IRS Too Easy on Payroll Taxes

Martin Vaughan reports today in the Wall Street Journal [subscription required]: "IRS Too Easy On Payroll Taxes, Study Finds."

The Internal Revenue Service is too lenient with business owners who fail to remit payroll taxes to the federal government, congressional investigators said in a study to be released Tuesday.

More than 1.6 million businesses are behind on payroll-tax payments, for a total of $58 billion owed as of Sept. 30, 2007, the Government Accountability Office said. In pointed language, the GAO said the IRS is slow to file liens and focuses too much on voluntary compliance rather than using stronger medicine.

"IRS's collection philosophy focuses on gaining voluntary compliance, even for recalcitrant businesses that repeatedly fail to remit payroll taxes and whose actions indicate no intention to become compliant," according to the report. "It is incumbent upon IRS to revise its approach ... to prevent businesses from continuing to accumulate payroll tax debt."

The GAO findings take center stage at a Tuesday hearing of the Senate Permanent Subcommittee on Investigations, which has a history of pressuring the IRS to more aggressively pursue delinquent taxpayers.

At issue are Social Security taxes -- both the 6.2% of wages withheld from employees, and the employer match -- and Medicare taxes that the employer holds "in trust" and is required to remit to the federal government. Failure to do so is a felony, and the IRS has authority to seize the personal assets of business owners if they are found to be "willful" in diverting payroll taxes.

This trend may seem to go against what we are led to believe in the DOL/EBSA world with respect to the timing of remittance (i.e. separation from the employer's general assets) of participant's 401(k) contributions.

The GAO recommended that the IRS revise its procedures to allow for more prompt filing of liens against property, along with other administrative improvements.
The IRS agreed with all of the GAO's recommendations. In response to the report, it noted that the IRS collects 99.8% of all payroll taxes assessed. The $58 billion is a cumulative total of uncollected debts over 10 years. The IRS considers about half of that debt to be uncollectible because the businesses in question are insolvent or defunct.

The GAO said it found "extensive evidence of abuse and potential criminal activity" in a review of IRS cases related to payroll-tax collection. It said in a number of cases, business owners made extravagant personal purchases or made business investments even as they continued to flout their payroll-tax obligations.

Wait, wait, wait, here's the punchline... There had to be a human element to this story:

For instance, one dentist who owes the IRS more than $500,000 after 15 years of underpaying, lives in a $700,000 home that is deeded to a spouse, and sold property to children at below-market rates to pre-empt tax liens.