GAO: Contractors owe $3 billion in taxes

The Government Accountability Office said Thursday that 33,000 contractors owe more than $3 billion in unpaid taxes.

The report (GAO-05-637) investigated 50 civilian agency contractors more closely and found that all of them had "abusive and potentially criminal activity," auditors said. It reported that businesses failed to forward the payroll taxes they collected from their employees to the IRS, which is a felony. On Thursday, GAO officials declined to identify the contractors, citing privacy issues. A spokesman said, however, that the agency will refer the contractors to the IRS for potential investigation.

In one case, a contractor repeatedly opened new businesses and closed old ones that carried large tax debts for more than 20 years. Federal agencies paid that contractor $1 million in fiscal 2004, despite the fact that he owed almost $900,000 in taxes. In another case, a waste collection agency that contracts with the Veterans Affairs Department owes almost $13 million in taxes and the owner has property worth more than $2 million.

GAO auditors said the Treasury Department's Financial Management Service, which disburses and collects money for the government, mismanaged data related to tax collection and in some cases was not even aware of problems until GAO pointed them out. In fiscal 2004, FMS paid $3.8 billion to contractors without recording their proper name, the report stated.

The report recommended withholding payments to contractors if their payment file lacks a proper name.

FMS disagreed, saying that withholding might delay payments to contractors who are paying their taxes.

Richard L. Gregg, FMS commissioner, also said that primary responsibility for collection of unpaid taxes rests with the IRS, and that parts of the GAO report were misleading. He noted recent improvement in tax collection: "Virtually every trend line shows strong increases in collections for the past several years."

"It doesn't appear to be epidemic across government contractors," said Stan Soloway, president of the Professional Services Council in Arlington, Va., which represents contractors. He said that few contractors were at fault compared to the total number -- 300,000 -- that work with the government, and the ones that had failed to pay taxes were likely small.

"I would think that with the average contractor, the last thing they'd want to do is get in trouble and not pay their taxes," said Cathy Garman, senior vice president of public policy at the Contract Services Association.

The GAO report said that the fact that these contractors have not paid taxes reduces their operating costs, which gives them an unfair competitive advantage against those who are paying their taxes.

"Federal contractors should be held to a higher degree of responsibility to pay their fair share of taxes owed because they are being paid by the government," GAO said.

In February 2004, GAO reported that 27,000 Pentagon contractors owed $3 billion in unpaid taxes.

Sen. Norm Coleman, R-Minn., chairman of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, and Sen. Carl Levin, D-Mich., ranking member of the subcommittee, requested the GAO investigation and held a hearing on the report Thursday. The senators announced that the IRS and FMS promised to expand the task force responsible for monitoring tax collection from contractors. The task force was created last year and has increased collection from Pentagon contractors by 2,500 percent, according to the subcommittee.

"Step by step, we are identifying and closing the loopholes that have allowed federal contractors to cheat on their taxes," said Coleman.

Colleen M. Kelley, president of the National Treasury Employees Union and a longtime opponent of the privatization of government jobs, called the situation "outrageous."

"At the minimum, every single one of these contractors should immediately be barred from doing business with the federal government," said Kelley.

The General Services Administration, which secures governmentwide contracts for agencies, said that it will take appropriate action against "any contractor considered not to be responsible." It could not immediately say whether or not it will consider barring those charged with violating tax law from its contracting vehicles.

Soloway said he doesn't think there need to be more laws, but rather better enforcement and communication between the IRS, FMS, and awarding agencies.

GAO has placed IRS enforcement of tax law on its list of programs at high risk of fraud, waste and abuse since 1990.