WASHINGTON More than a million and a half businesses owe the government about $58 billion in taxes they were supposed to withhold from employees' paychecks but never forwarded to the IRS, congressional investigators said in a report made public Monday.
The 1.6 million businesses owing income, Social Security and Medicare taxes from their payrolls as of Sept. 30 last year included an accommodation and food service company that had failed to pay $12 million while the owner diverted business money to buy luxury cars, planes and a mansion in a foreign country, the Government Accountability Office found.
A construction company that owed $2.5 million dating back five years was found to be underbidding contracts while using unpaid payroll taxes to subsidize losses.
The $58 billion in unpaid taxes covers 10 years. Beyond that, a statute of limitations generally kicks in and the money is permanently lost.
"Cheating on payroll taxes is not an abstract concept," said Sen. Norm Coleman of Minnesota, who asked for the GAO study. "Over the past 10 years, $44 billion has been transferred from general tax revenues to cover shortfalls in Social Security and Medicare. That means these businesses are contributing to the bankruptcy and insolvency of programs that are designed to assist our nation's seniors."
Coleman, the senior Republican on the Senate Homeland Security Committee's investigations subcommittee, is seeking re-election this year.
The panel's Democratic chairman, Sen. Carl Levin, D-Mich., called on the IRS "to move forcefully to end this abysmal situation."
The Internal Revenue Service has made collecting unpaid taxes supposedly withheld from payrolls a priority, the report said but has classified $30 billion of them as currently uncollectible. The agency cites factors such as businesses being defunct, insolvent after bankruptcy or in court challenging assessments.
But the GAO faulted the tax agency for relying on voluntary compliance, even for the worst offenders. The IRS faces difficult challenges in balancing collection actions against taxpayer rights, it said, but to the extent that it does not actively pursue cheats, it "is not acting in the best interests of the federal government, the employees of the businesses involved, the perceived fairness of the tax system or overall compliance with the tax laws."
It said it takes the IRS 40 weeks, on average, to decide to pursue collection against offenders, and an additional 40 weeks to assess a penalty, called a Trust Fund Recovery Penalty.
The IRS, in a statement, said it collects 99.8 percent of all Social Security, Medicare and unemployment insurance taxes. It contrasted the uncollected taxes with $21.4 trillion it received from all sources over the 10-year period.
"The GAO report represents a momentary snapshot of our long-term effort to improve employment tax collection," the IRS said. The agency said it resolved 5.2 million delinquent cases in fiscal year 2007, compared to 3 million in 2002.
The GAO report found that unpaid payroll taxes comprised more than half of all taxes owed by businesses, and about one-fifth of all outstanding business and individual taxes owed as of last September.
The deadbeats tend to make a habit of it: 70 percent of unpaid taxes are owed by businesses with more than a year, or four tax quarters, of not paying. The number of businesses with more than 20 quarters of payroll tax debt jumped from 5,367 in 1998 to 14,681 last year.
A waste-management firm owing $16 million stretched out over 10 years. The business was investigated for hiring illegal immigrants and the owner was arrested for income-tax crimes.
A health-care company owing $2.5 million over 30 quarters filed for bankruptcy three times. Around the time of the bankruptcy filings, officers made cash withdrawals from the business of about $700,000. The IRS filed a lien against the business and assessed penalties against three of its officers.
Payroll taxes are amounts employers withhold from employees' wages for federal income taxes, Social Security and Medicare. Employees pay 6.2 percent of gross wages for Social Security and 1.45 percent for Medicare, sums matched by the employer.
On the Net:
Government Accountability Office: www.gao.gov
Internal Revenue Service: www.irs.gov/