Tax Compliance:

Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System

GAO-08-31: Published: Nov 16, 2007. Publicly Released: Dec 17, 2007.

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Since February 2004, GAO has reported that weaknesses in the federal programs and controls that allowed thousands of federal contractors, tax exempt entities, and Medicare providers to receive government money while owing taxes. GAO was asked to determine if these problems exist for entities who receive federal grants or direct assistance and (1) describe the magnitude of taxes owed, (2) provide examples of grant recipients involved in abusive and potentially criminal activity, and (3) assess efforts to prevent delinquent taxpayers from participating in such programs. To perform this work, GAO analyzed data from the Internal Revenue Service (IRS), three of the largest grant and direct assistance payment systems, representing over $460 billion in payments in fiscal years 2005 and 2006, and the Housing and Urban Development (HUD) Section 8 tenant-based housing program. GAO investigated 20 cases to provide examples of grant recipients involved in abusive activity.

While most recipients of payments federal grant and direct assistance programs pay their federal taxes, tens of thousands of recipients collectively owed $790 million in federal taxes as of September 30, 2006. This included over 2,000 individuals and organizations that received $124 billion of payments directly from the federal government and who owed more than $270 million of unpaid taxes (almost 6 percent of such recipients) and about 37,000 landlords participating in HUD's Section 8 tenant-based housing program who owed an estimated $520 million of unpaid taxes (almost 4 percent of such landlords). The $790 million estimate is likely substantially understated because GAO's analysis excluded the 80 percent of federal grants that are directly given to state and local governments which, in turn, disburse the grants to the ultimate recipients. GAO selected 20 grant and direct assistance recipients with high tax debt for a more in-depth investigation of the extent and nature of abuse and criminal activity. For all 20 cases GAO found abusive and potential criminal activity related to the federal tax system, including failure to remit individual income taxes and/or payroll taxes to IRS. Rather than fulfill their role as ''trustees'' of payroll tax money and forward it to IRS, these grant recipients diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under U.S. law. Individuals associated with some of these recipients diverted the payroll tax money for their own benefit or to help fund their businesses. GAO referred these 20 cases to IRS for additional collection and investigation action, as appropriate. Federal law and current governmentwide policies do not prohibit individuals and organizations with unpaid taxes from receiving grants or direct assistance. Several federal agencies established policies against awarding grants to tax delinquent applicants; however, federal agencies do not verify applicants' certification that they do not owe taxes. Further, federal law generally prohibits the disclosure of taxpayer data to federal agencies. Eleven grant recipients that GAO investigated appeared to have made false statements by not disclosing their tax debt as required. Further, agencies that award grants are not required to inquire as to recipients' tax debt status prior to providing direct assistance payments.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Director, Office of Management and Budget, should assess the need to issue guidance requiring federal agencies that award certain grants and other direct assistance, where appropriate in relation to the potential adverse effect on potential applications, to conduct actions that would help determine if applicants had unpaid federal tax debt, including obtaining applicant consent to inquire as to tax debt status from IRS; this could be achieved through sampling or other risk-based assessments.

    Agency Affected: Executive Office of the President: Office of Management and Budget

    Status: Closed - Implemented

    Comments: In response to our recommendation, OMB established a Task Group to address the recommendation. Based on its work, the task force found that such actions would increase the cost of compliance without providing a commensurate increase in the reliability of the data already being submitted. As such, the task force concluded that there was no need for action on this matter.

    Recommendation: The Director, Office of Management and Budget, should assess the need to issue guidance requiring federal agencies that award certain grants and other direct assistance, where appropriate in relation to the potential adverse effect on potential applications, to consider the result of those inquiries in the award determinations.

    Agency Affected: Executive Office of the President: Office of Management and Budget

    Status: Closed - Implemented

    Comments: In response to our recommendation, OMB established a Task Group to address the recommendation. Based on its work, the task force found that such actions would increase the cost of compliance without providing a commensurate increase in the reliability of the data already being submitted. As such, the task force concluded that there was no need for action on this matter.

    Recommendation: The Acting Commissioner of Internal Revenue should evaluate the 20 referred cases detailed in this report for appropriate additional collection action or criminal investigation as warranted.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Through May 2012, IRS has evaluated the 20 cases and took appropriate collection actions, resulting in the closure of the 20 cases.

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