Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes

Our analysis indicates that the failure to pay taxes among DOD contractors  also exists among civilian agency contractors and totaled billions of  dollars. Our analysis of FMS and IRS records indicates that during fiscal  year 2004, FMS made payments on behalf of civilian agencies to about  33,000 federal contractors with over $3.3 billion in unpaid federal taxes as  of September 30, 2004. We estimate that if there were no legal or  administrative impediments to the levy program—if all unpaid federal  taxes were considered and all payments to these 33,000 contractors with  unpaid federal taxes were subjected to the 15 percent levy—FMS could  have collected as much as $350 million in unpaid federal taxes from civilian  contractors during fiscal 2004. However, employers are subject to  civil and criminal penalties if they do not remit payroll taxes to the federal  government. While Substantial, the Amount of Unpaid Taxes of Civilian Contractors Is Likely Understated

The amount of unpaid federal taxes we identified among civilian agency  contractors—$3.3 billion—is likely understated for three main reasons:  (1) we intentionally limited our scope to contractors with agreed-to  federal tax debt for tax periods prior to 2004 that had substantial amounts  of both unpaid taxes and payments from civilian agencies; (2) FMS  disbursement files did not always contain the information we needed to  determine whether the contractors owed federal taxes; and (3) the IRS  taxpayer account database contains errors, and the database reflects only  the amount of unpaid taxes either reported by the taxpayer on a tax return  or assessed by IRS through its various enforcement programs. Figure 6 shows that slightly over half  ($51 billion) of all policy exclusions are due to IRS’s determination that the  tax debtor is in financial hardship. Further, because of a  lack of proactive management, FMS did not send tens of billions of dollars  more in payments to the levy program. FMS Did Not Include All Agency Payments in the Levy Program

FMS has not updated its TOP database to capture payments from about 150  agency paying stations, resulting in $40 billion of fiscal year 2004 civilian  agency contractor payments being excluded from potential levy. For example, one contractor with unpaid taxes received from the  State Department payments totaling over $400,000, which could not be  levied because of the missing name. Examples of Abusive or Potentially Criminal Activity Related to the Federal Tax System by Businesses

Our audits and investigations of the 50 case study business contractors  showed substantial abuse and potential criminal activity related to the tax  system. IRS assessed a trust  fund penalty on the officers of this company for willfully failing to remit  payroll taxes withheld from their employees’ salaries. Although we found that payments to a number of  contractors were not levied because IRS excluded their tax debts from TOP  for at least a part of fiscal year 2004 for statutory or policy reasons, many  others were not levied because of FMS’s lack of effective oversight or  proactive management of the levy program. Further, it was FMS that did  not identify and inform agencies to correct payment information for tens  of billion of dollars in payments that did not have the basic information  necessary for the payments to be matched against outstanding federal tax  debt for potential levy. To identify payments to contractors disbursed through the government  purchase card, we obtained from the Bank of America the database of  purchase card payments made by the National Aeronautics and Space  Administration (NASA). We specifically included contractors from NASA and the Departments of Homeland Security (Transportation Security  Administration), Justice, State, and Veterans Affairs.
Why GAO Did This Study

Tax abuses by contractors working for the Department of Defense, on which GAO previously reported, have led to concerns about similar abuses by those hired by civilian agencies. GAO was asked to determine if similar problems exist at civilian agencies and, if so, to (1) quantify the amount of unpaid federal taxes owed by civilian agency contractors paid through the Financial Management Service (FMS), (2) identify any statutory or policy impediments and control weaknesses that impede tax collections under the Federal Payment Levy Program (FPLP), and (3) determine whether there are indications of abusive or potential criminal activity by contractors with unpaid tax debts.

What GAO Found

FMS and IRS records showed that about 33,000 civilian agency contractors owed over $3 billion in unpaid federal taxes as of September 30, 2004. All 50 civilian agency contractors we investigated had abusive and potentially criminal activity. For example, businesses with employees did not forward payroll taxes withheld from their employees to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Further, several individuals own multiple businesses with unpaid federal taxes--one individual owns about 20 businesses that did not fully pay taxes related to over 300 returns. Some contractors purchased or owned millions of dollars of property while they did not remit payroll taxes. These activities were identified for contractors at the Departments of Justice, Homeland Security, and Veterans Affairs; the National Aeronautics and Space Administration; and others agencies. GAO's analysis indicates that if all tax debts owed by, and all payments made to, the 33,000 contractors were included in the FPLP, FMS could have collected hundreds of millions of dollars in fiscal year 2004. However, because only a fraction of all unpaid taxes and a portion of FMS payments are subjected to the levy program, FMS actually collected only $16 million from civilian contractors. For example, about $171 billion of unpaid federal taxes were not sent to the levy program to be offset against payments because of specific statutory requirements or IRS policy exclusions, such as debtors' claims of financial hardship or bankruptcy. Tens of billions of dollars in federal payments were not compared against tax debts for potential levy because FMS did not proactively manage and oversee the levy program. Until we brought it to FMS's attention, FMS did not know that it did not submit $40 billion of contractor payments from some civilian agencies for potential levy. FMS also did not identify payment files that did not contain contractor tax identification numbers, names, or both, resulting in $21 billion in payments to contractors that could not be levied. FMS also excluded billions of dollars from levy because of what it considered programming limitations without taking proactive steps to overcome those limitations. Further, civilian agency purchase card payments to contractors totaling $10 billion could not be levied. Improvements at FMS could result in tens of millions of dollars of additional levies annually.