updated 7/29/2008 1:43:50 PM ET 2008-07-29T17:43:50

A top IRS official promised Congress Tuesday that the agency "will do better" in collecting billions in taxes that businesses supposedly withheld from employees' paychecks but never remitted to the government.

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Linda Stiff, a deputy Internal Revenue Service commissioner, agreed with senators — who criticized the agency's enforcement efforts — that the loss of about $58 billion in payroll taxes estimated to be owed the government is unacceptable. She said the IRS has made collecting those taxes a high priority.

While too high, the $58 billion "represents a snapshot of unpaid employment taxes" as part of a long-term improvement effort, Stiff testified at a hearing of the Senate Homeland Security Committee's investigative panel. "Our numbers show dramatic improvement in the last several years, but we know we still have a long way to go."

"We can and we will do better," Stiff said.

The IRS says it resolved 5.2 million delinquent cases in the fiscal year ending Sept. 30, compared with 3 million in 2002. At the same time, the agency has classified $30 billion of the unpaid payroll taxes as uncollectible, citing factors such as businesses becoming defunct or insolvent, according to a new report by congressional investigators.

The Government Accountability Office report found that the 1.6 million U.S. businesses owing income, Social Security and Medicare taxes from their payrolls as of Sept. 30, 2007, included a food service company that failed to pay $12 million while the owner diverted the money to buy luxury cars, planes and a mansion in a foreign country.

"This is the mother of all tax cheats. ... It's clear that tax cheats are living the high life at the expense of hardworking American taxpayers," Sen. Norm Coleman of Minnesota, the subcommittee's senior Republican, said at the hearing. At a time of widespread economic stress for ordinary Americans, seeing the conduct of cheating business owners stirs outrage, said Coleman, who requested the GAO study.

Given that $44 billion has been transferred over the past 10 years from general tax revenues to cover shortfalls in Social Security and Medicare, the business "deadbeats" are contributing to the insolvency of programs intended to help the nation's seniors, he said.

The $58 billion in unpaid payroll taxes covers 10 years. Beyond that, a statute of limitations generally kicks in and the money is permanently lost.

The report faulted the IRS for relying on voluntary compliance, even for the worst offenders. It said it takes the IRS 40 weeks, on average, to decide to pursue collection against offenders, and an additional 40 weeks to assess a penalty, called a Trust Fund Recovery Penalty.

The subcommittee's chairman, Sen. Carl Levin, D-Mich., said the IRS has failed to use effectively the enforcement tools available to it — primarily filing tax liens against businesses and filing personal claims against company officers and owners.

"Many payroll-tax cheats have been allowed to repeatedly violate the law for years at a time, accumulating massive payroll-tax debts that can't ultimately be collected," he said.

Seventy percent of all unpaid payroll taxes are owed by businesses that have failed to remit them for more than a year, according to the GAO report. That means at least four violations by each business since taxes are remitted quarterly.

Levin said the IRS should develop an expedited process for filing liens and levying Trust Fund Recovery Penalties against businesses and key employees, and develop performance measures for payroll-tax collection by agency employees.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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