Firms owe billions in unpaid payroll taxes

WASHINGTON (Reuters) - More than 1.6 million U.S. businesses owe the Internal Revenue Service more than $58 billion in unpaid taxes for Social Security, Medicare and unemployment insurance, a government watchdog agency said on Tuesday.

In a report to the Senate Homeland Security investigations subcommittee, the Government Accountability Office said the IRS fails to take full advantage of tools available to collect unpaid taxes and to prevent further cheating on payroll taxes.

"When businesses do not remit payroll taxes, they are using employees' money to fund business operations or the personal lifestyle of the businesses' owners," GAO Director of Financial Management and Assurance Steven Sebastian said in testimony to the committee.

This problem is a fraction of the estimated $300 billion or so in unpaid taxes each year that some members of Congress believe can be collected through tougher enforcement.

Payroll taxes are withheld from workers' wages by employers to fund the Social Security and Medicare retirement and health programs. Additional payroll taxes are collected to finance unemployment insurance. When the money is not passed on to the government, general revenues have to be tapped to make up for the loss to the programs' trust funds.

"Many of these businesses repeatedly failed to remit amounts withheld from employees' salaries," the GAO found.

Subcommittee Chairman Carl Levin, a Michigan Democrat, and Sen. Norm Coleman of Minnesota, the panel's top Republican, called on the IRS to beef up enforcement.

"IRS's pursuit of unpaid payroll taxes hasn't gotten the job done," Coleman said. "Rather than aggressively using the collection tools at their disposal, they seem content with hoping these tax deadbeats will come to their senses."

Deputy IRS Commissioner Linda Stiff told the committee that the agency collects 99.8 percent of payroll taxes owed, about $11 trillion over the last 10 years. The $58 billion in unpaid payroll tax debt as of September 2007, represents a 10-year total and $26 billion of that represents principal, with $32 billion in uncollected penalties and interest, she said.

Stiff said the IRS was refocusing efforts to use enforcement tools more effectively in payroll tax cases.

Payroll taxes represent a lion's share of the total revenues collected by the IRS. In 2007, the IRS collected $2.7 trillion in taxes. Of that, $1.7 trillion was payroll taxes, Stiff said.