Our review of IRS tax records showed that over 1.6 million businesses  owed over $58 billion in unpaid payroll taxes to the federal government as  of September 30, 2007. For  example, 70 percent of all unpaid payroll taxes are owed by businesses  with more than a year (4 tax quarters) of unpaid payroll taxes, and over a  quarter of unpaid payroll taxes are owed by businesses that have tax debt  for more than 3 years (12 tax quarters). IRS’s Collection Approach Does Not Always Prevent the Accumulation of Unpaid Payroll Taxes

Our audit of payroll tax cases identified several issues that adversely affect  IRS’s ability to prevent the accumulation of unpaid payroll taxes and to  collect these taxes. IRS’s Approach Focuses On Voluntary Compliance, Even for Egregious Payroll Tax Offenders

As discussed previously, IRS has a number of powerful tools at its disposal  to help prevent the accumulation of unpaid taxes and to collect the taxes  that are owed. We have previously reported that IRS subordinates the use of some of its  collection tools in order to seek voluntary compliance, and that IRS’s  repeated attempts to gain voluntary compliance often results in minimal or  no actual collections. IRS’s Approach Can Result in Delayed Enforcement Actions

In reviewing specific collection actions taken by IRS, we found that  revenue officers often did not timely take basic steps to protect the  government’s interest in a tax debtor’s property by filing a lien or to hold  the business’s owners and officers personally responsible for willfully  failing to remit withheld payroll taxes. Businesses Engaged in Abusive and Potentially Criminal Activity Related to the Federal Tax System

Our analysis of unpaid payroll tax debt found substantial evidence of  abusive and potentially criminal activity related to the federal tax system  by businesses and their owners or officers. While much of the tax debt may be owed by those with little  ability to pay, some abuse the tax system, willfully diverting amounts  withheld from their employees’ salaries to fund their business operations  or their own personal lifestyles. In total, IRS records indicate over 1,500  owners/officers had been found by IRS to be responsible for non-payment  of payroll taxes at 3 or more businesses, and 18 business owners/officers  had been found by IRS to be responsible for not paying the payroll taxes  for over 12 separate businesses. IRS found  three officers of the business to be willful and responsible for not  remitting payroll taxes. To determine whether businesses with unpaid payroll taxes were engaged  in abusive or potentially criminal activities with regard to the federal tax  system, we used data mining techniques to identify 50 businesses as  illustrative case studies based on criteria such as businesses with large  dollar amounts of unpaid payroll taxes accumulated over multiple tax  quarters.
Why GAO Did This Study

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.

What GAO Found

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.