Senate Appropriations Committee chair Barbara Mikulski, D-Md., urged Internal Revenue Service Acting Commissioner Steven T. Miller to do more to keep unscrupulous payroll service providers from cheating small businesses out of unremitted withholding taxes during an IRS budget hearing.

Mikulski discussed the problem with Miller and Treasury Inspector General for Tax Administration J. Russell George during Wednesday’s hearing before her committee’s financial services subcommittee. Mikulski introduced legislation last month to protect small business owners from tax theft and fraud by payroll service providers. Several Maryland small businesses that have used the services of a payroll service provider believe their provider failed to pay, or made only partial payments, of federal and state withholding and unemployment taxes.

Small businesses have been hurt by late fees and penalties resulting from misdirected and delayed state and federal taxes, Mikulski noted. Earlier this year, police began investigating a Bel Air, Md., payroll service provider, AccuPay, after several of its clients accused it of failing to forward their tax payments to the federal government. The firm filed for bankruptcy in April.

Miller acknowledged that it was a “horrible situation” when a payroll provider goes out of business without remitting small businesses' taxes. Mikulski said there should be “yellow flashing lights” when a payroll provider is going out of business. Miller acknowledged that the IRS also needs to be aware of warning signs when a payroll service provider suddenly changes its address.

TIGTA Inspector General J. Russell George said he believes the IRS needs to get better control over improprieties committed by payroll service providers. Mikulski contended that payroll service fraud was a “nationwide problem,” but Miller would only go so far as to say that it was a “recurring problem.”

Mikulski’s bill, The Small Business Tax Fraud Prevention Act, aims to protect small businesses who have been victimized by payroll service provider fraud by increasing oversight of the industry while providing needed protections to small businesses. The legislation would increase oversight of payroll services by requiring them to register with the IRS and be IRS bonded or certified. The bill would also provide protections to small businesses by requiring the IRS to send dual notification to a business when its address has been changed by a third-party payer. In addition, it would penalize a payroll service provider who fails to remit taxes for a client. The bill would also provide assistance to defrauded businesses that need relief from tax liability by requiring the IRS to give greater consideration to Offers in Compromise. 

Last month, Mikulski sent a letter to Miller to express her frustration with reports that the IRS has been aware of payroll service provider irregularities and has not taken significant steps to protect small businesses. She said the IRS needs to take immediate action to prevent third-party payer fraud in the future, and called on him to expedite any Request for Abatement of Interest for Maryland businesses that may have been affected in the midst of tax season.

Identity Theft
During Wednesday’s hearing, Miller said the IRS is doing a better job now of combating identity theft and tax fraud. George responded that it is often the case that identity thieves are able to claim the tax refunds ahead of the legitimate taxpayer because of a “whoever gets there first” approach at the IRS. He also chided the IRS for taking too long to respond to identity theft cases, but Miller contended that George’s characterization was the way it was in the past. He argued that the IRS has been more proactive this year in battling the problem of identity theft.

In a report submitted with his written testimony, George noted, “Expanding compliance checks before the IRS issues refunds would involve matching information returns to tax returns during, rather than after, the tax filing season. This approach would require a major reworking of some fundamental IRS computer systems but could help address identity theft-related fraud and allow the IRS to use enforcement resources on other compliance problems.”

Miller contended that the IRS has been committing more staff members to resolving identity theft cases, even at the cost of having fewer people on the agency's toll-free taxpayer service line or on our automated collection phones that help the IRS collect past-due taxes.

“Our efforts to address identity theft and refund fraud are expanding and touch nearly every part of the IRS,” he said in his prepared testimony. “We are working hard to prevent fraud, investigate identity theft-related crimes and help taxpayers who have been victimized by identity thieves. Over 3,000 IRS employees are currently working on identity theft—more than double the number at the start of last filing season. We have also trained 37,000 employees who work with taxpayers to recognize identity theft and help victims. Since the beginning of 2013, the IRS has worked with taxpayers victimized by identity theft to resolve and close more than 200,000 cases. To help past identity theft victims avoid delays in filing future returns and receiving refunds, we expanded the issuance of Identity Protection Personal Identification Numbers to more than 770,000 past victims this year, more than twice as many as last year. Last fiscal year, the IRS significantly expanded its fraud detection efforts, expending nearly $330 million combating refund fraud, including identity theft.”

Ending the Sequester
During the hearing, Mikulski also stressed the importance of ending the sequester in order to properly fund the Treasury Department and the IRS. “As we all know, we are in sequester now and unless sequester is canceled we will face sequester for the next eight years,” she said.

Treasury Secretary Jack Lew also testified before her subcommittee. “The sequester has taken a toll on Treasury, but we are doing everything we can to absorb these cuts without reducing services,” he said in his prepared testimony. “We have scaled back training, delayed contracts, and limited purchases. Even with these measures, the brunt of the cuts is being felt by Treasury’s hard-working public servants. At the IRS, workers will have to stay at home without pay for as many as seven days between now and September. The FY 2013 IRS operating plan is almost $1 billion below the FY 2011 enacted level, and as a result, the IRS has 8,000 fewer full-time employees than just two years ago. Sequestration hurts not only Treasury employees, but taxpayers as well. The cuts imposed by sequestration erode our ability to provide quality service by forcing the IRS to answer fewer calls and creating unexpected delayed in responding to taxpayer questions. It will also lead to fewer enforcement actions and reduced revenue collection.”