WASHINGTON (AP) – Thousands of hospitals, nursing homes and other Medicare health providers owe the federal government more than $2 billion in payroll and other back taxes.

In some cases, they used the money to buy luxury cars, million-dollar homes and other personal items, congressional auditors say.

A report by the Government Accountability Office, obtained Thursday by The Associated Press, examined roughly 436,000 providers who received government payments in 2006 for treating Medicare patients. It found that more than 27,000, or about 6 percent, owed the federal Treasury back taxes.

Nearly half those taxes – $896 million – was money the health care providers withheld from their employees’ paychecks for Social Security and Medicare programs. Instead of paying those payroll taxes to the government, the owners of hospitals and nursing homes diverted it into personal accounts, the GAO said.

Some nursing homes also had health and safety violations or lacked the required licensing, in one case losing track of a patient who has yet to be found and in other cases not taking appropriate action to prevent a patient’s suicide, investigators said.

“Medicare is a health care program that is designed to serve our nation’s seniors, yet this investigation reveals that at all levels from hospitals to nursing homes to doctors – some health care providers are subverting the tax system to line their pockets,” said Sen. Norm Coleman, R-Minn., the top Republican on the Senate Homeland Security subcommittee on investigations, which requested the GAO report.

“Employees who work hard each day shouldn’t have to worry whether their paychecks are being used by their employers to live lavishly,” he added, calling for greater oversight of health care practitioners who serve “the nation’s most vulnerable communities.”

The GAO report urges the Centers for Medicare and Medicaid Services and its contractors to better screen prospective Medicare providers, such as requiring them to disclose tax debts. Under federal law, the Internal Revenue Service cannot disclose taxpayers’ information, even to CMS, without their permission first.

It also calls for CMS to participate fully in an IRS program established in 1997 that would seize up to 15 percent of federal payments, such as Medicare reimbursements, until a tax debt is paid.

GAO urged CMS to join the program as early as 2001 and has since put out follow-up reports on Medicare tax abuse. CMS has hedged, citing in part technical difficulties.

By failing to participate, the federal government lost a chance to recoup more than $140 million in unpaid taxes in 2006 alone, GAO said.

“As federal deficits continue to mount, the federal government must take all effective measures to collect the billions of dollars of unpaid taxes,” investigators wrote. “Because payroll taxes fund the Medicare program, Medicare providers should especially pay their fair share of taxes owed.”

In a statement Thursday, Kerry Weems, CMS’ acting administrator, said the agency was taking several steps to ensure that Medicare providers pay their taxes. CMS now has $10 billion a month in Medicare payments subject to the IRS tax repayment program, Weems said, and substantially more payments will be incorporated by October.

In addition, CMS said it was proposing regulatory changes to ensure that newly enrolling Medicare suppliers have no unpaid tax debt.

“We take this issue very seriously,” Weems said.

Coleman and Sen. Carl Levin, D-Mich., who chairs the investigations subcommittee, introduced legislation that would basically require what the CMS is promising, with all Medicare payments subject to the IRS levy program within four years. A similar bill has passed the House.

In the report, GAO investigators highlighted 25 cases from 2006 they found to be egregious. They declined to identify providers or reveal locations due to privacy concerns, but GAO said the cases had been referred to the IRS for criminal investigation.

Among them:

-Nursing home: $7 million in Medicare payments, $13 million in taxes owed since early 2000. The IRS investigated the company related to offshore accounts; a bank closed its checking accounts because of alleged check kiting of hundreds of thousands of dollars. An executive was found to own luxury cars, boats, luxury furniture, timeshares and other possessions.

-Hospital: $21 million in Medicare payments, $15 million in owed taxes. The company’s tax debts primarily consisted of payroll taxes not turned over to the government while one of the owners lived in a personal residence worth more than $6 million. Owners were found liable for millions of dollars to Medicare for submitting false claims from another medical business.

-Home health care: $300,000 in Medicare payments, $600,000 in owed taxes. The owner and related trust had nearly $6 million in real estate, including a home worth $2 million, and gambled tens of thousands of dollars at the same time the company owed taxes. The owner also closed a company that owed taxes and started a new business, while continuing to receive Medicare payments under the closed company’s tax ID number.

-Durable medical equipment supplier: $400,000 in Medicare payments; $400,000 in owed taxes. The company had hundreds of thousands of dollars in “suspicious bank activities” while owing taxes, mostly payroll taxes. The company paid to remodel an officer’s personal residence from employee retirement contributions and is under investigation for Medicare and Medicaid fraud.

-Nursing home: $1 million in Medicare payments, $6 million in owed taxes dating back to the 1990s. The owner, which transferred a home worth more than $1 million to a spouse in the mid-2000s at the same time the company owed taxes, was convicted of diversion of funds from federally backed loans; the owner was also indicted for Medicaid fraud and patient neglect.

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On the Net:

Government Accountability Office: www.gao.gov

AP-ES-06-19-08 1841EDT