Evidence suggests that many businesses are no longer taking their obligation to pay and remit payroll tax seriously. According to recent GAO report, as of last September 30, 1.6 million businesses owe the IRS in excess of $58 billion in payroll taxes, interest, and penalties. That is the amount accumulated over a period of ten years. Taxes that have been owed for longer than ten years may have been permanently lost, due to a statute of limitations.
That amounts to about 20 percent of the total delinquent taxes ($288 billion) for the same period. Spot audits by the GAO and the IRS reveal that most of the missing tax money is money that was withheld from employee salaries. Some of the unpaid tax money has been used by business owners for their own purposes - an example from the report is that of a business owner who diverted $2.5 million in payroll taxes, while purchasing luxury cars and other personal property - or to fund operations, which gives them an unfair advantage over honest business owners who properly meet their payroll tax obligations.
Who is Failing to Pay Taxes?
The majority of offenders are from three industries: construction ($8.6 billion), professional services ($4.4 billion), and healthcare ($4 billion).
Seventy percent of all unpaid payroll taxes is owed by companies with more than four quarters of unpaid federal taxes. More than 25 percent of the delinquent payroll taxes is owed by businesses with more than 12 quarters of unpaid taxes. Some of the unpaid taxes are from business owners with multiple operations (as many as a dozen different entities all with unremitted payroll taxes). Since much of the unpaid tax money represents Social Security taxes and Hospital Insurance, the federal government may be forced to transfer money from the General Fund to cover the shortfall. As of last November, the government had already transferred $44 billion more than it took in.
In the decade beginning October 1, 1998 and ending September 30,2007, the number of businesses with more than 20 quarters of delinquent taxes grew by 174 percent. Businesses with more than 40 quarters of delinquent taxes grew by 470 percent.
The IRS states that it doesn't have sufficient resources to begin collection action against all of its high-priority cases. They estimate that about 52 percent of the delinquent funds, or $30 billion, is currently collectible. Others are deemed uncollectible for various reasons, including that the debtor business is defunct, insolvent after bankruptcy, or experiencing financial hardship.
The GAO's Summary of the Problem
The General Accounting Office report included a review of IRS procedures for achieving compliance and found many problems. The tax authority acknowledges that it has powerful tools available for tax collection, but that they are not always used effectively. They also acknowledge that their delinquent tax rolls include many repeat offenders who refuse to come into compliance. Here are some of the major issues the GAO found with IRS enforcement.
- The agency strives for voluntary compliance, rather than compulsory, which tends to let offenders ride for years before the tax is collected.
- Though liens can be used to enforce compliance, they often are not filed on a timely basis. Over one third of the cases that had gone to collection did not have liens filed.
- In addition, penalties are not assessed promptly on those responsible for failing to remit taxes, sometimes resulting in lost opportunities to assess penalties at all. The GAO found that the average time it takes to pursue collection is 40 weeks, and another 40 weeks to assess the Trust Fund Recovery Penalty.
- The tax agency often places a higher priority on collecting from delinquent businesses rather than from the individuals responsible for remitting taxes.
- Offenders are not always barred from continuing to rack up more payroll tax debt.
- The IRS doesn't have a plan in place to improve this problem area.
The GAO noted that in many cases, states do a better job of enforcing compliance and preventing accumulation of unpaid payroll taxes. They also have systems established in coordination with financial institutions that allow them to identify and act on levy sources.
After much criticism from the U.S. Senate, Deputy IRS Commissioner Linda Stiff told them that though the numbers look dismal, IRS collection activities have shown much greater results in recent years. In the year ended September 30, 2007, for example, 5.2 million delinquent cases were settled, as opposed to 3 million in 2002.
At a time when so many Americans are straining to make financial ends meet, this kind of behavior is stirring outrage, said Norm Coleman the Republican Senator from Minnesota who requested the GAO study.