Federal Contractors Owe Billions in Back Taxes

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Last week, the Government Accountability Office (GAO) released a report “Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence” that found 33,000 firms and individuals contracted to provide goods and services to a variety of federal agencies owed more than $3 billion in unpaid federal taxes as of September 30, 2004.

The report, according to The Hill, was requested by the Senate Governmental Affairs' Permanent Subcommittee on Investigations and made public during hearings held Thursday, June 16. The hearing is the second of what is turning into a series of hearings on tax abuses and evasions by contractors. The first hearing convened in February and focused on defense contractors.

“The widespread tax cheating by federal contractors will end,” Senator Norm Coleman (R-MN), Chairman of the Subcommittee says in a statement on his website. “Step by step we are identifying and closing the loopholes that have allowed federal contractors to cheat on their taxes.”

The Washington Post reports that the GAO report does not identify any of the contractors by name, size or location. The report does, however, focus on 50 cases where evidence of potentially criminal activity has been discovered according to OneWorld. Some of the examples cited in the report include:

  • A firm providing contract temporary workers to the Department of Housing and Urban Development (HUD) which for nearly two decades has simply closed operations under one name and reopened immediately under a new name when bills for back taxes got too high.
  • A firm that continued to receive federal contracts while repeatedly reopening the same business in the same location after declaring bankruptcy to avoid paying taxes.
  • The owner of a firm transferred payroll taxes withheld form employee paychecks into an offshore bank account rather than making the required payments to the government.
  • The owner of another firm who purchased million-dollar residential and commercial properties, a fleet of luxury vehicles and an unrelated business while owing more than $18 million in unpaid taxes.

“It is disgraceful that 33,000 contractors contracting with the federal government owe over $3.3 billion in unpaid taxes,” adds Carl Levin (D-MI), ranking member of the Subcommittee, to Coleman's written statement. “This tax dodging hurts honest taxpayers, honest businesses, and our country as a whole. Effective use of the federal tax levy program is necessary to help keep the tax dodger's hand out of the taxpayer's wallet.”

The GAO report was also critical of the Treasury Department's Financial Management Services (FMS), which, according to The Hill, collected only $16 million of the $50 million in taxes owed during fiscal year 2004.

“Tens of billions of dollars in federal payments were not matched against tax debts for potential levy because FMS did not proactively manage and oversee the levy program,” Reuters quotes the GAO as saying. “Until GAO brought it to FMSs attention, FMS was unaware that $40 billion of contractor payments had not been submitted for potential levy.”

“On a broader scale, FMS has a track record that clearly demonstrates leadership with respect to the government-wide collection of debts,” FMS Commissioner Richard Gregg is quoted by OneWorld as saying in testimony defending FMS actions before members of the Subcommitte.

OneWorld reports that the GAO recommends that FMS match names on contractor payment records with tax records from the Internal Revenue Service in order to take advantage on a law, enacted last year, authorizing the withholding of all payments to delinquent contractors. Among more than a dozen other recommendations, the GAO also proposed authorizing government officials to verify whether the companies and individuals bidding on federal contracts owe back taxes prior to awarding contracts. IRS Commissioner Mark Everson testified that such a proposal would erode taxpayer privacy protections by failing to distinguish between tax delinquents and those committing criminal abuse of the tax system.

“Under these circumstances, we must bar certain companies and individuals from receiving federal contracts,” Coleman to the Washington Post. “When individuals or companies demonstrate flagrant disregard for the tax system…it is appropriate to publish their names and bar their receipt of federal contracts.”

According to The Hill none of the 47 cases investigated by the GAO last year, have been referred for criminal prosecution although some are under investigation by the IRS.

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