The Latest Government "FAD"


If you don't take care of your taxes, you risk some pretty expensive fines and penalties. Some of those amounts are fixed, like $89 per partner per month for failing to file your partnership return. Others are based on the actual tax due, like the 10% penalty for failing to file employment taxes. The IRS can slap liens on your home or other property, and they can impose levies to pluck back taxes from your paycheck, your bank account, or your retirement plan. They can even seize your assets and auction them to collect the amount you owe them.  

Having said all that, would it surprise you to learn that there's someone with a "Get Out of Jail Free" card for not paying taxes? Would it surprise you even more to learn that it's the government itself?  

The Treasury Inspector General for Tax Administration (TIGTA) is an independent board that oversees the IRS. Their job is to audit, investigate, and inspect the tax system itself, as well as to prevent and detect fraud, waste, and abuse within the IRS and related entities. Last month, the TIGTA issued a report with a bland and vague title: A Concerted Effort Should Be Taken to Improve Federal Government Agency Tax Compliance. But that deceptively bureaucratic name masks a pretty startling conclusion:  

"Federal agencies are exempt from paying Federal income taxes; however, they are not exempt from meeting their employment tax deposits and related reporting requirements. As of December 31, 2011, 70 Federal agencies with 126 delinquent tax accounts owed approximately $14 million in unpaid taxes. In addition, 18 Federal agencies had not filed or were delinquent in filing 39 employment tax returns. Federal agencies should be held to the same filing and paying standards as all American taxpayers."  

When the federal debt is $16 trillion, $14 million might not seem like a lot. But believe it or not, the problem is bad enough that the IRS has an entire unit, called the Federal Agency Delinquency Program (FAD), just to collect delinquent taxes from other federal agencies. How well do they do? Last month's report took a look at the December 2008 "FAD list" of 132 delinquent accounts to see what had happened through December, 2011. The TIGTA found that just 33% of the delinquent agencies had paid their employment taxes and 30% of those accounts were still open and unresolved, three years later. Even worse, 36% of the accounts had actually expired, meaning the IRS won't ever collect those balances.  

While the FAD unit’s purpose is to collect delinquent taxes, their power to do so is very limited. IRS Policy Statement 2-4 says the IRS can't assess interest or penalties against delinquent federal agencies. And even if they could, Comptroller General Opinion B-161457 says that the agencies aren't even authorized to pay them.  

You might ask yourself why it even matters whether the government pays taxes to itself, but as TIGTA concluded, the government should be held accountable like all American taxpayers. We're in the home stretch of an election centered largely on the role we want entitlements to play in our society, so it seems fair to ask Uncle Sam to set the best example possible!