Medicare Contractors Owe Taxes, GAO Says

The federal government has failed to collect more than $1 billion in back taxes owed by Medicare doctors and suppliers, nearly half of it payroll taxes deducted by health-care providers who spent the money on luxury cars and other personal expenses rather than sending it to the IRS, a congressional report says.

The money has not been collected because the Department of Health and Human Services, which oversees Medicare, has failed to connect its computers to the Internal Revenue Service and other Treasury Department divisions, the Government Accountability Office report says. Such a connection would allow the agencies to quickly identify who owes taxes and begin deducting that money from checks the federal contractors receive from Medicare.

The collection gap persists despite the GAO's recommendation in 2001 that HHS and Treasury coordinate to ensure no federal contractor abuses the federal tax system by failing to pay taxes. Many of those who owe tax continue to work for Medicare, and their tax liability has grown, GAO researchers have told members of Congress.

The report by the GAO, the research arm of Congress, found that 21,000, or about 5 percent, of the doctors and other health-care suppliers providing outpatient services billed to Medicare in the first nine months of 2005 owed more than $1 billion in taxes going back nearly a decade. Medicare is the federal health-insurance program for people 65 and older and also for people on disability.

About $430 million of the money owed came from payroll taxes collected from workers but was never passed on to the Internal Revenue Service, a felony. Instead, the medical providers bought "million-dollar homes and luxury vehicles" such as Jaguars, private jets and yachts, the report says.

The report was released yesterday by the permanent subcommittee on investigations of the Senate Homeland Security and Governmental Affairs Committee, which is holding a hearing today on the findings. The hearing is the fourth the subcommittee has held since 2004 into why billions of dollars in unpaid taxes by government contractors remains uncollected. The revelations of unpaid taxes by government contractors come as Congress grapples with how to close the $350 billion federal tax gap, the difference between taxes owned and taxes collected.

Sen. Norm Coleman of Minnesota, the ranking Republican on the subcommittee, said yesterday that the situation is particularly distressing because there could easily have been a system in place to fix it. He said that in 2001, when the GAO first suggested to HHS that it could coordinate with Treasury to identify tax deadbeats, HHS said the two agencies' computers were not compatible, making it impossible to work together. HHS computers were updated by 2004, giving the department no excuse, he said.

Contractors who do pay their taxes, as well as rank-and-file taxpayers, "should be pretty angry," Coleman said.

"We are very concerned about this issue and are working hard with the Department of Treasury and the IRS to ensure that we do not overpay providers or other entities who owe the IRS money," Leslie V. Norwalk, the acting director of the HHS unit that oversees Medicare, said in a statement. She said HHS has no authority to "deny physicians the right to participate in Medicare if they have tax debt."

The subcommittee's previous hearings have documented that contractors owing $7.7 billion in back taxes continued to win contracts from the Department of Defense and many civilian federal agencies, including the General Services Administration.

Coleman said the hearings have caused the government to greatly increase automatic garnishing of payments to contractors where 15 percent is taken out and sent to the IRS. Money collected totaled $136 million in 2004. In 2006 it had reached $339 million.

The GAO report said its investigators will probe other Medicare suppliers, including hospitals and nursing facilities, to identify others who have "abused the federal tax system while doing business with the federal government."