Financial Management
Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence Gao ID: GAO-05-637 June 16, 2005Tax abuses by contractors working for the Department of Defense, on which GAO previously reported, have led to concerns about similar abuses by those hired by civilian agencies. GAO was asked to determine if similar problems exist at civilian agencies and, if so, to (1) quantify the amount of unpaid federal taxes owed by civilian agency contractors paid through the Financial Management Service (FMS), (2) identify any statutory or policy impediments and control weaknesses that impede tax collections under the Federal Payment Levy Program (FPLP), and (3) determine whether there are indications of abusive or potential criminal activity by contractors with unpaid tax debts.
FMS and IRS records showed that about 33,000 civilian agency contractors owed over $3 billion in unpaid federal taxes as of September 30, 2004. All 50 civilian agency contractors we investigated had abusive and potentially criminal activity. For example, businesses with employees did not forward payroll taxes withheld from their employees to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Further, several individuals own multiple businesses with unpaid federal taxes--one individual owns about 20 businesses that did not fully pay taxes related to over 300 returns. Some contractors purchased or owned millions of dollars of property while they did not remit payroll taxes. These activities were identified for contractors at the Departments of Justice, Homeland Security, and Veterans Affairs; the National Aeronautics and Space Administration; and others agencies. GAO's analysis indicates that if all tax debts owed by, and all payments made to, the 33,000 contractors were included in the FPLP, FMS could have collected hundreds of millions of dollars in fiscal year 2004. However, because only a fraction of all unpaid taxes and a portion of FMS payments are subjected to the levy program, FMS actually collected only $16 million from civilian contractors. For example, about $171 billion of unpaid federal taxes were not sent to the levy program to be offset against payments because of specific statutory requirements or IRS policy exclusions, such as debtors' claims of financial hardship or bankruptcy. Tens of billions of dollars in federal payments were not compared against tax debts for potential levy because FMS did not proactively manage and oversee the levy program. Until we brought it to FMS's attention, FMS did not know that it did not submit $40 billion of contractor payments from some civilian agencies for potential levy. FMS also did not identify payment files that did not contain contractor tax identification numbers, names, or both, resulting in $21 billion in payments to contractors that could not be levied. FMS also excluded billions of dollars from levy because of what it considered programming limitations without taking proactive steps to overcome those limitations. Further, civilian agency purchase card payments to contractors totaling $10 billion could not be levied. Improvements at FMS could result in tens of millions of dollars of additional levies annually.
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Report to Congressional Requesters:
June 2005:
Financial Management:
Thousands of Civilian Agency Contractors Abuse the Federal Tax System
with Little Consequence:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-637]:
GAO Highlights:
Highlights of GAO-05-637, a report to congressional requesters:
Why GAO Did This Study:
Tax abuses by contractors working for the Department of Defense, on
which GAO previously reported, have led to concerns about similar
abuses by those hired by civilian agencies. GAO was asked to determine
if similar problems exist at civilian agencies and, if so, to (1)
quantify the amount of unpaid federal taxes owed by civilian agency
contractors paid through the Financial Management Service (FMS), (2)
identify any statutory or policy impediments and control weaknesses
that impede tax collections under the Federal Payment Levy Program
(FPLP), and (3) determine whether there are indications of abusive or
potential criminal activity by contractors with unpaid tax debts.
What GAO Found:
FMS and IRS records showed that about 33,000 civilian agency
contractors owed over $3 billion in unpaid federal taxes as of
September 30, 2004. All 50 civilian agency contractors we investigated
had abusive and potentially criminal activity. For example, businesses
with employees did not forward payroll taxes withheld from their
employees to IRS. Willful failure to remit payroll taxes is a felony
under U.S. law. Further, several individuals own multiple businesses
with unpaid federal taxes”one individual owns about 20 businesses that
did not fully pay taxes related to over 300 returns. Some contractors
purchased or owned millions of dollars of property while they did not
remit payroll taxes. These activities were identified for contractors
at the Departments of Justice, Homeland Security, and Veterans Affairs;
the National Aeronautics and Space Administration; and other agencies.
Examples of Abusive and Potentially Criminal Activity:
Business: Health care;
Unpaid tax amount: $18 million;
Fiscal year 2004 FMS payments: $300,000;
Contractor activity: Purchased multimillion-dollar properties while not
paying millions in payroll taxes.
Business: Consulting;
Unpaid tax amount: $1 million;
Fiscal year 2004 FMS payments: $200,000;
Contractor activity: Doubled salary of one officer/owner to over
$750,000 while not remitting payroll taxes.
Business: Temporary help;
Unpaid tax amount: $900,000;
Fiscal year 2004 FMS payments: $1 million;
Contractor activity: A pattern of nearly 20 years of closing businesses
with tax debts, opening new ones, and incurring more tax debts.
Business: Security;
Unpaid tax amount: $400,000;
Fiscal year 2004 FMS payments: $200,000;
Contractor activity: Diverted payroll taxes to a foreign bank account
to build a house overseas.
Source: GAO analysis of civilian agency, IRS, FMS, public, and other
records.
[End of table]
GAO‘s analysis indicates that if all tax debts owed by, and all
payments made to, the 33,000 contractors were included in the FPLP, FMS
could have collected hundreds of millions of dollars in fiscal year
2004. However, because only a fraction of all unpaid taxes and a
portion of FMS payments are subjected to the levy program, FMS actually
collected only $16 million from civilian contractors. For example,
about $171 billion of unpaid federal taxes were not sent to the levy
program to be offset against payments because of specific statutory
requirements or IRS policy exclusions, such as debtors‘ claims of
financial hardship or bankruptcy.
Tens of billions of dollars in federal payments were not compared
against tax debts for potential levy because FMS did not proactively
manage and oversee the levy program. Until we brought it to FMS‘s
attention, FMS did not know that it did not submit $40 billion of
contractor payments from some civilian agencies for potential levy. FMS
also did not identify payment files that did not contain contractor tax
identification numbers, names, or both, resulting in $21 billion in
payments to contractors that could not be levied. FMS also excluded
billions of dollars from levy because of what it considered programming
limitations without taking proactive steps to overcome those
limitations. Further, civilian agency purchase card payments to
contractors totaling $10 billion could not be levied. Improvements at
FMS could result in tens of millions of dollars of additional levies
annually.
What GAO Recommends:
GAO makes 18 recommendations to FMS to improve the FPLP and increase by
tens of millions of dollars annually the amounts levied from payments
to contractors with unpaid federal taxes. GAO also recommends that the
Internal Revenue Service (IRS) review and, if warranted, pursue
collection or criminal investigation of the 50 case study contractors
identified in this report. IRS agreed and FMS partially agreed. FMS did
not agree that it should withhold payments to contractors without names
or work with IRS to address challenges related to levying purchase card
payments. GAO disagrees with FMS‘s assessment and reiterates support
for all of its recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-637.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Greg Kutz at (202) 512-
9095 or Steven Sebastian at (202) 512-3406.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes:
Legal Requirements and IRS Policy Decisions Contribute to the Levy
Collection Gap:
Lack of FMS Oversight and Proactive Management Further Contribute to
the Levy Collection Gap:
Civilian Agency Contractors Involved in Abusive and Potentially
Criminal Activity Related to the Federal Tax System:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Contractors with Unpaid Federal Taxes:
Appendix III: Comments from the Internal Revenue Service:
Appendix IV: Comments from the Financial Management Service:
Appendix V: Staff Acknowledgments:
Tables:
Table 1: Payments Not Matched against Tax Debts for Potential Levy:
Table 2: Types of Goods and Services Provided by Civilian Agency
Contractors in Case Studies:
Table 3: Civilian Agency Contractors with Unpaid Federal Taxes:
Table 4: Civilian Agency Contractors with Unpaid Federal Taxes:
Figures:
Figure 1: Levy Process:
Figure 2: Type of Debt Owed by Civilian Contractors as of September 30,
2004:
Figure 3: Civilian Contractors' Unpaid Federal Taxes by Tax Periods
through 2003 by Calendar Year:
Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005:
Figure 5: IRS Statutory Exclusions as of April 2005:
Figure 6: IRS's Policy Exclusions from the Levy Program as of April
2005:
Figure 7: Purchase Card Expenditures by Civilian Agencies--Fiscal Years
1997-2004:
Abbreviations:
ACH: Automated Clearing House:
ACH-CTX: Automated Clearing House-Corporate Trade Exchange:
ACS: Automated Collection System:
DCIA: Debt Collection Improvement Act of 1996:
DOD: Department of Defense:
EFT: electronic funds transfer:
FICA: Federal Insurance Contribution Act:
FMS: Financial Management Service:
FPLP: Federal Payment Levy Program:
IRS: Internal Revenue Service:
NASA: National Aeronautics and Space Administration:
PACER: Payments, Claims, and Enhanced Reconciliation:
TFRP: trust fund recovery penalty:
TIN: taxpayer identification number:
TOP: Treasury Offset Program:
Letter June 16, 2005:
Congressional Requesters:
The success of our tax system hinges on the public's perception of its
fairness, including the extent to which taxpayers believe their
friends, neighbors, and business competitors are complying with the tax
laws and are actually paying their taxes. The Internal Revenue
Service's (IRS) own data in this regard are not encouraging. IRS
reported that the federal government does not receive hundreds of
billions of dollars in taxes owed annually. Recent IRS data, released
in March 2005, showed that the estimated net annual tax gap-- the
difference between what taxpayers should pay on a timely basis and what
IRS collected through voluntary compliance and enforcement activities--
ranged from $250 billion to nearly $300 billion.[Footnote 1]
A portion of the tax gap is owed by contractors receiving payments from
the federal government. For example, in February 2004, we reported that
some Department of Defense (DOD) contractors abuse the federal tax
system with little consequence.[Footnote 2] In our report and during a
related congressional hearing,[Footnote 3] we pointed out that based on
our analysis of a limited number of DOD disbursement systems, more than
27,000 DOD contractors owed nearly $3 billion in unpaid federal taxes.
We also reported that some of these contractors were engaged in
abusive[Footnote 4] and potentially criminal[Footnote 5] activities.
Due to the significance of the issues raised at that hearing, you asked
us to provide additional information about whether contractors for
other federal agencies were engaged in similar tax abuses and to
provide recommendations to increase the effectiveness and efficiency of
tax revenue collections from federal contractors under the Federal
Payment Levy Program (FPLP).
This is the first in a series of reports to respond to your request.
The specific objectives of this first audit and investigation were, to
the extent possible, to (1) quantify the magnitude of unpaid taxes of
contractors at federal civilian agencies that are paid through the
Department of the Treasury's (Treasury) Financial Management Service
(FMS); (2) identify some statutory or policy impediments and control
weaknesses that impede tax collections under the FPLP; and (3)
determine, using case studies, whether indications exist that federal
contractors with unpaid taxes are engaged in abusive or potentially
criminal activities. To identify the extent of such activities, we
analyzed the tax debt and activity of entities with either the same
owners or officers, common taxpayer identification numbers (TIN) or
addresses, or other relationships as a group to identify patterns of
abusive or potentially criminal activities. We will address issues
surrounding the amount of tax debt IRS sends to the FPLP in subsequent
reports.
To meet our first two objectives, we (1) identified civilian agency
contractors receiving federal payments that owe taxes by comparing the
database of FMS contractor payments with the IRS database of unpaid
taxes, (2) estimated the potential dollar amount that could be
collected if all unpaid taxes owed by civilian contractors and all FMS
payments to civilian contractors were subject to the FPLP, (3) reviewed
major federal laws and regulations and FMS policies on the FPLP, and
(4) interviewed FMS and IRS officials on processes and procedures
related to the FPLP. To avoid overstating the tax debt and potential
levy amount, we limited the population of tax debts from which we
performed our analysis to tax debts that have been agreed to by the
taxpayers or confirmed by the courts, tax debts for periods prior to
calendar year 2004, tax debts of more than $100, and fiscal year 2004
civilian contractor payments paid through FMS of more than $100. We
used data mining techniques to meet our third objective--identifying
civilian agency contractors engaged in abusive or potentially criminal
activity.
Although we were able to validate that the payment data provided by FMS
reflected disbursements to contractors, we were unable to confirm that
the disbursement data we received reflect all payments made to
contractors. Specifically, FMS was unable to provide us with electronic
disbursement data related to payments made to contractors through
Fedwire, a large system used for payments requiring same-day
settlement. Further, IRS's databases do not identify all unpaid federal
taxes caused by a contractors' underreporting of income or failure to
file taxes. Because of these problems, the FMS and IRS data we used
will likely understate the magnitude of contractors with unpaid federal
taxes and the potential levy collection. Further details on our scope
and methodology are included in appendix I.
Our work was performed from May 2004 through May 2005 in accordance
with generally accepted government auditing standards. The
investigative portion of our work was completed in accordance with
investigative standards established by the President's Council on
Integrity and Efficiency. The results of 10 case studies we
investigated are shown in table 3. The results of another 40 case
studies are included in appendix II. We requested comments on a draft
of comments on a draft of this report from the Commissioner for
Internal Revenue or his designee and from the Commissioner, Financial
Management Service or his designee. We received written comments from
the Internal Revenue Service and the Financial Management Service,
which are reprinted in appendixes III and IV of this report.
Results in Brief:
As was the case at DOD, many contractors of civilian agencies
throughout the federal government abuse the federal tax system with
little consequence. Our analysis of FMS and IRS records showed that
about 33,000 contractors that received substantial federal payments
from civilian agencies during fiscal year 2004 owed a total of more
than $3 billion in unpaid taxes. The unpaid taxes included corporate
income, excise, unemployment, individual income, and payroll
taxes.[Footnote 6] We estimate that if there were no legal or
procedural impediments to levying contractor payments to satisfy unpaid
federal taxes, IRS and FMS could collect hundreds of millions of
dollars annually. Since FMS collected $16 million in levies[Footnote 7]
from civilian contractors through the FPLP during fiscal year 2004,
there is a significant tax levy collection gap. We also found evidence
of abusive and potentially criminal activity on the part of contractors
with unpaid tax debts.
A substantial portion of the levy collection gap is attributable to
legal requirements and policy decisions at IRS. Of IRS's approximately
$269 billion in unpaid federal taxes as of April 2005, about $171
billion is excluded from the levy program. Of this amount, about $71
billion was excluded because of statutory provisions while another $100
billion was excluded due to IRS policy decisions. This leaves
approximately $98 billion in tax debt potentially subject to collection
through the levy program. However, for 70 percent of the amount that
IRS forwards to FMS for potential levy, IRS had not yet completed all
of the legal notifications necessary for FMS to begin levying payments.
As a result, only a small fraction of all unpaid federal taxes are
eligible to be collected through the levy program. While the exclusion
of unpaid federal taxes from the levy program is justified depending on
the circumstances, it nevertheless results in the potential loss of
hundreds of millions of dollars in tax collections. We will examine in
detail in a later report the accuracy and reasonableness of the IRS
exclusions.
Weaknesses in internal controls and lack of proactive management at FMS
further restricted the levy potential and contributed to the levy
collection gap. We estimate that if the FMS deficiencies we identified
were corrected, FMS could have collected at least $50 million more than
it did in fiscal year 2004. Specifically, lack of oversight led to
FMS's failure to update its levy database to include all agency paying
stations, resulting in $40 billion in contractor payments--16 percent
of all fiscal year 2004 contractor payments recorded in FMS's payment
database--being inappropriately excluded from the levy program. Lack of
oversight also resulted in payments being sent to the levy program
without the necessary data required for levy. Payments with missing
data included $17 billion in payments made to contractors without TINS
and with obviously erroneous TINs,[Footnote 8] nearly $4 billion
without valid contractor names, and $5 billion without proper payment
type coding. A cursory review could have identified these deficiencies
in agency-submitted payment files. With the exception of payments
without TINs, FMS was not aware of these omissions until we brought
them to its attention. Further, although FMS was aware that payments
were made to contractors without TINs, FMS had not taken action to
address this deficiency. FMS's failure to identify and enforce
information requirements for disbursements reduced the amount of unpaid
federal taxes that was collected through the FPLP.
FMS has not been proactive in making changes necessary to maximize levy
collections by adding tens of billions of dollars in payments that are
currently excluded from the FPLP. These exclusions include about $26
billion (11 percent of FMS's 2004 contractor disbursements) of certain
categories of payments that FMS recorded in its payment database during
fiscal year 2004, and an unknown but potentially material amount of
Fedwire payments--payments requiring same-day settlement. FMS has not
taken actions to include these payments in the levy program because of
what it considers programming limitations. Similarly, FMS does not levy
any contractor payments to collect taxes owed by individuals, including
self-employed individuals and those with sole proprietorships. IRS and
FMS decided not to levy contractors' payments to collect the unpaid
federal taxes of contractors that file individual tax returns to avoid
the possibility of mistakenly levying an individual's payment to
satisfy an unrelated business's tax debt. Such an error could occur
because a business and an individual could have identical TINs and
similar names, and FMS's disbursement files do not distinguish between
payments to businesses and payments to individuals. While FMS and IRS
officials recognized that the potential risk of an improper levy
resulting from an erroneous match of an individual's payment with a
business's tax debt is probably small, they have only recently begun to
take steps to allow the unpaid federal taxes of individuals to be
collected under the levy program.
Finally, FMS has not addressed other challenges in the levy program
that further limit its effectiveness at collecting unpaid taxes. These
challenges include (1) matching the contractor name on the payment
record to the name in IRS's tax records, (2) levying contractors paid
with government purchase cards, and (3) implementing the increased 100
percent levy provision authorized in 2004. We found that nearly $2
billion of payments to contractors with unpaid taxes could not be
levied because of the requirement to match both the name and TIN in the
payment records to the unpaid federal taxes in the Treasury Offset
Program (TOP) database. FMS does not subject to levy the nearly $10
billion of fiscal year 2004 federal payments to contractors made with
purchase cards because the government payment is made to the bank that
issued the purchase card, not the contractor doing business with the
government. FMS officials stated that although they had met with
certain bank officials and another federal agency regarding this issue,
they had not yet determined how to collect federal debts from
contractors paid with the purchase cards. Finally, FMS faces a
significant challenge in implementing a provision of the American Jobs
Creation Act of 2004, which allows the federal government to levy up to
100 percent--up from a maximum of 15 percent--of specified payments for
goods and services provided by contractors with unpaid federal taxes.
FMS faces difficulty because civilian payment systems presently do not
distinguish goods and services, which are subject to the increased 100
percent levy provision, from real estate payments, which IRS has
determined are not. Overall, until FMS improves its oversight and
management of the FPLP and addresses these challenges, it will not be
able to realize the full potential of the program.
Our audit and investigation of 50 case study contractors[Footnote 9]
paid through FMS identified numerous instances of abusive or
potentially criminal activity. The subjects of the 50 case studies are
mostly small companies--many of them closely held by the owners and
officers--operating in wage-based industries. These companies provided
building maintenance, computer, consulting, health care, personnel,
security, and other services at numerous federal agencies, including
agencies tasked with national security and law enforcement, such as the
Departments of Homeland Security, Justice, and State. The 50 case
studies included businesses that had unpaid payroll taxes (as well as
corporate income, personal income, and other types of unpaid taxes).
One group of related businesses had unpaid taxes in over 300 tax
returns. Rather than fulfilling their role as "trustees" and forwarding
these amounts as required by law to IRS, these contractors diverted the
money for personal gain or to fund their businesses. Willful failure to
remit payroll taxes is a felony.
Some owners or officers of businesses with unpaid taxes also have
individual tax debts and are associated with other businesses that have
unpaid federal taxes. One case study contractor has a 20-year history
of opening a business, failing to remit taxes withheld from employees
to IRS, and then closing the business, only to start the cycle all over
again and incur more tax debts almost immediately. We also found that a
number of owners or officers in our case studies have significant
personal assets, including a sports team, commercial properties, houses
worth over $1 million, and luxury vehicles. Despite owning significant
assets, the owners or officers did not ensure the payment of the
delinquent taxes of their businesses, and sometimes did not pay their
own individual income taxes.
Through our case studies, we also found that some owners or officers of
civilian agency contractors with unpaid federal taxes had been
convicted or indicted of criminal conduct, such as embezzlement and
money laundering. For example, an officer of one case study contractor
was convicted for stealing hundreds of thousands of dollars from the
company, and the company's owner was indicted for embezzlement. Some
contractors included in our investigation stated that they diverted the
payroll taxes that they did not remit to IRS for personal gain or to
fund their businesses. One of the owners was using the payroll taxes
not remitted to IRS to build a house overseas.
Finally, to improve collections under the FPLP, we are making 18
recommendations to the Commissioner of the Financial Management
Service, including recommendations to include all payment categories in
the levy program; ensure payments from all agency paying stations are
subjected to potential levy; and verify that all payment files contain
information needed to levy contractor payments, such as payment type,
name, and TIN (where required). We are also recommending that FMS work
with IRS to determine how to collect unpaid taxes from sole proprietors
and contractors paid with government purchase cards and to determine
the steps needed to implement the 100 percent levy authorized by the
American Jobs Creation Act of 2004. In addition, we are making a
recommendation to the Commissioner of Internal Revenue to review the 50
case study companies and determine whether additional collection action
or criminal investigation is warranted.
IRS agreed and FMS partially agreed with our recommendations. FMS did
not agree with our recommendations that it should withhold payments to
contractors without names or work with IRS to explore options to levy
or otherwise collect from purchase card payments. FMS also disagreed
with our characterization of its management of the levy program but did
not dispute the factual basis on which we based our findings and
recommendations. We disagree with FMS's assessment and reiterate
support for our recommendations. See the "Agency Comments and Our
Evaluation" section of this report for a more detailed discussion of
the agency comments. We have reprinted the IRS and FMS written comments
in appendixes III and IV.
Background:
In its role as the nation's tax collector, IRS is responsible for
collecting taxes, processing tax returns, and enforcing the nation's
tax laws. Treasury's FMS is the central disbursing authority for
civilian agencies. With limited exceptions,[Footnote 10] FMS processes
most disbursements for civilian agencies in the executive branch. FMS
is also the federal government's central debt collection agency. Since
fiscal year 2000, FMS has operated the FPLP in conjunction with IRS to
collect unpaid federal taxes, including tax debt owed by federal
contractors.
IRS's Collection of Unpaid Taxes:
Since 1990, we have designated IRS's enforcement of tax laws as a
governmentwide high-risk area.[Footnote 11] In attempting to ensure
that taxpayers fulfill their obligations, IRS is challenged on
virtually every front. While IRS's enforcement workload--measured by
the number of taxpayer returns filed--has continually increased, until
fiscal year 2005, the resources IRS has been able to dedicate to
enforcing the tax laws have declined. Enforcement efforts are designed
to increase compliance and reduce the tax gap. However, IRS recently
reported that the gross tax gap, that is, the difference between what
the taxpayers should pay on a timely basis and what they actually pay,
exceed $300 billion annually. IRS estimated the gross tax gap to be
between $312 billion and $353. IRS further reported that its
enforcement activities, coupled with late payments, recover just $55
billion of that amount, leaving a net tax gap of from $257 billion to
$298 billion. Preliminary IRS estimates indicate that noncompliance is
from 15 percent to 16.6 percent of taxpayers' true tax liability, which
further fuels congressional and public concern that declines in IRS
compliance and collections programs are eroding taxpayer confidence in
the fairness of our federal tax system.
FMS Disbursements:
In fiscal year 2004, FMS made over 940 million disbursements totaling
over $1.5 trillion. FMS's major disbursing activities include paying
Social Security benefits, veterans' compensation, federal tax refunds,
federal salaries and pensions, and contractor and miscellaneous
payments. For statutory and logistical reasons, a limited number of
other governmental agencies, such as DOD and the U.S. Postal Service,
have their own authority to disburse funds. Those agencies that have
the authority to disburse federal funds are referred to as Non-Treasury
Disbursing Offices.
Although FMS is the disbursing agent for most of the federal
government, that is, it physically writes the checks or sends the
electronic payments, it does so on the behalf of, and at the direction
of, the various federal agencies. Federal agencies may have multiple
offices or locations that perform accounting for and preparation of
payment information, referred to by FMS as agency locations or paying
stations.[Footnote 12] To generate a payment, an agency payment
location sends FMS a payment file, along with an accompanying payment
certification requesting that FMS disburse funds. Agencies typically
send the certification and detailed payment information in an automated
form, and FMS loads the payment data into its payment system. Once
loaded, FMS verifies that all payment requests were properly authorized
and certified and that the amount on the payment file agrees with the
certification amount before processing the payments for disbursement.
FMS disburses federal funds via three main mechanisms: electronic funds
transfer (EFT) via Automated Clearing House (ACH), Fedwire, and checks.
Fedwire is also an EFT that provides for immediate transfers of funds
from the government's account in the Federal Reserve to the
contractors' bank accounts. According to FMS records, of the
approximately $1.5 trillion disbursed by FMS in fiscal year 2004, about
66 percent was disbursed using ACH, 17 percent via Fedwire, and the
remaining 17 percent as checks.
Once payments are disbursed, payment information related to ACH and
checks are sent to FMS's Payments, Claims, and Enhanced Reconciliation
(PACER) system, which maintains payment data and provides federal
payment agencies online access to these data. Among other payments,
PACER contained about 12.9 million contractor payments valued at $247
billion for fiscal year 2004. Unlike checks and ACH payments, detailed
information regarding Fedwire payments is not sent to the PACER payment
database.
Treasury Offset and Federal Payment Levy Programs:
In 1996, Congress passed the Debt Collection Improvement Act 1996
(DCIA) to maximize the collection of delinquent nontax debts owed to
federal agencies. As part of implementing its responsibilities under
DCIA, Treasury established the TOP, to be administered by FMS, to
centralize the process by which certain federal payments are withheld
or reduced (offset) to collect delinquent nontax debts owed to federal
agencies.[Footnote 13] Under the regulations implementing DCIA, FMS and
other disbursing agencies are required to compare their payment records
with debt recorded in the TOP database. If a match occurs, the
disbursing agency must offset the payment, thereby reducing or
eliminating the nontax debt.
To improve collection of unpaid taxes, the Taxpayer Relief Act of 1997
authorized IRS to continuously levy up to 15 percent of specified
federal payments made to businesses and individuals with unpaid federal
taxes.[Footnote 14] The continuous levy program, now referred to as
FPLP, was implemented in July 2000. The FPLP provides for the levy of
various federal payments, including federal employee retirement
payments, certain Social Security payments, selected federal salaries,
and contractor payments. For payments disbursed by FMS on behalf of
most federal agencies, the amount to be levied and credited to IRS is
deducted before FMS disburses the payment. In fiscal year 2004, IRS
received $114 million through the FPLP for delinquent taxes, $16
million of which was from payments to civilian contractors.
IRS coordinated with FMS to utilize the TOP database as the means of
collecting taxes under the FPLP. Each week IRS sends FMS an extract of
its tax debt files containing updated account balances of tax debts
that are already in TOP, the new tax debts that need to be added to
TOP, and all taxes in TOP that need to be rescinded.[Footnote 15] These
data are uploaded into TOP. For a payment to be levied through the
FPLP, a debt has to exist in TOP and a payment has to be available.
Figure 1 provides an overview of this process.
Figure 1: Levy Process:
[See PDF for image]
[End of figure]
FMS sends payment data to TOP to be matched against unpaid federal
taxes. TOP electronically compares the names and TINs on the payment
files to the control names (first four characters of the names) and
TINs of the debtors listed in TOP. If there is a match and IRS has
updated TOP to reflect that it has completed all legal notifications,
the federal payment is reduced (levied) to help satisfy the unpaid
federal taxes.
Federal Contractor Tax Compliance Task Force:
To address issues raised by our February 12, 2004, report and
testimony, a multi-agency task force was established to help improve
the FPLP. The task force includes representatives from the Department
of Defense, Defense Finance and Accounting Service, IRS, FMS, General
Services Administration (GSA), Office of Management and Budget, and
Department of Justice.
The objectives of the task force were to (1) identify and implement
short-term and long-term operational changes to improve federal tax
compliance of DOD contractors, including increasing the number of tax
debts and the number of DOD contractor payments available for matching
through TOP, and (2) identify potential changes that would enhance
efforts to address federal contractor tax delinquencies and prevent
future occurrences of tax abuse by federal contractors.
The task force issued its report in October 2004. In its report, the
task force identified actions and made recommendations to improve tax
compliance of federal contractors, including maximizing the number of
delinquent tax debts that IRS makes available for matching, maximizing
DOD payment information available for matching, increasing the
effectiveness of the matching and levy processes, and preventing
federal contract awards to those who abuse the tax system. A number of
the improvements identified by the task force have already been
implemented.
Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes:
Our analysis indicates that the failure to pay taxes among DOD
contractors also exists among civilian agency contractors and totaled
billions of dollars. Our analysis of FMS and IRS records indicates that
during fiscal year 2004, FMS made payments on behalf of civilian
agencies to about 33,000 federal contractors with over $3.3 billion in
unpaid federal taxes as of September 30, 2004.[Footnote 16] We estimate
that if there were no legal or administrative impediments to the levy
program--if all unpaid federal taxes were considered and all payments
to these 33,000 contractors with unpaid federal taxes were subjected to
the 15 percent levy--FMS could have collected as much as $350 million
in unpaid federal taxes from civilian contractors during fiscal
2004.[Footnote 17] Because some unpaid federal taxes are excluded due
to statutory requirements, IRS and FMS would never be able to collect
the entire amount. Over half of the $3.3 billion in tax debt was coded
by IRS as being excluded from the levy program for statutory reasons,
including contractors being in bankruptcy, having installment payment
agreements, or awaiting the completion of the required legal
notifications regarding the tax debt. However, many improvements can be
made to lessen the tax levy collection gap. As will be discussed later
in the report, the American Jobs Creation Act of 2004[Footnote 18]
increased the maximum levy to 100 percent of any specified payments to
contractors for goods and services provided the federal government.
When implemented, the maximum levy amount that could be collected is
even greater.
Characteristics of Contractors' Unpaid Federal Taxes:
The amount of unpaid taxes for these contractors paid through Treasury
FMS ranged from a small amount owed by an individual for a single tax
period[Footnote 19] to a group of related businesses owing about $13
million for over 300 tax periods.[Footnote 20] Unpaid taxes owed by
these contractors included payroll, corporate income, excise,
unemployment, individual income, and other types of taxes.
In the case of unpaid payroll taxes, employers withheld federal taxes
from employees' wages, but did not send the withheld payroll taxes or
the employers' matching amounts to IRS as required by law, instead
diverting the money for personal gain or to fund their businesses. One
IRS official acknowledged that frequently small businesses are
undercapitalized and use the tax money as operating capital. However,
employers are subject to civil and criminal penalties if they do not
remit payroll taxes to the federal government. When an employer
withholds taxes from an employee's wages, the employer is deemed to
have a responsibility to deposit in a separate bank account these
amounts held "in trust" for the federal government until making a
federal tax deposit in that amount.[Footnote 21] To the extent these
withheld amounts are not forwarded to the federal government, the
employer is liable for these amounts, as well as the employer's
matching Social Security contributions. Individuals within the business
(e.g., corporate officers) may be held personally liable for the
withheld amounts not forwarded, and they can be assessed a civil
monetary penalty known as a trust fund recovery penalty
(TFRP).[Footnote 22]
Willful failure to remit payroll taxes is a criminal felony
offense[Footnote 23] punishable by imprisonment of not more than 5
years, while the failure to properly segregate payroll taxes can be a
criminal misdemeanor offense[Footnote 24] punishable by imprisonment of
up to a year. The employee is not responsible for the employer's
failure to remit payroll taxes since the employer is responsible for
submitting the amounts withheld. The Social Security and Medicare trust
funds are subsidized or made whole for unpaid payroll taxes by the
general fund, as we discussed in previous reports.[Footnote 25] Over
time, the amount of this subsidy is significant.
As shown in figure 2, over a third of the total tax amount owed by
civilian contractors was for unpaid payroll taxes and over 40 percent
was for corporate income taxes. The remainder consisted of individual
income taxes, and other taxes. As discussed later in our case studies,
some of these contractors also owe state tax debts.
Figure 2: Type of Debt Owed by Civilian Contractors as of September 30,
2004:
[See PDF for image] - graphic text:
Pie chart with four items.
Corporate income tax: $1.5 billion: 45%;
Payroll taxes: $1.2 billion: 37%;
Other tax: $0.4 billion: 12%;
Individual income tax: $0.2 billion: 6%.
Source: GAO analysis of IRS and FMS data as of September 30, 2004.
[End of figure]
A substantial amount of the unpaid federal taxes shown in IRS records
as owed by civilian contractors had been outstanding for several years.
As reflected in figure 3, over half of the unpaid taxes owed by
civilian contractors were for tax periods prior to calendar year
2000.[Footnote 26]
Figure 3: Civilian Contractors' Unpaid Federal Taxes by Tax Periods
through 2003 by Calendar Year:
[See PDF for image] - graphic text:
Pie chart with four items.
1990-1999: $1.5 billion: 46%;
2000-2002: $1.1 billion: 33%;
2003: $0.5 billion: 16%;
Prior to 1990: $0.2 billion: 5%;
Source: GAO analysis of IRS and FMS data as of September 30, 2004.
[End of figure]
Prompt collection of unpaid taxes is vital because, as our previous
work[Footnote 27] has shown, as unpaid taxes age, the likelihood of
collecting all or a portion of the amount owed decreases. This is due,
in part, to the continued accrual of interest and penalties on the
outstanding federal taxes, which, over time, can dwarf the original tax
obligation. The amount of unpaid federal taxes reported above does not
include all tax debts owed by the civilian agency contractors due to
statutory provisions that give IRS a finite period under which it can
seek to collect on unpaid taxes. Generally, there is a 10-year
statutory collection period beyond which IRS is prohibited from
attempting to collect tax debt. [Footnote 28] Consequently, if the
contractors owe federal taxes beyond the 10-year statutory collection
period, the older tax debt may have been removed from IRS's records. We
were unable to determine the amount of tax debt that had been removed.
While Substantial, the Amount of Unpaid Taxes of Civilian Contractors
Is Likely Understated:
The amount of unpaid federal taxes we identified among civilian agency
contractors--$3.3 billion--is likely understated for three main
reasons: (1) we intentionally limited our scope to contractors with
agreed-to[Footnote 29] federal tax debt for tax periods prior to 2004
that had substantial amounts of both unpaid taxes and payments from
civilian agencies; (2) FMS disbursement files did not always contain
the information we needed to determine whether the contractors owed
federal taxes; and (3) the IRS taxpayer account database contains
errors, and the database reflects only the amount of unpaid taxes
either reported by the taxpayer on a tax return or assessed by IRS
through its various enforcement programs. The IRS database does not
reflect amounts owed by businesses and individuals that have not filed
tax returns and for which IRS has not assessed tax amounts due.
To avoid overestimating the amount owed by government contractors, we
took a number of steps to exclude unpaid federal taxes that federal
contractors recently incurred or that are not individually significant.
For example, some recently assessed tax debts that appear as unpaid
taxes through a matching of PACER and IRS records may involve matters
that are routinely resolved between the taxpayer and IRS, with the
taxes paid, abated, or both[Footnote 30] within a short period. We
attempted to eliminate these types of debt by focusing on unpaid
federal taxes for tax periods prior to calendar year 2004 and
eliminating tax debt of $100 or less. We also eliminated all tax debt
identified by IRS as not being agreed to by the contractor.
Additionally, we eliminated contractors with tax debt that received
payments of $100 or less during fiscal year 2004.[Footnote 31]
Regarding the completeness of FMS disbursement information, we found
that some contractors paid through FMS could not be identified due to
blank or obviously erroneous TINs, such as TINs made up of all zeros or
all nines. The lack of TINs prevented us from determining whether
contractors had unpaid federal taxes and, if so, the amount of unpaid
taxes owed by the contractors. Additionally, as will be discussed in
more detail in a later section of this report, FMS does not maintain
detailed electronic payment information for a large disbursement
system--Fedwire--that also makes disbursements to contractors, and thus
the value of unpaid taxes associated with contractors paid through that
system could not be determined.
As we have previously reported,[Footnote 32] IRS records contain errors
that affect the accuracy of taxpayer account information. Consequently,
some of the $3.3 billion may not reflect true unpaid taxes, although we
cannot quantify this amount. Nonetheless, we believe the $3.3 billion
represents a conservative estimate of unpaid federal taxes owed by
civilian contractors paid through FMS.
Also limiting the completeness of our estimate of the unpaid federal
taxes of civilian contractors is the fact that the IRS tax database
reflects only the amount of unpaid taxes either reported by the
contractor on a tax return or assessed by IRS through its various
enforcement programs. The IRS database does not reflect amounts owed by
businesses and individuals that have not filed tax returns and for
which IRS has not assessed tax amounts due. During our review, we
identified instances in which civilian contractors failed to file tax
returns for a particular tax period and, therefore, were listed in IRS
records as having no unpaid taxes for that period. Further, our
analysis did not attempt to account for businesses or individuals that
purposely underreported income and were not specifically identified by
IRS. According to IRS, underreporting of income is the largest
component of the roughly $300 billion tax gap. Preliminary IRS
estimates show underreporting accounts for more than 80 percent of the
total tax gap. Consequently, the true extent of unpaid taxes for these
businesses and individuals is not known.
Actual Levy Collections Significantly Less Than Maximum Potential Levy
Amount:
There is a large tax levy collection gap between the maximum potential
levy we calculated and the amount FMS actually collected under the
FPLP. We estimate that if there were no legal or administrative
provisions that remove some tax debt from the levy program and if all
PACER contractor payments were subjected to a 15 percent levy to
satisfy all the unpaid taxes of those civilian contractors, FMS could
have collected as much as $350 million in fiscal year 2004. However,
during fiscal year 2004, FMS collected about $16 million from civilian
contractors--or about 5 percent of the approximately $350 million
maximum levy collection estimate we calculated. As discussed earlier in
this report, because some unpaid federal taxes are excluded due to
statutory requirements, IRS and FMS will never be able to close the
levy collection gap completely. For example, over half of the $3.3
billion in tax debt was coded by IRS as being excluded from the levy
program for statutory reasons, including contractors being in
bankruptcy, having installment agreements, or awaiting the completion
of the required initial legal notifications. However, many improvements
can be made to narrow the tax levy collection gap.
We found that a vast majority of the collection gap is attributable to
debts that are excluded from TOP because of current law and IRS
policies. While we will provide an overview of the exclusions later in
this report, we will examine in detail in a later report the accuracy
and reasonableness of the exclusions and IRS's applications of those
exclusions. The remaining gap--to be covered in detail in this report-
-between what could be collected and what was actually collected is
attributable to the fact that not all FMS payments could be matched
against unpaid federal taxes for levy. We estimate that the federal
government could have collected at least $50 million more in unpaid
federal taxes in fiscal year 2004 using the FPLP if all PACER
contractor payments could be matched against tax debts in TOP.
Legal Requirements and IRS Policy Decisions Contribute to the Levy
Collection Gap:
The actual collection of unpaid federal taxes from the levy program
does not approach our maximum estimate largely because IRS excludes--
either for statutory or policy reasons--almost two-thirds of unpaid
federal taxes from potential levy collection. Since we last reported on
DOD contractors that abused the federal tax system,[Footnote 33] IRS
has added about $28 billion in unpaid federal taxes to the levy program
from categories it formerly excluded (from its total population of all
tax debts). Despite these efforts, the amount that is excluded from the
levy program is significant. Our analysis of all tax debt recorded by
IRS--$269 billion[Footnote 34] in unpaid taxes--including amounts owed
by civilian contractors, indicates that $171 billion was excluded from
potential levy collection as of April 2005. For the civilian
contractors in fiscal year 2004, these exclusions accounted for over 80
percent of the levy collection gap. As shown in figure 4, $71 billion
(26 percent) of all unpaid federal taxes are excluded from the levy
program as a result of statutory requirements, while another $100
billion (37 percent) of unpaid federal taxes are excluded due to IRS
policy decisions, leaving approximately $98 billion (37 percent)
potentially subject to collection through the levy program. While the
exclusion of unpaid federal taxes from the levy program is justified
depending on the circumstances, it nevertheless results in the loss of
potentially hundreds of millions of dollars in tax collections from the
levy program.
Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005:
[See PDF for image] - graphic text:
Pie chart with three items.
Policy exclusions: $100 billion: 37;
In levy program: $98 billion: 37%;
Statutory exclusions: $71 billion: 26%.
Source: GAO analysis of unaudited IRS data as of April 2005.
[End of figure]
In addition to not sending the majority of unpaid federal taxes to the
levy program, FMS records indicate that as of September 30, 2004, about
70 percent of the unpaid taxes that IRS submitted to TOP had not yet
completed the collection due process requirements necessary to allow
the levying of payments to begin. As a result, only a small portion of
unpaid federal taxes is available for immediate levy. We will examine
in detail in a later report the accuracy and reasonableness of the IRS
exclusions and IRS's applications of those exclusions. What follows is
a more detailed description of the amounts and types of unpaid taxes
excluded from the FPLP for statutory and policy reasons, as well as a
detailed discussion of the limitations associated with much of the
unpaid federal taxes that are referred to the FPLP.
A Substantial Portion of Unpaid Federal Taxes Are Legally Excluded from
the Levy Program:
According to IRS records, as of April 2005, IRS had coded about $71
billion of unpaid federal taxes as being legally excluded from the levy
program. As shown in figure 5, IRS records indicate that bankruptcy and
taxpayer agreements--including installment or offer in compromise
(OIC)[Footnote 35] agreements--each account for about a quarter of all
statutory exclusions. Another $27 billion (38 percent) of the $71
billion in statutory exclusions is due to IRS not having completed all
initial taxpayer notifications required by law before a tax debt could
be referred to TOP--these are cases that IRS refers to as being in
notice status.
Figure 5: IRS Statutory Exclusions as of April 2005:
[See PDF for image] -graphic text:
Pie chart with four items.
Notice status: $27 billion: 38%;
Installment or OIC: $20 billion: 28%;
Bankruptcy: $17 billion: 24%;
Other: $7 billion: 10%.
Source: GAO analysis of unaudited IRS data as of April 2005.
[End of figure]
For tax debt in notice status--the first phase of IRS's collection
process--IRS sends a series of up to four separate notices to tax
debtors asking them to pay their tax debt. Upon receipt of each of the
notices, the debtors have a minimum of 30 days to respond in various
ways:
* disagree with IRS's assessment and collection of tax liability and
appeal the tax debt;
* negotiate with IRS to set up an alternative payment arrangement, such
as an installment agreement or an offer in compromise;
* apply to IRS for a hardship determination, whereby tax debtors
demonstrate to IRS that making any payments at all would result in a
significant financial hardship; or:
* elect to pay off the debt in full.
Each time the debtor responds to a notice, the matter must be resolved
before IRS can proceed with further notices or other collection
actions. For example, IRS must determine whether to accept or reject an
installment agreement or determine that the tax debtor is in financial
hardship before proceeding with the collection process. During this
entire notice phase, IRS is required to exclude the tax debt from the
levy program. IRS does not begin further collection action, for
example, the unpaid federal taxes are excluded from levy, until the
series of initial notifications are complete. IRS also sends out an
annual notification letter requesting payment of the unpaid federal
taxes.
IRS Policy Decisions Exclude Many Tax Debts from the Levy Program:
In addition to legal restrictions, IRS makes policy and operational
decisions that exclude about $100 billion in unpaid tax debts from the
levy program. Categories of unpaid tax debts IRS has coded as being
excluded due to policy decisions include those of tax debtors with
financial hardship,[Footnote 36] tax debtors working with IRS to
voluntarily comply, and tax debtors under active criminal
investigation. Figure 6 shows that slightly over half ($51 billion) of
all policy exclusions are due to IRS's determination that the tax
debtor is in financial hardship. Another 40 percent ($40 billion) of
the policy exclusions include tax debtors who are deceased and those
tax debtors that have filed appeals, claims, or amended returns. About
7 percent ($7 billion), referred to as tax administration exclusions,
is excluded from the levy program because an IRS official is working to
encourage the affected tax debtor to voluntarily pay the federal taxes
owed. About 2 percent ($2 billion) are excluded due to active criminal
investigations.
Figure 6: IRS's Policy Exclusions from the Levy Program as of April
2005:
[See PDF for image]
[End of figure]
Since our 2004 report on DOD contractors who abuse the tax
system,[Footnote 37] in which we recommended that IRS change or
eliminate policies that prevent businesses and individuals with federal
contracts from entering the levy program, IRS has taken specific
actions to include more tax debt in the levy program. Specifically, IRS
submitted an additional $28 billion to the levy program by removing
many of the systemic exclusions for cases being actively pursued by IRS
officials for collection (i.e., those excluded for tax administration
purposes).[Footnote 38] As a result of these and other improvements
(including DOD submitting more of its payments in the levy program),
collections from contractor payments under the levy program increased
over 200 percent in fiscal 2004 over fiscal 2003. Collections continued
to increase in the first half of fiscal year 2005.
Our past audits have indicated that IRS records contain coding errors
that affect the accuracy of taxpayer account information--including
exclusion categories. While we did not evaluate the appropriateness of
the exclusion categories in this report, the categories used by IRS are
only as good as the codes IRS has input into its systems.[Footnote 39]
In our previous work on DOD contractors with tax debt, we found that
inaccurate coding at times prevented both IRS collection action and
cases from entering the levy program. Therefore, the effective
management of these codes is critical because if these exclusion codes
(such as codes identifying a contractor as being in bankruptcy or
having an installment agreement) remain in the system for long periods,
either because IRS delays processing taxpayer agreements or because IRS
fails to input or reverse codes after processing is complete, cases may
be needlessly excluded from the levy program.
Most Tax Debt IRS Submits to the Levy Program Is Not Legally Ready for
Levy:
FMS records indicate that as of September 30, 2004, about 70 percent of
the tax debt IRS sent to the levy program is not available for
immediate levy because IRS has not completed all the necessary legal
notifications before the levying of payments can begin. In addition to
the initial series of notice letters that are sent out at the beginning
of IRS's collection efforts, IRS is required to send the debtor an
additional notice of intent to levy that includes information regarding
the tax debtor's right to a hearing prior to levy action--also referred
to as a collection due process notice. Although the tax debtor has up
to 30 days to respond to this notice under the law, IRS has chosen to
wait 10 weeks before proceeding with collection actions, such as
levying. Until the due process notification and waiting period have
been completed, a tax debt may be submitted to TOP but is not subject
to immediate levy. For civilian contractors, IRS generally does not
initiate the collection due process notifications until FMS identifies
that the contractor is to receive a federal payment.
Once the debtor receives the notice of impending levy, IRS gives the
debtor up to 10 weeks to respond to the notice. As in the initial
notice process, the debtor can respond to IRS by disagreeing with IRS's
assessment (in this case, filing for a due process hearing),
negotiating with IRS to set up an alternative payment arrangement,
applying for a hardship determination, or making payment in full. If a
tax debtor does not respond to IRS and take advantage of those options
within the notification period, IRS will instruct FMS to start levying
future payments. The tax debt in the levy program is then coded for
immediate levy. For future payments, FMS will proceed with the
continuous levy by reducing each scheduled payment to the tax debtor by
15 percent--or the exact amount of tax owed if it is less than 15
percent of the payment--until the tax debt is satisfied.
Not having tax debt ready for levy results in the loss of millions of
dollars of tax revenue for the federal government. For example, for our
50 case studies we identified payments totaling $1.6 million in which
the TIN of the contractor matched an IRS tax debt, but no levy was
taken because IRS had not yet completed the collection due process
activities. This situation contributes to these contractors facing
little or no consequences for their abuse of the federal tax system.
IRS has an automated process in place by which, once a match is made
against a tax debt in the levy program, a due process notice is
automatically sent to the contractor. However, the payments made
between the time of the initial match and when IRS completes its due
process notification process--usually 10 weeks--cannot be levied and
the potential collections are lost to the federal government.
Additionally, if the tax debtor files for a due process hearing once it
receives the notice, the tax debt will continue to be excluded from
levy until the process--which could take months--is complete.
Prior to 1998, IRS was authorized to levy a payment immediately upon
matching a tax debt with a federal payment so long as the collection
due process notice had been sent. At that time, IRS did not have to
wait before proceeding with the levy. This allowed the levy program to
capture the payment before it was made to preserve the government's
right to the payment while providing the contractor a postlevy due
process. However, the IRS Restructuring and Reform Act of 1998 requires
that debtors be afforded an opportunity for a collection due process
hearing before a levy action can take place. To comply with this
provision, IRS has chosen to wait a minimum of 10 weeks for the tax
debtor to respond to the collection due process notice. However, IRS's
10-week waiting period causes the federal government to miss levying
some contractor payments.
IRS has acknowledged that the delay in initiating the due process
notice can result in lost collections and is investigating ways to
begin the process earlier. The joint task force established after our
previous audit has supported making the due process for the FPLP a
postlevy process.[Footnote 40] This would allow IRS to levy payments
when first identified and provide contractors with procedural due
process remedies afterwards. To expedite the notification, IRS
officials stated that they had begun matching new DOD contracts valued
at over $25,000 against tax debt and sending out collection due process
notifications at that time rather than waiting until payments are made.
To address this same issue, the task force is also exploring avenues to
combine the collection due process notice with the last of its initial
notification letters sent to tax debtors. This would allow IRS to have
all tax debt legally ready for levy prior to it being sent to TOP to be
matched against federal payments. We fully support the task force's and
IRS's efforts to increase the amount of tax debt that is ready for
immediate levy.
Lack of FMS Oversight and Proactive Management Further Contribute to
the Levy Collection Gap:
FMS has contributed to the tax levy collection gap by not taking a
proactive stance in overseeing and managing the levy program. GAO's
Standards for Internal Controls in the Federal Government considers a
positive control environment--which includes the establishment of
mechanisms to monitor or oversee program operations--to be the
foundation for all other standards. For FMS, such management control
and oversight is critical in its role as the federal government's debt
collector and chief money disburser. However, because of a lack of
oversight, FMS did not detect and have agencies correct obviously
inaccurate information for tens of billions of dollars in payments to
contractors, and therefore was not able to match these payments against
tax debts for potential levy. Further, because of a lack of proactive
management, FMS did not send tens of billions of dollars more in
payments to the levy program. We estimate that these deficiencies
resulted in at least $50 million in lost levy collections from civilian
agency contractors during fiscal year 2004.[Footnote 41] Table 1
provides a breakdown of the deficiencies that result in payments not
being subject to levy. Further discussion of these deficiencies will be
provided in detail later in this report.
Table 1: Payments Not Matched against Tax Debts for Potential Levy:
Dollars in billions.
Cause of payment not being levied: Payments submitted to TOP that could
not be levied: Payments where the agency payment station has not been
loaded in TOP;
Amount excluded: $40.
Cause of payment not being levied: Payments submitted to TOP that could
not be levied: Payments containing blank or obviously inaccurate TINs;
Amount excluded: $17.
Cause of payment not being levied: Payments submitted to TOP that could
not be levied: Payments containing blank or invalid names;
Amount excluded: $4.
Cause of payment not being levied: Payments submitted to TOP that could
not be levied: Payments containing invalid payment types;
Amount excluded: $5.
Cause of payment not being levied: Payments FMS does not submit to TOP:
Certain categories of payments (at least $26 billion in certain types
of payments and an unknown amount in Fedwire payments[A]);
Amount excluded: Unknown amount.
Cause of payment not being levied: Payments FMS does not submit to TOP:
Payments to individuals;
Amount excluded: $2.
Source: GAO analysis of FMS data.
Notes: The exclusion categories above cannot be added together to
derive the total amount of excluded payments because many payments had
multiple deficiencies, each of which would have prevented the payment
from being levied. For example, some payments without TINs also have
invalid names, and some payments originating from agency payment
locations that were not entered into the TOP database were also payment
categories FMS was not sending to the levy program.
[A] During fiscal year 2004, Fedwire disbursed $191 billion, some of
which was to contractors. FMS does not maintain detailed historical
records and could not determine the value of contractor payments paid
with Fedwire.
[End of table]
In addition to these deficiencies, FMS also faces design challenges in
the levy program that limit its effectiveness at collecting unpaid
taxes. These challenges include the difficulty in matching the name of
the contractor recorded in the payment files to the name recorded in
IRS's tax records and the difficulty in levying vendors paid with
government purchase cards. FMS also has not implemented a provision of
the American Jobs Creation Act of 2004, which allows the federal
government to levy up to 100 percent of payments to contractors with
unpaid federal taxes.
FMS Did Not Include All Agency Payments in the Levy Program:
FMS has not updated its TOP database to capture payments from about 150
agency paying stations,[Footnote 42] resulting in $40 billion of fiscal
year 2004 civilian agency contractor payments being excluded from
potential levy. Although effective internal control would generally
include oversight of key agency functions, FMS did not perform the
management oversight necessary to identify that a significant portion
of all its disbursements were not included in the levy program. Of the
$40 billion not sent to TOP, we determined that approximately $9
billion in payments were made to civilian contractors with tax debts,
none of which could be levied.
Federal agencies may have multiple offices or locations that perform
accounting for and preparation of payment information, referred to as
agency payment locations or paying stations. For a payment to be
matched against tax debts for the purpose of levy, the paying station
from which the payment originates needs to be programmed into the TOP
database. If a paying station is not in the TOP database, TOP considers
that location to be excluded from the levy program, and thus payments
from that location will not be matched against unpaid federal taxes for
potential levy. The approximately 150 paying stations not included in
TOP are paying stations for portions of a majority of federal
departments, including the Departments of Homeland Security, the
Interior, Justice, State, the Treasury, and Health and Human Services.
An FMS official stated that at the time FMS implemented TOP in the
1990s, it had a centralized monitoring system to verify that payments
from all payment locations were included in TOP. According to the
official, after the initial group of paying units was incorporated into
TOP, FMS did not take steps to ensure that the TOP database was up to
date and that payments from new payment locations were incorporated
into TOP. FMS was unaware that a large percentage of its disbursements
were being excluded from potential levy. Since we brought the problem
to their attention, FMS officials stated that efforts are under way to
update TOP for the paying stations we identified as being excluded from
the levy program.[Footnote 43] The officials also stated that they plan
to reinstate the centralized monitoring to ensure that paying stations
are updated in TOP so that payments from these stations would be
available for potential levy.
FMS Disbursed Payments to Contractors without Proper TINs:
During fiscal year 2004, FMS disbursed over $17 billion in payments to
civilian agency contractors without TINs or with obviously inaccurate
TINs. Valid TIN information is critical to the levy program[Footnote
44] because payments lacking this information cannot be matched against
tax debts. The DCIA[Footnote 45] requires executive agencies to obtain
TINs from contractors and to include TINs on certified payment
vouchers, which are submitted to Treasury.[Footnote 46] Without a
proper TIN, payments cannot be levied.
We found that payment records with blank or obviously inaccurate TINs
in the TIN fields are prevalent in the payment files submitted to FMS
by some agencies. For example, over half of payments at one agency and
over three-quarters of payments at another agency were made to
contractors that had blank or obviously erroneous TINs, such as TINs
made up of all zeros or all 9s. While certain vendors are exempt from
the requirements to have a TIN, the exemptions are rare and are
generally limited to foreign companies providing goods and services to
federal agencies in a foreign country or companies performing
classified work. However, FMS does not gather information to determine
whether the payments to contractors without TINs or with obviously
inaccurate TINs are exempt from the TIN requirement or that all
nonexempt payments include TINs. FMS officials stated that the
responsibility for gathering and submitting TIN information was solely
that of the paying agency. In subsequent audit efforts, we will
evaluate selected agencies' controls over obtaining and submitting TIN
information for all nonexempt payments.
FMS officials stated that FMS tabulates payment records with obviously
inaccurate TINs by agency[Footnote 47] to compile a monthly TIN
Compliance Report. This report is used to monitor agencies that send in
payment requests with obviously inaccurate TINs.[Footnote 48] According
to FMS officials, in cases of significant noncompliance, FMS encourages
agencies to send payment files with valid TINs. However, FMS does not
enforce the TIN requirement by rejecting agency payments without TINs
or requiring the agencies to certify that the payments not containing
TINs meet one of the TIN exclusion criteria. As a result, agencies
continue to submit payment requests without TINs, which cannot be
levied to collect unpaid federal taxes.
We found that some civilian agency contractors without TINs or with
obviously inaccurate TINs in the agency payment files received payments
during fiscal year 2004 and had unpaid federal taxes. For example, FMS
paid about $700,000 to one contractor with an invalid TIN. Based on
investigative work, we were able to determine that this contractor had
failed to pay all its payroll taxes and owed more than $50,000 in
unpaid taxes. Had the payment file contained a TIN and if the tax debt
were subject to immediate levy, the government could have collected the
full amount of unpaid taxes from this contractor during fiscal year
2004.
FMS Made Disbursements to Contractors without Proper Names:
FMS made disbursements of nearly $3.8 billion in fiscal year 2004 to
contractors whose payment files did not contain the name of the
contractor receiving the payment. We found that instead of the
contractor's name, the disbursement file name field was either blank or
contained only numeric characters.[Footnote 49] The lack of a name on
the payment file does not prevent the payment from occurring because
FMS made these disbursements electronically via direct deposit into the
contractors' bank accounts. However, valid name information is critical
because the levy program requires a match between both the name and TIN
for a levy to occur.[Footnote 50] The lack of a proper name could have
been detected if FMS had conducted a cursory review of the payment
files submitted by the agencies.
For example, our review readily identified that most of the payment
files submitted by the State Department did not contain valid
contractor names. In addition, about $3.2 billion of the nearly $3.8
billion we identified as payments made to contractors without names in
the payment files were made on behalf of the State Department. Until we
brought the matter to their attention, senior officials at both the
State Department and FMS were not aware that the State Department's
contractor payments did not contain valid names. At our request, a
State Department official investigated and found that the department's
payment systems did contain valid names but that a programming error
resulted in the wrong field being sent to FMS as the name field. The
official told us that the error in the payment file is not new because
the structure of the payment file sent to FMS had remained the same
since the 1980s. Once we brought this to the attention of State
Department officials, they were quickly able to identify corrective
actions, and according to the State Department, they have since
corrected the deficiency.
Our analysis of FMS payment data found that FMS made disbursements
without contractor names, totaling approximately $400 million, to about
2,000 companies that had about $370 million in unpaid federal taxes.
FMS's failure to detect and correct missing names had a direct impact
on the levy program. For example, one contractor with unpaid taxes
received from the State Department payments totaling over $400,000,
which could not be levied because of the missing name. The same
contractor also received payments from other civilian agencies.
However, because the contractor's name was included in the payment
files from the other agencies, the levy program collected over $50,000
from those payments. If FMS or the State Department had identified and
corrected the name problem, an additional $60,000 in unpaid federal
taxes from this contractor could have been collected through the levy
program.
FMS Made Payments without Proper Payment Type Codes:
FMS disbursed $5 billion in payments using checks based on agency-
submitted payment files that did not contain data in the payment type
field during fiscal year 2004. FMS uses the payment type field in the
agency-submitted payment files to determine if the payment is required
to be included in the levy program. If a payment file record has a
blank payment type field, it is not matched in the levy program to
collect unpaid federal taxes. As a result, none of the $5 billion in
payments we identified as having a blank payment type field could have
been levied to collect the contractors' unpaid federal taxes. FMS
lacked the oversight to detect that the payment files submitted by
agencies were not adequately coded. After we brought this to
management's attention, an FMS official stated that FMS planned to
establish a new centralized program to monitor the completeness of
agency information.
FMS Has Not Taken Action to Include All Categories of Contractor
Payments in the Levy Program:
FMS has not been proactive in including many categories of payments in
the levy program, and has therefore kept tens of billions of dollars in
contractor payments from being subject to potential levy collection.
FMS uses several payment mechanisms to make its disbursements. FMS
payment mechanisms (payment categories) include what it refers to as
type A, type B, which includes Automated Clearing House-Corporate Trade
Exchange (ACH-CTX), and Fedwire.[Footnote 51] However, FMS has only
taken action to include a portion of type B payments in the levy
program. FMS has not taken action to include the other categories of
payments due to what it considers to be programming limitations.
Therefore, none of those payments can be levied to collect unpaid
federal taxes.
Although it is responsible for the levy program, FMS also could not
quantify the magnitude of federal contractor payments that it was not
sending to the levy program, nor could FMS estimate the amount of levy
collections it was missing because it had not included all payment
categories in the program. FMS officials estimated that FMS paid about
$11 billion in contractor payments via ACH-CTX in fiscal year 2004, and
our analysis identified at least $15 billion in type A contractor
payments.[Footnote 52] The combined amount of those two categories--
$26 billion, though likely understated--represents almost 11 percent of
all contractor disbursements recorded in FMS's PACER database. In
addition, FMS disbursed approximately $191 billion[Footnote 53] in
Fedwire payments, but FMS could not identify the value of Fedwire
contractor payments that were not sent to the levy program.
Type A Payments:
FMS officials stated FMS had not included type A payments in the levy
program because it is waiting for a new disbursement system to be
deployed. Type A payments are payments whereby the agency certifies the
payment in the same file that contains detailed payment
information.[Footnote 54] Although FMS had performed some preliminary
studies in 2001 regarding how to send type A payments to TOP, officials
were unable to provide information regarding the cost of making system
corrections.[Footnote 55] At that time, FMS was developing a new
payment system that it estimated would be completed as early as 2003
and therefore decided not to make the system changes. However, at the
time of our audit, the new system was still not fully deployed.
Consequently, over the last 4 years the federal government has lost the
collections that could have been levied from those payments. FMS
officials stated that FMS is continuing to focus on completing the
deployment of a new disbursement system, which it now estimates will be
fully operational in 2006, rather than including type A payments in its
current system. FMS tentatively plans to incorporate type A payments
into TOP in calendar year 2006 when its new system is scheduled to be
operational.
ACH-CTX Payments:
FMS officials stated that FMS does not send ACH-CTX payments to TOP for
levy. According to FMS officials, ACH-CTX can be used to pay multiple
invoices to a single contractor. However, the structure of the ACH-CTX
payments requires that the total payment amount disbursed to the
contractor match exactly the total of the invoices that the payment is
to cover. If a levy were to take place, the total payment amount would
differ from the total amount of the invoices that support the payment.
Consequently, FMS officials stated that they cannot levy a portion of
the payment. Officials stated that although they could not separately
identify them in the PACER database, FMS made about $11 billion in ACH-
CTX payments to contractors during fiscal year 2004.
FMS officials stated they had not developed an implementation plan or
timeline to incorporate ACH-CTX contractor payments into the levy
program.
Fedwire Payments:
As with type A payments, FMS officials stated that FMS is currently
focused on completing a new disbursement system prior to incorporating
Fedwire payments--payments requiring same-day settlement--into TOP. FMS
officials recognized that Fedwire payments, as a whole, are not
specifically exempt from levy, though individual Fedwire payments may
be exempt. FMS officials stated that the decision to exclude Fedwire
payments from the levy program was also based on the limited time
window FMS has to send Fedwire payments to the Federal Reserve and the
operational and system changes necessary to send those payments to
TOP.[Footnote 56] FMS's TOP implementation plan, dated January 2005,
called for incorporating Fedwire payments into TOP in calendar year
2007, over 10 years after DCIA first required the establishment of a
centralized offset program. However, FMS officials recently informed us
that they are going to study the costs of submitting Fedwire payments
to TOP and may not attempt to include them in the levy program. As a
result, FMS officials stated that they no longer have a timeline to
incorporate Fedwire payments into TOP. We recognize that submitting
Fedwire to the levy program could result in a delay in disbursement,
but until FMS fully explores and identifies options for submitting
Fedwire payments through TOP, potentially billions of dollars may be
disbursed to contractors with unpaid federal taxes without the
possibility of being levied.
FMS Does Not Offset Contractor Payments to Collect Tax Debts of
Individuals:
Because payment systems do not identify whether the payment is being
made to a business or individual, FMS does not offset contractor
payments to collect the unpaid federal taxes owed by individuals. Our
analysis determined that civilian agency contractors with unpaid
federal taxes who are individuals received payments totaling nearly $2
billion while owing over $290 million in unpaid federal taxes.
Agency payment records do not distinguish payments made to individuals,
such as those who are self-employed or sole proprietors, from payments
made to businesses. IRS decided that due to the lack of distinction
between these two types of payments in FMS's system and the possibility
of improperly levying payments, contractor payments should not be
levied to satisfy the unpaid federal taxes of individuals. According to
IRS, an improper levy could occur because a business's TIN could be the
same as an individual's Social Security number (the individual's TIN).
According to FMS officials, IRS instructed FMS not to match any
contractor payments against unpaid federal taxes owed by individuals
for potential levy following discussions between FMS and IRS.
However, both FMS and IRS officials have indicated that the potential
risk of an improper levy is small. For a levy to occur, a match must
exist between the TIN and name in the payment files and the TIN and
name control in the tax debt file. FMS indicated it has performed a
study and found that only a small number of cases potentially have a
business TIN and name that would match with an individual's TIN and
name. After we met with IRS and FMS officials regarding this issue, IRS
directed FMS to begin levying contractor payments against tax debts
owed by individuals. FMS officials stated that they will need to make
system changes to implement this action.
FMS Faces Challenges in Addressing Other Program Limitations:
FMS faces management challenges in addressing certain limitations in
the levy program that result in reduced collections. Specifically,
almost $2 billion of contractor payments could not be levied due to
difficulties in matching both the name and TIN in the payment records
to the tax debt in the TOP database. Additionally, nearly $10 billion
in federal payments made via purchase cards to contractors are not
subject to levy because the government payment is made to the bank, not
the contractor doing business with the government. Finally, FMS faces
challenges in implementing a provision contained in the American Jobs
Creation Act of 2004, which provides for increasing the amount of levy
to a maximum of 100 percent of payments to contractors with unpaid tax
debts.
Limitations in TIN/Name Match Reduces Levy Collections:
Potentially thousands of payments are not levied every week because the
TINs and names from the payment records do not match against the names
and TINs in TOP for potential levy. Data from FMS's PACER and TOP
databases indicate that about $1.7 billion of payments made to
contractors with unpaid federal taxes in TOP could not be levied
because the control name supplied by IRS did not match the payee name
in PACER. As a result, none of these payments could be levied to
collect delinquent tax debt.
IRS provides TOP with both a TIN and a "control name" of both companies
and individuals with unpaid federal taxes. In general, the control name
is the first four characters of an individual's last name or the first
four characters of the business name. TOP analyzes the name in the
payment files to determine if it contains the IRS control name. If it
identifies the control name (first four characters of the IRS name)
anywhere within the name field of the payment file, TOP levies the
payment to collect the unpaid taxes. If the control name is not found
in the payment record's name field, TOP records the mismatch on a
report that it sends to IRS to identify the mismatches.
We reviewed an example of the report containing approximately 2,400
different payments that could not be levied to identify some of the
causes for the mismatches. We found that a number of payments were not
levied because the payments were made using an individual's name and
the business's TIN. The following hypothetical example based on an
actual case illustrates the difficulty in matching names under the levy
program. In one case, the payment was made to an individual doctor, J.
Doctor, MD. However, the TIN provided was to the doctor's practice,
Jenny Doctor, MD PA. For IRS, the control name of the business TIN was
"JENN." As a result, although the TIN of the payment matched the TIN of
the tax debt, the control name "JENN" did not appear within the payment
name "J Doctor." Because the names did not match, the payments to this
contractor were not levied.
After we brought this to FMS's and IRS's attention, IRS began working
with FMS to increase the number of control names it sends to TOP.
According to IRS officials, IRS is taking action to begin sending up to
10 additional business control names to FMS to be matched against
payment data.[Footnote 57] IRS officials believed that this should
increase the number of matches available under the levy program. IRS is
also evaluating additional changes to increase the number of name
controls that it sends to FMS for matching with payments to
individuals.
Billions of Dollars in Purchase Card Payments Are Not Levied:
Due to the structure of the credit card program, whereby payments are
made to the government purchase card bank and not directly to
contractors with unpaid tax debts, none of the $10 billion in purchase
card payments made during fiscal year 2004 were able to be offset or
levied. FMS officials have acknowledged the need to address those
challenges and stated that FMS has met with certain bank officials and
another federal agency regarding how to approach the issues. However,
they have not yet determined how to collect federal debts from
contractors paid with the government purchase card.
The Governmentwide Commercial Purchase Card Program was established to
streamline federal agency acquisition processes by providing a low-
cost, efficient vehicle for obtaining goods and services directly from
contractors. Governmentwide efforts to promote increased use of
purchase cards for small and routine purchases have dramatically
increased purchase card spending. As shown in figure 7, purchase card
expenditures by civilian agencies increased from nearly $3 billion in
fiscal year 1997 to nearly $10 billion in fiscal year 2004. The use of
purchase cards has accrued significant benefits to the federal
government; however, contractors receiving payments through purchase
cards are not currently subject to the levy program.
Figure 7: Purchase Card Expenditures by Civilian Agencies--Fiscal Years
1997-2004:
[See PDF for image]
[End of figure]
All purchase card payments are made to one of the five banks that issue
government purchase cards--Bank One, Bank of America, CitiBank, Mellon
Bank, or US Bank. In accordance with standard credit card payment
procedures, those banks are responsible for interfacing with Visa or
MasterCard and the contractor's bank to pay for the goods or services
provided. This payment process shields the identity of the contractor
that is ultimately paid by the civilian agency receiving the goods or
services from the levy program. Consequently, the disbursement file
contains only the name of the purchase card issuing bank and its TIN
and not the contractor that was actually doing business with the
government.
Without identifying the contractor doing business with the government,
the federal government is unable to collect federal debts from payments
to these contractors. To demonstrate the effect of payments to
contractors using the purchase card, we obtained the National
Aeronautics and Space Administration's (NASA) fiscal year 2004 purchase
card transactions and compared the contractors from which NASA
purchased goods and services to the IRS unpaid taxes database. During
fiscal year 2004, NASA used purchase cards to pay about 12,000
contractors nearly $80 million. According to IRS's data on unpaid tax
debts, over 750 of those contractors had about $440 million in unpaid
federal taxes. However, none of the purchase card payments made to
these contractors could be levied to collect the unpaid federal taxes.
In contrast, in analyzing the TOP database, we found that non-purchase
card payments made during fiscal year 2004 to 49 of these same
contractors were levied.
FMS recognizes purchase card payments as a significant problem for the
government's debt collection and lists the government purchase card
program among the payment streams that need to be incorporated into
TOP. FMS officials have stated they face both operational and legal
issues to incorporate such payments into TOP and that the process of
paying the purchase card issuing bank may prevent FMS from using TOP to
collect from contractors paid with purchase cards. Until the challenge
is thoroughly examined by FMS and IRS and solutions are identified, the
federal government will continue to be unable to levy or otherwise
collect from tens, if not hundreds, of billions of dollars in payments
to civilian contractors.
Statutory Authorization for Increased Levy Has Yet to Be Implemented:
FMS has not fully implemented a new provision, authorized by Congress
in 2004, that increased the maximum levy percentage on contractor
payments. In October 2004, Congress passed the American Jobs Creation
Act 2004 to increase the maximum continuous levy from 15 percent to up
to 100 percent of payments to contractors with unpaid taxes. The act
specifically increased the continuous levy on payments to vendors for
"goods and services" sold or leased to the government. According to
IRS, the legal language, which specified that goods and services be
subject to the 100 percent levy provision, excludes real estate, such
as rent payments, from the new levy requirement. This exclusion
presents significant implementation challenges for FMS because the
civilian agencies' payment systems cannot separately identify real
estate transactions from other contractor payments. Without the ability
to distinguish between these payments, FMS could not implement the new
law for civilian payments in such a way as to exempt real estate
transactions from the 100 percent levy. FMS officials stated they had
recently been able to implement the 100 percent levy provision for
certain DOD payments, but were unable to do so for their own
disbursements. According to FMS and IRS officials, a specific
legislative change is being sought to make real estate payments subject
to the new 100 percent levy requirement.
We estimate that increasing the levy percentage from 15 to 100 could
cause a dramatic increase in collections. We performed a separate
analysis of our maximum levy potential estimate as if there were no
legal or administrative impediments--estimated at $350 million for a 15
percent levy--and found that if a 100 percent levy rate had been
applied in fiscal year 2004, FMS could have collected as much as $800
million from civilian contractors if all payments had been matched
against all tax debt.[Footnote 58]
Civilian Agency Contractors Involved in Abusive and Potentially
Criminal Activity Related to the Federal Tax System:
We found abusive and potentially criminal activity related to the
federal tax system for all 50 cases that we audited and investigated.
The case studies were selected from the population of about 33,000
contractors that were receiving federal payments during fiscal year
2004 and owed over $3.3 billion in unpaid federal taxes as of September
30, 2004, using a non-probability selection approach. The basis for
selecting each of the case study contractors was that they all had
unpaid taxes totaling more than $100,000 and federal payments totaling
more than $10,000. When our audit and investigative work indicated that
the 50 contractors we originally selected were related to other
entities--defined as entities sharing the same owner or officer or
common addresses--we performed additional work to determine whether the
related entities and the owners owed tax debts as of September 30,
2004, and received other federal payments during fiscal year
2004.[Footnote 59] While we were able to identify some related
entities, in some cases other related entities might exist that we were
not able to identify. In addition, we found that 3 of the 50 case
studies involve owners or officers who had been either convicted or
indicted for non-tax-related criminal activities, or were under IRS
investigation. We are referring the 50 cases detailed in this report to
IRS so that a determination can be made as to whether additional
collection action or criminal investigations are warranted. For more
information on our criteria for the selection of the 50 case studies,
see appendix I.
Nature of Business for Case Study Contractors:
The federal government is a large and complex organization, consisting
of 15 cabinet-level agencies--one defense and 14 civilian agencies--and
numerous independent agencies, administrations, and other entities that
collectively spent more than $2.5 trillion in fiscal year 2004.
Civilian agencies operate throughout the country and in more than 250
foreign countries, carrying out a multitude of missions and programs.
Because civilian agencies contract for a large variety of goods and
services to carry out functions as diverse as guarding the nation's
borders, providing medical benefits to veterans, administering justice,
and exploring space, it is not surprising that civilian agency
contractors with unpaid taxes operate in a large number of industries.
The industries are typically wage-based, while the 50 case studies are
mostly small, many of them closely held by the owners and officers.
Table 2 shows a breakdown for the 50 contractor case studies by the
type of goods and services provided.
Table 2: Types of Goods and Services Provided by Civilian Agency
Contractors in Case Studies:
Type of business: Building maintenance;
Number: 6.
Type of business: Communications;
Number: 2.
Type of business: Consulting;
Number: 2.
Type of business: Health care;
Number: 12.
Type of business: Manufacturing;
Number: 5.
Type of business: Personnel services;
Number: 2.
Type of business: Professional services;
Number: 6.
Type of business: Sanitation;
Number: 2.
Type of business: Security services;
Number: 2.
Type of business: Transportation;
Number: 3.
Type of business: Other;
Number: 8.
Type of business: Total;
Number: 50.
Source: GAO analysis of civilian agency and public records.
[End of table]
Examples of Abusive or Potentially Criminal Activity Related to the
Federal Tax System by Businesses:
Our audits and investigations of the 50 case study business contractors
showed substantial abuse and potential criminal activity related to the
tax system. All 48 of the contractors in our case studies that file
business tax returns had tax periods in which the contractors withheld
taxes from their employees' paychecks but did not remit them to
IRS.[Footnote 60] Rather, these companies diverted the money to fund
business operations, for personal gain, or for other purposes. As
discussed earlier in this report, businesses with employees are
required by law to remit employment taxes to IRS or face potential
civil or potential criminal penalties. Specifically, the act of
willfully failing to collect or pay any tax is a felony while the
failure to comply with certain requirements for the separate accounting
and deposit of withheld income and employment taxes is a misdemeanor.
Six of the case study businesses involved owners or officers who were
"multiple abusers," those involved with a group of related companies
that owed taxes. The owners or operators of some of these businesses
not only failed to have their businesses pay taxes, but several also
failed to pay their own individual income taxes, with three individuals
having more than $100,000 in unpaid individual income taxes. The
related businesses involving these multiple abusers repeatedly failed
to pay taxes. For example, several groups of related businesses owed
taxes for more than 50 tax periods--one group of about 20 businesses
owed taxes for over 300 tax periods. One case study business owner
(whose businesses received more than $1 million in federal payments in
fiscal year 2004) has a pattern of opening a business, failing to remit
at least some payroll taxes, closing the business, and then opening a
new business to repeat the same pattern. The owner repeated this
pattern for at least three businesses over nearly 20 years.
Table 3 highlights 10 case studies with unpaid payroll tax debts. Nine
of the 10 cases have unpaid payroll taxes of 10 tax periods or more.
The amount of unpaid taxes associated with these 10 cases ranged from
nearly $400,000 to $18 million--6 businesses owed more that $1 million
in unpaid federal taxes. Our investigations revealed that some owners
have substantial personal assets--including commercial real estate, a
sports team, or multiple luxury vehicles--yet their businesses fail to
remit the payroll taxes withheld from employees' salaries. Several
owners owned homes worth over $1 million--one owner had over $3 million
and another had over $30 million in real estate holdings. Others
informed our agents that they diverted payroll taxes they did not remit
to IRS for personal gain or to fund their business, while others were
engaged in activities that indicated potential diversion of payroll
taxes for personal gain. For example, one owner transferred the payroll
taxes he withheld from employees to a foreign bank account and was
using the money to build a home in that country, while another
contractor doubled the salary of an officer in a 5-year period to over
$750,000 at the same time that the business failed to remit payroll
taxes and declared losses of more than $2 million. Another purchased a
number of multimillion-dollar properties and an unrelated business at
the same time that his many businesses owed taxes, while yet another
owner purchased, within a 2-year period, four vehicles totaling nearly
$200,000 after the owner's business started accumulating unpaid tax
debts.
IRS has taken some collection actions against the contractors in our
case studies, but has not been successful at collecting the unpaid
taxes. For example, we found that in all 10 cases shown in table 3, IRS
has assessed trust fund penalties on the owners or officers for willful
failure to remit to the government amounts they withheld from their
employees' salaries.[Footnote 61] However, as we have previously
reported, IRS seldom collects on trust fund penalties. As of September
30, 2004, the balance on the trust fund penalties owed by the owners or
officers of the 10 case studies was over $19 million. IRS has also
taken some collection actions against all 10 contractors, such as
placing liens on the assets of the companies or owners. Although some
of the owner/officers had substantial assets, including expensive homes
and luxury automobiles, the information we reviewed did not identify
that IRS has performed seizures of these assets. However, we identified
that 3 of the 10 owners or officers had been convicted or indicted for
non-tax-related offenses or were under active IRS investigation for tax-
related offenses.
Table 3: Civilian Agency Contractors with Unpaid Federal Taxes:
Case study: 1; Goods, services, or nature of work and agencies to which
they were provided: Health care related services to Departments of
Veterans' Affairs and Health and Human Services;
Fiscal year 2004 FMS payments[A]: Over $300,000;
Unpaid federal tax amount[B]: Over $18 million;
Comments:
* Business is affiliated with many other health care-related
facilities, including nursing and convalescent homes;
* Taxes owed by related entities cover over 80 tax periods;
* Since failing to fully remit all the taxes withheld from employees'
paychecks starting in the late 1990s, the owner purchased multimillion-
dollar properties, an unrelated business, and a number of luxury
vehicles;
* Other real estate holdings include residential and commercial
properties valued in the tens of millions of dollars.
Case study: 2; Goods, services, or nature of work and agencies to which
they were provided: Waste collection services to the Department of
Justice;
Fiscal year 2004 FMS payments[A]: Over $700,000;
Unpaid federal tax amount[B]: Over $2 million;
Comments:
* Company and several other entities share the same address or
executives;
* Taxes owed by related entities cover over 40 tax periods and include
individual income tax debt of one owner;
* Since the late 1990s, about the same time that the company failed to
pay all of its payroll taxes, the company regularly withdrew cash from
its bank accounts. These withdrawals totaled several million dollars;
* Since failing to fully remit all the payroll taxes withheld from
employees' paychecks, one owner sold his residence for more than $1
million.
Case study: 3; Goods, services, or nature of work and agencies to which
they were provided: Health care related services to the Department of
Veterans Affairs;
Fiscal year 2004 FMS payments[A]: Nearly $250,000;
Unpaid federal tax amount[B]: Over $9 million;
Comments:
* Business is affiliated with three other related companies;
* Taxes owed by related entities cover over 60 tax periods and include
the owner's individual income tax debt totaling hundreds of thousands;
* One entity is under IRS investigation. In addition, owner is
suspected of fraudulent banking activity;
* Since failing to pay taxes, officer spent tens of thousand of dollars
on gambling; and one of the three companies had multiple withdrawals of
cash from bank accounts--each totaling tens of thousands of dollars.
Case study: 4; Goods, services, or nature of work and agencies to which
they were provided: Waste collection services to the Department of
Veterans Affairs;
Fiscal year 2004 FMS payments[A]: Over $10,000;
Unpaid federal tax amount[B]: Nearly $13 million;
Comments:
* Company is one of almost 20 related entities, all of which owed
unpaid taxes--primarily payroll taxes;
* Taxes owed by related entities cover over 300 tax periods;
* The owner also owns a residential property located near a golf course
and other commercial properties in several states with assessed value
of over $2 million.
Case study: 5; Goods, services, or nature of work and agencies to which
they were provided: Payroll and temporary employment services to the
Department of Housing and Urban Development;
Fiscal year 2004 FMS payments[A]: Over $1 million;
Unpaid federal tax amount[B]: Nearly $900,000;
Comments:
* Business related to three other entities;
* Taxes owed by two related entities cover over 20 tax periods;
* Some tax debts of remaining entities were not paid for so long that
IRS is now legally prohibited from seeking collection;
* The owner's history of delinquency stretches nearly 20 years and
covered multiple businesses. Specifically, the owner typically incurs
payroll taxes on one company, is assessed trust fund penalty on that
company but makes no or little payments, closes company, starts another
company, and repeats the same pattern;
* For example, the owner filed for bankruptcy protection in the late
1990s. In the early 2000s, after the court denied the owner's request
for bankruptcy protection, the owner closed the company and immediately
established a new business with a similar name at the same address that
provides the same services;
* The owner rents office space in an expensive area of a major
metropolitan city and purchased a luxury automobile at the same time
the company had filed for bankruptcy protection and was not remitting
all of the payroll taxes.
Case study: 6; Goods, services, or nature of work and agencies to which
they were provided: Health care related services to Department of
Veterans Affairs;
Fiscal year 2004 FMS payments[A]: Nearly $300,000;
Unpaid federal tax amount[B]: Over $10 million;
Comments:
* The company's delinquent taxes--primarily payroll taxes--cover 20 tax
periods from the late 1990s;
* IRS is investigating the company for potential criminal activity;
* Since failing to pay payroll taxes in late 1990s, an officer assessed
a trust fund violation purchased several vehicles totaling nearly
$200,000;
* Since the late 1990s, the company reported cumulative losses on its
tax returns totaling about $5 million;
* Despite these continued losses and accumulated tax debt, the company
is involved in a multimillion-dollar joint venture.
Case study: 7; Goods, services, or nature of work and agencies to which
they were provided: Security guard services to Departments of Homeland
Security and Veterans Affairs;
Fiscal year 2004 FMS payments[A]: Over $200,000;
Unpaid federal tax amount[B]: Over $400,000;
Comments:
* The company had not filed all required tax returns since the early
2000s, and had been delinquent in payroll taxes almost continuously
since the late 1990s;
* Delinquent tax debts cover over 25 tax periods and include the
owner's individual income taxes totaling tens of thousands of dollars.
In addition, the owner repeatedly failed to file personal income tax
returns;
* The owner diverted unpaid payroll taxes to a foreign bank account to
build a house overseas.
Case study: 8; Goods, services, or nature of work and agencies to which
they were provided: Consulting services to the Smithsonian Institution;
Fiscal year 2004 FMS payments[A]: Over $200,000;
Unpaid federal tax amount[B]: Over $1 million;
Comments:
* The business's unpaid federal taxes are primarily payroll taxes
incurred in late 1990s and early 2000;
* Unpaid tax debt balance covers more than 20 tax periods and includes
hundreds of thousands of dollars in individual income tax debts owed by
two officers;
* During the same period that tax debt was incurred, the company
declared large losses but doubled the salary of one officer to over
three-quarters of a million dollars;
* Officers own several luxury vehicles and multimillion-dollar
properties in exclusive areas of a major metropolitan area;
* The company is making payments on current installment agreement.
Case study: 9; Goods, services, or nature of work and agencies to which
they were provided: Armed security guard services to several agencies
including the Department of Justice and the Environmental Protection
Agency;
Fiscal year 2004 FMS payments[A]: About $500,000;
Unpaid federal tax amount[B]: Nearly $400,000;
Comments:
* Tax debt balance includes over $200,000 in payroll taxes owed for
almost 10 tax periods;
* In the early 2000s, company did not file income tax returns;
* In mid-2000s, an officer of the company was convicted for stealing
hundreds of thousands of dollars from the company;
* The owner is under indictment for embezzlement and money laundering.
Case study: 10; Goods, services, or nature of work and agencies to
which they were provided: Building maintenance, lawn and garden, and
sanitary services to Department of Transportation;
Fiscal year 2004 FMS payments[A]: Over $300,000;
Unpaid federal tax amount[B]: Nearly $400,000;
Comments:
* This business did not make any payroll tax deposits for several years
from the late 1990s through the early 2000s;
* Tax debt balance covers more than 30 tax periods and includes nearly
$100,000 in personal tax debt of the officer;
* The company is a chronic nonpayer of corporate tax debts and has not
made any voluntary income tax payments since the mid-1990s;
* The officer is also a chronic nonfiler of his individual income
taxes. In one of those years, the officer reported net income of about
$100,000 but paid no taxes.
Source: GAO analysis of civilian agency, IRS, FMS, public, and other
records.
Notes: Dollar amounts are rounded for the tax debt, estimated maximum
levy, and government payments. The nature of unpaid taxes for
businesses was primarily due to unpaid payroll taxes.
[A] Civilian agency vendor payments provided by FMS from its PACER
system.
[B] Unpaid tax amount as of September 30, 2004.
[End of table]
The following provides illustrative detailed information on several of
these cases.
* Case 1: This case includes many related companies that provide health
care services to the Department of Veterans Affairs, for which they
received over $300,000 in payments during fiscal year 2004. The related
companies have different names, operate in a number of different
locations, and use at least several other TINs. However, they share a
common owner and contact address. The businesses collectively owed more
than $18 million in tax debts--of which nearly $17 million is unpaid
federal payroll taxes dating back to the mid-1990s. IRS has assessed a
multimillion-dollar trust fund penalty for willful failure to remit
payroll taxes on each of two officers. During the early 2000s, at the
time when the owner's business and related companies were still
incurring payroll tax debts, the owner purchased a number of
multimillion-dollar properties, an unrelated business, and a number of
luxury vehicles. Our investigation also determined that real estate
holdings registered to the owner totaled more than $30 million.
* Case 2: This case comprises a number of related entities, all of
which provide waste collection and recycling services. These entities
received fiscal year 2004 payments from the Department of Justice
totaling over $700,000, about half of which is from purchase card
payments, while owing in aggregate over $2 million in tax debt. These
taxes date to the late 1990s and consist primarily of payroll taxes.
Despite the fact that the company reportedly used legally available
means to repeatedly block federal efforts to file liens against the
company, liens totaling more than $1 million exist against the company.
IRS has also assessed trust fund penalties against the two officers. At
the same time that the entities were incurring the tax debt, cash
withdrawals totaling millions of dollars were made against the
business's bank account. Further, since the company started owing
taxes, the owner had sold real estate valued at over $1 million. The
executives of these entities also drive late-model luxury or antique
automobiles. Recently, the company started to make payments on its
taxes.
* Case 3: This case includes several nursing care facilities, three of
which owed taxes--primarily payroll--totaling nearly $9 million. In
addition, an owner's individual income tax debt totaled more than
$400,000. One business provides nursing care services to the Department
of Veterans Affairs, for which it was paid over $200,000 during fiscal
year 2004. An officer of the company has been assessed a multimillion-
dollar trust fund penalty for willful failure to remit payroll taxes
and was recently arrested on fraud charges. Our investigative work
indicates that an owner of the company made multiple cash withdrawals,
each valued at tens of thousands of dollars, in the early 2000s while
owing payroll taxes, and that those cash withdrawals were used for
gambling. We further determined that cash transfers totaling over $7
million were made in a 7-month period in the early 2000s.
* Case 7: This contractor provided guard and armed security services to
the Department of Homeland Security and the Department of Veterans
Affairs, for which it was paid over $200,000 during fiscal year 2004.
This business has a history of noncompliance with federal tax laws.
Specifically, the business was consistently delinquent in paying its
taxes since the late 1990s and has not filed all its income and payroll
tax returns for a number of years in the late 1990s. The owner of this
business also has not filed individual income tax returns for a number
of years since the late 1990s. In the last 1-year period that the
business made payroll tax deposits, the business reported that it owed
nearly $80,000 in payroll taxes but made payments totaling less than
$4,000--about one-twentieth of the taxes owed. At the same time that
the owner withheld but failed to remit payroll taxes, the owner
diverted the money into a foreign bank account to build a house
overseas.
* Case 8: During fiscal year 2004, this company provided consulting
services to the Smithsonian Institution, for which it received over
$200,000. Starting in the late 1990s, the company did not remit to the
government all the money it withheld from its employees' salaries.
However, at about the time the company was failing to remit the taxes,
it nearly doubled one officer's salary to over $750,000. IRS assessed a
trust fund penalty on the officers of this company for willfully
failing to remit payroll taxes withheld from their employees' salaries.
Those officers own homes valued at millions of dollars in exclusive
neighborhoods in a large metropolitan area and several late-model
luxury vehicles.
Contractors Also Had Unpaid State or Local Tax Debt:
In addition to problems with paying federal taxes, contractors in at
least 9 of the 10 case studies had unpaid state and or local tax debt.
We determined that the amount and severity of the unpaid state and or
local taxes were significant enough for state and local tax authorities
to file liens against those contractors. As we will be reporting in a
related product, neither the states nor FMS has pursued potentially
beneficial agreements to authorize the levying of federal payments,
including contractor payments, to satisfy delinquent state tax
debts.[Footnote 62]
Levy Collection:
The 50 case studies we selected illustrate FMS's inability to collect
the maximum levy amount. Although we found that payments to a number of
contractors were not levied because IRS excluded their tax debts from
TOP for at least a part of fiscal year 2004 for statutory or policy
reasons, many others were not levied because of FMS's lack of effective
oversight or proactive management of the levy program. One case study
contractor in particular illustrated the problems associated with the
levy program that we discussed earlier in this report. This contractor
received $4 million during fiscal year 2004, but only about $600,000 of
those payments were levied. Of the remaining $3.4 million that was not
levied, about two-thirds was not levied because the tax debt was either
not referred to TOP or it was referred to TOP but it was still in the
notice process during the first 7 months of fiscal year 2004. The
remaining one-third was not levied because the name provided in the
payment files did not match the IRS control name in TOP or because
payments were made using one of its specialized mechanisms. We estimate
that if all the tax debt and all of the payments of the 50 case studies
were subjected to a levy of 15 percent, FMS could have collected about
$3.8 million in unpaid federal taxes in fiscal year 2004. In contrast,
FMS actually collected $240,000 from these case study contractors.
Conclusions:
In the current environment of federal deficits and rising obligations,
the federal government cannot afford to leave hundreds of millions of
dollars in taxes uncollected each year. However, this is precisely what
has been occurring with respect to the FPLP, which our work shows has
largely failed to approach its potential. The levy program has thus far
been inhibited from achieving its potential primarily because
substantial tax debt is not subject to levy and because FMS, the
nation's debt collector, has exercised ineffective oversight and
management of the program.
Further, by failing to pay taxes on their income or diverting the
payroll taxes withheld from their employees' salaries to fund business
operations or their own personal lifestyles, contractors with unpaid
tax debts effectively decrease their operating costs. The lower
operating costs provide these individuals and their companies with an
unfair competitive advantage over the vast majority of companies that
pay their fair share of 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, and the failure to
effectively enforce the tax laws against them encourages noncompliance
among other contractors as well. The federal government will continue
to lose hundreds of millions of dollars in tax collections annually
until actions are taken to send all payments to the levy program,
ensure that all payments have the information necessary to allow them
to be levied, and establish a proactive approach toward managing the
levy program.
Recommendations for Executive Action:
To comply with DCIA, further implement the Taxpayer Relief Act, and
support the federal government's efforts to collect unpaid federal
taxes, we recommend that the Commissioner of the Financial Management
Service take the following 18 actions:
* To obtain reasonable assurance that payments from all paying
locations are subjected to potential levy in TOP,
* update the TOP database to include payments from all agency paying
locations in TOP for potential levy and:
* develop and implement a monitoring process to ensure TOP's list of
agency paying locations is consistently updated.
* To obtain reasonable assurance that payment files contain a TIN for
each payment requiring a TIN,
* enforce requirements that federal agencies must include TINs on all
payment vouchers submitted to FMS for disbursement or expressly
indicate that the contractor meets one of the criteria that exempts the
contractor from providing a TIN and:
* develop and implement procedures to review payments submitted by
paying agencies to verify that each payment has either a TIN or a
certification that the contractor is exempt from providing a TIN.
* To obtain reasonable assurance that all payment files submitted by
agencies contain a contractor's name, develop procedures to:
* evaluate payment files to identify payments with blank or obviously
inaccurate name fields;
* notify agencies of deficiencies in payment files regarding blank or
obviously inaccurate name fields;
* collaborate with agencies submitting payment files with blank or
obviously inaccurate names in the name field, including the State
Department, to develop and implement procedures to capture the
contractors' names in the payment files; and:
* reject agency requests for payments with blank or obviously
inaccurate names.
* To obtain reasonable assurance that payment files contain a payment
type and thus, if appropriate, are subject to a levy,
* instruct all agencies that they must indicate a payment type on all
payments and:
* implement monitoring procedures to verify that all payments indicate
payment type.
* To obtain reasonable assurance that all categories of eligible
payments to contractors with unpaid federal taxes are subjected to the
TOP levy process,
* develop and implement procedures to submit type A payments to TOP for
potential levy,
* develop and implement procedures to submit ACH-CTX payments to TOP
for potential levy, and:
* develop and implement procedures to submit Fedwire payments to TOP
for potential levy.
* To collect unpaid taxes of individuals, make changes to TOP to levy
contractor payments to collect the unpaid federal taxes owed by
individuals.
* To ensure that more payments are matched against tax debt in TOP,
take actions necessary to incorporate IRS's expanded list of control
names into TOP.
* To address challenges of collecting unpaid taxes of contractors paid
using purchase cards, in conjunction with IRS, monitor payments to:
* assess the extent to which contractors paid with purchase cards owe
federal taxes and:
* assess alternatives available to levy or otherwise collect unpaid
taxes from those contractors.
* To address challenges associated with implementing the authorized
increase of the levy to 100 percent, work with IRS to determine steps
necessary to implement the increased levy percentage.
Finally, we recommend that the Commissioner of Internal Revenue
evaluate the 50 referred cases detailed in this report and consider
whether additional collection action or criminal investigations are
warranted.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Commissioner of Internal Revenue (see app. III) and the Commissioner of
the Financial Management Service (see app. IV).
Response from IRS and Our Evaluation:
In responding to a draft of our report, IRS agreed that continued
efforts are needed to improve and enhance the use of the levy program
as a tool to deal with contractors that abuse the tax system. IRS noted
that it had taken or was taking a number of actions toward this goal.
For example, IRS stated that it had begun, with DOD's assistance, to
issue collection due process notices to DOD contractors at the time of
contract award rather than after a contract payment is made, thereby
allowing IRS to levy more DOD contractor payments without delay. IRS
stated that it planned to expand this process to contractors at other
agencies later in 2005. IRS also stated that it is working to change
its notice process so that more debts can be ready for levy at the time
of inclusion in TOP. IRS reiterated the progress it has made to remove
systematic exclusions, resulting in an additional $28 billion in tax
debts being included in the FPLP, which we noted in our report. These
actions have resulted in the federal government collecting, in the
first 7 months of fiscal year 2005, $12.2 million in unpaid tax debts
from civilian contractors--a nearly threefold increase from the same
period in fiscal year 2004. IRS further stated that it would
continuously evaluate its policies so that it does not unnecessarily
exclude tax debts from the levy program.
IRS concurred with our finding that the matching of the TIN and name of
contractor payments against records of unpaid federal taxes could be
improved, and stated that it will begin sending a greater number of
control names--up to 10 variations of the contractor's name as recorded
in IRS's files--to FMS to match against FMS's payment data. IRS also
stated that it was working to develop a consent-based TIN verification
system for contractors doing business with the federal government and
that it anticipated implementation of this system later this year. We
believe that the completion of these actions can significantly improve
collections of outstanding federal tax debt through the levy program.
With respect to the report's recommendations, IRS agreed to work with
FMS and other agencies through the Federal Contractor Tax Compliance
Task Force (FCTC) to conduct further analysis of the significant
challenge presented by contractors paid with purchase cards. IRS also
stated that as of April 2005, the 100 percent levy provision had been
implemented with respect to DOD contractors paid through DOD's largest
payment system, and that IRS was working with Treasury on a technical
correction to allow the 100 percent levy on all federal contractors.
Finally, IRS agreed with our recommendation to review the 50
contractors discussed in our report to determine what additional
actions are warranted.
Response from FMS and Our Evaluation:
In its response to a draft of our report, FMS generally agreed with
many of our findings and recommendations. However, FMS stated that we
mischaracterized its role in the levy process, and that primary
responsibility rests with IRS. FMS also did not concur with our
conclusions that its oversight and management of the program were
ineffective. Additionally, FMS disagreed that it had not fully
implemented the legislatively authorized increase in the maximum amount
of contractor payments subject to levy. FMS also stated that it
disagreed with our recommendation that it withhold payments that do not
include a valid name and stated that it was not in a position to
implement our recommendations with respect to working with IRS
regarding issues associated with collecting outstanding federal tax
debt from purchase card payments. Finally, FMS stated that the numbers
and potential levy collection amounts presented in the report were
confusing and could be misleading.
We do not believe we mischaracterized FMS's role in the levy process.
On its Web site, FMS states that it "serves as the government's central
debt collection agency, managing the government's delinquent debt
portfolio." In our opinion, the agency that is responsible for managing
the government's delinquent debt portfolio needs to do so in a
proactive manner, which we did not always find to be the case. While we
agree that IRS has a key role in the levy process, many of the issues
in our report touch at the heart of FMS's debt collection
responsibilities and most of the weaknesses and challenges discussed in
this report can only be addressed by FMS. For example, it was FMS that
did not send billions of dollars of payments to the levy program
because it had no monitoring mechanism in place to determine that over
100 agency paying locations created since the late 1990s were not
included in the levy program. Further, it was FMS that did not identify
and inform agencies to correct payment information for tens of billion
of dollars in payments that did not have the basic information
necessary for the payments to be matched against outstanding federal
tax debt for potential levy. These findings form the basis of our
conclusion that FMS has not exercised effective oversight and
management of the levy program.
Despite the issues raised in our report, which FMS did not dispute, it
disagreed that its management of the program was ineffective. FMS
pointed to increased collections from the levy program in fiscal years
2003, 2004, and 2005, to date, as evidence of excellent leadership and
program management. However, the recent increase in collections in the
levy program is primarily the result of actions stemming from the
formation of the FCTC, which was created in response to issues we
raised in our February 2004 report on DOD contractors that abused the
tax system. Further, the actions that have led to the increased
collections were taken by DOD and IRS. Finally, while collections have
increased in the last 3 years, the annual totals to date have not been
significant given the potential of the program and, in the context of
the program's 8-year life, the annual increases have come about only
very recently.
In its response, FMS stated that it is not normally in a position to
mandate changes to agencies. We disagree. FMS is in a unique position
to identify and help correct many of the issues we identified in the
program, some of which are relatively simple and could be quickly
addressed. For example, it took the Department of State (State) about a
month to correct the problem we identified with respect to missing
names in the payment file it had been submitting to FMS for payment
once we brought the matter to the department's attention. A programming
error appears to have resulted in the names not being in the
disbursement files sent to FMS. According to a State official, the
department has likely had names of its payment files since the 1980s,
and it did not know that the names were not getting to FMS. Because of
State's responsiveness to our finding, FMS is now levying payments from
State's contractors with unpaid taxes. Had FMS provided effective
oversight and management of the debt collection program, it could have
detected the problem years ago and worked with the State Department to
correct it long before our audit. While we agree that agencies should
be responsible for the completeness and accuracy of the payment files
they send to FMS, we believe FMS should take a more proactive role in
identifying issues that impede the program's ability to maximize
collections and work with agencies to resolve such issues.
In responding to our report, FMS disagreed with our conclusion that it
had not implemented the provision of the American Jobs Creation Act of
2004 authorizing an increase in the maximum amount of contractor
payments subject to levy of up to 100 percent. FMS noted that it had
made the changes necessary in the levy program to allow for levying at
100 percent, but that it was unable to implement the provision because
civilian agencies' payment records do not separately identify real
estate transactions--which are not subject to the 100 percent levy--
from other contractor payments. Our report clearly indicates that the
100 percent levy provision had not yet been fully implemented because
of a number of challenges, including the determination by IRS that real
estate transactions are not subject to the 100 percent levy provision,
and that agency pay systems are presently unable to identify real
estate transactions from other contractor payments. We also
acknowledged in our report that a legislative change is being sought to
subject real estate payments to the 100 percent levy provision. Our
report describes this issue not as a weakness in the program but,
rather, as another challenge that FMS faces in maximizing collections
under the levy program. Our report also acknowledges that certain DOD
payments are already being levied at the 100 percent maximum.
FMS also did not concur with our recommendation to withhold payments
that do not include a valid name in the payment record. However, FMS
said it would improve monitoring and ensure agencies' compliance with
the requirement to include names, TINs, and payment types on certified
vouchers. This is in line with our recommendation, and we commend FMS
for its willingness to increase efforts to enforce the requirements. As
the State Department's prompt response to our findings indicates, when
weaknesses are identified, such as records without payee names,
agencies can take corrective actions, thereby making it unnecessary to
withhold payments. However, FMS has had many years to require agencies
to improve the data in their payment records but has, until now, not
done so. As we point out in the report, in 1997 FMS proposed a rule
that would require disbursing officials to reject agency payment
requests that do not contain TINs (that is, withhold the payment), yet
later rescinded the proposed rule and instead required agencies to
submit to FMS implementation plans to achieve compliance with the TIN
requirement. Although FMS requested the implementation plans in 1997,
it has not been successful in gaining agency compliance. We believe
that if FMS had been more proactive, the intervening years since 1997
would have provided FMS and the agencies ample opportunities to take
corrective action. As such, we continue to believe FMS needs to take
stronger leadership in enforcing the requirements with respect to the
completeness and accuracy of information in agency-submitted payment
files.
In its response, FMS accurately summarizes some of the challenges that
we described in the draft report regarding levying government purchase
card payments. These challenges are precisely why we recommended that
FMS work with IRS and arrive at a solution to subjecting to potential
levy or other form of collection the roughly $10 billion in annual
purchase card payments made to civilian agency contractors. However,
FMS suggested that we instead redirect the recommendation to have GSA
work with IRS. In addition, FMS pointed out that the FCTC could also
provide valuable assistance in determining the most efficient and
effective means of addressing contractors that have unpaid taxes and
are being paid via government purchase cards. While we agree that GSA
could assist FMS and IRS with this challenge, at the same time, we
believe that as the government's central debt collector, FMS should
assume a leadership role in emerging issues such as the rise in
purchase card payments, as it has significant implications with respect
to its debt collection responsibilities. In our opinion, FMS is the
only federal entity with the ability to identify which contractors that
are receiving federal payments have leviable tax debt. This is a role
FMS plays when it compares the TIN and the name on FMS payments to the
list of contractors with unpaid taxes to determine whether the payment
should be levied. If FMS worked with the five banks that currently
issue government purchase cards to routinely obtain electronic files
listing the contractors being paid with purchase cards, FMS could
determine which government contractors that are paid with a government
purchase card have unpaid taxes. Consequently, we continue to believe
that FMS, in conjunction with IRS, would be in the best position to
monitor purchase card payments and assess the extent to which
contractors paid with purchase cards have unpaid federal taxes, and
then to identify solutions to the challenges presented by purchase card
payments.
Finally, in its response, FMS stated that the numbers and potential
levy collection amounts presented in the report are confusing and
potentially misleading. Specifically, FMS stated that our reporting of
the levy collection gap of $350 million was misleading as it suggested
that FMS would be able to collect that amount through the levy program.
In our report, we have taken care to clearly note that the levy
collection gap is an indicator of the amount of tax debt civilian
contractors owe that could be levied from the payments they get from
the federal government if all payments for which we have information
could be levied against all outstanding federal tax debt. We further
note throughout the report that because some tax debts are excluded due
to specific statutory requirements, IRS and FMS are presently
restricted by law from collecting a significant portion of this
estimated amount. We do, however, clearly identify that a portion of
the levy collection gap--at least $50 million--that is directly
attributable to weaknesses in internal controls and lack of proactive
management at FMS. This amount is understated due to the unavailability
of Fedwire information at FMS and because we were unable to estimate
collections against many payments that did not contain valid TINs and
payment types. FMS's response does not recognize that although IRS has
a key responsibility to refer tax debts, FMS has an equally key
responsibility--to make all payments available for levy.
As agreed with your offices, unless you announce the contents of this
report earlier, we will not distribute it until 30 days after its date.
At that time, we will send copies to the Secretary of the Treasury, the
Commissioner of the Financial Management Service, the Commissioner of
Internal Revenue, and interested congressional committees and members.
We will also make copies available to others upon request. In addition,
this report will be available at no charge on the GAO Web site at
[Hyperlink, http://www.gao.gov].
Please contact Gregory D. Kutz at (202) 512-9095 or [Hyperlink,
kutzg@gao.gov] or Steven J. Sebastian at (202) 512-3406 or [Hyperlink,
sebastians@gao.gov] if you or your staff have any questions concerning
this report. Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report. GAO
staff who made major contributions to this report are listed in
appendix V.
Signed by:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
List of Requesters:
The Honorable Susan M. Collins:
Chairman:
The Honorable Joseph I. Lieberman:
Ranking Minority Member:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Norm Coleman:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Daniel K. Akaka:
Ranking Minority Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To identify the magnitude of unpaid taxes owed by contractors receiving
payments from federal agencies disbursed by the Financial Management
Service (FMS), we obtained information from both the Internal Revenue
Service (IRS) and FMS. To identify taxes owed, we obtained IRS's unpaid
assessment database as of September 30, 2004. To identify disbursements
FMS made to contractors, we obtained from FMS extracts of the Payments,
Claims, and Enhanced Reconciliation (PACER) database containing data on
payments FMS made to contractors via Automated Clearing House (ACH) and
by check during fiscal year 2004. PACER contains information such as
payee and payment amount for disbursements FMS makes on behalf of
federal agencies.[Footnote 63] To determine the amount of levies that
have been collected and the amount of tax debt that has been referred
to the Treasury Offset Program (TOP), we obtained from FMS the TOP
database as of September 30, 2004. As discussed later in this appendix,
we first performed work to assess the reliability of the data provided.
To determine the value of unpaid taxes owed by contractors, we matched
PACER disbursements coded as "vendor" to the IRS unpaid assessment
database using the tax identification number (TIN) field in both
databases. This match resulted in the identification of about 63,000
contractors with more than $5.4 billion in unpaid federal taxes. To
avoid overestimating the amount owed by contractors with unpaid tax
debts and to capture only significant tax debts, we excluded from our
analysis tax debts and payments meeting specific criteria to establish
a minimum threshold in the amount of tax debt and in the amount of
payments to be considered when determining whether a tax debt is
significant. The criteria we used to exclude tax debts and payments are
as follows:
* tax debts that IRS classified as compliance assessments or memo
accounts for financial reporting,
* tax debts from calendar year 2004 tax periods,
* contractors with total unpaid taxes of $100 or less, and:
* contractors with cumulative fiscal year 2004 payments of $100 or
less.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid, tax debts that are
recently incurred, and tax debts and payments that are insignificant
for the Federal Payment Levy Program (FPLP). Specifically, compliance
assessments or memo accounts were excluded because these taxes have
neither been agreed to by the taxpayers nor affirmed by the court, or
these taxes could be invalid or duplicative of other taxes already
reported. We excluded calendar year 2004 tax debts to eliminate tax
debt that may involve matters that are routinely resolved between the
taxpayer and IRS, with the taxes paid or abated[Footnote 64] within a
short period. We further excluded tax debts and cumulative fiscal year
2004 payments of $100 or less because they are insignificant for the
purpose of calculating potential levy collection. Using the above
criteria, we identified about 33,000 contractors with over $3.3 billion
in unpaid taxes as of September 30, 2004.
To determine the potential fiscal year 2004 levy collections, we used
15 percent of the payment or total tax debt amount, whichever is less.
Our analysis was performed as if (1) all unpaid federal taxes were
referred to FMS for inclusion in the TOP database and (2) all fiscal
year 2004 disbursements for which FMS maintained detailed
information[Footnote 65] were included in TOP for potential levy.
Because some tax debts are excluded from the FPLP due to statutory
exclusions, a gap will continue to exist between what could be
collected and the maximum levy amount calculated. However, as discussed
in the body of the report, the potential levy collection amount of $350
million may be understated because we excluded, by design, specific tax
debts and payment amounts from the calculation of levy, and missing
data in FMS's disbursement information prevented us from providing the
full magnitude of tax debts and potential levy collection. The American
Jobs Creation Act of 2004 provided for a 100 percent levy on vendor
payments for goods or services sold or leased to the federal
government, effective October 2004. If unpaid tax debts and payments to
contractors in future years remain consistent with fiscal year 2004
patterns, we determined a potential future levy amount based on a levy
ratio of 100 percent of payments or total tax debt amount, whichever is
less.
To determine the effect of IRS and FMS policies and procedures on the
amounts actually collected through the FPLP, we conducted work at both
agencies related to their respective roles in the implementation of the
FPLP. At IRS, we interviewed agency officials and obtained
documentation that detailed the statutory requirements and policy and
administrative decisions that exclude certain tax debts from the FPLP.
We did not evaluate the accuracy and reasonableness of these
exclusions, which will be examined in detail in a later report. At FMS,
we reviewed documentation and interviewed agency officials to obtain an
understanding of FMS's FPLP policies, implementing guidance, operating
procedures, and internal controls related to the TOP and disbursement
operations. We also visited the San Francisco Regional Finance Center
where we observed work flow processes. We obtained a copy of the TOP
database as of September 30, 2004. The TOP database contains all debt,
including tax debt, referred to it by federal agencies, including IRS.
FMS uses the TOP database for levying contractor payments. As discussed
later, we performed work to assess the reliability of data in TOP.
To identify payments to contractors disbursed through the government
purchase card, we obtained from the Bank of America the database of
purchase card payments made by the National Aeronautics and Space
Administration (NASA). We reconciled control totals for this data with
Bank of America and the General Services Administration. We restricted
purchase card data to one agency to demonstrate the magnitude and
effect of issues surrounding levying purchase card payments.
To identify indications of abuse or potential criminal activity, we
selected 50 civilian contractors for a detailed audit and
investigation. The 50 contractors were chosen using a nonprobability
selection approach based on our judgment, data mining, and a number of
other criteria. Specifically, we narrowed the 33,000 contractors with
unpaid taxes based on the amount of unpaid taxes, number of unpaid tax
periods, amount of FMS payments, indications that owner(s) might be
involved in multiple companies with tax debts, and representation of
these contractors across government. We specifically included
contractors from NASA[Footnote 66] and the Departments of Homeland
Security (Transportation Security Administration), Justice,
State,[Footnote 67] and Veterans Affairs. These agencies were selected
based on a number of criteria: national security concerns; amount of
payments to contractors, especially those with tax debts; amount of
payments made without TINs, names, or both; amount of levy collected;
and amount of payments made with blank pay types. The reliability of
TINs and contractor names, and whether the agencies' payment systems
are sufficiently integrated to maximize levy collection, will also be
covered in later work.
We obtained copies of automated tax transcripts and other tax records
(e.g., revenue officer's notes) from IRS as of December 2004 and
reviewed these records to exclude contractors that had recently paid
off their unpaid tax balances and considered other factors before
reducing the number of businesses to 50 case studies. We performed
additional searches of criminal, financial, and public records. In
cases where record searches and IRS tax transcripts indicate that the
owners or officers of a business are involved in other related
entities[Footnote 68] that have unpaid federal taxes, we performed
detailed audit and investigation on the related entities and the
owner(s) or officer(s), and not just the original business we
identified. In instances where related entities exist, we defined a
case study to include all the related entities, and reported on the
combined unpaid taxes and combined fiscal year 2004 payments for the
original business and all the related entities. We identified civilian
agency contract awards using the Federal Procurement Data System. Our
investigators contacted some contractors and performed interviews.
In addition, while assessing the reliability of the data provided by
FMS, we identified nearly $17 billion in payments that contain either
no TIN or an obviously inaccurate TIN.[Footnote 69] To determine
whether contractors with no TINs or obviously inaccurate TINs had tax
debts, we used investigative techniques to identify some of those
contractors' TINs and, through comparison with the IRS records of
unpaid taxes, we determined whether those contractors owed tax debts.
On May 9, 2005, we requested comments on a draft of comments on a draft
of this report from the Commissioner for Internal Revenue or his
designee and from the Commissioner of the Financial Management Service
or his designee. We received written comments from Commissioner of
Internal Revenue dated May 27, 2005, and from the Commissioner of the
Financial Management Service dated May 25, 2005, and reprinted those
comments in appendixes III and IV of this report. We conducted our
audit work from May 2004 through May 2005 in accordance with generally
accepted government auditing standards, and we performed our
investigative work in accordance with standards prescribed by the
President's Council on Integrity and Efficiency.
Data Reliability Assessment:
For the IRS database we used, we relied on the work we perform during
our annual audits of IRS's financial statements. While our financial
statement audits have identified some data reliability problems
associated with the coding of some of the fields in IRS's tax records,
including errors and delays in recording taxpayer information and
payments, we determined that the data were sufficiently reliable to
address the report's objectives. Our financial audit procedures,
including the reconciliation of the value of unpaid taxes recorded in
IRS's masterfile to IRS's general ledger, identified no material
differences.
For PACER and TOP, we interviewed FMS officials responsible for the
databases and reviewed documentation provided by FMS supporting quality
reviews performed by FMS on its databases. In addition, we performed
electronic testing of specific data elements in the databases that we
used to perform our work. Based on our review of FMS's documents and
our own testing, we concluded that the data elements used for this
report are sufficiently reliable for the purpose of this report. In
instances where we found problems with the data, such as data with
missing TINs and names, we include those in this report. We also
compared the PACER data to the President's budget and the TOP data to
the IRS unpaid assessment file.
[End of section]
Appendix II: Contractors with Unpaid Federal Taxes:
Table 3 provides data on 10 detailed case studies. Table 4 provides
details of the remaining 40 businesses we selected as case studies. As
with the 10 cases discussed in the body of this report, we also found
substantial abuse or potentially criminal activity related to the
federal tax system during our review of these 40 case studies. The case
studies primarily involve businesses with unpaid payroll taxes, some
for as many as 35 tax periods. IRS has imposed trust fund penalties for
willful failure to remit payroll taxes on the officers of 17 of the 40
case studies. In addition to owing federal taxes, 28 of these 40 case
study contractors owed sufficient state tax debts to warrant state tax
authorities to file liens against them. As we have done in the body of
the report, in instances where the business we selected also had
related entities, we considered the business and all related entities
as one case study and reported the civilian agency payments and unpaid
federal tax amount for all related entities in the table.
Table 4: Civilian Agency Contractors with Unpaid Federal Taxes:
Case study: 11;
Goods, services, or nature of work: Professional and clerical services;
Agencies making payments: Multiple departments, including the
Department of Homeland Security (DHS);
Fiscal year 2004 civilian agency payments: Over $1.5 million;
Unpaid federal tax amount at 9/30/04: Over $1 million;
Comments:
* Filed multiple tax returns late. For several years in the early
2000s, the company remitted no payroll taxes to IRS;
* Firm's primary client is the federal government;
* Has existing contracts in FY 2005 with the federal government;
* Diverted payroll taxes to fund business due to cash flow problems.
Case study: 12;
Goods, services, or nature of work: Consulting service;
Agencies making payments: Multiple agencies including the Department of
the Interior (Interior) and the Small Business Administration;
Fiscal year 2004 civilian agency payments: Over $200,000;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Repeatedly under paid its payroll taxes since the late 1990s and owes
payroll tax debt for more than 15 tax periods;
* Officer has mortgages of over $1 million;
* Has existing contracts in FY 2005 with the federal government.
Case study: 13;
Goods, services, or nature of work: Temporary help;
Agencies making payments: DHS;
Fiscal year 2004 civilian agency payments: Nearly $50,000;
Unpaid federal tax amount at 9/30/04: Over $600,000;
Comments:
* Several other related entities--one of which is bankrupt--also have
tax debt;
* Not in the FPLP because of IRS exclusion policy;
* Invalid name in payment files, thus levy cannot be taken even if debt
is unblocked;
* The owner attempted to negotiate repayment of IRS taxes so owner
could start a new multimillion-dollar business;
* FY 2004 maximum levy collections estimated at $7,000.
Case study: 14;
Goods, services, or nature of work: Nursing care facilities;
Agencies making payments: Department of Veterans Affairs (VA);
Fiscal year 2004 civilian agency payments: Nearly $200,000;
Unpaid federal tax amount at 9/30/04: Over $4 million;
Comments:
* Not in the levy program because of IRS exclusion policy;
* Joint target of a federal and state criminal investigation for
fraudulent financial activities;
* Defaulted on several federal government loans;
* Millions in trust fund penalties assessed on officer;
* One of the related entities closed by state due to health code
violations in 2004;
* FY 2004 maximum levy collections estimated at over $25,000.
Case study: 15;
Goods, services, or nature of work: Building maintenance services;
Agencies making payments: Multiple departments including Departments of
Agriculture, Homeland Security, the Interior, the Treasury, and
Veterans Affairs;
Fiscal year 2004 civilian agency payments: Over $4 million;
Unpaid federal tax amount at 9/30/04: Over $700,000;
Comments:
* Levy not collected on other payments because name different from IRS
control name and payments made using specialized payment mechanism not
submitted to TOP;
* Payroll tax returns frequently filed late;
* FY 2004 maximum levy collections estimated at $630,000, compared to
nearly $100,000 actually collected.
Case study: 16;
Goods, services, or nature of work: Moving and storage;
Agencies making payments: DHS and the Department of State;
Fiscal year 2004 civilian agency payments: Over $200,000;
Unpaid federal tax amount at 9/30/04: Nearly $700,000;
Comments:
* Not in levy program due to pending appeal against a tax assessment;
* The owner has a vacation home as well as a primary residence;
* FY 2004 maximum levy collections estimated at over $33,000.
Case study: 17;
Goods, services, or nature of work: Business training and support
services;
Agencies making payments: Multiple departments including DHS and the
Departments of Justice and the Interior;
Fiscal year 2004 civilian agency payments: Nearly $130,000;
Unpaid federal tax amount at 9/30/04: Nearly $1.5 million;
Comments:
* Business generally did not pay payroll taxes;
* In the early 2000s, business failed to remit most of taxes owed to
IRS;
* Levy of $1,500 collected but payments over $100,000 not levied during
FY 2004 because the name in the payment database did not match with IRS
name;
* FY 2004 maximum levy collections estimated at nearly $20,000.
Case study: 18;
Goods, services, or nature of work: Tour services;
Agencies making payments: DHS;
Fiscal year 2004 civilian agency payments: Over $20,000;
Unpaid federal tax amount at 9/30/04: Nearly $800,000;
Comments:
* Business frequently did not pay payroll taxes;
* In the FPLP but no levies collected during FY 2004 because FMS does
not include the payment category used by the agency in the TOP system;
* FY 2004 maximum levy collections estimated at $3,000.
Case study: 19;
Goods, services, or nature of work: Telecommunications;
Agencies making payments: DHS;
Fiscal year 2004 civilian agency payments: Over $400,000;
Unpaid federal tax amount at 9/30/04: Nearly $300,000;
Comments:
* Officers assessed penalties for willful failure to remit payroll
taxes;
* Over $1,000 collected from levies in FY 2004, but many payments not
levied because they had no name or were made via a payment category FMS
does not include in TOP;
* FY 2004 maximum levy collections estimated at $60,000.
Case study: 20;
Goods, services, or nature of work: Nonprofit social service;
Agencies making payments: Department of Justice (Justice);
Fiscal year 2004 civilian agency payments: Over $70,000;
Unpaid federal tax amount at 9/30/04: Nearly $900,000;
Comments:
* Delinquency dates to late 1990s;
* Owes taxes for more than 20 tax periods;
* Officers have been assessed more than $200,000 for willful failure to
remit payroll taxes related to 10 tax periods;
* Not in the levy program because of IRS exclusion policy and because
FMS had not included the agency paying location in TOP;
* FY 2004 maximum levy collections estimated at $11,000.
Case study: 21;
Goods, services, or nature of work: Ministry;
Agencies making payments: Justice;
Fiscal year 2004 civilian agency payments: Nearly $1.3 million;
Unpaid federal tax amount at 9/30/04: Over $400,000;
Comments:
* Owes on more than 10 tax periods;
* Typically made partial or no payments on payroll taxes. For example,
in 2001, withheld about $180,000 from employees but remitted nothing;
* Over $50,000 collected from levies in FY 2004. However, some periods
not in TOP due to a pending tax claim;
* FY 2004 maximum levy collections estimated at nearly $195,000.
Case study: 22;
Goods, services, or nature of work: Freight;
Agencies making payments: Multiple departments including Interior,
Justice, and Treasury;
Fiscal year 2004 civilian agency payments: Over $300,000;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Did not file several years of early 2000s tax returns until April
2004;
* Did not remit any payroll taxes withheld from employees since early
2000s;
* Owes tax debt on more than 20 tax periods;
* The owner had drug-related criminal activity;
* Levy started in September 2004, but prior to that no levies collected
in FY 2004 because of IRS exclusion policy;
* FY 2004 maximum levy collections estimated at $46,000.
Case study: 23;
Goods, services, or nature of work: Court reporter;
Agencies making payments: Justice;
Fiscal year 2004 civilian agency payments: Over $25,000;
Unpaid federal tax amount at 9/30/04: Over $400,000;
Comments:
* Consistently owed unpaid payroll taxes from late 1990s through 2002;
* Consistently reported losses or no income;
* Two owners assessed hundreds of thousands in penalties for willful
failure to remit payroll taxes;
* New installment agreement in 2004, for which $2,000 had been
received;
* No levies collected in FY 2004;
* FY 2004 maximum levy collections estimated at nearly $4,000.
Case study: 24;
Goods, services, or nature of work: Aircraft and space parts;
Agencies making payments: NASA;
Fiscal year 2004 civilian agency payments: Over $100,000;
Unpaid federal tax amount at 9/30/04: Nearly $200,000;
Comments:
* Owes more than 10 tax periods;
* Did not pay any IRS payroll taxes withheld from employees for five
periods;
* Companies did not file income taxes for several years in the early
2000s;
* Over $7,000 collected from levies in FY 2004. Levy less than
estimated because some tax debt excluded due to IRS exclusion policy;
* FY 2004 maximum levy collections estimated at nearly $17,000.
Case study: 25;
Goods, services, or nature of work: Electro-optic equipment;
Agencies making payments: DHS and NASA;
Fiscal year 2004 civilian agency payments: Nearly $700,000;
Unpaid federal tax amount at 9/30/04: Over $1 million;
Comments:
* Withheld more than $500,000 from employees one year in early 2000s
but remitted less than $50,000 to IRS;
* Received nearly $900,000 in grants;
* Payments not levied due to pending installment agreement;
* FY 2004 maximum levy collections estimated at nearly $105,000.
Case study: 26;
Goods, services, or nature of work: Acquisition and financial support;
Agencies making payments: Multiple departments, including Health and
Human Services (HHS), Transportation (Transportation), as well as NASA;
Fiscal year 2004 civilian agency payments: Over $3 million;
Unpaid federal tax amount at 9/30/04: Nearly $400,000;
Comments:
* Not in the levy program because of IRS exclusion policy;
* Has an existing contract in FY 2005 with the federal government;
* FY 2004 maximum levy collections estimated at nearly $380,000.
Case study: 27;
Goods, services, or nature of work: Computer software;
Agencies making payments: Multiple agencies including HHS, Justice,
Treasury, and NASA;
Fiscal year 2004 civilian agency payments: Over $300,000;
Unpaid federal tax amount at 9/30/04: Over $50,000;
Comments:
* Payments were not levied because of an IRS statutory exclusion;
* FY 2004 maximum levy collections estimated at $46,000.
Case study: 28;
Goods, services, or nature of work: Logistics and engineering services;
Agencies making payments: Agriculture and NASA;
Fiscal year 2004 civilian agency payments: Over $650,000;
Unpaid federal tax amount at 9/30/04: Over $2 million;
Comments:
* Payroll taxes owed since early 2000s;
* Multiple cash withdrawals totaling tens of thousands of dollars each;
* Penalties were assessed on an officer of the company for failure to
remit payroll taxes;
* FY 2004 maximum levy collections estimated at $98,000.
Case study: 29;
Goods, services, or nature of work: Casino;
Agencies making payments: NASA, Interior, and Agriculture;
Fiscal year 2004 civilian agency payments: Over $35,000; Unpaid federal
tax amount at 9/ 30/04: Over $1.5 million;
Comments:
* Large penalty for intentional disregard for requirement to file
accurate information returns;
* Annual net income $6 million to over $30 million over the past 10
years;
* One payment not levied because tax debt not turned on for immediate
levy in TOP;
* FY 2004 maximum levy collections estimated at $5,000.
Case study: 30;
Goods, services, or nature of work: Manufacturing;
Agencies making payments: NASA (including credit cards);
Fiscal year 2004 civilian agency payments: More than $600,000, $30,000
of which is credit card payments;
Unpaid federal tax amount at 9/30/04: Nearly $200,000;
Comments:
* Subsidiary of international defense- related group;
* Taxes owed mostly interest and penalties;
* Company noted as having problems with filing tax returns;
* Levies totaling nearly $6,600 collected, but maximum levy was not
collected because majority of tax debts were not in TOP;
* FY 2004 maximum levy collections estimated at nearly $100,000 not
including amounts paid to contractor via government purchase card.
Case study: 31;
Goods, services, or nature of work: Medical doctor;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $180,000;
Unpaid federal tax amount at 9/30/04: Nearly $700,000;
Comments:
* Tax debt dates back to early 1990s;
* Contractor payments not levied to pay tax debt of individuals;
* FY 2004 maximum levy collections estimated at $27,000.
Case study: 32;
Goods, services, or nature of work: Engineering;
Agencies making payments: Treasury;
Fiscal year 2004 civilian agency payments: Over $500,000;
Unpaid federal tax amount at 9/30/04: Nearly $2 million;
Comments:
* Owner did not file personal income tax return for 2 years in early
2000s;
* Payments were not levied because of an IRS statutory exclusion;
* FY 2004 maximum levy collections estimated at $75,000.
Case study: 33;
Goods, services, or nature of work: Plumbing, heating, and air
conditioning;
Agencies making payments: Multiple departments including Labor,
Treasury, and VA;
Fiscal year 2004 civilian agency payments: Over $130,000;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Substantial payments made to IRS in early FY 2005 to settle tax debt;
* No levies collected in FY 2004 because of IRS exclusion policy;
* FY 2004 maximum levy collections estimated at nearly $20,000.
Case study: 34;
Goods, services, or nature of work: Janitorial;
Agencies making payments: Agriculture and VA;
Fiscal year 2004 civilian agency payments: Over $700,000;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Almost all of the taxes owed are unpaid payroll taxes that company
withheld from employees but failed to remit;
* No levies collected in FY 2004 because of an installment agreement,
which is an IRS statutory exclusion;
* FY 2004 maximum levy collections estimated at $107,000.
Case study: 35;
Goods, services, or nature of work: Building construction;
Agencies making payments: HHS and VA;
Fiscal year 2004 civilian agency payments: Over $1.5 million;
Unpaid federal tax amount at 9/30/04: Over $200,000;
Comments:
* Payroll taxes owed since the late 1990s;
* No levies collected in FY 2004 because of a tax claim;
* FY 2004 maximum levy collections would have completely paid off the
tax debt.
Case study: 36;
Goods, services, or nature of work: Health care services;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $40,000;
Unpaid federal tax amount at 9/30/04: Nearly $300,000;
Comments:
* Bankruptcy filed in late 1990s dismissed prior to 2004;
* Offer-in-compromise not rejected for 2 years, which resulted in
payments being excluded from levy program for almost two years;
* Installment agreement requested immediately after offer-in-compromise
rejected. No levies collected in FY 2004 because of an installment
agreement;
* FY 2004 maximum levy collections estimated at $6,500.
Case study: 37;
Goods, services, or nature of work: Public relations;
Agencies making payments: HHS;
Fiscal year 2004 civilian agency payments: Nearly $280,000;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Multiple federal and state tax liens and judgments;
* Unpaid payroll taxes since early 2000s;
* Officer assessed penalty for willful failure to pay payroll taxes;
penalty paid in full the year it was assessed;
* No levies collected in FY 2004;
* FY 2004 maximum levy collections estimated at nearly $42,000.
Case study: 38;
Goods, services, or nature of work: Telecommunications;
Agencies making payments: Commerce, Treasury, and HHS;
Fiscal year 2004 civilian agency payments: Over $1 million;
Unpaid federal tax amount at 9/30/04: Over $300,000;
Comments:
* Company owed payroll taxes back to the late 1990s;
* Over $10,000 collected from levies in FY 2004;
* FY 2004 maximum levy collections estimated at $211,000.
Case study: 39;
Goods, services, or nature of work: Building maintenance;
Agencies making payments: HHS and State;
Fiscal year 2004 civilian agency payments: Over $1.1 million;
Unpaid federal tax amount at 9/30/04: Nearly $1 million;
Comments:
* Company owed payroll taxes back to the late 1990s;
* Defaulted on installment agreement in early 2000s;
* Company filed an offer-in-compromise with IRS, which IRS rejected;
* Officers were assessed trust fund penalties for willfully failing to
pay payroll taxes withheld from employees;
* About $50,000 collected from levies in FY 2004;
* FY 2004 maximum levy collections estimated at $176,000.
Case study: 40;
Goods, services, or nature of work: Medical, dental, and hospital
equipment;
Agencies making payments: Executive Office of the President and
Agriculture;
Fiscal year 2004 civilian agency payments: Over $900,000;
Unpaid federal tax amount at 9/30/04: Nearly $2 million;
Comments:
* In the early 2000s, company collected more than $600,000 in payroll
taxes from employees that were not remitted to IRS;
* Company filed for bankruptcy in the late 1990s;
* About $6,000 collected from levies in FY 2004;
* FY 2004 maximum levy collections estimated at $139,000.
Case study: 41;
Goods, services, or nature of work: Health care services;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $60,000;
Unpaid federal tax amount at 9/30/04: Over $500,000;
Comments:
* Payroll taxes owed for almost every period since 2000;
* In the early 2000s, defaulted on an installment agreement after 10
months;
* An officer assessed trust fund penalties for willfully failing to
remit payroll taxes withheld from employees;
* No payments levied during FY 2004;
* FY 2004 maximum levy collections estimated at $10,000.
Case study: 42;
Goods, services, or nature of work: Automotive manufacturer;
Agencies making payments: Agriculture;
Fiscal year 2004 civilian agency payments: Over $60,000; Unpaid federal
tax amount at 9/ 30/04: Over $1 million;
Comments:
* Contractor in levy program during many months in 2004, but no levy
was taken because the name did not match with IRS name for levy;
* FY 2004 maximum levy collections estimated at $10,000.
Case study: 43;
Goods, services, or nature of work: Support and managerial services;
Agencies making payments: Treasury;
Fiscal year 2004 civilian agency payments: Over $90,000;
Unpaid federal tax amount at 9/30/04: Nearly $400,000;
Comments:
* Business in bankruptcy since late 1990s that was discharged in 2004;
* No payments levied in FY 2004;
* FY 2004 maximum levy collections estimated at $14,000.
Case study: 44;
Goods, services, or nature of work: Health care services;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $200,000;
Unpaid federal tax amount at 9/30/04: Nearly $2 million;
Comments:
* Payroll taxes owed for taxes in late 1990s and early 2000s;
* Payments were not levied because the business was in notice status,
which is an IRS statutory exclusion;
* FY 2004 maximum levy collections estimated at $31,000.
Case study: 45;
Goods, services, or nature of work: Ambulance services;
Agencies making payments: VA and Agriculture;
Fiscal year 2004 civilian agency payments: Over $20,000;
Unpaid federal tax amount at 9/30/04: Over 600,000;
Comments:
* Since the late 1990s, the company had annual revenue exceeding $10
million but repeatedly reported tax losses;
* Company under bankruptcy protection since early 2000s;
* No payments levied in FY 2004 due to IRS exclusion policy;
* FY 2004 maximum levy collections estimated at $3,000.
Case study: 46;
Goods, services, or nature of work: Taxi services;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $40,000;
Unpaid federal tax amount at 9/30/04: Over $600,000;
Comments:
* Company in litigation status since the mid-1990s, which prevented any
payments from being levied;
* An officer assessed trust fund penalties for willfully failing to pay
payroll taxes withheld from employees;
* Officer placed on an installment agreement in 2004;
* FY 2004 maximum levy collections estimated at $6,000.
Case study: 47;
Goods, services, or nature of work: Home health care services;
Agencies making payments: VA;
Fiscal year 2004 civilian agency payments: Over $200,000;
Unpaid federal tax amount at 9/30/04: Nearly $3 million;
Comments:
* No payments levied in FY 2004 due to an installment agreement for
which contractor is making payments;
* IRS had to construct payroll tax returns for five periods (over 1
year) because the company did not file quarterly payroll tax returns;
* FY 2004 maximum levy collections estimated at $31,000.
Case study: 48;
Goods, services, or nature of work: Residential care;
Agencies making payments: Justice;
Fiscal year 2004 civilian agency payments: Nearly $770,000;
Unpaid federal tax amount at 9/30/04: Nearly $9 million;
Comments:
* Multiple withdrawals of cash from late 1990s to 2001 totaling several
million dollars;
* An officer assessed trust fund penalties for willfully failing to
remit payroll taxes;
* The agency location code was not in TOP so no levies would have been
possible;
* FY 2004 maximum levy collections estimated at $115,000.
Case study: 49;
Goods, services, or nature of work: Building maintenance;
Agencies making payments: Social Security Administration;
Fiscal year 2004 civilian agency payments: Over $330,000;
Unpaid federal tax amount at 9/30/04: Over $400,000;
Comments:
* Company under bankruptcy protection in 2004;
* Officers assessed trust fund penalties for willfully failing to remit
payroll taxes;
* No payments levied in FY 2004;
* FY 2004 collections under effective levy estimated at nearly $50,000.
Case study: 50;
Goods, services, or nature of work: Special trade contractor;
Agencies making payments: Justice and Treasury;
Fiscal year 2004 civilian agency payments: Over $400,000;
Unpaid federal tax amount at 9/30/04: Over $100,000;
Comments:
* Tax debt dated to the late 1990s;
* Penalty assessed on officers being paid;
* Business current on installment agreement;
* FY 2004 maximum levy collections estimated at $65,000.
Source: GAO analysis of civilian agency, IRS, FMS, public, and other
records.
[End of table]
[End of section]
Appendix III: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY:
INTERNAL REVENUE SERVICE:
COMMISSIONER:
WASHINGTON, D.C. 20224:
May 27, 2005:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Sebastian:
We have reviewed your report entitled, "Financial Management: Some
Civilian Agency Contractors Abuse the Tax System with Little
Consequence" (GAO-05-637) and agree that we must continue to improve
and enhance the use of the Federal Payment Levy Program (FPLP) as a
tool to deal with contractors who abuse the federal tax system.
We appreciate your acknowledgment of the significant progress we have
made in the past year to improve the effectiveness of the FPLP. In
March 2004, the Internal Revenue Service (IRS), Financial Management
Services (FMS) and the Department of Defense (DOD) established the
Federal Contractor Tax Compliance Task Force (FCTC) to recommend and
implement actions to ensure federal contractors pay their taxes and
that we take appropriate enforcement actions, including levies, to
collect unpaid taxes. The collaborative efforts of the federal agencies
represented on the FCTC task force have already resulted in tremendous
benefits as evidenced by the improved program results. The IRS removed
many of the systemic exclusions that had prevented tax debts from being
available for levy through the FPLP. Consequently, as of April 2005,
$98 billion in tax debts were included in the FPLP, an increase of $28
billion over the prior year. Total FPLP collections in FY 2005 through
April exceeded $109 million compared to $50 million during the same
period of FY 2004. A similar comparison for collections from federal
contractors shows an even more significant increase --$23 million
through April 2005 compared to $5.4 million through April 2004. From
civilian contractors, the subject of your report, we have collected
$12.2 million in FY 2005 compared to $4.7 million in the same period of
FY 2004.
We are pleased with the results to date, and we continue to work with
FMS and other federal agencies on the FCTC to pursue further
enhancements to the FPLP. For example, we already have implemented a
data exchange with the DOD that enables issuance of the Collection Due
Process (CDP) notice at the time of contract award rather than after a
contract payment is made. As a result, IRS will be in a position to
levy an increased number of contractor payments without a delay. We
plan to expand this process to all federal contractors later this year.
As you noted, we are working with Treasury on a legislative proposal to
allow a post-levy CDP process on federal payments to contractors. If
enacted, this change will further improve our ability to levy earlier
on an increased number of contractor payments. In addition, we are
working to change our business tax collection process to combine the
CDP notice with the final notice making more debts ready for levy at
the time of inclusion in the Treasury Offset Program (TOP).
In order to increase the number of name and Taxpayer Identification
Number (TIN) matches with FMS, in January 2006, the IRS will begin
sending FMS up to ten additional business control names for each
account to be matched against payment data. We are also developing a
consent-based TIN verification system that will require contractors
interested in doing business with the federal government to consent to
validation of their name and TIN as a condition of registration in the
Central Contract Registration (CCR) database. We anticipate
implementation of this process later this year.
We agree that the use of purchase cards to pay federal vendors presents
a significant challenge. As you noted, the purchase card program yields
significant savings and efficiencies for the government-wide
procurement system. However, due to the complexity of the purchase card
payment process, vendors are paid in a manner that prevents the offset
of other debts, including taxes. We will partner with FMS and the other
agencies through the FCTC to conduct further analysis of this issue.
On April 15, 2005, we implemented the recently enacted 100 percent levy
provision on certain DOD contracts paid through the largest DOD payment
system. This provision will be implemented with respect to the
remaining DOD vendor payment systems in July 2005. We are also working
with Treasury on a technical correction which would allow the 100
percent levy on payments made to all federal vendors, not only vendors
of goods and services. We will continue to partner with FMS on full
implementation of this provision.
While we have taken significant actions to increase the dollars
available for levy, as you acknowledge in your report, a substantial
amount of tax debt ($71 billion) is excluded from the levy program for
statutory reasons. These excluded debts include those for taxpayers who
are in bankruptcy, have an installment agreement or have not yet
received their appeal rights prior to levy. The IRS must continue to
honor these statutory taxpayer rights as enacted by Congress. Another
$99 billion is excluded from the levy program due to IRS policy
including, as an example, tax debts of taxpayers who are experiencing a
financial hardship. We continuously evaluate these policy exclusions to
ensure that they are no broader than necessary.
In response to your recommendation, we are reviewing our case actions
on the 50 contractor businesses and individuals identified in your
report and will evaluate what additional actions are warranted. We
believe the FPLP is an effective automated process for serving tax
levies and collecting unpaid taxes. We will continue to pursue further
opportunities to improve the FPLP and deal with contractors who abuse
the tax system.
If you have any questions, please contact me or call Brady R. Bennett,
Director, Collection, Small Business/Self Employed Division at (202)
283-7660.
Sincerely,
Signed by:
Mark W. Everson:
[End of section]
Appendix IV: Comments from the Financial Management Service:
DEPARTMENT OF THE TREASURY:
FINANCIAL MANAGEMENT SERVICE:
COMMISSIONER:
WASHINGTON, D.C. 20227:
May 25, 2005:
Mr. Steven J. Sebastian:
Director, Financial Management and Assurance:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Sebastian:
Thank you for the opportunity to comment on the May 2005 draft audit
report titled "FINANCIAL MANAGEMENT: Some Civilian Agency Contractors
Abuse the Tax System with Little Consequence (GAO-05-637)." We
acknowledge that with any successful program, there are still
opportunities for improvement. Although I agree with many of the
recommendations presented in this draft report, I have concerns
regarding the following aspects of this report.
1. Management Oversight of the Levy Program:
I disagree with the draft report's conclusion that the Financial
Management Service (FMS) has ineffectively managed oversight of the
levy program. FMS and the Internal Revenue Service (IRS) have very
successfully implemented a phased-in approach of this program over the
last several years. Collections increased 49% from FY 2002 (first full
year of the Levy Program) to FY 2003, and another 27% from FY 2003 to
FY 2004. Through seven months of FY 2005, FMS has collected over $115
million in tax debts, more than in any prior full year of this program.
Much of this success is attributable to the work of the Federal
Contractor Tax Compliance Task Force (FCTC). The FCTC is a joint task
force consisting of the IRS, Department of Defense (DOD), Department of
Justice, General Services Administration (GSA), Office of Management
and Budget, and FMS. As a result of this task force: (1) more debts
were loaded into the Treasury Offset Program (TOP) database; (2) more
debts were made available earlier by the IRS for collection; and (3)
improvements were made in the accuracy of name and taxpayer
identification number (TIN) information in the Central Contractor
Registration (CCR) database. These and other changes will significantly
contribute to the continued rapid growth of the program.
In addition, throughout the report, the Government Accountability
Office (GAO) mischaracterizes FMS' role in the levy process. The
Federal Payment Levy Program (FPLP) is not exclusively an FMS program.
It is a program to collect delinquent taxes, the primary responsibility
for which rests with the IRS. FMS has no statutory role in the
collection of delinquent tax and has no authority to make
determinations regarding outstanding tax obligations or the method of
collecting those obligations. For example, the draft report charges FMS
with failing to levy vendor payments to collect individual tax debt.
IRS, which makes all determinations regarding what debts are subject to
levy, expressly instructed FMS not to levy vendor payments to collect
individual tax debts, and we have complied with its instructions.
Accordingly, we have modified our systems to support the requirements
of IRS.
I believe that FMS has provided excellent leadership and program
management to the debt collection program, both non-tax and tax debt.
Virtually every trend line shows strong increases in collections for
the past several years. Yet, managing any program is also about making
choices and determining priorities. FMS has made such choices in
managing our part of the tax levy program. We have allocated resources
to the highest management priorities to increase collections, but also
to ensure that the proper management controls are in place. Further,
FMS has long been an advocate of legislative or procedural changes that
would allow agencies to improve their debt collection referrals to us.
While FMS has demonstrated leadership, we are also not normally in a
position to mandate changes by agencies or to direct agency resources.
2. Withholding Payments:
At this time, I am opposed to GAO's recommendation to withhold
payments. Instead, we plan to work with Federal Program Agencies (FPAs)
on improving compliance before we consider rejecting payments. As the
Government's chief disbursing office, FMS ensures that certified
payments submitted to FMS are disbursed timely and accurately. Pursuant
to 31 U.S.C. 3528, it is certifying officials at the FPAs who are
responsible for the information (name, TIN, payment type) on the
payment voucher and for ensuring that the payment is legally
authorized.
Rather than withholding payments that do not include names, which could
unduly interfere with the timely disbursement of federal funds to
thousands of contractors who do not owe tax debts, we believe a better
approach is to increase our efforts to monitor and ensure agencies'
compliance with the requirement to include names, TINS, and payment
types on certified vouchers. Within the next week, FMS will be sending
a letter to all Chief Financial Officers enlisting their support in
this endeavor. It is our view that this approach will most effectively
address any underlying barriers to agency compliance. Withholding
payments should only be considered as a last resort. We therefore plan
to evaluate this approach over the next year and, at the end of that
time, determine whether withholding payments is warranted.
3. Implementing 100% Levy for Vendor Payments:
I disagree with the draft report's conclusion that we failed to
implement 100% levy as authorized in the American Jobs Creation Act of
2004, enacted October 2004. In November 2004 FMS made the programming
changes and was fully prepared to implement the 100 percent levy based
on its existing vendor payment guidance to the agencies. Subsequently,
in review of the statute, IRS determined that Treasury could not fully
implement this new version of the law without revisions. Where the law
could be implemented, FMS, IRS, and DOD have done so, effective April
29, 2005. Since then, DOD reports that on the two files they matched
with FMS for 100 percent levy, it collected $432,000 as compared to
$100,000 that it would have collected at 15 percent.
4. Government Purchase Card Program:
I agree with GAO's concern that the government purchase card program
does not facilitate tax levy of payments to contractors. It is my view,
however, that the GAO recommendations should be redirected to GSA and
IRS. In addition, the FCTC could provide valuable assistance in
determining the most efficient and effective means of addressing
vendors who have unpaid taxes and are paid via the government purchase
card.
The FPLP model does not work for credit cards. When a purchase is made
using a purchase card, there is no point in the process where FMS has
in its possession property belonging to the vendor. IRS levies FMS to
collect from payments disbursed by FMS or an authorized disbursement
officer. Credit card payments to vendors are not processed through FMS
or an authorized disbursement official. Because FMS does not issue
payments to contractors paid with purchase cards, or have information
regarding which vendors are receiving purchase card payments, FMS is
not in a position to implement the recommendations.
5. Misleading and Confusing Amounts in the Draft Report:
Throughout the draft report there is a confusing mix of numbers. At
some points the draft report discusses the overall tax gap, at other
points the report discusses taxes that might be collectible by tax levy
and at other times the report discusses amounts that might be
collectible by tax levy from contractors. In addition, GAO provides
estimates of the amount that FMS could have potentially collected
compared to what was actually collected even though it is clear that
the "potential" amount was not sent to us for levy in the first place.
For example, on page 26 of the report, GAO states: "We estimate that if
there were no legal or administrative provisions that remove some tax
debt from the levy program and if all PACER contractor payments were
subjected to a 15 percent levy .., FMS could have collected as much as
$350 million in fiscal year 2004." In the next paragraph, GAO goes on
to say: "We found that a vast majority of the collection gap is
attributable to debts that because of current law and IRS policies, are
excluded from TOP." I believe that on one hand suggesting that FMS
could have collected $350 million in fiscal year 2004 and then later
acknowledging that most of the debts to realize that amount of
collections were not sent to FMS for levy because of current law and
IRS policies is misleading. There are other similar instances in the
report of GAO showing large hypothetical or potential tax levy amounts
only to later state that only a small percentage was available to FMS
for levy purposes. While I recognize that GAO wants to portray the full
dimensions of the tax gap and the use of tax levy in narrowing that
gap, I believe that indicating that FMS could collect large amounts
from tax levy except for certain constraints gives an overall
impression that FMS has the authority to remove those constraints even
though that is not normally true.
Thank you for the opportunity to comment on this draft GAO report. If
you have any questions or wish to discuss these comments in more
detail, I can be reached on (202) 874-7000, or you may contact Marty
Mills on (202) 874-3810 or Judy Tillman on (202) 874-6780.
Sincerely,
Signed by:
Richard L. Gregg:
cc: Donald V. Hammond:
Fiscal Assistant Secretary:
U.S. Department of the Treasury:
[End of section]
Appendix V: Staff Acknowledgments:
Acknowledgments:
The following individuals made major contributions to this report:
Beverly Burke, Ray Bush, Richard Cambosos, William Cordrey, Francine
Delvecchio, F. Abe Dymond, Paul Foderaro, Alison Heafitz, Kenneth Hill,
Aaron Holling, Jason Kelly, John Kelly, Rich Larsen, Tram Le, Mai
Nguyen, Kristen Plungas, Rick Riskie, John Ryan, David Shoemaker, Sid
Schwartz, Esther Tepper, Tuyet-Quan Thai, Wayne Turowski, Matt Valenta,
Scott Wrightson, and Mark Yoder.
(192152):
FOOTNOTES
[1] These data were released to the public as part of a National
Research Program sample of 46,000 individual tax returns for calendar
year 2001. The tax gap amount also includes an estimate for corporate
tax debt based on IRS's 1988 compliance research.
[2] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb.
12, 2004).
[3] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb.
12, 2004).
[4] We considered activity to be abusive when a contractor's actions or
inactions, though not illegal, took advantage of the existing tax
enforcement and administration system to avoid fulfilling federal tax
obligations and were deficient or improper when compared with behavior
that a prudent person would consider reasonable.
[5] We characterized as potentially criminal any activity related to
federal tax liability that may be a crime under a specific provision of
the Internal Revenue Code. Depending on the potential penalty provided
by statute, the activity could be a felony (punishable by imprisonment
of more than 1 year) or a misdemeanor (punishable by imprisonment of 1
year or less).
[6] Payroll taxes are amounts that businesses withheld from employees'
wages for federal income taxes, Social Security, and Medicare but
failed to remit to IRS, as well as the related employer matching
contributions for Social Security and Medicare taxes.
[7] Levy generically refers to seizure of property to collect a debt.
For tax debt, it is the legal process by which IRS orders a third party
(e.g., FMS) to turn over property in its possession (e.g., the federal
payment) that belongs to the tax debtor named in a notice of levy.
Overall, the reduction of federal payments to satisfy debt is referred
to as an offset.
[8] A TIN is a unique nine-digit identifier assigned to each business
and individual that files a tax return. For businesses, the employer
identification number assigned by IRS serves as the TIN. For
individuals, the Social Security number assigned by the Social Security
Administration serves as the TIN.
[9] In instances where our work indicates that the owners or officers
of the business are involved in other related entities that have unpaid
federal taxes, we performed detailed audit and investigation on the
related entities, the owners or officers, and not just the original
business we identified. In instances where related entities exist, we
defined a case study to include all the related entities, and reported
on the combined unpaid taxes and combined fiscal year 2004 payments for
all the related entities.
[10] A few civilian agencies, such as the U.S. Postal Service, have
their own disbursing authority and do their own disbursements. Although
DOD has its own disbursement authority, some DOD payments are made
through FMS.
[11] Additionally, we designated IRS's financial management and systems
modernization as high-risk areas in 1995. See GAO, High-Risk Series: An
Overview, GAO/HR-95-1 (Washington, D.C.: February 1995). In 2005, two
of IRS's high-risk areas--collection of unpaid taxes and earned income
credit noncompliance--were consolidated to make a single high-risk area
called enforcement of tax laws. Also in 2005, IRS's high-risk areas of
business systems modernization and financial management were merged
into a single high-risk area called business systems modernization. See
GAO, High-Risk Series, An Update, GAO-05-207 (Washington, D.C.: January
2005).
[12] The Treasury agency location code (ALC) is used to identify
transactions, documents, and reports processed through Treasury by a
specific accounting point or station, within an agency or bureau of a
federal department or independent agency. The use of the ALC, also
referred to as the accounting station symbol, enables Treasury to
reconcile deposits and disbursements.
[13] In addition, for certain federal payments, TOP collects child
support debts and state income tax debts on behalf of the states.
[14] Taxpayer Relief Act of 1997 § 1024, 26 U.S.C. § 6331(h) (2000).
[15] Debts are rescinded for a variety of reasons. For example, IRS
will rescind a debt if the debtor is subject to a bankruptcy stay or if
other reasons justify the rescission (such as when debt is paid in
full, compromised, or otherwise satisfied).
[16] Our initial matches of civilian contractor payments made during
fiscal year 2004 with IRS tax debt as of September 30, 2004, identified
about 63,000 contractors that had tax debt totaling $5.4 billion. We
excluded from our preliminary estimates tax debts that have not been
agreed to by the tax debtor or affirmed by the court, tax debts from
calendar year 2004, tax debts of $100 or less, and fiscal year 2004 FMS
payments of $100 or less.
[17] This figure represents the potential levy that could be collected
if there were no legal or administrative impediments, that is, if all
payments, for which we have information, could be levied against all
IRS tax debt. This potential amount is likely understated because of
data limitations in the payment files and other issues, some of which
are discussed in this report.
[18] Pub. L. No. 108-357,§. 887(a), 118 Stat. 1418, October 22, 2004,
to be codified at 26 U.S.C. § 6331 (h)(3).
[19] A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is generally one quarter of a year. The
taxpayer is required to file quarterly returns with IRS for these types
of taxes, although payment of the taxes occurs throughout the quarter.
In contrast, for income, corporate, and unemployment taxes, a tax
period is 1 year. As described later in this report, a case study
consists in some cases of multiple related entities, some or all of
which owe tax debts. The number of tax periods and the accumulated tax
debts we are reporting reflect the accumulated tax periods and tax
debts of all related entities.
[20] IRS and FMS cannot collect from payments made to one related
company to satisfy the unpaid federal taxes of another related company.
[21] The law further provides that withheld income and employment taxes
are to be held in a separate bank account considered to be a special
fund in trust for the federal government. 26 U.S.C. § 7512(b).
[22] 26 U.S.C. § 6672.
[23] 26 U.S.C. § 7202.
[24] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b).
[25] GAO, Internal Revenue Service: Recommendations to Improve
Financial and Operational Management, GAO-01-42 (Washington, D.C.: Nov.
17, 2000); Internal Revenue Service: Composition and Collectibility of
Unpaid Assessments, GAO/AIMD-99-12 (Washington, D.C.: Oct. 29, 1998);
and Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty
Assessments Are Owed, GAO/AIMD/GGD-99-211 (Washington, D.C.: Aug. 2,
1999).
[26] Tax period may not always correspond to the age of the tax debt,
as when a tax form is filed years after the due date or when IRS
assesses additional taxes to earlier tax periods.
[27] GAO/AIMD/GGD-99-211.
[28] The 10-year time may be suspended including for periods during
which the taxpayer is involved in a collection due process appeal,
litigation, or a pending offer in compromise or installment agreement.
As a result, Fig. 3 includes taxes that are for tax periods from more
than 10 years ago.
[29] We eliminated from our analysis all tax debt coded by IRS as not
having been agreed to by the taxpayer (by filing a balance due return)
or a tax court. For financial reporting, those cases are referred to as
compliance assessments.
[30] Abatements are reductions in the amount of taxes owed and can
occur for a variety of reasons, such as to correct errors made by IRS
or taxpayers or to provide relief from interest and penalties. 26
U.S.C. § 6404.
[31] The $3.3 billion shown in our analysis includes only amounts of
tax debt owed by civilian contractors paid through FMS's PACER
database. Amounts owed by the owners, officers, or related business
entities that were not paid through FMS are not included in the $3.3
billion estimate of tax debt. We include this additional tax debt in
later discussions of our case study contractors.
[32] GAO, Financial Audit: IRS's Fiscal Years 2002 and 2001 Financial
Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).
[33] GAO-04-95.
[34] IRS's 2004 financial statements reported $237 billion in total
unpaid assessments. IRS eliminates from financial reporting certain tax
debt, including, among others, TFRP assessed against officers or owners
of companies to collect the federal taxes withheld by the business from
their employees but not remitted to the federal government. IRS does
not report these debts to eliminate double counting both the business
tax debt and the officer's assessment of those taxes.
[35] Installment agreements allow for payments on the debt in smaller,
more manageable amounts. An offer in compromise approved by IRS allows
a tax debtor to settle unpaid tax debt for less than the full amount
due.
[36] According to IRS, financial hardship can be either a statutory
exclusion (under 26 U.S.C. 6343(e)) or policy exclusion, depending on
when and who makes the determination. For reporting on the FPLP, IRS
categorizes hardship cases as policy exclusions.
[37] GAO-04-95.
[38] This was done automatically within IRS's tax database based on
various transaction and status codes. IRS previously blocked all cases
assigned to its Automated Collection System (ACS) and its field
collection function. The ACS process consists primarily of telephone
calls to the tax debtor to arrange for payment. Cases assigned to field
collections are those for which a revenue officer attempts face-to-face
contact and collection. Even though unblocked as a group, IRS officials
who work on ACS and field collection inventories can manually block
individual cases they are working in order to remove them from the levy
program.
[39] The process of sending cases to the levy program is driven by the
various status codes IRS enters into its tax records--such as codes
identifying a case as being in bankruptcy or having an installment
agreement.
[40] Federal Contractor Tax Compliance Task Force, Report to Senate
Committee on Governmental Affairs Permanent Subcommittee on
Investigations (Washington, D.C.: Oct. 26, 2004).
[41] This estimate is based on all contractor payments recorded in
PACER during fiscal year 2004 being sent to TOP to be matched against
the tax debt in TOP as of September 2004. Due to the unavailability of
information at FMS, our estimate does not include an estimate of the
amount that could be collected from sending Fedwire payments to TOP.
Additionally, we were unable to estimate collections against many
payments because of blank or invalid TIN information in FMS's payment
records. The estimate of a minimum of $50 million represents our total
estimate of potential levy collections from civilian contractors less
FMS's actual collections during fiscal year 2004.
[42] These stations are generally referred by their Treasury Agency
Location Code (ALC). The ALC is used to identify transactions,
documents, and reports processed through Treasury by a specific
accounting point or station, within an agency or bureau of a federal
department or independent agency. Using the ALC enables Treasury to
reconcile deposits and disbursements.
[43] An FMS official also noted that some of the agency paying stations
we identified only disbursed categories of payments that FMS does not
currently submit to the levy program, such as type A and ACH-CTX
payments.
[44] GAO, Tax Administration: More Can Be Done to Ensure Federal
Agencies File Accurate Information Returns. GAO-04-74 (Washington,
D.C.: Dec. 5, 2003).
[45] Pub. L. No. 104-134, 110 Stat. 1321-358, April 26, 1996.
[46] 31 U.S.C. § 7701(c) and (d).
[47] Tabulation is performed for the standard payment types sent
through the levy program, that is, payments known as type B. Type A
payments--which are payments that the agency certifies the payment in
the same file that contains detailed payment information--and Fedwire
payments are not tabulated or monitored.
[48] In 1997, Treasury proposed a rule that would require disbursing
officials to reject agency payment requests that do not contain TINs.
Upon review of the comments received in response to the proposed rule,
FMS rescinded the proposed rule, and instead required agencies to
submit to FMS implementation plans to achieve compliance with the TIN
requirement. FMS's responsibility includes monitoring payment vouchers
to ensure that agencies are meeting compliance goals and time frames as
identified in the implementation reports.
[49] In addition, we identified numerous payee names that contained
only a single alphabetic character in the name field. We did not
include these in our analysis of payments with improper name fields.
[50] GAO, Tax Administration: Millions of Dollars Could Be Collected If
IRS Levied More Federal Payments. GAO-01-711 (Washington, D.C.: July
20, 2001).
[51] For type B payments, agencies send FMS the certification for the
payment separately from the detailed payment information. Type A
payments are payments in which the agency certifies the payment in the
same file that contains detailed payment information. ACH-CTX payments
(a specific kind of type B payment) are ones whereby agencies can pay
multiple invoices to a single contractor using a single ACH-CTX
payment. Fedwire is a processing system designed for high-dollar, low-
volume payments that must be received by payees the same day as
originated by the agency.
[52] FMS officials could not identify type A or ACH-CTX payments in its
disbursement databases and therefore could not determine the amount
disbursed during fiscal year 2004 through type A. Based on data
provided by FMS on the payment locations that make only type A
payments, we determined that type A payments totaled at least $15
billion during fiscal year 2004. This number is understated because a
number of other locations made both type A and type B payments, but the
amount of type A payments made by these locations is not estimable.
[53] This amount does not include $66 billion in certain benefit
payments.
[54] The typical payment mechanism involves the certification being
sent to FMS separately from detailed payment information. This type of
payment, known as type B, is sent to TOP for levy.
[55] FMS estimated that it would take about 6 hours of programming and
1 to 3 days of testing to make changes necessary in one system to send
type A payments to TOP. FMS officials stated that it could take
additional programming time to prepare other systems to send type A
payment information to TOP. However, FMS officials stated they did not
know what additional programming might be required or the potential
cost thereof.
[56] FMS officials stated that they performed a statistical match on
Fedwire payments for 1 month in 2003. FMS officials stated that because
few of these Fedwire payments had valid TINs, a small amount would have
been offset. FMS did not maintain the detailed transactions for this
statistical match for our review.
[57] Once a match is made against the TIN in a contractor payment, FMS
would match the name against all of the control names provided by IRS
to determine if there is a match for potential levy.
[58] This estimate is based on all contractor payments recorded in
PACER during fiscal year 2004 being matched against all contractor tax
debt as of September 30, 2004. Due to the unavailability of information
at FMS, our estimate does not include an estimate of the amount that
could be collected from sending Fedwire payments to TOP. Additionally,
we were unable to estimate collections against many payments due to
blank or invalid TIN information in FMS's payment records.
[59] IRS and FMS cannot collect from payments made to one related
company to satisfy the unpaid federal taxes of another related company.
[60] The remaining two case study contractors were either individuals
or sole proprietorships that filed personal income tax returns.
[61] Overall, IRS assessed trust fund penalties in 27 of our 50 case
studies. See app. II for further details.
[62] GAO, Debt Collection: State and Federal Governments Are Not Taking
Action to Collect Unpaid Tax Debt through Reciprocal Agreements, GAO-
05-697R (Washington, D.C.: to be issued).
[63] PACER data indicated FMS also disbursed about $6 billion on behalf
of Department of Defense, primarily to health insurance providers.
[64] Abatements are reductions in the amount of taxes owed and can
occur for a variety of reasons, such as to correct errors made by IRS
or taxpayers or to provide relief from interest and penalties. 26
U.S.C. § 6404 (2000).
[65] As discussed earlier in the report, FMS does not maintain
historical data on Fedwire payments.
[66] NASA cases include NASA credit card payments.
[67] Our ability to identify Department of State (State) contractors
was significantly limited by the fact that the PACER database did not
identify the name of any State contractors. Consequently, we identified
only one State contractor for a case study selection. We were able to
identify that contractor because the contractor was paid by FMS on
behalf of (i.e., conducted work for) another agency.
[68] We define related entities as entities that share common owner(s)
or officer(s), a common TIN, or a common address.
[69] We termed obviously inaccurate TINs as those that fail to meet at
least some of the TIN validation rules. For example, the TIN contained
all the same digits (e.g., 999999999) or an unusual series of digits
(e.g., 123456789).
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