Billions in Payroll Tax Remain Unpaid to IRS

By Holly Watt
Special to The Washington Post
Tuesday, July 29, 2008

Businesses have shorted the Internal Revenue Service about $58 billion in federal payroll taxes they withheld from employees' wages over the past 10 years, congressional investigators have found.

The Government Accountability Office says in a report to be published today that 1.6 million businesses did not forward to the IRS taxes they collected for employees' federal income taxes, Social Security and Medicare payments.

The report was requested by the Senate Homeland Security and Governmental Affairs Committee's Permanent Subcommittee on Investigations. Lawmakers on both sides of the aisle expressed outrage upon learning of the GAO's findings.

Sen. Norm Coleman (Minn.), the ranking Republican on the subcommittee, called on the IRS "to take off the kid gloves" when dealing with such businesses.

"You have a situation where, for example, construction companies can make lower bids knowing that they can make up the difference with this cushion. That's an unfair competitive advantage to those companies," he said.

"At a time when our nation is drowning in debt, it is appalling that delinquent businesses have cheated Uncle Sam," agreed Sen. Carl M. Levin (D-Mich.), the subcommittee chairman.

The number of businesses with more than five years of payroll tax debt more than doubled in the past decade, from 5,367 to 14,681, while the number of businesses 10 years in arrears on payroll taxes had increased 470 percent. Beyond that point, under statutory limitation, the government usually writes off the tax debt.

Coleman said the IRS placed too much emphasis on voluntary compliance, a policy abused by repeat offenders. He called on the IRS "to use liens and levies much earlier" in pursuing tax debts.

"There needs to be a change of attitude," he said. "With the 10-year statute, the amount that they are writing off is going up and up. This year, it is $4 billion in payroll taxes."

While some business owners are deliberately defrauding the government, others get into trouble by granting themselves a short-term break from paying the taxes -- perhaps to get through a particularly tight quarter -- and then find themselves in a hole they can never get out of, said Giovanni Coratolo, the U.S. Chamber of Commerce's executive director of small and mid-market business councils.

"We do not in any way condone" such a practice, Coratolo said, "but sometimes businesses do make mistakes, and down the line," as interest and penalties accumulate, "it can actually sink some companies."

Coratolo warned that aggressive actions by tax collectors could be disastrous for small businesses.

Steve Ellis, vice president for Taxpayers for Common Sense, a government watchdog group, said: "Taxpayers need to be on a level playing field, or the people paying their fair share end up feeling like chumps."

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