Unpaid 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. GAO summarized this report in testimony before Congress; see: Payroll Taxes: Billions in Delinquent Taxes and Penalties Due but Unlikely to Be Collected, by Gregory D. Kutz, Associate Director for Governmentwide Accounting and Financial Management Issues, and Cornelia M. Ashby, Associate Director for Tax Policy and Administration Issues, before the Subcommittee on Government Management, Information and Technology, House Committee on Government Reform. GAO/T-AIMD/GGD-99-256, Aug. 2 (29 pages).

GAO noted that: (1) according to IRS records, at September 30, 1998, nearly 2 million businesses owed about $49 billion in payroll taxes, or about 22 percent of IRS' $222 billion total outstanding balance of unpaid tax assessments; (2) 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; (3) GAO's review of about 200 unpaid payroll tax cases and interviews with IRS revenue officers throughout the country indicated that the most common types of businesses or industries with unpaid payroll taxes included construction companies and restaurants, although other types of businesses also have unpaid payroll taxes; (4) according to IRS records, trust fund recovery penalties of about $15 billion had been assessed against, and continue to be owed by, approximately 185,000 individuals found to be willful and responsible for the nonpayment of payroll taxes withheld from employees; (5) IRS records indicate that nearly 25,000 individuals, or over 13 percent of the individuals assessed trust fund recovery penalties, were responsible for the nonpayment of payroll taxes at more than one business; (6) these records also indicate 29 cases in which the same individual was assessed a trust fund recovery penalty for more than 12 separate businesses; (7) individuals responsible for the nonpayment of payroll taxes and businesses that owe payroll taxes receive significant federal benefits and other federal payments; (8) GAO estimates that about 16,700 businesses and individuals with unpaid payroll taxes and trust fund recovery penalty assessments, respectively, received an estimated $7 billion in federal payments over a 3-month period; (9) GAO also estimates that 12,700 businesses with unpaid payroll taxes and individuals with outstanding trust fund recovery penalties had about $3.5 billion in outstanding Small Business Administration guaranteed loans at September 30, 1998; (10) GAO estimates that about 18,800 individuals with outstanding trust fund recovery penalty assessments at September 30, 1998, were receiving $212 million annually in Social Security, Railroad Retirement, federal retirement, and federal civilian salaries; (11) several factors affect IRS' ability to enforce compliance and pursue collections of unpaid payroll taxes; and (12) financial management system deficiencies and other internal control weaknesses affect the completeness and accuracy of taxpayer accounts, making it difficult for IRS to manage its unpaid assessments.