Payroll Taxes

Nearly 2 million businesses owed nearly $50 billion in payroll taxes as of September 1998, or about 22 percent of the Internal Revenue Service's (IRS) $222 billion total outstanding balance of unpaid tax assessments. The businesses that failed to remit withheld payroll taxes were typically in wage-based industries and had few available assets from which IRS could recover these taxes. They were usually small, closely held businesses using a corporate structure, but this varied throughout the country. GAO found that the most common types of businesses with unpaid payroll taxes were construction companies and restaurants, although other types of business--computer software; child care; and such professional services as legal, medical, and accounting firms--also have unpaid payroll taxes. Most unpaid payroll taxes are not fully collectible, and there is often no recovery potential because many of the businesses are insolvent, defunct, or otherwise unable to pay. Penalties of about $15 billion had been assessed against, and continue to be owed by, about 185,000 persons--typically corporation officers--found responsible for the nonpayment of payroll taxes withheld from employees. Individuals responsible for the nonpayment of payroll taxes and businesses that owe payroll taxes receive significant federal benefits and other federal payments. Several factors affect IRS' ability to enforce compliance and pursue collections of unpaid payroll taxes. For example, financial management system shortcomings and other internal control weaknesses affect the completeness and the accuracy of taxpayers' accounts, making it difficult for IRS to manage its unpaid assessments. Also, federal law does not prevent businesses or individuals from receiving federal payments or loans when they are delinquent in paying federal taxes. This testimony summarizes the August 1999 GAO report, GAO/AIMD/GGD-99-211.

GAO noted that: (1) at September 30, 1998, $49 billion in cumulative unpaid payroll taxes were owed by nearly 2 million businesses, and $15 billion in TFRPs had been assessed against and remained owed by, 185,000 individuals responsible for the nonpayment of payroll taxes; (2) the majority of these unpaid payroll taxes and associated TFRPs will unlikely be collected; (3) nearly 25,000 individuals with outstanding TFRPs were responsible for withholding but not forwarding payroll taxes to the government at more than one business; (4) a significant number of both businesses with unpaid payroll taxes and individuals with outstanding TFRPs are also receiving billions of dollars in federal benefits and payments; and (5) several factors, including financial management system deficiencies and internal control weaknesses, ineffective taxpayer education and early warning programs, and federal and state laws, affect the Internal Revenue Service's ability to enforce compliance and pursue collection of unpaid payroll taxes.