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Audit: Government due $49-billion in unpaid payroll taxes

The IRS' poor record-keeping has contributed to the problem, the General Accounting Office finds.

The government is owed $49-billion in unpaid payroll taxes and has little chance of collecting, a congressional audit has found. Poor record-keeping by the Internal Revenue Service is partly responsible.

IRS commissioner Charles Rossotti said the agency would use the audit to make "what near-term improvements we can."

More than 1.8-million businesses owed $49-billion in cumulative unpaid payroll taxes as of Sept. 30, according to a General Accounting Office audit released Monday. The sum includes about $19-billion in unpaid taxes and $30-billion in penalties and interest.

The taxes due represent 22 percent of the $222-billion in taxes owed the IRS as of September, the audit said.

The agency has levied $15-billion in additional penalties against 185,000 people for withholding but not forwarding the payroll taxes, which help pay for Social Security and Medicare benefits, to the U.S. Treasury.

At the same time, more than 18,000 people in this group received federal benefits worth $212-million, including Social Security and retirement payments, despite their $2-billion in payroll tax debt, the audit found. Federal law does not bar businesses or individuals from collecting federal payments or loans while they owe payroll taxes.

Gregory Kutz of the General Accounting Office estimated no more than 9 cents on the dollar of the outstanding payroll tax payments will be recovered. Many of the businesses are defunct or do not have the money to pay, or the IRS cannot find them, IRS records show.

Most of the offenders were small businesses in labor-intensive industries with few assets, such as construction companies and restaurants, Kutz said.

Several factors contribute to the problem, including technological and other operational weaknesses at the IRS, Kutz said.

State and federal law also can hinder the IRS' ability to collect, and the agency's criminal division will not prosecute people who fail to pay payroll taxes unless fraud is evident, the audit said.

The IRS is implementing changes required by a 1998 restructuring law. It also plans next summer to begin withholding up to 15 percent of a delinquent taxpayer's federal benefits, as authorized by separate legislation.