Although payroll tax debts are one of the IRS’s top collection priorities, the Service hasn’t made optimal use of its enforcement tools against the 1.6 million businesses owing $58 billion for employees’ income, Social Security and Medicare taxes, the Government Accountability Office said. Earlier GAO audits found that payroll taxes were a major component of tax debts owed by federal contractors (see “ Tax Matters: Bills Target Contractor Scofflaws,” July 07, page 84). In this follow-up study, the GAO found that although they are required to remit payroll taxes quarterly, some businesses allow them to accumulate for years, sometimes with little consequence. Seventy percent of unpaid payroll taxes were owed by businesses with more than a year’s worth of unpaid payroll taxes, one-fourth by businesses that hadn’t remitted them for more than three years.
Procedures designed to expedite enforcement of payroll taxes had the opposite effect when it came to liens, the GAO said. Such cases bypass the Service’s Automated Collection System to go directly to a revenue agent in the field. But because of staffing constraints, those cases languish for “extended periods” while awaiting assignment, with no lien filed in 80% of cases examined. Even after the cases are assigned to an agent, liens are underutilized, the GAO said, citing previous internal studies by the IRS. Another potentially powerful enforcement mechanism is making business owners and officers personally liable for the debt with a trust fund recovery penalty (IRC § 6672). But on average, the IRS took two years after assessing a tax debt to impose the penalty. Meanwhile, business owners in some cases continued to accumulate payroll tax debt, often along with other tax-abusive and even apparently criminal activities (besides the federal felony of willful failure to remit payroll taxes), the GAO said.
Besides potentially leaving employees holding the bag for nonwithheld income taxes, nonpayment of FICA for assessments issued as of Nov. 1, 2007, required the government to transfer $44 billion from general funds to the Social Security and Hospital Insurance trust funds, the GAO said.