What if the Internal Revenue Service somehow fumbled in its recordkeeping and, because of it, nearly $50 billion in payroll taxes owed to the federal government somehow slipped through the cracks? And what if the federal government had little chance of collecting all it is owed?
Regrettably, this is not a hypothetical. A new congressional audit has revealed that 1.8 million businesses owed the federal government $49 billion in cumulative un-paid payroll taxes as of Sept. 30, 1998. A General Accounting Office auditor estimates that no more than nine cents on the dollar will ever be collected. Keep in mind, that's money that helps pay for Social Security and Medicare benefits, among other things.The irony of this is, the Internal Revenue Service has a reputation as a stickler for details. The prudent executive carefully documents every financial transaction, then backs up the records just in case the tax auditor comes calling. Surely, the federal agency charged with collecting taxes should have like practices.
Technology may be a large part of the problem. Incredibly, the agency has no assurance that its records are accurate because it keeps separate databases for businesses and individuals on systems that cannot communicate with one another.
What's more, 18,000 people who have withheld but not forwarded payroll taxes to the government are receiving federal benefits worth $212 million, while owing $2 billion in back taxes. Still others who owe taxes have received federal loans, which, interestingly, is not barred under current law.
Other collection problems are tied to the businesses themselves. Many are defunct, do not have the money to pay or the IRS cannot find them.
Other federal and state laws may impede collections. The IRS criminal division, for instance, will not prosecute people who fail to pay payroll taxes unless fraud is evident.
IRS officials have vowed to use the congressional audit to make improvements but caution that systemic changes are needed to fix these problems. They won't occur overnight.
The agency is in the midst of an overhaul as required by a 1998 restructuring law. Beginning next summer, the agency plans to withhold up to 15 percent of a delinquent taxpayer's federal benefits, as authorized by separate legislation.
Meaningful, systemic changes must occur as soon as possible. Taxpayers who dutifully pay their taxes deserve better performance on the part of this agency.