A new report released by the Government Accountability Office (GAO) shows that more than 3,800 contractors doing business with the General Services Administration (GSA) have tax debts totaling some $1.4 billion, reports Time. Internal Revenue Service (IRS) records and GSA contracts over fiscal years 2004 and 2005 were reviewed to find 10 percent of the vendors under contract to GSA had cheated on their taxes.

The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations held a hearing to examine this report. Committee staff has identified $7.7 billion in taxes owed, according to the Associated Press. This is the committee’s third hearing dealing with contractors that owe federal taxes.

It was found that these contractors did not pay their corporate income taxes. Also, IRS payroll taxes collected on the behalf of their employees for Social Security, Medicare, and individual withholding taxes, went into their employer’s pockets, instead of being passed onto the government.

Time reports that there are no federal laws requiring GSA contacting officers to examine the tax debts of perspective contractors when awarding contracts, according to the GAO report. A contracting officer would also have a difficult time gaining access to a vendor’s IRS records.

The Associated Press reports that companies’ indicted or convicted of tax evasion for willfully failing to pay taxes can be barred from winning federal contracts. It is a criminal felony to fail to transfer payroll taxes to the government.

In 2004 the GAO found more than 27,000 Pentagon contactors, owing $3 million in back taxes, according to Time. This move prompted the Pentagon and other federal agencies, to increase the amount of back taxes recovered from contractors by more than 600 percent.

A GSA spokesman told Time that his agency “takes the issue of unpaid contractor taxes very seriously and all federal contractors should be held to high standards. It is simply unacceptable that tax cheats who owe the government millions in back taxes get millions from American taxpayers.”

The GAO report notes that a contracting company can save 15 percent in expenses by not paying their taxes. This allows “GSA contractors with tax debts [to] have an unfair advantage in costs when competing with contractors that pay their taxes.” The tax cheating contractors who submit low bids and win their contracts, allow the federal government to act penny wise and pound foolish, according to Time.

U.S. Comptroller General David Walker is also a CPA. In addition to recommending that the tax code must be simplified in order to close our nation’s tax gap, Walker said, “Our nation’s fiscal policy is on an imprudent and unsustainable course.” He goes on to say that, “Over the long term, we face a large and growing structural deficit due primarily to known demographic trends, rising health care costs, and lower federal revenues as a percentage of the economy,” according to an article published on the American Institute of Certified Public Accountants (AICPA) web site.

Walker concludes, the problem “is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. Rather, a fundamentalist reexamination of major policies and priorities will be important to recapture our future fiscal flexibility.”

There are several resources concerning the nation’s tax gap that you may want to review, including the GAO Tax Gap Report and the Updated IRS Tax Gap Estimate.