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CCH® PAYROLL — 9/16/08

GAO finds fault in payroll tax enforcement

‘‘While most businesses fulfill their fiduciary responsibility to the government to withhold taxes from their employee’s salaries, make matching contributions, and remit these sums to the government, a significant number do not.’’ That’s the finding of a recent report by the Government Accountability Office (GAO). The GAO concludes that the IRS must shoulder a big part of the blame for the ‘‘tax gap’’ in payroll taxes.

The GAO found that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid payroll taxes, including interest and penalties. Of that amount, 70% of all unpaid payroll taxes are owed by businesses with more than a year (four tax quarters) of unpaid federal payroll taxes, and over a quarter of unpaid payroll taxes were owed by businesses that accumulated tax debt for more than three years (12 tax quarters).

The GAO says that the IRS has a number of powerful tools at its disposal to collect the taxes that are owed, but is not using them wisely. For example:

• IRS’s overall approach to collection focuses primarily on gaining voluntary compliance, which can allow egregious payroll tax offenders to continue to accumulate payroll tax debt for years that may never be collected.
• IRS is not timely assessing personal penalties on individuals responsible for not remitting their businesses’ payroll tax debts (the ‘‘Trust Fund Recovery Penalty’’ or TFRP). In a sampling done by the GAO, it took the IRS over 40 weeks, on average, to decide to pursue collection against responsible owners/officers and an additional 40 weeks to actually assess penalties.
• IRS is not timely filing liens. The GAO found the IRS had not filed a lien against more than one-third of all businesses with unpaid payroll taxes assigned to the field. Over 80% of payroll cases in the queue awaiting assignment did not have a lien filed.

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