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. 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. 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. Employers may be subject to civil and criminal  penalties if they do not remit payroll taxes to the federal government. 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. 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. 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. 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. 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. 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. We  estimated these direct payments to final recipients represented about 20  percent of total federal grant and direct assistance payments. that the  recipient individuals or entities, including key officials, own or receive. Tax Compliance: Thousands of Organizations Exempt from Federal  Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. Internal Revenue Service: Procedural Changes Could Enhance Tax  Collections.
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. 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.