IRS Fails to Nab Payroll Cheats - FinancialWeek.com, August 25, 2008

Click here to read more articles

IRS fails to nab payroll cheats

Unpaid payroll taxes soared 20% in 10 years, to $58 billion in "07, according to latest audit. IRS vows: "We can and we will do better.'

By Neil Roland, FinancialWeek.com
August 25, 2008

For the past decade, the Internal Revenue Service has been the subject of audit reports criticizing the agency's failure to collect tens of billions of dollars in unpaid payroll taxes from businesses.

But those reports have yielded too little in the way of results for many in Congress, and by some measures the problem is getting worse. Unpaid payroll taxes rose from $49 billion to $58 billion between 1998 and 2007. The number of businesses that haven't paid taxes in more than five years nearly tripled, and those delinquent at least 10 years soared nearly sixfold.

Lawmakers pushing for an IRS crackdown on egregious offenders are citing a new report by the Government Accountability Office that calls on the agency to better identify repeat offenders and act more quickly-and come down harder-on violators.

Some say the report's distressing findings may force action this time, given that a record budget deficit awaits the next president.

"We can and we will do better," deputy IRS commissioner Linda Stiff told the Senate Permanent Subcommittee on Investigations, which requested the GAO report, during a hearing last month.

Ms. Stiff said the IRS has begun a series of studies aimed at improving payroll tax enforcement. She also noted that the agency has increased criminal enforcement cases by 55% in the last four years.

A federal case filed Aug. 6 adds an eye-popping dimension to the congressional findings-and may suggest a new IRS resolve. In one of the biggest payroll tax fraud cases ever, Florida businessman Frank Amodeo was charged with defrauding the government of $182 million in payroll taxes through a web of professional employee organizations he controlled.
One of those organizations, Presidio Solutions, transferred its book of business from one subsidiary to another, and the one with the lowest unemployment rate would report payroll taxes, the indictment filed in U.S. District Court in Orlando alleges. Mr. Amodeo, a disbarred lawyer, used the money to buy real estate in four states, a Gates Learjet plane, a Mercedes-Benz, a BMW and a Harley-Davidson motorcycle, the indictment alleges. His attorney, Butch Slaughter, declined to comment.

The GAO report, released late last month, found possibly widespread criminal intent among companies dodging payroll taxes. Thousands failed to pay Medicare and Social Security taxes for at least 12 months, and more than 9,000 business owners neglected to pay federal payroll taxes for two or more companies they own.

But several tax lawyers who represent businesses put the challenges facing the IRS in broader perspective, and said the agency is boxed in on a number of fronts.

"The IRS isn't a sponge that can absorb this problem in its entirety," said Don Rocen, who spent 21 years at the IRS, including stints as assistant to former commissioner Larry Gibbs and as a deputy chief counsel at the agency. "There are rights that taxpayers have, and the IRS is in dire need of resources."

The agency has to navigate a complex environment that requires it to get enforcement cooperation from states and the Justice Department, as well as political support from Congress. In addition, the IRS's powers were trimmed by 1998 legislation after reports of taxpayer harassment surfaced. And its computer systems have long been outdated, lawyers said.

An internal 2000 audit by the Treasury Department found revenue officers were reluctant to take enforcement action because of bad publicity about abused taxpayers that arose from Senate hearings a few years earlier.

"If the IRS jumped into enforcement actions and drove some small businesses into bankruptcy, I'd venture to say you'd see Congress stepping in again," said Mr. Rocen, a partner with Miller & Chevalier in Washington.

Payroll tax collection works voluntarily: A business withholds taxes from employee paychecks and is supposed to remit the money to the government periodically. Willful failure to do so is a felony, and the IRS can seize assets of firms found to be deliberately withholding payments.

Payroll taxes make up the largest portion of the taxes collected by the IRS, accounting for $1.7 trillion of the $2.7 trillion it gathered in fiscal year 2007, Ms. Stiff said last month.

A disproportionate number of violators were in the construction sector, according to both the July GAO report and one released in 1999. Most were small businesses, the earlier report said.

Tax lawyers said construction is a particularly difficult sector for the IRS to monitor. Because it is so cyclical, contractors may have cash-flow problems during housing slumps like the present. Owners are sometimes tempted to dip into the payroll tax fund as a temporary bridge, but then fall behind on remitting payments to the IRS. When business doesn't pick up, they find themselves in a hole, lawyers said.

"There's not necessarily malice aforethought," said Rich Walton, a partner at Buchalter Nemer in Los Angeles who used to work for the Justice Department's criminal division. "But by the time the IRS gets to them, the businesses often don't have any money left to pay."

In addition, some construction workers are illegal immigrants who are trying to keep a low profile. As a result, they want to be classified as independent contractors rather than employees so they won't have to give their Social Security numbers, said Chaya Kundra, a Rockville, Md., lawyer who worked for the Treasury Department's financial enforcement unit.

Even with all the IRS's persistent problems, some observers are optimistic that the agency's collections will improve. They cited efforts by Sens. Carl Levin (D-Mich.), Max Baucus (D-Mont.) and Charles Grassley (R-Iowa) to narrow the $353 billion gap between what taxpayers owe and what they pay.

"In recent years, there's been much more congressional interest in this issue than in years prior," said Alex Brill, an economic policy adviser at Buchanan Ingersoll & Rooney who was chief economist for the House Ways and Means Committee between 2002 and 2007. "So that bodes well."