Tax Compliance
Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System Gao ID: GAO-08-31 November 16, 2007Since February 2004, GAO has reported that weaknesses in the federal programs and controls that allowed thousands of federal contractors, tax exempt entities, and Medicare providers to receive government money while owing taxes. GAO was asked to determine if these problems exist for entities who receive federal grants or direct assistance and (1) describe the magnitude of taxes owed, (2) provide examples of grant recipients involved in abusive and potentially criminal activity, and (3) assess efforts to prevent delinquent taxpayers from participating in such programs. To perform this work, GAO analyzed data from the Internal Revenue Service (IRS), three of the largest grant and direct assistance payment systems, representing over $460 billion in payments in fiscal years 2005 and 2006, and the Housing and Urban Development (HUD) Section 8 tenant-based housing program. GAO investigated 20 cases to provide examples of grant recipients involved in abusive activity.
While most recipients of payments federal grant and direct assistance programs pay their federal taxes, tens of thousands of recipients collectively owed $790 million in federal taxes as of September 30, 2006. This included over 2,000 individuals and organizations that received $124 billion of payments directly from the federal government and who owed more than $270 million of unpaid taxes (almost 6 percent of such recipients) and about 37,000 landlords participating in HUD's Section 8 tenant-based housing program who owed an estimated $520 million of unpaid taxes (almost 4 percent of such landlords). The $790 million estimate is likely substantially understated because GAO's analysis excluded the 80 percent of federal grants that are directly given to state and local governments which, in turn, disburse the grants to the ultimate recipients. GAO selected 20 grant and direct assistance recipients with high tax debt for a more in-depth investigation of the extent and nature of abuse and criminal activity. For all 20 cases GAO found abusive and potential criminal activity related to the federal tax system, including failure to remit individual income taxes and/or payroll taxes to IRS. Rather than fulfill their role as ''trustees'' of payroll tax money and forward it to IRS, these grant recipients diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these recipients diverted the payroll tax money for their own benefit or to help fund their businesses. GAO referred these 20 cases to IRS for additional collection and investigation action, as appropriate. Federal law and current governmentwide policies do not prohibit individuals and organizations with unpaid taxes from receiving grants or direct assistance. Several federal agencies established policies against awarding grants to tax delinquent applicants; however, federal agencies do not verify applicants' certification that they do not owe taxes. Further, federal law generally prohibits the disclosure of taxpayer data to federal agencies. Eleven grant recipients that GAO investigated appeared to have made false statements by not disclosing their tax debt as required. Further, agencies that award grants are not required to inquire as to recipients' tax debt status prior to providing direct assistance payments.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-31, Tax Compliance: Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System
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Report to the Committee on Homeland Security and Governmental Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
November 2007:
Tax Compliance:
Federal Grant and Direct Assistance Recipients Who Abuse the Federal
Tax System:
Tax Compliances:
GAO-08-31:
GAO Highlights:
Highlights of GAO-08-31, a report to the Committee on Homeland Security
and Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
Since February 2004, GAO has reported that weaknesses in the federal
programs and controls that allowed thousands of federal contractors,
tax exempt entities, and Medicare providers to receive government money
while owing taxes. GAO was asked to determine if these problems exist
for entities who receive federal grants or direct assistance and (1)
describe the magnitude of taxes owed, (2) provide examples of grant
recipients involved in abusive and potentially criminal activity, and
(3) assess efforts to prevent delinquent taxpayers from participating
in such programs.
To perform this work, GAO analyzed data from the Internal Revenue
Service (IRS), three of the largest grant and direct assistance payment
systems, representing over $460 billion in payments in fiscal years
2005 and 2006, and the Housing and Urban Development (HUD) Section 8
tenant-based housing program. GAO investigated 20 cases to provide
examples of grant recipients involved in abusive activity
What GAO Found:
While most recipients of payments federal grant and direct assistance
programs pay their federal taxes, tens of thousands of recipients
collectively owed $790 million in federal taxes as of September 30,
2006. This included over 2,000 individuals and organizations that
received $124 billion of payments directly from the federal government
and who owed more than $270 million of unpaid taxes (almost 6 percent
of such recipients) and about 37,000 landlords participating in HUD‘s
Section 8 tenant-based housing program who owed an estimated $520
million of unpaid taxes (almost 4 percent of such landlords). The $790
million estimate is likely substantially understated because GAO‘s
analysis excluded the 80 percent of federal grants that are directly
given to state and local governments which, in turn, disburse the
grants to the ultimate recipients.
GAO selected 20 grant and direct assistance recipients with high tax
debt for a more in-depth investigation of the extent and nature of
abuse and criminal activity. For all 20 cases GAO found abusive and
potential criminal activity related to the federal tax system,
including failure to remit individual income taxes and/or payroll taxes
to IRS. Rather than fulfill their role as ’trustees“ of payroll tax
money and forward it to IRS, these grant recipients diverted the money
for other purposes. Willful failure to remit payroll taxes is a felony
under U.S. law. Individuals associated with some of these recipients
diverted the payroll tax money for their own benefit or to help fund
their businesses. GAO referred these 20 cases to IRS for additional
collection and investigation action, as appropriate.
Table: Examples of Abusive and Potentially Criminal Activity by Grant
and Direct Assistance Recipients:
Nature of work: Housing;
Unpaid tax amount as of September 2006: Over $3 million;
Activity: Landlord was convicted of illegally transferring property to
defraud creditors.
Nature of work: Social Services;
Unpaid tax amount as of September 2006: Over $1 million;
Activity: While failing to pay its taxes, the grant recipient paid
hundreds of thousand of dollars to a relative for services contracts.
Nature of work: Social Services;
Unpaid tax amount as of September 2006: Over $400,000;
Activity: Recipient investigated for using grant funds to purchase
luxury car, lakefront condominium, and Caribbean trips.
Source: GAO analysis of IRS data and available public records.
[End of table]
Federal law and current governmentwide policies do not prohibit
individuals and organizations with unpaid taxes from receiving grants
or direct assistance. Several federal agencies established policies
against awarding grants to tax delinquent applicants; however, federal
agencies do not verify applicants‘ certification that they do not owe
taxes. Further, federal law generally prohibits the disclosure of
taxpayer data to federal agencies. Eleven grant recipients that GAO
investigated appeared to have made false statements by not disclosing
their tax debt as required. Further, agencies that award grants are not
required to inquire as to recipients‘ tax debt status prior to
providing direct assistance payments.
What GAO Recommends:
GAO recommends that the Office of Management and Budget (OMB) assess
the need to require federal agencies to conduct inquiries into the tax
debt status of applicants where appropriate. GAO also recommends IRS
evaluate the 20 referred cases with high tax debts and abusive and
potential criminal activity for appropriate additional collection and
investigation action. IRS and OMB agreed with our recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-31]. For more information, contact Greg
Kutz at (202) 512-6722 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Grant and Direct Assistance Recipients Owe About $790 Million in Taxes:
Examples of Selected Recipients of Grants and Direct Assistance
Involved in Abusive and Criminal Activity Related to Federal Tax
System:
Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating
in Federal Grant or Direct Assistance Programs:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Examples of Grant and Direct Assistance Recipient Entities
with Unpaid Federal Taxes:
Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal
Taxes:
Abbreviations:
ASAP: Automated Standard Application Payment System:
CFDA: Catalog of Federal Domestic Assistance:
FAADS: Federal Assistance Awards Data System:
GAPS: Grant Administration and Payment System:
GSA :General Services Administration:
HHS :Department of Health and Human Services:
HUD Department of Housing and Urban Development:
IRS: Internal Revenue Service:
OMB: Office of Management and Budget:
PIC: Public Housing Information Center:
PMS: Payment Management System:
SF: Standard Form:
TIN: Taxpayer Identification Number:
TFRP: Trust Fund Recovery:
United States Government Accountability Office:
Washington, DC 20548:
November 16, 2007:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Carl Levin:
Chairman:
The Honorable Norm Coleman:
Ranking Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
This report continues a series of audits and investigations we have
performed at your request to help address the large tax gap facing our
nation. The tax gap represents the difference between what taxpayers
should pay on a timely basis and what the Internal Revenue Service
(IRS) collected through voluntary compliance and enforcement
activities. To help address the tax gap, beginning in February 2004, we
have issued a series of reports detailing how some organizations and
individuals abused the federal tax system at the same time they were
doing business with or receiving benefits from the federal government
and the lack of agency controls to prevent such abuses from
occurring.[Footnote 1] We determined there are few consequences of
abusing the tax system for these organizations and individuals, which
included defense, civilian agency, and General Services Administration
(GSA) contractors; tax-exempt (not-for-profit) organizations (including
charities participating in the Federal government's Combined Federal
Campaign); and Medicare physicians. While we performed this work it
came to our attention that some organizations and individuals who were
recipients of federal grants were also abusing the tax system. Thus,
you asked us to perform additional work and report specifically on
organizations and individuals who abuse the federal tax system at the
same time they receive federal grants or other similar types of federal
assistance known as direct payments for specified use[Footnote 2]
(direct assistance) programs.
Based on your request, we initiated a forensic audit and related
investigations to determine, to the extent practical, whether
recipients of federal grants and direct assistance have unpaid federal
taxes. Because the vast majority of federal grants and direct
assistance programs, an estimated 80 percent of awarded funds, are
administered and disbursed through state and local
governments,[Footnote 3] detailed payment data on the final recipients
needed for us to perform an electronic match with IRS taxpayer
delinquency files are not available at the federal level.[Footnote 4]
Thus, the specific objectives of our work were to (1) determine to the
extent practical the magnitude of federal taxes owed by individuals and
organizations receiving grants and direct assistance administered and
disbursed at the federal level and to further determine, using a
selected case study of a federal direct assistance program that
administers and disburses payments at the state and local level, tax
debts owed by state and local recipients of such programs; (2) provide
examples of grant and direct assistance recipients involved in abusive
or criminal activity related to the federal tax system; and (3) assess
efforts by awarding agencies to prevent delinquent taxpayers from
participating in federal grant and direct assistance programs.[Footnote
5]
To determine to the extent practical the magnitude of taxes owed by
individuals and organizations receiving grants or direct assistance
administered at the federal level, we utilized disbursements data from
three of the largest federal payment systems[Footnote 6] that processed
payments for the majority of federal grant and direct assistance
excluding Medicare and Medicaid during fiscal years 2005 and 2006. For
our case study of recipients receiving federal payments at the state
and local levels, we selected the Department of Housing and Urban
Development's (HUD) Section 8 tenant-based housing assistance program,
a direct assistance program to aid low-income families, because this
program is a large federal program that is administered at the state or
local government level. To determine the extent to which grant and
direct assistance recipients had unpaid federal taxes, we utilized IRS
unpaid tax data as of September 30, 2006. Using the Taxpayer
Identification Number (TIN), we electronically matched IRS's tax debt
data to payment and other management information that represented
payments to the various grant and direct assistance recipients we
identified.
To illustrate indications of abuse or criminal activity related to the
federal tax system in grant and direct assistance programs, based on
our data mining, we performed investigative work on a nonrepresentative
selection of 20 organizations and individuals that participated in
federal grant and direct assistance programs during fiscal years 2005
and 2006. We selected these organizations and individuals based upon
factors such as the amount of tax debt and the number of delinquent tax
periods. Our investigative work included reviewing tax records and
performing additional searches of criminal, financial, and other public
records.
To determine the actions that responsible federal agencies take to
prevent individuals and organizations with significant tax
delinquencies from receiving grants and direct assistance, we examined
governmentwide and selected agency policies and procedures, reviewed
selected application files, and interviewed officials from the Office
of Management and Budget (OMB); IRS; and Departments of Agriculture,
Education, Health and Human Services (HHS), Homeland Security, and HUD.
For details on our scope and methodology, see appendix I.
We conducted our audit between January 2007 and August 2007. We
performed our work in accordance with U.S. generally accepted
government auditing standards. The investigative portion of our work
was completed in accordance with investigative standards established by
the President's Council on Integrity and Efficiency.
Results in Brief:
While most recipients of payments from federal grant and direct
assistance programs pay their federal taxes, our comparison of IRS
unpaid assessments with disbursements made from three of the largest
federal grant and direct assistance payment systems and disbursement-
related data for the HUD Section 8 tenant-based housing assistance
program found that tens of thousands of recipients collectively owed
about $790 million in federal taxes as of September 30, 2006:
* Over 2,000 grant and direct assistance recipients who received
certain payments directly from three of the major federal grant and
direct assistance payment systems during fiscal years 2005 and 2006
(almost 6 percent of such recipients) owed more than $270 million of
unpaid taxes.
* About 37,000 landlords who participated in HUD's Section 8 tenant-
based housing direct assistance program during fiscal years 2005 and
2006 (almost 4 percent of landlords participating in HUD's tenant-based
program) had an estimated $520 million of unpaid federal taxes as of
September 30, 2006.
Our estimates of the taxes owed by grant and direct assistance
participants are likely substantially understated for a number of
reasons. For example, most federal grant and direct assistance programs
whose funds are disbursed through the three federal payment systems we
reviewed are provided to state and local governments who disburse funds
to the ultimate recipient (an estimated 80 percent of awarded funds)
and were thus excluded from our analysis. Except for our case study
involving the HUD Section 8 tenant-based program that provides direct
assistance through public housing agencies to landlords who make
available housing units to approved low-income families who select
dwelling units (landlords to rent from) in the private market,[Footnote
7] our audit did not include disbursements made to state and local
governments because detailed information on the ultimate recipients was
not practical to obtain. In addition, our estimate does not include
amounts owed by organizations and individuals that have not filed tax
returns or that have failed to report the full amount of taxes due
(referred to as nonfilers and underreporters) and for which IRS has not
determined that specific tax debts are owed. According to IRS,
underreporting of income accounts for more than 80 percent of the more
than $345 billion annual gross tax gap.
We found numerous cases of abusive and criminal activity related to the
federal tax system in our audit and investigation of 20 organizations
and individuals that we selected based on the large amount of federal
taxes owed and other factors. Of these 20 cases, 14 involved
organizations that received federal grants. All 14 grant recipient
organizations failed to properly remit to IRS payroll taxes withheld
from employees. Rather than fulfill their role as "trustees" of this
money and forward it to IRS as required by law, these case study
entities and their executives diverted the money for other purposes. In
one example, a nonprofit organization that provides social services
received over 1 million dollars in grants while owing hundreds of
thousands of dollars of unpaid payroll taxes. Instead of paying payroll
taxes, executives misappropriated grant funds for expensive clothing,
luxury vehicles, and lavish trips to the Caribbean.
We also found tax abuse in the other six cases that involved landlords
who benefited from federal housing subsidies provided under HUD's
Section 8 tenant-based housing program. For example, we identified one
participating landlord who was delinquent in paying federal income tax
and had also not properly maintained rental housing to acceptable
living standards. This landlord has been delinquent in paying federal
income taxes since the mid-1990s and owed over a million dollars of
federal taxes. Another participating landlord was convicted of money
laundering and other criminal activities.
Federal agencies do not prevent individuals and organizations with tax
debts from receiving federal grant payments. Federal law and current
governmentwide policies for administering grants, as reflected in OMB
Circulars, do not prohibit individuals and organizations with unpaid
taxes from receiving grants, nor do they require awarding agencies to
verify applicants' disclosures of existing federal debt delinquencies
in grant applications. Although several federal grant-awarding agencies
had policies against awarding grants to tax delinquent applicants, we
found no evidence that agencies enforce their policies. Specifically,
those agencies that told us they would not award a grant to an
applicant with unpaid taxes could not provide any examples where grant
officials denied a grant based on an applicant's self-disclosed tax
delinquencies or required applicants to make repayment arrangements.
Even if requirements to verify applicant disclosures did exist, absent
consent from the taxpayer, federal law generally prohibits IRS from
disclosing taxpayer data and, consequently, federal agencies have no
access to tax data directly from IRS. For example, as we stated
earlier, 14 cases that we investigated for indications of abuse and
potential criminal activity were grant recipients and were required to
submit applications prior to award of the grant.[Footnote 8] Of these
14 cases, 11 grant recipients submitted grant applications at the same
time they were delinquent in paying their taxes. Our review of those
grant applications found that these 11 grant recipients appear to have
made false statements by not disclosing their tax debts in their
applications even though they were required to do so.
Based on our review of landlords participating in HUD's Section 8
tenant-based housing program, a direct assistance program to aid low-
income families obtain affordable housing, our audit found that HUD and
its local housing authorities are neither required nor do they attempt
to prevent individuals and organizations with federal tax debts from
participating as landlords in the tenant-based housing program or
receiving federal rental subsidies. Specifically, HUD regulations do
not prohibit landlords with federal tax debts from receiving HUD
subsidized rental payments. Agency regulations do, however, permit
local housing authorities to reject landlords who have not paid state
or local real estate taxes, fines, or assessments.
We are recommending that the Director, Office of Management and Budget,
assess the need to require federal agencies that award certain grants
and other direct assistance, where appropriate, to conduct proactive
inquiries that would help determine if applicants had unpaid federal
tax debt, including obtaining applicant consent to inquire as to tax
debt status from the IRS, and consider the result of those inquiries in
the award determinations. We are also recommending that the Acting
Commissioner of Internal Revenue evaluate the 20 referred cases
detailed in this report with high tax debts and potential abusive and
criminal activity for appropriate additional collection action and
criminal investigation as warranted.
IRS provided written comments to a draft of this report and OMB
provided oral comments. Both IRS and OMB agreed with our
recommendations. See the Agency Comments and Our Evaluation section of
this report for a discussion of agency comments from OMB and IRS. We
have reprinted the IRS written comments in appendix III.
Background:
A federal grant is an award of financial assistance from a federal
agency to an organization to carry out an agreed-upon public purpose. A
Direct Payment for Specified Use (direct assistance) is an award of
financial assistance from the federal government to individuals,
private firms, and other private institutions to encourage or subsidize
a particular activity by conditioning the receipt of the assistance on
a particular performance by the recipient. As such, federal grants and
direct assistance programs do not include solicited contracts for the
procurement of goods and services for the federal government.
Based on our analysis of fiscal years 2004 and 2005 data from the
Federal Assistance Award Data System (FAADS),[Footnote 9] federal
agencies collectively awarded grants and direct assistance of
approximately $300 billion annually.[Footnote 10] Further analysis of
the FAADS data indicates that approximately 80 percent of federal
grants and direct assistance consist of federal funds provided to state
and local governments, which, in turn, disburse funds to the ultimate
recipients. Consequently, only about 20 percent of awarded funds are
provided directly from the federal government to the organization that
ultimately spends the money.
Governmentwide policies affecting the award and administration of
grants to nongovernmental entities are covered in OMB Circular No. A-
110, Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Non-Profit
Organizations. OMB Circular No. A-102, Grants and Cooperative
Agreements with State and Local Governments, provides governmentwide
guidance for administering grants provided to state and local
governments and prescribes similar procedures as those included in
Circular No. A-110. Direct assistance programs are not subject to the
same governmentwide policies as grants; procedures governing the
application and award processes for direct assistance are prescribed in
guidance and regulations promulgated by the cognizant federal agency
responsible for administering the program.
Most grant applicants that apply directly to the federal government are
required to complete an Application for Federal Assistance, Standard
Form (SF) 424. The SF 424 provides federal agencies with entity
information, such as name, employer identification number, address, and
a descriptive title of the project for which the grant will be used.
The applicant is required to certify that the information provided on
the SF 424 is true and correct and whether the applicant is currently
delinquent on any federal debt.
Grant and Direct Assistance Recipients Owe About $790 Million in Taxes:
While most federal grant and direct assistance recipients pay their
federal taxes, we identified tens of thousands of grant and direct
assistance recipients that collectively owed about $790 million in
federal taxes as of September 2006. These tax debts were owed by
entities who received federal payments directly from federal payment
systems during fiscal years 2005 and 2006 and individuals who
participated in HUD's Section 8 tenant-based housing program as
landlords during fiscal years 2005 and 2006. We used IRS's September
2006 unpaid assessments file data to calculate the amount of taxes owed
at or about the time the various grant recipients received their grant
payments. Specifically, we found:
* 2,000 of about 32,000 recipients (about 6 percent) who received
federal grant and direct assistance benefits directly from three of the
largest federal payment systems had more than $270 million of unpaid
federal taxes. About $110 million of the $270 million in unpaid taxes
represents unpaid payroll taxes.
* 37,000 of over 1 million landlords (about 4 percent) participating in
the HUD Section 8 program had about $520 million of unpaid federal
taxes. Most of these tax debts were unpaid individual income taxes.
In our audit, we found that grant recipients had a substantial amount
of unpaid payroll taxes.[Footnote 11] Employers may be subject to civil
and criminal penalties if they do not remit payroll taxes to the
federal government. When an employer withholds taxes from an employee's
wages, the employer is deemed to have a fiduciary responsibility to
hold these funds "in trust" for the federal government until the
employer makes a federal tax deposit in that amount. To the extent
these withheld amounts are not forwarded, the employer is liable for
these amounts, as well as the employer's matching Federal Insurance
Contribution Act contributions for Social Security and Medicare.
Individuals employed by the employer (e.g., owners or officers) may be
held personally liable for the withheld amounts not forwarded and
assessed a civil monetary penalty known as a trust fund recovery
penalty (TFRP).[Footnote 12] Willful failure to remit payroll taxes can
also be a criminal felony offense punishable by imprisonment of up to 5
years,[Footnote 13] while the failure to properly segregate payroll tax
funds can be a criminal misdemeanor offense punishable by imprisonment
of up to a year.[Footnote 14] The law imposes no penalties upon an
employee for the employer's failure to remit payroll taxes since the
employer is responsible for submitting the amounts withheld. The Social
Security and Medicare trust funds are subsidized or made whole for
unpaid payroll taxes by the federal government's general fund. Thus,
personal income taxes, corporate income taxes, and other government
revenues are used to pay for these shortfalls to the Social Security
and Medicare trust funds.
Although grant and direct assistance recipients had about $790 million
in unpaid federal taxes as of September 30, 2006, this amount likely
understates the full extent of unpaid taxes for these or other
organizations and individuals. For example, except for our case study
involving HUD's Section 8 tenant-based housing program, our estimate of
grant and direct assistance recipients was limited to data from three
of the largest government payment systems and thus did not include all
federal grant and direct assistance disbursements. Further, our
analysis of the three payment systems did not include recipients of
payments who received their payments through state and local government
entities. Based on our analysis of data from the FAADS, we estimated
that payments paid by the federal government to final recipients
account for only about 20 percent of the total grant and direct
assistance funds awarded by the federal government. The remaining 80
percent of grant and direct assistance funds are provided to states and
local governments, which, in turn, disburse them to the ultimate
recipient.
Further, to avoid overestimating the amount owed, we limited our scope
to tax debts that were affirmed by either the taxable entity or a tax
court for tax periods prior to 2006. We did not include the most
current tax year because recently assessed tax debts that appear as
unpaid taxes may involve matters that are routinely resolved between
the taxpayer and IRS, with the taxes paid, abated, or both within a
short period. We eliminated these types of debt by focusing on unpaid
taxes for tax periods prior to calendar year 2006 and eliminating tax
debt of $100 or less.
The IRS tax database reflects only the amount of unpaid taxes either
reported by the individual or organization on a tax return or assessed
by IRS through its various enforcement programs. The IRS database does
not reflect amounts owed by organizations and individuals that have not
filed tax returns and for which IRS has not assessed tax amounts due.
Further, our analysis did not attempt to account for organizations or
individuals that purposely underreported income and were not
specifically identified by IRS as owing the additional taxes. According
to IRS, underreporting of income accounted for more than 80 percent of
the estimated $345 billion annual gross tax gap.[Footnote 15]
Consequently, the full extent of unpaid taxes for grant and direct
assistance participants is not known.
Examples of Selected Recipients of Grants and Direct Assistance
Involved in Abusive and Criminal Activity Related to Federal Tax
System:
For all 20 cases of grant and direct assistance recipients we
investigated for examples of abusive and criminal activity related to
the federal tax system based on the large amount of tax debt and number
of delinquent tax periods, we found in all cases evidence that
indicated the existence of such abusive and criminal activities. Of
these 20 cases, 14 cases were not-for-profit organizations that
received grant payments and also had unpaid payroll taxes, some dating
as far back as the 1990s. For example, one educational institution
failed to submit employee payroll withholding taxes several times
within a 3-year period and accumulated an unpaid tax liability of
almost $4 million. For the cases of payroll tax delinquencies we
investigated, officials responsible for these organizations failed to
fulfill their role as "trustees" of employees' payroll tax withholdings
and forward this money to IRS as required by federal tax laws. Instead,
these officials diverted the withholdings to fund the organizations'
operations or for personal benefits, such as their own salaries or
extravagant vacations. The other 6 cases involved individuals who owed
individual income taxes and who also received government subsidy
payments through HUD's Section 8 low-income housing program. In one of
these cases, the landlord attempted to evict renters who were
instructed by IRS to pay the rent directly to IRS instead of the
landlord. In all 20 cases, we saw significant evidence of IRS
collection activity occurring, but in only a couple of cases did we see
action related to investigating these entities and individuals for
criminal violations of federal tax laws.
Table 1 highlights 10 cases of grant recipients we investigated with
unpaid taxes. The other 10 cases are summarized in appendix II.
Table 1: Examples of Grant and Direct Assistance Recipient Entities
with Unpaid Federal Taxes:
Case: 1;
Type of case: Grant;
Nature of work: Educational services;
Unpaid tax amount[A]: Nearly $1 million;
Comments:
* Tax debt is mostly unpaid payroll taxes from the early 2000s;
* Grant recipient received tens of thousands of dollars in grants;
* Officials of grant recipient claimed payroll taxes were embezzled by
an agency contracted to provide services to the grant recipient;
* Grant recipient acquired a million-dollar building when it had a
similar amount of tax liability;
* Grant recipient offered to repay 50 percent of the debt in
installments over several years;
* Officer owned several luxury vehicles;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 2;
Type of case: Grant;
Nature of work: Health education;
Unpaid tax amount[A]: Over $300,000;
Comments:
* Tax debts consist of unpaid payroll taxes;
* Grant recipient received about $1 million in grants;
* Officer's salary at over $100,000 is almost double the average of
service organizations in the area. In addition, officer has generous
travel expenses and other perks;
* Grant recipient owns property with fair market value over $2 million;
* Grant recipient offered compromise for two-thirds of the debt to be
paid over a period of more than a decade;
* During appeal of TFRP, officer refinanced residence and used proceeds
to pay credit card debts;
* Officer owns luxury vehicle;
* IRS assessed penalties against entity officials for willful failure
to pay payroll taxes.
Case: 3;
Type of case: Grant;
Nature of work: Health services;
Unpaid tax amount[A]: Nearly $1 million;
Comments:
* Grant recipient has incurred continuing payroll tax deposit
deficiencies since early 2000s;
* Grant recipient received tens of thousands of dollars in grant funds;
* Grant recipient owns commercial property with an appraised value over
$1 million;
* IRS filed numerous tax liens against grant recipient's property;
* IRS assessed penalties against one officer for willful failure to pay
payroll taxes.
Case: 4;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid tax amount[A]: Over $3 million;
Comments:
* Landlord investigated for mortgage fraud;
* Landlord was convicted for illegally transferring property to defraud
creditors;
* Landlord owns luxury vehicles, multiple real estate properties, and
an extensive investment portfolio.
Case: 5;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid tax amount[A]: Over $1 million;
Comments:
* Landlord has not filed required tax returns for over a decade;
* Landlord has never made estimated tax payments;
* Landlord did not report income information forms to IRS;
* Rental property is in extreme disrepair and has poor sanitation
conditions including piles of trash, beer cans, and human waste
throughout the yard.
Case: 6;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid tax amount[A]: Over $500,000;
Comments:
* Landlord has a related business owing hundreds of thousands of
dollars in payroll taxes;
* Landlord has attempted to avoid collection of IRS levies;
* Landlord owns luxury vehicle.
Case: 7;
Type of case: Grant;
Nature of work: Medical care;
Unpaid tax amount[A]: Over $500,000;
Comments:
* Tax debts largely consist of unpaid payroll taxes from the early
2000s;
* Grant recipient received about $1 million in grants;
* Grant recipient could not provide to other auditors documentation for
over $1 million in program costs;
* Grant recipient did not fund its pension plan;
* Official of grant recipient received hundreds of thousands of dollars
in consulting fees from grantee;
* Official owes tens of thousands in individual income taxes;
* IRS assessed penalties against grant recipient officials for willful
failure to pay payroll taxes;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 8;
Type of case: Grant;
Nature of work: Medical care;
Unpaid tax amount[A]: Nearly $100,000;
Comments:
* Tax debts largely consist of unpaid payroll taxes;
* Grant recipient received about $1 million in grants;
* Recipient official was convicted of theft;
* Auditor found questionable costs totaling tens of thousands of
dollars;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 9;
Type of case: Grant;
Nature of work: Social services;
Unpaid tax amount[A]: Over;
$1 million;
Comments:
* Tax debts largely consist of unpaid payroll taxes;
* Not-for-profit grant recipient received over $3 million of grant
funds;
* While failing to pay payroll taxes, the grant recipient organization
paid a relative of an entity official hundreds of thousands of dollars
for service contract;
* Key official's salary exceeded $100,000 a year;
* Grant recipient did not fully fund its pension plan;
* IRS previously assessed penalties against one officer for willful
failure to pay payroll taxes while employed at a previous not-for-
profit entity;
* An independent auditor's report stated there is substantial doubt
regarding the entity's ability to continue operating;
* Federal grant agency sought sanctions against grantee and its
officials for improper funds control and ineffective program oversight;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 10;
Type of case: Grant;
Nature of work: Social services;
Unpaid tax amount[A]: Over $400,000;
Comments:
* Tax debts largely consist of unpaid payroll taxes;
* Grant recipient received over $1 million in federal grants;
* Grant recipient official had prior conviction for tax evasion;
* Official received an annual salary in excess of $100,000 yet reported
tens of thousands of dollars less to IRS;
* Grant recipient official was investigated for using grant funds to
purchase expensive clothing, luxury vehicle, lakefront property,
private school tuition, and lavish trips to the Caribbean and
elsewhere;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Source: GAO's analysis of IRS, grant and direct assistance payments,
and other records.
[A] Rounded dollar amount of unpaid federal taxes as of September 30,
2006.
[End of table]
The following provide illustrative detailed information on several of
these cases:
Case 4: This landlord participating in the Section 8 tenant-based
housing program was involved in a fraudulent real estate transaction in
addition to owing over $3 million in delinquent income taxes. The
landlord was indicted on mortgage fraud and racketeering for attempting
to sell real estate at an inflated price using false appraisals.
Previously, the landlord's family member was convicted of conspiracy to
commit mail fraud, wire fraud, and money laundering in a scheme to sell
fraudulent vacation club memberships. In addition, the landlord was
charged with fraudulent conveyance of over $3 million worth of property
to defraud creditors.
Case 7: This grant recipient organization, which provides medical care
to low-income families, has experienced financial problems throughout
most of the 2000s and has several hundred thousand dollars in
delinquent payroll taxes. During these years, while failing to properly
fund its employee pension plan, the grant recipient paid hundreds of
thousands of dollars in consulting fees to a former employee. Grant
recipient could not document to other auditors over a million dollars
in expenses relating to grants. Grant recipient has not made required
contributions totaling tens of thousands of dollars to its pension
plan. In addition, IRS assessed a TFRP against key grant recipient
officials.
Case 9: This not-for-profit grant recipient has been in operation since
the 1980s to provide social services to disadvantaged individuals and
families and has another closely related not-for-profit entity that
also received federal grants. The recipient has over $1 million in
unpaid payroll taxes dating back to the early 2000s, and IRS has placed
several tax liens against the grantee's property. The grant recipient
has had recurring financial problems and an independent audit report
raised concerns about the entity's ability to continue operating. The
recipient has also been cited for commingling funds among related grant
recipients and for not having a functioning Board of Directors as
represented to the granting agency. The recipient has been recommended
for disbarment.
Case 10: This not-for-profit grant recipient stopped making payroll tax
deposits for several years beginning mid-2000s, accumulating unpaid
payroll taxes totaling several hundreds of thousands of dollars. IRS
filed liens against grantee assets and assessed the exempt organization
with payroll tax violation penalties and interest totaling tens of
thousands of dollars. A key grant recipient officer had a prior
conviction for tax evasion and was again investigated for improperly
using grant funds to purchase expensive clothing, a luxury vehicle, and
lavish vacations and to pay taxes assessed from a prior tax evasion
conviction. A key grantee officer had numerous individual income tax
delinquencies.
Federal Agencies Do Not Prevent Delinquent Taxpayers from Participating
in Federal Grant or Direct Assistance Programs:
Neither federal law nor current governmentwide policies for
administering federal grants or direct assistance prohibit applicants
with unpaid federal taxes from receiving grants and direct assistance
from the federal government. Even if such requirements did exist,
absent consent from the taxpayer, federal law generally prohibits IRS
from disclosing taxpayer data and, consequently, federal agencies have
no access to tax data directly from IRS. Moreover, federal agencies we
reviewed do not prevent organizations and individuals with unpaid
federal taxes from receiving grants or direct assistance for the
specific programs they administer.
With regard to administering federal grants, federal law and current
governmentwide policies, as reflected in OMB Circulars, do not prohibit
individuals and organizations with unpaid taxes from receiving
grants.[Footnote 16] OMB Circulars provide only general guidance with
regard to considering existing federal debt in awarding grants.
Specifically, the Circulars state that if an applicant has a history of
financial instability, or other special conditions, the federal agency
may impose additional award requirements to protect the government's
interests.[Footnote 17] However, the Circulars do not specifically
require federal agencies to take into account an applicant's delinquent
federal debt, including federal tax debt, when assessing applications.
While they require grant applicants to self-certify in their standard
government application (SF 424) whether they are currently delinquent
on any federal debt, including federal taxes, the Circulars contain no
provision instructing the agencies to verify such certifications or
describing how such verification should be done. No assessment of tax
debt is required by OMB on a sampling or risk-based assessment.
Although current governmentwide policies do not require it, federal
agencies, such as HHS and Department of Education, have policies
against awarding grants to applicants that owe federal debts. These
policies state that a grant may not be awarded until the debt is
satisfied or arrangements are made with the agency to which the debt is
owed. However, awarding agencies rely extensively on applicants' self-
certifications that they are not delinquent on any federal debt,
including tax debt. Certain agencies, such as HHS, stated that they
check credit reports to see if the grant applicant has any outstanding
tax liens prior to award of the contract. While it is difficult to
validate the agencies' assertions, none of these agencies could provide
us examples where grant officials denied a grant based on self-
disclosed tax delinquencies or required applicants to make repayment
arrangements with the agency to which debt was owed.
Even if requirements to verify applicants' disclosures did exist,
federal law poses a significant challenge to federal granting agencies
in determining the accuracy of representations made by organizations
applying for grants. Specifically, the law does not permit IRS to
disclose taxpayer information, including tax debts, to federal agency
officials unless the taxpayer consents.[Footnote 18] Thus, unless an
applicant provides consent requesting that IRS provide taxpayer
information to federal agencies, certain tax debt information generally
can only be discovered from public records when IRS files a tax lien
against the property of a tax debtor. Further, representatives of one
federal agency that has attempted to develop an approved consent form
discovered that IRS may not accept certain signed consent forms because
a requirement for an applicant to sign a consent form as a precondition
to the agency's acceptance of the application may be considered a form
of duress and thus raise a disclosure issue. Notwithstanding, while
information on filed tax liens is generally publicly available, IRS
does not file tax liens on all tax debtors nor does IRS have a central
repository of tax liens to which grant-awarding agencies have access.
Further, available information on tax liens may not be current or
accurate because other studies have shown that IRS has not always
released tax liens from property when the tax debt has been
satisfied.[Footnote 19]
Of the 20 organizations and individuals that we selected for additional
investigation of abuse and criminal activity, 14 were grant recipients
that were required to submit an application in order to be awarded a
grant.[Footnote 20] In our review of the grant applications for the 14
grant cases, we found that 11 applicants certified in their
applications that they were not currently delinquent in any federal
debt, even though IRS had current tax assessments on file for these
entities at the time the applications were filed.[Footnote 21] As a
result, these 11 cases appear to have violated the False Statements Act
because they did not declare their existing tax debt in their
applications even though they were required to do so.[Footnote 22]
Direct assistance programs are generally not subject to the same
governmentwide guidance for grants. Instead, the cognizant federal
agencies implement the necessary regulations for administering the
program. With regard to our HUD's Section 8 tenant-based program case
study, HUD regulations do not require local housing authorities to
identify whether landlords who participate in HUD's housing assistance
program and receive housing subsidies have outstanding federal tax
delinquencies or prohibit payments if such delinquencies are
identified. HUD regulations do permit local housing authorities to deny
program participation if a landlord has not paid state or local real
estate taxes, fines, or assessments. HUD regulations, however, do not
require local housing authorities to deny the landlord from
participating in the HUD program if the landlord owes any delinquent
federal debts, including federal taxes.
Conclusion:
Because about 80 percent of all federal grants and direct assistance
are administered and disbursed through state and local governments, the
extent to which all final recipients of these federal payments owe
taxes is not known. However, our limited audit has demonstrated that
tens of thousands of grant and direct assistance recipients have taken
advantage of the opportunity to avoid paying $790 million in federal
taxes. At the same time they failed to pay their federal taxes, these
individuals and organizations benefited by receiving billions of
dollars of federal grants or direct assistance benefits. With regard to
grants, allowing individuals and organizations to receive federal
grants while not paying their federal taxes is not fair to the vast
majority of grant applicants that pay their fair share of taxes. This
practice causes a disincentive to individuals and organizations to pay
their fair share of taxes and could lead to further erosion in
compliance with the nation's tax system.
Recommendations for Executive Action:
We recommend that the Director, Office of Management and Budget, assess
the need to issue guidance requiring federal agencies that award
certain grants and other direct assistance, where appropriate in
relation to the potential adverse effect on potential applications, to
take the following two actions:
* Conduct actions that would help determine if applicants had unpaid
federal tax debt, including obtaining applicant consent to inquire as
to tax debt status from IRS; this could be achieved through sampling or
other risk-based assessments.
* Consider the result of those inquiries in the award determinations.
We also recommend that the Acting Commissioner of Internal Revenue
evaluate the 20 referred cases detailed in this report for appropriate
additional collection action or criminal investigation as warranted.
Agency Comments and Our Evaluation:
We received written comment from IRS and oral comments from OMB on the
draft of this report. Both IRS and OMB agreed with the draft report's
recommendations. OMB also provided technical comments on the draft
report, which we incorporated as appropriate. We have reprinted IRS's
written comments in their entirety in Appendix III.
As agreed with your offices, unless you publicly release its contents
earlier we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies of this report to the
Acting Commissioner of Internal Revenue, the Director of the Office of
Management and Budget, interested congressional committees, and other
interested parties. We will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [hyperlink, http://www.gao.gov]. Please contact me at
(202) 512-6722 or kutzg@gao.gov if you have any questions concerning
this report. Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report.
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
[End of section]
Appendix I: Scope and Methodology:
To address our first objective to describe the magnitude of tax debt
owed, we obtained and analyzed federal payment databases from the
Department of the Treasury's Automated Standard Application Payment
System (ASAP), the Department of Education's Grant Administration and
Payment System (GAPS), and the Department of Health and Human Services'
(HHS) Payment Management System (PMS) for fiscal years 2005 and 2006.
These three agencies process grant and other assistance program
payments on behalf of many federal agencies and, in fiscal years 2005
and 2006, processed over $460 billion in grant and direct assistance
payments, excluding Medicare and Medicaid. Our analysis of data,
however, was limited because approximately 80 percent of federal grant
and direct assistance payments are paid to state and local
governments,[Footnote 23] which then disburse funds to final
recipients. Because identifying information on the final recipients of
payments provided at the state and local level is not available at the
federal level, our analysis was limited to those payments provided
directly by the federal government to final recipients. We estimated
these direct payments to final recipients represented about 20 percent
of total federal grant and direct assistance payments.
Because identifying information for final recipients of payments
provided at the state and local levels was not available at the federal
level and not practical for us to obtain, we selected one major federal
program that disburses funds at the local level for a case study
analysis. For this case study, we selected the Department of Housing
and Urban Development's (HUD) Section 8 tenant-based low-income housing
program, a program classified as a direct assistance program, which
provides rental assistance to low-income families by providing
supplemental rental payments directly to landlords participating in the
rental assistance program. We obtained and analyzed an extract from
HUD's Public Housing Information Center (PIC) database, which HUD
represented to be the most complete data source available on low-income
assisted households in HUD's public housing or voucher programs, that
contained identifying information on landlords who participated in
HUD's program during fiscal years 2005 and 2006.
To identify recipients of grants and direct assistance with unpaid
federal taxes, we obtained the Internal Revenue Service's (IRS)
September 30, 2006, unpaid assessments files and electronically matched
these files with the various grant and direct assistance recipients
identified in the above databases using the taxpayer identification
number. To avoid overstating the amount of unpaid taxes owed by grant
recipients and to capture only significant tax debt, we excluded tax
debts meeting specific criteria. The criteria we used to exclude tax
debts are as follows:
* tax debts IRS classified as compliance assessments or memo accounts
for financial reporting,[Footnote 24]
* tax debts from calendar year 2006 tax periods, and:
* grant recipients with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid and tax debts that are
incurred after the dates the entities received grant payments.
Compliance assessments or memo accounts were excluded because these
taxes have neither been agreed to by the taxpayers nor affirmed by the
court, or these taxes could be invalid or duplicative of other taxes
already reported. We excluded tax debts from calendar year 2006 tax
periods to eliminate tax debt that may involve matters that are
routinely resolved between the taxpayers and IRS, with the taxes paid
or abated within a short period. We also excluded tax debts of $100 or
less because they are insignificant for the purpose of determining the
extent of taxes owed by grant recipients.
To identify examples of grant and direct assistance recipients involved
in abusive or potential criminal activity related to the federal tax
system, we selected 20 recipients using a nonrepresentative selection
approach based on data-mining results, our judgment, and a number of
other criteria, including the amount of unpaid taxes and the number of
unpaid tax periods. We obtained and reviewed copies of automated tax
transcripts and other tax records (for example, revenue officers'
notes) from IRS. For the selected cases, we performed searches of
criminal, financial, and public records. Because our investigations
were generally limited to publicly available information, our audit of
the 20 cases may not have identified all related parties or all
significant assets or income (such as personal bank data, entities
established to hide assets, etc.) that the recipient individuals or
entities, including key officials, own or receive.
To determine actions federal agencies take to prevent individuals and
organizations with significant unpaid federal taxes from either being
approved for or receiving grant or direct assistance payments, we
reviewed governmentwide and agency-specific policies and procedures for
awarding grants and benefits from the respective programs. We also
interviewed officials from the Office of Management and Budget and the
Departments of Agriculture, Education, Homeland Security, HHS, and HUD
on whether tax debts are considered in their decisions to approve award
applications. In addition, to test whether grant applicants properly
disclosed their current tax delinquencies when submitting applications,
we requested and reviewed the grant applications for our 14 cases that
applied for grants.[Footnote 25]
We conducted our audit work from January 2007 through August 2007 in
accordance with U.S. generally accepted government auditing standards,
and we performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Data Reliability Assessment:
For IRS unpaid assessments data, we relied on the work we performed
during our annual audits of IRS's financial statements. While our
financial statement audits have identified some data reliability
problems associated with the coding of some of the fields in IRS's tax
records, including errors and delays in recording taxpayer information
and payments, we determined that the data were sufficiently reliable to
address our report's objectives. Our financial audit procedures,
including the reconciliation of the value of unpaid taxes recorded in
IRS's master file to IRS's general ledger, identified no material
differences.
For the GAPS, ASAP, and PMS data, we interviewed officials from
Education, Treasury, and HHS responsible for the databases. In
addition, we performed electronic testing of specific data elements
that we used to perform our work. HUD's PIC database has undergone
several audits and quality improvements in recent years and was
certified in fiscal year 2004 under HUD's Data Quality Improvement
Program as providing accurate information for reporting on program
performance under the Government Performance and Results Act. We held
discussions with HUD's database administrators on input controls used
to maintain data integrity for the data elements we used for our
analysis and with HUD programmers to discuss the programming code HUD
used to extract the data we used. We also performed electronic testing
of the data elements we used and performed limited verification tests.
Based on our discussions with agency officials, our review of agency
documents, and our own testing, we concluded that the data elements
used for this report were sufficiently reliable for our purposes.
[End of section]
Appendix II: Grant and Direct Assistance Recipients with Unpaid Taxes:
Table 1 provides data on 10 detailed case studies. Table 2 below
provides details of the remaining 10 organizations and individuals we
selected as case studies. As with the 10 cases discussed in the body of
this report, we found evidence of abusive and potential criminal
activity related to the federal tax system during our audit and
investigations of these 10 case studies.
Table 2: Grant/Direct Assistance Recipient Entities with Unpaid Federal
Taxes:
Case: 11;
Type of case: Grant;
Nature of work: Children's services;
Unpaid federal tax amount: Over $2 million;
Comments:
* While failing to remit payroll taxes dating back to the early 2000s,;
* grant recipient received over $2 million in federal grants in recent
years,;
* key official received compensation of over $100,000, and;
* grant recipient entered into multiple payment plans with the IRS and
was out of compliance on at least one;
* IRS assessed large penalties against key officers for willful failure
to pay payroll taxes;
* Federal tax liens were filed against the grant recipient;
* Despite owing taxes, grant recipient did not declare federal tax debt
in its grant application, an apparent violation of the False Statements
Act (18 U.S.C. § 1001).
Case: 12;
Type of case: Grant;
Nature of work: Community services;
Unpaid federal tax amount: Over $1 million;
Comments:
* Grant recipient received nearly $3 million in federal grants during a
recent 2-year period;
* Grant recipient officials claim they were unaware they had not paid
payroll taxes for several years;
* A top official received compensation of about $100,000;
* Federal tax liens were filed against the grant recipient;
* Grant recipient officials recently chose to close the entity rather
than pay the tax;
* Despite owing taxes, grant recipient did not declare federal tax debt
in its grant application, an apparent violation of the False Statements
Act (18 U.S.C. § 1001).
Case: 13;
Type of case: Grant;
Nature of work: Community services;
Unpaid federal tax amount: Over $300,000;
Comments:
* Grant recipient received over $2 million in federal grants;
* Grant recipient pays an annual salary over $70,000 to a relative of a
key official;
* Despite owing taxes, this grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 14;
Type of case: Grant;
Nature of work: Educational services;
Unpaid federal tax amount: Nearly $4 million;
Comments:
* Grant recipient received over $3 million in grants;
* Grant recipient failed to submit payroll deposits several times over
a 3-year period;
* Former key employee investigated for fraud allegations;
* Evidence that officials of grant recipient were removing assets to
avoid foreclosure and erasing computer memories to avoid prosecution;
* IRS assessed penalties against entity officials for willful failure
to pay payroll taxes;
* Despite owing taxes, the grant recipient did not declare federal tax
debt in its grant application, an apparent violation of the False
Statements Act (18 U.S.C. § 1001).
Case: 15;
Type of case: Grant;
Nature of work: Educational services;
Unpaid federal tax amount: Over $3 million;
Comments:
* Grant recipient received several million dollars in federal grants in
a recent year;
* Grant recipient owes mostly payroll taxes dating back to the early
2000s;
* IRS seized some of the grant recipient's assets;
* IRS assessed large penalties against several officials for willful
failure to pay payroll taxes;
* IRS filed federal tax liens against the entity;
* Despite owing taxes, grant recipient did not declare federal tax debt
in its grant application, an apparent violation of the False Statements
Act (18 U.S.C. § 1001).
Case: 16;
Type of case: Grant;
Nature of work: Educational services;
Unpaid federal tax amount: Over $300,000;
Comments:
* Grant recipient received over $2 million in federal grants during a
recent 2- year period while owing payroll taxes dating back to the late
1990s;
* Grant recipient did not file payroll tax returns for several years,
although it made payments for some periods. IRS is considering a
request from the grant recipient for an offer in compromise in which
the grantee would pay only a portion of the unpaid payroll taxes;
* Despite owing taxes, grant recipient did not declare federal tax debt
in its grant application, an apparent violation of the False Statements
Act (18 U.S.C. § 1001).
Case: 17;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid federal tax amount: Nearly $2 million;
Comments:
* Landlord did not file required tax returns for several years;
* During the same time the landlord failed to file tax returns, a
brokerage firm reported over $3 million in sales of securities;
* Landlord was involved in multiple real estate transactions during the
time the landlord failed to file tax returns;
* While owing taxes, the landlord transferred ownership of real
property to a third party who mortgaged the property to pay off
landlord's nontax debt.
Case: 18;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid federal tax amount: Over $1 million;
Comments:
* Landlord did not file required tax returns for several years;
* Landlord made several hundred thousand dollars in cash withdrawals
during a period while not filing taxes;
* Landlord was convicted of willful failure to file tax returns and
sentenced to 3 years probation;
* Landlord violated HUD rental property standards;
* Landlord's property that had significant environmental violations was
foreclosed on and sold.
Case: 19;
Type of case: Low-income housing subsidy;
Nature of work: Housing services;
Unpaid federal tax amount: Over $500,000;
Comments:
* Landlord has not paid withholding, estimated payments, or filed tax
returns the majority of years since early 1990s;
* Landlord's spouse had not filed a personal tax return since early
2000s;
* IRS has placed several hundreds of thousands in liens on landlord
property.
Case: 20;
Type of case: Grant;
Nature of work: Social services;
Unpaid federal tax amount: Over $800,000;
Comments:
* Grant recipient received nearly $400,000 in federal grants during a
recent 2-year period while owing payroll tax dating back to the early
2000s;
* Previous top official responsible for incurring the debt was
convicted of a felony;
* IRS assessed penalties on the previous top officer for willful
failure to pay payroll taxes;
* Federal tax liens were filed against the grant recipient.
Source: GAO's analysis of IRS, grant and direct assistance payments,
and other records.
[A] Rounded dollar amount of unpaid federal taxes as of September 30,
2006.
[End of table]
[End of section]
Appendix III: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
October 23, 2007:
Mr. Gregory Kutz:
Managing Director, Forensic Audits and Special Investigations:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Kutz:
I have reviewed the draft Government Accountability Office (GAO) report
titled: "Tax Compliance: Federal Grant and Direct Assistance Recipients
Who Abuse the Federal Tax System" (GAO-08-31).
Your report offers two recommendations. The first recommendation is
directed solely to the Office of Management and Budget (OMB). You
recommend the Director, OMB assess the need to require federal agencies
to conduct proactive inquiries into the tax debt status of award
applicants where appropriate. We realize the importance and potential
benefits of considering unpaid federal tax debt in the award
determinations, and will support OMB's assessment efforts. With regard
to your second recommendation, we agree to evaluate the 20 referred
cases detailed in the report for appropriate additional collection
action or criminal investigation as warranted. We will work with your
staff to secure additional information on the 20 cases.
If you have any questions, or if you would like to discuss this
response in more detail, please contact Frederick W. Schindler,
Director, Collection Policy at (202) 283-7650.
Sincerely,
Signed by:
Linda E. Stiff:
Acting Commissioner:
Enclosure:
Recommendation:
Evaluate the 20 referred cases detailed in this report for appropriate
additional aggressive collection action and criminal investigation as
warranted.
Response:
The IRS will work with your office to secure additional information on
the 20 cases identified in your audit with indications of abuse or
potential criminal activity. We plan to review each of these case files
and refer them for additional action as appropriate.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Greg D Kutz, (202) 512-6722, or kutzg@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Erika Axelson, James Berry,
Ray Bush, Bill Cordrey, Kenneth Hill, Aaron Holling, Wil Holloway,
Mitchell Karpman, John Kelly, Rick Kusman, Tram Le, John Ledford,
Barbara Lewis, Andrew McIntosh, Eduvina Rodriguez, John Ryan, Steve
Sebastian, Robert Sharpe, Barry Shillito, Pat Tobo, and Matthew Valenta
made key contributions to this report.
[End of section]
Related GAO Products:
Tax Compliance: Thousands of Organizations Exempt from Federal Income
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-1090T.
Washington, D.C.: July 24, 2007.
Tax Compliance: Thousands of Organizations Exempt from Federal Income
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-563.
Washington, D.C.: June 29, 2007.
Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax
System. GAO-07-742T. Washington, D.C.: April 19, 2007.
Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System. GAO-07-587T. Washington, D.C.: March 20, 2007.
Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections. GAO-07-26. Washington, D.C.: November 15, 2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and
Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and
Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006.
Financial Management: Thousands of GSA Contractors Abuse the Federal
Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006.
Financial Management: Thousands of Civilian Agency Contractors Abuse
the Federal Tax System with Little Consequence. GAO-05-683T.
Washington, D.C.: June 16, 2005.
Financial Management: Thousands of Civilian Agency Contractors Abuse
the Federal Tax System with Little Consequence. GAO-05-637. Washington,
D.C.: June 16, 2005.
Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. GAO-04-414T. Washington, D.C.: February 12,
2004.
Financial Management: Some DOD Contractors Abuse the Federal Tax System
with Little Consequence. GAO-04-95. Washington, D.C.: February 12,
2004.
[End of section]
Footnotes:
[1] See related GAO products at the end of this report.
[2] As classified by the General Services Administration's Catalog of
Federal Domestic Assistance (CFDA), published annually pursuant to 31
U.S.C. 6104 and OMB Circular No. A-89, Federal Domestic Assistance
Program Information (Aug. 17, 1984). We excluded Medicaid and Medicare
programs from this audit because we are conducting separate reviews on
Medicare and Medicaid program providers owing delinquent taxes.
[3] They are defined as state, county, city, or township governments;
special district governments (e.g., public housing authorities and
local transit authorities); independent school districts; and state-
controlled institutions of higher education.
[4] Detailed information on payments, including social security and
taxpayer identification numbers, for the ultimate recipients of grants
and direct payments administered at subfederal levels is maintained by
thousands of state and local governmental entities throughout the
country.
[5] Our audit also included a detailed assessment of tax debts owed by
recipients who received hurricane disaster assistance under the Federal
Emergency Management Agency's Individual and Households Disaster
Assistance Program (IHP), but we will be reporting the results from
this work separately.
[6] Data we analyzed represented grant and direct assistance payments
from the Department of Education's Grant Administration and Payment
System, the Department of the Treasury's Automated Standard Application
Payment System, and the Department of Health and Human Services'
Payment Management System.
[7] In the HUD Section 8 tenant-based program (also referred to as the
Housing Choice Voucher Program), HUD pays rental subsidies so eligible
families can afford decent, safe, and sanitary housing. The program is
generally administered by state or local governmental entities called
public housing agencies (PHAs). Families select and rent units that
meet program housing quality standards. PHAs then review the lease
arrangement for purposes such as determining whether the rent is
reasonable; the housing unit meets HUD's housing quality standards; and
the landlord is approvable, which includes, among other things, whether
the landlord has been debarred, suspended, or otherwise disqualified
from participating in HUD programs. If the PHA approves a family's unit
and tenancy, the PHA contracts with the landlord to make rent subsidy
payments on behalf of the family. HUD provides housing assistance funds
to the PHA who then pays the landlord.
[8] The other six cases involve HUD landlords. These six cases were not
required to submit a similar application that required the applicant to
disclose whether they were delinquent on any federal debt or not.
[9] The FAADS is a central collection of federal financial assistance
award transactions data compiled by the Bureau of the Census.
[10] Estimated annual awards exclusive of Medicare and Medicaid.
[11] Payroll taxes include income taxes, Social Security and Medicare
taxes, and the employer's matching share of Social Security and
Medicare, withheld from an employee's paycheck. Employers are to
collect and remit these taxes to the federal government. Even though a
grant-receiving entity may be exempt from paying income taxes, it still
is required to collect and submit payroll taxes for all employees.
[12] 26 U.S.C. § 6672.
[13] 26 U.S.C. § 7202.
[14] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b).
[15] According to IRS, nonfilers and underpayment of taxes comprised
the rest of the gross tax gap.
[16] The OMB Circulars are OMB Circular No. A-110, Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals, and Other Non-Profit Organizations
(Amended September 30, 1999) and OMB Circular No. A-102, Grants and
Cooperative Agreements with State and Local Governments (Amended August
29, 1997).
[17] In contrast, governmentwide policies for managing federal loan,
loan guarantees, and other credit programs promulgated in OMB Circular
No. A-129, Policies for Federal Credit Programs and Non-Tax Receivables
(November 2000) specifically require agencies to determine if an
applicant is delinquent on any federal debt, including tax debt, and
specifies using credit bureaus as a screening tool.
[18] 26 U.S.C. § 6103.
[19] GAO, IRS Lien Management Report: Opportunities to Improve
Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10,
2005) and GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005
Financial Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 2006).
[20] The other six cases involve HUD landlords. These six cases were
not required to submit a similar application that required the
landlords to disclose whether they were delinquent on any federal tax
debts or not.
[21] For the other three applicants, IRS did not levy tax assessments
until after applications were filed for two applicants and available
information did not permit us to determine the debt status for the
other applicant.
[22] 18 U.S.C. § 1001.
[23] As defined as state, county, city, or township governments;
special district governments (e.g., public housing authorities and
local transit authorities); independent school districts; and state-
controlled institutions of higher education.
[24] Under federal accounting standards, unpaid assessments require
taxpayer or court agreements to be considered federal taxes receivable.
Compliance assessments and memo accounts are not considered federal
taxes receivable because they are not agreed to by the taxpayers or the
courts.
[25] The other six cases were private landlords participating in HUD's
Section 8 tenant-based housing program.
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