Federal Laws and Regulations Regarding Tax Debtors Receiving Federal Contracts and Grants

Federal law does not prohibit a contractor with unpaid federal taxes from  receiving contracts from the federal government. Recovery Act Contract and Grant Recipients Are Estimated to Owe More Than $750 Million in Known Unpaid Federal Taxes

At least 3,700 recipients of Recovery Act contracts and grants are  estimated to owe $757 million in known unpaid federal taxes as of  September 30, 2009, though this amount is likely understated for reasons  discussed below. This represented nearly 5 percent of the approximate 80,000 contract and grant recipients in the Recovery.gov data as of July  ly  2010 that we reviewed. These approximately 3,700 recipients received over  $24 billion through Recovery Act contracts and grants. Employers are subject to civil and criminal penalties if they do not remit  payroll taxes to the federal government. A substantial amount of the estimated unpaid federal taxes shown in IR records owed by Recovery Act contract and grant recipients had been  outstanding from several tax years. 26 U.S.C. Examples of Recovery Act Contract and Grant Recipients Involved in Abusive Activity Related to the Federal Tax System

For the 15 cases of Recovery Act recipients with outstanding tax debt that  we selected for a detailed audit and investigation, we found abusive or  potential criminal activity related to the federal tax system. The amount of  known unpaid taxes associated with these case studies is about $40  million, ranging from approximately $400,000 to over $9 million. IRS has  taken collection or enforcement activities (e.g., filing of federal tax liens,  assessment of a TFRP) against all 15 of these recipients. We have  referred all 15 recipients to IRS for criminal investigation, if warranted. Appendix I: Objectives, Scope, and Methodology

Our objectives were to: (1) determine, to the extent possible, the  magnitude of known tax debt which is owed by Recovery Act contract and  grant recipients; and (2) provide examples of Recovery Act contract and  grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt  owed by Recovery Act contract and grant recipients, we obtained and  analyzed quarterly recipient reports submitted by contractors and  grantees, as available through www.recovery.gov (Recovery.gov) through  July 2010. We obtained and analyzed known tax debt data from the Internal Revenue  Service (IRS) as of September 30, 2009. To provide examples of Recovery Act recipients who have known unpaid  federal taxes, we selected 15 of the approximately 3,700 Recovery Act  recipients for a detailed audit and investigation. Because we  considered the number of delinquent tax periods in selecting these 15  recipients, we were more likely to select recipients who owed primarily  payroll taxes; our prior work has shown delinquent payroll taxes to be an  indicator of potential abusive or criminal activity. These case  studies serve to illustrate the sizeable amounts of taxes owed by some  organizations that received Recovery Act funding and cannot be  generalized beyond the cases presented.
Why GAO Did This Study

The American Recovery and Reinvestment Act (Recovery Act), enacted on February 17, 2009, appropriated $275 billion to be distributed for federal contracts, grants, and loans. As of March 25, 2011, $191 billion of this $275 billion had been paid out. GAO was asked to determine if Recovery Act contract and grant recipients have unpaid federal taxes and, if so, to (1) determine, to the extent possible, the magnitude of known federal tax debt which is owed by Recovery Act contract and grant recipients; and, (2) provide examples of Recovery Act contract and grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt owed by Recovery Act contract and grant recipients, GAO identified contract and grant recipients from www.recovery.gov and compared them to known tax debts as of September 30, 2009, from the Internal Revenue Service (IRS). To provide examples of Recovery Act recipients with known unpaid federal taxes, GAO chose a nonrepresentative selection of 30 Recovery Act contract and grant recipients, which were then narrowed to 15 based on a number of factors, including the amount of taxes owed and the number of delinquent tax periods. These case studies serve to illustrate the sizable amounts of taxes owed by some organizations that received Recovery Act funding and cannot be generalized beyond the cases presented. This report contains no recommendations.

What GAO Found

At least 3,700 Recovery Act contract and grant recipients--including prime recipients, subrecipients, and vendors--are estimated to owe more than $750 million in known unpaid federal taxes as of September 30, 2009, and received over $24 billion in Recovery Act funds. This represented nearly 5 percent of the approximately 80,000 contractors and grant recipients in the data from www.Recovery.gov as of July 2010 that GAO reviewed. Federal law does not prohibit the awarding of contracts or grants to entities because they owe federal taxes and does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal agencies unless the taxpayer consents. The estimated amount of known unpaid federal taxes is likely understated because IRS databases do not include amounts owed by recipients who have not filed tax returns or understated their taxable income and for which IRS has not assessed tax amounts due. In addition, GAO's analysis does not include Recovery Act contract and grant recipients who are noncompliant with or not subject to Recovery Act reporting requirements. GAO selected 15 Recovery Act recipients for further investigation. For the 15 cases, GAO found abusive or potentially criminal activity, i.e., recipients had failed to remit payroll taxes to IRS. Federal law requires employers to hold payroll tax money "in trust" before remitting it to IRS. Failure to remit payroll taxes can result in civil or criminal penalties under U.S. law. The amount of unpaid taxes associated with these case studies were about $40 million, ranging from approximately $400,000 to over $9 million. IRS has taken collection or enforcement activities (e.g., filing of federal tax liens) against all 15 of these recipients. GAO has referred all 15 recipients to IRS for further investigation, if warranted.