	Federal Contractors Owe Billions of Dollars in Unpaid Federal Taxes

In each of our audits and related investigations, we found thousands of  federal contractors that owed billions of dollars of federal taxes. About 42 percent of this $3 billion represented unpaid payroll taxes. In June 2005, we testified that about 33,000 civilian agency federal  contractors owed over $3.3 billion in federal taxes. Over a third of the  $3.3 billion represented unpaid payroll taxes. Because federal contractors may do business with more than one federal  agency, some federal contractors that owe tax debts may be included in  more than one analysis concerning DOD, GSA, and civilian federal  contractors that abuse the federal tax system. Employers are subject to civil  and criminal penalties if they do not remit payroll taxes to the federal  government. The IRS database did not  reflect amounts owed by businesses and individuals that have not filed tax  returns and for which IRS has not assessed tax amounts due. As result of the work we performed for the Senate Permanent  Subcommittee on Investigations, Committee on Homeland Security and  Governmental Affairs we made numerous recommendations to DOD and  civilian agencies to improve their controls over levying payments to  contractors with tax debt. We also referred 122 contractors to IRS for further investigation and  prosecution. Examples of Federal Contractors Involved in Abusive and Potentially Criminal Activity Related to the Federal Tax System

In our previous testimonies, we discussed the results of our in-depth  audits and related investigations of 122 federal contractors with  outstanding tax debt. Many of our case study contractors were small, closely held  companies that operated in wage-based industries, such as security,  weapon components, space and aircraft parts, building maintenance,  computer services, and personnel services. These 122 federal contractors  provided goods and services to a number of federal agencies including  DOD, GSA, the National Aeronautics and Space Administration, and the  Departments of Homeland Security, Justice, and Veterans Affairs. However, rather than  fulfilling their role as “trustees” and forwarding these funds to IRS, many  of these federal contractors used the funds for personal gain or to fund  their contractor operations. We also found that  a number of owners or officers of our case study contractors had  significant personal assets, including a sports team, commercial  properties, multimillion dollar houses, and luxury vehicles. Several owners  also gambled hundreds of thousands of dollars at the same time they were  not paying the taxes that their businesses owed. The company’s  owner has been investigated for embezzlement and fraud. Contractors with Unpaid Taxes Are Not Prohibited from Receiving Contracts from the Federal Government

Federal law and regulations, as reflected in the FAR, do not prohibit  contractors with unpaid federal taxes from receiving contracts from the  federal government. At the time of our review, none of the 122 federal contractors  described in our previous case study work were debarred from  government contracts, despite conducting abusive and potentially criminal  activities related to the tax system. Restrictions on IRS Tax Disclosure and Failure to Use Available Tools Hamper Consideration of Tax Debts in Contractor Qualification Determinations

Because of statutory restrictions on the disclosure of taxpayer  information, even if contracting officers were required to consider tax  debts in contractor qualification determinations, contracting officers do  not currently have access to tax debt information unless reported by  prospective contractors themselves or disclosed in public records. Contractors with Tax Debts Have Unfair Advantage in Contract Competition

Federal contractors who owe tax debts have an unfair competitive  advantage over contractors who pay their fair share.
Why GAO Did This Study

Since 1990, GAO has periodically reported on high-risk federal programs that are vulnerable to fraud, waste, and abuse. Two such high-risk areas are managing federal contracts more effectively and assessing the efficiency and effectiveness of federal tax administration. Weaknesses in the tax area continue to expose the federal government to significant losses of tax revenue and increase the burden on compliant taxpayers to fund government activities. Over the last several years, the Senate Permanent Subcommittee on Investigations requested GAO to investigate Department of Defense (DOD), civilian agency, and General Services Administration (GSA) contractors that abused the federal tax system. Based on that work GAO made recommendations to executive agencies including to improve the controls over levying payments to contractors with tax debt--many of which have been implemented--and referred 122 contractors to IRS for further investigation and prosecution. As requested, this testimony will highlight the key findings from prior testimonies and related reports. This testimony will (1) describe the magnitude of tax debt owed by federal contractors, (2) provide examples of federal contractors involved in abusive and potentially criminal activity related to the federal tax system, and (3) describe current law and proposed federal regulations for screening contractors with tax debts prior to the award of a contract.

What GAO Found

In our previous audits and related investigations, we reported that thousands of federal contractors had substantial amounts of unpaid federal taxes. Specifically, about 27,000 DOD contractors, 33,000 civilian agency contractors, and 3,800 GSA contractors owed about $3 billion, $3.3 billion, and $1.3 billion in unpaid taxes, respectively. These estimates were understated because they excluded federal contractors that understated their income or did not file their tax returns; however, some contractors may be counted in more than one of these groups. As part of this work, we conducted more in-depth investigations of 122 federal contractors and in all cases found abusive and potentially criminal activity related to the federal tax system. Many of these 122 contractors were small, closely held companies that provided a variety of goods and services, including landscaping, consulting, catering, and parts or support for weapons and other sensitive programs for many federal agencies including the departments of Defense, Justice, and Homeland Security. These contractors 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. A number of owners or officers of the 122 federal contractors owned significant personal assets, including a sports team, multimillion dollar houses, a high-performance airplane, and luxury vehicles. Several owners gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Federal law, as implemented by the Federal Acquisition Regulation (FAR), does not now require contractors to disclose tax debts or contracting officers consider tax debts in making contracting decisions. Federal contractors that do not pay tax debts could have an unfair competitive advantage in costs because they have lower costs than tax compliant contractors on government contracts. GAO's investigation identified instances in which contractors with tax debts won awards based on price differential over tax compliant contractors.