(This story was updated to include additional comments from the IRS)
As of December, 70 federal agencies owed the U.S. Treasury $14 million in unpaid taxes that were withheld from federal workers’ paychecks, according to a federal audit released Thursday.
Unlike private businesses, federal agencies are exempt from paying federal income taxes. However, like private employers, federal law requires agencies to withhold and pay employment taxes on behalf of their employees, such as Medicare and Social Security withholdings.
“Federal agencies must comply with the same filing and paying standards that apply to all American taxpayers,” J. Russell George, Treasury Inspector General for Tax Administration, said in a written statement.
The Treasury Inspector General for Tax Administration’s audit also found that the IRS did not make recommended changes included in a similar audit five years ago and needs to improve its efforts to get federal agencies to pay their taxes on time.
IRS cites ‘substantial progress’
In an emailed statement to Federal News Radio, the IRS said it is “committed” to collecting the billions in employment tax deposits agencies are required to withhold and pay each year and cited the “substantial progress” it has made over the past several years.
In 2005, the amount of delinquent employment tax deposits owed by agencies topped $406 million, the IRS said, which has since dropped by nearly 97 percent to its current $14 million level.
“Despite a number of complexities, the IRS is working to continue to make progress in this area,” the agency said.
The list detailing which agencies owe back taxes and how much each owes was redacted from the audit report. TIGTA spokeswoman Karen Kraushaar said by law, no taxpayer’s return information, including taxes owed or delinquent, can be disclosed. That law applies to governments as well as individuals and corporations.
The audit found that 18 agencies also failed to file or were late in filing their tax returns. Agencies owe $2.6 million worth of taxes dating back more than three years. The IRS stopped trying to collect $2.4 million worth of those oldest cases, according to the report.
Policies, laws hinder collections
Faris Fink, commissioner of the Small Business/Self-Employed Division of the IRS, which is responsible for collecting back taxes from federal agencies, said the office faces “significant obstacles” in collecting those taxes.
By law, agencies can only use current appropriations to pay taxes for the current fiscal year, making it difficult for the IRS to collect taxes owed from prior years, the report said.
The IRS cannot charge the federal government interest or penalties for not paying taxes like it can private taxpayers or businesses. Nor can the IRS place a lien or confiscate government property to enforce tax laws.
Instead, the IRS relies on its Federal, State, and Local Government Office to educate agencies and encourage them to pay their taxes in full and on time.
“We concur with your reported outcome measures,” Fink said in his written response to the audit. “As you mention in your report, federal appropriations law and IRS policies make it difficult to collect delinquent taxes from federal agencies.”
The report recommends that the IRS notify each agency’s chief finance officer when payments are late. TIGTA also recommends the IRS work to develop regulatory and law changes that could make it easier to collect taxes from federal agencies. And the IRS should set standards for the time needed to process and close out delinquent cases.
In its 2007 review, TIGTA recommended that the IRS develop a method to resolve old agency delinquent accounts; better record and share the causes of the delinquencies and results of any action to better focus outreach and education efforts and to draft comprehensive guidelines and procedures to assign, control and resolve federal tax delinquencies.
“By not fully implementing the corrective actions to address the recommendations from our prior report, SB/SE Division officials have not been as effective in educating federal agencies about their tax responsibilities, preventing the violation of IRS policies, and reducing the amount of time required to work and close (Federal Agency Delinquency) Program cases,” the report said.
A database detailing the reasons for the delinquencies included vague descriptions such as “dead end” or “agency.” And a secondary reason field that provided more detailed explanations such as ‘”payment misapplied to another tax period” or “unable to locate payment” was not shared with the education and outreach arm of the IRS, the report said.
Following the 2007 review, the IRS crafted new policies to improve delinquency processing. However the new audit found the agency did not regularly adhere to those procedures including a lack of follow-up action within 60 days, assessing penalties illegally, and taking more than two years to close out some cases, the report said.
(Federal News Radio’s Jack Moore contributed to this report)