Taking Tax Cheats Off the Federal Payroll

It’s a matter of common sense – if someone owed you money, you wouldn’t pay him for something else. You’d apply it to his debt.

Now, what if the money wasn’t a loan but instead he was dodging making a payment he owed you? You sure as heck wouldn’t be paying him a dime! It’s hard to believe, but that’s exactly what the federal government is doing right now – paying for services from people who dodge their taxes.

The Senate Permanent Subcommittee on Investigations, which I chair, recently heard testimony that about 21,000 Medicare providers, including doctors, ambulance companies and medical laboratories, collectively owe more than $1 billion in delinquent taxes. Yet the government continues to pay them in full for their services – around $140 million for the first nine months of 2005 alone.

Medicare is an extraordinarily successful program that is indispensable to the health of our people, and the vast majority of Medicare health care providers are honest, tax-paying citizens. That is all the more reason to crack down on the few service providers who profit from Medicare while failing to pay their taxes. Their dishonesty hurts us all.

For example, our investigation revealed that one physician who owes the government $1 million in taxes (mainly payroll taxes he withheld from his employees but never passed on to the government) received $1 million in Medicare payments from the government over nine months. This is not a case of extenuating circumstances or personal hardship. The physician reported income of half a million dollars and owned a million-dollar home, a 58-foot yacht, and several night clubs. He was simply ripping off honest taxpayers.

Another example is an ambulance company that owes $11 million in back taxes, yet was paid more than $1 million in Medicare dollars during the nine months studied.

Outside of Medicare, the government does a good job of screening for such problems. There is a database of tax cheats that other federal agencies check their records against before paying a contractor. If a cheater is found, a portion of the payment is withheld to repay his or her debt.

Key parts of Medicare, however, have not been participating in this program. That failure means that, year after year, as much as $300 billion in federal Medicare payments have not been screened for unpaid taxes.

I recently co-sponsored a bipartisan bill with Senator Norm Coleman of Minnesota and Senator Claire McCaskill of Missouri to fix this problem. The bill would require Medicare to screen its payments for tax cheaters and to withhold 15 percent or more of those payments until all unpaid taxes are recovered. The bill would also require Medicare to review its payments to check for service providers that have other debts, such as delinquent student loans, child support, and debts owed to other federal agencies.

Finally, the bill would simplify the collection process by allowing the IRS to begin withholding amounts from federal payments earlier in the collection process. Currently, the IRS must send four notices requesting payment and a notice of intent to collect, and wait for a hearing and any appeal to finish before it can begin to withhold money from a federal payment. That can take months or even years. This unwieldy process has meant that over half of tax debt – $67 billion in 2006 – has remained outside of the collection system. A streamlined system will allow substantially more federal tax debt to be collected, while still being fair to people who are appealing their tax assessments.

Tax dodging hurts our country by undermining the fairness of our tax system and by forcing honest taxpayers to make up the shortfall needed to pay for government programs including Medicare. When these tax delinquents also receive large payments of federal funds, it adds insult to injury.

Our bipartisan bill will stop these tax cheats from stuffing taxpayer dollars into their pockets with one hand while stiffing Uncle Sam with the other.