WASHINGTON (August 2, 2012)--Congressional investigators say the government still paid thousands of Medicaid health care service providers even though the firms owed hundreds of millions of dollars in federal taxes and a legal technicality is making it harder for the IRS to collect.

In a report out Thursday, the Government Accountability Office said one dentist who received more than $100,000 from Medicaid despite owing back income taxes was spending lavishly on fine dining, trips, spas, shopping and wine.

Medicaid payments to doctors, hospitals and other providers aren't technically considered federal funds, since they're funneled through state health care programs.

Because of that loophole, the IRS can't just shut off the payment spigot to collect tax debts.

Investigators only looked at three states, so the true extent of the losses is greater.