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, and over 100,000 businesses  currently owe for more than 2 years (8 quarters) of payroll taxes. 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

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. 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 lifestyle. In total, IRS records indicate that 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 that 18 business owners/officers were found by  IRS to be responsible for not paying the payroll taxes for over 12 separate  businesses. First, allowing businesses to continue to  not remit payroll taxes affects the general public’s perception regarding  the fairness of the tax system, a perception that may result in lower overall  compliance. The  recommendations include (1) developing a process and performance  measures to monitor collection actions taken by revenue officers against  egregious payroll tax offenders and (2) developing procedures to more  timely file notice of federal tax liens against egregious businesses and  assess penalties to hold responsible parties personally liable for not  remitting withheld payroll taxes.
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 and 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 non-payment 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.