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[110 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:44584.wais]
S. Hrg. 110-623
PAYROLL TAX ABUSE: BUSINESSES OWE BILLIONS AND WHAT NEEDS TO BE DONE
ABOUT IT
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
of the
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 29, 2008
__________
Available via http://www.gpoaccess.gov/congress/index.html
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Committee on Homeland Security and Governmental Affairs
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44-584 PDF WASHINGTON DC: 2008
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TED STEVENS, Alaska
THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio
MARK PRYOR, Arkansas NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana TOM COBURN, Oklahoma
BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
Michael L. Alexander, Staff Director
Brandon L. Milhorn, Minority Staff Director and Chief Counsel
Trina Driessnack Tyrer, Chief Clerk
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware NORM COLEMAN, Minnesota
MARK L. PRYOR, Arkansas TOM COBURN, Oklahoma
BARACK OBAMA, Illinois PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri JOHN WARNER, Virginia
JON TESTER, Montana JOHN E. SUNUNU, New Hampshire
Elise J. Bean, Staff Director and Chief Counsel
Julie Davis, Counsel, Office of Senator Carl Levin
Audrey Ellerbee, Congressional Fellow, Office of Senator Carl Levin
Mark L. Greenblatt, Staff Director and Chief Counsel to the Minority
Jay Jennings, Minority Senior Investigator
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1
Senator Coleman.............................................. 4
Senator McCaskill............................................ 17
WITNESSES
Tuesday, July 29, 2008
Steve J. Sebastian, Director, Financial Management and Assurance,
U.S. Government Accountability Office.......................... 7
Linda Stiff, Deputy Commissioner for Services and Environment,
Internal Revenue Service, U.S. Department of the Treasury...... 9
Alphabetical List of Witnesses
Sebastian, Steve J.:
Testimony.................................................... 7
Prepared statement........................................... 27
Stiff, Linda:
Testimony.................................................... 9
Prepared statement........................................... 133
APPENDIX
GAO Report titled ``Tax Compliance, Business Owe Billions in
Federal Payroll Taxes,'' dated July 2008, GAO-08-617, submitted
by Mr. Sebastian............................................... 59
``A Comprehensive Strategy for Reducing the Tax Gap,'' U.S.
Department of the Treasury, Office of Tax Policy, September 26,
2006, submitted by Ms. Stiff................................... 144
``Reducing the Federal Tax Gap,'' A Report on Improving Voluntary
Compliance, Internal Revenue Service, U.S. Department of the
Treasury, August 2, 2007, submitted by Ms. Stiff............... 16200
PAYROLL TAX ABUSE: BUSINESSES OWE
BILLIONS AND WHAT NEEDS TO BE
DONE ABOUT IT
----------
TUESDAY, JULY 29, 2008
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:05 a.m., in
Room SD-342, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin, Coleman, and McCaskill.
Staff Present: Elise J. Bean, Staff Director and Chief
Counsel; Mary D. Robertson, Chief Clerk; Julie Davis, Counsel
to Senator Levin; Audrey Ellerbee, Congressional Fellow to
Senator Levin; Mark L. Greenblatt, Chief Counsel and Staff
Director to the Minority; Jay Jennings, Senior Investigator to
the Minority; Erica Flint, Staff Assistant to the Minority;
Sheldon Shoemaker (Sen. McCaskill); John Kim, Law Clerk; and
Mark Leduc (Sen. Collins).
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody.
Today, over 1.6 million businesses owe more than $58
billion to Uncle Sam for unpaid Federal payroll taxes that have
accumulated over the last 10 years. Over half of this debt is
now uncollectible. That is the conclusion of a Government
Accountability Office (GAO) study requested by this
Subcommittee on the problem of unpaid payroll taxes.
Today's Subcommittee hearing will examine what is behind
this staggering number and what can be done about it. Of the
many tax schemes this Subcommittee has investigated over the
years, the blatant cheating on the payroll tax is particularly
galling because delinquent businesses are stashing away not
only the payroll taxes that they owe Uncle Sam, but also
stealing funds withheld from employee paychecks. Employers are
required to withhold from their employees' salaries amounts for
individual Federal income taxes and for Social Security and
Medicare taxes. These businesses have a fiduciary
responsibility to hold the funds they withhold from employees
``in trust'' for the government. The employer must also match
the amounts withheld for Social Security and Medicare. The
willful failure to remit any of these types of payroll taxes is
a felony. The fact that this problem is so widespread is a
disgrace.
Ten years ago, in 1998, the GAO conducted another study on
payroll taxes and found that unpaid payroll taxes then totaled
$49 billion. In the 10 years since, the number of businesses
with unpaid payroll taxes declined from 1.8 million to 1.6
million, but the size of the tax debt got nearly $10 billion
worse, not better. Part of the reason appears to be ineffective
IRS payroll collection efforts, despite the fact that IRS has
continued to deem collection of payroll taxes ``one of its
highest priorities.'' The GAO report identifies a host of
problems with those efforts, and here are just three of them.
The first is the fact that many payroll tax cheats have
been allowed to repeatedly violate the law for years at a time,
accumulating massive payroll tax debts that cannot ultimately
be collected.
GAO's report discloses that 70 percent of all unpaid
payroll taxes are owed by businesses that have failed to remit
payroll taxes for more than 1 year. This means the business has
at least four violations since payroll taxes are supposed to be
remitted quarterly. Over 25 percent have failed to remit their
taxes for more than 3 years. Nine percent have payroll
violations stretching back 5 to 10 years. In addition,
thousands of businesses are involved. GAO reports that the
number of firms with more than 5 years of payroll tax debt has
nearly tripled, from 5,000 in 1998 to 14,000 in 2007. And those
with more than 10 years of payroll tax debt went from 68 in
1998, to 490 businesses in 2007. That is a 500-percent
increase.
One case study highlighted in GAO's report involves a
business with payroll violations dating back to 1994. As of
July 2007, that business had accumulated unpaid payroll taxes
totaling almost $1 million.
And IRS data shows that as unpaid payroll taxes get older,
the likelihood of collecting the amounts owed declines
dramatically. The result, according to the GAO, is that 52
percent of existing payroll tax debt is now uncollectible.
But that is not all. Tax delinquent businesses allowed to
operate for years with impunity gain an unfair advantage over
honest competitors. By shirking their taxes, these businesses
incur lower operating costs and may drive out honest firms. In
one case study in the GAO report, a business used $2.5 million
that should have gone for payroll taxes to subsidize its
underbidding of contracts.
Next, how is it that payroll tax cheats are able to
continue operating with impunity for years at a time? That gets
us to the second major problem: The IRS' failure to make
effective use of available enforcement tools.
Current law provides the IRS with several powerful
collection tools, but often the IRS has failed to make
effective use of them. As the GAO points out, ``Having a
reticence to use enforcement tools may, over time, actually
diminish voluntary compliance and collections.'' In other
words, when honest taxpayers see tax cheats getting away with
blatant misconduct, it not only undermines confidence in the
tax system as a whole, it could encourage cheating.
The IRS has two primary enforcement tools to stop payroll
tax cheats: Filing liens against the business and filing
personal claims against the business' officers or owners. The
GAO found that tax liens were not filed against businesses with
unpaid payroll taxes in over 30 percent of all payroll tax
cases assigned to the field for collection effort. That is
nearly one-third of the payroll cases being ``worked on'' by a
revenue officer, or 140,000 delinquent businesses.
GAO also found that the IRS often failed to assess
penalties against the individual officers and owners of the
business charged with collecting payroll taxes. Current law
states that these individuals can be held personally liable for
the portions of the payroll tax withheld from an employee if
they willfully failed to collect or pay the tax. GAO describes
multiple cases of business owners with payroll tax debt using
business funds to pay for their own lavish lifestyles.
To collect the missing money from individual business
officers or owners, the IRS can file a trust fund recovery
penalty (TFRP). GAO determined that it took the IRS an average
of 40 weeks to determine whether a TFRP should be assessed and
then an additional 40 weeks to actually assess it. Now, that
adds up to nearly 2 years, or over a year and a half, to start
collection on a TFRP.
In addition, a 2005 study by the Treasury Inspector General
for Tax Administration revealed that 43 percent of people who
received a TFRP never made a payment on it, and that the IRS
only collected 8 percent of the amount for which the TFRPs were
issued. In one example reported by the GAO, the IRS assessed a
business owner with a TFRP, but failed to file an accompanying
tax lien. Therefore, the owner was able to sell a vacation home
in Florida, and the IRS missed the opportunity to collect any
of the unpaid taxes from the proceeds of the sale.
Still another problem is the IRS' practice of assigning a
new revenue officer to assess a TFRP in cases where another
revenue officer has already initiated enforcement action
against a business with unpaid taxes. GAO found that in 75
percent of the cases it reviewed, the TFRP was either not
assigned or was assigned to a different revenue officer than
the one already taking action against the business for unpaid
taxes. Doubling up revenue officers on a single business makes
little sense when there are too few revenue officers to go
around.
In addition to finding that the IRS made ineffective use of
tax liens and TFRPs in many payroll cases, GAO determined that
the IRS failed to take timely enforcement action in half of the
cases in which tax debtors missed specific deadlines. That
means one out of two tax cheats missed payments they were
required to make with no immediate consequences. Now, that
shocking statistic sure has to change.
Finally, the Subcommittee has discovered that the majority
of businesses with unpaid payroll taxes do not get immediate
enforcement attention. Instead, following a 15-week
notification process, many cases are assigned to a so-called
queue where they languish until a revenue officer is assigned
to them. Right now, of the $28 billion in unpaid payroll taxes
still deemed collectible, about $9 billion is sitting in the
queue awaiting assignment to a revenue officer. That so many
cases sit unproductively before any enforcement action is taken
is inexcusable.
Now, here are three actions that could be taken to
strengthen enforcement action against payroll tax cheats.
First, the IRS should develop an expedited process for
filing liens and assessing TFRPs against businesses with unpaid
payroll taxes. These tax liens and TFRPs should be
automatically imposed after a business has missed a specified
number of quarterly payroll tax payments, unless a revenue
officer provides written justification why those actions should
not be taken. Also, the business tax case and the TFRP
assessment should, when possible, be treated as a single,
unified, and coordinated collection effort assigned to a single
revenue officer, instead of the current practice, which most
often has TFRP collections assigned to a different revenue
officer, if they get assigned at all.
Second, Congress should enact S. 1124--the Levin-Coleman
Tax Lien Simplification Act, to streamline the tax lien system.
Right now, tax liens have to be filed on paper in 4,000
locations across the country, each with its own forms and
filing requirements. The process is wasteful, burdensome, and
inefficient. Our bill would require the Treasury to establish
an electronic tax lien registry at the Federal level, which
would not only make filing liens easier and more transparent,
but would also, according to the IRS' own estimates, save $570
million over 10 years from improved efficiencies alone.
Third, the IRS should develop payroll tax collection
performance measures. It is baffling that, with respect to this
``high-priority'' issue, the IRS currently does not have a
single performance measure to assess its progress in combating
payroll tax cheats. When we asked IRS how long the average
payroll tax case is open, we were told they do not track this
data. Moreover, neither IRS managers nor revenue officers are
currently evaluated on their efforts to collect payroll taxes
or prevent the accumulation of payroll tax debt. These types of
agency-level and personnel performance measures should be
developed on an urgent basis.
Finally, it is ridiculous that one of this Administration's
top tax enforcement efforts has been to go after the small-
dollar claims under the Earned Income Tax Credit Program, the
EITC Program, which is a refundable tax credit available to
workers with low incomes. We should be using our limited number
of revenue agents to catch the biggest fish--including payroll
tax cheats who are misusing billions of dollars of employee and
taxpayer money to benefit themselves.
I commend Senator Coleman for initiating the Subcommittee's
request for the GAO study on this important problem, I commend
his staff, and I now turn to him for his opening remarks.
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. Thank you, Mr. Chairman, and let me, if I
may, return the compliment. I was reflecting on where we are
with this hearing and the work that we did together on sham tax
schemes, I think ``Flips'' and ``Blips,'' and looking at
literally billions of dollars that were not being put into the
Federal Treasury, and we focused on those. And you, Mr.
Chairman, and your staff have been a champion of targeting the
offshore tax havens, cleaning those up. I have joined you with
full force and vigor, and it has been a tremendous effort. We
focused on Federal contractors, and they are being paid Federal
dollars at the same time that they owe tax dollars. It was
actually during the course of that investigation that we
noticed a commonality of payroll taxes not being forwarded to
IRS. These are cases in which we were actually paying Federal
dollars to folks who owed tax dollars.
I think we have reached a point now with payroll taxes
where this is the mother of all tax gaps, $58 billion. And
clearly it needs to be addressed. Payroll taxes are an
essential part of our tax system. As the Chairman has
indicated--and GAO will go through it--employers withhold taxes
from their employees' paychecks and are required to forward
that money to the IRS. These funds include income taxes, as
well as other taxes that go directly to fund Social Security
and Medicare. The employers handle these in trust for their
employees and, clearly, that trust is being violated, and in
many cases has been violated for years. The loss ultimately is
to all taxpayers.
According to the GAO study, more than 1.6 million of those
businesses are breaching that trust and are simply keeping
their employees' taxes. The amount over the past 10 years that
those businesses have failed to pay is a whopping $58 billion
of their employees' payroll taxes.
But, again, I think it is important to stress that they are
not just breaching their employees' trust; they are
shortchanging all honest American taxpayers by forcing more of
the weight on the sagging shoulders of hard-working Americans.
This is not a theoretical exercise. As a direct result of these
unpaid payroll taxes, the government must transfer up to $4
billion in taxes from the general fund to pay for Medicare and
Social Security. The IRS estimates that, over the past 10
years, $44 billion has been transferred from general tax
revenues to Social Security and Medicare.
These are difficult times, as stressful as certainly any in
my 32 years of public service as I have seen. And so when we
look at the challenge of the times that the average taxpayer is
facing and we have these deadbeats and billions of taxpayer
dollars being used to cover the shortfalls, clearly something
must be done.
If you look at the cases, it is enough at times to make
your blood boil--cases in which business owners have failed to
pay payroll taxes, while purchasing luxury cars, planes,
mansions, properties in tropical islands and other far-flung
countries. In several case studies, the owners made massive
withdrawals from business accounts, pocketing $20,000, $50,000,
and even hundreds of thousands of dollars in cash. It is clear
that tax cheats are living the high life at the expense of
hard-working American taxpayers.
The GAO report identifies case after case in which the
businesses owe millions upon millions in payroll taxes. Even
worse, these tax cheats appear to be stringing the IRS along,
refusing to submit their taxes for 8, 9, and even 10 years. And
after 10 years, because of the statute of limitations the case
falls over the edge and we lose any ability to proceed. Some
play a shell game to avoid paying taxes, moving money between
multiple entities, shifting assets to family members, and even
claiming bankruptcy to avoid obligations.
So let's step back and put this in perspective: Our tax
gap, which is the difference between the taxes that are owed
and the amount that is actually paid, approaches $300 billion.
And this, by the way, is just taxes that we know of. It does
not include underreported taxes. It does not include unreported
income. And so it is actually understating the nature of the
problem. Unpaid payroll taxes are the single largest business
component of that gap, making up more than 20 percent of the
tax gap itself. And to make matters worse, the GAO will
indicate that the problem is growing and growing. Over the past
few years, the amount of unpaid payroll taxes has increased
just under 20 percent.
While the problem is expanding, our ability to address the
problem is shrinking. The IRS' backlog of payroll tax cases
dwarfs the number of cases actually being pursued. As cases
languish in the backlog and the statute of limitations expires,
billions of dollars in unpaid payroll taxes are written off
every year. I believe more than $4 billion in unpaid tax debt
will be completely written off this year. By 2012, the write-
off of unpaid tax debt is expected to reach $5 billion each
year, and within a couple of years, the write-offs of taxes
that simply cannot be collected will grow another 20 percent to
$6 billion. So what is clear is that we have a problem and we
have to fix it.
Is it a $58 billion problem? Is it a $28 billion problem if
half of the $58 billion is uncollectible? Is it uncollectible
because we did not move quickly enough? Whether it is $28
billion or $58 billion, even for government this is real money.
This is big money.
How do we move forward? The report identifies a number of
concerns with the IRS' current collection procedures and offers
numerous recommendations to improve its enforcement regime. If
we are going to make any inroads in collecting unpaid payroll
taxes, we have to consider substantial changes to IRS'
collection policies and procedures.
A specific concern here is that when we are dealing with
scofflaws and egregious cases, the IRS may have overemphasized
getting taxpayers to comply with the law voluntarily. Getting
voluntary compliance is a desirable goal. I want to stress
that. We understand that. And it would appear to be the right
strategy in most circumstances.
But GAO cites examples in which the tax cheats are simply
stringing the IRS along for years and years, even though they
show no inclination to comply voluntarily. The voluntary
measures are not increasing compliance in these egregious
cases. The time for talk in these cases, in the egregious
cases, beyond-the-pale cases, the time for talk and voluntary
compliance has passed, and it is time for action.
The report is chock full of case studies in which the IRS
revenue officers appear to treat the worst of the worst with
kid gloves. Perhaps we should reconsider the broad discretion
given to those revenue officers when dealing with the worst tax
cheats and encourage the use of more stringent enforcement
tools for these extreme cases.
Mr. Chairman, I would note that I would add my voice and
associate myself with your comments in terms of some of the
specific recommendations that should be adopted.
As a former prosecutor, I know the threat of prosecution
and aggressive enforcement are powerful deterrents. I call upon
the IRS to ratchet up its efforts to recover these billions in
back taxes and hold these tax cheats accountable.
The good news is that there is hope. The States have been
developing creative and effective mechanisms for collecting
taxes, such as identifying tax cheats on the Internet. The
State of Minnesota is one of those States that publishes the
names of tax cheats, and these are not folks who are working
out the problem, these are not folks who are in bankruptcy. So
you can identify the specific class of folks who deserve to
have their name out there, and as a result, it serves as a
deterrent. In addition, the IRS has also acknowledged the
problem and has indicated a positive attitude and a willingness
to take necessary steps to address the issue.
If the issue is more legislation, we need to know what that
is. If the issue is a change in process, then the IRS has to do
that. The bottom line is that the problem is real and has to be
addressed, and hopefully this hearing will be a step in that
direction.
Mr. Chairman, I look forward to exploring these issues with
you and our witnesses today.
Senator Levin. Thank you very much, Senator Coleman.
Let me now welcome our witnesses for today's hearing: Steve
Sebastian, the Director of the Financial Management and
Assurance Unit at the Government Accountability Office; and
Linda Stiff, the Deputy Commissioner for Services and
Enforcement at the Internal Revenue Service. We appreciate very
much both of you being with us today. You have appeared before
this Subcommittee in the past. We welcome you back.
I think you will remember that, pursuant to Rule VI, all
witnesses who testify before the Subcommittee are required to
be sworn. So at this time, I would ask you to please stand and
raise your right hand. Do you swear that the testimony you are
about to give will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Mr. Sebastian. I do.
Ms. Stiff. I do.
Senator Levin. We will be using our usual timing system
today so that about a minute before your time is up--a minute
before the red light will come on, you will see the light
change from green to yellow, which then gives you an
opportunity to conclude your remarks, and your written
testimony, for which we are grateful, will be printed in the
record in its entirety. And we ask that you limit your oral
testimony to no more than 5 minutes.
Mr. Sebastian, we will have you go first, followed by Ms.
Stiff, and then we will turn to questions. Mr. Sebastian.
TESTIMONY OF STEVE J. SEBASTIAN,\1\ DIRECTOR, FINANCIAL
MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Sebastian. Mr. Chairman and Senator Coleman, thank you
for the opportunity to discuss the results of our review of
unpaid payroll taxes. Our report,\1\ which is being released
today, was prepared at the request of this Subcommittee and the
Senate Committee on Finance in response to previous work we
have done on Federal contractors with tax debt. The bottom line
of my testimony this morning is that unpaid payroll taxes are
substantial and represent a significant enforcement challenge
for the IRS.
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\1\ The prepared statement of Mr. Sebastian appears in the Appendix
on page 27.
\1\ The GAO report entitled ``Tax Compliance, Businesses Owe
Billions in Federal Payroll Taxes,'' July 2008, GAO-08-617, submitted
by Mr. Sabastian appears in the Appendix on page 59.
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Before I begin, it is important to remember that payroll
taxes are comprised of individual income tax withholdings and
employee withholdings for Social Security and Medicare, as well
as the employer's matching amounts. As the posterboard
illustrates, employers withhold amounts from employees'
paychecks, hold them in trust for the Federal Government, and
periodically are required to remit them and the matching
amounts.
My testimony this morning will discuss two main aspects
from our review: First, the significance of unpaid payroll
taxes and, second, issues impacting IRS' ability to collect
payroll taxes owed and to prevent the further accumulation of
such taxes.
First, our study found that, as of September 30, 2007, 1.6
million businesses owed over $58 billion in unpaid payroll
taxes, including penalties and interest. As such, payroll taxes
comprise over half of IRS' inventory of delinquent business
taxes. Much of this debt is owed by repeat offenders. In fact,
the number of more egregious offenders has grown significantly
since our last review in 1998.
As the posterboard illustrates, the number of businesses
with over 5 years of unpaid payroll taxes has increased nearly
three-fold, and the number with over 10 years of unpaid payroll
taxes has increased five-fold. Equally disturbing is that over
9,000 individuals were responsible for not paying the payroll
taxes at multiple businesses, over a dozen for some.
Second, our study found that while payroll taxes are
considered a high priority, IRS does not always utilize its
existing collection tools to collect the payroll taxes owed and
to prevent the further accumulation of such taxes.
IRS has a powerful tool to hold business owners and
officers personally responsible for the non-payment of payroll
taxes: The trust fund recovery penalty (TFRP). However, IRS is
not always assessing the TFPRs timely, and once assessed, the
IRS is not always moving to take aggressive action against
these TFRPs. Further, the TFRP is treated as a separate
collection effort from the business case when, in essence, it
is essentially the same tax debt.
Liens are another powerful tool in IRS' enforcement
arsenal. However, IRS does not always file liens to protect the
government's interest, and when it does, it does not always do
so timely. Ironically, because of certain IRS policies, lower-
priority cases may actually have tax liens filed while higher-
priority cases, such as payroll taxes, may not. Eighty percent
of payroll tax cases in IRS' queue awaiting assignment did not
have a tax lien filed.
Driving these issues is IRS' emphasis on gaining voluntary
compliance. While this approach is consistent with IRS' mission
statement and is appropriate for the vast majority of generally
compliant taxpayers, such an approach for egregious payroll tax
offenders appears to do little to collect what is already owed
and to prevent businesses from further accumulating payroll tax
debt.
There is a point at which efforts to continue to work with
the business to gain voluntary compliance may need to cease and
more aggressive enforcement efforts commence. State collection
officials we spoke with seemed to have recognized this. After a
certain point, they changed their focus to one of stopping the
bleeding.
In summary, businesses that withhold money from their
employees' paychecks and fail to remit these monies to the
Federal Government are breaching their fiduciary responsibility
to the government and to their employees. Additionally, such
businesses have a competitive advantage over those businesses
that comply with the tax laws.
There is a lot at stake. As the posterboard illustrates,
the $58 billion in unpaid payroll taxes currently on the books
will expire over the next several years. To the extent IRS'
efforts are unsuccessful in collecting such taxes prior to
their expiration, and in preventing the further accumulation of
such taxes, the compliant taxpayer is left to pick up the tab.
We believe implementation of the recommendations contained
in our report will assist IRS in strengthening enforcement and
improving the collection of payroll taxes.
Mr. Chairman, this concludes my statement. I would be
pleased to answer any questions you or Senator Coleman may have
at this time.
Senator Levin. Thank you so much, Mr. Sebastian. Ms. Stiff.
TESTIMONY OF LINDA STIFF,\1\ DEPUTY COMMISSIONER FOR SERVICES
AND ENVIRONMENT, INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF
THE TREASURY
Ms. Stiff. Chairman Levin, Ranking Member Coleman, and
Members of the Subcommittee, thank you for the opportunity to
testify today on the status of IRS efforts to collect Federal
employment taxes. I appreciate the contribution this
Subcommittee has made over the last 4 years with its
investigations of Federal contractors who are delinquent and of
efforts by unscrupulous promoters and taxpayers to avoid
taxation in the United States. The IRS has found the
opportunity to work with you and your staffs very valuable in
each instance.
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\1\ The prepared statement of Ms. Stiff appears in the Appendix on
page 133.
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We look forward to working with you to improve our efforts
in the collection of Federal employment taxes. While we have
made great progress over the last 5 years, as the GAO report
released this morning demonstrates, we can and we must do
better.
Employment taxes represent the largest portion of total tax
dollars collected by the IRS. In fiscal year 2007, of the $2.7
trillion that came in through taxes, $1.7 trillion was payroll
taxes. Accordingly, the collection of delinquent employment
taxes is a critical priority for us at the Service.
In 1998, Congress passed the IRS Restructuring and Reform
Act, which provided a sweeping realignment of the IRS
workforce, particularly in the area of collection. In addition,
it significantly raised the bar on taxpayer rights. As we at
the IRS sought to respond to these sweeping changes, our
enforcement presence suffered. There was uncertainty over when
and how certain enforcement tools should be applied; and as a
result, over the next 4 years, there was an erosion in the use
of those tools, including liens.
The findings in the GAO report reflect the lingering
results of this drop-off. As the GAO reported, more than 60
percent of the unpaid payroll taxes are owed for periods 2002
and prior. By 2003, the IRS had managed to reset the workforce,
and we are beginning to restore the balance between services
and enforcement. We once again began utilizing our full arsenal
of enforcement tools, including liens, without sacrificing the
gains we had made in improving taxpayer rights.
For example, in fiscal year 2002, we resolved just over 3
million delinquent accounts. By last year, that number had
grown to over 58 percent, with more than 5.2 million delinquent
accounts being resolved. This gain occurred despite the fact
that we have been operating with a relatively flat budget and
while ensuring the protection of taxpayer rights.
Part of our success in this turnaround can be credited to
research. Since 2003, 19 research projects have been conducted
to help improve IRS employment tax efforts. These projects have
focused on selecting the right cases, routing those cases to
the IRS staff with the right skills, and enhancing our ability
to choose the right enforcement tools to resolve cases as
efficiently as possible.
Further complicating our collection efforts is the overall
environment in which many businesses operate. It is important
to note that the Small Business Administration has found that
more than a third of all small businesses do not survive 2
years. Sixty percent do not survive 6 years. Unpaid payroll
taxes reflect this reality. Of the $58 billion in total
reported unpaid employment taxes reported by GAO, 34 percent of
that is attributable to firms in bankruptcy or out of business.
I also want to note that historically the IRS succeeds in
collecting 99.8 percent of all employment taxes owed. Over the
last 10 years, that means more than $11 trillion in payroll
taxes was collected. Clearly, when you are dealing with net
numbers this size, even a decimal point represents a
significant amount.
I want to report to you that, after reviewing the findings
in the GAO report, I have charged a service-wide task force on
collections to refocus its efforts to concentrate solely on the
more effective use of enforcement tools in employment tax
cases.
To support that effort, we are launching a series of
research studies to determine--and I think they go right on
point to the recommendations that the two of you have made for
us today--to look at the effective use of the Trust Fund
recovery penalty; earlier consideration of the filing of liens;
greater use of automated collection tools throughout the
collection process; and to determine if there is a ``point of
no return'' where we need to take a different position with the
taxpayers we are dealing with.
The task force met last week and has begun an aggressive
plan for completing its review of these areas. We think these
efforts will result in continued improvements.
Mr. Chairman, Senator Coleman, let me assure you that the
collection of employment taxes is a core mission of the IRS and
that, like you, we believe leaving $58 billion on the table is
unacceptable. I pledge to you today that we can and we will do
better. I look forward to working with you and other Members of
the Subcommittee as we move forward.
Thank you, and I will be happy to respond to any questions.
Senator Levin. Thank you very much, Ms. Stiff.
Why don't we start with about an 8-minute round, whoever is
keeping track of this.
I was intrigued by the report that talked about 15 weeks of
notices when there is a failure to remit the payroll tax. Is
that the traditional period of notices that go out to
businesses?
Ms. Stiff. Actually, it is a little bit more complex than
the way you have described it. Taxpayers receive a notice--I
think you were talking about the application of the trust fund
recovery penalty notice?
Senator Levin. No, just the business--I guess you call it
the business case.
Ms. Stiff. OK. On a business case, taxpayers are entitled
to receive two notices with an attempt to collect, and let me
add that 80 percent of taxpayers actually self-correct through
that notice stream. And each of those notices offer up to about
45 days, so you quickly accrue into a period of weeks to let
taxpayers resolve that debt. And it works because 80 percent of
them participate.
Senator Levin. So then it is two 45-day periods, so that is
about 12 to 13 weeks.
Ms. Stiff. Right.
Senator Levin. So at the end of the 13 weeks, about 20
percent typically have not responded; 80 percent have
responded. That is worth doing, obviously. Then why not an
automatic lien for the 20 percent?
Ms. Stiff. There are a couple of instances where our
practices provide for, if taxpayers get to that point in the
process and there is a dispute over whether or not the
liability is correct or whether the amount of the liability is
in question----
Senator Levin. Putting those aside.
Ms. Stiff. OK. Taxpayers are entitled to due process. In
other instances, there is another exception where taxpayers are
actually in the process of securing financing to pay off the
debt.
Senator Levin. OK. What does that leave left?
Ms. Stiff. I don't know what the number is that is left----
Senator Levin. Well, 10 or 15 percent, would you guess?
Ms. Stiff. Let me bottom-line it. I agree with you that in
those instances, once we have exhausted those two exceptions,
we should be looking to apply the lien.
Senator Levin. And how many weeks would you estimate it
takes to exhaust those two exceptions? A month? Two months?
Ms. Stiff. Depending on the----
Senator Levin. What should your target be? You have got to
have targets here? What is your target?
Ms. Stiff. I don't know that I could give you a number of
days, but certainly I would expect that once we have made
contact with the taxpayer, we make a request for financial
information to help us make the assessment. We provide
taxpayers an opportunity to get that information, provide it
back. We work with them. In some instances, 30 days might be
adequate. In other instances, taxpayers with complex financial
information may need 90 days. But I think the important thing
is at the point where we have determined that they are no
longer acting in good faith with us, that is the point when we
need to be applying that lien. And that is sooner than we are
doing it today in many instances.
Senator Levin. All right. So at the point when you have
made that determination, which you should begin to make that
determination, would you agree immediately after those two 45-
day periods are over? Is it 30 days or 45?
Ms. Stiff. They get the notice process, and then we contact
them and start soliciting their financial information. Once we
have ascertained that either the information they have leads us
to believe that filing the lien is correct.
Senator Levin. OK.
Ms. Stiff. We should do it.
Senator Levin. And, on the average, should that take 2
months more? Does that sound about right on the average? Give
me some number.
Ms. Stiff. Sir, I don't have a number.
Senator Levin. A range. How about 30 to 90 days?
Ms. Stiff. I will say that I would like to think that in 30
to 90 days that taxpayers would have had an opportunity to
provide the information to us that they need to.
Senator Levin. All right. And then you agree that the lien
should automatically be filed.
Ms. Stiff. I don't know that I can say in every instance
because it will be fact and circumstance driven. But as a
general rule, I would expect that we would take the action at
that time.
Senator Levin. And when you file a lien, do you have to
have a precise number of dollars on that lien?
Ms. Stiff. Yes.
Senator Levin. There has to be a precise number of dollars
on----
Ms. Stiff. No. I think the lien is on the property, and it
is for the amount that is owed the government.
Senator Levin. But it has to be for a specific amount? It
cannot be for a range here?
Ms. Stiff. It is a specific amount on the lien.
Senator Levin. All right. GAO has found that tax liens were
not filed at any point against these businesses with unpaid
payroll taxes in over 30 percent of all payroll tax cases
assigned to the field for collection effort. And we have
introduced a bill called the Tax Lien Simplification Act, S.
1124, which would create a centralized electronic registry that
would be more efficient, less burdensome. And according to
estimates provided by the IRS itself, taxpayers would save
about $570 million over 10 years just from the simplification,
the efficiency of an electronic system instead of what you do
now.
Do you believe that the creation of that electronic system
would help raise the percentage of cases in which liens are
filed? Ms. Stiff, do you want to start?
Ms. Stiff. Sure. I don't know that the creation of the
system itself will increase the number of liens, but I think it
certainly will enable and facilitate our ability to do it.
Senator Levin. Mr. Sebastian.
Mr. Sebastian. I believe it expedites the process and could
result in an increase in the number of lien filings. Also very
important, it may address an issue, a longstanding issue GAO
has on the back end of the process. When taxpayers have
actually resolved their tax debt, it may lead to more timely
release of those tax liens. So it really serves two purposes.
Senator Levin. Now, is the Treasury aware that the IRS has
estimated that our tax lien bill would save the taxpayers $570
million just due to lower administrative costs, Commissioner
Stiff? Are they aware of the fact that you have made that
estimate?
Ms. Stiff. I don't know that they are, and I have to say
that I actually have not seen all those numbers myself. I
believe those numbers were estimates that were done sometime
back when this was a gleam in someone's eye. But I do believe
that there is definitely cost savings to be had and would want
an opportunity to update those.
Senator Levin. Well, would you make the Treasury aware?
Ms. Stiff. Yes, sir.
Senator Levin. And would you let us know what you tell them
in terms of your estimate?
Ms. Stiff. Yes, sir.
Senator Levin. The IRS has told the Subcommittee also that
if the tax lien bill were enacted, it would free up a couple
hundred persons from the Tax Lien Division to do other tax
collection work. Are you familiar with that estimate that the
IRS has given our Subcommittee?
Ms. Stiff. No, sir, I have not seen that myself. But we do
have a group of people that are dedicated to this full-time,
and I have no doubt that with the implementation of new
technology, those numbers might be less than they are today.
Senator Levin. Has the IRS taken a position on our bill?
Ms. Stiff. As you know, the IRS does not take a position on
policy or on legislation. That is the role of the Treasury.
Senator Levin. Do you ever make a recommendation to the
Treasury about policy?
Ms. Stiff. Let me say this, that we appreciate the work of
your staff on putting forward this proposal. We find it
thoughtful, and we actually would like the opportunity to flesh
it out a little bit more with you and the staff, because there
are a number of administrability issues, one being that it
would require appropriated funds for funding. Second, it is
going to take time to build. Three, there are a number of
issues of State law, State rights, State revenue streams, I
think security, identity theft protection issues. And so we
welcome the opportunity to talk through with your folks how to
address those administrability issues.
Senator Levin. OK. And, Mr. Sebastian, have you looked at
our bill?
Mr. Sebastian. We have read through the bill, and I cannot
give you a comprehensive analysis, but on the surface, it
appears to resolve several issues. As I just indicated, I think
it would streamline the lien process of assigning liens. It
might also help deal with some problems IRS has experienced
over the years on the back end, and that is releasing tax
liens.
Senator Levin. One of you--I think, Ms. Stiff, you talked
about using electronic capability a lot more than you use now
in terms of using your lien process, which is obviously not
used to its fullest extent and it is complicated. You have got
thousands of different jurisdictions that you have got to
figure out. So this is a way of using an electronic capability
that is not now being used, and I would hope that you could let
us know within 30 days, if you would, what suggested changes
you would make in the language to address any problems that you
see?
Ms. Stiff. OK. We will work with the Department to do that.
Senator Levin. Thank you. Senator Coleman.
Senator Coleman. Thank you, Mr. Chairman.
Mr. Sebastian, if I can ask that question about the scope
of the problem, we are talking about $58 billion, I think I
noted in my opening statement. That is based on reported
income. We have a $300 billion tax gap based on reported
income. Do we have any estimates on the size of the actual tax
gap?
Mr. Sebastian. You mean amounts not currently on----
Senator Coleman. Yes, is there any way to figure out what
we are really--what the Treasury is really losing here?
Mr. Sebastian. Well, the IRS has estimated, based on a
study done several years ago, that the gross tax gap is about
$345 billion, and when all is said and done, their enforcement
efforts collect about, I think, $55 billion of that, which
leaves a net of maybe $290 billion.
In looking at some of the detail behind that study, we have
identified a minimum of about $15 billion annually attributed
to payroll taxes, and I am not including self-employed here
because the number would grow to maybe $54 billion. But just
with respect to payroll taxes, employee withholding, about $15
billion annually that is included in that estimate.
Now, some portion of that may ultimately be identified by
the IRS through its various enforcement programs, including
matching return information with W-2s, etc., and some small
portion of that may ultimately be collected. But roughly $15
billion is what the IRS would estimate annually in payroll
taxes associated with the tax gap.
I would also add that in looking at some of the data on
IRS' inventory over the years, it looks as though they add
roughly $5 to $5.5 billion in new unpaid payroll taxes to the
inventory of delinquent tax debt each year.
Senator Coleman. Let me step back. If we did nothing, if we
made no changes, what would happen to the outstanding payroll
tax debt?
Mr. Sebastian. My concern is that it would ultimately grow
and, to some extent, be offset by amounts that hit their
statutory expiration date and are written off. So 9 years ago,
we were looking at a balance of $49 billion. Now we are looking
at a balance of $58 billion, roughly $5.5 billion being added
into the inventory annually, and roughly $4 billion and growing
at $5 billion and even $6 billion being written off over the
next several years.
Senator Coleman. Are we also seeing larger amounts that
have to be transferred from the general revenue fund into the
Social Security and Medicare funds because of the failure to
pay these taxes?
Mr. Sebastian. To the extent that the balance grows, yes,
you would see more in the way of transfers from the general
fund to subsidize the Social Security and Medicare trust funds.
Senator Coleman. Let me turn to you, Ms. Stiff. And, by the
way, first, I appreciate the good relationship we have had with
the IRS on so many of these matters, and I appreciate your
candor, both in discussing the historical perspective and some
of the concerns where the IRS did step back from enforcement.
We understand that. And the concern is that as we look at these
egregious cases, is there a line that needs to be drawn?
Let me first go back to the filing of a lien. The report
indicated that $9 billion, I believe, was in the queue--in
other words, there is $9 billion in debt that is kind of lined
up awaiting action. Now, those cases that are assigned to
revenue agents, are those past the point where we have sent a
notice and it has been determined that there is some debt out
there? Where does that fit in with Chairman Levin's--he talked
about the timeline of notice, and then you indicated that some
of those cases have perhaps some specific concerns that would
have us not move forward. When something is assigned, what is
the determination point you assign something over to an agent?
Ms. Stiff. Well, I think you have hit the nail on the head.
These cases that are sitting there in the queue, in all candor,
I would say are the cases, as GAO reported, that I think we
have got to in the coming weeks identify actions. We can get
those assessed and liens filed whether or not they end up in
the hands of a RO. So that we can protect the government's
interest during whatever period they are there. We are going to
be back with some steps that we are talking through right now
as to how to address those cases in the queue that both you and
the Chairman have brought up here today.
Senator Coleman. I appreciate that. That is what struck me,
that $9 billion in the queue, obviously these are cases in
which folks are not making payments, they are going to be
assigned to an agent. You have a backlog, and there are other
issues that we have to address in terms of funding enforcement,
and this Subcommittee has been very supportive of that. But I
appreciate the candor, it would appear that the first thing you
want to do is protect the government's interest. That is what
the lien does. And when you do that, then you have time to do
some other things. So I appreciate the focus on that.
I am not sure if this is for Mr. Sebastian or Ms. Stiff.
Can I go back to other cases? One of the things we looked at
was the Financial Management Service, the levying process. It
appears--and this goes back to some earlier reports that have
been done, I think perhaps in 1999, there were cases in which
the government paid over $211 million annually to folks who
owed $2 billion in outstanding trust fund recovery penalties.
In other words, we have folks who are identified as having
trust fund recovery penalties, but at the same time, they are
getting Federal payments along the way. Have we looked at that
recently? Is that still a possibility to use the levying
process with the FMS to ensure that we are getting a return
from folks who have trust fund penalty obligations?
Mr. Sebastian. We did not look at that as part of this
study. In previous work that we have done for this
Subcommittee, looking at contractors with tax debt, we have
looked into that whole issue of how much of IRS tax debt
actually gets into the levy program and is turned on and is
then subject to levy of Federal payments.
I have some conflicting information, quite frankly, on
whether or not individuals that have been assessed a trust fund
recovery penalty are or are not included. But what I will point
out is a significant number of businesses do not have
associated trust fund recoveries. So to the extent that the IRS
has not assessed responsible businesses and officers, those
accounts would not be subject to levy in the first place.
Senator Coleman. So we start off first with, I think, the
need to look at moving on a more accelerated basis with the
lien process, to at least protect the government's interest,
and then the next focus would be at what point can we move more
aggressively on the trust fund recovery process. And then if
you do that, there is another step to look at, and that is to
say are there, in fact, payments being made to these folks that
we could then use for the levy process.
So, Ms. Stiff, I appreciate your forward-looking approach
here to say you have a task force, you have identified some of
the concerns the Chairman and I have raised. For me, it becomes
pretty logical: Protect the government's interest and move more
effectively to be in a position to levy. We have not even
talked about some of the stronger actions you could take such
as the injunctive process. There are some very strong actions
here that I would think in the most egregious cases may be
warranted. The report indicates that those are very rarely
used. Very rarely did you take the toughest steps. And we are
dealing with folks who may be involved in criminal activity, 10
years of simply ignoring their tax responsibilities, records of
using these funds for personal gain, personal use. So I would
hope you would take another look at that.
Perhaps this is too big a question to respond in the time I
have, but is there a possibility of drawing a bright line about
when getting voluntary compliance ceases and more aggressive
action is needed--or is this something that requires discretion
plus how do we get to that point where we move from voluntary
to more aggressive, more forceful, more dictated, more mandated
action on the part of the IRS?
Ms. Stiff. I don't think that over our history that we have
arrived at a bright-light test that applies in each and every
instance. But one of the things I commit to you is that is an
area that the task force is going to look at, because even if
you cannot have a broad, sweeping rule that applies to
everything, it would seem that we can begin testing application
of some rules and see where they work and what the outcome is
for both the taxpayers and the government, and then where it
works, apply it more broadly. So we are going to be doing some
work in that area.
Senator Coleman. Mr. Chairman, could I ask just Mr.
Sebastian to respond?
Senator Levin. Sure.
Senator Coleman. Mr. Sebastian, would you respond to that,
please?
Mr. Sebastian. I would tend to agree with what I just
heard. Right now, it would be hard to tell what is the fine
line. Clearly, when we get to 40, 50 quarters of outstanding
tax debt, these cases have gone on much too long. Whether the
magic number is 10, 15, 20 quarters, I don't know. I think that
is information that the IRS could actually look at through some
detailed analysis and then set up what may be the rule with
exceptions that should apply in certain cases.
Senator Coleman. Thank you, Mr. Sebastian.
Senator Levin. Thank you. Senator McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you, Mr. Chairman.
I am going to follow up a little bit on Senator Coleman's
line of questioning. We have had a Treasury Inspector General
for Tax Administration study from 8 years ago, another study in
2005 that basically says that voluntary compliance is not
working. We are here today because voluntary compliance is not
working. This problem is not getting better. It is getting
worse.
I understand a little bit about deterrence. There are
crimes you can deter, and there are crimes you cannot deter.
There are many crimes that, even if you do the toughest
prosecutions imaginable, people are still going to go and
commit those crimes. I think sometimes politicians like to
think deterrence works in every instance if you have tough
criminal penalties.
But I will tell you where deterrence does work. It works in
the business community. When businesspeople see other
businesspeople on the courthouse steps on the evening news, it
works. And I would like Mr. Sebastian and Ms. Stiff to discuss
the failure of any meaningful criminal prosecution. If someone
has gotten notice after notice after notice and they continue
to engage in this behavior for years, the reason they are doing
it is they know nothing is going to happen to them. And I don't
know why we need a task force, honestly. I mean, if you have
gotten notice and you have not paid your payroll taxes and you
have gotten notices every quarter for 2 or 3 years, we need a
task force to tell us that we need to put people in jail for
that? They are purposely not paying what they owe. It is so
unfair to people who pay taxes.
Mr. Sebastian, what did your report specifically say about
the likelihood of criminal prosecution in any of these cases?
Mr. Sebastian. We did not do a detailed review of that
looking at past cases. I do know that the IRS has prosecuted
payroll tax cases, and the Deputy Commissioner could probably
elaborate on that. I can tell you that in discussions that we
have had with revenue officers--and this really mirrors what we
found in 1998 when we did the earlier study. The IRS and, in
particular, the Criminal Investigation Division and the
Department of Justice are somewhat reluctant to pursue
prosecution for employment tax offenses. They cite the process
is very labor intensive, laborious. There is a tremendous
amount of burden on the part of the IRS to actually provide the
Department of Justice with the information they need to
successfully prosecute a case.
Again, these are discussions that we had with revenue
officers, but it has served as a deterrent to moving forward,
taking more aggressive enforcement action in a number of cases.
Senator McCaskill. Could you address that in terms of the
likelihood of criminal prosecution for repeat offenders who
have been noticed and noticed and noticed and obviously
voluntary is not in their dictionary?
Ms. Stiff. Well, first--and I know that the three of you
are familiar with that--the bar for criminal prosecution is
certainly a higher bar than what we have in the civil arena.
And many of the cases outlined in this report actually would be
very difficult for the Department of Justice to prosecute
successfully because many of these taxpayers are not out--they
are part in, part out. They come in, they make good-faith
efforts for a couple of years, and then it recurs again. And so
there are a number of difficulties, I believe, for the Justice
Department in trying to prosecute that.
Having said that, in the last 4 years our criminal
investigations in the employment tax arena have increased by 55
percent. We made a conscious effort in 2003, after the drawdown
of enforcement that occurred after RRA 1998 to work with the
Justice Department and to work with our criminal investigators
and our fraud specialists to reinvigorate that program and the
referrals. And I think I outlined in my testimony several
strong examples of where we have been effective and successful
in actually getting criminal prosecutions and having offenders
actually serve time.
Senator McCaskill. And how many criminal prosecutions
occurred last year for failure to pay payroll taxes in the
whole country?
Ms. Stiff. I do not have the number right off the top of my
head. I want to say roughly 200.
Senator McCaskill. So we are talking about an average of
four cases per State?
Ms. Stiff. It probably was not that, but yes.
Senator McCaskill. And how many offenders do you think we
have in the country right now?
Ms. Stiff. I do not have that number. I know that the GAO
report says that we have 1.6 million businesses known to us
that we are talking about here today.
Senator McCaskill. Well, I think the standard in the
criminal law here is ``knowingly,'' and having a great deal of
experience bringing criminal cases in my life, you have to
convince 12 people beyond a reasonable doubt that somebody did
not pay the money knowingly. And, trust me, there are going to
be taxpayers on that jury. They are going to be offended
because they are paying their taxes every year. A lot of small
businesspeople at their own--they are cutting their take of the
business in order to comply with the law.
I just have a hard time--I run into this all the time,
where people say, well, what you have to do to bring a criminal
case at Justice, or maybe what we have to do is ask some
questions at the Justice Department as to what they are
requiring in order to bring a criminal case. But if somebody
walked into my office when I was a prosecutor and said, ``Here
is a stack of letters that this businessman signed for or
businesswoman signed for, quarter after quarter after quarter--
I am assuming a lot of these are return receipt requested,
correct? These notifications?
Ms. Stiff. I actually do not know the answer to that. I
would have to check.
Senator McCaskill. I am assuming bad news from the IRS is
usually return receipt requested. Usually that green card is
something that comes with it. And you have a pile of those in
front of a jury and say how many times this employer has been
notified to pay their payroll taxes and they failed to do it
again? That is knowingly. It is not complicated. It is not
hard.
I just think that we need to really stay focused on
criminal prosecution for repeat offenders. And I think you
would see a miraculous turnaround in this country. I think they
all know out there that when it comes to the end of the month
and they cannot pay anything, the one that they can get away
with is not paying the IRS. And I think that is why they do it.
I do not think it is that complicated.
This task force that you are referring to, how long do you
think the task force is going to take to come up with
recommendations?
Ms. Stiff. Well, I suspect that within 90 days we will have
a suite of recommendations. I suspect that sooner than that we
will begin doing some of the more obvious and easier things to
do.
But on the criminal investigation side, I mean, we do not
disagree. We believe we need to have a strong criminal
investigation presence where the circumstances warrant that.
Senator McCaskill. Well, I think repeat offenders, that is
the circumstance. And I think the bright line is just deciding
if you do it for longer than 2 years, you are up. And you know
what is going to happen? These people are not going to take a
chance at rolling the dice in front of a jury. They are going
to pay for probation. That is what happens in the criminal
justice system all the time with white-collar crime. They pay
for probation. But that is better than them not paying.
I think that the efficacy of taking a much more aggressive
approach on criminal prosecution is going to make a real
difference in this area. And I guess, Mr. Sebastian, my
frustration is: How many times has there been a report issued
about this subject? And how many times has something actually
happened meaningful to change things?
Mr. Sebastian. I can only say I have been involved in
multiple reports over the last 10 years looking at payroll
taxes, either as the subject or peripherally. And you are
absolutely right. We continue to see the same thing. We
continue to see multiple offenders flagrantly violating the tax
laws.
Senator McCaskill. I guess we can go back here another 10
years, another five or six reports, or we can get busy and try
to put some people in jail. And I think it will work, Mr.
Chairman. Thank you.
Senator Levin. Thank you. We have focused also--in addition
to what Senator McCaskill has talked about in terms of criminal
enforcement--we have also talked about a lien system which is
functional, which is easily worked, and how much money would be
saved by doing that. And we would ask you if you would take a
look--and I had the staff give you copies of this analysis.
This analysis was prepared by the IRS at our request. We
asked the IRS to take a look at an electronic system for lien
filing. If you look at the right, the bottom at the right over
the 10-year period, the cost of the current system is $679
million, and the cost of doing this electronically would be
$107 million. That is where our figure comes from. Are you
familiar with that, Ms. Stiff?
Ms. Stiff. I cannot say that I have seen this before.
Senator Levin. I am kind of surprised.
Ms. Stiff. I have no doubt that my staff and folks worked
on this, and I do not challenge that, but I have not personally
had a chance to review this.
Senator Levin. Well, I hope you will take a look at this.
Ms. Stiff. I certainly will.
Senator Levin. Now, there was a chart that the staff put
up, increases in number of businesses with multiple payroll tax
debts. I am wondering if somebody could put that chart up
again.\1\
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\1\ The chart referred to appears as an attachment to the GAO
Statement in the Appendix on page 56.
---------------------------------------------------------------------------
The number of businesses with unpaid payroll taxes has
declined although the number of payroll taxes owing has
increased. The decrease in the number of businesses is down
from 1.8 to 1.6 million--that is not on the chart. That is the
number we have received. I guess the GAO can confirm that.
Mr. Sebastian. That is correct.
Senator Levin. And yet we see on this chart that there is a
vast increase in the number of businesses with over 5 years of
debt, and even a bigger percentage increase in the number of
businesses with over 10 years of debt. That is a striking chart
to me.\1\
What is the explanation for that? Why don't we go after the
ones that have the longest owing debt?
Ms. Stiff. Well, I think that collection experts, private
sector and public sector, maintain that the earlier you get to
the debt, the greater the likelihood of recovering the amounts
owed.
Senator Levin. Sure.
Ms. Stiff. Or a higher percent of it.
Senator Levin. I can understand that. What I am intrigued
by is the percentage has gone up. The numbers have gone up. Do
you see what I am saying?
Ms. Stiff. Yes, sir. And I do not know that I can nail the
numbers, but basically, as I said in my oral statement, we had
a period from 1998 to 2002 where the number of delinquent
accounts that we touched decreased significantly.
Senator Levin. All right. Does the GAO have the numbers for
2002 to 2007? Do you happen to have those numbers handy?
Mr. Sebastian. In terms of?
Senator Levin. If we looked at just 2002, what the numbers
were that had over 5 years of debt, instead of 1998?
Mr. Sebastian. No, I do not. It is a snapshot of a certain
point in time.
Senator Levin. Would you just for the record give us a
different snapshot to take care of the point that Ms. Stiff is
making?
Mr. Sebastian. We will do what we can, but the reason that
I hesitate on that is because, as accounts hit their statutory
expiration date and fall off, they are no longer in the
inventory. So to be able to construct this analysis, I would
need to know what the inventory was comprised of in 2002, 2003,
and 2004. We may not be able to get that information. We will
do what we can.
Senator Levin. Fine. But you do know what it was in 1998.
Mr. Sebastian. Yes, and that was based on the fact we had
done this analysis and reported out in 1998.
Senator Levin. Got you. If it is not too much trouble, if
you could get that for us, it would be helpful.
Now, Senator Coleman read from the top of page 32 of the
GAO report, and I want to pursue that: ``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.'' And I am trying to
understand why it should not be automatic at that point. Why
should not a lien be automatically filed if somebody is in the
queue awaiting assignment?
Ms. Stiff. Well, I think that was the question that I
answered earlier, that we actually--I agree that queue is a
weakness in the system and that will be one of the first areas
that we are looking at, is to see what analysis can be done
there and which cases the lien filing would be appropriate.
Senator Levin. Automatically. If you are assigned and you
are waiting in a queue, why would that not automatically result
in a lien? That is my question.
Ms. Stiff. Well, automatically, I guess it may be semantics
here. We do not have an automatic lien-filing system, so
someone has got to----
Senator Levin. Why should it not be automatic?
Ms. Stiff. You mean the decision to apply the lien.
Senator Levin. Yes. If someone is in a queue for
enforcement, they have ignored all your notices.
Ms. Stiff. I am agreeing with you.
Senator Levin. All right. I want to just get back to the
taxes owing issue. The taxes that we are talking about in terms
of criminal enforcement are taxes which were withheld from the
employee. Is that correct? Those are the ones that are put in
trust.
Ms. Stiff. Yes.
Senator Levin. So that when we are talking criminal
enforcement, it is for failure to send to the government the
tax money of the employee that was withheld from the employee's
pay. Is that correct?
Ms. Stiff. Yes.
Senator Levin. It is not a felony for failing to pay your
own taxes. It is a felony for withholding taxes from an
employee and then not sending those to the government.
Ms. Stiff. Yes, sir.
Senator Levin. OK, because I think there could be some
confusion. We do not throw people in jail in this country for
failing to pay their taxes. It is only if there is fraud, if
there is misrepresentation, or if there is a specified crime
such as not sending to the government trust fund monies which
do not belong to you. It is someone else's money that is being
stolen or cheated here. I get a little nervous here when I hear
about not paying your taxes resulting in criminal enforcement.
And I think I am right on this. I hope I am.
Ms. Stiff. Well, it is further compounded by the fact that
in all too many cases, these individuals have little or nothing
that the government can recover at that time.
Senator Levin. I understand that.
Ms. Stiff. They have exhausted all their finances.
Senator Levin. Yes, but I am just talking about criminal
law enforcement here. I want to have the record--if I am
correct, which I hope I am.
I would like to talk about this earned income tax credit
(EITC). This Administration has put a great deal of emphasis on
going after the poorer folks who are somehow or other not
entitled to an earned income tax credit, which allegedly they
have taken, and comparing that to the big fish who get away
with not paying other people's taxes which they have withheld
and put in trust, and some of the other abuses that this
Subcommittee has seen.
How many IRS personnel are involved in the EITC delinquency
program, do you know?
Ms. Stiff. I do not have the number off the top of my head.
Senator Levin. Do you know how that would compare to the
number of personnel who are in the----
Ms. Stiff. In collection, we probably have between 8,000
and 10,000 individuals working here, and I am guesstimating off
the top of my head--I will get you a better number--a couple
thousand working on the EITC.
Senator Levin. The EITC, would you get us those numbers?
Ms. Stiff. Sure thing.
Senator Levin. Thanks. Senator Coleman.
Senator Coleman. Thank you, Mr. Chairman. I want to just
follow up on the trust fund recovery program, the idea that
criminal charges were being focused on monies that you were
supposed to forward, held in trust, and the issue I talked
about earlier, monies from the general fund coming in at the
end of the year, that is for the trust fund recovery program,
right? In other words, we have got to take general fund money
to pay for what employers do not send in. Is that correct, Mr.
Sebastian?
Mr. Sebastian. That is correct. What they withhold from
employees' paychecks and do not remit to the Federal
Government.
Senator Coleman. And when we are talking about levy
programs and liens, we are talking about going after the TFRP
funds? What about the monies that you are owed? Any levies
apply to that? Do the liens apply to that, or we are just
dealing with trust fund recovery money?
Ms. Stiff. No, levies and liens apply to individual income
taxes as well when there is a delinquency and we believe it is
appropriate.
Senator Coleman. I talked before about whether we would be
referring any cases to the FMS for levying. Do you know if any
of the cases in the queue, that $9 billion, is there any
referral to FMS for levying possibilities with those dollars?
Ms. Stiff. All of these cases are in the FMS levy program,
so if there is a match, the levy will be applied against them.
Senator Coleman. Let me just ask one question--because
Senator McCaskill was talking about deterrence. One of the ways
in which the State has found what they believe to be an
effective deterrence is publishing the names of individuals who
have these obligations or repeat scofflaws--again, not cases in
which they are contesting, not cases in which there is a
bankruptcy, etc., but those cases which establish that you have
a problem here and there has been no response. Why doesn't the
IRS do that?
Ms. Stiff. Any number of reasons. First of all, probably a
matter of policy and a matter of practice, and the fact that
the lien-filing process--I forget which one of you described
earlier--is very localized and very decentralized across all
States. And I do not know that we even have a master database.
Senator Coleman. Would it be something that the IRS would
look at, this idea of publishing names? Is that something that
is within the realm of possibility? And if so, is it something
that you need legislative authority to do?
Ms. Stiff. I think we need legislation, absolutely, because
we would probably be barred from sharing that under the current
statutes.
Senator Coleman. I would like you to get back to the
Subcommittee with something very specific, in fact, if there is
legislative authority that is needed, and also----
Ms. Stiff. I am confident it requires legislation.
Senator Coleman. The other area where the States have been
apparently more effective is in being able to track down
dollars that have been shifted between financial institutions.
Oftentimes, we see in these cases somebody emptying out one
account and then creating another one, and it is kind of a
difficult trail to follow. At least in the States they
apparently have been able to cut that.
Mr. Sebastian, did you track that at all? And are there
specific things that we could be doing to be as effective on
the Federal level?
Mr. Sebastian. Well, in fact, it is one of our
recommendations that the IRS take a look at what some of the
States are doing. I think we looked at maybe five States, five
or six States that actually are working to better perfect their
levying process, either through legislation or agreements with
financial institutions, so you are not spending a tremendous
amount of resources trying to find the bank account of a
particular individual and then levying. That process has
already been established through agreements with financial
institutions.
Senator Coleman. And, Ms. Stiff, has this been a problem
for IRS--do you have these agreements with financial
institutions? Is this something that the agency looks to do in
order to more effectively trace where some of the dollars are?
Ms. Stiff. We are going to be looking at everything we are
doing and see what opportunities there are to improve. Let me
just say--and at the risk of sounding a little bit defensive,
when we characterize what the States are doing or what we are
doing, I just feel compelled to remind that we succeed in
collecting 99.8 percent of all employment taxes owed; over the
last 10 years, IRS collected more than $11 trillion in payroll
taxes. And so it is not as if our processes are not robust and
rigorous in terms of getting employment tax collections. I
think that both the GAO and the Subcommittee have just
highlighted on where the weaknesses are and where there is the
most opportunity.
Senator Coleman. And we are not arguing about that, but as
you indicated in your testimony, when you are talking about
trillions, a decimal point is a big number.
Ms. Stiff. It is a lot.
Senator Coleman. And if the States are doing something that
is seemingly more effective, my question is simply: Is it
something that the IRS can do? Is it something you have
considered? And if the problem is legislative authority, we
would like to know. In other words, if it is something that
makes sense----
Ms. Stiff. OK.
Senator Coleman [continuing]. I need to know whether you
need more authority to do that or whether you simply refuse to
do it or whether it is something you would like to do but you
can do administratively. Again, does it make sense? Is it
another tool in your arsenal? And then if it is not, you have
to get back to us and say, Senator, we need legislative
authority. If you legislate it, we are prepared to do it.
Ms. Stiff. Absolutely. We will do a review of the best
practices, look at what we are doing versus what is being done,
and come back to you where we need assistance.
Senator Coleman. And I appreciate that. Mr. Sebastian.
Mr. Sebastian. Yes, Senator Coleman, I just wanted to
mention, when Ms. Stiff talks about the $1.7, $1.9 trillion, it
is important to remember that the vast majority of taxpayers
are compliant. So those monies, much of those monies are
actually coming in almost on autopilot. These are compliant
taxpayers. They understand. They make their timely tax
deposits, file their returns, etc.
I think the bigger measure would be for those that
initially are not paying their taxes when due, how much is IRS
collecting on those through the notice process, through its
enforcement actions, and compare that against some of the
issues that we have identified in our study.
Senator Coleman. I think that is fair, and, again, I think
what makes this so outrageous and so irritating is that the
average taxpayer is doing what they should be doing.
Mr. Sebastian. Absolutely.
Senator Coleman. And as a result, certainly the burden then
is back to us to say, OK, for those scofflaws and tax cheats,
we are going to be very aggressive to ensure that they live up
to the obligations because it is an affront to the average
taxpayer when they do not.
Thank you, Mr. Chairman.
Senator Levin. I just have a couple more questions. Going
back to the lien issue again, in terms of the question of if
the lien is automatic, how could some businesses then be able
to pay their back taxes or stay in business to pay back taxes.
If you made it automatic after a certain period of time, then
it could be removed, obviously, if the business carries their
burden of persuading one of your employees that removal of the
lien will lead to greater collection than maintaining the lien.
But at least it would create some pressure on that company to
pay their back taxes.
Ms. Stiff. I do not disagree with that.
Senator Levin. All right. Now, do you have performance
measures for employees in the collection area as to how well
they are doing that goes into their employment record?
Ms. Stiff. OK. After RRA 1998, we were statutorily
prohibited from the use of many of what you would consider
common-sense kinds of collection measures in terms of how many
dollars you collect, how many cases you close. But we use a
variety of other types of measures, proxy measures to how long
it takes them to do their cases, are they following up timely.
And I think you certainly saw in some of these examples that
was not happening as well.
But the issue of measures in the collection arena is,
frankly, very dicey in light of the statutory prohibitions and
a risk of--I mean, in an area where managers particularly out
in the field with revenue officers working for them, there is
an abundance of caution and a high degree of angst.
Senator Levin. Is there a clear direction as to what can be
done and what cannot be done?
Ms. Stiff. Yes, sir. Every year we go out and we do an
annual reorientation, a retraining of managers and of ROs about
what can be done. But the kinds of things that you talked about
earlier are probably going to fall under the statutory
prohibition.
Senator Levin. But in terms of what can be done, clarity as
to that, there is a clear instruction to your managers as to
what performance criteria, can be used?
Ms. Stiff. Yes, sir.
Senator Levin. All right. Any other questions?
Senator Coleman. I have nothing further, Mr. Chairman.
Senator Levin. We appreciate again your testimony. It has
been very helpful.
Ms. Stiff. Thank you.
Mr. Sebastian. Thank you.
Senator Coleman. Thank you.
Senator Levin. The hearing is adjourned.
[Whereupon, at 10:25 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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