Every time an American worker gets paid, part of their check is supposed to be set aside for Social Security and Medicare, federal programs to workers with their retirement and medical expenses. But a government investigation released early exclusively to ABC News today, found that, as of Sept. 30, 2007, 1.6 million businesses had failed to pay these taxes.

"What's happening is that these companies are using our money like a petty cash fund," Sen. Norm Coleman, R-Minn., ranking member of the Senate Subcommittee on Investigations, said. "And these company owners are living the good life, driving fancy cars, all with your money."

The Government Accountability Office report said the business owners took the money out of their employees' paychecks, but then kept it for themselves instead of turning it over to the government.

Among the examples from the report was a consulting business that failed to pay more than $1.5 million in payroll taxes since 2007. The company's owner diverted much of the money into his personal account.

A construction company didn't pay $2.5 million in taxes over 12 years and used the money to prop up its business.

And a health care company racked up $8 million in unpaid taxes, diverted from employee salaries, over seven years. The owner claimed he couldn't afford to pay the taxes and filed for bankruptcy multiple times, despite the fact that he lived in a multimillion-dollar mansion.

The IRS also found many business owners are repeat offenders, failing to make payroll tax payments at three or more different businesses.

Overall, the investigation found that companies failed to pay $58 billion in payroll taxes since September 2007, which came at the expense of employees and the government.

The GAO criticized the IRS itself for trying to get problem companies to pay voluntarily, instead of filing liens against them to seize their assets, or imposing fines against the owners to hold them personally responsible.

In the report, GAO investigators state that the IRS's current approach to collection is "a practice that can result in minimal or no actual collections for these offenders."

In a written response, the IRS agreed that it could do a better job, but said that it takes in 99.8 percent of payroll taxes, and that it has already improved its collection systems.

"We need to tell the IRS it's time to take the kid gloves off when dealing with egregious tax cheats," Coleman said.

The GAO recommends that the IRS beef up its processes and performance measures for collecting from egregious payroll tax offenders, and create penalties to hold parties financially responsible for abusing the tax system.

On Tuesday, a Senate committee will hold a hearing to question the IRS about its failure to collect billions of dollars worth of payroll taxes.

By ELISABETH LEAMY
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