The Internal Revenue Service should apply stronger policies and procedures to crack down on employers who don't pay federal payroll taxes, the Government Accountability Office said.
More than 1.6 million businesses take advantage of the IRS’ policy of voluntary compliance to avoid paying $58 billion in federal payroll taxes, GAO said in a report released July 29. Unpaid payroll taxes are part of the annual shortfall in tax payments that IRS has reported amounts to $282 billion, GAO said.
The payroll taxes involved include the funds that employers are required to withhold from employees’ salaries for federal income taxes, employees' payments for funding Social Security and Medicare, and employers’ matching amount for Social Security and Medicare, GAO said.
Although the IRS has procedures available to prevent more unpaid payroll taxes and collect what is owed, its approach to gain voluntary compliance, even for major tax offenders, can result in minimal collections or no actual collections for these offenders, GAO said.
Of the $58 billion in outstanding payroll taxes, about 70 percent is owed by businesses that have owed the money for more than a year, and a quarter of those taxes were owed by businesses that built up tax debt for more than three years, said Steven Sebastian, director of GAO's financial management and assurance issues section.
“As a result of the failure of these businesses to pay payroll taxes, the compliant taxpayer bears an increased burden to fund the nation’s commitments,” he said.
IRS also has not acted quickly to file liens against businesses and has not always held those responsible personally liable for the unpaid payroll taxes, the report said.
Among the 50 businesses with payroll tax debt that it studied, GAO found evidence of abuse and criminal activity to cheat the tax system, Sebastian said.
“The business owners or officers in our case studies diverted payroll tax funds for their own benefit or to help fund business operations,” he said.
GAO recommended that IRS' leadership implement better monitoring and detailed guidance in its collection processes against major payroll tax offenders, and review case prioritization and practices to identify enforcement and collection procedures that could produce better results. The service also should develop performance goals and measures that it could evaluate against the reduction of unpaid payroll taxes, the report said.
The IRS also needs to execute procedures to quickly file federal tax liens against property after it identifies payroll tax debt and make sure that the tax liens are filed on both the businesses and the owners and officers who have already been assessed penalties, GAO said.
The IRS agreed and said it was focusing on businesses with long periods of unpaid payroll taxes.
The union representing IRS employees, the National Treasury Employees Union, said the growth in unpaid federal payroll taxes underscores the need for more IRS staffing and resources.
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