IRS criticized for failure to collect payroll taxes

The General Accounting Office reported Monday that the IRS is unlikely to collect much of the $49 billion in cumulative unpaid payroll taxes, which accounts for 22 percent of the $222 billion overall owed to the IRS in delinquent taxes.

GAO Associate Director Gregory Kutz said only about 9 percent of this money, often owed by labor-intensive businesses such as restaurants and construction companies, will likely be collected. "The result is the compliant taxpayers must pay more," Kutz said.

Kutz told the House Government Reform Government Management, Information and Technology Subcommittee the IRS has serious system deficiencies that make collection too slow, that IRS education and early warning programs are ineffective and that federal and state laws make it difficult to share IRS information with states that could make IRS collection easier.

Moreover, GAO reported that many delinquent individuals and businesses receive $10.7 billion annually in federal benefits from vendor and civilian payments and Small Business Administration loans.

IRS Commissioner Charles Rossotti said "we fully comprehend the significance" of the delinquent payroll taxes, adding that "decades-old technology" make it nearly impossible to identify and collect quickly on payroll taxes.

"We must shift from addressing taxpayer problems well after returns are filed to addressing them as early in the process as possible, and in fact prevent problems whenever possible," he said.

Rossotti outlined an IRS pilot program beginning in September, along with funding that recently became available from a special technology account, as developments that will help the IRS improve collection.

Government Management, Information and Technology Subcommittee Chairman Stephen Horn, R-Calif., expressed dismay that delinquent taxpayers could enter into installment payments with the IRS and stop payment after the 10-year statute of limitations runs out.

"I think we'll all get calls from our constituents when we get back to our office [asking] 'Where can we get these million dollar loans and make these $25 a month in payments?'" Horn observed.

Rep. Jim Turner, D-Texas, floated the idea of requiring a bond payment for all startup businesses, which would guarantee payment of payroll taxes.

To limit the burden of startup costs for a business, Turner suggested that a bond payment should exempt smaller "mom and pop" businesses with few employees.