Financial Management
Some DOD Contractors Abuse the Federal Tax System with Little Consequence Gao ID: GAO-04-414T February 12, 2004GAO addressed issues related to three high-risk areas including the Department of Defense (DOD) and the Internal Revenue Service (IRS) financial management and IRS collection of unpaid taxes. This testimony provides a perspective on (1) the magnitude of unpaid federal taxes owed by DOD contractors, (2) whether indications exist of abuse or criminal activity by DOD contractors related to the federal tax system, (3) whether DOD and IRS have effective processes and controls in place to use the Treasury Offset Program (TOP) in collecting unpaid federal taxes from DOD contractors, and (4) whether DOD contractors with unpaid taxes are prohibited by law from receiving federal contracts. In a companion report issued today.
DOD and IRS records showed that over 27,000 contractors owed about $3 billion in unpaid taxes as of September 30, 2002. DOD has not fully implemented provisions of the Debt Collection Improvement Act of 1996 that would assist IRS in levying up to 15 percent of each contract payment to offset a DOD contractor's federal tax debt. We estimate that DOD could have collected at least $100 million in fiscal year 2002 had it and IRS fully utilized the levy process authorized by the Taxpayer Relief Act of 1997. As of September 2003, DOD had collected only about $687,000 in part because DOD provides contractor payment information from only 1 of its 16 payment systems to TOP. In response to our draft report, DOD developed a schedule to provide payment information to TOP for all of its additional payment systems by March 2005. Furthermore, we found abusive or potentially criminal activity related to the federal tax system through our audit and investigation of 47 DOD contractor case studies. The 47 contractors provided a variety of goods and services, including building maintenance, catering, dentistry, funeral services, and parts or support for weapons and other sensitive military programs. The businesses in these case studies owed primarily payroll taxes with some dating back to the early 1990s. These payroll taxes included amounts withheld from employee wages for Social Security, Medicare, and individual income taxes. However, rather than fulfill their role as "trustees" and forward these amounts to IRS, these DOD contractors diverted the money for personal gain or to fund the business. For example, owners of two businesses each borrowed nearly $1 million from their companies and, at about the same time, did not remit millions of dollars in payroll taxes. One owner bought a boat, several cars, and a home outside the United States. The other paid over $1 million for a furnished home. Both contractors received DOD payments during fiscal year 2002, but one went out of business in 2003. The business, however, transferred its employees to a relative's company (also with unpaid taxes) and recently received payments on a previous contract. IRS's continuing challenges in collecting unpaid federal taxes also contributed to the problem. In several case studies, IRS was not pursuing DOD contractors due to resource and workload management constraints. For other cases, control breakdowns resulted in IRS freezing collection activity for reasons that were no longer applicable. Federal law does not prohibit contractors with unpaid federal taxes from receiving federal contracts. OMB is responsible for providing overall direction to governmentwide procurement policies, regulations, and procedures, and is in the best position to develop policy options for prohibiting federal contracts to contractors that abuse the tax system.
GAO-04-414T, Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence
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Testimony:
Before the Permanent Subcommittee on Investigations, Committee on
Governmental Affairs, U.S. Senate:
For Release on Delivery Expected at 9:30 a.m. EST Thursday, February
12, 2004:
FINANCIAL MANAGEMENT:
Some DOD Contractors Abuse the Federal Tax System with Little
Consequence:
Statement of Gregory D. Kutz:
Director, Financial Management and Assurance:
Steven J. Sebastian:
Director, Financial Management and Assurance:
John J. Ryan:
Assistant Director, Office of Special Investigations:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-414T]:
GAO Highlights:
Highlights of GAO-04-414T, a testimony before the Permanent
Subcommittee on Investigations, Committee on Governmental Affairs,
U.S. Senate
Why GAO Did This Study:
GAO addressed issues related to three high-risk areas including the
Department of Defense (DOD) and the Internal Revenue Service (IRS)
financial management and IRS collection of unpaid taxes. This
testimony provides a perspective on (1) the magnitude of unpaid
federal taxes owed by DOD contractors, (2) whether indications exist
of abuse or criminal activity by DOD contractors related to the
federal tax system, (3) whether DOD and IRS have effective processes
and controls in place to use the Treasury Offset Program (TOP) in
collecting unpaid federal taxes from DOD contractors, and (4) whether
DOD contractors with unpaid taxes are prohibited by law from receiving
federal contracts.
In a companion report issued today, GAO made recommendations to DOD
for complying with statutory guidance and supporting IRS efforts in
collecting unpaid taxes, to IRS for improving the effectiveness of
collection activities, and to the Office of Management and Budget
(OMB) to develop options for prohibiting awards to contractors that
abuse the tax system. DOD and IRS partially agreed; OMB did not agree.
DOD and OMB also did not agree with GAO‘s matters for congressional
consideration that DOD report on its collections through TOP, and OMB
report on policy options developed for contractors that abuse the tax
system. GAO reiterated support for its recommendations as well as its
suggestions to Congress.
What GAO Found:
DOD and IRS records showed that over 27,000 contractors owed about $3
billion in unpaid taxes as of September 30, 2002. DOD has not fully
implemented provisions of the Debt Collection Improvement Act of 1996
that would assist IRS in levying up to 15 percent of each contract
payment to offset a DOD contractor‘s federal tax debt. We estimate
that DOD could have collected at least $100 million in fiscal year
2002 had it and IRS fully utilized the levy process authorized by the
Taxpayer Relief Act of 1997. As of September 2003, DOD had collected
only about $687,000 in part because DOD provides contractor payment
information from only 1 of its 16 payment systems to TOP. In response
to our draft report, DOD developed a schedule to provide payment
information to TOP for all of its additional payment systems by March
2005.
Furthermore, we found abusive or potentially criminal activity related
to the federal tax system through our audit and investigation of 47
DOD contractor case studies. The 47 contractors provided a variety of
goods and services, including building maintenance, catering,
dentistry, funeral services, and parts or support for weapons and
other sensitive military programs. The businesses in these case
studies owed primarily payroll taxes with some dating back to the
early 1990s. These payroll taxes included amounts withheld from
employee wages for Social Security, Medicare, and individual income
taxes. However, rather than fulfill their role as ’trustees“ and
forward these amounts to IRS, these DOD contractors diverted the money
for personal gain or to fund the business.
For example, owners of two businesses each borrowed nearly $1 million
from their companies and, at about the same time, did not remit
millions of dollars in payroll taxes. One owner bought a boat, several
cars, and a home outside the United States. The other paid over $1
million for a furnished home. Both contractors received DOD payments
during fiscal year 2002, but one went out of business in 2003. The
business, however, transferred its employees to a relative‘s company
(also with unpaid taxes) and recently received payments on a previous
contract.
IRS‘s continuing challenges in collecting unpaid federal taxes also
contributed to the problem. In several case studies, IRS was not
pursuing DOD contractors due to resource and workload management
constraints. For other cases, control breakdowns resulted in IRS
freezing collection activity for reasons that were no longer
applicable. Federal law does not prohibit contractors with unpaid
federal taxes from receiving federal contracts. OMB is responsible for
providing overall direction to governmentwide procurement policies,
regulations, and procedures, and is in the best position to develop
policy options for prohibiting federal contracts to contractors that
abuse the tax system.
www.gao.gov/cgi-bin/getrpt?GAO-04-414T
To view the full product, click on the link above. For more
information, contact Gregory D. Kutz at (202) 512-9095 or
kutzg@gao.gov, or Steven J. Sebastian at (202) 512-3406.
[End of section]
Mr. Chairman, Members of the Subcommittee, and Representative
Schakowsky:
Thank you for the opportunity to discuss payments to Department of
Defense (DOD) contractors that abuse the federal tax system. Our
related report,[Footnote 1] released today and developed at the request
of this Subcommittee and Representative Schakowsky, addresses issues
related to three high-risk areas: DOD and Internal Revenue Service
(IRS) financial management and IRS collection of unpaid taxes. Since
1990, we have periodically reported on federal programs and operations
that are high risk due to their greater vulnerabilities to fraud,
waste, and abuse. As a result of the fraud and abuse identified in our
series of testimonies and reports on DOD's purchase card program, you
requested more comprehensive audits and investigations of controls over
payments to DOD contractors.
DOD and IRS face a variety of high-risk challenges. Of the 26 areas on
our governmentwide "high risk" list, 6 are DOD program areas, and the
department shares responsibility for 3 other high-risk areas that are
governmentwide in scope. Financial management, 1 of the 6 DOD program
high-risk areas, has weaknesses, including nonintegrated and
proliferating financial management systems, and fundamental flaws in
the overall control environment. As we have documented in numerous
reports, DOD's financial management problems leave it highly vulnerable
to fraud, waste, and abuse. IRS high-risk areas include financial
management weaknesses and difficulties in collecting unpaid taxes. Both
areas continue to expose the federal government to significant losses
of tax revenue and disproportionately increase the burden on compliant
taxpayers to fund government activities.
Today, we will summarize our work on DOD payments to contractors that
abuse the federal tax system. Our testimony will provide a perspective
on (1) the magnitude of unpaid federal taxes owed by DOD contractors,
(2) whether DOD and IRS have effective processes and controls in place
to use the Treasury Offset Program (TOP) and Federal Payment Levy
Program (FPLP) in collecting unpaid federal taxes from DOD contractors,
(3) whether indications exist of abuse or criminal activity by DOD
contractors related to the federal tax system, and (4) whether DOD
contractors with unpaid federal taxes are prohibited by law from
receiving federal contracts.
Summary:
The federal government will continue to miss opportunities to collect
on hundreds of millions of dollars in unpaid federal taxes owed by DOD
contractors until DOD begins to fulfill its responsibilities under the
Debt Collection Improvement Act of 1996 (DCIA) by fully assisting IRS
in its attempts to levy DOD contractor payments, and IRS fully utilizes
its authority under FPLP. Based on DOD and IRS records, over 27,000
contractors registered in DOD's automated registration system had
nearly $3 billion in unpaid federal taxes as of September 30, 2002. DOD
contractors receiving fiscal year 2002 payments from five of the
largest Defense Finance and Accounting Service (DFAS) contract and
vendor payment systems owed at least $1.7 billion of this nearly $3
billion.
As the largest purchaser of goods and services in the federal
government, DOD payments to contractors totaled about $183 billion in
fiscal year 2002. We estimate that DOD, which functions as its own
disbursing agent, could have offset payments and collected at least
$100 million in unpaid taxes in fiscal year 2002 if it had fully
assisted IRS in effectively levying contractor payments. However, in
the 6 years since passage of the Taxpayer Relief Act of 1997,[Footnote
2] DOD has collected only about $687,000. DOD recently implemented a
TOP payment reporting process for its contract payment system, which
disbursed over $86 billion to contractors in fiscal year 2002. However,
DOD did not have formal plans or a schedule at the completion of our
work for reporting payment information from its 15 vendor payment
systems, which disbursed another $97 billion to contractors in fiscal
year 2002. In response to our draft report, DOD developed a schedule to
provide payment information to TOP for all of its additional payment
systems by March 2005. DOD did not have an organizational structure in
place to implement a TOP reporting process at the remaining payment
systems.
IRS faces a number of high-risk challenges. Due to resource and
workload management constraints, IRS established policies that either
exclude or delay putting a significant number of cases into the levy
program. In addition to policy constraints, inaccurate or outdated
information in IRS systems prevent cases from entering the levy
program. Our review of IRS collection efforts against DOD contractors
selected for audit and investigation indicated that IRS attempts to
work with the businesses and individuals to achieve voluntary
compliance, pursuing enforcement actions such as levies of federal
contract payments later rather than earlier in the collection process.
For many of our case study contractors, this resulted in businesses and
individuals continuing to receive federal contract payments without
making any payments on their unpaid federal taxes.
We also found numerous instances of abusive or potentially criminal
activity related to the federal tax system during our audit and
investigation of 47 DOD contractor case studies. The 34 case studies
involving businesses[Footnote 3] with employees had primarily unpaid
payroll taxes, some dating to the early 1990s and some for as many as
62 tax periods.[Footnote 4] These payroll taxes included amounts
withheld from employees for Social Security, Medicare, and individual
income taxes. However, rather than fulfill their role as "trustees" and
forward these amounts to IRS, these DOD contractors diverted the money
for personal gain or to fund their businesses. The other 13 case
studies involved individuals who had unpaid income taxes dating as far
back as the 1980s. Several contractors in our study provided parts or
services supporting weapons and other sensitive military programs.
Federal law does not prohibit a contractor with unpaid federal taxes
from receiving contracts from the federal government. DOD contract
awards of nearly $165 billion represented nearly two-thirds of the
federal government's contracting activity during fiscal year 2002. The
criteria calling for federal agencies to do business only with
responsible contractors do not require contracting officers to consider
a contractor's tax noncompliance, unless the contractor has been
suspended or debarred for tax evasion as explained later in our
statement. Presently, the federal government has no coordinated process
for identifying and determining the businesses and individuals that
abuse the federal tax system and for conveying that information to
contracting officers for use before awarding contracts.
As discussed in the report released today, we made recommendations to
DOD for complying with DCIA and supporting IRS efforts under the
Taxpayer Relief Act of 1997 in collecting unpaid taxes, to IRS for
improving the effectiveness of collection activities, and to the Office
of Management and Budget (OMB) to develop options for prohibiting
federal contract awards to businesses and individuals that abuse the
federal tax system. DOD and IRS partially agreed, and OMB did not agree
with our recommendations. DOD and OMB also did not agree with our
matters for congressional consideration that DOD report on its
collections through the TOP, and OMB report on policy options developed
and actions taken against contractors that abuse the federal tax
system. We reiterated support for our recommendations as well as our
suggestions to Congress.
DOD Contractors Owe Billions in Unpaid Federal Taxes:
The nearly $3 billion in unpaid federal taxes owed by over 27,000
contractors registered in DOD's Central Contractor Registration system
(CCR) represented almost 14 percent of the registered contractors as of
February 2003. In addition, DOD contractors receiving fiscal year 2002
payments from five of the largest DFAS contract and vendor payment
systems represented at least $1.7 billion of the nearly $3 billion in
unpaid federal taxes shown on IRS records. Data reliability issues with
respect to DOD and IRS records prevented us from identifying an exact
amount of unpaid federal taxes. Consequently, the total amount of
unpaid federal taxes owed by DOD contractors is not known.
The type of unpaid taxes owed by these DOD contractors varied and
consisted of payroll, corporate income, excise, unemployment,
individual income, and other types of taxes. Unpaid payroll taxes
include amounts that a business withholds from an employee's wages for
federal income taxes, Social Security, Medicare, and the related
matching contributions of the employer for Social Security and
Medicare. As shown in figure 1, about 42 percent of the total tax
amount owed by DOD contractors was for unpaid payroll taxes.
Figure 1: DOD Contractor Unpaid Taxes by Tax Type:
[See PDF for image]
[End of figure]
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 hold these amounts "in trust" for the federal
government until the employer makes a federal tax deposit in that
amount. 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 Federal Insurance Contribution Act
contributions for Social Security and Medicare. Individuals within the
business (e.g., corporate officers) may be held personally liable for
the withheld amounts not forwarded and assessed a civil monetary
penalty known as a trust fund recovery penalty (TFRP). Failure to remit
payroll taxes can also be a criminal felony offense punishable by
imprisonment of more than a year, while the failure to properly
segregate payroll taxes can be a criminal misdemeanor offense
punishable by imprisonment of up to a year.
The law imposes no penalties upon an employee 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 a previous report.[Footnote 5] Over
time, the amount of this subsidy is significant. As of September 1998,
the estimated cumulative amount of unpaid taxes and associated interest
for which the Social Security and Medicare trust funds were subsidized
by the general fund was approximately $38 billion.
A substantial amount of the unpaid federal taxes shown in IRS records
as owed by DOD contractors had been outstanding for several years. As
reflected in figure 2, 78 percent of the nearly $3 billion in unpaid
taxes was over a year old as of September 30, 2002, and 52 percent of
the unpaid taxes was for tax periods prior to September 30, 1999.
Figure 2: DOD Contractor Unpaid Taxes by Fiscal Year:
[See PDF for image]
[End of figure]
Our previous work[Footnote 6] has shown that 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 tax debt, which, over time, can dwarf the
original tax obligation.
DOD and IRS Are Not Collecting Millions in Unpaid Federal Taxes from
Contractors:
Until DOD establishes processes to provide information from all payment
systems to TOP, the federal government will continue missing
opportunities to collect hundreds of millions of dollars in tax debt
owed by DOD contractors. Additionally, IRS's current implementation
strategy appears to make the levy program one of the last collection
tools IRS uses. Changing the IRS collection program to (1) remove the
policies that work to unnecessarily exclude cases from entering the
levy program and (2) promote the use of the levy program to make it one
of the first collection tools could allow IRS--and the government--to
reap the advantages of the program earlier in the collection process.
DOD Is Not Fully Assisting in the Collection of Unpaid Taxes Owed by
Its Contractors:
We estimate that DOD, which functions as its own disbursing agent,
could have offset payments and collected at least $100 million in
unpaid taxes in fiscal year 2002 if it and IRS had worked together to
effectively levy contractor payments. However, in the 6 years since the
passage of the Taxpayer Relief Act of 1997, DOD has collected only
about $687,000. DOD collections to date relate to DFAS payment
reporting associated with implementation of the TOP process in December
2002 for its contract payment system,[Footnote 7] which disbursed over
$86 billion to DOD contractors in fiscal year 2002.
Although it has been more than 7 years since the passage of
DCIA,[Footnote 8] DOD has not fully assisted IRS in using its
continuous levy authority for the collection of unpaid taxes by
providing Treasury's Financial Management Service (FMS) with all DFAS
payment information. IRS's continuous levy authority authorizes the
agency to collect federal tax debts of businesses and individuals that
receive federal payments by levying up to 15 percent of each payment
until the debt is paid. Under TOP, FMS matches a database of debtors
(including those with federal tax debt) to certain federal payments
(including payments to DOD contractors). When a match occurs, the
payment is intercepted, the levied amount is sent to IRS, and the
balance of the payment is sent to the debtor. All disbursing agencies
are to compare their payment records with the TOP database. Since DOD
has its own disbursing authority, once DFAS is notified by FMS of the
amount to be levied, DOD should deduct this amount from the contractor
payment before it is made to the payee and forward the levied amount to
the Department of the Treasury as described in figure 3.
Figure 3: DOD Contractor Payment Levy Process:
[See PDF for image]
Source: GAO.
[End of figure]
The TOP database includes federal tax and nontax debt, state tax debt,
and child support debt. By fully participating in the TOP process, DOD
will also aid in the collection of other debts, such as child support
and federal nontax debt (e.g., student loans).
At the completion of our work, DOD had no formal plans or schedule to
begin providing payment information from any of its 15 vendor payment
systems to FMS for comparison with the TOP database. These 15
decentralized payment systems disbursed almost $97 billion to DOD
contractors from 22 different payment locations in fiscal year 2002. In
response to our draft report, DOD developed a schedule to provide
payment information to TOP for all of its additional payment systems by
March 2005. As we have previously reported, DOD's business systems
environment is stovepiped and not well integrated.[Footnote 9] DOD
recently reported that its current business operations were supported
by approximately 2,300 systems in operation or under development, and
requested approximately $18 billion in fiscal year 2003 for the
operation, maintenance, and modernization of DOD business systems. In
addition, DFAS did not have an organizational structure in place to
implement the TOP payment reporting process. DOD recently communicated
a timetable for implementing TOP reporting for its vendor payment
systems with completion targeted for March 2005.
IRS Policies Exclude Cases from the Levy Program:
IRS's continuing challenges in pursuing and collecting unpaid taxes
also hinder the government's ability to take full advantage of the levy
program. For example, due to resource constraints, IRS has established
policies that either exclude or delay referral of a significant number
of cases to the program. Also, the IRS review process for taxpayer
requests, such as installment agreements or certain offers in
compromise which IRS is legally required to consider, often takes many
months, during which time IRS excludes these cases from the levy
program. In addition, inaccurate or outdated information in IRS systems
prevents cases from entering the levy program. Our audit and
investigation of 47 case studies also showed IRS continuing to work
with businesses and individuals to achieve voluntary compliance, and
taking enforcement actions such as levies of federal contractor
payments later in the collection process. We recently recommended that
IRS study the feasibility of submitting all eligible unpaid federal tax
accounts to FMS on an ongoing basis for matching against federal
payment records under the levy program, and use information from any
matches to assist IRS in determining the most efficient method of
collecting unpaid taxes, including whether to use the levy
program.[Footnote 10] The study was not completed at the time of our
audit. In earlier reviews,[Footnote 11] we estimated IRS could use the
levy program to potentially recover hundreds of millions of dollars in
tax debt.
Although the levy program could provide a highly effective and
efficient method of collecting unpaid taxes from contractors that
receive federal payments, IRS policies restrict the number of cases
that enter the program and the point in the collection process they
enter the program. For each of the collection phases listed below, IRS
policy either excludes or severely delays putting cases into the levy
program.
* Phase 1: Notify taxpayer of unpaid taxes, including a demand for
payment letter.
* Phase 2: Place the case into the Automated Collection System (ACS)
process. The ACS process consists primarily of telephone calls to the
taxpayer to arrange for payment.
* Phase 3: Move the case into a queue of cases awaiting assignment to a
field collection revenue officer.
* Phase 4: Assign the case to field collections where a revenue officer
attempts face-to-face contact and collection.
As of September 30, 2002, IRS listed $81 billion of cases in these four
phases: 17 percent were in notice status, 17 percent were in ACS, 26
percent were in field collection, and 40 percent were in the queue
awaiting assignment to the field. At the same time these four phases
take place, sometimes over the course of years, DOD contractors with
unpaid taxes continue to receive billions of dollars in contract
payments. IRS excludes cases in the notification phase from the levy
program to ensure proper notification rules are followed. However, as
we previously reported, once proper notification has been completed,
IRS continues to delay or exclude from the levy program those accounts
placed in the other three phases.[Footnote 12] IRS policy is to exclude
accounts in the ACS phase primarily because officials believed they
lack the resources to issue levy notices and respond to the potential
increase in telephone calls from taxpayers responding to the notices.
Additionally, IRS excludes the majority of cases in the queue phase
(awaiting assignment to field collection) from the levy program for 1
year. Only after cases await assignment for over a year does IRS allow
them to enter the levy program. Finally, IRS excludes most accounts
from the levy program once they are assigned to field collection
because revenue officers said that the levy action could interfere with
their successfully contacting taxpayers and resolving the unpaid taxes.
These policy decisions, which may be justified in some cases, result in
IRS excluding millions of cases from potential levy. IRS officials that
work on ACS and field collection inventories can manually unblock
individual cases they are working in order to put them in the levy
program. However, by excluding cases in the ACS and field collection
phases, IRS records indicate it excluded as much as $34 billion of
cases from the levy program as of September 30, 2002. In January 2003,
IRS unblocked and made available for levy those accounts identified as
receiving federal salary or annuity payments. However, other accounts
remain blocked from the levy program. IRS stated that it intended to
unblock a portion of the remaining accounts sometime in 2005.
Additionally, $32 billion of cases are in the queue, and thus under
existing policy would be excluded from the levy program for the first
year each case is in that phase. IRS policies, along with its inability
to more actively pursue collections, both of which IRS has in the past
attributed to resource constraints, combine to prevent many cases from
entering the levy program. Since IRS has a statutory limitation on the
length of time it can pursue unpaid taxes, generally limited to 10
years from the date of the assessment, these long delays greatly
decrease the potential for IRS to collect the unpaid taxes.
We identified specific examples of IRS not actively pursuing collection
in our review of 47 selected cases involving DOD contractors. In one
case, IRS cited resource and workload management considerations. IRS is
not currently seeking collection of about $14.9 billion of unpaid taxes
citing these considerations-about 5 percent of its overall inventory of
unpaid assessments as of September 30, 2002. In another case, IRS cited
financial hardship where the taxpayer was unable to pay. This puts
collection activities on hold until the taxpayer's adjusted gross
income (per subsequent tax return filings) exceeds a certain threshold.
Some cases repeatedly entered the queue awaiting assignment to a field
collection revenue officer and remained there for long periods.
IRS Delays in Processing and Inaccurate Records Exclude Cases from the
Levy Program:
In addition to excluding cases for various operational and policy
reasons as described above, IRS excludes cases from the levy program
for particular taxpayer events such as bankruptcy, litigation, or
financial hardship, as well as when taxpayers apply for an installment
agreement or an offer in compromise. When one of these events take
place, IRS enters a code in its automated system that excludes the case
from entering the levy program. Although these actions are appropriate,
IRS may lose opportunities to collect through the levy program if the
processing of agreements is not timely or prompt action is not taken to
cancel the exclusion when the event, such as a dismissed bankruptcy
petition, is concluded.
Delays in processing taxpayer documents and errors in taxpayer records
are long-standing problems at IRS and can harm both government
interests and the taxpayer. Our review of cases involving DOD
contractors with unpaid federal taxes indicates that problems persist
in the timeliness of processing taxpayer applications and in the
accuracy of IRS records. For example, we identified a number of cases
in which the processing of DOD contractor applications for an offer in
compromise or an installment agreement was delayed for long periods,
thus blocking the cases from the levy program and potentially reducing
government collections. We also found that inaccurate coding at times
prevented both IRS collection action and cases from entering the levy
program. For example, if these blocking codes 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.
IRS Subordinates Use of the Levy Program to Other Collection Efforts:
Although the nation's tax system is built upon voluntary compliance,
when businesses and individuals fail to pay voluntarily, the government
has a number of enforcement tools to compel compliance or elicit
payment. Our review of DOD contractors with unpaid federal taxes
indicates that although the levy program could be an effective,
reliable collection tool, IRS is not using the program as a primary
tool for collecting unpaid taxes from federal contractors. For the
cases we audited and investigated, IRS subordinated the use of the levy
program in favor of negotiating voluntary tax compliance with the DOD
contractors, which often resulted in minimal or no actual collections.
DOD Contractors Involved in Abusive or Potentially Criminal Activity
Related to the Federal Tax System:
We selected for case study 47 businesses and individuals that had
unpaid taxes and were receiving DOD contractor payments in fiscal year
2002. For all 47 cases that we audited and investigated, we found
abusive or potentially criminal activity related to the federal tax
system. Thirty-four of these case studies involved businesses with
employees that had unpaid payroll taxes dating as far back as the early
1990s, some for as many as 62 tax periods. However, rather than fulfill
their role as "trustees" of this money and forward it to IRS, these DOD
contractors diverted the money for other purposes. The other 13 case
studies involved individuals that had unpaid income taxes dating as far
back as the 1980s. We are referring the 47 cases detailed in our
related report to IRS for evaluation and additional collection action
or criminal investigation.
Examples of Abusive or Potentially Criminal Activity Related to the
Federal Tax System by Businesses:
Our audit and investigation of the 34 case study business contractors
showed substantial abuse or potential criminal activity as all had
unpaid payroll taxes and all diverted funds for personal or business
use. In table 1, and on the following pages, we highlight 13 of these
businesses and estimate the amounts that could have been collected
through the levy program based on fiscal year 2002 DOD payments. For
these 13 cases, the businesses owed unpaid taxes for a range of 6 to 30
quarters (tax periods). Eleven of these cases involved businesses that
had unpaid taxes in excess of 10 tax periods, and 5 of these were in
excess of 20 tax periods. The amount of unpaid taxes associated with
these 13 cases ranged from about $150,000 to nearly $10 million; 7
businesses owed in excess of $1 million. In these 13 cases, we saw some
cases where IRS filed tax liens on property and bank accounts of the
businesses, and a few cases where IRS collected minor amounts through
the levying of non-DOD federal payments. We also saw 1 case in which
the business applied for an offer in compromise, which IRS rejected on
the grounds that the business had the financial resources to pay the
outstanding taxes in their entirety, and 2 cases in which the
businesses entered into, and subsequently defaulted on, installment
agreements to pay the outstanding taxes. In 5 of the 13 cases, IRS
assessed the owners or business officers with TFRPs, yet no collections
were received from these penalty assessments.
Table 1: DOD Contractors with Unpaid Federal Taxes--Business:
Case study: 1;
Goods or service and nature of DOD work:
Base support and custodial services: provides dining, trash removal,
security, cleaning, and recycling programs on military bases;
Unpaid federal tax amount[A]: Nearly $10 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$527,000;
Fiscal year 2002 DOD payments[C]: $3.5 million;
Comments: State tax authorities levied the business bank account. The
owner borrowed nearly $1 million from the business. The owner bought a
boat, several cars, and a home outside the United States. The business
was dissolved in 2003 and transferred its employees to a relative's
business, where it submitted invoices and received payments from DOD
on a previous contract through August 2003.
Case study: 2;
Goods or service and nature of DOD work:
Engineering research services: conducts studies for DOD;
Unpaid federal tax amount[A]: Over $1 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$58,000;
Fiscal year 2002 DOD payments[C]: $390,000;
Comments: The owner paid $1 million to purchase a house and
furnishings in the mid-1990s. At around the same time, the owner
borrowed nearly $1 million from the business, and the business stopped
paying its taxes in full. DOD awarded the business contracts totaling
over $600,000.
Case study: 3;
Goods or service and nature of DOD work:
Aircraft-related goods: manufactures structural parts for DOD
aircraft;
Unpaid federal tax amount[A]: Nearly $2 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$50,000;
Fiscal year 2002 DOD payments[C]: $336,000;
Comments: The business received over 30 DOD contracts from 1997
through 2002 totaling nearly $2 million.
Case study: 4;
Goods or service and nature of DOD work:
Research services:
provides research for DOD;
Unpaid federal tax amount[A]: Over $700,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$13,000;
Fiscal year 2002 DOD payments[C]: $86,000;
Comments: DOD awarded the business a contract in 2002 for nearly
$800,000. Owner has over $1 million in loans related to cars, real
estate, and recreational activities, and owner also has a high-
performance airplane.
Case study: 5;
Goods or service and nature of DOD work:
Janitorial services:
provides custodial services at a DOD facility;
Unpaid federal tax amount[A]: Over $3 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$108,000;
Fiscal year 2002 DOD payments[C]: $719,000;
Comments: The business did not make tax payments after early 2001, and
it made only partial payments prior to that dating back to the mid-
1990s. The business also did not file corporate tax returns for 8
years.
Case study: 6;
Goods or service and nature of DOD work:
Private security services: provides security guards at military bases;
Unpaid federal tax amount[A]: Nearly $6 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$3,000;
Fiscal year 2002 DOD payments[C]: $21,000;
Comments: One of the business's officers, who owns a large boat, paid
off a recreation-related loan in 1999. The business paid taxes while
in bankruptcy, but largely stopped paying after emerging from
bankruptcy.
Case study: 7;
Goods or service and nature of DOD work:
Furniture sales and construction services:
sells and installs office furniture at military installations;
Unpaid federal tax amount[A]: Over $150,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$6,000;
Fiscal year 2002 DOD payments[C]: $38,000;
Comments: The owners used the business to pay personal expenses, such
as house mortgage and credit cards. One owner is a retired military
officer.
Case study: 8;
Goods or service and nature of DOD work:
Custodial services:
provides janitorial and housekeeping services at military
installations;
Unpaid federal tax amount[A]: Over $800,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$219,000;
Fiscal year 2002 DOD payments[C]: $1.5 million;
Comments: The business received numerous DOD contracts from 1998
through 2001 totaling nearly $12 million. The business is linked to
potential check fraud.
Case study: 9;
Goods or service and nature of DOD work:
Construction services:
provides housing management services, including maintenance, repairs,
and renovations, on military bases;
Unpaid federal tax amount[A]: Over $1 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$357,000;
Fiscal year 2002 DOD payments[C]: $2.4 million;
Comments: The business owes DOD tens of thousands of dollars for an
overpayment in early 2000.
Case study: 10;
Goods or service and nature of DOD work:
Base support services:
provides landscaping and snow removal at a military base;
Unpaid federal tax amount[A]: Nearly $1 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$33,000;
Fiscal year 2002 DOD payments[C]: $217,000;
Comments: The business was awarded contracts from 1999 through 2000
worth over $1 million. The business owes taxes dating back to the
early 1990s.
Case study: 11;
Goods or service and nature of DOD work:
Construction services: provides repairs to aircraft hangars at a
military base;
Unpaid federal tax amount[A]: Over $700,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$422,000;
Fiscal year 2002 DOD payments[C]: $2.8 million;
Comments: [Empty].
Case study: 12;
Goods or service and nature of DOD work:
Medical personnel services: provides;
nursing, pharmacy, physical therapy, and other skilled medical
personnel in DOD facilities;
Unpaid federal tax amount[A]: Nearly $6 million;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$698,000;
Fiscal year 2002 DOD payments[C]: $4.7 million;
Comments: Several federal and state tax liens have been placed against
the owner.
Case study: 13;
Goods or service and nature of DOD work:
Aircraft- related goods: manufactures aircraft components for several
DOD and civilian programs;
Unpaid federal tax amount[A]: Over $400,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$29,000;
Fiscal year 2002 DOD payments[C]: $194,000;
Comments: The business was awarded numerous DOD contracts in a recent
4-year period totaling over $300,000.
Source: GAO analysis of DOD, IRS, FMS, public, and other records.
Notes: Dollar amounts are rounded. The nature of unpaid taxes for
businesses was primarily due to unpaid payroll taxes. A contractor
registers in the CCR database with either an EIN or an SSN. In our
report, any contractor registering with an EIN is referred to as a
business, and any contractor registering with an SSN is referred to as
an individual. An individual in CCR could be a business owner (i.e.,
sole proprietorship).
[A] Unpaid tax amount as of September 30, 2002.
[B] The estimated collections under an effective tax levy use the
assumptions that all unpaid federal taxes are referred to TOP at
Treasury FMS and all fiscal year 2002 DOD payment information is
provided to TOP. The collection amount is calculated on 15 percent of
the payment amount up to the amount of unpaid taxes.
[C] DOD payments from MOCAS, One Bill Pay, Integrated Accounts Payable
System (IAPS), Computerized Accounts Payable System (CAPS) Clipper, and
CAPS Windows automated systems identified by GAO.
[End of table]
The following provides illustrative detailed information on several of
these cases.
* Case # 1 - This base support contractor provided services such as
trash removal, building cleaning, and security at U.S. military bases.
The business had revenues of over $40 million in 1 year, with over 25
percent of this coming from federal agencies. This business's
outstanding tax obligations consisted of unpaid payroll taxes. In
addition, the contractor defaulted on an IRS installment agreement. IRS
assessed a TFRP against the owner. The business reported that it paid
the owner a six figure income and that the owner had borrowed nearly $1
million from the business. The business also made a down payment for
the owner's boat and bought several cars and a home outside the
country. The owner allegedly has now relocated his cars and boat
outside the United States. This contractor went out of business in 2003
after state tax authorities seized its bank account. The business
transferred its employees to a relative's business, which also had
unpaid federal taxes, and submitted invoices and received payments from
DOD on a previous contract through August 2003.
* Case # 2 - This engineering research contractor received nearly
$400,000 from DOD during 2002. At the time of our audit, the contractor
had not remitted its payroll tax withholdings to the federal government
since the late 1990s. In 1996, the owner bought a home and furnishings
worth approximately $1 million and borrowed nearly $1 million from the
business. The owner told our investigators that the payroll tax funds
were used for other business purposes.
* Case # 3 - This aircraft parts manufacturer did not pay payroll
withholding and unemployment taxes for 19 of 20 periods through the
mid-to late 1990s. IRS assessed a TFRP against several corporate
officers, and placed the business in the FPLP in 2000. This business
claims that its payroll taxes were not paid because the business had
not received DOD contract payments; however, DOD records show that the
business received over $300,000 from DOD during 2002.
* Case # 5 - This janitorial services contractor reported revenues of
over $3 million and had received over $700,000 from DOD in a recent
year. The tax problems of this business date back to the mid-1990s. At
the time of our audit, the business had both unpaid payroll and
unemployment taxes of nearly $3 million. In addition, the business did
not file its corporate tax returns for 8 years. IRS assessed a TFRP
against the principal officer of the business in early 2002. This
contractor employed two officers who had been previously assessed TFRPs
related to another business.
* Case # 7 - This furniture business reported gross revenues of over
$200,000 and was paid nearly $40,000 by DOD in a recent year. The
business had accumulated unpaid federal taxes of over $100,000 at the
time of our audit, primarily from unpaid employee payroll taxes. The
business also did not file tax returns for several years, even after
repeated notices from IRS. The owners made an offer to pay IRS a
portion of the unpaid taxes through an offer in compromise, but IRS
rejected the offer because it concluded that the business and its
owners had the resources to pay the entire amount. At the time of our
audit, IRS was considering assessing a TFRP against the owners to make
them personally liable for the taxes the business owed. The owners used
the business to pay their personal expenses, such as their home
mortgage, utilities, and credit cards. The owners said they considered
these payments a loan from the business. Under this arrangement, the
owners were not reporting this company benefit as income so they were
not paying income taxes, and the business was reporting inflated
expenses.
* Case # 9 - This family-owned and operated building contractor
provided a variety of products and services to DOD, and DOD provided a
substantial portion of the contractor's revenues. At the time of our
review, the business had unpaid payroll taxes dating back several
years. In addition to failing to remit the payroll taxes it withheld
from employees, the business had a history of filing tax returns late,
sometimes only after repeated IRS contact. Additionally, DOD made an
overpayment to the contractor for tens of thousands of dollars.
Subsequently, DOD paid the contractor over $2 million without
offsetting the earlier overpayment.
* Case # 10 - This base support services contractor has close to $1
million in unpaid payroll and unemployment taxes dating back to the
early 1990s, and the business has paid less than 50 percent of the
taxes it owed. IRS assessed a TFRP against one of the corporate
officers. This contractor received over $200,000 from DOD during 2002.
Examples of Abuse of the Federal Tax System by Individuals:
Individuals are responsible for the payment of income taxes, and our
audit and investigation of 13 individuals showed significant abuse of
the federal tax system similar to what we found with our DOD business
case studies. In table 2, and on the following pages, we highlight four
of the individual case studies. In all four cases, the individuals had
unpaid income taxes. In one of the four cases, the individual operated
a business as a sole proprietorship with employees and had unpaid
payroll taxes. Taxes owed by the individuals ranged from four to nine
tax periods, which equated to years. Each individual owed in excess of
$100,000 in unpaid income taxes, with one owing in excess of $200,000.
In two of the four cases, the individuals had entered into, and
subsequently defaulted on, at least one installment agreement to pay
off the tax debt.
Table 2: DOD Contractors with Unpaid Federal Taxes--Individual:
Case study: 14;
Goods or service and nature of DOD work:
Vehicle repair services: provides repair and painting for military
vehicles;
Unpaid federal tax amount[A]: Over $100,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$22,000;
Fiscal year 2002 DOD payments[C]: $147,000;
Comments: The business was investigated for paying employee wages in
cash. Despite a substantial tax liability, the owner recently
purchased a home valued at over $1 million as well as a luxury sports
car. The owner also owes a federal agency for child support.
Case study: 15;
Goods or service and nature of DOD work:
Dentist: provides dental services at military facility;
Unpaid federal tax amount[A]: Over $100,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$12,000;
Fiscal year 2002 DOD payments[C]: $78,000;
Comments: DOD recently increased the individual's contract by over
$80,000. The dentist's credit history included several credit card
accounts that were identified for collection action.
Case study: 16;
Goods or service and nature of DOD work: Dentist: provides dental
services at military facility;
Unpaid federal tax amount[A]: Over $200,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$11,000;
Fiscal year 2002 DOD payments[C]: $76,000;
Comments: DOD awarded the individual a multiyear contract for over
$400,000. This individual paid income tax for only 1 year since 1993.
The individual previously had a business that owes over $100,000 in
unpaid payroll and unemployment taxes going back to the early 1990s.
Case study: 17;
Goods or service and nature of DOD work: Training services:
conducts management and leadership courses;
Unpaid federal tax amount[A]: Over $100,000;
Estimated fiscal year 2002 collections under effective tax levy[B]:
$2,000;
Fiscal year 2002 DOD payments[C]: $12,000;
Comments: This individual has not paid income taxes for 5 years.
Source: GAO analysis of DOD, IRS, FMS, public, and other records.
Notes: Dollar amounts are rounded. Nature of unpaid taxes for
individuals was primarily due to unpaid income taxes. A contractor
registers in the CCR database with either an EIN or an SSN. In our
report, any contractor registering with an EIN is referred to as a
business, and any contractor registering with an SSN is referred to as
an individual. An individual in CCR could be a business owner (i.e.,
sole proprietorship). For cases selected as individuals, we reviewed
both the owner and related business information, if it could be
identified.
[A] Unpaid tax amount as of September 30, 2002.
[B] The estimated collections under an effective tax levy use the
assumptions that all unpaid federal taxes are referred to TOP at
Treasury FMS and all fiscal year 2002 DOD payment information is
provided to TOP. The collection amount is calculated on 15 percent of
the payment amount up to the amount of unpaid taxes.
[C] DOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated
systems identified by GAO.
[End of table]
The following provides illustrative detailed information on these four
cases.
* Case # 14 - This individual's business repaired and painted military
vehicles. The owner failed to pay personal income taxes and did not
send employee payroll tax withholdings to IRS. The owner owed over
$500,000 in unpaid federal business and individual taxes. Additionally,
the TOP database showed the owner had unpaid child support. IRS levied
the owner's bank accounts and placed liens against the owner's real
property and business assets. The business received over $100,000 in
payments from DOD in a recent year, and the contractor's current DOD
contracts are valued at over $60 million. In addition, the business was
investigated for paying employee wages in cash. Despite the large tax
liability, the owner purchased a home valued at over $1 million and a
luxury sports car.
* Case # 15 - This individual, who is an independent contractor and
works as a dentist at a military installation, had a long history of
not paying income taxes. The individual did not file several tax
returns and did not pay taxes in other periods when a return was filed.
The individual entered into an installment agreement with IRS but
defaulted on the agreement. This individual received $78,000 from DOD
during a recent year, and DOD recently increased the individual's
contract by over $80,000.
* Case # 16 - This individual is another independent contractor who
also works as a dentist on a military installation. DOD paid this
individual over $200,000 in recent years, and recently signed a
multiyear contract worth over $400,000. At the time of our review, this
individual had paid income taxes for only 1 year since the early 1990s
and had accumulated unpaid taxes of several hundred thousand dollars.
In addition, the individual's prior business practice owes over
$100,000 in payroll and unemployment taxes for multiple periods going
back to the early 1990s.
* Case # 17 - DOD paid this individual nearly $90,000 for presenting
motivational speeches on management and leadership. This individual has
failed to file tax returns since the late 1990s and had unpaid income
taxes for a 5-year period from the early to mid-1990s. The total amount
of unpaid taxes owed by this individual is not known because of the
individual's failure to file income tax returns for a number of years.
IRS placed this individual in the levy program in late 2000; however,
DOD payments to this individual were not levied because DFAS payment
information was not reported to TOP as required.
See our related report[Footnote 13] for details on the other 30 DOD
contractor case studies.
Contractors with Unpaid Taxes Are Not Prohibited by Law from Receiving
Contracts from the Federal Government:
Federal law does not prohibit a contractor with unpaid federal taxes
from receiving contracts from the federal government. Existing
mechanisms for doing business only with responsible contractors do not
prevent businesses and individuals with unpaid federal taxes from
receiving contracts. Further, the government has no coordinated process
for identifying and determining the businesses and individuals with
unpaid taxes that should be prevented from receiving contracts and for
conveying that information to contracting officers before awarding
contracts.
In previous work, we supported the concept of barring delinquent
taxpayers from receiving federal contracts, loans and loan guarantees,
and insurance. In March 1992, we testified on the difficulties involved
in using tax compliance as a prerequisite for awarding federal
contracts.[Footnote 14] In May 2000, we testified in support of H.R.
4181 (106th Congress), which would have amended DCIA to prohibit
delinquent federal debtors, including delinquent taxpayers, from being
eligible to contract with federal agencies.[Footnote 15] Safeguards in
the bill would have enabled the federal government to procure goods or
services it needed from delinquent taxpayers for designated disaster
relief or national security. Our testimony also pointed out
implementation issues, such as the need to first ensure that IRS
systems provide timely and accurate data on the status of taxpayer
accounts. However, this legislative proposal was not adopted and there
is no existing statutory bar on delinquent taxpayers receiving federal
contracts.
Federal agencies are required by law to award contracts to responsible
sources.[Footnote 16] This statutory requirement is implemented in the
FAR, which requires that government purchases be made from, and
government contracts awarded to, responsible contractors
only.[Footnote 17] To effectuate this policy, the government has
established a debarment and suspension process and established certain
criteria for contracting officers to consider in determining a
prospective contractor's responsibility. Contractors debarred,
suspended, or proposed for debarment are excluded from receiving
contracts and agencies are prohibited from soliciting offers from,
awarding contracts to, or consenting to subcontracts with these
contractors, unless compelling reasons exist. Prior to award,
contracting officers are required to check a governmentwide list of
parties that have been debarred, suspended, or declared ineligible for
government contracts,[Footnote 18] as well as to review a prospective
contractor's certification[Footnote 19] on debarment, suspension, and
other responsibility matters. Among the causes for debarment and
suspension is tax evasion.[Footnote 20] In determining whether a
prospective contractor is responsible, contracting officers are also
required to determine that the contractor meets several specified
standards, including "a satisfactory record of integrity and business
ethics." Except for a brief period during 2000 through 2001,
contracting officers have not been required to consider compliance with
federal tax laws in making responsibility determinations.[Footnote 21]
Neither the current debarment and suspension process nor the
requirements for considering contractor responsibility effectively
prevent the award of government contracts to businesses and individuals
that abuse the tax system. Since most businesses and individuals with
unpaid taxes are not charged with tax evasion, and fewer still
convicted, these contractors would not necessarily be subject to the
debarment and suspension process. None of the contractors described in
this report were charged with tax evasion for the abuses of the tax
system we identified.
A prospective contractor's tax noncompliance, other than tax evasion,
is not considered by the federal government before deciding whether to
award a contract to a business or individual. Further, no coordinated
and independent mechanism exists for contracting officers to obtain
accurate information on contractors that abuse the tax system. Such
information is not obtainable from IRS because of a statutory
restriction on disclosure of taxpayer information.[Footnote 22] As we
found in November 2002,[Footnote 23] unless reported by prospective
contractors themselves, contracting officers face significant
difficulties obtaining or verifying tax compliance information on
prospective contractors.
Moreover, even if a contracting officer could obtain tax compliance
information on prospective contractors, a determination of a
prospective contractor's responsibility under the FAR when a contractor
abused the tax system is still subject to a contracting officer's
individual judgment. Thus, a business or individual with unpaid taxes
could be determined to be responsible depending on the facts and
circumstances of the case. Since the responsibility determination is
largely committed to the contracting officer's discretion and depends
on the contracting situation involved, there is the risk that different
determinations could be reached on the basis of the same tax compliance
information. On the other hand, if a prospective contractor's tax
noncompliance results in mechanical determinations of
nonresponsibility, de facto debarment could result. Further, a
determination that a prospective contractor is not responsible under
the FAR could be challenged.[Footnote 24]
Because individual responsibility determinations can be affected by a
number of variables, any implementation of a policy designed to
consider tax compliance in the contract award process may be more
suitably addressed on a governmentwide basis. The formulation and
implementation of such a policy may most appropriately be the role of
OMB's Office of Federal Procurement Policy. The Administrator of
Federal Procurement Policy provides overall direction for
governmentwide procurement policies, regulations, and procedures. In
this regard, OMB's Office of Federal Procurement Policy is in the best
position to develop and pursue policy options for prohibiting federal
contract awards to businesses and individuals that abuse the tax
system.
Concluding Comments:
Thousands of DOD contractors that failed in their responsibility to pay
taxes continue to get federal contracts. Allowing these contractors to
do substantial business with the federal government while not paying
their federal taxes creates an unfair competitive advantage for these
businesses and individuals at the expense of the vast majority of DOD
contractors that do pay their taxes. DOD's failure to fully comply with
DCIA and IRS's continuing challenges in collecting unpaid taxes have
contributed to this unacceptable situation, and have resulted in the
federal government missing the opportunity to collect hundreds of
millions of dollars in unpaid taxes from DOD contractors. Working
closely with IRS and Treasury, DOD needs to take immediate action to
comply with DCIA and thus assist in effectively implementing IRS's
legislative authority to levy contract payments for unpaid federal
taxes. Also, IRS needs to better leverage its ability to levy DOD
contractor payments, moving quickly to use this important collection
tool. Beyond DOD, the federal government needs a coordinated process
for dealing with contractors that abuse the federal tax system,
including taking actions to prevent these businesses and individuals
from receiving federal contracts.
Our related report on these issues released today includes nine
recommendations to DOD, IRS, and OMB. Our DOD recommendations address
the need to comply with the DCIA by supporting IRS efforts under the
Taxpayer Relief Act of 1997 to collect unpaid federal taxes. Our IRS
recommendations address improving the effectiveness of IRS collection
activities through earlier use of the Federal Payment Levy Program and
changing or eliminating policies that prevent businesses and
individuals with federal contracts from entering the levy program. Our
OMB recommendation addresses developing and pursuing policy options for
prohibiting federal contract awards to businesses and individuals that
abuse the federal tax system. In written comments on a draft of our
report, DOD and IRS officials partially agreed with our
recommendations. OMB officials did not agree with our recommendation to
develop policy options for prohibiting federal contract awards to
businesses and individuals that abuse the federal tax system.
Our report also suggests that Congress consider requiring DOD to
periodically report to Congress on progress in providing its payment
information to TOP for each of its contract and vendor payment systems,
including details of the resulting collections by system and in total
for all contract and vendor payment systems during the reporting
period. In addition, our report suggests that Congress consider
requiring that OMB report to Congress on progress in developing and
pursuing options for prohibiting federal government contract awards to
businesses and individuals that abuse the federal tax system, including
periodic reporting of actions taken. DOD and OMB did not agree with our
matters for congressional consideration.
We continue to believe all of our recommendations and matters for
congressional consideration constitute valid and necessary courses of
action, especially in light of the identified weaknesses and the slow
progress of DOD to fully implement the offset provisions of the DCIA
since its passage more than 7 years ago.
Mr. Chairman, Members of the Subcommittee, and Ms. Schakowsky, this
concludes our prepared statement. We would be pleased to answer any
questions you may have.
GAO Contacts and Staff Acknowledgments:
For future contacts regarding this testimony, please contact Gregory D.
Kutz at (202) 512-9095 or [Hyperlink, kutzg@gao.gov], Steven J.
Sebastian at (202) 512-3406 or [Hyperlink, sebastians@gao.gov], or
John J. Ryan at (202) 512-9587 or [Hyperlink, ryanj@gao.gov].
Individuals making key contributions to this testimony included Tida
Barakat, Gary Bianchi, Art Brouk, Ray Bush, William Cordrey, Francine
DelVecchio, K. Eric Essig, Kenneth Hill, Jeff Jacobson, Shirley Jones,
Jason Kelly, Rich Larsen, Tram Le, Malissa Livingston, Christie
Mackie, Julie Matta, Larry Malenich, Dave Shoemaker, Wayne Turowski,
Jim Ungvarsky, and Adam Vodraska.
(192118):
FOOTNOTES
[1] U.S. General Accounting Office, Financial Management: Some DOD
Contractors Abuse the Federal Tax System with Little Consequence, GAO-
04-95 (Washington, D.C.: Feb. 12, 2004).
[2] The act enhanced IRS's ability to collect unpaid federal taxes by
authorizing IRS to continuously levy up to 15 percent of certain
federal payments made to businesses and individuals.
[3] A tax identification number (TIN) is a unique nine-digit identifier
assigned to each business and individual that files a tax return. For
businesses, the employer identification number (EIN) assigned by IRS
serves as the TIN. For individuals, the Social Security number (SSN)
assigned by the Social Security Administration serves as the TIN.
Contractors register their TINs in the CCR database in either the TIN/
EIN field or the SSN field. In our report, a contractor completing the
TIN/EIN field is referred to as a business, while a contractor
completing the SSN field is referred to as an individual.
[4] A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is 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.
[5] U.S. General Accounting Office, Unpaid Payroll Taxes: Billions in
Delinquent Taxes and Penalty Assessments Are Owed, GAO/AIMD/GGD-99-211
(Washington, D.C.: Aug. 2, 1999).
[6] U.S. General Accounting Office, 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 GAO/AIMD/GGD-99-211.
[7] Mechanization of Contract Administration Services (MOCAS).
[8] Congress passed DCIA to maximize the collection of delinquent
nontax debts owed to federal agencies. Under the regulations
implementing DCIA, disbursing agencies, including DOD and others that
independently disburse rather than having it done on their behalf by
FMS, are required to compare their payment records with the TOP
database. If a match occurs, the disbursing agency must offset the
payment, thereby reducing or eliminating the nontax debt.
[9] U.S. General Accounting Office, DOD Business Systems Modernization:
Continued Investment in Key Accounting Systems Needs to Be Justified,
GAO-03-465 (Washington, D.C.: Mar. 28, 2003); DOD Business Systems
Modernization: Important Progress Made to Develop Business Enterprise
Architecture, but Much Work Remains, GAO-03-1018 (Washington, D.C.:
Sept. 19, 2003).
[10] U.S. General Accounting Office, Tax Administration: Federal
Payment Levy Program Measure, Performance, and Equity Can Be Improved,
GAO-03-356 (Washington, D.C.: Mar. 6, 2003).
[11] U.S. General Accounting Office, Tax Administration: IRS' Levy of
Federal Payments Could Generate Millions of Dollars, GAO/GGD-00-65
(Washington, D.C.: Apr. 7, 2000), GAO-03-356, and GAO-01-711.
[12] GAO-03-356.
[13] GAO-04-95.
[14] U.S. General Accounting Office, Tax Administration: Federal
Contractor Tax Delinquencies and Status of the 1992 Tax Return Filing
Season, GAO/T-GGD-92-23 (Washington, D.C.: Mar. 17, 1992).
[15] U.S. General Accounting Office, Debt Collection: Barring
Delinquent Taxpayers From Receiving Federal Contracts and Loan
Assistance, GAO/T-GGD/AIMD-00-167 (Washington, D.C.: May 9, 2000).
[16] 10 U.S.C. § 2305 (b) and 41 U.S.C. § 253b (2000).
[17] 48 C.F.R. § 9.103 (a).
[18] Contractors included on the list as having been declared
ineligible on the basis of statutory or regulatory procedures are
excluded from receiving contracts under the conditions and for the
period set forth in the statute or regulation. Agencies are prohibited
from soliciting offers from, awarding contracts to, or consenting to
subcontracts with these contractors under these conditions and for that
period.
[19] Such certification is required only for contracts exceeding the
simplified acquisition threshold.
[20] The government may suspend a contractor suspected of tax evasion,
upon adequate evidence, and debar a contractor for a conviction or
civil judgment for commission of tax evasion. Further, prospective
contractors are required to certify in their bids or proposals whether
they or their principals, within the preceding 3 years, were convicted
or had civil judgments rendered against them for commission of tax
evasion, and whether they or their principals are presently indicted or
otherwise criminally or civilly charged with commission of tax evasion.
[21] In December 2000, a controversial revision to the FAR was issued
that required contracting officers to consider a prospective
contractor's compliance with several areas of law, including tax, in
determining a satisfactory record of integrity and business ethics.
This revision was revoked in December 2001 after having been
effectively suspended for many federal agencies earlier in 2001.
[22] 26 U.S.C. § 6103 (2000).
[23] U.S. General Accounting Office, Government Contracting:
Adjudicated Violations of Certain Laws by Federal Contractors, GAO-03-
163 (Washington, D.C.: Nov. 15, 2002).
[24] For example, if the prospective contractor is a small business,
the nonresponsibility determination would be reviewed by the Small
Business Administration, which could issue a Certificate of Competency
stating that the prospective contractor is responsible for the purpose
of receiving and performing a specific government contract. A
determination of nonresponsibility could also be protested through the
bid protest process.
