The companies, many in the construction industry, have failed to pay Medicare and Social Security taxes for at least 12 months, suggesting possible criminal intent, according to a report released Tuesday, July 29, by the Government Accountability Office. All told, these companies have cheated the federal government out of $40 billion in owed taxes.

The report also found that more than 9,000 owners of businesses have failed to pay federal payroll taxes for two or more companies they own.

One businessman who owed $2.5 million in payroll taxes was the subject of 10 lawsuits, was underreporting personal income, and was involved in possible check kiting and money laundering, the report said. Another who owed the same amount made large cash withdrawals before filing for many bankruptcies.

A dentist who owed $1 million in payroll and personal taxes has a $700,000 home and a luxury car, both in his wife’s name, and sold property to his children for less than market value, the 70-page report says.

Indeed, many violators had the ability to pay, owning luxury cars, multimillion-dollar homes and real estate on tropical islands, according to the report. They were not forced to do so because of the IRS’ focus on voluntary compliance or its failure to file tax liens against tax debtors’ property.

The report also noted that some businesses used the cash that should have gone to taxes to underbid competitors on contracts.

“The blatant cheating on payroll tax is particularly galling because delinquent businesses are stashing away not only the taxes they owe Uncle Sam but also stealing funds withheld from employee paychecks,” said Sen. Carl Levin, D-Michigan, chairman of the Senate Permanent Subcommittee on Investigation, which held a hearing Tuesday on the findings.

Payroll taxes collected from employees are supposed to be remitted to the government periodically. Willful failure to remit payroll taxes is a felony, and the IRS has the authority to seize the assets of those found to be deliberately withholding these payments.

A total of 1.6 million businesses owe more than $58 billion in federal payroll taxes that have accumulated over the past 10 years, the report found. About 70 percent of these unpaid taxes are owed by businesses that failed to remit them for more than a year, and 25 percent have failed to do so for more than three years.

The IRS won’t see much of this money; 52 percent of the existing payroll tax debt is uncollectible, primarily because the debtor businesses are defunct, the report said.

The agency acknowledged its shortcomings while saying it has increased criminal enforcement cases by 55 percent in the past four years.

Deputy IRS commissioner Linda Stiff added that small businesses with financial problems often use payroll tax money to compensate employees or pay electric bills.

“This is a story we see repeated over and over again and is perhaps one of our greatest challenges in the collection of federal payroll taxes,” Stiff told the subcommittee.

The IRS has formed a task force to address payroll tax collection issues and has begun a series of studies “to determine the appropriate mix of taxpayer service and enforcement,” she said.

A Democratic senator expressed skepticism that the task force would do much good, adding that the government needs to step up criminal prosecutions.

“If you gather notice after notice every quarter for years, and you still don’t pay, we need a task force to tell us we need to put people in jail for that?” said Sen. Claire McCaskill of Missouri.

The report found “substantial evidence of abusive and potentially criminal activity related to the federal tax system by businesses and their owners or officers.”

The Department of Justice has been “somewhat reluctant” to pursue payroll tax cases, in part because they are labor-intensive, said Steve Sebastian, GAO director of financial management and assurance.

Filed by Neil Roland of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.