This is the accessible text file for GAO report number GAO-08-101R 
entitled 'Tax Compliance: Some Hurricanes Katrina and Rita Disaster 
Assistance Recipients Have Unpaid Federal Taxes' which was released on 
December 17, 2007.

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United States Government Accountability Office: 
Washington, DC 20548: 

GAO-08-101R: 

November 16, 2007: 

The Honorable Joseph I. Lieberman: 
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Carl Levin: 
Chairman: 
The Honorable Norm Coleman: 
Ranking Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland 
Security and Governmental Affairs: 
United States Senate: 

Subject: Tax Compliance: Some Hurricanes Katrina and Rita Disaster 
Assistance Recipients Have Unpaid Federal Taxes: 

Since February 2004, we have issued a series of reports detailing how 
some organizations and individuals, including defense, civilian agency, 
and General Services Administration (GSA) contractors; tax-exempt (not- 
for-profit) organizations; and Medicare physicians, abused the federal 
tax system at the same time they were doing business with or receiving 
benefits from the federal government.[Footnote 1] While we performed 
this work it came to our attention that some organizations and 
individuals that were recipients of federal grants and other direct 
assistance were also abusing the tax system. Thus, you asked us to 
perform additional work and report specifically on organizations and 
individuals that abuse the federal tax system at the same time they 
receive federal grants or other similar types of federal assistance, 
known as direct payments for specified use (direct assistance) 
programs.[Footnote 2] 

Based on your request, we completed a forensic audit and related 
investigations of unpaid federal taxes owed by recipients of the 
Federal Emergency Management Agency's (FEMA) Individuals and Households 
Program (IHP) following hurricanes Katrina and Rita.[Footnote 3] IHP is 
a federal direct assistance program authorized by the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 
as amended by the Disaster Mitigation Act of 2000. We conducted our 
audit of IHP concurrently with our broader audit of federal grant and 
direct assistance recipients that have unpaid federal taxes, which you 
also requested. We will be reporting the results of that work 
separately. 

The specific objectives of our work were to (1) determine, to the 
extent practical, the estimated magnitude of federal taxes owed by 
individuals receiving IHP disaster assistance benefit payments 
following hurricanes Katrina and Rita and (2) provide illustrative 
examples of abusive or criminal activity related to the federal tax 
system by IHP recipients with unpaid federal taxes. 

To estimate the magnitude of unpaid federal taxes owed by IHP disaster 
relief assistance recipients following hurricanes Katrina and Rita, we 
matched the Internal Revenue Service's (IRS) tax debts as of September 
30, 2005, with IHP disaster assistance benefit payments made for 
hurricanes Katrina and Rita maintained in FEMA's National Emergency 
Management Information System. We used only taxes assessed for tax 
periods prior to 2005 to ensure that our analysis included only taxes 
owed prior to when the hurricanes struck. To be conservative in our 
estimate, we further excluded from our analysis tax debts that had not 
been agreed to by the tax debtor or affirmed by the court and tax debts 
of $100 or less. To provide examples of the extent and nature of abuse 
or potential criminal activity related to the federal tax system by IHP 
recipients with unpaid federal taxes, we performed more in-depth 
investigative work on a nonrepresentative selection of five IHP 
recipients. These cases were selected based on amounts owed in federal 
taxes from the top 10 percent of the IHP recipient population. For 
these five cases, we reviewed copies of automated tax transcripts and 
other tax records (for example, revenue officers' notes) and performed 
additional investigative research on available criminal, financial, and 
public records. 

We conducted our work from January 2007 through August 2007. We 
performed our audit in accordance with U.S. generally accepted 
government auditing standards. The investigative portion of our work 
was completed in accordance with investigative standards established by 
the President's Council on Integrity and Efficiency. 

Results in Brief: 

While about 95 percent of all IHP recipients of disaster relief 
assistance following hurricanes Katrina and Rita paid their federal 
taxes, tens of thousands owed federal taxes at the time of the 
disaster. We identified about 80,000 of the 1.5 million individuals 
(about 5 percent) who received disaster assistance benefits for 
hurricanes Katrina and Rita and owed over $700 million combined in 
unpaid federal taxes prior to those hurricanes. However, our estimates 
of the taxes owed by these recipients is understated in that we did not 
include amounts owed by individuals who have not filed tax returns or 
who have failed to report the full amount of taxes due (referred to as 
nonfilers and underreporters) and for whom IRS has not determined that 
specific tax debts are owed. FEMA officials stated that they do not 
screen disaster applicants for tax debts. FEMA officials stated that 
there is no law or regulation that requires FEMA to screen IHP 
applicants prior to providing disaster assistance. 

The five IHP recipients with which we chose to illustrate abusive and 
criminal activity related to the federal tax system had tax debts 
ranging from about $400,000 to over $2 million. Our investigation found 
that a number of these individuals had a history of failing to file tax 
returns for several years prior to the hurricane disasters. We also 
found instances in which IHP recipients attempted to transfer property 
to avoid IRS seizure. For example, one IHP recipient in the oil and gas 
industry forged a third party's signature to illegally transfer land. 
Another IHP recipient, a lawyer, transferred a large quantity of stock 
to a family member while IRS was taking collection actions against the 
lawyer. 

We received written comments on a draft of this report from the 
Department of Homeland Security (DHS). In its written comments, DHS 
stated that FEMA's administration of disaster assistance programs to 
victims of hurricanes Katrina and Rita with tax liabilities was 
consistent with federal law and policy. As recognized in our draft 
report, DHS is not required to screen applicants for tax debts (see the 
Agency Comments and Our Evaluation section of this report). We have 
reprinted DHS's written comments in their entirety in the enclosure. In 
addition, IRS and DHS provided technical comments on the draft report, 
which we incorporated as appropriate. 

Background: 

Making landfall in late August 2005, Hurricane Katrina devastated much 
of the Gulf Coast; the storm surge caused major or catastrophic damage 
along the coastlines of Alabama, Mississippi, and Louisiana. In 
September 2005, Hurricane Rita caused further devastation, making 
landfall on the Louisiana and Texas Gulf Coasts. These two hurricanes 
left more than 1,500 dead, affected 90,000 square miles, caused more 
than $80 billion in damage, and forced mass evacuations. An estimated 
600,000 households were displaced, and FEMA has reported that over 
50,000 households remained in temporary housing 2 years later. 

The Stafford Act grants the principal authority for the President to 
provide assistance in mitigating, responding to, and preparing for 
disasters and emergencies such as earthquakes, hurricanes, floods, 
tornadoes, and terrorist acts. The mission of FEMA, within DHS, which 
administers the Stafford Act, is to reduce loss of life and property 
and protect the nation from all types of hazards through a 
comprehensive, risk-based emergency management program. Section 408 of 
the Stafford Act, 42 U.S.C.  5174, is the general authority for the 
President to provide assistance to individuals and households. This 
section encompasses housing assistance as well as "other needs" 
assistance, which includes medical, dental, funeral, personal property, 
transportation, and other financial assistance for certain needs 
arising from a major disaster. These two types of assistance are 
administered by FEMA under IHP. IHP provides housing and "other needs" 
assistance in the forms of direct assistance (the provision of 
temporary housing units) and financial assistance (grant funding for 
temporary housing and other disaster-related needs) to eligible 
disaster victims. 

Our previous forensic audits and related investigations found 
significant control weaknesses in FEMA's disaster relief program. In 
several hearings, we testified that control weaknesses in FEMA's IHP 
have left the government vulnerable to significant fraud, waste, and 
abuse. In February 2006, we testified that specific control weaknesses 
in IHP resulted in improper expedited assistance payments and 
nonexistent controls left the government vulnerable to substantial 
fraud and abuse related to IHP.[Footnote 4] Several months later, in 
June 2006, we testified on additional work performed whereby we 
projected that the weak or nonexistent controls resulted in an 
estimated $600 million to $1.4 billion dollars in potentially 
fraudulent and improper IHP payments or about 16 percent of the first 
$6 billion of IHP disbursements for hurricanes Katrina and 
Rita.[Footnote 5] In December 2006, we again testified that FEMA made 
nearly $17 million in potentially improper rental assistance payments, 
fraudulent rental assistance payments, or both to individuals after 
they had moved into FEMA trailers.[Footnote 6] Based on this work, we 
referred to the Katrina Fraud Task Force thousands of cases of 
individuals we believe received fraudulent and improper payments of IHP 
benefits. 

Magnitude of Unpaid Taxes Owed by IHP Recipients: 

While about 95 percent of all IHP recipients of hurricanes Katrina and 
Rita assistance did not have unpaid federal taxes, we identified tens 
of thousands of IHP recipients with unpaid federal taxes. We identified 
about 80,000 of the nearly 1.5 million registrants (about 5 percent) 
who received IHP disaster assistance payments for hurricanes Katrina 
and Rita and had over $700 million in unpaid federal taxes at about the 
time the hurricanes struck. Most of the taxes owed by these IHP 
recipients were individual federal income taxes. In addition, as 
reflected in figure 1, about two-thirds of unpaid federal taxes were 
for tax periods through calendar year 2000.[Footnote 7] 

Figure 1: IHP Recipients with Unpaid Federal Taxes (by Tax Year) as of 
September 30, 2005: 

[See PDF for image] 

This figure is a pie-chart depicting IHP recipients with unpaid federal 
taxes (by tax year) as of September 30, 2005. The following data is 
depicted: 

Prior to 1996: 29% ($218 million); 
1996 to 2000: 38% ($284 million); 
2001 to 2004: 33% ($244 million). 

Source: GAO analysis of FEMA and IRS data as of September 30, 2005. 

[End of figure] 

Although $700 million in unpaid taxes owed by IHP participants as of 
September 30, 2005, is a substantial amount, this amount understates 
the full extent of unpaid federal taxes for these individuals. To avoid 
overestimating the amount owed, we limited our scope to federal tax 
debts that were affirmed by either the individual or a tax court for 
tax periods prior to 2005. We did not include any debts incurred during 
the most current tax year to avoid including any tax debts that were 
assessed subsequent to the hurricanes. We also purposely excluded 
recently assessed tax debts that appear as unpaid taxes because they 
may involve matters that will be routinely resolved between the 
taxpayer and IRS. We further excluded tax debts of less than $100 
because they are insignificant for the purpose of determining the 
extent of taxes owed. 

Our estimate is also likely to be understated because the IRS tax 
database we used to derive our estimate reflects only the amount of 
unpaid taxes either reported by an individual or organization on a tax 
return or assessed by IRS through its various enforcement programs. The 
IRS database does not reflect amounts owed by organizations and 
individuals that have not filed tax returns and for which IRS has not 
assessed tax amounts due. For example, during our audit, we identified 
instances from our case studies in which individuals failed to file tax 
returns for a particular tax period and IRS had not assessed taxes for 
these tax periods. Consequently, while these individuals may have 
additional unpaid taxes, they were listed in IRS records as having no 
unpaid taxes for that period. Further, our analysis did not attempt to 
account for individuals who purposely underreported income and were not 
specifically identified by IRS as owing the additional taxes. According 
to IRS, underreporting of income accounted for more than 80 percent of 
the estimated $345 billion annual gross tax gap.[Footnote 8] 

Federal law and regulations do not prohibit IHP applicants that owe tax 
debts from receiving disaster assistance from the federal government. 
In fact, Office of Management and Budget (OMB) policy is to allow 
disaster loans to individuals with federal tax debts.[Footnote 9] 
Consistent with this policy, FEMA officials stated that they do not 
screen disaster applicants for tax debts. FEMA officials stated that 
there is no law or regulation that requires FEMA to screen IHP 
applicants prior to providing disaster assistance. 

Examples of IHP Recipients Involved in Abusive and Criminal Activity 
Related to Federal Tax System: 

The five IHP recipients with which we chose to illustrate abusive and 
criminal activity related to the federal tax system had tax debts 
ranging from about $400,000 to over $2 million. A number of these 
individuals had a history of failing to file tax returns for several 
years. Two IHP recipients also attempted to transfer property to avoid 
IRS seizure. Table 1 highlights the five cases of IHP recipients we 
investigated with unpaid taxes. 

Table 1: Descriptions of Five IHP Recipients with Unpaid Federal Taxes 
Investigated for Possible Abusive and Criminal Activity: 

Case: 1; 
Nature of work: Doctor; 
Unpaid tax amount[A]: $2 million; 
Comments: 
* FEMA recipient received several thousand dollars in disaster 
assistance; 
* FEMA recipient has a history of repeated failures to pay income tax 
and filing late returns, spanning back to the 1980s; 
* FEMA recipient's return in the early 2000s reported income of several 
hundred thousand dollars, but recipient did not report income in recent 
years; 
* Recipient had unreported gambling winnings totaling over a quarter of 
a million dollars at the same time that the recipient owed federal 
taxes; 
* FEMA recipient was charged with illegally dispensing a controlled 
substance. 

Case: 2; 
Nature of work: Doctor; 
Unpaid tax amount[A]: $2 million; 
Comments: 
* FEMA recipient received IHP assistance of several thousand dollars; 
* FEMA recipient did not file required tax returns for several years; 
* FEMA recipient said the reason for not filing returns was that the 
recipient was overwhelmed with the filing process and decided to wait 
for IRS to seek the returns; 
* IRS filed several tax liens against recipient's property. 

Case: 3; 
Nature of work: Contractor; 
Unpaid tax amount[A]: $500,000; 
Comments: 
* FEMA recipient received IHP assistance of several thousand dollars; 
* FEMA recipient has over a 10-year history of tax problems; 
* While owing taxes, FEMA recipient earned compensation up to $300,000 
prior to the hurricane; 
* FEMA recipient purchased numerous vehicles, including a luxury 
vehicle; 
* IRS filed multiple tax liens against taxpayer's assets. 

Case: 4; 
Nature of work: Attorney; 
Unpaid tax amount[A]: $400,000; 
Comments: 
* FEMA recipient received over a thousand dollars in disaster 
assistance; 
* FEMA recipient has a history of repeated noncompliance with paying 
federal individual and employer payroll taxes,[B] spanning back to the 
late 1980s and did not file tax returns for several years; 
* Recipient transferred ownership of a large quantity of stock to a 
family member while IRS was taking collection actions against the 
recipient; 
* IRS filed tax liens against recipient. 

Case: 5; 
Nature of work: Oil and gas entrepreneur; 
Unpaid tax amount[A]: $400,000; 
Comments: 
* FEMA recipient received several thousand dollars in disaster 
assistance; 
* FEMA recipient's annual income prior to the hurricane was from 
$50,000 to $100,000; 
* FEMA recipient has a history of repeated federal tax noncompliance 
dating back to the early 1990s; 
* FEMA recipient forged a third party's signature to illegally transfer 
land to avoid IRS seizure. 

Source: GAO's analysis of IRS records, IHP assistance payments, and 
other records. 

[A] Rounded dollar amount of unpaid federal taxes as of September 30, 
2005. 

[B] Payroll taxes include employee's income taxes and Social Security 
and Medicare taxes withheld from an employee's paycheck. Employers are 
to collect and remit these taxes to the federal government. Employers 
are deemed to have a fiduciary responsibility to hold withheld funds 
"in trust" for the federal government until the employer makes a 
federal tax deposit in that amount. The employer's owners or officers 
may be held personally liable for these amounts and may be subject to 
civil and criminal penalties for failure to remit payroll taxes. 

[End of table] 

Our previous forensic audits and related investigations found 
significant control weaknesses in FEMA's disaster relief program that 
have left the government vulnerable to significant fraud, waste, and 
abuse. Our review of FEMA data found that in several of these cases, 
the IHP recipient received disaster assistance without FEMA inspection 
of the claimed damaged property or after the inspection actually found 
no damage to the property. As a result, FEMA was at risk of paying 
disaster assistance to recipients that were not entitled to such 
benefits. For these five cases, we did not make a determination of 
potential fraud related to the disaster relief program because it was 
not included in the scope of this work. 

Agency Comments and Our Evaluation: 

On October 26, 2007, we received written comments on a draft of this 
report from the Department of Homeland Security (DHS). In its written 
comments, DHS stated that FEMA's administration of disaster assistance 
programs to victims of hurricanes Katrina and Rita with tax liabilities 
was consistent with federal law and policy. As recognized in our draft 
report, DHS is not required to screen applicants for tax debts. We have 
reprinted DHS's written comments in their entirety in the enclosure. In 
addition, IRS and DHS provided technical comments on the draft report, 
which we incorporated as appropriate. 

As agreed with your offices, unless you publicly release its contents 
earlier we plan no further distribution of this report until 30 days 
from its date. At that time, we will send copies of this report to the 
Secretary of Homeland Security and the Acting Commissioner of Internal 
Revenue. We will make copies available to others upon request. In 
addition, the report will be available at no charge on the GAO Web site 
at [hyperlink, http://www.gao.gov]. 

Please contact me at (202) 512-6722 or kutzg@gao.gov if you have any 
questions concerning this report. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. 

Signed by: 

Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigation: 

Enclosure - 1: 

[End of section] 

Comments from the Department of Homeland Security: 

U.S. Department of Homeland Security: 
Washington, DC 20528: 

October 26, 2007: 

Mr. Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Kutz: 

Re: Draft Letter of Correspondence GAO-08-1018, Tax Compliance: Some 
Hurricanes Katrina and Rita Disaster Assistance Recipients Have Unpaid 
Federal Taxes (GAO Job Code 192258): 

The Department of Homeland Security appreciates the opportunity to 
review and comment on the draft letter of correspondence referenced 
above. The U.S. Government Accountability Office (GAO) sought to 
determine the magnitude of federal taxes owed by individuals receiving 
disaster assistance benefit payments made under the Individual and 
Housing Program (IHP) following hurricanes Katrina and Rita. GAO also 
sought to provide examples of abusive or criminal activity related to 
the federal tax system by IHP recipients with unpaid federal taxes. The 
letter of correspondence contains no recommendations; so action on the 
part of the Department is not warranted. 

The Federal Emergency Management Agency's (FEMA's) administration of 
disaster assistance programs involving Hurricanes Katrina and Rita 
recipients with tax liabilities has been consistent with federal law 
and policy. Disaster assistance provided to individuals with 
outstanding tax debts does not constitute the same type of potential 
improper payments or fraud that was the subject of other GAO reports 
and investigations regarding controls within FEMA's disaster relief 
programs. Additionally, disaster assistance payments are not considered 
to be taxable income and are therefore not subject to the IRS 
continuous levy program. 

The results in brief section notes that "FEMA officials stated that 
there is no law or regulation that requires FEMA to screen IHP 
applicants prior to providing disaster assistance." However, the draft 
does not cite the two existing portions of the law and federal 
regulations indicating that we are not required to do such screening: 

* Robert T. Stafford Disaster Relief and Emergency Assistance Act, P.L. 
93-288, as amended, 42 U.S.C. 5121-5206, and Related Authorities (June 
2007)- "Assistance not income- Federal major disaster and emergency 
assistance provided to individuals and families under this Act, and 
comparable disaster assistance provided by States, local governments, 
and disaster assistance organizations, shall not be considered as 
income or a resource when determining eligibility for or benefit levels 
under federally funded income assistance or resource-tested benefit 
programs." 42 U.S.C. Sec. 5155(d), 

* 44 C.F.R. Sec. 206.110 (g)  Emergency Management and Assistance 
(Revised October 1, 2006)  "Exemption from Garnishment  All 
assistance provided under this subpart is exempt from garnishment, 
seizure, encumbrance, levy, execution, pledge, attachment, release of 
waiver. Recipients of rights under this provision may not reassign or 
transfer the rights. The exemptions do not apply to FEMA recovering 
assistance fraudulently obtained or misapplied." 

The Department of Homeland Security and FEMA remain committed to the 
effective and efficient administration of federal disaster relief 
programs, including the prevention of fraud, waste and abuse. 

Sincerely, 

Signed by: 

Steven J. Pecinovsky: 
Director: 
Departmental GAO/OIG Liaison Office: 

[End of enclosure] 

Related GAO Products: 

Tax Compliance: Thousands of Organizations Exempt from Federal Income 
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-1090T. 
Washington, D.C.: July 24, 2007. 

Tax Compliance: Thousands of Organizations Exempt from Federal Income 
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-563. 
Washington, D.C.: June 29, 2007. 

Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax 
System. GAO-07-742T. Washington, D.C.: April 19, 2007. 

Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax 
System. GAO-07-587T. Washington, D.C.: March 20, 2007. 

Internal Revenue Service: Procedural Changes Could Enhance Tax 
Collections. GAO-07-26. Washington, D.C.: November 15, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and 
Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006. 

Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and 
Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006. 

Financial Management: Thousands of GSA Contractors Abuse the Federal 
Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006. 

Financial Management: Thousands of Civilian Agency Contractors Abuse 
the Federal Tax System with Little Consequence. GAO-05-683T. 
Washington, D.C.: June 16, 2005. 

Financial Management: Thousands of Civilian Agency Contractors Abuse 
the Federal Tax System with Little Consequence. GAO-05-637. Washington, 
D.C.: June 16, 2005. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System 
with Little Consequence. GAO-04-414T. Washington, D.C.: February 12, 
2004. 

Financial Management: Some DOD Contractors Abuse the Federal Tax System 
with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 
2004. 

[End of section] 

Footnotes: 

[1] See related GAO products at the end of this report. 

[2] As classified by GSA's Catalog of Federal Domestic Assistance, 
published annually pursuant to 31 U.S.C.  6104 and OMB Circular No. A- 
89, Federal Domestic Assistance Program Information (Aug. 17, 1984). 

[3] IHP provides temporary housing or financial assistance to eligible 
victims. 

[4] GAO, Expedited Assistance for Victims of Hurricanes Katrina and 
Rita: FEMA's Control Weaknesses Exposed the Government to Significant 
Fraud and Abuse, GAO-06-403T (Washington, D.C.: Feb. 13, 2006). 

[5] GAO, Hurricanes Katrina and Rita Disaster Relief: Improper and 
Potentially Fraudulent Individual Assistance Payments Estimated to Be 
Between $600 Million and $1.4 Billion, GAO-06-844T (Washington, D.C.: 
June 14, 2006). 

[6] GAO, Hurricanes Katrina and Rita Disaster Relief: Continued 
Findings of Fraud, Waste, and Abuse, GAO-07-252T (Washington, D.C.: 
Dec. 6, 2006). 

[7] There is a 10-year statute of limitations beyond which IRS is 
prohibited from attempting to collect tax debt. The 10-year time may be 
suspended for a variety of reasons, including for periods during which 
the taxpayer is involved in a collection due process appeal, 
litigation, or a pending offer in compromise or installment agreement. 
As a result, fig. 1 includes taxes that are for tax periods from more 
than 10 years ago. 

[8] According to IRS, nonfilers and underpayment of taxes constituted 
the rest of the gross tax gap. 

[9] OMB Circular No. A-129, Policies for Federal Credit Programs and 
Non-Tax Receivables (Revised November 2000). 

[End of section] 

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