By Staff
Today, over 1.6 million businesses owe more than $58 billion in unpaid federal payroll taxes accumulated over the last ten years. The U.S. Senate Permanent Subcommittee on Investigations, which I chair, has been investigating this blatant cheating. We asked the Government Accountability Office (GAO) to study the problem of unpaid payroll taxes, and last month we held a hearing on the issue. What we found is a disgrace.
Employers are required to withhold from their employees' salaries amounts for income taxes, Social Security, and Medicare. By law, it is the duty of these businesses to hold these funds "in trust" for the government. The GAO's study reveals that while the vast majority of businesses are complying with the law, some are using the funds withheld from employee paychecks for their own benefit.
The GAO did a similar study of payroll taxes in 1998, then reporting that 1.8 million businesses owed a total of $49 billion in unpaid taxes. In ten years, the number of delinquent businesses has slightly declined, but the amount owed has grown. Despite the fact that the IRS has continued to deem collection of payroll taxes "one of its highest priorities," part of the reason this is happening appears to be ineffective Internal Revenue Service (IRS) payroll collection efforts.
While the IRS collects 99.8 percent of all payroll taxes, leaving $58 billion on the table is still unacceptable.
There are a number of problems with IRS payroll collection efforts. Most critically, a small but growing number of payroll tax cheats have been allowed to repeatedly violate the law for years at a time.
The GAO's study reveals that the number of firms with more than five years of payroll tax debt has nearly tripled, from 5,000 in 1998 to 14,000 in 2007. IRS data show that the likelihood of collecting what is owed from businesses declines dramatically the longer payroll taxes go unpaid.
The result is that 52 percent of existing payroll debt is now uncollectable.
By using employees' tax dollars to incur lower operating costs, these businesses use their unpaid payroll taxes to gain an unfair advantage over honest competitors.
The IRS has also failed to make the most effective use of their available enforcement tools. Those tools include filing a tax lien, which allows the IRS to collect back taxes through property owned by the business. Yet, in 30 percent of cases that were assigned to a revenue officer for review, tax liens were not filed against businesses.
The IRS can also hand out Trust Fund Recovery Penalties (TFRPs), which make the owners or officers of the delinquent businesses personally liable for the outstanding debt. The GAO report indicated that, on average, the IRS took almost two years to start collection on a TFRP. Finally, while $9 billion in payroll tax cases do not even have a single officer assigned to them, the IRS at times doubles up and assigns a second officer to some cases.
To help address these issues, Congress should enact the Tax Lien Simplification Act that I introduced. It would create an electronic filing system to replace the current wasteful, burdensome and inefficient paper filing system.
The new streamlined system would save $570 million over 10 years, according to IRS estimates.
I also believe the IRS should implement much-needed payroll tax collection performance measures. The IRS needs to track payroll tax cases and evaluate revenue officers on their efforts in recovering unpaid taxes, as well as put in place more automatic actions against cheating businesses.
We must hold the IRS more accountable for its performance, to ensure that payroll tax cheats will no longer be able to misuse billions of dollars of employee and taxpayer money for their own benefit.