health education; 
Unpaid tax amount[A]: Over $300,000; 
Comments: 
* Tax debts consist of unpaid payroll taxes; 
* Grant recipient received about $1 million in grants; 
* Officer's salary at over $100,000 is almost double the average of 
service organizations in the area. In addition, officer has generous 
travel expenses and other perks; 
* Grant recipient owns property with fair market value over $2 million; 
* Grant recipient offered compromise for two-thirds of the debt to be 
paid over a period of more than a decade; 
* During appeal of TFRP, officer refinanced residence and used proceeds 
to pay credit card debts; 
* Officer owns luxury vehicle; 
* IRS assessed penalties against entity officials for willful failure 
to pay payroll taxes. 

Case: 3; 
Type of case: Grant; 
Nature of work: Health services; 
Unpaid tax amount[A]: Nearly $1 million; 
Comments: 
* Grant recipient has incurred continuing payroll tax deposit 
deficiencies since early 2000s; 
* Grant recipient received tens of thousands of dollars in grant funds; 
* Grant recipient owns commercial property with an appraised value over 
$1 million; 
* IRS filed numerous tax liens against grant recipient's property; 
* IRS assessed penalties against one officer for willful failure to pay 
payroll taxes. 

Case: 4; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $3 million; 
Comments: 
* Landlord investigated for mortgage fraud; 
* Landlord was convicted for illegally transferring property to defraud 
creditors; 
* Landlord owns luxury vehicles, multiple real estate properties, and 
an extensive investment portfolio. 

Case: 5; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $1 million; 
Comments: 
* Landlord has not filed required tax returns for over a decade; 
* Landlord has never made estimated tax payments; 
* Landlord did not report income information forms to IRS; 
* Rental property is in extreme disrepair and has poor sanitation 
conditions including piles of trash, beer cans, and human waste 
throughout the yard. 

Case: 6; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid tax amount[A]: Over $500,000; 
Comments: 
* Landlord has a related business owing hundreds of thousands of 
dollars in payroll taxes; 
* Landlord has attempted to avoid collection of IRS levies; 
* Landlord owns luxury vehicle. 

Case: 7; 
Type of case: Grant; 
Nature of work: Medical care; 
Unpaid tax amount[A]: Over $500,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes from the early 
2000s; 
* Grant recipient received about $1 million in grants; 
* Grant recipient could not provide to other auditors documentation for 
over $1 million in program costs; 
* Grant recipient did not fund its pension plan; 
* Official of grant recipient received hundreds of thousands of dollars 
in consulting fees from grantee; 
* Official owes tens of thousands in individual income taxes; 
* IRS assessed penalties against grant recipient officials for willful 
failure to pay payroll taxes; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 8; 
Type of case: Grant; 
Nature of work: Medical care; 
Unpaid tax amount[A]: Nearly $100,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Grant recipient received about $1 million in grants; 
* Recipient official was convicted of theft; 
* Auditor found questionable costs totaling tens of thousands of 
dollars; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 9; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid tax amount[A]: Over; 
$1 million; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Not-for-profit grant recipient received over $3 million of grant 
funds; 
* While failing to pay payroll taxes, the grant recipient organization 
paid a relative of an entity official hundreds of thousands of dollars 
for service contract; 
* Key official's salary exceeded $100,000 a year; 
* Grant recipient did not fully fund its pension plan; 
* IRS previously assessed penalties against one officer for willful 
failure to pay payroll taxes while employed at a previous not-for-
profit entity; 
* An independent auditor's report stated there is substantial doubt 
regarding the entity's ability to continue operating; 
* Federal grant agency sought sanctions against grantee and its 
officials for improper funds control and ineffective program oversight; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 10; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid tax amount[A]: Over $400,000; 
Comments: 
* Tax debts largely consist of unpaid payroll taxes; 
* Grant recipient received over $1 million in federal grants; 
* Grant recipient official had prior conviction for tax evasion; 
* Official received an annual salary in excess of $100,000 yet reported 
tens of thousands of dollars less to IRS; 
* Grant recipient official was investigated for using grant funds to 
purchase expensive clothing, luxury vehicle, lakefront property, 
private school tuition, and lavish trips to the Caribbean and 
elsewhere; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Source: GAO's analysis of IRS, grant and direct assistance payments, 
and other records. 

[A] Rounded dollar amount of unpaid federal taxes as of September 30, 
2006. 

[End of table] 

The following provide illustrative detailed information on several of 
these cases: 

Case 4: This landlord participating in the Section 8 tenant-based 
housing program was involved in a fraudulent real estate transaction in 
addition to owing over $3 million in delinquent income taxes. The 
landlord was indicted on mortgage fraud and racketeering for attempting 
to sell real estate at an inflated price using false appraisals. 
Previously, the landlord's family member was convicted of conspiracy to 
commit mail fraud, wire fraud, and money laundering in a scheme to sell 
fraudulent vacation club memberships. In addition, the landlord was 
charged with fraudulent conveyance of over $3 million worth of property 
to defraud creditors. 

Case 7: This grant recipient organization, which provides medical care 
to low-income families, has experienced financial problems throughout 
most of the 2000s and has several hundred thousand dollars in 
delinquent payroll taxes. During these years, while failing to properly 
fund its employee pension plan, the grant recipient paid hundreds of 
thousands of dollars in consulting fees to a former employee. Grant 
recipient could not document to other auditors over a million dollars 
in expenses relating to grants. Grant recipient has not made required 
contributions totaling tens of thousands of dollars to its pension 
plan. In addition, IRS assessed a TFRP against key grant recipient 
officials. 

Case 9: This not-for-profit grant recipient has been in operation since 
the 1980s to provide social services to disadvantaged individuals and 
families and has another closely related not-for-profit entity that 
also received federal grants. The recipient has over $1 million in 
unpaid payroll taxes dating back to the early 2000s, and IRS has placed 
several tax liens against the grantee's property. The grant recipient 
has had recurring financial problems and an independent audit report 
raised concerns about the entity's ability to continue operating. The 
recipient has also been cited for commingling funds among related grant 
recipients and for not having a functioning Board of Directors as 
represented to the granting agency. The recipient has been recommended 
for disbarment. 

Case 10: This not-for-profit grant recipient stopped making payroll tax 
deposits for several years beginning mid-2000s, accumulating unpaid 
payroll taxes totaling several hundreds of thousands of dollars. IRS 
filed liens against grantee assets and assessed the exempt organization 
with payroll tax violation penalties and interest totaling tens of 
thousands of dollars. A key grant recipient officer had a prior 
conviction for tax evasion and was again investigated for improperly 
using grant funds to purchase expensive clothing, a luxury vehicle, and 
lavish vacations and to pay taxes assessed from a prior tax evasion 
conviction. A key grantee officer had numerous individual income tax 
delinquencies. 

Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating 
in Federal Grant or Direct Assistance Programs: 

Neither federal law nor current governmentwide policies for 
administering federal grants or direct assistance prohibit applicants 
with unpaid federal taxes from receiving grants and direct assistance 
from the federal government. Even if such requirements did exist, 
absent consent from the taxpayer, federal law generally prohibits IRS 
from disclosing taxpayer data and, consequently, federal agencies have 
no access to tax data directly from IRS. Moreover, federal agencies we 
reviewed do not prevent organizations and individuals with unpaid 
federal taxes from receiving grants or direct assistance for the 
specific programs they administer. 

With regard to administering federal grants, federal law and current 
governmentwide policies, as reflected in OMB Circulars, do not prohibit 
individuals and organizations with unpaid taxes from receiving 
grants.[Footnote 16] OMB Circulars provide only general guidance with 
regard to considering existing federal debt in awarding grants. 
Specifically, the Circulars state that if an applicant has a history of 
financial instability, or other special conditions, the federal agency 
may impose additional award requirements to protect the government's 
interests.[Footnote 17] However, the Circulars do not specifically 
require federal agencies to take into account an applicant's delinquent 
federal debt, including federal tax debt, when assessing applications. 
While they require grant applicants to self-certify in their standard 
government application (SF 424) whether they are currently delinquent 
on any federal debt, including federal taxes, the Circulars contain no 
provision instructing the agencies to verify such certifications or 
describing how such verification should be done. No assessment of tax 
debt is required by OMB on a sampling or risk-based assessment. 

Although current governmentwide policies do not require it, federal 
agencies, such as HHS and Department of Education, have policies 
against awarding grants to applicants that owe federal debts. These 
policies state that a grant may not be awarded until the debt is 
satisfied or arrangements are made with the agency to which the debt is 
owed. However, awarding agencies rely extensively on applicants' self- 
certifications that they are not delinquent on any federal debt, 
including tax debt. Certain agencies, such as HHS, stated that they 
check credit reports to see if the grant applicant has any outstanding 
tax liens prior to award of the contract. While it is difficult to 
validate the agencies' assertions, none of these agencies could provide 
us examples where grant officials denied a grant based on self- 
disclosed tax delinquencies or required applicants to make repayment 
arrangements with the agency to which debt was owed. 

Even if requirements to verify applicants' disclosures did exist, 
federal law poses a significant challenge to federal granting agencies 
in determining the accuracy of representations made by organizations 
applying for grants. Specifically, the law does not permit IRS to 
disclose taxpayer information, including tax debts, to federal agency 
officials unless the taxpayer consents.[Footnote 18] Thus, unless an 
applicant provides consent requesting that IRS provide taxpayer 
information to federal agencies, certain tax debt information generally 
can only be discovered from public records when IRS files a tax lien 
against the property of a tax debtor. Further, representatives of one 
federal agency that has attempted to develop an approved consent form 
discovered that IRS may not accept certain signed consent forms because 
a requirement for an applicant to sign a consent form as a precondition 
to the agency's acceptance of the application may be considered a form 
of duress and thus raise a disclosure issue. Notwithstanding, while 
information on filed tax liens is generally publicly available, IRS 
does not file tax liens on all tax debtors nor does IRS have a central 
repository of tax liens to which grant-awarding agencies have access. 
Further, available information on tax liens may not be current or 
accurate because other studies have shown that IRS has not always 
released tax liens from property when the tax debt has been 
satisfied.[Footnote 19] 

Of the 20 organizations and individuals that we selected for additional 
investigation of abuse and criminal activity, 14 were grant recipients 
that were required to submit an application in order to be awarded a 
grant.[Footnote 20] In our review of the grant applications for the 14 
grant cases, we found that 11 applicants certified in their 
applications that they were not currently delinquent in any federal 
debt, even though IRS had current tax assessments on file for these 
entities at the time the applications were filed.[Footnote 21] As a 
result, these 11 cases appear to have violated the False Statements Act 
because they did not declare their existing tax debt in their 
applications even though they were required to do so.[Footnote 22] 

Direct assistance programs are generally not subject to the same 
governmentwide guidance for grants. Instead, the cognizant federal 
agencies implement the necessary regulations for administering the 
program. With regard to our HUD's Section 8 tenant-based program case 
study, HUD regulations do not require local housing authorities to 
identify whether landlords who participate in HUD's housing assistance 
program and receive housing subsidies have outstanding federal tax 
delinquencies or prohibit payments if such delinquencies are 
identified. HUD regulations do permit local housing authorities to deny 
program participation if a landlord has not paid state or local real 
estate taxes, fines, or assessments. HUD regulations, however, do not 
require local housing authorities to deny the landlord from 
participating in the HUD program if the landlord owes any delinquent 
federal debts, including federal taxes. 

Conclusion: 

Because about 80 percent of all federal grants and direct assistance 
are administered and disbursed through state and local governments, the 
extent to which all final recipients of these federal payments owe 
taxes is not known. However, our limited audit has demonstrated that 
tens of thousands of grant and direct assistance recipients have taken 
advantage of the opportunity to avoid paying $790 million in federal 
taxes. At the same time they failed to pay their federal taxes, these 
individuals and organizations benefited by receiving billions of 
dollars of federal grants or direct assistance benefits. With regard to 
grants, allowing individuals and organizations to receive federal 
grants while not paying their federal taxes is not fair to the vast 
majority of grant applicants that pay their fair share of taxes. This 
practice causes a disincentive to individuals and organizations to pay 
their fair share of taxes and could lead to further erosion in 
compliance with the nation's tax system. 

Recommendations for Executive Action: 

We recommend that the Director, Office of Management and Budget, assess 
the need to issue guidance requiring federal agencies that award 
certain grants and other direct assistance, where appropriate in 
relation to the potential adverse effect on potential applications, to 
take the following two actions: 

* Conduct actions that would help determine if applicants had unpaid 
federal tax debt, including obtaining applicant consent to inquire as 
to tax debt status from IRS; this could be achieved through sampling or 
other risk-based assessments. 

* Consider the result of those inquiries in the award determinations. 

We also recommend that the Acting Commissioner of Internal Revenue 
evaluate the 20 referred cases detailed in this report for appropriate 
additional collection action or criminal investigation as warranted. 

Agency Comments and Our Evaluation: 

We received written comment from IRS and oral comments from OMB on the 
draft of this report. Both IRS and OMB agreed with the draft report's 
recommendations. OMB also provided technical comments on the draft 
report, which we incorporated as appropriate. We have reprinted IRS's 
written comments in their entirety in Appendix III. 

As agreed with your offices, unless you publicly release its contents 
earlier we plan no further distribution of this report until 30 days 
from its date. At that time, we will send copies of this report to the 
Acting Commissioner of Internal Revenue, the Director of the Office of 
Management and Budget, interested congressional committees, and other 
interested parties. We will make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at [hyperlink, http://www.gao.gov]. Please contact me at 
(202) 512-6722 or kutzg@gao.gov if you have any questions concerning 
this report. Contact points for our Offices of Congressional Relations 
and Public Affairs may be found on the last page of this report. 

Signed by: 

Gregory D. Kutz: 

Managing Director: 

Forensic Audits and Special Investigations: 

[End of section] 

Appendix I: Scope and Methodology: 

To address our first objective to describe the magnitude of tax debt 
owed, we obtained and analyzed federal payment databases from the 
Department of the Treasury's Automated Standard Application Payment 
System (ASAP), the Department of Education's Grant Administration and 
Payment System (GAPS), and the Department of Health and Human Services' 
(HHS) Payment Management System (PMS) for fiscal years 2005 and 2006. 
These three agencies process grant and other assistance program 
payments on behalf of many federal agencies and, in fiscal years 2005 
and 2006, processed over $460 billion in grant and direct assistance 
payments, excluding Medicare and Medicaid. Our analysis of data, 
however, was limited because approximately 80 percent of federal grant 
and direct assistance payments are paid to state and local 
governments,[Footnote 23] which then disburse funds to final 
recipients. Because identifying information on the final recipients of 
payments provided at the state and local level is not available at the 
federal level, our analysis was limited to those payments provided 
directly by the federal government to final recipients. We estimated 
these direct payments to final recipients represented about 20 percent 
of total federal grant and direct assistance payments. 

Because identifying information for final recipients of payments 
provided at the state and local levels was not available at the federal 
level and not practical for us to obtain, we selected one major federal 
program that disburses funds at the local level for a case study 
analysis. For this case study, we selected the Department of Housing 
and Urban Development's (HUD) Section 8 tenant-based low-income housing 
program, a program classified as a direct assistance program, which 
provides rental assistance to low-income families by providing 
supplemental rental payments directly to landlords participating in the 
rental assistance program. We obtained and analyzed an extract from 
HUD's Public Housing Information Center (PIC) database, which HUD 
represented to be the most complete data source available on low-income 
assisted households in HUD's public housing or voucher programs, that 
contained identifying information on landlords who participated in 
HUD's program during fiscal years 2005 and 2006. 

To identify recipients of grants and direct assistance with unpaid 
federal taxes, we obtained the Internal Revenue Service's (IRS) 
September 30, 2006, unpaid assessments files and electronically matched 
these files with the various grant and direct assistance recipients 
identified in the above databases using the taxpayer identification 
number. To avoid overstating the amount of unpaid taxes owed by grant 
recipients and to capture only significant tax debt, we excluded tax 
debts meeting specific criteria. The criteria we used to exclude tax 
debts are as follows: 

* tax debts IRS classified as compliance assessments or memo accounts 
for financial reporting,[Footnote 24] 

* tax debts from calendar year 2006 tax periods, and: 

* grant recipients with total unpaid taxes of $100 or less. 

The criteria above were used to exclude tax debts that might be under 
dispute or generally duplicative or invalid and tax debts that are 
incurred after the dates the entities received grant payments. 
Compliance assessments or memo accounts were excluded because these 
taxes have neither been agreed to by the taxpayers nor affirmed by the 
court, or these taxes could be invalid or duplicative of other taxes 
already reported. We excluded tax debts from calendar year 2006 tax 
periods to eliminate tax debt that may involve matters that are 
routinely resolved between the taxpayers and IRS, with the taxes paid 
or abated within a short period. We also excluded tax debts of $100 or 
less because they are insignificant for the purpose of determining the 
extent of taxes owed by grant recipients. 

To identify examples of grant and direct assistance recipients involved 
in abusive or potential criminal activity related to the federal tax 
system, we selected 20 recipients using a nonrepresentative selection 
approach based on data-mining results, our judgment, and a number of 
other criteria, including the amount of unpaid taxes and the number of 
unpaid tax periods. We obtained and reviewed copies of automated tax 
transcripts and other tax records (for example, revenue officers' 
notes) from IRS. For the selected cases, we performed searches of 
criminal, financial, and public records. Because our investigations 
were generally limited to publicly available information, our audit of 
the 20 cases may not have identified all related parties or all 
significant assets or income (such as personal bank data, entities 
established to hide assets, etc.) that the recipient individuals or 
entities, including key officials, own or receive. 

To determine actions federal agencies take to prevent individuals and 
organizations with significant unpaid federal taxes from either being 
approved for or receiving grant or direct assistance payments, we 
reviewed governmentwide and agency-specific policies and procedures for 
awarding grants and benefits from the respective programs. We also 
interviewed officials from the Office of Management and Budget and the 
Departments of Agriculture, Education, Homeland Security, HHS, and HUD 
on whether tax debts are considered in their decisions to approve award 
applications. In addition, to test whether grant applicants properly 
disclosed their current tax delinquencies when submitting applications, 
we requested and reviewed the grant applications for our 14 cases that 
applied for grants.[Footnote 25] 

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

Data Reliability Assessment: 

For IRS unpaid assessments data, we relied on the work we performed 
during our annual audits of IRS's financial statements. While our 
financial statement audits have identified some data reliability 
problems associated with the coding of some of the fields in IRS's tax 
records, including errors and delays in recording taxpayer information 
and payments, we determined that the data were sufficiently reliable to 
address our report's objectives. Our financial audit procedures, 
including the reconciliation of the value of unpaid taxes recorded in 
IRS's master file to IRS's general ledger, identified no material 
differences. 

For the GAPS, ASAP, and PMS data, we interviewed officials from 
Education, Treasury, and HHS responsible for the databases. In 
addition, we performed electronic testing of specific data elements 
that we used to perform our work. HUD's PIC database has undergone 
several audits and quality improvements in recent years and was 
certified in fiscal year 2004 under HUD's Data Quality Improvement 
Program as providing accurate information for reporting on program 
performance under the Government Performance and Results Act. We held 
discussions with HUD's database administrators on input controls used 
to maintain data integrity for the data elements we used for our 
analysis and with HUD programmers to discuss the programming code HUD 
used to extract the data we used. We also performed electronic testing 
of the data elements we used and performed limited verification tests. 

Based on our discussions with agency officials, our review of agency 
documents, and our own testing, we concluded that the data elements 
used for this report were sufficiently reliable for our purposes. 

[End of section] 

Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes: 

Table 1 provides data on 10 detailed case studies. Table 2 below 
provides details of the remaining 10 organizations and individuals we 
selected as case studies. As with the 10 cases discussed in the body of 
this report, we found evidence of abusive and potential criminal 
activity related to the federal tax system during our audit and 
investigations of these 10 case studies. 

Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal 
Taxes: 

Case: 11; 
Type of case: Grant; 
Nature of work: Children's services; 
Unpaid federal tax amount: Over $2 million; 
Comments: 
* While failing to remit payroll taxes dating back to the early 2000s,; 
* grant recipient received over $2 million in federal grants in recent 
years,; 
* key official received compensation of over $100,000, and; 
* grant recipient entered into multiple payment plans with the IRS and 
was out of compliance on at least one; 
* IRS assessed large penalties against key officers for willful failure 
to pay payroll taxes; 
* Federal tax liens were filed against the grant recipient; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. § 1001). 

Case: 12; 
Type of case: Grant; 
Nature of work: Community services; 
Unpaid federal tax amount: Over $1 million; 
Comments: 
* Grant recipient received nearly $3 million in federal grants during a 
recent 2-year period; 
* Grant recipient officials claim they were unaware they had not paid 
payroll taxes for several years; 
* A top official received compensation of about $100,000; 
* Federal tax liens were filed against the grant recipient; 
* Grant recipient officials recently chose to close the entity rather 
than pay the tax; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. § 1001). 

Case: 13; 
Type of case: Grant; 
Nature of work: Community services; 
Unpaid federal tax amount: Over $300,000; 
Comments: 
* Grant recipient received over $2 million in federal grants; 
* Grant recipient pays an annual salary over $70,000 to a relative of a 
key official; 
* Despite owing taxes, this grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 14; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Nearly $4 million; 
Comments: 
* Grant recipient received over $3 million in grants; 
* Grant recipient failed to submit payroll deposits several times over 
a 3-year period; 
* Former key employee investigated for fraud allegations; 
* Evidence that officials of grant recipient were removing assets to 
avoid foreclosure and erasing computer memories to avoid prosecution; 
* IRS assessed penalties against entity officials for willful failure 
to pay payroll taxes; 
* Despite owing taxes, the grant recipient did not declare federal tax 
debt in its grant application, an apparent violation of the False 
Statements Act (18 U.S.C. § 1001). 

Case: 15; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Over $3 million; 
Comments: 
* Grant recipient received several million dollars in federal grants in 
a recent year; 
* Grant recipient owes mostly payroll taxes dating back to the early 
2000s; 
* IRS seized some of the grant recipient's assets; 
* IRS assessed large penalties against several officials for willful 
failure to pay payroll taxes; 
* IRS filed federal tax liens against the entity; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. § 1001). 

Case: 16; 
Type of case: Grant; 
Nature of work: Educational services; 
Unpaid federal tax amount: Over $300,000; 
Comments: 
* Grant recipient received over $2 million in federal grants during a 
recent 2- year period while owing payroll taxes dating back to the late 
1990s; 
* Grant recipient did not file payroll tax returns for several years, 
although it made payments for some periods. IRS is considering a 
request from the grant recipient for an offer in compromise in which 
the grantee would pay only a portion of the unpaid payroll taxes; 
* Despite owing taxes, grant recipient did not declare federal tax debt 
in its grant application, an apparent violation of the False Statements 
Act (18 U.S.C. § 1001). 

Case: 17; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Nearly $2 million; 
Comments: 
* Landlord did not file required tax returns for several years; 
* During the same time the landlord failed to file tax returns, a 
brokerage firm reported over $3 million in sales of securities; 
* Landlord was involved in multiple real estate transactions during the 
time the landlord failed to file tax returns; 
* While owing taxes, the landlord transferred ownership of real 
property to a third party who mortgaged the property to pay off 
landlord's nontax debt. 

Case: 18; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Over $1 million; 
Comments: 
* Landlord did not file required tax returns for several years; 
* Landlord made several hundred thousand dollars in cash withdrawals 
during a period while not filing taxes; 
* Landlord was convicted of willful failure to file tax returns and 
sentenced to 3 years probation; 
* Landlord violated HUD rental property standards; 
* Landlord's property that had significant environmental violations was 
foreclosed on and sold. 

Case: 19; 
Type of case: Low-income housing subsidy; 
Nature of work: Housing services; 
Unpaid federal tax amount: Over $500,000; 
Comments: 
* Landlord has not paid withholding, estimated payments, or filed tax 
returns the majority of years since early 1990s; 
* Landlord's spouse had not filed a personal tax return since early 
2000s; 
* IRS has placed several hundreds of thousands in liens on landlord 
property. 

Case: 20; 
Type of case: Grant; 
Nature of work: Social services; 
Unpaid federal tax amount: Over $800,000; 
Comments: 
* Grant recipient received nearly $400,000 in federal grants during a 
recent 2-year period while owing payroll tax dating back to the early 
2000s; 
* Previous top official responsible for incurring the debt was 
convicted of a felony; 
* IRS assessed penalties on the previous top officer for willful 
failure to pay payroll taxes; 
* Federal tax liens were filed against the grant recipient. 

Source: GAO's analysis of IRS, grant and direct assistance payments, 
and other records. 

[A] Rounded dollar amount of unpaid federal taxes as of September 30, 
2006. 

[End of table] 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Commissioner: 
Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

October 23, 2007: 

Mr. Gregory Kutz: 

Managing Director, Forensic Audits and Special Investigations: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, D.C. 20548: 

Dear Mr. Kutz: 

I have reviewed the draft Government Accountability Office (GAO) report 
titled: "Tax Compliance: Federal Grant and Direct Assistance Recipients 
Who Abuse the Federal Tax System" (GAO-08-31). 

Your report offers two recommendations. The first recommendation is 
directed solely to the Office of Management and Budget (OMB). You 
recommend the Director, OMB assess the need to require federal agencies 
to conduct proactive inquiries into the tax debt status of award 
applicants where appropriate. We realize the importance and potential 
benefits of considering unpaid federal tax debt in the award 
determinations, and will support OMB's assessment efforts. With regard 
to your second recommendation, we agree to evaluate the 20 referred 
cases detailed in the report for appropriate additional collection 
action or criminal investigation as warranted. We will work with your 
staff to secure additional information on the 20 cases. 

If you have any questions, or if you would like to discuss this 
response in more detail, please contact Frederick W. Schindler, 
Director, Collection Policy at (202) 283-7650. 

Sincerely, 

Signed by: 

Linda E. Stiff: 
Acting Commissioner: 

Enclosure: 

Recommendation: 

Evaluate the 20 referred cases detailed in this report for appropriate 
additional aggressive collection action and criminal investigation as 
warranted. 

Response: 

The IRS will work with your office to secure additional information on 
the 20 cases identified in your audit with indications of abuse or 
potential criminal activity. We plan to review each of these case files 
and refer them for additional action as appropriate.

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Greg D Kutz, (202) 512-6722, or kutzg@gao.gov: 

Staff Acknowledgments: 

In addition to the individual named above, Erika Axelson, James Berry, 
Ray Bush, Bill Cordrey, Kenneth Hill, Aaron Holling, Wil Holloway, 
Mitchell Karpman, John Kelly, Rick Kusman, Tram Le, John Ledford, 
Barbara Lewis, Andrew McIntosh, Eduvina Rodriguez, John Ryan, Steve 
Sebastian, Robert Sharpe, Barry Shillito, Pat Tobo, and Matthew Valenta 
made key contributions to this report. 

[End of section] 

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 report. 

[2] As classified by the General Services Administration's Catalog of 
Federal Domestic Assistance (CFDA), published annually pursuant to 31 
U.S.C. 6104 and OMB Circular No. A-89, Federal Domestic Assistance 
Program Information (Aug. 17, 1984). We excluded Medicaid and Medicare 
programs from this audit because we are conducting separate reviews on 
Medicare and Medicaid program providers owing delinquent taxes. 

[3] They are defined as state, county, city, or township governments; 
special district governments (e.g., public housing authorities and 
local transit authorities); independent school districts; and state- 
controlled institutions of higher education. 

[4] Detailed information on payments, including social security and 
taxpayer identification numbers, for the ultimate recipients of grants 
and direct payments administered at subfederal levels is maintained by 
thousands of state and local governmental entities throughout the 
country. 

[5] Our audit also included a detailed assessment of tax debts owed by 
recipients who received hurricane disaster assistance under the Federal 
Emergency Management Agency's Individual and Households Disaster 
Assistance Program (IHP), but we will be reporting the results from 
this work separately. 

[6] Data we analyzed represented grant and direct assistance payments 
from the Department of Education's Grant Administration and Payment 
System, the Department of the Treasury's Automated Standard Application 
Payment System, and the Department of Health and Human Services' 
Payment Management System. 

[7] In the HUD Section 8 tenant-based program (also referred to as the 
Housing Choice Voucher Program), HUD pays rental subsidies so eligible 
families can afford decent, safe, and sanitary housing. The program is 
generally administered by state or local governmental entities called 
public housing agencies (PHAs). Families select and rent units that 
meet program housing quality standards. PHAs then review the lease 
arrangement for purposes such as determining whether the rent is 
reasonable; the housing unit meets HUD's housing quality standards; and 
the landlord is approvable, which includes, among other things, whether 
the landlord has been debarred, suspended, or otherwise disqualified 
from participating in HUD programs. If the PHA approves a family's unit 
and tenancy, the PHA contracts with the landlord to make rent subsidy 
payments on behalf of the family. HUD provides housing assistance funds 
to the PHA who then pays the landlord. 

[8] The other six cases involve HUD landlords. These six cases were not 
required to submit a similar application that required the applicant to 
disclose whether they were delinquent on any federal debt or not. 

[9] The FAADS is a central collection of federal financial assistance 
award transactions data compiled by the Bureau of the Census. 

[10] Estimated annual awards exclusive of Medicare and Medicaid. 

[11] Payroll taxes include income taxes, Social Security and Medicare 
taxes, and the employer's matching share of Social Security and 
Medicare, withheld from an employee's paycheck. Employers are to 
collect and remit these taxes to the federal government. Even though a 
grant-receiving entity may be exempt from paying income taxes, it still 
is required to collect and submit payroll taxes for all employees. 

[12] 26 U.S.C. § 6672. 

[13] 26 U.S.C. § 7202. 

[14] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b). 

[15] According to IRS, nonfilers and underpayment of taxes comprised 
the rest of the gross tax gap. 

[16] The OMB Circulars are OMB Circular No. A-110, Uniform 
Administrative Requirements for Grants and Agreements with Institutions 
of Higher Education, Hospitals, and Other Non-Profit Organizations 
(Amended September 30, 1999) and OMB Circular No. A-102, Grants and 
Cooperative Agreements with State and Local Governments (Amended August 
29, 1997). 

[17] In contrast, governmentwide policies for managing federal loan, 
loan guarantees, and other credit programs promulgated in OMB Circular 
No. A-129, Policies for Federal Credit Programs and Non-Tax Receivables 
(November 2000) specifically require agencies to determine if an 
applicant is delinquent on any federal debt, including tax debt, and 
specifies using credit bureaus as a screening tool. 

[18] 26 U.S.C. § 6103. 

[19] GAO, IRS Lien Management Report: Opportunities to Improve 
Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 
2005) and GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 
Financial Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 2006). 

[20] The other six cases involve HUD landlords. These six cases were 
not required to submit a similar application that required the 
landlords to disclose whether they were delinquent on any federal tax 
debts or not. 

[21] For the other three applicants, IRS did not levy tax assessments 
until after applications were filed for two applicants and available 
information did not permit us to determine the debt status for the 
other applicant. 

[22] 18 U.S.C. § 1001. 

[23] As defined as state, county, city, or township governments; 
special district governments (e.g., public housing authorities and 
local transit authorities); independent school districts; and state- 
controlled institutions of higher education. 

[24] Under federal accounting standards, unpaid assessments require 
taxpayer or court agreements to be considered federal taxes receivable. 
Compliance assessments and memo accounts are not considered federal 
taxes receivable because they are not agreed to by the taxpayers or the 
courts. 

[25] The other six cases were private landlords participating in HUD's 
Section 8 tenant-based housing program. 

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