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GAO testimony likely to provoke increased scrutiny of provider income tax payments
A review found that the IRS was unable to recover an estimated $40 million to $150 million in tax revenue from delinquent providers in 2005.
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In testimony before the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs of the United States Senate, the Government Accountability Office reported its findings of a recent review that it conducted on provider income tax payments. The GAO found that a significant number of providers have failed to remit a substantial portion of their annual income tax payments. According to the GAO’s testimony, these shortfalls contributed to an estimated $40 million to $150 million of lost tax revenue for the first 9 months of calendar year 2005. The GAO also criticized the Department of Health and Human Services for failing to adopt sufficient mechanisms to help collect these providers’ tax debts.
In response to the GAO’s testimony, the acting administrator of the Centers for Medicare and Medicaid Services, Leslie Norwalk, remarked that she was outraged by the GAO’s findings and requested that Congress legislate to allow CMS to access Internal Revenue Service records in order to garnish payments to delinquent providers. The committee rejected the proposal and indicated it expects CMS to cooperate with other governmental agencies to identify providers that are not covering their tax obligations.
In light of the foregoing testimony and the GAO’s findings, providers should anticipate increased scrutiny from CMS and other governmental agencies during the next few years.
The GAO report
 Alan E. Reider |  Allison Weber Shuren |
During calendar year 2005, HHS paid more than $300 billion in Medicare benefits. Twenty percent of that amount was paid to providers — physicians, health professionals and suppliers of services related to senior care. Given the amount of money at issue, Congress requested that the GAO review tax records and payments to these providers to determine the extent to which they underpaid their annual taxes. Congress also requested that the GAO evaluate the extent to which HHS had incorporated measures to prevent delinquent providers from participating in the Medicare program and whether HHS used any means to levy payments made under Medicare in order to collect unpaid tax debts.
The GAO found that more than 21,000 of these providers owed tax debts of approximately $1.3 billion. In order to gather data regarding the reasons for the aforementioned tax liabilities, the GAO analyzed 40 Medicare providers’ tax returns. The GAO found that 25 of the 40 providers included in the study owed employment taxes. The other 15 providers had personal income tax liabilities, which, in some cases, dated back to the 1970s. Despite these unpaid tax obligations, HHS continued to pay these providers for services rendered to Medicare beneficiaries.
Efforts to recover tax debts
Andrew B. Dahlinghaus |
The GAO criticized HHS’ lack of effort toward collecting sums that providers owe to the federal government. Specifically, the Taxpayer Relief Act of 1997 authorizes the IRS to levy federal payments to delinquent taxpayers, referred to as the continuous levy program (CLP), until 100% of a tax debt is retired. HHS does not participate in the CLP, and as a result, the IRS was unable to recover an estimated $40 million to $150 million in tax revenue from delinquent providers in 2005.
In addition, the GAO concluded that HHS has not adopted or implemented any policy or regulation to screen providers for unpaid taxes or require contractors to obtain consent for IRS disclosure of unpaid federal tax debts. This lack of regulatory guidance from HHS does little to dissuade providers from evading their federal tax obligations. Finally, the GAO suggested that HHS’ exclusion authority does not sufficiently deter providers from shirking their tax obligations.
Anticipated efforts to collect payments
HHS has been under pressure to help recover providers’ unpaid taxes for a number of years. Indeed, in 2001, the GAO recommended that HHS participate in the CLP. The GAO’s recommend-ation went unanswered. Then, in July 2006, the IRS encouraged HHS to utilize the CLP and requested HHS to participate in the Federal Contractor Tax Compliance Task Force, a multi-agency group dedicated to improving the continuous tax levy process. In February, HHS attended its first Task Force meeting.
HHS’ willingness to participate in the Task Force meetings coupled with Ms. Norwalk’s alarming remarks during the GAO’s testimony suggest that HHS will soon begin to implement efforts to help the IRS recover taxes that providers owe. In addition, it is conceivable that given current budgetary shortfalls, Congress may act to increase pressure on providers. Accordingly, providers should immediately implement necessary steps to ensure their accounting systems are accurately capturing their tax liabilities. Absent such proactive measures, health care providers may be unprepared for anticipated additional scrutiny from governmental authorities.
For more information:
- Andrew B. Dahlinghaus can be reached at Arent Fox LLP, 1050 Connecticut Ave. NW, Washington, DC 20036-5339; 202-857-6414; e-mail: dahlinghaus.andrew@arentfox.com.