The GAO Should Apologize to Small Business

Here’s a letter I just sent to Senator Carl Levin (D – Mich):

August 12, 2008


Honorable Carl Levin


Senate Homeland Security and Governmental Affairs Committee’s Permanent Subcommittee on Investigations


Fax: 202-224-1388


Dear Sir:


This letter is in response to a July 29, 2008 Washington Post article about the GAO report that found that “Businesses have shorted the Internal Revenue Service about $58 billion in federal payroll taxes they withheld from employees’ wages over the past 10 years.”


Here you are quoted in the article:


“At a time when our nation is drowning in debt, it is appalling that delinquent businesses have cheated Uncle Sam,” agreed Sen. Carl M. Levin (D-Mich.), the subcommittee chairman.




We do your dirty work for you, the federal government.  We withhold payroll taxes from our employees, kick in another 7.65% for our share of Social Security and Medicare, and 99.9% of the time pay it to Uncle Sam.  How much would it cost you to collect that money from individuals directly?  What would the compliance rate be?  Please, show a little respect for your front-line tax collectors.


If we’re one day late, you hit us with a penalty of 2%.  6 to 15 days late, and the penalty is 5% of the taxes withheld.  What kind of BS is that?


Most states would call that usury.  The last time I did the analysis, I came up with a APR of 50%+ for an instance of borrowing from the feds for a quarter or two, and paying it back over time.


I think the GAO owes small business and the IRS an apology.

Has anyone tallied the amount of penalties and interest collected vs. the amount of uncollectible debt written off?  I’m just a simple man, and have no time to pester the bureaucracy for details – but a quick look at statistics published by the IRS seem to indicate that $7 billion in civil penalties were assessed against employers in FY2007 related to payroll taxes.  (See links to IRS tables at the end of this letter). You guys have the resources to get at the numbers.  Me – I’m just an entrepreneur struggling to make ends meet.  But gosh, the total penalties could equal or exceed the $58 billion not collected over the last 10 years.  Is not your outrage just a little misplaced?


My reading of the total tax collections table indicates that $7 trillion in employment taxes were collected over the last 10 years.  The $58 billion is less than 1% of that total.  Bad debt expense of less than 1% of revenues – not too bad considering the riff-raff (i.e. small businesses like mine) you have to deal with.


I’m shocked that the number of egregious cases is so low.  14,681 out of what – 30 million or so employers/tax collectors?  That is less than 0.05%.

Do you know what it is like to meet a payroll?  It ain’t easy.  Has anyone inside the GAO ever met a  payroll?  Probably not.  (Why else would they be working for the government?)  I’m just trying to give you some insight that may be lacking from government investigators operating Inside the Beltway.


Sure, they may be able to find some egregious cases that should be vigorously pursued (I’m all for pursuing the deadbeats).  After all, these are the ones that make the headlines.   But I suspect the vast majority of the 1.6 million employers who have fallen behind in their payroll taxes are just doing what they can to survive as they are buffeted by the winds of erratic cash flow.  They’re not deadbeats – just experiencing temporary liquidity problems.


The constant refrain you here from people who have taken the entrepreneurial plunge is how difficult it is to manage cash flow.  The consequences of doing it poorly are severe.  Please, don’t make it any tougher.


Predatory Sub-Prime Lenders look nice by comparison

Here’s how it works in the real world:

For small companies whose total withholding is $50,000 or less per year, they are required to send in the withholding by the 15th of the month after the employees were paid.


If you miss a payment, the IRS doesn’t notice until you file the quarterly report by the 30th of the month after quarter end.  Even then, it may take them a quarter or two before they ask for the money.  And if you resume paying as you go, they will allow you to pay off the old stuff over time.  Sometimes they will even abate some of the penalties.

It is one of the easiest ways to borrow money.  You don’t even have to fill out a credit app.


What about the fine print?  Oh yeah.  Officers of the company are personally liable for payroll taxes withheld.  The debt is not discharged in bankruptcy.  The IRS can and does threaten to talk to your business associates and neighbors to find out why you haven’t paid on time. They can file an intent to levy, and attach your bank accounts.  This is a pretty big hammer.  They don’t have to be nice.


From Lemons, Lemonade

Here’s what I propose (in addition to a public apology from the GAO):

Make this a profit center for the IRS.  Offer a $50,000 credit line to any business that withholds and remits payroll taxes.  No – make it $100,000.  Set the interest rate high – enough to cover loan losses and make a profit, but less than loan shark levels.   Require NO paperwork.  None.  Nada.          


Then sit back, watch the economy catch fire as entrepreneurs put this money to good use, and extra tax revenues roll in.  Sure beats building a bridge to nowhere, or screwing up grain markets with ethanol subsidies.


Here is a link to the Washington Post article:


Here are the tables from the IRS Data Books:


Sincerely Yours,



Rusty Luhring

Founder and CEO

Luhring SurvivalWare, Inc.