This is the accessible text file for GAO report number GAO-08-617 
entitled 'Tax Compliance: Businesses Owe Billions in Federal Payroll 
Taxes' which was released on July 29, 2008.

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

On December 19, 2008, the PDF file was revised to correct table 1 on page 
24 of the report and accompanying text on page 15, 23-24, and 26. The number 
of businesses with over 20 quarters of payroll tax debt as of September 
30, 2007, changed from 14,681 to 10,083, and the percentage increase changed 
from 174 to 88. The number of businesses with over 40 quarters of payroll tax 
debt as of September 30, 2007, changed from 490 to 169, and the percentage 
increase changed from 470 to 97. 

Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

July 2008: 

Tax Compliance: 

Businesses Owe Billions in Federal Payroll Taxes: 

GAO-08-617: 

GAO Highlights: 

Highlights of GAO-08-617, a report to Congressional Committees. 

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. 

Table: Examples of Tax-Related Abusive and Potentially Criminal 
Activity: 

Business: Construction; 
Unpaid payroll taxes: Almost $2.5 million over 12 years; Activity: 
Potential illegal check kiting and money laundering. 

Business: Health care; 
Unpaid payroll taxes: Almost $2.5 million over 7 years; Activity: 
Officers took large cash withdrawals prior to filing bankruptcy 
multiple times. 

Business: Dentist; 
Unpaid payroll taxes: Over $500,000 over 10 years; Activity: Owner owed 
over $500,000 in personal taxes, put property in spouse's name, and 
sold property to children for less than market value. 

Sources: GAO analysis of IRS, public, and other records. 

[End of table] 

What GAO Recommends: 

GAO makes six recommendations to IRS to address issues identified in 
this report, including development of (1) processes and performance 
measures to monitor collection actions against egregious payroll tax 
offenders and (2) procedures to timely file tax liens and assess 
penalties to hold responsible parties personally liable for not 
remitting withheld payroll taxes. IRS agreed to our recommendations. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-617]. For more 
information, contact Steven J. Sebastian at (202) 512-3406 or 
sebastians@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

A Significant Number of Businesses Are Not Paying Billions of Dollars 
of Payroll Taxes: 

IRS's Collection Approach Does Not Always Prevent the Accumulation of 
Unpaid Payroll Taxes: 

Businesses Engaged in Abusive and Potentially Criminal Activity Related 
to the Federal Tax System: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Businesses with Unpaid Payroll Taxes: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Changes In Payroll Tax Debt, 1998 to 2007: 

Table 2: Number of Individuals with Trust Fund Recovery Penalties for 
Two or More Businesses: 

Table 3: Businesses That Fail To Remit Payroll Taxes: 

Table 4: Businesses That Fail To Remit Payroll Taxes: 

Figures: 

Figure 1: Types of Business Taxes Owed: 

Figure 2: Summary of Payroll Tax Debt Categorized by Number of Tax 
Quarters Outstanding: 

Figure 3: Summary of Payroll Tax Debt by Tax Year: 

Figure 4: Breakdown of Components of Payroll Taxes by the Amount of 
Unpaid Interest, Tax, and Penalties (dollars in billions): 

Figure 5: Summary of Unpaid Payroll Taxes by Related Industry (dollars 
in billions): 

Figure 6: Summary of Payroll Tax Debt by Collection Status (dollars in 
billions): 

Figure 7: Summary of Payroll Taxes Considered Currently Not Collectible 
(dollars in billions): 

Figure 8: Summary of Outstanding Payroll Tax Debt by Year of Statutory 
Collection Period Expiration (dollars in billions): 

Abbreviations: 

ACS: Automated Collection System: 

FICA: Federal Insurance Contribution Act: 

IRC: Internal Revenue Code: 

IRM: Internal Revenue Manual: 

IRS: Internal Revenue Service: 

NAIC: North American Industry Classification: 

RRA: Restructuring and Reform Act of 1998: 

TIGTA: Treasury Inspector General for Tax Administration: 

TFRP: Trust Fund Recovery Penalty: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

July 25, 2008: 

Congressional Committees: 

The operations of the Internal Revenue Service (IRS) potentially impact 
the lives of every American and are critical to the fiscal well being 
of the federal government. IRS's taxpayer service and enforcement 
efforts generate 96 percent of the federal revenue for the United 
States government. In 2007, IRS processed over 230 million tax returns 
and collected over $2.7 trillion in taxes. Although the majority of 
businesses and individuals voluntarily comply with the nation's tax 
laws, many do not. For those that do not, IRS's enforcement programs 
collected over $40 billion in taxes from businesses and individuals in 
2007. In spite of these efforts, IRS has a significant gap between what 
taxpayers should pay and what IRS actually collects. IRS estimates that 
the annual net tax gap--the amount of taxes that go unidentified and 
uncollected each year--amounts to nearly $300 billion. 

One of the elements of this tax gap is unpaid payroll taxes. Payroll 
taxes are amounts employers withhold from employee's wages for federal 
income taxes, Social Security, and Medicare, as well as the employer's 
mandatory matching contributions for Social Security and Medicare 
taxes. In our previous reports and in related testimonies on federal 
contractors with tax debt,[Footnote 1] we reported that tens of 
thousands of federal contractors were not paying billions of dollars in 
taxes owed and that most of those contractors had failed to remit to 
the government amounts they had withheld from their employees' salaries 
to satisfy their tax obligations. The willful failure to remit payroll 
taxes is a felony under federal law.[Footnote 2] Due to the continuing 
significance of this issue, you asked us to review IRS's overall 
approach to the prevention and collection of unpaid payroll taxes. 

The specific objectives of this report were to determine (1) the 
magnitude of unpaid federal payroll tax debt, (2) the factors affecting 
IRS's ability to enforce compliance or pursue collections against 
businesses with unpaid payroll taxes, and (3) whether some businesses 
with unpaid payroll taxes are engaged in abusive[Footnote 3] or 
potentially criminal activities with regard to the federal tax system. 

To meet our objectives, we analyzed IRS's database of unpaid taxes as 
of September 30, 2007, to determine the magnitude of unpaid payroll 
taxes and to identify, to the extent possible, owners or officers who 
repeatedly abused the tax system by not remitting withheld payroll 
taxes. To determine IRS's procedures to prevent the accumulation of 
unpaid payroll taxes and to collect such taxes, we reviewed IRS's 
policies as laid out in its Internal Revenue Manual (IRM) and discussed 
those policies and procedures with cognizant IRS officials and revenue 
officers. We reviewed a sample of 76 businesses whose owners IRS found 
personally liable for the failure to remit payroll taxes withheld from 
employees' paychecks.[Footnote 4] Although the sample was selected as a 
part of our audit of IRS's fiscal year 2007 financial statements, for 
the purposes of this report we reviewed those cases to identify the 
timeliness of IRS's collection actions.[Footnote 5] To further review 
IRS's collection actions, we also performed a macro-analysis of IRS's 
overall inventory of unpaid tax debts. Finally, to determine whether 
businesses with unpaid payroll taxes were engaged in abusive or 
potentially criminal activities with regard to the federal tax system, 
we reviewed documentation on IRS's collection actions and discussed the 
appropriateness of those actions or the absence of actions with IRS 
revenue officers for 50 businesses selected as case studies. See 
appendix I for more detailed information on the scope and methodology 
of our work. The results of 12 of the 50 case studies we audited are 
shown in table 3. The results of the other 38 case studies are included 
in appendix II. 

We conducted this performance audit from April 2007 through May 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

While most businesses fulfill their fiduciary responsibility to the 
government to withhold taxes from their employee's salaries, make 
matching contributions, and remit these sums to the government, a 
significant number do not. As of September 30, 2007, IRS's records 
showed that over 1.6 million businesses owed over $58 billion in unpaid 
payroll taxes, including interest and penalties. Of that amount, 70 
percent of all unpaid payroll taxes are owed by businesses with more 
than a year (4 tax quarters) of unpaid federal payroll taxes, and over 
a quarter of unpaid payroll taxes were owed by businesses that 
accumulated tax debt for more than 3 years (12 tax quarters). Because 
unpaid payroll taxes include amounts owed for Social Security and 
Hospital Insurance (Medicare Part A) taxes,[Footnote 6] the federal 
government may have to transfer higher amounts from the General Fund to 
the Social Security and Hospital Insurance Trust Funds to make up for 
the amounts businesses fail to remit. IRS estimated that for the tax 
debt it had in its inventory of unpaid assessments as of November 1, 
2007, the General Fund had transferred $44 billion to the trust funds 
over what IRS collected. 

IRS has a number of powerful tools at its disposal to prevent the 
accumulation of unpaid taxes and to collect the taxes that are owed. 
However, IRS acknowledges that its traditional collection methods do 
not always bring taxpayers into compliance and that there is a major 
compliance problem regarding the large number of businesses that 
repeatedly do not remit payroll taxes. In reviewing IRS's collection 
actions for egregious payroll tax offenders, we identified several 
issues that limit the effectiveness of IRS's current approach. 

* IRS's overall approach to collection focuses primarily on gaining 
voluntary compliance, which can allow egregious payroll tax offenders 
to continue to accumulate payroll tax debt for years that may never be 
collected. 

* IRS is not timely filing liens. Our analysis of IRS's inventory of 
unpaid payroll tax cases as of September 30, 2007, found that for over 
a third of all businesses with unpaid payroll taxes assigned to the 
field, IRS had not filed a lien. Over 80 percent of payroll cases in 
the queue awaiting assignment did not have a lien filed. Circumstances 
may not warrant a lien being filed in all cases, such as when 
businesses are highly leveraged or have few tangible assets. However, 
for cases in which IRS has not filed a lien, the government's interest 
in the tax debtor's property is not protected. 

* IRS is not timely assessing penalties to individuals responsible for 
not remitting business's payroll tax debts. IRS has a powerful tool to 
hold responsible owners and officers personally liable for withheld 
payroll taxes--a Trust Fund Recovery Penalty (TFRP). We found that, in 
a sample of 76 TFRP assessments, it took IRS over 40 weeks, on average, 
to decide to pursue collection against responsible owners/officers and 
an additional 40 weeks to actually assess the TFRP. Delays in assessing 
a TFRP can result in lost opportunities to collect unpaid payroll tax 
debts from the owners/officers while allowing them to continue to use 
the business to fund a personal lifestyle through the non-remittance of 
payroll taxes. We also found that IRS does not place as high a priority 
on collection efforts against the responsible owners/officers as it 
does the business, and treats the TFRP as a separate collection effort 
unrelated to the business. 

* IRS actions do not always prevent egregious payroll tax offenders 
from accumulating additional unpaid payroll tax debt. 

* IRS does not have performance measures to establish goals related to 
the collection and prevention of unpaid payroll taxes and to track its 
actual performance against these goals. 

Further, we found that some states have additional tools they use to 
collect unpaid taxes at the state level and to help prevent the further 
accumulation of these unpaid taxes. 

* Publishing tax debtor names: An increasing number of states-- 
currently around 19 and the District of Columbia--now publish the names 
of tax debtors on Web sites as a means of both collecting unpaid taxes 
and stopping the further accumulation of these taxes. Currently, IRS is 
prohibited by law from publicly disclosing names of tax debtors in this 
manner. 

* Identifying levy sources: Several states have initiated legislation 
or entered into agreements with financial institutions to match account 
information against tax debts, allowing states to more easily identify 
levy sources to aid in the collection of unpaid taxes. 

Our analysis and data mining of IRS tax records indicated that some 
businesses were involved in abusive or potentially criminal activity 
related to the tax system. 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 3 or more businesses, and 18 had been found responsible for 
not remitting payroll taxes for 12 different businesses. We selected 50 
businesses with payroll tax debt as case studies. Our analysis of those 
businesses showed some owners/officers abuse the tax system, willfully 
diverting amounts withheld from their employees' salaries to fund their 
business operations or their own personal lifestyle. For example, the 
owner of one of our case study businesses that owed almost $2.5 million 
was under-reporting their personal income and was involved in possible 
check kiting and money laundering. Another had accumulated almost $2.5 
million in unpaid payroll taxes and made large cash withdrawals prior 
to filing bankruptcy multiple times. A third had accumulated over 
$500,000 in unpaid payroll taxes over a 10-year period as well as 
another $500,000 in personal taxes. The owner had put property in a 
spouse's name and sold property to children for less than market value 
to avoid IRS collection action. 

To address the issues identified in this report, we are making six 
recommendations to the Commissioner of IRS. Five of those 
recommendations are for IRS to review or revise its collection policies 
to provide better monitoring or more detailed guidance on collection 
actions to be taken against egregious payroll tax offenders and to 
strengthen its existing collection tools. We are also recommending that 
IRS work with states to develop ways of more effectively identifying 
potential levy sources. In comments on a draft of this report, IRS 
concurred with all six of our recommendations and agreed that all 
appropriate tools must be used to bring payroll tax offenders into 
compliance. Specifically, IRS agreed to evaluate its existing practices 
and determine appropriate changes. IRS also said it would work with the 
states that are matching financial institution accounts to tax debt to 
identify levy sources to determine whether a similar program in IRS 
would be cost effective and consistent with privacy laws. 

See the "Agency Comments and Our Evaluation" section of this report for 
a more detailed discussion of agency comments. We have reprinted IRS's 
written comments in appendix III. 

Background: 

In its role as the nation's tax collector, IRS is responsible for 
collecting taxes, processing tax returns, and enforcing the nation's 
tax laws. Since 1990, we have designated IRS's enforcement of tax laws 
as a governmentwide high-risk area.[Footnote 7] In attempting to ensure 
that taxpayers fulfill their obligations, IRS is challenged on 
virtually every front. IRS's enforcement workload--measured by the 
number of tax returns filed--has continually increased, while the 
number of staff dedicated to collections has not. 

As of September 30, 2007, IRS's master file database of taxpayer 
accounts reflected about $282 billion in outstanding taxes owed by 
businesses and individuals.[Footnote 8] This amount understates the 
true cumulative amount of unpaid taxes. For example, IRS has a 
statutory limitation on the length of time it can pursue unpaid taxes, 
generally 10 years from the date of the assessment.[Footnote 9] After 
that period, IRS removes the tax debt from its records. Additionally, 
the amount of unpaid taxes is understated because many tax debts go 
unidentified and unrecorded on IRS's tax records due to non-filing or 
underreporting of tax liabilities. These unidentified and uncollected 
taxes are part of IRS's estimate of the annual tax gap. Therefore, the 
true cumulative amount of unpaid taxes would be far higher than $282 
billion. 

The amount of unpaid taxes ranges from small amounts owed by 
individuals for a single tax period[Footnote 10] to millions of dollars 
owed by businesses over multiple periods. For businesses, the taxes 
owed include corporate income, estate, excise, and payroll taxes, as 
shown in figure 1. 

Figure 1: Types of Business Taxes Owed (dollars in billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Types of Business Taxes Owed: 
Payroll: $58 billion (53%); 
Corporate income: $24 billion (22%); 
Estate: $6 billion (6%); 
Unemployment: $4 billion (4%); 
Excise: $3 billion (3%); 
Other: $13 billion (12%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

The total amount of tax debt includes interest and penalties that are 
added to or accumulate on the original taxes owed. 

[End of figure] 

Payroll Taxes: 

Employers are required to withhold from their employees' salaries 
amounts for individual federal income taxes and for Federal Insurance 
Contribution Act (FICA) taxes, which includes Old-Age, Survivors and 
Disability Insurance (Social Security) and Hospital Insurance (Medicare 
Part A) taxes. In 2007, the FICA taxes to be withheld consisted of 6.2 
percent of an employee's gross salary up to $97,500 for Social Security 
taxes and an additional 1.45 percent of the gross salary for hospital 
insurance. Employers are also required to match the amounts withheld 
from an employee's salary for Social Security and hospital insurance 
taxes. Taken together, the amounts withheld from an employee's salary 
for federal individual income and FICA taxes, along with the employer's 
matching portion of FICA taxes, comprise the business's payroll taxes. 
[Footnote 11] 

Employers are generally required to remit payroll taxes periodically 
through the Federal Tax Deposit system. The frequency of those deposits 
depends on the amount of taxes due and the frequency of the employer's 
payroll. Employers must remit payroll taxes either (1) semiweekly if 
their total tax liability is more than $50,000 during a 12-month period 
ending June 30 of the prior year or (2) monthly if their total tax 
liability is $50,000 or less during this same 12-month period. The 
business tax liability is reported to IRS either quarterly on Form 941 
or annually on Form 944. Additionally, employers are required to report 
employees' earnings to the Social Security Administration annually. 

IRS's Payroll Tax Collection Process: 

When a business files a tax return indicating that it owes more in 
payroll taxes than it has deposited, IRS records or assesses the tax 
liability in its systems. IRS can also identify and assess tax 
liabilities through its enforcement efforts, such as its examination or 
nonfiler programs.[Footnote 12] Once payroll tax debt is assessed and 
recorded in its database of unpaid taxes, IRS has a number of 
collection tools at its disposal to attempt to collect from tax debtors 
who do not voluntarily comply with the tax laws. Each case has unique 
aspects and therefore may require varying collection methods. However, 
for payroll tax cases, IRS generally follows a three-step collection 
process. 

* Step 1--Notification of tax debt--Once a business fails to remit 
taxes owed, IRS sends the business a series of notice letters. Business 
tax debt typically stays in the notification phase about 15 weeks. 

* Step 2--Assignment for collection--After tax debt leaves the notice 
phase, it may be placed in a queue awaiting assignment to collection 
personnel. If a tax debtor already has tax debt being worked on by 
collections personnel, it will generally bypass the queue and be 
assigned directly to the collection officer already working to collect 
the other tax debt. When a case leaves the queue and is assigned to the 
field for collections, it is first assigned to a manager. The manager 
has a waiting list of cases held for assignment to individual revenue 
officers. A case may be assigned to the field, but not be actively 
worked on because it is awaiting assignment by the manager. 

* Step 3--Collection actions--IRS pursues collection of taxes owed 
either through direct contact by revenue officers in the field 
(referred to as the collection field function) or through calls and 
correspondence by IRS's Automated Collection System (ACS). 

IRS's ACS process consists primarily of telephone calls to the tax 
debtor through IRS's nationwide network of call centers. ACS generally 
handles less complex and lower priority taxes. Because IRS has 
designated the collection of payroll taxes as one of its top 
priorities, payroll tax cases generally do not go through the ACS 
process. Also, although cases may move through the steps sequentially, 
it is not necessary that they do so. Cases begin in the notice phase, 
but they may enter the queue or field collection repeatedly. 

IRS's Tax Collection Tools: 

IRS has numerous enforcement tools that it can use when businesses fail 
to remit payroll taxes as required. IRS's tools begin with a series of 
letters sent to the business in the notice phase to encourage voluntary 
compliance, which, if not accomplished, can lead to the use of 
increasingly more aggressive or invasive tools, including filing liens 
or seizing business assets, and filing for court-ordered injunctive 
relief. 

Once assigned a tax debt for collection, the revenue officer will seek 
to get full payment from the tax debtor. If the tax debtor is unable to 
pay in full, the revenue officer will seek to get the debtor to agree 
to a repayment plan, either an installment agreement or an offer-in- 
compromise.[Footnote 13] In general, the revenue officer will seek to 
get the tax debtor to become compliant and voluntarily pay the tax debt 
without IRS having to take more intrusive collection actions. In fiscal 
year 2007, IRS collected over $17 billion of all types of taxes from 
almost 3 million tax debtors through installment agreements. 

If, however, a tax debtor fails to agree to voluntarily pay the tax 
debt, the revenue officer can increase the invasiveness of their 
collection efforts and use its three primary tools to achieve 
compliance and tax collection: lien, levy, or seizure. If those are not 
successful at bringing a tax debtor into compliance, in certain 
circumstances, IRS can seek injunctive relief to close a non-compliant 
business or seek criminal prosecution for failing to pay payroll taxes, 
particularly if there are indications of fraud. An overview of each of 
these tools follows. 

Liens: 

Among IRS's tools to collect outstanding taxes is its ability to use 
the property of a taxpayer as security for an outstanding tax debt. 
This is accomplished by filing a notice of federal tax lien. The lien 
serves to protect the interest of the federal government and as a 
public notice to current and potential creditors of the government's 
interest in the taxpayer's property.[Footnote 14] Although the tax lien 
exists under the law even before a notice is filed, the lien is 
perfected when IRS provides notice of its interest by filing the lien 
with a designated office, such as a local courthouse in the county 
where the taxpayer's property is located. If the Service does not file 
a Notice of Federal Tax Lien (NFTL) with a state or local recording 
office where the taxpayer's property is situated, the Government will 
have a more junior position to other creditors who have perfected their 
judgments or security.[Footnote 15] 

IRS reported filing more than 680,000 tax liens in fiscal year 2007. 
[Footnote 16] Since a lien encumbers taxpayer property and because 
federal tax liens appear on commercial credit reports, IRS's ability to 
file a lien is a powerful tool in enforcing the tax laws. Filing a lien 
prevents the taxpayer from selling an asset, with clear title, without 
first paying off the outstanding tax debt.[Footnote 17] 

Levies and Seizures: 

Levies are legal seizures of tax debtors' assets to satisfy tax 
delinquencies.[Footnote 18] A levy is different from a lien in that a 
lien is a claim used as security for the tax debt, while a levy 
actually takes the property to satisfy the tax debt. Generally, IRS is 
authorized to levy property of the tax debtor in the possession of a 
third party, such as bank accounts, federal payments, and wages. 
[Footnote 19] IRS records indicate that it filed over 3.7 million levy 
actions against tax debtors for property held by third parties in 
fiscal year 2007. IRS also may seize and sell real or personal property 
held directly by the tax debtor, such as business assets like business 
equipment, cars, or paintings. However, under reforms put in place 
under the Internal Revenue Service Restructuring and Reform Act of 1998 
(RRA),[Footnote 20] IRS cannot seize assets before determining whether 
the tax debtor has equity in the property subject to seizure. For 
example, if an asset is fully encumbered with commercial loans, IRS may 
not seize the asset. Although IRS records indicate that the number of 
actions to seize and sell assets held by the tax debtor has been 
steadily rising over the past several years, reaching 676 seizure 
actions in fiscal year 2007, the number is far below the over 10,000 
seizure actions taken in 1997 prior to the enactment of RRA.[Footnote 
21] 

Injunctive Relief: 

In addition to actions it can take to collect unpaid taxes, IRS can 
also take action to attempt to stop businesses from continuing to 
accumulate unpaid taxes. One tool IRS has is injunctive relief. 
[Footnote 22] Injunctive relief is a court ordered "prohibition of an 
act." If the act, or practice covered under the court order continues, 
the business can be found in contempt of court, and IRS can force it to 
cease operations. The IRM states that injunctive relief is an 
"extraordinary remedy" used only if previous actions have either been 
exhausted or it would have been futile to continue. Injunctive relief 
can be an important tool for IRS when businesses have no equity and 
therefore are impervious to seizure actions. 

To obtain an injunctive relief order, IRS must demonstrate to the court 
the (1) tax debtor's persistent failure to comply with the law despite 
IRS's repeated efforts to bring the tax debtor into compliance and (2) 
likelihood of future violations (i.e., the tax debtor will continue to 
accumulate tax debt). To gain an injunction, IRS first issues a letter 
to the tax debtor that includes strong language, including threats of 
criminal prosecution for failure to comply.[Footnote 23] The IRM notes 
that before seeking injunctive relief, the revenue officer should 
require the business to (1) file monthly employment tax returns 
(instead of quarterly), (2) establish a separate bank account for 
payroll taxes withheld, and (3) make all payroll tax deposits to that 
account within 2 days of paying employees. 

Criminal Investigations: 

Although the willful failure to remit payroll taxes is a felony, IRS 
generally does not pursue a criminal prosecution unless fraud can be 
determined. In the past, we have reported that some IRS employees 
believe IRS and the District Counsel are reluctant to pursue 
prosecution against even egregious offenders.[Footnote 24] 

Trust Fund Recovery Penalty: 

When businesses withhold funds from an employee's salary for federal 
income taxes and the employee's FICA obligations, they are deemed to 
have a fiduciary responsibility to hold these amounts "in trust" for 
the federal government. To the extent that the business does not 
forward withholdings to the federal government, it is liable for these 
amounts, as well as its matching FICA contribution. Officials of the 
business can also be held personally liable for payment of the withheld 
amounts. 

Under section 6672 of the IRC, individuals who are determined by IRS to 
be responsible for collecting, accounting for, and paying over payroll 
taxes who willfully fail to collect or pay this tax can be assessed a 
TFRP. To show willfulness, IRS must show that the responsible 
individual was aware of the outstanding taxes and either deliberately 
chose not to pay the taxes or recklessly disregarded an obvious risk 
that the taxes would not be paid. It should be noted that the 
deliberate intent or desire to defraud the federal government is not 
necessary for IRS to assess a TFRP. For example, an individual, in a 
business, who is responsible for collecting payroll taxes who decides 
to pay the business's monthly rent payment instead of remitting 
employee withholdings to the federal government, can be found to be 
acting willfully and thus assessed a TFRP. Typically, these responsible 
individuals are owners or officers of a corporation, such as a 
president or treasurer. 

More than one person may be a "responsible individual" under section 
6672, and thus multiple people in the business may be assessed a TFRP. 
The amounts assessed against each individual can vary depending on an 
individual's responsibility to collect payroll taxes and the extent of 
the willful failure to pay over this tax for multiple periods; however, 
each responsible individual can be assessed a TFRP for the total amount 
of the withholdings not paid. Additionally, the business itself is 
still liable for the entire amount of the unpaid payroll taxes. 
However, it has long been IRS's policy to only collect the unpaid tax 
once. For example, if, after IRS assesses a TFRP against an officer of 
a corporation, the business pays the entire balance of the unpaid 
payroll taxes, the officer would no longer be liable for the TFRP 
assessment. Similarly, if two officers are each assessed TFRPs related 
to their business covering the same period of unpaid payroll taxes and 
one of the officers makes a partial payment, the liabilities of both 
officers, as well as the liability of the business, are to be reduced 
by the amount of the payment. 

IRS uses the TFRP as a tool to hold owners and other officials 
associated with a business individually liable for the business's 
failure to remit withheld payroll taxes. As such, the TFRP provides a 
means for IRS to seek collection from those responsible for failing to 
remit the withheld payroll taxes even if the business closes. The TFRP 
may also be used as a compliance tool to deter future non-payment of 
taxes by the business. TFRP assessments are also subject to the 10-year 
statutory collection limitation. 

A Significant Number of Businesses Are Not Paying Billions of Dollars 
of Payroll Taxes: 

Employers are required to withhold from their employees' salaries 
amounts for both individual federal income taxes and FICA taxes, which 
include Social Security and Hospital Insurance taxes.[Footnote 25] 
While the majority of businesses pay the taxes withheld from employees' 
salaries as well as the employer's matching amounts, a significant 
number of businesses do not. 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. The failure 
by businesses to remit payroll taxes results in the loss of revenues to 
the federal government. In addition, it creates a situation in which 
the general revenue fund subsidizes the Social Security and Hospital 
Insurance trust funds to the extent that Social Security and Hospital 
Insurance taxes owed are not collected. Over time, the amount of this 
shortfall, or subsidy, is significant. IRS estimated that the General 
Fund has transferred to the trust funds $44 billion[Footnote 26] over 
what IRS collected in self employment and payroll taxes for the 
inventory of total unpaid taxes on record as of November 1, 2007. The 
estimate does not include an estimate for tax debts that have been 
written off of IRS's tax records in previous years due to expiration of 
the statutory collection period. As a result of the failure of these 
businesses to pay payroll taxes, the compliant taxpayer bears an 
increased burden to fund the nation's commitments. Although IRS has 
made the collection of unpaid payroll taxes one of its top priorities, 
most of the unpaid payroll tax inventory (52 percent, equal to $30 
billion) was classified as currently uncollectible by IRS. While IRS 
has assigned about $7 billion to revenue officers for collection, about 
$9 billion of unpaid payroll taxes are in a queue awaiting assignment. 
Our analysis of the unpaid payroll tax inventory shows that the number 
of businesses with more than 20 quarters of tax debt (5 years of unpaid 
payroll tax debt) almost doubled between 1998 and 2007. Because IRS 
is statutorily limited in the length of time it has to collect unpaid 
taxes--generally 10 years from the date the tax debt is assessed--the 
federal government will lose its right to collect billions of dollars 
in payroll taxes each year if IRS does not obtain payment from tax 
debtors before the statutory period for collection expires. 

Magnitude of Unpaid Payroll Tax Debt: 

Of the $282 billion in cumulative, identified, unpaid taxes owed to the 
federal government as of September 30, 2007, IRS records show that over 
$58 billion (over 20 percent) is owed for unpaid payroll taxes. This 
total includes amounts, earned by employees, that were withheld from 
their salaries to satisfy their tax obligations, as well as the 
employers' matching amounts, but which the business diverted for other 
purposes. Over 1.6 million businesses have unpaid payroll tax debt. 
Many of these businesses repeatedly failed to remit amounts withheld 
from employees' salaries. 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). Figure 2 shows the total dollar amount of payroll tax debt 
summarized by the number of unpaid payroll tax quarters outstanding. 

Figure 2: Summary of Payroll Tax Debt Categorized by Number of Tax 
Quarters Outstanding (dollars in billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Tax Debt Categorized by Number of Tax Quarters 
Outstanding: 
1-4 quarters: $18 billion (30%); 
5-8 quarters: $15 billion (25%); 
9-12 quarters: $10 billion (17%); 
13-20 quarters: $10 billion (18%); 
21-40 quarters: $5 billion (9%); 
More than 40 quarters: less than $1 billion (1%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Much of the unpaid payroll tax debt has been outstanding for several 
years. As reflected in figure 3, our analysis of IRS records shows that 
over 60 percent of the unpaid payroll taxes was owed for tax periods 
from 2002 and prior years.[Footnote 27] 

Figure 3: Summary of Payroll Tax Debt by Tax Year (dollars in 
billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Tax Debt by Tax Year: 
Prior to 1997: $6 billion (10%); 
1997-2002: $29 billion (51%); 
2003 to 2006: $21 billion (35%); 
Tax year 2007: $2 billion (4%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Prompt collection action is vital because, as our previous work has 
shown, as unpaid taxes age, the likelihood of collecting all or a 
portion of the amount owed decreases.[Footnote 28] Further, the 
continued accrual of interest and penalties on the outstanding federal 
taxes can, over time, eclipse the original tax obligation. Figure 4 
shows that over half of the unpaid payroll taxes owed is for interest 
and penalties on the original tax debt. 

Figure 4: Breakdown of Components of Payroll Taxes by the Amount of 
Unpaid Interest, Tax, and Penalties (dollars in billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Breakdown of Components of Payroll Taxes by the Amount of Unpaid 
Interest, Tax, and Penalties: 
Taxes: $26 billion (46%); 
Interest: $18 billion (30%); 
Penalties: $14 billion (24%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Using IRS's database of unpaid taxes, we were able to identify many of 
the industry types associated with businesses owing payroll taxes. 
Figure 5 presents the major industries with outstanding unpaid payroll 
taxes according to IRS records.[Footnote 29] 

Figure 5: Summary of Unpaid Payroll Taxes by Related Industry (dollars 
in billions): 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Industry: Construction; 
Unpaid payroll taxes: $8.6 billion. 

Industry: Professional Services; 
Unpaid payroll taxes: $4.4 billion. 

Industry: Health Care; 
Unpaid payroll taxes: $4 billion. 

Industry: Manufacturing; 
Unpaid payroll taxes: $3.7 billion. 

Industry: Sales; 
Unpaid payroll taxes: $3.6 billion. 

Industry: Administrative and Waste Services; 
Unpaid payroll taxes: $3.6 billion. 

Industry: Other Services; 
Unpaid payroll taxes: $2.7 billion. 

Industry: Accommodation and Food Services; 
Unpaid payroll taxes: $2.6 billion. 

Industry: Transportation and Warehousing; 
Unpaid payroll taxes: $2.1 billion. 

Industry: Other; 
Unpaid payroll taxes: $4.3 billion. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

Unpaid Payroll Taxes Result in the General Fund Subsidizing Social 
Security and Hospital Insurance Trust Funds: 

When businesses fail to remit taxes withheld from employees' salaries, 
the payroll tax receipts are then less than the payroll taxes due, and 
the Social Security and Hospital Insurance trust funds will have less 
financial resources available to cover current and future benefit 
payments. However, the trust funds are funded based on wage estimates 
and not actual payroll tax collections. Therefore, the General Fund 
transfers to the trust funds amounts that should be collected but are 
not necessarily collected, resulting in the General Fund subsidizing 
the trust funds for amounts IRS is unable to collect. As of November 1, 
2007, IRS estimated that the amount of unpaid taxes and interest 
attributable to Social Security and hospital insurance taxes in IRS's 
$282 billion unpaid assessments balance was approximately $44 billion. 
[Footnote 30] This estimate represents a snapshot of the amount that 
needed to be provided to the Social Security and Hospital Insurance 
trust funds based on the outstanding tax debt on IRS's books at the 
time. It does not include an estimate for tax debts that have been 
written off of IRS's tax records in previous years due to expiration of 
the statutory collection period.[Footnote 31] Recent IRS data indicate 
that the shortfall is about $2 billion to $4 billion annually due to 
uncollected payroll taxes. 

Collection Status of Payroll Tax Debt: 

Of the $58 billion in unpaid payroll taxes as of September 30, 2007, 
IRS categorized about $4 billion as going through IRS's initial 
notification process. The notification process results in significant 
collections, particularly with respect to generally compliant taxpayers 
who respond to the notices by paying off the outstanding taxes owed or 
entering into installment agreements to pay off the tax debt over time. 
IRS records indicate that over half of all unpaid tax collections 
result from the notification process. Because IRS has made the 
collection of payroll taxes one of its highest priorities, once a case 
completes the notification process, it is generally sent to IRS's field 
collections staff for face-to-face collection action. However, IRS does 
not have sufficient resources to immediately begin collection actions 
against all of its high-priority cases. As a result, IRS holds a large 
number of cases in a queue awaiting assignment. Of the $54 billion in 
unpaid payroll taxes that had completed the notification process, about 
$7 billion was being worked on by IRS revenue officers for collection 
and about $9 billion was in a queue awaiting assignment for collection 
action. Most of the unpaid payroll tax inventory was classified as 
currently uncollectible by IRS. As shown in figure 6, IRS considered 
$30 billion--52 percent of all payroll tax debt--to be currently not 
collectible. 

Figure 6: Summary of Payroll Tax Debt by Collection Status (dollars in 
billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Tax Debt by Collection Status: 
Currently not collectible: $30 billion (52%); 
Queue: $9 billion (16%); 
Field collections: $7 billion (12%); 
Notice: $4 billion (7%); 
Bankruptcy/litigation: $2 billion (3%); 
Other: $6 billion (10%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

IRS classifies tax debt cases as currently not collectible for several 
reasons, including (1) the business owing the taxes is defunct, 
[Footnote 32] (2) the business is insolvent after bankruptcy, or (3) 
the business is experiencing financial hardship. As shown in figure 7, 
of those unpaid payroll tax cases IRS has classified as currently not 
collectible, almost two-thirds were as a result of a business being 
defunct. 

Figure 7: Summary of Payroll Taxes Considered Currently Not Collectible 
(dollars in billions): 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Summary of Payroll Taxes Considered Currently Not Collectible: 
Defunct: $20 billion (66%); 
Insolvent (post-bankruptcy): $4 billion (13%); 
Hardship: $2 billion (7%); 
In-business: $2 billion (7%); 
Other: $2 billion (7%). 

Source: GAO analysis of IRS data as of September 30, 2007. 

Note: The category "In-business" generally refers to a business that 
IRS deems does not have the resources to pay taxes owed and therefore 
no further collection will be attempted. Similarly, primarily for sole 
proprietors, if IRS determines the owner is financially unable to pay 
taxes, it categorizes both the owner's personal account and the related 
business as being in financial hardship so that no further collection 
action is taken against them until their financial condition improves. 
The "other" designation includes cases in which IRS has been unable to 
locate or contact the business owing the payroll tax debt. 

[End of figure] 

Although IRS has taken a number of steps to improve collections by 
prioritizing cases with better potential for collectibility, the 
collection of payroll taxes remains a significant problem for IRS. From 
1998, when we performed our last in-depth review of payroll taxes, 
[Footnote 33] to September 2007, we found that while the number of 
businesses with payroll tax debt decreased from 1.8 million to 1.6 
million, the balance of outstanding payroll taxes in IRS's inventory of 
tax debt increased from about $49 billion to $58 billion. Our analysis 
of the unpaid payroll tax inventory shows that the number of businesses 
with more than 20 quarters of tax debt (5 years of unpaid payroll tax 
debt) almost doubled between 1998 and 2007, from just over 5,000 
businesses in 1998 to over 10,000 as of September 30, 2007. The number 
of businesses that had not paid payroll taxes for over 40 quarters (10 
years or more) during this period also almost doubled, from 86 
businesses to 169 businesses. These figures are shown in table 1. 

Table 1: Changes In Payroll Tax Debt, 1998 to 2007: 

Businesses with over 20 quarters of payroll tax debt; 
As of September 30, 1998: 5,367; 
As of September 30, 2007: 10,083; 
Percentage increase: 88. 

Businesses with over 40 quarters of payroll tax debt; 
As of September 30, 1998: 86; 
As of September 30, 2007: 169; 
Percentage increase: 97. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of table] 

As discussed previously, IRS is statutorily limited in the length of 
time it has to collect unpaid taxes--generally 10 years from the date 
the tax debt is assessed.[Footnote 34] Once that statutory period 
expires, IRS can no longer attempt to collect the tax. IRS records 
indicate that over $4 billion of unpaid payroll taxes will expire in 
each of the next several years due to this statutory period. Figure 8 
shows the amount of unpaid payroll taxes that will statutorily expire 
and be written off by IRS over the next several years if IRS is unable 
to collect the taxes. 

Figure 8: Summary of Outstanding Payroll Tax Debt by Year of Statutory 
Collection Period Expiration (dollars in billions): 

[See PDF for image] 

This figure is a vertical bar graph depicting the following data: 

Summary of Outstanding Payroll Tax Debt by Year of Statutory Collection 
Period Expiration: 

Collection status expiration date: 2008; 
Outstanding Payroll Tax Debt: $4.2 billion. 

Collection status expiration date: 2009; 
Outstanding Payroll Tax Debt: $4.3 billion. 

Collection status expiration date: 2010; 
Outstanding Payroll Tax Debt: $4.2 billion. 

Collection status expiration date: 2011; 
Outstanding Payroll Tax Debt: $4.6 billion. 

Collection status expiration date: 2012; 
Outstanding Payroll Tax Debt: $5.1 billion. 

Collection status expiration date: 2013; 
Outstanding Payroll Tax Debt: $4.7 billion. 

Collection status expiration date: 2014; 
Outstanding Payroll Tax Debt: $4.6 billion. 

Collection status expiration date: 2015; 
Outstanding Payroll Tax Debt: $5.1 billion. 

Collection status expiration date: 2016; 
Outstanding Payroll Tax Debt: $5.9 billion. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of figure] 

As figure 8 indicates, the federal government will lose its right to 
collect billions of dollars in payroll taxes each year if IRS does not 
obtain payment from tax debtors before the statutory period for 
collection expires.[Footnote 35] 

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. Foremost is that IRS's approach 
focuses on getting businesses--even those with dozens of quarters of 
payroll tax debt--to voluntarily comply. We found IRS often either did 
not use certain collection tools, such as liens or TFRPs, or did not 
use them timely, and that IRS's approach does not treat the business's 
unpaid payroll taxes and responsible party's penalty assessments as a 
single collection effort. Additionally, although unpaid payroll taxes 
are one of their top collection priorities, IRS did not have 
performance measures to evaluate the collection of unpaid payroll taxes 
or the related TFRP assessment. Finally, we found some state revenue 
agencies are using tools to collect or prevent the further accumulation 
of unpaid taxes that IRS is either legally precluded from using or 
which it has not yet developed. 

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. Those tools include the ability to 
file liens on a tax debtor's property, levy available funds from bank 
accounts and other financial sources, and seize and sell property owned 
by the tax debtor to help satisfy the tax debt. However, even with such 
tools, we found that some businesses continued to accumulate payroll 
tax debt for dozens of tax quarters. This is partly because IRS's 
approach to collection focuses first on gaining voluntary compliance, 
even for more egregious payroll tax offenders. IRS acknowledges that in 
some instances its collection methods do not bring taxpayers into 
compliance. 

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.[Footnote 36] Our audit of businesses 
with payroll tax debt and our analysis of businesses with multiple 
quarters of unpaid payroll taxes again found revenue officers 
continuing to work with a business to gain voluntary compliance while 
the business continued to accumulate unpaid payroll taxes. As discussed 
earlier, our analysis of IRS's inventory of unpaid payroll taxes found 
that over 10,000 businesses owed payroll taxes for 20 or more quarters-
-5 years or more. 

One of our case studies illustrates the extent to which unpaid payroll 
taxes can accumulate using a voluntary compliance approach for unpaid 
payroll taxes. In this case, the business was opened in 1994, after its 
owner closed a similar business that owed payroll taxes. From its 
inception, the case study business was not compliant with tax laws, 
making some tax payments, but not filing any of the required tax 
returns. In July 1999, IRS identified that the business was not filing 
its required payroll tax returns and assigned the case to a revenue 
officer for investigation. After working with the business for 5 
months, the revenue officer secured 22 quarters of delinquent payroll 
tax returns. Those returns indicated a total tax debt, including 
interest and penalties, of almost $500,000. In March 2000, the business 
requested to be put on an installment agreement to repay over time the 
known outstanding taxes it owed. However, the business was not eligible 
for an installment agreement because it was not compliant with its 
filing requirements. The revenue officer worked with the business for 
another 9 months attempting to obtain the financial information needed 
to initiate an installment agreement. Meanwhile, the business continued 
to accumulate unpaid payroll tax debt of about $20,000 each quarter. 
The revenue officer continued to work with the business to gain 
voluntary compliance, but the business did not provide the needed 
financial information until the revenue officer filed levies against 
the business's known bank accounts in early 2001. The levies resulted 
in collections of less than $5,000 toward the unpaid tax debt. After 2- 
1/2 more years, in August 2003, the revenue officer noted that, though 
IRS had been seeking compliance for several years, the business was 
still not compliant with filing requirements, had not provided current 
financial information, and was generally unresponsive. Although the 
revenue officer continued to obtain some delinquent tax returns and 
some payroll tax payments as a result of the officer's efforts, the 
business continued to accumulate additional tax debt. As of July 2007, 
the business had accumulated payroll taxes from over 30 quarters 
totaling almost $1 million, and other taxes, including business income 
taxes, of almost $400,000. Those unpaid taxes stretch back to the 
inception of the business in 1994. Additionally, the business has not 
filed required payroll tax returns since the fourth quarter of 2004-- 
potentially accruing a quarter million dollars in additional unpaid 
payroll tax debt. 

Failing to take more aggressive collection actions against businesses 
that repeatedly fail to remit payroll taxes has a broader impact than 
on just a single business. If left to accumulate unpaid payroll taxes, 
businesses gain an unfair business advantage over their competitors at 
the expense of the government. As we have found previously,[Footnote 
37] in at least one of our case study businesses, IRS determined that 
the non-compliant business obtained contracts through its ability to 
undercut competitors due in part to the business's reduced costs 
associated with its non-payment of payroll taxes. Similarly, in another 
case the revenue officer noted that the business was underbidding on 
contracts and was using unpaid payroll taxes to offset the business's 
losses. 

Failure to take prompt actions to prevent the further accumulation of 
unpaid payroll taxes can also have a detrimental impact on the business 
and the associated owners/officers. As we have reported in the past, 
non-compliant businesses can accumulate substantial unpaid taxes as 
well as associated interest and penalties.[Footnote 38] Over time, 
these unpaid balances may compound beyond the business's ability to 
pay--ultimately placing the business and responsible officers in 
greater financial jeopardy. 

It should be noted that IRS is legally precluded from taking collection 
actions during certain periods, such as when a tax debtor is involved 
in bankruptcy proceedings. During those periods, even though IRS may 
not be able to take collection actions, tax debtors may continue to 
accumulate additional tax debt. However, IRS's focus on voluntary 
compliance has negatively affected IRS's collection efforts for years. 
Our current findings on IRS's focus on voluntary compliance are similar 
to those of the Treasury Inspector General for Tax Administration 
(TIGTA) in a study from 8 years ago. In its 2000 study, TIGTA found 
that revenue officers were focused on IRS's customer service goals and 
therefore were reluctant to take enforcement actions. As a result, they 
continued to work with tax debtors to gain voluntary payment rather 
than using more aggressive enforcement tools such as levies or 
seizures. TIGTA found that in 116 cases they reviewed, revenue officers 
did not file a lien, issue a summons, or levy or seize assets in almost 
a third of the cases. Revenue officers considered seizing assets in 
just 3 of the 116 cases, but actually seized assets in just 1 case. 
[Footnote 39] TIGTA also reported that as a result of IRS not taking 
effective collection actions, the cases (while under review by TIGTA) 
accrued more unpaid taxes while assigned to revenue officers than the 
revenue officers were able to collect. Again in 2005, TIGTA reported 
that IRS allowed tax debtors to continue to delay taking action on 
their tax debt by failing to take aggressive collection actions. 
[Footnote 40] TIGTA found that IRS did not take timely follow-up action 
for half of the cases for which tax debtors missed specific deadlines. 

IRS has recently strengthened its IRM to include some specific steps 
for dealing with businesses that repeatedly fail to remit payroll taxes 
and to stress the importance of preventing the further accumulation of 
unpaid payroll taxes. The revised IRM advises revenue officers to take 
all appropriate remedies to bring the tax debtor into compliance and 
that they should consider seizing assets and pursuing TFRP assessments 
against responsible parties. It is important for IRS to support 
taxpayers in remaining compliant and to facilitate businesses becoming 
compliant; however, having a primary focus on voluntary compliance can 
lead to delays in taking stronger actions against flagrant tax debtors 
who refuse to comply with the tax laws and accumulate dozens of 
quarters of payroll tax debt. Having a reticence to use enforcement 
tools may, over time, actually diminish voluntary compliance and 
collections. IRS's guidance states that businesses that fail to comply 
with the tax law jeopardize the public perception of tax enforcement, 
which has a detrimental effect both on compliance and collections. 

One official from a state taxing authority told us that the state 
benefited from IRS's approach because it allowed the state to collect 
its unpaid taxes from business tax debtors before IRS. In one of our 
case study businesses, although IRS successfully levied some financial 
assets, a mortgage holder and state and local officials seized the 
business's assets to satisfy the business's debts. In another case, IRS 
did not seize assets, but received some collections because local 
officials seized and sold the business owner's house. We noted this 
issue in our previous report on DOD contractors with tax debt.[Footnote 
41] 

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. Our analysis 
indicated that IRS had not filed a lien to protect the government's 
interest in a business property in over 30 percent of all payroll tax 
cases assigned to the field for collection effort. Additionally, our 
review of recent IRS actions to assess TFRPs against owners/officers of 
businesses with payroll tax debt found that revenue officers took 40 
weeks on average to determine that a TFRP should be assessed and an 
additional 40 weeks on average to actually assess the penalty. 

Failure to take timely action to file liens or assess TFRPs has been a 
long-standing problem. In 2005, TIGTA reported that IRS's revenue 
officers often failed to take timely collection actions on payroll tax 
cases and concluded that not taking timely and aggressive collection 
actions on cases allowed businesses to continue to accumulate unpaid 
payroll taxes.[Footnote 42] IRS's own analysis of TFRP assessments, 
also done in 2005, found that less than half of all TFRP cases had a 
lien filed to protect the interest of the government.[Footnote 43] 

IRS Does Not Always File Tax Liens Timely: 

Our audit found that for payroll tax debt, one of its highest 
collection priorities, IRS does not always file liens to protect the 
government's interest in property and, when it does so, it does not 
always do so timely. Our analysis of IRS's inventory of unpaid payroll 
taxes as of September 30, 2007, found that IRS had not filed liens on 
over one-third of all businesses with payroll tax debt cases assigned 
to the field for collection efforts - over 140,000 businesses. IRS 
guidance states that filing a lien is extremely important to protect 
the interests of the federal government, creditors, and taxpayers in 
general, and that the failure to file and properly record a federal tax 
lien may jeopardize the federal government's priority right against 
other creditors.[Footnote 44] 

The ability to file a tax lien in the public records is a powerful tool 
for IRS. The lien appears on credit reports for both individuals and 
businesses and can stay there for approximately 10 years. For an 
individual, the presence of a tax lien can make it more difficult to 
obtain credit, in turn making it more difficult to buy a home, rent an 
apartment, or buy a car. Tax debtors that are able to get credit may 
have to pay higher credit rates. For businesses, the presence of a tax 
lien can result in a creditor no longer shipping inventory unless paid 
for by cash and banks withdrawing lines of credit. This can ultimately 
cause businesses to fail. Lien filing may also increase the likelihood 
of collection by IRS. The 2005 IRS study of TFRP cases found that cases 
where a lien had been filed had more average payments--about a third 
more--than where a lien had not been filed.[Footnote 45] 

Although the IRM does not explicitly state that liens should be filed, 
it does emphasize the need to do so to protect the interest of the 
federal government. Because businesses may be highly leveraged or have 
few tangible assets, the filing of a lien may not always be 
advantageous to the government; other situations may also make it 
counterproductive to file a lien. The IRM does allow revenue officers 
to not file a lien in order to allow a business to obtain a loan or to 
otherwise continue operating so that the business may become compliant 
and pay the past due tax debt. However, failure to file a lien can have 
a negative impact on tax collections. For example, IRS assessed the 
business owner in one of our case studies a TFRP to hold the owner 
personally liable for the withheld payroll taxes owed by the business. 
However, IRS did not assign the assessment to a revenue officer for 
collection, and thus did not file a Notice of Federal Tax Lien on the 
owner's property. Because there was no lien filed, the owner was able 
to sell a vacation home in Florida and IRS did not collect any of the 
unpaid taxes from the proceeds of the sale. 

As in the case above, IRS's case assignment policy can delay the filing 
of liens for payroll tax cases. Because payroll tax cases are one of 
IRS's top collection priorities, once the notification process is 
complete, IRS bypasses its ACS process and routes these cases to 
revenue officers for collection. However, IRS generally must place 
cases in a queue until a revenue officer is available to work the 
cases. Cases can be in the queue for extended periods of time awaiting 
assignment. For the period that a case is in the queue, revenue 
officers are not assigned to file liens and take other collection 
actions.[Footnote 46] Our analysis found that for the $9 billion of 
payroll tax cases in the queue awaiting assignment as of September 30, 
2007, over 80 percent of the cases did not have a lien filed. As a 
result, lower priority tax cases that go through the ACS process may 
have liens filed faster than the higher priority payroll tax cases. 

IRS has been aware of this issue. Its own study in 2005 found less than 
half of payroll tax cases in which IRS assessed the business owner or 
officer a TFRP had a lien filed to protect the interest of the 
government, and only 27 percent of TFRP assessments that were under a 
year old had a lien filed. As the previously discussed case study 
illustrates, the timeliness of lien filing is critical in such cases to 
protect the government's interest in the owner's personal property and 
to encourage the owners/officers to make the business compliant. 

IRS is taking some steps to address these issues. For example, IRS is 
investigating the feasibility of routing payroll tax cases that might 
otherwise be sent to the queue through the ACS process to have a lien 
filed. Additionally, in recent years IRS has begun to put in the IRM 
timeliness guidelines for the use of certain collection tools, 
including lien filings. The IRM now calls for revenue officers to make 
a determination to file a lien within 10 days of initial contact. These 
are positive steps which could help improve the timeliness of IRS's 
lien filings in the future. However, while not all cases warrant having 
a lien filed, our analysis has shown that, overall, 60 percent of all 
unpaid payroll tax cases currently in IRS's inventory do not have a 
lien filed to protect the government's interest in tax debtors' 
property. 

IRS Does Not Always Assess Trust Fund Recovery Penalties Timely: 

Although IRS has a powerful tool to hold responsible owners and 
officers personally liable for unpaid payroll taxes through assessing a 
TFRP, we found that IRS often takes a long time to determine whether to 
hold the owners/officers of businesses personally liable and, once the 
decision is made, to actually assess penalties against them for the 
taxes. In reviewing the sample of TFRP assessments selected as part of 
our audit of IRS's fiscal year 2007 financial statements, we found that 
from the time the tax debt was assessed against the business, IRS took 
over 2 years, on average, to assess a TFRP against the business owners/ 
officers.[Footnote 47] We found that revenue officers, once assigned to 
a payroll tax case, took an average of over 40 weeks to decide whether 
to pursue a TFRP against business owners/officers and an additional 40 
weeks on average to formally assess the TFRP.[Footnote 48] For 5 of the 
76 sampled cases, IRS took over 4 years to assess the TFRP. We did not 
attempt to identify how frequently IRS assesses a TFRP against 
responsible owners/officers. However, in TIGTA's 2005 report on its 
review of IRS's collection field function, it noted that for cases 
where a TFRP was applicable, revenue officers did not initiate or 
conduct the interview to begin the TFRP process in over a quarter of 
the cases TIGTA reviewed.[Footnote 49] 

The timely assessment of TFRPs is an important tool in IRS's ability to 
prevent the continued accumulation of unpaid payroll taxes and to 
collect these taxes. Once a TFRP is assessed, IRS can take action 
against both the owners/officers and the business to collect the 
withheld taxes. For egregious cases, such as some of those in our case 
studies, taking strong collection actions against the owners' personal 
assets may be the best way to either get the business to become tax 
compliant or to convince the owners to close the business, thus 
preventing the further accumulation of unpaid taxes. Failure to timely 
assess a TFRP can result in businesses continuing to accumulate unpaid 
payroll taxes and lost opportunities to collect these taxes from the 
owners/officers of the businesses. For example, one business had tax 
debt from 2000, but IRS did not assess a TFRP against the business's 
owner until the end of 2004. In the meantime, the owner was drawing an 
annual salary of about $300,000 and had sold property valued at over 
$800,000. Within 1 month of IRS assessing the TFRP, the owner closed 
the business, which by then had accumulated about $3 million in unpaid 
taxes. [Footnote 50] 

Lack of timeliness in assessing TFRPs has been a long-standing problem 
for IRS. Our annual audit of IRS's financial statements in the late 
1990's identified this problem and we made recommendations for IRS to 
analyze and determine the factors causing delays in both processing and 
recording TFRP assessments. Although IRS has taken many steps to 
improve the timeliness of TFRP assessments, such as centralizing TFRP 
assessment processing and implementing a new Web-based application, 
these actions have not been fully effective in resolving this issue. 
During our audit of IRS's fiscal year 2007 financial statements, we 
continued to find long delays in IRS's processing and posting of TFRP 
assessments.[Footnote 51] 

For most of the time our case study businesses were being worked on by 
revenue officers, the IRM required them to make a determination of 
whether to pursue a TFRP assessment within 180 days--about 26 weeks. 
However, the IRM was silent about how long it should take to actually 
assess the TFRP once revenue officers determined that the failure by 
the responsible individuals to remit payroll taxes was willful. 
Additionally, although IRS had a 180-day requirement to make a 
determination, revenue officers could make the determination to delay 
the assessment, thus making a timely determination while still not 
moving forward to formally assess the TFRP against the responsible 
individuals. 

In September 2007, IRS implemented new IRM requirements to address the 
timeliness of TFRP assessments. Under the new policy, revenue officers 
are now required to make the determination as to whether to pursue a 
TFRP within 120 days of the case being assigned and to complete the 
assessment within 120 days of the determination. However, the revised 
IRM maintains the provision to allow the revenue officer, with manager 
authorization, to delay the TFRP determination. Additionally, the IRM 
does not include a requirement for IRS to monitor the new IRM standards 
for assessing TFRPs. 

IRS's Approach for Businesses and Responsible Parties Is Inconsistent: 

IRS assigns a higher priority to collection efforts against the 
business with unpaid payroll taxes than against the business's 
responsible owners/officers. Further, it treats the TFRP assessments as 
a separate collection effort unrelated to the business tax debt, even 
though the business payroll tax liabilities and the TFRP assessments 
are essentially the same tax debt. As a result, once the revenue 
officer assigned to the business payroll tax case decides to pursue a 
TFRP against the responsible owners/officers, the TFRP case does not 
automatically remain with this revenue officer. Accordingly, IRS often 
does not assign the TFRP assessment to a revenue officer for 
collection, and when it does, it may not assign it to the same revenue 
officer that is responsible for collecting unpaid taxes from the 
business. In reviewing the sample of TFRP assessments selected as part 
of our audit of IRS's fiscal year 2007 financial statements, we found 
that half of the TFRP assessments had not been assigned to a revenue 
officer by the time of our audit.[Footnote 52] Of those that had been 
assigned, over half of the TFRP assessments had not been assigned to 
the same revenue officer that was working the related business case. 

Assigning the collection efforts against the business and the TFRP 
assessments to different revenue officers can result in the responsible 
owners/officers being able to continue to use the business to fund a 
personal lifestyle while not remitting payroll taxes. For example, in 
one of our case studies the owner was assessed a TFRP, but continued to 
draw a six-figure income while not remitting amounts withheld from the 
salaries of the business's employees. 

In contrast, having either a single revenue officer assigned or 
coordinating the efforts of multiple revenue officers could provide IRS 
with several advantages, including the following: 

* For egregious cases, taking strong collection actions against the 
owner's personal assets may be a more effective means of either getting 
the business to be compliant or convincing the owner to close the 
unprofitable business to prevent the further accumulation of unpaid 
payroll taxes. 

* Assigning a single revenue officer could expedite the assignment of 
TFRP assessments and collection efforts against those cases. For 
example, one of our case study businesses was assessed a TFRP, but 
since the TFRP had a lower priority, it was sent to the queue. Because 
the case had not been assigned, IRS did not file a tax lien on the 
owner of the business and thus the assessment of the TFRP had very 
little impact. Additionally, since IRS has a statutory time limitation 
to collect against a tax debt, this owner was almost half-way through 
the statutory period before the case was ever worked on. 

* Assigning a single revenue officer could help improve IRS's ability 
to ensure assessments are made, transaction codes are input, and 
collections are properly posted against trust fund amounts to all 
related parties, a long-standing problem identified as a part of our 
financial statement audits.[Footnote 53] 

IRS collection officials said the agency categorizes the unpaid payroll 
tax debt of the business as a high priority to ensure that higher-level 
revenue officers are assigned mainly to the more complex business 
cases.[Footnote 54] IRS may also assign the business payroll tax debt 
and the TFRP assessment to different collection officials because the 
business and the responsible owners/officers are not located in the 
same zip code area. For example, if an officer is in a different state 
than the business, the collection efforts would be handled by separate 
officials to facilitate face-to-face collection efforts and to allow 
the revenue officer to physically go to courthouses to perform property 
searches. IRS collection officials also stated that attempting to 
assign the same revenue officer both the TFRP assessments and the 
business payroll tax case for collection would overload the revenue 
officers with work and result in fewer high-priority payroll tax cases 
being worked on. This view, however, stems from separating the 
collection efforts of the business and the individual and not 
considering the business's unpaid payroll taxes and the TFRP assessment 
as a single case. In essence, the TFRP assessment is the same tax debt 
as the business's payroll tax debt; the assessment is merely another 
means through which IRS can attempt to collect the monies withheld from 
a business's employees for income, Social Security, and hospital 
insurance taxes that were not remitted to the government.[Footnote 55] 
This view that the payroll tax debt and the TFRP assessment are 
essentially the same tax debt is reinforced by IRS's own practice of 
crediting all related parties' accounts whenever a collection is made 
against either assessment. 

Prior studies have found that IRS's practice of assigning TFRP 
assessments a lower priority than business cases has not been very 
successful for collecting the unpaid taxes. In its own August 2005 
study, IRS reported that it had assessed over $11.9 billion in TFRP 
assessments (including interest) between 1996 and 2004, yet had 
collected only 8 percent of those assessments. IRS reported that for 
those assessments made in 1996, for which IRS had been attempting 
collection for at least 8 years, the collection rate was only 13 
percent. For all responsible owners/officers that were assessed a TFRP, 
43 percent never made a payment on their trust fund penalty. IRS 
reported that of those TFRP assessments that had been resolved, almost 
half were resolved in the first year of the assessment, and almost 93 
percent were resolved in the first 4 years.[Footnote 56] 

IRS's Approach Does Not Prevent Egregious Accumulation of Unpaid 
Payroll Taxes: 

IRS policies have not resulted in effective steps being taken against 
egregious businesses to prevent the further accumulation of unpaid 
payroll taxes. Our audit found thousands of businesses that had 
accumulated more than a dozen tax quarters of unpaid payroll tax debt. 
The IRM states that revenue officers must stop businesses from 
accumulating payroll tax debt, and instructs revenue officers to use 
all appropriate remedies to bring the tax debtor into compliance and to 
immediately stop any further accumulation of unpaid taxes. It further 
states that if routine case actions have not stopped the continued 
accumulation of unpaid payroll taxes, revenue officers should consider 
seizing the business's assets or pursuing a TFRP against the 
responsible parties. However, IRS successfully pursued less than 700 
seizure actions in fiscal year 2007. We were unable to determine how 
many of those seizure actions were taken against payroll tax debtors. 
Regarding TFRPs, as discussed previously, IRS does not always assess 
the TFRPs timely and IRS does not prioritize the TFRP assessment 
against the owner as highly as it does the business payroll taxes. This 
can result in little collection action being taken against the parties 
responsible for the failure to remit withheld payroll taxes. 

When a business repeatedly fails to comply after attempts to collect, 
the IRM states that the business should be considered an egregious 
offender and IRS should take aggressive collection actions, including 
threats of legal action that can culminate in court-ordered injunctions 
for the business to stop accumulating unpaid payroll taxes or face 
business closure. However, IRS obtained less than 10 injunctions in 
fiscal year 2007 to stop businesses from accumulating additional 
payroll taxes. Revenue officers we spoke to believe the injunctive 
relief process to be too cumbersome to use effectively in its present 
form.[Footnote 57] One revenue officer stated that because of the 
difficulty in carrying out the administrative and judicial process to 
close a business through injunctive relief, he had not attempted to 
take such action in over a decade. We have reported in the past that 
the U.S. Attorney's Office and the District Counsel prefer not to seek 
such injunctions due to the time and expense required to prosecute 
these cases.[Footnote 58] IRS is taking some action to attempt to 
address this issue by piloting a Streamline Injunctive Relief Team to 
identify cases and develop procedures to quickly move a case from 
administrative procedures to judicial actions.[Footnote 59] These 
procedures will be used for the most egregious taxpayers when the 
revenue officer can establish that additional administrative procedures 
would be futile. 

Similar to IRS, all of the state tax collection officials we contacted 
told us that their revenue department's primary goal was to prevent 
businesses from continuing to flaunt tax laws and to stop them from 
accumulating additional tax debt. They said that after a business had 
been given a period of time to comply with its current tax obligations 
and begin paying past taxes, state tax collection officials changed 
their focus to one of "stopping the bleeding." As such, some have made 
the policy decision to seek to close non-compliant businesses, as 
discussed in the following two examples. 

* One Georgia state official we spoke to said the state had passed laws 
to allow businesses to be closed through administrative procedures 
within the department of revenue without judicial intervention. The 
procedure is tied to the state's ability to seize the assets of the 
business. The state may seize the assets of businesses that do not 
comply with their tax obligations as a means of closing the business to 
prevent the further accumulation of unpaid taxes, even if the sale of 
those assets do not result in collections to reduce the business's 
current tax debt.[Footnote 60] The official we spoke to stated that it 
is a routine part of the state's collection arsenal and the state 
closed several dozen businesses this way in 2007 to prevent the further 
accumulation of unpaid trust fund taxes. 

* Kentucky developed a procedure to close businesses that does not 
involve the seizure of the business's assets. That state centralized 
the judicial proceedings for closing a business in a single court that 
is experienced in tax-related injunctions and therefore is willing and 
able to move through the process quickly. One official told us the 
state closed about 100 businesses a month through such proceedings to 
prevent the further accumulation of unpaid payroll tax debt. 

To the extent IRS is not taking effective steps to deal with egregious 
payroll tax offenders that repeatedly fail to comply with the tax laws, 
businesses may continue to withhold taxes from employees' salaries but 
divert the funds for other purposes. 

IRS's Approach Does Not Measure Effectiveness: 

Although IRS has made the collection of unpaid payroll taxes one of its 
top priorities, IRS has not established goals or measures to assess its 
progress in collecting or preventing the accumulation of payroll tax 
debt. Performance measurement and monitoring supports resource 
allocation and other policy decisions to improve an agency's operations 
and the effectiveness of its approach. Performance monitoring can also 
help an agency by measuring the level of activity (process), the number 
of actions taken (outputs), or the results of the actions taken 
(outcomes). 

Although IRS does have a broad array of operational management 
information available to it, we did not identify any specific 
performance measures associated with payroll taxes or TFRP assessments. 
IRS has caseload and other workload reports for local managers (to 
measure process and outputs); however, these localized reports are not 
rolled up to a national level to allow IRS managers to monitor the 
effectiveness or efficiency of its collection and enforcement efforts. 
Additionally, these operational reports do contain information about 
unpaid payroll tax and TFRP case assignments, but rather are used 
primarily to monitor workload issues, not program effectiveness. For 
example, IRS has developed some reports that identify "over-aged" cases 
(those that have not been resolved within a certain length of time), 
and to identify businesses that continue to accrue additional payroll 
tax debt, but those reports are designed for workload management. 

To report on its outcomes or the effectiveness of its operations, IRS 
reports on overall collection statistics and presents that information 
in the Management Discussion and Analysis accompanying its annual 
financial statement and in its IRS Data Book.[Footnote 61] However, IRS 
does not specifically address unpaid payroll taxes as a part of those 
discussions. IRS officials stated that they do not have specific lower- 
level performance measures that target collection actions or collection 
results for unpaid payroll taxes or TFRP assessments. Such performance 
measures could be useful to assist IRS in measuring the success of its 
efforts to collect or prevent the further accumulation of unpaid 
payroll taxes and to formulate more effective approaches to dealing 
with this compliance issue. 

IRS's Approach Could Benefit from Additional Tools: 

In our discussions with IRS revenue officers concerning some of the 
egregious payroll tax offenders included in our case studies, they 
noted that having certain additional tools available to them could 
allow them to more effectively deal with recalcitrant businesses. Those 
tools include (1) the ability to publish the names of tax debtors and 
(2) improved methods of identifying business assets for levy.[Footnote 
62] 

Revenue officers stated, and we acknowledge, that IRS faces challenges 
in balancing voluntary compliance with the need to enforce the tax 
laws. Many businesses have accumulated dozens of tax quarters worth of 
payroll tax debt, sometimes accumulating over a million dollars in 
unpaid payroll taxes. In those egregious situations, including many of 
our case studies, IRS's policy to encourage voluntary compliance and 
use of available collection tools neither resulted in the collection of 
the unpaid portion nor prevented the further accumulation of more 
unpaid payroll taxes. As part of our audit, we spoke with a number of 
state revenue department officials to identify specific collection 
approaches and tools used by those states to pursue payment of unpaid 
taxes. We found that several states had already developed and were 
effectively using the types of tools IRS revenue officers said would be 
beneficial to them. 

IRS Cannot Publish Tax Debtor Information: 

The IRC generally prohibits IRS from publicly disclosing federal tax 
information without taxpayer consent.[Footnote 63] Although IRS tax 
liens are public information, IRS does not centrally publish its lien 
filings or otherwise make available information about businesses or 
individuals with tax debt. However, during our discussions, IRS 
officials told us that being able to do so could increase IRS's ability 
to collect payroll tax debts. 

In contrast, an increasing number of states--at least 19 including New 
Jersey, Connecticut, Indiana, and California--are seeking to increase 
tax collections by publicizing the names of those with delinquent tax 
bills.[Footnote 64] For example, a recent California law mandates the 
state to publish each year the names of the top 250 personal and 
corporate state tax debtors with at least $100,000 in state tax debt. 
[Footnote 65] The list does not include those who are fighting the tax 
bills in courts, have sought bankruptcy protection, or have set up 
payment plans with the state. Public disclosure of tax debtors can be 
very effective. Just threatening to publish the names of tax offenders 
can bring some into compliance, while actually appearing on a tax 
offender list can bring about societal pressure to comply. For example, 
in California 26 tax debtors threatened with public disclosure stepped 
forward to settle their tax debts and thus avoided appearing on the 
list. In Connecticut, the state claims the public disclosure of tax 
debtors has resulted in over $100 million in collections from the first 
4 years of the program. The potential public disclosure of tax debtors 
may also encourage greater tax compliance among the general population 
of taxpayers to avoid potentially being on the list. 

IRS Cannot Always Identify Levy Sources: 

As discussed previously, IRS has the authority to levy a tax debtor's 
income and assets when there is a demand for payment and there has been 
a refusal or an inability to pay by the taxpayer subject to the levy. 
[Footnote 66] Although IRS has this authority, IRS officials stated 
that they often have difficulty using levies to collect unpaid payroll 
taxes because, for example, the levy may be made against funds in a 
bank account at a certain point in time when little or no funds are 
available. Additionally, IRS officials told us, and in our case studies 
we found, that IRS sometimes has difficulty identifying which banks or 
financial institutions a tax debtor is using. This is the case because 
tax debtors will often change financial institutions to avoid IRS 
levies. Once a levy is served against an account, a tax debtor will 
often close the account and open an account in a different financial 
institution. IRS must then search for where the tax debtor is now doing 
business and attempt to serve a new levy. One IRS official stated that 
IRS may serve levies on multiple banks while searching for the new 
accounts. Such a process of searching for accounts is very time 
consuming for both the revenue officers and the financial institutions 
being served the levies and is a burden to these financial 
institutions. 

Several states use legal authorities to assist in identifying levy 
sources. States such as Kentucky, Maryland, Massachusetts, Indiana, and 
New Jersey have enacted legislation for matching programs or entered 
into agreements with financial institutions to participate in matching 
bank account information against state tax debts. This matching allows 
states to more easily identify potential levy sources and simplifies 
the financial institution's obligations to respond to multiple levies. 
IRS is currently working with at least one state to investigate the 
potential for this matching, but in our discussions with IRS collection 
officials, they stated that IRS has not sought legislation or 
agreements with financial institutions to enhance its levying powers. 

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. As noted, over 1.6 
million businesses owe unpaid payroll taxes. We identified tens of 
thousands of businesses that filed 10 or more tax returns acknowledging 
that the business owed payroll taxes, yet failed to remit those taxes 
to the government. 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 addition to owing payroll taxes for multiple tax periods and 
accumulating tax debt for years, many of the owners and officers of 
these businesses are repeat offenders. We identified owners who were 
involved in multiple businesses, all of which failed to remit payroll 
taxes as required. For example, in one of our case studies in which a 
business owed almost $2.5 million, the owner was involved in multiple 
other businesses, all of which owed unpaid payroll taxes. IRS records 
indicated that the owner was also underreporting personal income to 
avoid paying personal income taxes. Additionally, the owner was the 
subject of at least 10 lawsuits either pending or settled and was 
involved in possible check kiting and money laundering. 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. It 
should be noted that these numbers represent only those responsible 
individuals IRS found acted willfully in the non-payment of the 
businesses' payroll taxes and who were assessed TFRPs--they do not 
represent the total number of repeat offenders with respect to non- 
payment of payroll taxes. Table 2 shows the number of individuals with 
TFRPs for two or more businesses. 

Table 2: Number of Individuals with Trust Fund Recovery Penalties for 
Two or More Businesses: 

Number of businesses associated with owner/officer: 2; 
Number of individuals: 7,716. 

Number of businesses associated with owner/officer: 3; 
Number of individuals: 1,011. 

Number of businesses associated with owner/officer: 4; 
Number of individuals: 290. 

Number of businesses associated with owner/officer: 5; 
Number of individuals: 101. 

Number of businesses associated with owner/officer: 6; 
Number of individuals: 60. 

Number of businesses associated with owner/officer: 7-12; 
Number of individuals: 72. 

Number of businesses associated with owner/officer: Over 12; 
Number of individuals: 18. 

Number of businesses associated with owner/officer: Total; 
Number of individuals: 9,268. 

Source: GAO analysis of IRS data as of September 30, 2007. 

[End of table] 

Our audits and investigations of the 50 case study businesses with tax 
debt found substantial evidence of abuse and potential criminal 
activity related to the tax system; 12 of these case studies follow. 
All of the case studies involved businesses that had withheld taxes 
from their employees' paychecks and diverted the money to fund business 
operations or for personal gain. Employers are required by law to remit 
withheld taxes, and the employer's matching contributions, to IRS or 
face potential civil or criminal penalties. Although we reviewed tax 
records and other information for all 50 cases, we performed a more in- 
depth review of 12 case study businesses for this report. IRS had filed 
a lien to protect the government's interests for all of the 12 case 
studies, and had filed liens for all but 5 of the 38 cases presented in 
appendix II.[Footnote 67] Table 3 shows the results of 12 of the case 
studies we performed. 

Table 3: Businesses That Fail To Remit Payroll Taxes: 

Case study: 1;
Nature of business: Automotive; 
Unpaid payroll tax: Over $3.5 million for almost 40 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* Widely advertised business with dozens of employees; 
* For last decade the business has not remitted the payroll taxes 
withheld from its employees, paying less than a quarter of the payroll 
taxes owed; 
* For the last 2 years the owner reported making about $100,000 in 
salary; 
* Owner transferred $1.5 million in property after being assessed a 
TFRP; 
* Recently the owner's personal residence sold for over $600,000; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 2; 
Nature of business: Healthcare; 
Unpaid payroll tax: Almost $2.5 million for over 30 quarters; 
Comments: 
* Business also owes almost $500,000 in non-payroll tax debt; 
* Business is currently in business with over 100 employees; 
* IRS stated that the officers consistently avoided IRS action by 
filing bankruptcy. Business filed for bankruptcy three times, two of 
which were dismissed; 
* Around the time of bankruptcy filings, officers made large cash 
withdraws from the business of about $700,000; 
* IRS found two officers of business were paying personal expenses 
through the business; 
* One officer purchased luxury vehicles and personal property while 
business was not remitting payroll taxes; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three officers willful and responsible for not remitting 
taxes withheld from employees and assessed them a TFRP. 

Case study: 3; 
Nature of business: Janitorial; 
Unpaid payroll tax: Almost $500,000 for almost 30 quarters; 
Comments: 
* Business also owes over $10,000 in non-payroll tax debt; 
* Business is currently in business; 
* Owner has an extensive criminal history; 
* IRS agreed to allow business to pay via an installment agreement, but 
the payments will cover only a small percentage of the payroll tax debt 
owed; 
* Owner owns multiple rental properties and a $500,000 personal 
residence; 
* IRS noted that owner had the ability to pay the tax liability; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 4; 
Nature of business: 
Legal services; Unpaid payroll tax: Over $500,000 for over 50 quarters; 
Comments: 
* Business also owes almost $10,000 in non-payroll tax debt; 
* Owner is currently in business as a lawyer, but continues to 
accumulate unpaid payroll taxes; 
* Owner owes more than $600,000 on over 10 years of personal taxes, and 
did not file most recent years' personal tax returns; 
* Owner has multiple real estate properties, including property on a 
tropical island; 
* IRS notes that owner has the ability to pay, but refuses; 
* IRS filed a lien against the business for unpaid taxes. 

Case study: 5; 
Nature of business: Dentist; 
Unpaid payroll tax: Over $500,000 for over 40 quarters; 
Comments: 
* Business also owes over $7,000 in non-payroll tax debt; 
* Business is still operating with employees, but for over 15 years it 
has not remitted all required payroll taxes to IRS; 
* Owner lives in a large home with acreage valued at over $700,000. The 
house is deeded under spouse's name, but spouse's income is 
insufficient to pay the interest on the mortgage. Owner admits to 
paying the mortgage; 
* Owner sold real estate to children for less than market value; 
* Owner drives a later model luxury vehicle registered under wife's 
name; 
* Owner stated he would pay all the business's expenses before paying 
taxes; 
* Owner is not compliant with personal taxes, owing over $500,000; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 6; 
Nature of business: Consulting; 
Unpaid payroll tax: Almost $1.5 million for over 30 quarters; 
Comments: 
* Business also owes over $500,000 in non-payroll tax debt; 
* Business gave owner cash loans; 
* IRS found that business monies flowed into owner's personal accounts; 
* Owner has not filed personal tax returns since early 1990s and owes 
over $400,000 in personal taxes; 
* Owner has multiple businesses that have been delinquent since 1994; 
* According to IRS, owner kept changing legal representatives to stall 
collection efforts with repeated requests for the same information; 
* Owner sold assets to relative after receiving notice of potential 
TFRP issued by IRS; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP for this and other 
businesses. 

Case study: 7; 
Nature of business: Manufacturing; 
Unpaid payroll tax: Almost $1.5 million for over 40 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* IRS revenue officer notes indicate business monies may have been 
flowing into owner's personal accounts while withheld payroll taxes 
were not being remitted; 
* IRS found owner hid business assets in personal name, keeping IRS 
from seizing them; 
* Owner is also delinquent on personal taxes; 
* IRS officials stated that owner used appeals and offers in compromise 
(OIC) to delay IRS collection efforts; 
* Owner defaulted on OIC for TFRPs; 
* IRS found owner had underreported tax liabilities for at least one 
tax quarter; 
* Business assets given to relative, who used them to start a new 
business; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP for both this business and 
at least two previous businesses. 

Case study: 8; 
Nature of business: Construction; 
Unpaid payroll tax: Almost $2.5 million for over 20 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $100,000; 
* IRS found business was underbidding contracts while using unpaid 
payroll taxes to subsidize its losses; 
* Business claimed that if it paid payroll taxes, it would not be able 
to pay employees or other business expenses and would have to close; 
* Business has not filed taxes for all tax quarters; 
* IRS considered pursuing business for fraud charges, but did not 
pursue; 
* Business/owners have received four civil judgments against it and 
almost 20 liens; 
* Revenue officer notes state that the owners have repeatedly taken 
steps to avoid IRS collection action including the following: filed 
bankruptcy (which was dismissed), filed appeals against liens, 
requested abatements of penalties (which were denied), appealed the 
denial (which was sustained by appeals), submitted a request for 
installment agreement (which was denied as being insufficient), then 
appealed the denial of the installment agreement (which was upheld by 
appeals), "and every other conceivable action to delay or hinder IRS's 
collection efforts"; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three owners willful and responsible for not remitting 
taxes withheld from employees and assessed them TFRPs. 

Case study: 9; 
Nature of business: Manufacturing; 
Unpaid payroll tax: Almost $1 million for almost 40 quarters; 
Comments: 
* Business also owes over $400,000 in non-payroll tax debt; 
* Owners and business investigated for bankruptcy fraud; 
* Revenue officer stated the business was a "sweat shop"; 
* IRS found owner had closed several businesses with tax debt when 
investigated by IRS and opened new ones; 
* Business has not filed payroll returns since late 2005; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found two owners willful and responsible for not remitting taxes 
withheld from employees and assessed them TFRPs. 

Case study: 10; 
Nature of business: Healthcare; 
Unpaid payroll tax: Over $8 million for nearly 30 quarters; 
Comments: 
* Business also owes almost $20,000 in non-payroll tax debt; 
* Although owner has luxury cars and a multimillion dollar home, he 
claimed inability to pay taxes due to financial hardship; 
* Owner also owed city and state government agencies for taxes; 
* One commercial creditor seized and sold some of owner's assets to 
satisfy debts; 
* Owner has pled guilty to and was incarcerated for fraud and the 
business and owner together have almost 100 judgments and liens filed 
against them; 
* Owner evaded IRS levies by using check cashing businesses and 
continued to write checks to himself; 
* A relative purchased a commercial building that had been sold to 
satisfy owner's debts and the owner has since set up another business 
therein; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found owner willful and responsible for not remitting taxes 
withheld from employees and assessed a TFRP. 

Case study: 11; 
Nature of business: Construction; 
Unpaid payroll tax: Almost $2.5 million for over 50 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $70,000; 
* Owners owe multi-million dollar tax debt for multiple companies since 
the early 2000s, and IRS records indicate that the owners have also 
underreported personal income; 
* Financial records indicate business may be guilty of illegal check 
kiting and money laundering; 
* Owners have several judgments outstanding and at least 10 lawsuits 
pending or settled; 
* IRS officials indicated that the owners consistently stalled 
collection efforts through such means as using multiple representatives 
and filing for bankruptcy, which has kept IRS from seizing assets; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found two owners willful and responsible for not remitting taxes 
withheld from employees and assessed them TFRPs. 

Case study: 12; 
Nature of business: Transportation; 
Unpaid payroll tax: Almost $1.5 million for over 20 quarters; 
Comments: 
* Business also owes non-payroll tax debt of almost $100,000; 
* Business has not filed taxes for all tax quarters; 
* Business has 17 judgments and state and federal tax liens, while one 
officer has over 50 such judgments and liens; 
* Another officer has unpaid personal taxes and IRS has investigated 
the officer for potential criminal activity; 
* IRS records indicate the officers commingled business and personal 
funds and that they consistently evaded assessment by refusing to 
cooperate; 
* Officers misrepresented tax delinquencies to a potential lender; 
* Officers investigated by IRS for establishing networks of short-lived 
corporations that accrue significant tax liabilities and then close, 
leaving a large amount of uncollectible payroll taxes; 
* IRS filed a lien against the business for unpaid taxes; 
* IRS found three officers willful and responsible for not remitting 
taxes withheld from employees and assessed them TFRPs. 

Source: GAO analysis of IRS data, including unpaid federal tax debt as 
of September 30, 2007. 

[End of table] 

Our audits and investigations of the 50 case study businesses with tax 
debt, 12 of which are detailed in table 3, showed abuse and potential 
criminal activity related to the tax system. The following provides 
some illustrative examples of several of these cases. 

* Case 1: The owner of this automotive firm continued to draw about a 
six-figure income from the business and owned substantial real property 
while the business accumulated more than $3.5 million in unpaid federal 
payroll taxes over a 10-year period. For the last decade, this business 
has withheld taxes from its employees but remitted less than a quarter 
of the taxes actually owed. IRS found the owner of the company willful 
and responsible for not remitting the taxes, and IRS records indicate 
the owner avoided paying taxes and trust fund amounts by transferring 
$1.5 million in property after being assessed the TFRP and selling a 
personal residence valued at over $600,000. 

* Case 2: This healthcare business, which owes almost $2.5 million of 
unpaid payroll taxes, repeatedly refused to remit withheld federal 
payroll taxes and the officers used the business to pay personal 
expenses. In addition, IRS records indicated the business's officers 
attempted to avoid paying taxes by filing Chapter 11 bankruptcy on 
three separate occasions, two of which were dismissed. Around the time 
of the bankruptcy filings, the officers withdrew about $700,000 of cash 
from the business. IRS found three officers of the business to be 
willful and responsible for not remitting payroll taxes. 

* Case 6: This consulting business accumulated almost $1.5 million in 
unpaid federal payroll taxes beginning over 10 years ago and over a 
half-million dollars in other federal taxes. The owner had multiple 
businesses that have not filed required tax returns. Additionally, the 
business owner has not filed personal returns since the early 1990s and 
owes over $400,000 in personal taxes. The owner received several cash 
loans from the business while not paying taxes, and business monies 
were diverted into the owner's personal bank accounts. This business 
owner avoided IRS by changing representatives and attorneys, which has 
had the effect of stalling IRS actions with repeated requests for the 
same information. To avoid collection action, the owner sold assets to 
a relative after receiving notice that IRS was about to assess a TFRP. 

* Case 7: This manufacturing business owes almost $1.5 million in 
unpaid payroll taxes for over 40 tax quarters. The owner also 
underreported tax liabilities and was found willful and responsible for 
not remitting payroll taxes from two other businesses. IRS found that 
business monies may be flowing into personal accounts, and that the 
owner has hidden business assets in his own name in order to prevent 
IRS seizures. The owner also gave business assets to a relative who has 
used them to start a new business. The owner used appeals and offers in 
compromise as a means to delay IRS collection efforts, and has already 
defaulted on an offer in compromise for earlier TFRPs. 

* Case 10: This healthcare business has accumulated over $8 million in 
unpaid payroll taxes for almost 30 quarters. The owner was convicted of 
tax fraud. Despite living in a multi million dollar home, the taxpayer 
claimed inability to pay taxes due to financial hardship, and evaded 
IRS levies by using check cashing businesses and writing checks to 
himself, even paying himself a salary while incarcerated. Some of the 
owner's properties were sold by creditors, and the owner set up a new 
business in one of the business's properties bought by a relative. 
Although other creditors seized and sold property to settle debts, we 
found no evidence of IRS taking such actions. 

* Case 11: The owners of this construction company accumulated almost 
$2.5 million in unpaid payroll taxes from over 50 tax quarters (over 12 
years of non-payment). The owners also had tax debt from other 
businesses dating back to the early 2000s. IRS records indicate that 
the business owners underreported their personal income. Financial 
records indicate that the owners may be involved in illegal check 
kiting and money laundering dating back to the late 1990s, have several 
judgments outstanding, and at least 10 lawsuits pending or settled. IRS 
officials indicated that the owners have consistently stalled 
collection efforts through such means as filing for bankruptcy, which 
has kept IRS from seizing assets. 

Conclusions: 

Businesses that withhold money from their employees' salaries are 
required to hold those funds in trust for the federal government. 
Willful failure to remit these funds is a breach of that fiduciary 
responsibility and is a felony offense. A business's repeated failure 
to remit payroll taxes to the government over long periods of time 
affects far more than the collection of the unpaid taxes. First, 
allowing businesses to continue to not remit payroll taxes affects the 
general public perception regarding the fairness of the tax system, 
which may result in lower overall compliance. Second, because of 
failure of businesses to remit payroll taxes, the burden of funding the 
nation's commitments, including payments to the Social Security and 
Hospital Insurance trust funds, falls more heavily on taxpayers who 
willingly and fully pay their taxes. Third, the failure to remit 
payroll taxes gives the non-compliant business an unfair competitive 
advantage because that business can use those funds that should have 
been remitted for taxes to either lower overall business costs or 
increase profits. Businesses that fail to remit payroll taxes may also 
under bid tax-compliant businesses, causing them to lose business and 
encouraging them to also become non-compliant. Fourth, allowing 
businesses to continue accumulating unpaid payroll taxes has the effect 
of subsidizing their business operations, thus enriching tax abusers or 
prolonging the demise of a failing business. Fifth and last, in an era 
of growing federal deficits and amidst reports of an increasingly 
gloomy fiscal outlook, the federal government cannot afford to allow 
businesses to continue to accumulate unpaid payroll tax debt with 
little consequence. 

For these reasons, it is vital that IRS use the full range of its 
collection tools against businesses with significant payroll tax debt 
and have performance measures in place to monitor the effectiveness of 
its actions to collect and prevent the further accumulation of unpaid 
payroll taxes. IRS has stated that the collection of unpaid payroll 
taxes is one of its highest priorities. However, IRS's collection 
philosophy focuses on gaining voluntary compliance, even for 
recalcitrant businesses that repeatedly fail to remit payroll taxes and 
whose actions indicate no intention to become compliant. Businesses 
that continue to accumulate unpaid payroll tax debt despite efforts by 
IRS to work with them are demonstrating that they are either unwilling 
or unable to comply with the tax laws. In such cases, because the 
decision to not file or remit payroll taxes is made by the owners or 
responsible officers of a business, IRS should consider strong 
collection action against both the business and the responsible owners 
and officers to prevent the further accumulation of unpaid payroll 
taxes and to collect those taxes for which the business and owners have 
a legal and fiduciary obligation to pay. 

IRS faces difficult challenges in balancing aggressive collection 
actions against taxpayer rights and individuals' livelihoods. However, 
to the extent IRS does not pursue aggressive collection actions against 
businesses with multiple quarters of unpaid payroll taxes, IRS is not 
acting in the best interests of the federal government, the employees 
of the businesses involved, the perceived fairness of the tax system, 
or overall compliance with the tax laws. Therefore, it is incumbent 
upon IRS to revise its approach and develop performance measures to 
provide for the effective use of the full range of available 
enforcement tools against egregious offenders to prevent those 
businesses from continuing to accumulate payroll tax debt. It is also 
incumbent upon IRS to proactively seek out and appropriately implement 
other tools (particularly those with demonstrated success at the state 
level) to enhance its ability to prevent the further accumulation of 
unpaid payroll taxes and to collect those taxes that are owed. Although 
IRS does need to work with businesses to try to gain voluntary tax 
compliance, for businesses with demonstrated histories of egregious 
abuse of the tax system, IRS needs to alter its approach to include 
focusing on stopping the accumulation of additional unpaid payroll tax 
debt by egregious businesses. 

Recommendations for Executive Action: 

To provide better monitoring and more detailed guidance on collection 
actions to be pursued against egregious payroll tax offenders, to 
strengthen existing collection tools, and to develop additional 
enforcement tools to effectively identify potential levy sources, we 
recommend that the Commissioner of Internal Revenue take the following 
six actions: 

* Develop a process to monitor collection actions taken by revenue 
officers against egregious payroll tax offenders to ensure collection 
actions appropriately utilize all available collection tools contained 
in the IRM. 

* Review current case prioritization and assignment practices to 
determine if IRS's enforcement and collection procedures could be 
enhanced by requiring, to the maximum extent feasible, businesses with 
egregious payroll tax debt and the responsible owners/officers with a 
TFRP assessment be treated as a single unified and coordinated 
collection effort assigned to a single revenue officer. 

* Develop and implement procedures to expeditiously file a Notice of 
Federal Tax Lien against property as soon as possible after payroll tax 
debt is identified (including cases in the queue awaiting assignment) 
and ensure liens are filed on both businesses with unpaid payroll taxes 
and owners/officers assessed a TFRP. 

* Develop and implement procedures to monitor and report on revenue 
officers' compliance with the new TFRP assessment time frames to ensure 
revenue officers are making TFRP determinations and assessments in a 
timely manner. 

* Develop performance goals and measures that specifically evaluate the 
accumulation of unpaid payroll taxes by businesses (especially 
egregious businesses with over 20 quarters of payroll tax debt), the 
extent and timeliness of TFRP assessments, and the effectiveness of 
actions taken to collect unpaid payroll taxes and TFRP assessments. 

* Work with states that have developed procedures for matching 
financial accounts to tax debts to evaluate the potential for IRS to 
either develop and implement similar measures or partner with states 
that currently have that tool to leverage their efforts to assist 
revenue officers in identifying a business's leviable assets. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, IRS recognized that all 
appropriate tools must be used to bring payroll tax offenders into 
compliance and concurred with all six of our recommendations. IRS noted 
that it had implemented numerous actions to improve its tax collection 
processes and procedures as well as to prioritize assignment of cases. 
It also noted that it continues to explore other opportunities. In 
particular, IRS cited its projects to increase its focus on businesses 
that accumulate multiple periods of unpaid payroll taxes and to improve 
the timeliness of lien filing and TFRP determinations. 

With respect to our five recommendations for IRS to review or revise 
its collection policies and to strengthen its existing collection tools 
to be used in dealing with egregious payroll tax offenders, IRS agreed 
to evaluate its practices and develop appropriate changes. 
Specifically, IRS agreed to (1) explore the value of using existing 
data to evaluate collection actions taken by revenue officers, (2) 
assign a single revenue officer to collect both a business's egregious 
unpaid payroll tax debt and the responsible owners/officers with a TFRP 
assessment when feasible, (3) evaluate its existing practices and 
determine appropriate changes to its lien filing procedures to allow 
liens to be filed as soon as a payroll tax liability is identified, (4) 
consider ways to use its TFRP reports to monitor and report on revenue 
officers' compliance with new TFRP assessment time frames, and (5) 
evaluate the effectiveness and feasibility of establishing performance 
goals and measures on the timeliness of TFRP assessments. 

With respect to our recommendation to work with states that have 
developed procedures for matching financial accounts to tax debts to 
identify levy sources, IRS agreed with our recommendation. IRS said it 
would work with those states to determine the effectiveness of their 
programs and whether a similar program in IRS would be cost effective 
and consistent with privacy laws. 

As agreed with your offices, unless you announce its contents earlier, 
we will not distribute this report until 30 days from its date. At that 
time, we will send copies of this report to the Secretary of the 
Treasury, the Commissioner of the Financial Management Service, the 
Commissioner of Internal Revenue, and interested congressional 
committees and members. We will also make copies available to others 
upon request. In addition, this report will be available at no charge 
on the GAO Web site at [hyperlink, http://www.gao.gov. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-3406 or sebastians@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix IV. 

Signed by: 

Steven J. Sebastian: 
Director Financial Management and Assurance: 

List of Committees: 

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: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

[End of section] 

Appendix I: Scope and Methodology: 

* To identify the magnitude of unpaid payroll tax debt, we obtained 
IRS's database of unpaid taxes as of September 30, 2007. We extracted 
all payroll tax debt from that database and performed analysis to 
identify the number of businesses with tax debt and the total dollar 
value of tax debt associated with those businesses. We analyzed and 
summarized the overall payroll tax debt by: 

* the number of tax quarters of payroll tax owed by businesses; 

* the tax period for which the debt was owed; 

* the amount of the tax debt associated with interest, penalties, and 
assessed taxes; and: 

* the collection status of the debt, such as whether it is awaiting 
assignment, assigned in the field for collections, or coded as being 
currently not collectible. 

We also analyzed the tax debt to determine the date on which IRS will 
be statutorily prohibited from seeking collection from tax debtors and 
will remove the tax debt from its records.: 

We requested that IRS perform specific data analysis of its tax records 
to identify amounts that should have been remitted by businesses for 
those trust funds, but were not, to develop an estimate of the total 
amount that the General Fund subsidizes the Social Security and 
Medicare Part A trust funds due to unpaid taxes. To validate IRS's 
estimate, we compared that analysis to one prepared by IRS as of 
September 30, 1998, during one of our previous audits.[Footnote 68] At 
that time, IRS estimated the cumulative amount of the subsidy to be $38 
billion. Because IRS removes tax debt from its records once the debt's 
statutory collection period expires (generally 10 years from the date 
the tax is assessed), those estimates represented approximately a 10- 
year subsidy. To further validate the 10-year estimate, we obtained 
from IRS the annual increase in the subsidy based on unpaid taxes. IRS 
determined the subsidy to be between $2 billion to $4 billion annually. 
IRS developed its estimates based on data contained in its masterfile 
of tax information, which we audit as part of IRS's annual financial 
statement audit. 

To identify IRS's reports and measures to manage unpaid payroll taxes, 
we discussed IRS's tracking of cases with cognizant managers and 
revenue officers. In addition, we reviewed IRS's reported measures in 
both the IRS Databook and IRS's Management Discussion and Analysis 
accompanying its annual financial statements. 

To determine IRS policies and procedures in place to prevent the non- 
payment of payroll taxes and to collect outstanding payroll taxes, we 
reviewed IRS's policies as laid out in the Internal Revenue Manual 
(IRM) and discussed those policies and procedures with cognizant IRS 
officials and revenue officers. We also reviewed certain Treasury 
Inspector General for Tax Administration (TIGTA) and IRS reports 
related to the collection of unpaid payroll taxes. To supplement our 
discussions with IRS officials on tax collection activities, we also 
interviewed a number of state tax collection officials, including 
officials from Georgia, Kentucky, Maryland, and North Carolina, 
regarding tools and procedures used by those states to collect unpaid 
taxes. 

Additionally, we reviewed a sample of 76 businesses whose owners/ 
officers IRS found personally liable for the failure to remit payroll 
taxes withheld from employees' paychecks. The sample was originally 
selected as part of our audit of IRS's fiscal year 2007 financial 
statements. The primary purpose of the sample was to determine whether 
IRS was properly recording payments to all related parties. However, we 
also performed other tests of IRS's controls using this same sample. 
Although we identified issues related to the timeliness of certain 
collection actions based upon that sample, we are unable to project 
these results because the sampling units used for the financial 
statement audit were payments rather than accounts. We analyzed tax 
transcripts and other IRS records for those cases with assessed TFRPs 
to identify the dates that IRS revenue officers (1) initiated contact 
with the business, (2) made the determination to pursue the TFRP 
against the officers, and (3) assessed the TFRP. 

To further review IRS's collection actions, we also performed a macro- 
analysis of IRS's overall inventory of unpaid payroll tax debts. We 
used macro-analysis to determine such factors as the percentage of 
payroll tax debt with liens. We also used macro-analysis to determine 
the most common types of industries with unpaid payroll taxes. We 
analyzed IRS's database of unpaid taxes and the information using the 
North American Industry Classification (NAIC) system codes in that 
database.[Footnote 69] Using those codes, we were able to identify the 
industry type for about 70 percent of the payroll tax debt.[Footnote 
70] 

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. For those businesses, we 
reviewed IRS's collection actions and discussed the appropriateness of 
those actions or lack of actions with IRS revenue officers. We obtained 
copies of IRS's automated tax transcripts and other tax records (e.g., 
revenue officers' notes) from IRS. We also performed additional 
searches of financial and public records. In cases where record 
searches and IRS tax transcripts indicated that the owners or officers 
of a business were involved in other related businesses that had unpaid 
federal taxes, we performed additional analysis of those related 
businesses and the owners/officers. 

We conducted this performance audit from April 2007 through May 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Data Reliability Assessment: 

For the IRS databases we used, 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 the report's objectives. Our financial audit procedures, 
including the reconciliation of the value of unpaid taxes recorded in 
IRS's masterfile to IRS's general ledger, identified no material 
differences. 

[End of section] 

Appendix II: Businesses with Unpaid Payroll Taxes: 

[End of section] 

Table 3 provided data on 12 detailed case studies. Table 4 shows the 
remaining 38 case studies that we audited. As with the 12 cases, we 
also found substantial evidence of abuse or potentially criminal 
activity related to the federal tax system during our review of these 
38 case studies. 

Table 4: Businesses That Fail To Remit Payroll Taxes: 

Case study: 13; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 30; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: Since the late 1990s the business has only paid a small 
amount of the payroll taxes due. At the time of our review, IRS was 
trying to seize commercial property from officer. 

Case study: 14; 
Nature of business: Transportation and warehousing; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: Company went out of business but not before owners made cash 
withdrawals of over $50,000. Owner has another company with payroll tax 
debt. 

Case study: 15; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: Owner closed this business with tax debt and started another, 
which has also accumulated unpaid payroll taxes. 

Case study: 16; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Over $2 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business is a sole proprietorship. Owner withdrew over 
$20,000 cash from business before going into bankruptcy. 

Case study: 17; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/over 
$50,000; 
Did IRS file a lien?: Yes;
Comments: Although business has recently begun paying payroll taxes, it 
has unpaid payroll tax debt dating back to the mid-1990s. Owner had 
over $1 million converted from the business's name to the owner's 
personal name. 

Case study: 18; 
Nature of business: Transportation and warehousing; 
Number of unpaid payroll tax quarters: Over 50; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid payroll tax debt for 10 years 
until mid-2000s, then declared bankruptcy and closed. 

Case study: 19; 
Nature of business: Mining; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Almost $2.5 million/over 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid payroll taxes since early 1990s 
and only stopped when business was destroyed by a natural disaster. At 
the time of our review, federal agencies were paying to clean up the 
business site. 

Case study: 20; 
Nature of business: Manufacturing; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Over $2 million/over 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid payroll taxes since late 1990s. 
In the mid-2000s, the business entered into an installment agreement 
with IRS to pay on the debt. 

Case study: 21; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/almost 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid tax debt beginning in the late 
1980s. IRS revenue officer notes showed little collection action taken 
against this business since then. 

Case study: 22; 
Nature of business: Construction;
Number of unpaid payroll tax quarters: Over 30; 
Unpaid payroll taxes/other federal tax debt: Almost $1.5 million/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid payroll tax debt from the late 
1990s to the early 2000s, became relatively compliant in the mid-2000s, 
but then began accruing more payroll tax debt. IRS designated the case 
as currently not collectible due to owner's financial hardship and has 
not been seeking collection of the unpaid taxes. 

Case study: 23; 
Nature of business: Other services; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Almost $1 million/none; 
Did IRS file a lien?: Yes; 
Comments: While accumulating unpaid payroll tax debt for over 10 years, 
the owner of this business withdrew almost $500,000 in cash. Business 
has since closed leaving almost $1 million in unpaid payroll taxes. 

Case study: 24; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 30; 
Unpaid payroll taxes/other federal tax debt: Almost $1 million/under 
$50,000; 
Did IRS file a lien?: No; 
Comments: Business has continued to accumulate unpaid payroll taxes 
since the early 1990s through the time of our review. IRS records 
indicated that this case has not been worked on even though the 
business continued to operate and not pay payroll taxes. 

Case study: 25; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 30; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: Although IRS was attempting to seize business assets at the 
time of our review, this sole proprietor business has been accumulating 
unpaid payroll tax debt sporadically since the late 1990s. When 
contacted by IRS, owner claimed its bookkeeper was embezzling funds. 

Case study: 26; 
Nature of business: Professional, scientific, and technical services; 
Number of unpaid payroll tax quarters: Over 20; 
Unpaid payroll taxes/other federal tax debt: Over $3 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has payroll tax debt dating back to the late 
1990s, but IRS records indicate few collection actions have been taken. 
IRS has found owner personally liable for willful failure to remit 
payroll taxes. 

Case study: 27; 
Nature of business: Construction; Number of unpaid payroll tax 
quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Almost $1 million/almost 
$200,000; 
Did IRS file a lien?: Yes; 
Comments: This business has unpaid payroll tax debt dating back to the 
early 1990s. Although business was given an installment agreement to 
pay the tax debt, it did not make payments. At the time of our review, 
the case had been in the queue since the mid-2000s awaiting assignment. 

Case study: 28; 
Nature of business: Healthcare and social assistance; 
Number of unpaid payroll tax quarters: Almost 80; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has tax debt dating back to the early 1980s. 
Case was considered for possible criminal investigation, but not yet 
pursued. 

Case study: 29; 
Nature of business: Educational services; 
Number of unpaid payroll tax quarters: Almost 40; 
Unpaid payroll taxes/other federal tax debt: Over $2 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has been accumulating tax debt for a decade. 
Although it was granted an offer-in-compromise to settle the tax debt 
for less than was owed, business did not make payments. Business has 
numerous judgments from creditors. 

Case study: 30; 
Nature of business: Transportation and warehousing; 
Number of unpaid payroll tax quarters: Almost 40; 
Unpaid payroll taxes/other federal tax debt: Over $500,000/over 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: The owner of this business has a criminal record and has had 
various judgments from creditors. IRS chose not to assess a TFRP since 
the owner would be unable to pay. Business twice filed bankruptcy and 
each time it was dismissed. 

Case study: 31; 
Nature of business: Healthcare and social assistance; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Over $1.5 million/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: IRS has chosen not to take collection actions against this 
business due to the needs of the local community. 

Case study: 32; 
Nature of business: Other services (except public administration); 
Number of unpaid payroll tax quarters: Over 20; 
Unpaid payroll taxes/other federal tax debt: Over $1.5 million/none; 
Did IRS file a lien?: Yes; 
Comments: This business has periodically not paid taxes for over 20 
years. Business has applied various times for installment agreements or 
an offer-in-compromise. Business has multiple state and federal liens. 

Case study: 33;
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Almost $1 million/over 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has tax debt dating back to at least the early 
1990s. It has multiple judgments against it including a tort suit, and 
multiple state and federal liens. 

Case study: 34; 
Nature of business: Construction; Number of unpaid payroll tax 
quarters: Over 50; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: Business accumulated unpaid taxes for over 12 years, then 
closed with over $1 million in tax debt. Although IRS considered the 
case for a fraud investigation, it did not pursue this due to health 
issues in the business officer's family. 

Case study: 35; 
Nature of business: Professional, scientific, and technical services; 
Number of unpaid payroll tax quarters: Almost 50; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/over 
$50,000; 
Did IRS file a lien?: Yes; C
Comments: Business has tax debt dating back to the late 1980s. The 
owner has sold commercial property to a related party, shielding it 
from IRS collection action, and has applied for an offer-in-compromise 
to pay less than it owes. 

Case study: 36; 
Nature of business: Professional, scientific, and technical services; 
Number of unpaid payroll tax quarters: Over 30; 
Unpaid payroll taxes/other federal tax debt: Over $1 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has tax debt back to the early 2000s and has 
not filed returns since 2006. 

Case study: 37; 
Nature of business: Accommodation and food services; 
Number of unpaid payroll tax quarters: Almost 40; 
Unpaid payroll taxes/other federal tax debt: Over $200,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business has tax debt dating back to the late 1990s. 
Business has closed and IRS did not file TFRPs within the statutory 
period, thus missing an opportunity to collect unpaid payroll taxes 
from the responsible officers. 

Case study: 38; 
Nature of business: Accommodation and food services; 
Number of unpaid payroll tax quarters: Almost 20; 
Unpaid payroll taxes/other federal tax debt: Over $100,000/under 
$50,000; 
Did IRS file a lien?: No; 
Comments: Business owed tax debt back to the early 2000s, when officers 
made large cash withdrawals from the business. At the time of our 
review, business had been in the queue awaiting assignment since the 
mid-2000s. TFRPs were assessed on two officers. After the assessment 
but before IRS filed a federal tax lien, one officer sold property for 
almost $150,000. IRS reached an installment agreement with one officer 
while another officer claimed inability to pay and filed bankruptcy. 
One officer was charged for concealing a weapon and driving under the 
influence, and has become a fugitive. 

Case study: 39; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Almost 20; 
Unpaid payroll taxes/other federal tax debt: Under $50,000/under 
$50,000; 
Did IRS file a lien?: No; 
Comments: Business has accumulated payroll tax debt dating back to the 
late 1990s, but the tax debt has been in IRS's queue of cases awaiting 
assignment since July 2006. At the time of our review, IRS had neither 
filed a federal tax lien or assessed TFRPs. 

Case study: 40; 
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Over 10; 
Unpaid payroll taxes/other federal tax debt: Almost $1 million/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business accumulated unpaid taxes for over 3 years. When 
IRS investigated, owner claimed employees were embezzling funds. At the 
time of our review, IRS was seeking to assess a TFRP, but the owner had 
filed an appeal of the action. 

Case study: 41; 
Nature of business: Other services (except public administration); 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Almost $100,000/under 
$50,000; 
Did IRS file a lien?: No; 
Comments: This business has accumulated payroll tax debt dating back to 
the late 1990s and has multiple state and federal liens filed. 

Case study: 42; 
Nature of business: Information services; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Almost $2.5 million/over 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: The owner of this business was involved with over 30 
businesses, including several defunct businesses for which the owner 
owed TFRPs since the 1980s. The owner was also sentenced to prison for 
willful failure to pay payroll taxes. In addition, owner had been 
investigated for check kiting, arrested for fraud, and had several 
lawsuits pending. Same officer was involved in our case study #44. 

Case study: 43; 
Nature of business: Accommodation and food services; 
Number of unpaid payroll tax quarters: Almost 20; 
Unpaid payroll taxes/other federal tax debt: Over $12 million/almost 
$2.5 million; 
Did IRS file a lien?: Yes; 
Comments: This business, with tax debt dating back to the mid-1990s, 
was under criminal investigation by IRS. The owner has a long criminal 
history of involvement in many businesses with tax debt. The owner 
diverted funds from businesses to pay for luxury cars, planes, and a 
mansion in a foreign country, and has been involved in over a dozen 
bankruptcies. 

Case study: 44; 
Nature of business: Healthcare and social assistance; 
Number of unpaid payroll tax quarters: Almost 20; 
Unpaid payroll taxes/other federal tax debt: Almost $5 million/almost 
$100,000; 
Did IRS file a lien?: Yes; 
Comments: This business has refused to pay any payroll taxes for almost 
5 years. Because of the nature of the business, IRS has been reluctant 
to close the business, but did convict the owner on criminal charges 
related to failure to pay payroll taxes. Same officer was involved in 
our case study #42. 

Case study: 45; 
Nature of business: Administrative and support and waste management and 
remediation services; 
Number of unpaid payroll tax quarters: Over 40; 
Unpaid payroll taxes/other federal tax debt: Over $16 million/almost 
$1.5 million; 
Did IRS file a lien?: Yes; 
Comments: Since the mid-1990s, business has not paid nor filed payroll 
taxes, neither has the owner paid or filed income taxes. When 
investigated by IRS, the business filed 30 quarters of payroll taxes at 
one time and went out of business. Business was being investigated for 
hiring illegal immigrants and the owner has a criminal history. IRS 
pursued a criminal investigation against the business and owner, and 
arrested the owner for income tax crimes. 

Case study: 46;
Nature of business: Construction; 
Number of unpaid payroll tax quarters: Almost 30; 
Unpaid payroll taxes/other federal tax debt: Almost $500,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This sole proprietor accumulated almost a half million 
dollars of payroll tax debt. IRS designated the owner as being in 
financial hardship and has not pursued collection action against the 
company. Business owner stated that it could not pay taxes because its 
contractors took too long to pay him. Owner of the business made an 
offer-in-compromise to pay 2 cents on the dollar to settle the debt, 
but IRS rejected the offer. 

Case study: 47; 
Nature of business: Manufacturing; 
Number of unpaid payroll tax quarters: Over 10; 
Unpaid payroll taxes/other federal tax debt: Almost $100,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This business was a sole proprietor that accumulated payroll 
tax debt for 4 years. IRS's investigation found the owner to be an 
extremely poor manager with no knowledge of how to handle payroll 
taxes. Once IRS contacted the owner regarding the debt, the owner 
agreed to close the business. 

Case study: 48; 
Nature of business: Transportation and warehousing; 
Number of unpaid payroll tax quarters: Almost 10; 
Unpaid payroll taxes/other federal tax debt: Almost $100,000/under 
$50,000; 
Did IRS file a lien?: No; 
Comments: This business has periodically failed to pay payroll taxes 
since the early 2000s and has not filed returns in 2 years. IRS records 
indicated that the case has never been investigated for collections, 
has had no liens filed, and was recently "shelved" by IRS due to lack 
of resources to pursue collection of the tax debt. 

Case study: 49; 
Nature of business: Other services (except public administration); 
Number of unpaid payroll tax quarters: Almost 20; 
Unpaid payroll taxes/other federal tax debt: Over $200,000/under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This sole proprietor business has payroll tax debt dating 
back to the late 1990s. Although there were indications at the time of 
our review that the business was still operating, it has not filed a 
payroll tax return since the early 2000s; thus its tax debt may be much 
higher. IRS has designated the owner as being in financial hardship and 
has not investigated the case for collections. 

Case study: 50; 
Nature of business: Other services (except public administration); 
Number of unpaid payroll tax quarters: Almost 40; 
Unpaid payroll taxes/other federal tax debt: Over $500,000 /under 
$50,000; 
Did IRS file a lien?: Yes; 
Comments: This sole proprietor business has accumulated over 10 years 
of payroll tax debt. IRS has designated the owner as being in financial 
hardship and has not pursued collection action against the business, 
but the business continues to accumulate more unpaid payroll tax debt. 
Business assets were seized as part of a commercial foreclosure. 

Source: GAO analysis of IRS data, including unpaid federal tax debt as 
of September 30, 2007. 

[End of table] 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

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

July 18, 2008: 

Mr. Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Sebastian: 

I have reviewed the Government Accountability Office (GAO) draft report 
titled, Tax Compliance: Businesses Owe Billions in Federal Payroll 
Taxes (GAO-08-617). We agree preventing and collecting unpaid payroll 
taxes is an important responsibility of the Internal Revenue Service 
(IRS). All appropriate available tools must be used to bring payroll 
tax offenders into compliance. 

In 2007, the IRS Collection program collected $31.8 billion, of which 
approximately $7.2 billion was related to payroll tax. Payroll tax 
liabilities are a top priority for assignment to our Collection Field 
function. 

We have implemented numerous actions to improve our processes and 
procedures as well as to prioritize assignment of cases, and continue 
to explore other opportunities. These improvements include the 
following: 

* We recently made refinements to our "potential in-business pyramider" 
indicator. This indicator was established to monitor the degree to 
which taxpayers in active Collection inventory remain in compliance 
with current filing and paying requirements. The taxpayer's ability to 
remain current is crucial to our collectibility determination. 

* We are testing a number of recommendations made by our Corporate 
Approach to Collection Inventory team. These include increasing the 
dollar threshold to allow our Automated Collection System (ACS) to work 
more payroll tax liabilities and calculating risk scores to keep 
payroll tax cases in certain high risk categories longer. 

* We have established special search abilities and reports to track and 
monitor taxpayers with multiple payroll tax liabilities. 

* We are working to improve the effectiveness of available collection 
tools. For example, streamlined injunctive relief procedures are being 
piloted for possible use in delinquency cases that involve repeat, in-
business taxpayers. 

* We have taken steps to improve the timeliness of lien filing while 
recognizing the decision to file a lien is influenced by the impact 
lien filing will have on the taxpayer's ability to pay. 

* We have added new timeframes to the Internal Revenue Manual to 
improve the timeliness of the Trust Fund Recovery Penalty determination 
and its ultimate assessment. 

* We have fine-tuned the Federal Tax Deposit Alerts program. Reviews 
indicate our efforts to get the right alerts worked by revenue officers 
are resulting in more taxpayers benefiting from this compliance 
program. 

* We continue to explore new ways to identify potential levy sources. 

A separate enclosure specifically addresses each of your 
recommendations. 

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

Sincerely, 

Signed by: 

Linda E. Stiff: 

Enclosure: 

GAO Recommendations and IRS Responses to GAO Draft Report Tax 
Compliance: Businesses Owe Billions in Federal Payroll Taxes (GAO-08-
617): 

Recommendation: Develop a process to monitor collection actions taken 
by revenue officers against egregious payroll tax offenders to ensure 
collection actions appropriately utilize all available collection tools 
contained in the IRM. 

Comments: We agree to explore the value of a regular extract from our 
ENTITY program of taxpayers by area with a number to be determined of 
unpaid payroll tax quarters to be shared with the Director, Collection 
for discussion with the area director. Our quality reviews already 
examine cases for the appropriateness and timeliness of enforcement 
action. 

Recommendation: Review current case prioritization and assignment 
practices to determine if IRS's enforcement and collection procedures 
could be enhanced by requiring, to the maximum extent feasible, 
businesses with egregious payroll tax debt and the responsible 
owners/officers with a TFRP assessment be treated as a single unified 
and coordinated collection effort assigned to a single revenue officer. 

Comments: We agree that, when feasible, egregious payroll tax 
assessments and TFRP assessments should be assigned to a single revenue 
officer. Treating payroll tax and TFRP assessments as a single unified 
and coordinated collection effort may achieve the advantages outlined 
in the report. Timely determinations, recommendations and assessment of 
the TFRP will accelerate the statutory notice requirements and may 
enable the revenue officer to more effectively leverage the assessments 
to gain compliance and/or prevent accumulation of additional unpaid 
payroll taxes. 

Recommendation: Develop and implement procedures to allow liens to be 
filed against property as soon as possible after payroll tax debt is 
identified (including cases in the queue awaiting assignment) to ensure 
liens are placed on businesses with unpaid payroll taxes and 
owners/officers assessed a TFRP. 

Comments: We agree to evaluate our existing practices and determine if 
a change should be made to our current case routing criteria in order 
to allow liens to be filed as soon as a payroll tax liability is 
identified. 

Recommendation: Develop and implement procedures to monitor and report 
on revenue officers' compliance with the new TFRP assessment timeframes 
to ensure revenue officers are making TFRP determinations and 
assessments in a timely manner. 

Comments: We agree to consider ways to use the reports available on the 
timeliness of TFRP assessment. 

Recommendation: Develop performance goals and measures that 
specifically evaluate the accumulation of unpaid payroll taxes by 
businesses (especially egregious businesses with over 20 quarters of 
payroll tax debt), the extent and timeliness of TRFP assessment, and 
the effectiveness of actions taken to collect unpaid payroll taxes and 
TFRP assessments. 

Comments: We agree to evaluate the effectiveness and feasibility of 
establishing performance goals and measures based on the information in 
the reports tracking the timeliness of TFRP assessments. 

Recommendation: Work with states that have developed procedures for 
matching financial accounts to tax debts to evaluate the potential for 
IRS to either develop and implement similar measures or to partner with 
states that currently have that tool to leverage their effort to assist 
revenue officers in identifying a business' leviable assets. 

Comments: We agree with this recommendation. We will work with the 
states that have developed a program to match financial accounts with 
tax debts to determine the program's effectiveness and whether a 
similar program in IRS would be cost effective and consistent with 
privacy laws. 

[End of section] 

Appendix IV GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Steven J. Sebastian, (202) 512-3406 or sebastians@gao.gov: 

Acknowledgments: 

The following individuals made major contributions to this report: 
William J. Cordrey, Sean Bell, Russell Brown, Ray Bush, Kenneth Hill, 
Delores Lee, David Shoemaker, Lisa Warde, Tina Wu, and J. Mark Yoder. 

[End of section] 

Footnotes: 

[1] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-95] (Washington, D.C.: Feb. 12, 2004); GAO, Financial 
Management: Some DOD Contractors Abuse the Federal Tax System with 
Little Consequence, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
04-414T] (Washington, D.C.: Feb. 12, 2004); GAO, Financial Management: 
Thousands of Civilian Agency Contractors Abuse the Federal Tax System 
with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-637] (Washington, D.C.: June 16, 2005); GAO, 
Financial Management: Thousands of Civilian Agency Contractors Abuse 
the Federal Tax Systems with Little Consequence, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-05-683T] (Washington, D.C.: June 
16, 2005); GAO, Financial Management: Thousands of GSA Contractors 
Abuse the Federal Tax System, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-492T] (Washington, D.C.: Mar. 14, 2006); GAO, 
Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax 
System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-587T] 
(Washington, D.C.: Mar. 20, 2007); GAO, Tax Compliance: Thousands of 
Federal Contractors Abuse the Federal Tax System, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-742T] (Washington, D.C.: Apr. 
19, 2007); and GAO, Medicaid: Thousands of Medicaid Providers Abuse the 
Federal Tax System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
08-239T] (Washington, D.C.: Nov. 14, 2007). 

[2] 26 U.S.C. § 7202. 

[3] We considered activity to be abusive when a business's actions or 
inactions, though not illegal, took advantage of the existing tax 
enforcement and administration system to avoid fulfilling federal tax 
obligations and were deficient or improper when compared with behavior 
that a prudent person would consider reasonable. 

[4] Under section 6672 of the Internal Revenue Code (IRC), individuals 
who are determined by IRS to be responsible for collecting, accounting 
for, and paying over payroll taxes who willfully fail to collect or pay 
these taxes can be assessed a Trust Fund Recovery Penalty (TFRP). This 
penalty, typically assessed against owners or officers of a 
corporation, such as a president or treasurer, is assessed for the 
amount of taxes the business withheld from its employees' salaries but 
did not remit to the federal government, the so-called trust fund 
portion of payroll taxes. The business itself is still liable for the 
entire amount of the unpaid payroll taxes, but IRS can seek collection 
from the responsible owner/officers for the trust fund portion of the 
unpaid taxes when they are assessed this penalty. 

[5] The sample was originally selected as part of our audit of IRS's 
financial statements, see GAO, Financial Audit: IRS's Fiscal Years 2007 
and 2006 Financial Statements, GAO-08-166 (Washington, D.C.: Nov. 9, 
2007). The primary purpose of the sample was to determine whether IRS 
was properly recording payments to all related parties. However, we 
also performed other tests of IRS's controls using this same sample. 
Although we identified issues related to IRS's assignment of cases 
among revenue officers and the timeliness of certain collection actions 
based upon that sample, we are unable to project these results because 
the sampling unit used for the financial statement audit was payments 
rather than accounts. 

[6] These amounts are collected pursuant to the Federal Insurance 
Contributions Act. 26 U.S.C. ch. 21. 

[7] Additionally, we designated IRS's financial management and systems 
modernization as high-risk areas in 1995. GAO, High-Risk Series: An 
Overview, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/HR-95-1] 
(Washington, D.C.: February 1995). In 2005, two of IRS's high-risk 
areas--collection of unpaid taxes and earned income credit non-
compliance--were consolidated to make a single high-risk area called 
enforcement of tax laws. Also in 2005, IRS's high-risk areas of 
business systems modernization and financial management were merged 
into a single high-risk area called business systems modernization. 
GAO, High-Risk Series, An Update, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-05-207] (Washington, D.C.: January 2005). 

[8] For financial reporting purposes, IRS reported $263 billion for the 
total amount of unpaid taxes. IRS's financial statements reflect a 
lower amount of tax debt for a number of reasons, including the removal 
of duplicate tax assessments for multiple officers of a business 
assessed a TFRP. 

[9] 26 U.S.C. § 6502. The 10-year period can be extended or suspended 
under a variety of circumstances, such as agreements by the taxpayer to 
extend the collection period in connection with an installment 
agreement, bankruptcy litigation, and court appeals. Consequently, some 
tax assessments can and do remain on IRS's records for decades. 

[10] A "tax period" varies by tax type. For example, the tax period for 
payroll and excise taxes is one quarter of a year. The taxpayer is 
required to file quarterly returns with IRS for these types of taxes, 
although payment of the taxes occurs throughout the quarter. In 
contrast, for income, corporate, and unemployment taxes, a tax period 
is 1 year. 

[11] Federal unemployment taxes are also paid by employers. However, 
these taxes are not included in the unpaid payroll taxes discussed in 
this report. 

[12] Under the nonfiler program (26 U.S.C. § 6020(b)) IRS contacts 
businesses that have not filed tax returns. If they do not respond, for 
enforcement purposes, IRS independently prepares their tax returns and 
makes a proposed tax assessment. These assessments are generally based 
on very limited information. 

[13] Installment agreements allow for payments on the debt in smaller, 
more manageable amounts. An offer-in-compromise approved by IRS allows 
a tax debtor to settle unpaid tax debt for less than the full amount 
due. 

[14] Under IRC sections 6321 and 6322, a federal tax lien arises by 
operation of law when the IRS assesses the tax debt and the taxpayer 
neglects or refuses to pay the liability upon receiving notice and 
demand for payment. The tax lien encumbers the taxpayer's property or 
rights to property. 

[15] The federal tax lien is not valid against purchasers, holders of 
security interests, mechanics lienors, and judgment lien creditors 
until a NFTL has been filed (26 U.S.C. § 6323(a)). 

[16] IRS can file multiple liens against a taxpayer to cover property 
the taxpayer owns in different geographical locations. 

[17] Filing a federal tax lien makes it much more difficult for a 
taxpayer to sell or otherwise dispose of an asset because of the cloud 
on title created by the notice. 

[18] 26 U.S.C. § 6331. 

[19] By law, some property cannot be levied or seized. For example, IRS 
may not seize any of the taxpayer's property when the expense of 
selling the property would be more than the fair market value of the 
property. 26 U.S.C. § 6331(f). Other items IRS may not levy or seize 
include: unemployment benefits; certain annuity and pension benefits; 
certain service-connected disability payments; workmen's compensation; 
salary, wages, or income included in a judgment for court-ordered child 
support payments; and certain public assistance payments. 26 U.S.C. § 
6334(a). 

[20] Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998) (pertinent 
section codified at 26 U.S.C. § 6331(j)). 

[21] Section 1203 of RRA required the IRS Commissioner to terminate the 
employment of employees for misconduct in the seizure of taxpayers' 
property. 

[22] Injunctive relief is a judicial remedy for non-compliance that 
requires a party either to refrain from certain actions or to perform 
certain actions. Federal courts have jurisdiction to issue injunctions 
when necessary to enforce internal revenue laws under section 7402(a) 
of the IRC. 

[23] This letter, known as the 903 Letter, says in part: "We may file a 
public notice (federal tax lien) showing that the government has a 
right to the interest in your property or seize (levy) your property or 
rights to property to enforce collecting taxes we've determined you owe 
based on information available to us. Under the law we may charge you 
criminal penalties, such as a fine up to $100,000 and up to one year in 
jail upon conviction, if you don't comply with the special bank deposit 
requirements. We encourage you to comply with the employment tax 
deposit rules." 

[24] GAO, Payroll Taxes: Billions in Delinquent Taxes and Penalties Due 
But Unlikely to Be Collected, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/T-AIMD/GGD-99-256] (Washington, D.C.: Aug. 2, 1999). 

[25] Amounts transferred by the Department of the Treasury to these 
trust funds are an estimate of taxes received determined by applying 
applicable tax rates to wage amounts certified by the Commissioner of 
Social Security (42 U.S.C. §§ 401, 1395i). Because wage information is 
provided only quarterly to IRS and only annually to the Social Security 
Administration, initial distributions to the trust funds are based on 
estimates prepared by Treasury's Office of Tax Analysis and the Social 
Security Administration's Office of the Chief Actuary, with adjustments 
subsequently made as a result of the Commissioner's certifications. 
Consequently, the amounts distributed to the Social Security and 
Hospital Insurance trust funds are based on the wages an individual 
earns, not the amount the employer actually forwards to the government. 

[26] Accrued interest is included in this amount because assessments 
distributed to the trust funds earn interest at Treasury-based interest 
rates, similar to IRS's interest accruals. 

[27] The tax period may not always correspond to the age of the tax 
debt. For example, tax debt may be fairly new even if it is for an 
earlier tax period when a taxpayer files a tax form years after the due 
date or when IRS assesses additional taxes for an earlier tax period. 

[28] GAO, Financial Management: Thousands of Civilian Agency 
Contractors Abuse the Federal Tax System with Little Consequence, 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-637] (Washington, 
D.C.: June 16, 2005). 

[29] We analyzed IRS's database of unpaid taxes and the information on 
the North American Industry Classification (NAIC) system codes in that 
database. The NAIC system is used by federal statistical agencies in 
classifying business establishments. Using those codes, we were able to 
identify the industry type for about 70 percent of the payroll tax 
debt. 

[30] IRS's $282 billion in unpaid assessments are as of September 30, 
2007. Although the dates of IRS's estimate of total unpaid Social 
Security and hospital insurance taxes, and IRS's total unpaid 
assessments, are about 1 month apart, we believe that for comparison 
purposes it is appropriate. About $21 billion of the $44 billion was 
due to businesses' unpaid payroll taxes, while $23 billion was the 
result of unpaid individual self-employment taxes. 

[31] Because of its statutorily limitation, this amount represents an 
estimate of the subsidy provided over approximately a10-year period. 

[32] IRS defines a defunct business as one that is inactive with no 
leviable assets. 

[33] GAO, Unpaid Payroll Taxes: Billions in Delinquent Taxes and 
Penalty Assessments Are Owed, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/AIMD/GGD-99-211] (Washington, D.C.: Aug. 2, 1999). 

[34] 26 U.S.C. § 6502. 

[35] A certain percentage of unpaid payroll taxes that will expire 
include taxes due on accounts that have been investigated and 
determined to be uncollectible. Specifically, the unpaid payroll taxes 
of an out of business and defunct corporation will be reported as 
currently not collectible and allowed to expire as prescribed by law. 
IRS may use a TFRP to collect from the responsible individuals. 

[36] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-95] (Washington, D.C.: Feb. 12, 2004). 

[37] GAO, Financial Management: Thousands of GSA Contractors Abuse the 
Federal Tax System, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
06-492T] (Washington, D.C.: Mar. 14, 2006). 

[38] GAO, Tax Administration: IRS's Efforts to Improve Compliance with 
Employment Tax Requirements Should Be Evaluated, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-02-92] (Washington, D.C.: Jan. 
15, 1992). 

[39] Treasure Inspector General for Tax Administration, Improvements 
Are Needed In Resolving In-Business Trust Fund Delinquencies to Prevent 
Tax Liabilities from Pyramiding, 2000-30-111 (Washington, D.C.: August 
2000). 

[40] Treasury Inspector General for Tax Administration, The Collection 
Field Function Needs to Improve Case Actions to Prevent Employers From 
Incurring Additional Trust Fund Tax Liabilities, 2005-30-142 
(Washington D.C.: Sept. 21, 2005). 

[41] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-95]. 

[42] Treasury Inspector General for Tax Administration, The Collection 
Field Function Needs to Improve Case Actions to Prevent Employers From 
Incurring Additional Trust Fund Tax Liabilities, 2005-30-142 
(Washington D.C.: Sept. 21, 2005). 

[43] Internal Revenue Service Small Business /Self Employed (SB/SE) 
internal research report, Research Report on the Collectibility of 
Trust Fund Recovery Penalty (TFRP) Assessments, 03.01.001.05 (Denver 
project, Aug. 31, 2005). 

[44] Internal Revenue Service noted that there are a number of factors 
that serve to delay the filing of a lien, including cases being placed 
in the queue for extended periods of time. 

[45] Internal Revenue Service Small Business /Self Employed (SB/SE) 
internal research report, Research Report on the Collectibility of 
Trust Fund Recovery Penalty (TFRP) Assessments, 03.01.001.05 (Denver 
project, Aug. 31, 2005). 

[46] Cases may move in and out of the queue several times, so some 
cases may have liens filed even though the business or owner/officer 
case is currently in the queue. 

[47] Taxpayers have 60 days from the date of proposed assessment to 
make an appeal of the TFRP assessment. According to IRS, during the 
period July 10, 2007 through July 11, 2008, approximately 6.1% 
individual TFRP recommendations were sent to Appeals. IRS stated that, 
on average, its process took 236 days to resolve the appeal. IRS's 
lengthy appeals process also contributes to long delays in making some 
TFRP assessments. 

[48] The results of this sample, while statistically selected, are not 
projectible to the universe because the sample was not specifically 
designed to assess the timeliness of collection actions. 

[49] Treasury Inspector General for Tax Administration's sample 
included 166 businesses for which a TFRP interview was applicable. 
TIGTA 2005-30-142. 

[50] This example was originally reported in our prior report on GSA 
contractors, GAO, Financial Management: Thousands of GSA Contractors 
Abuse the Federal Tax System, GAO-06-492T (Washington, D.C.: Mar. 14, 
2006). For this report, we performed additional analysis of the 
business. 

[51] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]. 

[52] The sample consisted of 76 TFRP payments in 2007. We were able to 
obtain sufficient data to perform our analysis for 60 percent of the 
cases in the sample (45 of the 76 cases). We were unable to project 
these results because the sampling units used for the financial 
statement audit were payments rather than accounts. 

[53] GAO, Financial Audit: IRS's Fiscal Years 2007 and 2006 Financial 
Statements, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166] 
(Washington, D.C.: Nov. 9, 2007). 

[54] IRS officials told us that IRS's procedures allow the revenue 
officer in charge of the business case to take control of the 
collection efforts of the related owners/officers so long as the 
revenue officer and owners/officers are in the same assignment area 
(usually a zip code). 

[55] Under the law, TFRP assessments, while equal to the total amount 
of unpaid payroll taxes, constitute a separate liability from the 
payroll taxes. However, it is IRS's policy to collect only the amount 
of the unpaid payroll tax debt, whether from the business, in the form 
of a TFRP, or a combination of both. 

[56] Internal Revenue Service SB/SE Research Denver, Project 
03.01.001.05. 

[57] The IRM places a high standard for seeking an injunction against a 
business. It states that the revenue officer must be able to show 
irreparable harm and that IRS has no adequate remedy at law other than 
the injunction. 

[58] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD/AIMD-99-
211]. 

[59] According to IRS, it is developing and testing streamlined 
injunctive relief procedures for requesting a suit for injunctive 
relief without the burden of proceeding with trust fund compliance 
procedures, including monthly filing and special bank accounts. The 
cases being tested are those in which the facts show that the taxpayer 
knows about the federal tax deposit laws, and show that further 
administrative activity would be futile due to the egregious nature of 
the taxpayer's history of non-compliance. Taxpayers to whom these 
streamlined procedures are designed to apply include the following: (1) 
taxpayers who may have received a Letter 903 in the past; (2) taxpayers 
who were previously assessed a Trust Fund Recovery Penalty; (3) 
taxpayers who have engaged in multiple entities to avoid paying trust 
fund taxes; (4) taxpayers who have a history of filing bankruptcies to 
avoid employment tax collection or continue to pyramid taxes while in 
bankruptcy. 

[60] As noted earlier, IRC 6331(f) prohibits IRS from taking seizure 
action on a case where the expenses of seizure exceed the fair market 
value of the asset. 

[61] Data Book 2007, Internal Revenue Service Publication 55B 
(Washington, D.C.: March 2008). 

[62] Some collection officials thought the tools IRS currently has at 
its disposal were sufficient to prevent and collect unpaid payroll 
taxes. They stated that what was needed was timelier contact and more 
diligent follow-up on deadlines. 

[63] 26 U.S.C. § 6103. Subsection 6103(k) provides exceptions to the 
disclosure prohibition. For example, IRS can disclose the amount of the 
taxpayer's outstanding debt secured by a lien to persons with evidence 
of rights in the property subject to the lien. 

[64] The 19 states we identified that disclose information about those 
with unpaid tax debt were California, Colorado, Connecticut, Delaware, 
Georgia, Indiana, Illinois, Kansas, Kentucky, Maryland, Minnesota, 
Montana, North Carolina, New Jersey, Pennsylvania, Rhode Island, South 
Carolina, Washington, and Wisconsin. 

[65] Cal. Rev. & Tax. Code § 19195. 

[66] As discussed previously, levy is the legal seizure of the 
taxpayer's property to satisfy a tax debt. IRS may order a third party 
to turn over property in its possession that belongs to the delinquent 
taxpayer named in a notice of levy. IRS levies against bank accounts, 
brokerage accounts, or business account receivables are generally one- 
time levies of amounts in the account at the time the levy is served. 
However, IRS can also use a "continuous" levy against wages or certain 
federal payments. IRS officials stated that finding an account with 
money in it is often a "hit or miss" proposition since they are one- 
time levies. 

[67] IRS noted that in half of the 12 case studies presented here IRS 
was stayed from collection action for various lengths of time due to 
factors such as bankruptcy filings. IRS noted that during those periods 
in which IRS collection action was stayed, some businesses continued to 
accumulate additional unpaid payroll taxes. 

[68] IRS has a statutory limitation on the length of time it can pursue 
unpaid taxes, generally 10 years from the date of the assessment. After 
that period, IRS removes the tax debt from its records. 

[69] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/AIMD/GGD-99-
211]. 

[70] Under section 6672 of the IRC, individuals who are determined by 
IRS to be responsible for collecting, accounting for, and paying over 
payroll taxes who willfully fail to collect or pay these tax can be 
assessed a TFRP. Typically, these individuals are owners or officers of 
a corporation, such as a president or treasurer. More than one 
individual can be found willful and responsible for a business's 
failure to pay the federal government withheld payroll taxes and thus 
be assessed a TFRP. The business itself is still liable for the entire 
amount of the unpaid payroll taxes. However, IRS policies require that 
it only collect the unpaid tax once. 

[71] The NAIC was developed as the standard for use by federal 
statistical agencies in classifying business establishments in the U.S. 
The NAIC codes provide a guide to the type of activity the business is 
engaged in although it may be engaged in multiple activities, some of 
which are not reflected in its NAIC code. 

[72] The remaining payroll tax debt could not be classified by industry 
either because the NAIC codes were not available or were not in a 
format we could analyze. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548: 

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: