Recovery Act
Thousands of Recovery Act Contract and Grant Recipients Owe Hundreds of Millions in Federal Taxes
Gao ID: GAO-11-686T May 24, 2011
This testimony discusses the results of our most recent report, which we are releasing today, on American Recovery and Reinvestment Act of 2009 (Recovery Act) contract and grant recipients that owe federal taxes. Collectively, individuals, businesses, and other entities owed the U.S. government about $330 billion in known unpaid taxes, including interest and penalties, as of September 30, 2010, according to the Internal Revenue Service (IRS). IRS enforcement of the nation's tax laws continues to be on our High-Risk List. The Recovery Act appropriated $275 billion to be distributed for federal contracts, grants, and loans. According to www.Recovery.gov (Recovery.gov) data on federal spending, as of March 25, 2011, about $191 billion of that amount had been paid out. As far back as 1992, we have said that Congress should consider whether tax compliance should be a prerequisite for receiving a federal contract. Federal law does not prohibit the awarding of contracts or grants to entities because they owe federal taxes and does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal agencies unless the taxpayer consents. Because of the potential that some Recovery Act recipients also have unpaid federal taxes you asked us to investigate this issue. This statement is based on our most recent report regarding tax delinquent federal contractors and grantees. Our report and my statement address two issues: (1) the magnitude of known tax debt owed by Recovery Act contract and grant recipients; and (2) examples of Recovery Act contract and grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt owed by Recovery Act contract and grant recipients, we identified contract and grant recipients from Recovery.gov and compared them to known tax debts as of September 30, 2009, from IRS.
We found the following: (1) Thousands of Recovery Act contract and grant recipients owe hundreds of millions in federal taxes: At least 3,700 Recovery Act contract and grant recipients--including prime recipients, subrecipients, and vendors--are estimated to owe more than $750 million in known unpaid federal taxes as of September 30, 2009, and received over $24 billion in Recovery Act funds. This represented nearly 5 percent of the approximately 80,000 contractors and grant recipients in the data from Recovery.gov as of July 2010 that we reviewed. The estimated amount of known unpaid federal taxes is likely understated because IRS databases do not include amounts owed by recipients who have not filed tax returns or understated their taxable income and for which IRS has not assessed tax amounts due. In addition, our analysis does not include Recovery Act contract and grant recipients who are noncompliant with or not subject to Recovery Act reporting requirements. Our analysis also does not include contract and grant recipients that were not registered in the Central Contractor Registration (CCR). Because Recovery.gov does not contain taxpayer identification numbers (TIN), we used CCR to identify the TIN for each contract and grant recipient. We were not able to match about 17,000 of the 80,000 recipients in Recovery.gov to the CCR database. As such, those 17,000 recipients were not included in our analysis. (2) Examples of Recovery Act recipients with unpaid federal taxes engaged in abusive or potentially criminal activity: For the 15 cases we selected for further review, we found abusive or potentially criminal activity, i.e., recipients had failed to remit payroll taxes to IRS. Federal law requires employers to hold payroll tax money "in trust" before remitting it to IRS. Failure to remit payroll taxes can result in civil or criminal penalties under U.S. law. The amount of unpaid taxes associated with these case studies were about $40 million, ranging from approximately $400,000 to over $9 million. IRS has taken collection or enforcement activities (e.g., filing of federal tax liens) against all 15 of these recipients. Our analysis and investigation found that only 1 of these 15 Recovery Act recipients was subject to the new Federal Acquisition Regulation requirement for certification of tax debts in relation to their Recovery Act awards. Because that contractor was current on its repayment agreement, the contractor was not required to disclose its tax debts. The other 14 recipients were grant recipients or contract subrecipients. However, 1 of the 14 companies that recently filed an Online Representations and Certifications Application improperly stated that the company had not been notified of any delinquent federal taxes (greater than $3,000) within the preceding 3 years. We did not identify any circumstances (e.g., current repayment agreement) that would allow the company to make such certification. We have referred all 15 recipients to IRS for further investigation, if warranted.
GAO-11-686T, Recovery Act: Thousands of Recovery Act Contract and Grant Recipients Owe Hundreds of Millions in Federal Taxes
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United States Government Accountability Office:
GAO:
Testimony:
Before the Permanent Subcommittee on Investigations, Committee on
Homeland Security and Governmental Affairs, U.S. Senate:
For Release on Delivery:
Expected at 2:30 p.m. EDT:
Tuesday, May 24, 2011:
Recovery Act:
Thousands of Recovery Act Contract and Grant Recipients Owe Hundreds
of Millions in Federal Taxes:
Statement of Gregory D. Kutz, Director:
Forensic Audits and Investigative Service:
GAO-11-686T:
Chairman Levin, Ranking Member Coburn, and Members of the Subcommittee:
Thank you for the opportunity to discuss the results of our most
recent report, which we are releasing today, on American Recovery and
Reinvestment Act of 2009 (Recovery Act) contract and grant recipients
that owe federal taxes.[Footnote 1],[Footnote 2] Collectively,
individuals, businesses, and other entities owed the U.S. government
about $330 billion in known unpaid taxes, including interest and
penalties, as of September 30, 2010, according to the Internal Revenue
Service (IRS). IRS enforcement of the nation's tax laws continues to
be on our High-Risk List.[Footnote 3] The Recovery Act appropriated
$275 billion to be distributed for federal contracts, grants, and
loans.[Footnote 4] According to [hyperlink, http://www.Recovery.gov]
(Recovery.gov) data on federal spending, as of March 25, 2011, about
$191 billion of that amount had been paid out.[Footnote 5] As far back
as 1992, we have said that Congress should consider whether tax
compliance should be a prerequisite for receiving a federal contract.
[Footnote 6] Federal law does not prohibit the awarding of contracts
or grants to entities because they owe federal taxes and does not
permit IRS to disclose taxpayer information, including unpaid
federal taxes, to federal agencies unless the taxpayer consents.
Because of the potential that some Recovery Act recipients also have
unpaid federal taxes you asked us to investigate this issue.
My statement today is based on our most recent report regarding tax
delinquent federal contractors and grantees. Our report and my
statement address two issues: (1) the magnitude of known tax debt owed
by Recovery Act contract and grant recipients; and (2) examples of
Recovery Act contract and grant recipients who have known unpaid
federal taxes. To determine, to the extent possible, the magnitude of
known tax debt owed by Recovery Act contract and grant recipients, we
identified contract and grant recipients from Recovery.gov and
compared them to known tax debts as of September 30, 2009, from IRS.
[Footnote 7] To provide examples of Recovery Act recipients with known
unpaid federal taxes, we chose a nonrepresentative selection of 30
Recovery Act contract and grant recipients, which were then narrowed
to 15 based on a number of factors, including the amount of taxes owed
and the number of delinquent tax periods. These case studies serve to
illustrate the sizable amounts of taxes owed by some organizations
that received Recovery Act funding and cannot be generalized beyond
the cases presented. Our work was performed in accordance with
generally accepted government auditing standards and with standards
for investigations prescribed by the Council of the Inspectors General
on Integrity and Efficiency.
My testimony today summarizes our findings on each of the two issues
discussed in our report. Specifically, we found the following:
* Thousands of Recovery Act contract and grant recipients owe hundreds
of millions in federal taxes: At least 3,700 Recovery Act contract and
grant recipients--including prime recipients, subrecipients, and
vendors--are estimated to owe more than $750 million in known unpaid
federal taxes as of September 30, 2009, and received over $24 billion
in Recovery Act funds. This represented nearly 5 percent of the
approximately 80,000 contractors and grant recipients in the data from
Recovery.gov as of July 2010 that we reviewed. The estimated amount of
known unpaid federal taxes is likely understated because IRS databases
do not include amounts owed by recipients who have not filed tax
returns or understated their taxable income and for which IRS has not
assessed tax amounts due. In addition, our analysis does not include
Recovery Act contract and grant recipients who are noncompliant with
or not subject to Recovery Act reporting requirements. Our analysis
also does not include contract and grant recipients that were not
registered in the Central Contractor Registration (CCR).[Footnote 8]
Because Recovery.gov does not contain taxpayer identification numbers
(TIN), we used CCR to identify the TIN for each contract and grant
recipient. We were not able to match about 17,000 of the 80,000
recipients in Recovery.gov to the CCR database. As such, those 17,000
recipients were not included in our analysis.
* Examples of Recovery Act recipients with unpaid federal taxes
engaged in abusive or potentially criminal activity: For the 15 cases
we selected for further review, we found abusive or potentially
criminal activity, i.e., recipients had failed to remit payroll taxes
to IRS. Federal law requires employers to hold payroll tax money "in
trust" before remitting it to IRS. Failure to remit payroll taxes can
result in civil or criminal penalties under U.S. law. The amount of
unpaid taxes associated with these case studies were about $40
million, ranging from approximately $400,000 to over $9 million. IRS
has taken collection or enforcement activities (e.g., filing of
federal tax liens) against all 15 of these recipients. Our analysis
and investigation found that only 1 of these 15 Recovery Act
recipients was subject to the new Federal Acquisition Regulation
requirement for certification of tax debts in relation to their
Recovery Act awards.[Footnote 9] Because that contractor was current
on its repayment agreement, the contractor was not required to
disclose its tax debts. The other 14 recipients were grant recipients
or contract subrecipients. However, 1 of the 14 companies that
recently filed an Online Representations and Certifications
Application improperly stated that the company had not been notified
of any delinquent federal taxes (greater than $3,000) within the
preceding 3 years. We did not identify any circumstances (e.g.,
current repayment agreement) that would allow the company to make such
certification. We have referred all 15 recipients to IRS for further
investigation, if warranted. Table 1 provides summary information on 3
of our 15 case study examples of Recovery Act contractors and grant
recipients with known unpaid federal taxes.
Table 1: Examples of Recovery Act Contract and Grant Recipients with
Known Unpaid Taxes:
Nature of work: Construction;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B]: Over $700 thousand;
Comments:
* Company primarily owes payroll taxes from the mid 2000s. The company
generally did not make any federal tax deposits during that time;
* Company received multiple Recovery Act awards;
* At the same time that the company was not paying its federal tax
deposit, a company executive had hundreds of thousands of dollars in
casino transactions;
* According to IRS records, a company executive admitted to paying
other creditors while neglecting to pay payroll taxes. IRS assessed a
Trust Fund Recovery Penalty (TFRP) against a key executive for failure
to pay payroll taxes;
* IRS established an installment agreement with the company to make
monthly payments of over $1,000;
* Federal government awarded the company millions of dollars in
nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this company.
Nature of work: Social services;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B]: Over $2 million;
Comments:
* Nonprofit organization primarily owes payroll taxes from the mid to
late 2000s. Nonprofit organization did not make any federal tax
deposits for several periods;
* On multiple occasions, the nonprofit organization defaulted on
installment agreements with IRS. IRS records also indicated that the
nonprofit organization may have submitted an offer in compromise to
delay IRS collection efforts;
* An executive was assessed a TFRP. IRS records indicated that this
executive was responsible for numerous questionable business expenses.
In addition, the executive had numerous transactions with casinos
totaling hundreds of thousand of dollars each year. IRS records also
indicated that IRS assessed a TFRP on this executive for another
entity that went defunct;
* IRS records indicated that the nonprofit organization failed to meet
employee payroll obligations on numerous occasions in the late 2000s;
* According to one executive, the nonprofit received millions of
dollars in government grants;
* IRS filed federal tax liens against this organization.
Nature of work: Technical services;
Total Recovery Act awards[A]: Over $100 thousand;
Known unpaid federal taxes[B]: Over $4 million;
Comments:
* Company owes payroll taxes from the mid to late 2000s. For several
periods, the company did not make any tax deposits. According to IRS
records, the company claimed it did not make tax deposits because the
government did not give the company an abatement on its taxes[C];
* IRS assessed a TFRP against a company executive, who owns real
estate valued at an estimated $4 million. This executive also
purchased a luxury vehicle at the same time the company was not paying
its payroll taxes. The company executive reported hundreds of
thousands of dollars in adjusted gross income in a recent tax return;
* IRS established an installment agreement with the company to make
monthly payments of tens of thousands of dollars. IRS records
indicated that the company provided unique and essential services to
the government;
* Federal government awarded the company millions of dollars in
nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this company.
Source: GAO's analysis of IRS and Recovery.gov records.
Note: All dollar amounts are rounded.
[A] Total Recovery Act awards are based on contractor and grantee
recipient reports as of July 2010.
[B] Rounded known unpaid tax amount as of September 30, 2009. Known
unpaid tax amount does include penalty and interest.
[C] 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.
[End of table]
Additional examples of Recovery Act contract and grant recipients with
known unpaid taxes can be found in our report.
Chairman Levin, Ranking Member Coburn, this completes my prepared
statement. I would be happy to respond to any questions you or other
Members of the Committee may have at this time.
Contacts:
For additional information about this testimony, please contact
Gregory D. Kutz at (202) 512-6722 or kutzg@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement.
[End of section]
Footnotes:
[1] GAO, Recovery Act: Thousands of Recovery Act Contract and Grant
Recipients Owe Hundreds of Millions in Federal Taxes, [hyperlink,
http://www.gao.gov/products/GAO-11-485] (Washington, D.C.: Apr. 28,
2011).
[2] For the purposes of this report, we refer to prime recipients,
subrecipients, and vendors as recipients of Recovery Act funds.
[3] GAO, GAO's 2011 High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-11-394T] (Washington, D.C.: Feb. 17,
2011).
[4] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009).
[5] Recovery.gov is a Web site created under the Recovery Act in order
to track and publicly disclose the projects and activities for which
Recovery Act funds were expended or obligated and information
concerning the amount and use of funds by nonfederal recipients. It
includes spending at the prime recipient level, as well as certain
subrecipients.
[6] GAO, Tax Administration: Federal Contractor Tax Delinquencies and
Status of the 1992 Tax Return Filing Season, [hyperlink,
http://www.gao.gov/products/GAO/T-GGD-92-23] (Washington, D.C.: Mar.
17, 1992).
[7] Specifically, we obtained all of the fourth quarterly contract and
grant recipient reports made available on July 30, 2010, as well as
all reports from prior quarterly submissions that were marked as
"final" by the recipients.
[8] CCR is the primary registrant database for the U.S. federal
government. According to the Federal Acquisition Regulation 4.1102,
prospective contractors shall be registered in the CCR database prior
to award of a contract or agreement. Entities applying for grant
awards from the federal government also need to register in CCR. All
Recovery Act prime recipients were to register in the CCR database.
[9] On May 22, 2008, the Civil Agency Acquisition Council and the
Defense Acquisition Regulations Council amended the FAR by adding
conditions regarding delinquent federal taxes and the violation of
federal criminal tax laws. The FAR rule requires offerors on federal
contracts to certify whether or not they have, within a 3-year period
preceding the offer, been convicted of or had a civil judgment
rendered against them for, among other things, violating federal
criminal tax law, or been notified of any delinquent federal taxes
greater than $3,000 for which the liability remains unsatisfied. This
certification is made through the Online Representations and
Certifications Application Web site, orca.bpn.gov.
[End of section]
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