	Magnitude of Unpaid Taxes of GSA Contractors

Over 3,800 GSA contractors had about $1.4 billion in unpaid federal taxes  as of June 30, 2005. This represents approximately 10 percent of GSA  contractors during fiscal year 2004 and the first 9 months of fiscal year  2005. In addition to  civil penalties, criminal penalties exist for an employer’s failure to turn  over withheld employee payroll taxes to IRS. Our audit and investigation of the 25 case-study business contractors  showed substantial abuse or potential criminal activity as all had unpaid  payroll taxes and have diverted those funds for personal or business use. Further, several owners owned homes worth over $1 million. At the same time the company was not paying its taxes, the company made  a loan to a company officer for hundreds of thousands of dollars. Tax Debts Are Generally Not Considered When Awarding Contracts

Federal law implemented in the FAR, and GSA internal policies do not  require GSA contracting officers to examine tax debt when awarding  contracts, nor do they provide guidance as to what role, if any, tax debt  should play in determining whether prospective contractors meet the  general criteria of responsible contractors. However, the FAR does not require contracting officers to  consider tax debt in making this determination. As a result, when in direct competition for  homogenous types of goods and services in wage-based businesses, these  contractors could offer prices for their goods and services that are lower  than their tax compliant competitors. Aside from any  general concerns about the federal government doing business with  contractors that do not pay their taxes, allowing these contractors to do  business with the federal government while not paying their taxes could  create an unfair competitive advantage for these contractors. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) determine the magnitude of tax debts owed by  GSA contractors; (2) identify examples of GSA contractors that have tax  debts and are also engaged in potentially abusive, fraudulent, or criminal  activities; and (3) determine whether GSA screens contractors for tax  debts and criminal activities prior to awarding contracts and at the  exercise of any government contract options. To identify the magnitude of unpaid taxes owed by GSA contractors, we  first identified the federal contractors that were either GSA interagency  contractors or that were paid by GSA. To identify GSA-paid contractors,  we obtained from the Department of the Treasury’s Financial Management  Service (FMS) the Payments, Claims, and Enhanced Reconciliation  (PACER) database containing all Automated Clearing House (ACH) and  check payments made by FMS on behalf of GSA to federal contractors  during fiscal year 2004 and the first 9 months of fiscal year 2005. Specifically, we narrowed the 25 contractors with unpaid taxes based on  the amount of unpaid taxes, number of unpaid tax periods, amount of  payments reported by GSA and FMS, indications that owner(s) might be  involved in multiple companies with tax debts, and selection of  contractors doing business with a variety of federal agencies. Through its supply schedules and  governmentwide acquisition contracts, GSA arranges for federal agencies  to purchase billions of dollars of goods and services directly from private  vendors.
Why GAO Did This Study

In February 2004 and again in June 2005, GAO testified that some Department of Defense (DOD) and civilian agency federal contractors abused the federal tax system with little consequence. Previous problems we identified with contractors with unpaid taxes have led to concerns over whether any interagency contractors, such as those on the General Services Administration's (GSA) federal supply schedule, failed to pay their taxes. GSA, through its federal supply schedule and other interagency contracts, arranges for federal agencies to purchase billions of dollars of goods and services directly from private vendors. GAO was asked to determine if GSA contractors, including both contractors that were paid by GSA and GSA interagency contractors, have unpaid federal taxes, and if so, to (1) determine the magnitude of tax debts owed by GSA contractors; (2) identify examples of GSA contractors that have tax debts and are also engaged in potentially abusive, fraudulent, or criminal activities; and (3) determine whether GSA screens contractors for tax debts and criminal activities prior to awarding contracts and at the exercise of any government contract options.

What GAO Found

Over 3,800 GSA contractors had tax debts totaling about $1.4 billion as of June 30, 2005. This represented approximately 10 percent of the number of GSA contractors during fiscal year 2004 and the first 9 months of fiscal year 2005. GAO investigated 25 GSA contractors with abusive and potentially criminal activity. These businesses had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. These contractors worked for a number of federal agencies including the departments of Defense, Justice, and Homeland Security. A number of owners or officers of the 25 GSA contractors have significant personal assets, including commercial properties, houses worth over $1 million, and luxury vehicles. In addition, several of the owners of these GSA contractors gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Neither federal law, as implemented by the Federal Acquisition Regulation (FAR), nor GSA policies require contracting officers to specifically consider tax debts in making contracting decisions either at initial award or when considering options to extend. In addition, federal law generally prohibits the disclosure of taxpayer data, and consequently contracting officers have no access to tax data directly from the IRS. GSA contractors that do not pay tax debts could have an unfair competitive advantage in costs because they may have lower costs than tax compliant contractors on government contracts. This is especially true in wage-based businesses that provide homogenous types of goods and services. GAO's investigation identified instances in which contractors with tax debts won awards based on price differential over tax compliant competing contractors.