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Medicaid Providers Found To Be Abusing Federal Tax System

by Leroy Baker, Tax-News.com, New York

15 November 2007


A Senate committee is investigating the findings of a report by the Government Accountability Office (GAO) which showed that hospitals, doctors and other health care providers participating in the Medicaid system have evaded hundreds of millions of dollars in federal taxes.

The claims are being investigated by the Senate Permanent Subcommittee on Investigations, which has presented evidence that roughly 30,000 physicians and health care service providers that receive billions of Medicaid dollars every year owe back-taxes of more than $1 billion, although the actual figure could be double this amount.

The GAO study, prompted by a request from the Committee, was limited to seven states that make up 43% of Medicaid expenditures (California, Colorado, Florida, Maryland, New York, Pennsylvania, and Texas). As a result, the actual total is much larger – potentially as high as 60,000 providers owing $2 billion in back-taxes. The GAO estimated that, if the payments to Medicaid providers in just those seven states had been levied, the federal government could have recovered up to $160 million in one year alone.

The GAO selected 25 Medicaid providers with high federal tax debt as case studies for more in-depth investigation of the extent and nature of the abuse. For all 25 cases, the GAO found "abusive and related criminal activity, including failure to remit individual income taxes or payroll taxes to IRS".

"Rather than fulfil their role as 'trustees' of federal payroll tax funds and forward them to IRS, these providers diverted the money for other purposes. Willful failure to remit payroll taxes is a felony under US law," the report noted.

According to the GAO, individuals associated with some of these providers diverted the payroll tax money for their own benefit, or to help fund their businesses. "Many of these individuals accumulated substantial assets, including million-dollar houses and luxury vehicles, while failing to pay their federal taxes," it found.

These 25 providers received Medicaid payments ranging from about $100,000 to about $39 million in fiscal year 2006.

The GAO concluded that the Centers for Medicare & Medicaid Services (CMS), which organises the Medicaid program, failed to prevent providers with delinquent federal taxes from enrolling in Medicaid. However, CMS officials have countered that a requirement for screening potential providers for unpaid taxes could adversely impact states' ability to provide health care to low income people. Furthermore, federal law generally prohibits the disclosure of taxpayer data to CMS and states.

The study revealed that no tax debt owed by Medicaid providers has ever been collected through the continuous levy program, and during the GAO's audit, the IRS had not made a determination on whether Medicaid payments are considered "federal payments" and thus eligible for its continuous levy program. For fiscal year 2006, if an effective levy was in place for the seven selected states, the GAO estimates that the federal government could have collected between $70 million and $160 million.

“These doctors are supposed to be serving the most needy, instead they are cheating taxpayers in order to line their pockets,” commented Sen. Norm Coleman, the ranking Republican on the Committee. “These are not your everyday tax-cheats. These are health-care providers that receive billions from Medicaid every year, but at the same time, refuse to pay their fair share of taxes. Not only are they cheating American taxpayers, they are abusing their employees. Rather than following the law, many of these Medicaid providers diverted their employees’ payroll taxes to buy luxury cars, boats, and multi-million dollar properties.”

“The key question that looms over this problem is whether the federal government can levy the payments that these Medicaid practitioners receive under the Federal Payment Levy Program," Coleman added. "If the IRS’s informal decision holds we need to find a way a viable way of recouping taxpayer dollars. There are complex legal and technical hurdles to we need to overcome to find an answer to this problem, but we have had great success in the past."

Sen Carl Levin, Committee Chairman, observed that: “The vast majority of physicians and companies who participate in the Medicaid program are true public servants who deserve our admiration and gratitude. But a small portion of Medicaid medical providers are public delinquents who are not paying their taxes. It is long past time to tell the Medicaid tax-dodgers that it is not okay for them to shortchange the very taxpayers who are supplying their payment to them and force honest American citizens to shoulder the taxes they are shirking.”

Levin added: “The federal tax levy program is designed to make sure that folks who get paid with taxpayer dollars get a portion of those dollars withheld if they have outstanding tax debt. But federal tax levies don’t now apply to Medicare medical providers who get paid with a mix of state and federal dollars. We need to figure out how to enlist the tax levy program to stop those Medicaid medical providers from putting taxpayer dollars into one pocket while stiffing Uncle Sam by dodging their taxes."

Medicaid, the government health care program for the poorest Americans, covers roughly 55 million people, of which 27 million are children, 14 million are adults in families with children, 8 million are people with disabilities, and 6 million are aged 65 and over.

This is the fifth hearing to result from the Subcommittee’s three-year investigation into contractors that provide goods or services to the federal government, but fail to pay their fair share of taxes. A 2004 hearing determined that 27,000 contractors with the Department of Defense had tax debts totaling roughly $3 billion.


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