Financial Management
Thousands of GSA Contractors Abuse the Federal Tax System Gao ID: GAO-06-492T March 14, 2006In February 2004 and again in June 2005, GAO testified that some Department of Defense (DOD) and civilian agency federal contractors abused the federal tax system with little consequence. Previous problems we identified with contractors with unpaid taxes have led to concerns over whether any interagency contractors, such as those on the General Services Administration's (GSA) federal supply schedule, failed to pay their taxes. GSA, through its federal supply schedule and other interagency contracts, arranges for federal agencies to purchase billions of dollars of goods and services directly from private vendors. GAO was asked to determine if GSA contractors, including both contractors that were paid by GSA and GSA interagency contractors, have unpaid federal taxes, and if so, to (1) determine the magnitude of tax debts owed by GSA contractors; (2) identify examples of GSA contractors that have tax debts and are also engaged in potentially abusive, fraudulent, or criminal activities; and (3) determine whether GSA screens contractors for tax debts and criminal activities prior to awarding contracts and at the exercise of any government contract options.
Over 3,800 GSA contractors had tax debts totaling about $1.4 billion as of June 30, 2005. This represented approximately 10 percent of the number of GSA contractors during fiscal year 2004 and the first 9 months of fiscal year 2005. GAO investigated 25 GSA contractors with abusive and potentially criminal activity. These businesses had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. These contractors worked for a number of federal agencies including the departments of Defense, Justice, and Homeland Security. A number of owners or officers of the 25 GSA contractors have significant personal assets, including commercial properties, houses worth over $1 million, and luxury vehicles. In addition, several of the owners of these GSA contractors gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Neither federal law, as implemented by the Federal Acquisition Regulation (FAR), nor GSA policies require contracting officers to specifically consider tax debts in making contracting decisions either at initial award or when considering options to extend. In addition, federal law generally prohibits the disclosure of taxpayer data, and consequently contracting officers have no access to tax data directly from the IRS. GSA contractors that do not pay tax debts could have an unfair competitive advantage in costs because they may have lower costs than tax compliant contractors on government contracts. This is especially true in wage-based businesses that provide homogenous types of goods and services. GAO's investigation identified instances in which contractors with tax debts won awards based on price differential over tax compliant competing contractors.
GAO-06-492T, Financial Management: Thousands of GSA Contractors Abuse the Federal Tax System
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Testimony:
Before the Permanent Subcommittee on Investigations, Committee on
Homeland Security and Governmental Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EST:
Tuesday, March 14, 2006:
Financial Management:
Thousands of GSA Contractors Abuse the Federal Tax System:
Statement of:
Gregory D. Kutz, Managing Director:
Forensic Audits and Special Investigations:
Steven J. Sebastian, Director:
Financial Management and Assurance:
John J. Ryan, Assistant Director:
Forensic Audits and Special Investigations:
GAO-06-492T:
GAO Highlights:
Highlights of GAO-06-492T, a testimony before the Permanent
Subcommittee on Investigations, Committee on Homeland Security and
Governmental Affairs, U.S. Senate:
Why GAO Did This Study:
In February 2004 and again in June 2005, GAO testified that some
Department of Defense (DOD) and civilian agency federal contractors
abused the federal tax system with little consequence. Previous
problems we identified with contractors with unpaid taxes have led to
concerns over whether any interagency contractors, such as those on the
General Services Administration‘s (GSA) federal supply schedule, failed
to pay their taxes. GSA, through its federal supply schedule and other
interagency contracts, arranges for federal agencies to purchase
billions of dollars of goods and services directly from private
vendors. GAO was asked to determine if GSA contractors, including both
contractors that were paid by GSA and GSA interagency contractors, have
unpaid federal taxes, and if so, to (1) determine the magnitude of tax
debts owed by GSA contractors; (2) identify examples of GSA contractors
that have tax debts and are also engaged in potentially abusive,
fraudulent, or criminal activities; and (3) determine whether GSA
screens contractors for tax debts and criminal activities prior to
awarding contracts and at the exercise of any government contract
options.
What GAO Found:
Over 3,800 GSA contractors had tax debts totaling about $1.4 billion as
of June 30, 2005. This represented approximately 10 percent of the
number of GSA contractors during fiscal year 2004 and the first 9
months of fiscal year 2005.
GAO investigated 25 GSA contractors with abusive and potentially
criminal activity. These businesses had not forwarded payroll taxes
withheld from their employees and other taxes to IRS. Willful failure
to remit payroll taxes is a felony under U.S. law. Furthermore, some
company owners diverted payroll taxes for personal gain or to fund
their businesses. These contractors worked for a number of federal
agencies including the departments of Defense, Justice, and Homeland
Security.
A number of owners or officers of the 25 GSA contractors have
significant personal assets, including commercial properties, houses
worth over $1 million, and luxury vehicles. In addition, several of the
owners of these GSA contractors gambled hundreds of thousands of
dollars at the same time they were not paying the taxes that their
businesses owed.
Examples of Abusive and Potentially Criminal Activity:
[See PDF for image]
Source: GAO‘s analysis of IRS, FMS, GSA, public, and other records.
[End of table]
Neither federal law, as implemented by the Federal Acquisition
Regulation (FAR), nor GSA policies require contracting officers to
specifically consider tax debts in making contracting decisions either
at initial award or when considering options to extend. In addition,
federal law generally prohibits the disclosure of taxpayer data, and
consequently contracting officers have no access to tax data directly
from the IRS. GSA contractors that do not pay tax debts could have an
unfair competitive advantage in costs because they may have lower costs
than tax compliant contractors on government contracts. This is
especially true in wage-based businesses that provide homogeneous types
of goods and services. GAO‘s investigation identified instances in
which contractors with tax debts won awards based on price differential
over tax compliant competing contractors.
www.gao.gov/cgi-bin/getrpt?GAO-06-492T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory Kutz at (202) 512-
7455 or Steve Sebastian at (202) 512-3406.
[End of section]
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to discuss General Services
Administration (GSA) contractors that have abused the federal tax
system while doing business with the federal government. In hearings
held by this subcommittee in February 2004 and again in June
2005,[Footnote 1] we testified that some Department of Defense (DOD)
and civilian agency federal contractors abused the federal tax system
with little consequence. In 2005, we designated interagency
contracting, in which GSA plays a prominent role, as a new high-risk
area.[Footnote 2] This designation is partly based on the fact that
interagency contracting[Footnote 3] tends to create an incentive for
the agency awarding the contracts to focus more on increasing
contracting volume that generate fees than on compliance with sound
contracting policy and required procedures (see app. II for further
details on GSA's contracting role).
This testimony continues a body of work which has identified federal
contractors with unpaid taxes. Our prior work gave rise to concerns
over whether GSA interagency contractors, such as those on GSA's
federal supply schedule, have also failed to pay their fair share of
taxes.[Footnote 4] As a result, you asked us to determine if GSA
contractors have unpaid federal taxes,[Footnote 5] and if so, to (1)
determine the magnitude of tax debts owed by GSA contractors; (2)
identify examples of GSA contractors that have tax debts and are also
engaged in potentially abusive, fraudulent, or criminal activities; and
(3) determine whether GSA screens contractors for tax debts and
criminal activities prior to awarding contracts and at the exercise of
any government contract options.
To identify GSA contractors with unpaid federal taxes, we obtained and
analyzed the Internal Revenue Service (IRS) tax debt data as of June
30, 2005. We matched the identities of contractors with IRS tax debts
to federal contractors that were either paid or awarded contracts by
GSA to contract with federal agencies during fiscal year 2004 and the
first 9 months of fiscal year 2005. To illustrate indications of abuse
or potentially criminal activity, based on our data mining, we selected
25 GSA contractors for a detailed audit and investigation. For these 25
contractors, we reviewed copies of automated tax transcripts and other
tax records (for example, revenue officer's notes) and performed
additional searches of criminal, financial, and public records. To
determine whether GSA contracting officers are required to consider tax
debts or other criminal activities, we examined the Federal Acquisition
Regulation (FAR) and GSA regulations, policies and procedures for
conducting responsibility determinations on prospective contractors. We
also discussed acquisition policies and procedures used to award
contracts with GSA officials and, as part of these discussions, we
determined whether contracting officers specifically consider tax debts
or perform background investigations in determining whether a
prospective contractor is a responsible source before the contract is
awarded and before the option to extend the contract is exercised. For
details on our scope and methodology, see appendix I.
We conducted our audit work from June 2005 through January 2006 in
accordance with U.S. generally accepted government auditing standards.
We performed our investigative work in accordance with standards
prescribed by the President's Council on Integrity and Efficiency.
Summary:
During fiscal year 2004 and the first 9 months of fiscal year 2005,
thousands of GSA contractors abused the federal tax system with little
consequence.[Footnote 6] Specifically, our analysis of data provided by
the Department of Treasury's Financial Management Service (FMS), GSA,
and the IRS indicates that over 3,800 GSA contractors, or about 10
percent of all GSA contractors, had tax debts totaling about $1.4
billion as of June 30, 2005.[Footnote 7] The unpaid taxes included
corporate income, payroll,[Footnote 8] excise, and unemployment taxes.
We found instances of abusive or potentially criminal activity related
to the federal tax system through our audit and investigation of 25 GSA
contractor case studies. These 25 contractors provided a variety of
goods and services, including building maintenance, security services,
and computer services. During fiscal year 2004 and the first 9 months
of fiscal year 2005, the contractors were tasked by multiple agencies,
including the departments of Defense, Justice, Homeland Security, and
Veterans Affairs to perform work under a GSA contract.
The 25 contractors owed primarily payroll taxes, with some dating back
to the mid-1990s. These payroll taxes included amounts withheld from
employee wages for Social Security, Medicare, and individual income
taxes. However, rather than fulfilling their role as "trustees" and
forwarding these amounts to IRS, many of these GSA contractors diverted
the money for personal gain or to fund the business. Willful failure to
remit payroll taxes is a criminal felony offense[Footnote 9] while the
failure to properly segregate payroll taxes can be a criminal
misdemeanor offense.[Footnote 10] In one case study, the contractor did
not pay its tax liability at the time the company was making a loan to
a company officer for hundreds of thousands of dollars in the 1990s.
The company subsequently filed for bankruptcy. After the company's
bankruptcy was discharged in the late 1990s, the company failed again
to remit all of its payroll taxes. At the same time of owing payroll
taxes, the company officer who received the loan acquired a luxury
vehicle and purchased a residential property currently valued in the
millions of dollars. Similarly, a number of owners or officers in the
other 24 case studies had significant personal assets, including
commercial properties, houses worth over $1 million, and luxury
vehicles. Despite owning significant assets, the owners or officers did
not pay the delinquent taxes of their businesses, and sometimes did not
pay hundreds of thousands of dollars of their own individual income
taxes. Several owners also gambled hundreds of thousands of dollars at
the same time they were not paying the taxes that their businesses
owed.
The Federal Acquisition Regulation (FAR) limits awards of contracts to
responsible prospective contractors. A responsible prospective
contractor is a contractor that meets seven specific criteria,[Footnote
11] including adequate financial resources and a satisfactory record of
integrity and business ethics. However, neither federal law, as
implemented by the FAR, nor GSA implementing policy specifically
require contracting officers to take into account a contractor's tax
debt when assessing whether a prospective contractor is responsible. In
policies issued to implement the FAR, GSA's guidance does not discuss
whether or how tax debts should be considered when making a
determination of responsibility. We also found that the FAR does not
require, and GSA has not issued a policy on, assessing a current
contractor's tax debts at the time the government exercises an option
to extend a contract. As a result, no review is systematically
performed by GSA to determine if such contractors have unpaid taxes at
the time a contract is awarded or when an option to extend a contract
is exercised by the government.
Due to the lack of specific responsibility criteria related to tax
debts, limited GSA access to tax information, and lack of other
procedures to assess contractor tax debts, GSA ultimately awarded
contracts, including supply schedule contracts that other federal
agencies may use to acquire services and products for their procurement
needs, to businesses with significant tax debts. Federal law generally
prohibits the disclosure of taxpayer data, and consequently contracting
officers have no access to tax data directly from the IRS. Contracting
officers can obtain some tax debt information by checking publicly
available data sources to determine if IRS or state agencies have filed
tax liens against a tax debtor's assets. However, liens that IRS places
on the company and/or its officers are not available at a single
publicly available database, and IRS does not always file liens against
tax debtors.
Finally, in wage-based businesses that provide homogeneous goods and
services, GSA contractors that owe tax debts have an unfair advantage
in price competition because they do not bear the same costs, such as
payroll taxes, that tax compliant contractors do on government
contracts.
Magnitude of Unpaid Taxes of GSA Contractors:
Over 3,800 GSA contractors had about $1.4 billion in unpaid federal
taxes as of June 30, 2005.[Footnote 12] This represents approximately
10 percent of GSA contractors during fiscal year 2004 and the first 9
months of fiscal year 2005. We took a conservative approach to
identifying the amount of tax debt owed by GSA contractors, and
therefore the amount is likely understated.
Characteristics of Contractors' Unpaid Federal Taxes:
As shown in figure 1, 85 percent of the approximately $1.4 billion in
unpaid taxes owed by GSA contractors was comprised of corporate income
and payroll taxes. The other 15 percent of taxes included excise,
unemployment, individual income, and other types of taxes. Unlike our
previous reports on contractors with tax debts, a larger percentage of
taxes owed by GSA contractors was comprised of corporate income taxes,
which are unpaid amounts that corporations owe on the income of their
business. This was due to a handful of GSA contractors that owed a
significant amount of corporate income tax debts as of June 2005.
Excluding this handful of cases, payroll taxes make up about 40 percent
of the outstanding taxes owed by GSA contractors.
Figure 1: Type of Federal Tax Debt Owed by GSA Contractors:
[See PDF for image]
[End of figure]
Unpaid payroll taxes include amounts that an employer withholds from an
employee's wages for federal income taxes, Social Security, and
Medicare--but does not remit to IRS--and the related matching
contributions of the employer for Social Security and Medicare.
Employers who do not remit payroll taxes to the federal government are
subject to civil and criminal penalties.
The amount of unpaid federal taxes we identified among GSA contractors-
-$1.4 billion--is likely understated. First, to avoid overestimating
the amount owed by government contractors, we intentionally limited our
scope to tax debts that were affirmed by either the contractor or a tax
court for tax periods prior to 2005.[Footnote 13] We did not include
the most current tax year because recently assessed tax debts that
appear as unpaid taxes may involve matters that are routinely resolved
between the taxpayer and IRS, with the taxes paid, abated,[Footnote 14]
or both within a short period. We eliminated these types of debt by
focusing on unpaid federal taxes for tax periods prior to calendar year
2005 and eliminating tax debt of $100 or less.[Footnote 15]
Also limiting the completeness of our estimate of the unpaid federal
taxes of GSA 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
from our case studies in which GSA 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 estimated $345 billion annual gross tax gap. IRS
estimates that underreporting accounts for more than 80 percent of the
total gross tax gap. Consequently, the true extent of unpaid taxes for
these businesses and individuals is not known.
GSA Contractors Involved in Abusive and Potentially Criminal Activity
Related to the Federal Tax System:
As discussed previously, businesses with employees are required by law
to collect, account for, and transfer income and employment taxes
withheld from employees' wages to IRS. Businesses that fail to remit
payroll taxes to the federal government are liable for the amounts
withheld from employees, and IRS can assess a trust fund recovery
penalty (TFRP) equal to the total amount of taxes not collected or not
accounted for and paid against individuals who are determined by IRS to
be "willful and responsible" for the nonpayment of withheld payroll
taxes.[Footnote 16] In addition to civil penalties, criminal penalties
exist for an employer's failure to turn over withheld employee payroll
taxes to IRS. Willful failure to remit payroll taxes is a criminal
felony offense punishable by imprisonment of not more than 5
years,[Footnote 17] while the failure to properly segregate payroll
taxes can be a criminal misdemeanor offense punishable by imprisonment
of up to a year.[Footnote 18]
Our audit and investigation of the 25 case-study business contractors
showed substantial abuse or potential criminal activity as all had
unpaid payroll taxes and have diverted those funds for personal or
business use. The 25 case-study contractors typically operate in wage-
based industries, providing security, building maintenance, computer
services, and personnel services for GSA and the departments of
Defense, Homeland Security, Justice, and Veterans Affairs. The types of
contracts that were awarded to these contractors included products
and/or services related to law enforcement, disaster relief, and
national security. The amount of unpaid taxes associated with these
case studies ranged from approximately $100,000 to over $9 million.
Furthermore, we determined that several of the case studies had unpaid
state and local taxes where state and local taxing authorities had
filed multiple tax liens against them. Subsequent to the award of the
most recent contract by GSA, one case study company and its owner were
debarred from future federal contracts for illegal activity unrelated
to their failure to pay their payroll taxes.
Table 1 highlights 10 case studies with unpaid taxes. Our
investigations revealed that, despite their companies owing substantial
amounts of taxes to the IRS, some owners had substantial personal
assets--including commercial real estate, interest in a chain store, or
multiple luxury vehicles. Further, several owners owned homes worth
over $1 million.
See appendix III for the details on the other 15 GSA contractor case
studies. We are referring the 25 cases detailed in our report to IRS so
that it can determine whether additional collection action or criminal
investigation is warranted.
Table 1: GSA Contractors with Unpaid Federal Taxes:
Case study: 1;
Nature of work: Emergency supplies;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $700,000;
Comments:
* Company made large loans to a company officer at same time the
company was not paying its taxes;
* IRS assessed a Trust Fund Recovery Penalty against owner;
* Company filed for bankruptcy protection owing substantial state and
federal taxes;
* The owner owned multiple real properties, including a million dollar
home, and a luxury vehicle while company owed taxes;
* Company had a federal tax lien at time GSA awarded a federal supply
schedule contract.
Case study: 2;
Nature of work: Security services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $9 million;
Comments:
* Company filed for bankruptcy in 2000s;
* At the time company was not remitting all of its payroll taxes to
IRS, the owner withdrew large amounts of funds from the company for
personal use;
* Owner used over $100,000 on gambling;
* Company submitted false reports on a government contract;
* Owner is being investigated for fraud.
Case study: 3;
Nature of work: Building maintenance;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $700,000;
Comments:
* Company affiliated with two other related entities with tax debt;
* Company filed for bankruptcy in 2000s;
* Company did not file some recent payroll tax returns;
* Owner made large cash withdraws totaling tens of thousands of dollars
during the time little or no payroll taxes were remitted to IRS;
* At the same time that the company was remitting little of its payroll
taxes to IRS, the owner bought a luxury automobile, owned a number of
rental properties, and had partial ownership in a chain store;
* Owner owes over $100,000 in personal income taxes.
Case study: 4;
Nature of work: Security services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Nearly $2 million;
Comments:
* Tax debt is primarily unpaid payroll taxes;
* Company repeatedly underpaid payroll taxes to fund company
operations;
* At the time company was underpaying payroll taxes, owner's reported
personal income was nearly $1 million;
* Company and IRS are negotiating installment agreement to pay unpaid
taxes;
* Owner owns residential property, commercial real estate, and land
worth over $1 million;
* Owner owes over $200,000 in personal income taxes.
Case study: 5;
Nature of work: Building maintenance;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $2 million;
Comments:
* Company owes over $2 million in unpaid payroll taxes for more than 10
tax periods;
* Owner used unremitted payroll taxes to fund the business;
* Owner owns multiple commercial and residential properties.
Case study: 6;
Nature of work: Moving services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $2 million;
Comments:
* Company claimed payroll taxes were not paid due to employee
embezzlement;
* Company filed offer in compromise with IRS for about 5 percent of its
outstanding tax balance, which IRS rejected;
* The owners own homes cumulatively valued over $1 million and own
several luxury vehicles;
* Spouse of one of the owners recently received about $1.5 million in
cash for sale of house.
Case study: 7;
Nature of work: Building maintenance services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $1 million;
Comments:
* Company owes payroll taxes for about 20 tax periods;
* IRS placed federal tax liens on company from late 1990s to early
2000s;
* Owner owes over $250,000 in personal income taxes.
Case study: 8;
Nature of work: Building maintenance services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $100,000;
Comments:
* Almost all taxes owed are unpaid payroll taxes;
* The owner maintains two residential properties valued at over
$1million in total;
* Federal and state tax liens were filed against the company.
Case study: 9;
Nature of work: Human resource services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $400,000;
Comments:
* IRS reported company's tax debts to Treasury for continuous levy on
federal contractor payments;
* Owner owns multiple real properties and several luxury vehicles;
* At the time owner did not remit all taxes owed to IRS, the owner made
multiple large cash withdraws at gambling casinos;
* Company obtained contract for hurricane relief efforts.
Case study: 10;
Nature of work: Public communications;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $2 million;
Comments:
* Almost all taxes owed are unpaid payroll taxes;
* The owner owns residential properties valued at about $1 million;
* At the time the company did not pay all of its payroll taxes, the
owner made about $500,000 of cash withdrawals at gambling casinos.
Source: GAO's analysis of IRS, FMS, GSA, public, and other records.
[End of table]
The following provides illustrative detailed information on several of
these cases.
* Case 1: This contractor provides emergency supplies for civilian
agencies. At the same time the company was not paying its taxes, the
company made a loan to a company officer for hundreds of thousands of
dollars. The company subsequently filed for bankruptcy owing a
substantial amount of federal and state taxes. After the company came
out of bankruptcy, the company again failed to remit all of its taxes,
including payroll taxes. IRS assessed a trust fund recovery penalty
against the company and the owner for willful failure to remit payroll
taxes.
* Case 2: The company provided security services for a civilian agency.
Our investigative work indicates that an owner of the company made
multiple cash withdrawals, totaling close to $1 million, while the
contractor owed payroll taxes. The company's owner used the cash
withdrawals to fund an unrelated business and purchase a men's gold
bracelet worth over $25,000. The company's owner has been investigated
for fraud.
* Case 4: The company provides security services for a civilian agency.
Our investigative work indicates that the owner of the company did not
make tax deposits because the company did not have the funds to pay
employee costs or other business expenses. However, we found that the
company owner owns multiple properties worth over $1 million. The owner
also owes IRS approximately $200,000 for personal income taxes.
Tax Debts Are Generally Not Considered When Awarding Contracts:
Federal law implemented in the FAR, and GSA internal policies do not
require GSA contracting officers to examine tax debt when awarding
contracts, nor do they provide guidance as to what role, if any, tax
debt should play in determining whether prospective contractors meet
the general criteria of responsible contractors. Also, due to a
statutory restriction on disclosure of taxpayer information, even if
tax debts specifically were to be considered in the awarding of
contracts, no coordinated or independent mechanism exists for
contracting officers to obtain complete information on contractors that
have unpaid tax debt. Therefore, GSA does not screen contractors for
tax debts prior to awarding contracts to GSA-paid contractors and GSA
interagency contractors, and ultimately, contractors with unpaid
federal taxes receive contracts from the federal government.
Contractors with Federal Tax Debts Are Not Explicitly Prohibited from
Doing Business with the Federal Government:
Federal law implemented in the FAR and GSA internal policies do not
expressly prohibit a contractor with unpaid federal taxes from being
awarded contracts from the federal government. Although the FAR
requires that federal agencies only do business with responsible
contractors, it does not specifically require federal agencies to deny
the award of contracts to businesses and individuals that have unpaid
taxes, unless the contractor was specifically debarred or suspended by
a debarring official for specific actions, such as conviction for tax
evasion.
As part of the contractor responsibility determination for prospective
contractors, the FAR requires contracting officers to determine whether
a prospective contractor meets several specified standards, including
adequate financial resources and a satisfactory record of integrity and
business ethics. However, the FAR does not require contracting officers
to consider tax debt in making this determination.[Footnote 19]
Similarly, GSA policies in implementing the FAR do not provide any
additional guidance to GSA contracting officers on whether or how tax
debts should be considered when making a determination of financial
responsibility.[Footnote 20] According to GSA officials, contracting
officers may consider delinquent tax debts as part of their overall
determination of a prospective contractor's financial capability;
however, the focus of such evaluation is on determining whether the
contractor has the financial capability to deliver the products and
services. Thus, there is no expectation that the contracting officer
will consider tax compliance when evaluating whether companies have the
integrity or ethics to perform the contract. In addition, according to
GSA officials, the determination for financial capability of the
contract is only applicable when awarding new contracts.[Footnote 21]
Thus, if the contractor does not pay its tax debts after the contract
award, no consideration of this will be made by GSA contracting
officers for the duration of the contract or at the subsequent exercise
of any options to extend, which for certain GSA Supply Schedule
contracts can last up to 20 years.
The FAR specifies that unless compelling reasons exist, agencies are
prohibited from soliciting offers from, or awarding contracts to,
contractors that are debarred, suspended, or proposed for debarment for
various reasons, including tax evasion.[Footnote 22] Conviction for tax
evasion is cited as one of the causes for debarment, while commission,
i.e., indictment, for tax evasion is cited as a cause for suspension.
However, the deliberate failure to remit taxes, in particular payroll
taxes, while a felony offense, will likely not result in a company
being debarred or suspended unless the contractor was indicted or
convicted of the crime. During our work, we found that none of the
contractors described in this testimony, nor the 97 contractors we
reported in our previous work, have been charged with tax
evasion,[Footnote 23] despite having abusive and potentially criminal
activities related to the tax system.
Restrictions on Tax Data Hamper Making Contractor Responsibility
Determinations:
Current law restricts contracting officers' access to tax debt
information unless reported by prospective contractors themselves or
disclosed in public records. Consequently, contracting officers do not
have ready access to information on unpaid tax debts to assist in
making contractor responsibility determinations with respect to
financial capability, ethics, and integrity.
Contracting officers do not have a coordinated and independent
mechanism to obtain accurate tax debt information on contractors that
abuse the tax system. Federal law does not permit IRS to disclose
taxpayer information, including tax debts.[Footnote 24] Thus, unless
the taxpayer provides consent,[Footnote 25] certain tax debt
information can only be discovered from public records when IRS files a
federal tax lien against the property of a tax debtor.[Footnote 26]
However, contracting officers are not required to obtain credit
reports, which provides public record information, and when credit
reports are obtained, GSA contracting officers generally focus on the
contractor's credit score and not necessarily any liens or other public
information. In addition, public record information is limited because
IRS does not file tax liens on all tax debtors, and, while IRS has a
central repository of tax liens, contracting officers do not have
access to that information. Further, the listing of a federal tax lien
in the credit reports of businesses or individuals may not be a
reliable indicator of a contractor's tax indebtedness because of
deficiencies in IRS's internal controls that have resulted in IRS not
always releasing tax liens from property when the tax debt has been
satisfied[Footnote 27].
Unless reported by prospective contractors themselves, contracting
officers face significant difficulties obtaining or verifying tax
compliance information on prospective contractors. For example, in one
contractor file we reviewed, a GSA official did inquire about a federal
tax lien with a prospective contractor. The prospective contractor
provided documentation to GSA demonstrating the satisfaction of the tax
liability covered by that lien. However, because the GSA official could
not obtain information from the IRS on tax debts, this official was not
aware that the contractor had other unresolved tax debts unrelated to
this particular tax lien.
GSA Contractors Not Required to Undergo Further Determination of
Responsibility or Background Investigation:
GSA interagency contractors are not only approved to do business with
GSA, but with all federal agencies. The FAR does not require agencies
that use contracts awarded by other agencies to perform additional
background or other investigation to validate the awarding agencies'
determination that the contractors are responsible. Agency officials at
the four agencies at which we inquired--the departments of Justice,
State, and Veterans Affairs, and the National Aeronautics and Space
Administration--generally stated that they did not perform additional
background or other investigations when using contractors selected for
interagency contracts. These officials informed us that they had
assumed GSA performed all the screening necessary to ensure that the
contractors were responsible contracting sources. Consequently, when
GSA awards interagency contracts to contractors with tax debt,
contractors with tax debts will be given an opportunity to do business
with other federal agencies for the duration of the GSA contract.
Contractors with Tax Debts Have Unfair Cost Advantage in Contract
Competition:
GSA contractors with tax debts have an unfair advantage in costs when
competing with contractors that pay their taxes. This is particularly
true for wage-based industries that provide relatively basic types of
goods and services, such as security and moving services. The most
egregious abuse, not remitting employee payroll taxes, saved these
companies over 15 percent of the employee's wages. Clearly, contractors
that do not pay their taxes do not bear the same costs that tax
compliant contractors have when competing on contracts. As a result,
when in direct competition for homogeneous types of goods and services
in wage-based businesses, these contractors could offer prices for
their goods and services that are lower than their tax compliant
competitors. Our investigations showed that some GSA contractors that
did not fully pay their payroll taxes were issued task orders based
solely on price over competing contractors that did not have any tax
debts. The following provides information on these cases.
Case 1: A GSA Schedule contractor was competitively awarded a task
order from the GSA schedule in the late 1990s to provide temporary
personnel services over another GSA contractor that was compliant with
its taxes. The task order award was based solely on the hourly cost of
the temporary employee. At the time, the contractor had owed taxes for
at least 10 years. This contractor had a history of incurring payroll
taxes on one company, then upon being assessed a trust fund recovery
penalty on that company but making little or no payments, closing that
company and starting another. The owner later renewed the contract
under a new company name and Taxpayer Identification Number.
Case 2: A GSA Schedule contractor was issued two competitive task
orders for services related to moving office furniture and equipment.
On both task orders, the contractor's offer for services was
significantly less than three competing offers on the first order and
two competing offers on the second order. The contractor owed about
$700,000 in unpaid taxes (mostly payroll taxes) while its competitors
did not owe any unpaid taxes. Because the contractor did not pay its
payroll taxes, a significant cost in a wage-based business, the
contractor's cost structure provided the contractor more flexibility in
setting its price in the competition for federal contracts.
Concluding Comments:
There is widespread concern today about contractor fraud and related
ethics problems in federal government contracting. However, except for
contractors charged with or convicted of tax evasion, no laws or
policies exist today that prevent GSA contractors with abusive and
potentially criminal activity related to the federal tax system from
being awarded contracts and doing business with federal agencies. Aside
from any general concerns about the federal government doing business
with contractors that do not pay their taxes, allowing these
contractors to do business with the federal government while not paying
their taxes could create an unfair competitive advantage for these
contractors. In essence, the current contract award process fails to
encourage contractors to pay these taxes. This causes a disincentive to
contractors to pay their fair share of taxes, and could lead to further
erosion in compliance with the nation's tax system.
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to (1) determine the magnitude of tax debts owed by
GSA contractors; (2) identify examples of GSA contractors that have tax
debts and are also engaged in potentially abusive, fraudulent, or
criminal activities; and (3) determine whether GSA screens contractors
for tax debts and criminal activities prior to awarding contracts and
at the exercise of any government contract options.
To identify the magnitude of unpaid taxes owed by GSA contractors, we
first identified the federal contractors that were either GSA
interagency contractors or that were paid by GSA. To identify GSA-paid
contractors, we obtained from the Department of the Treasury's
Financial Management Service (FMS) the Payments, Claims, and Enhanced
Reconciliation (PACER) database containing all Automated Clearing House
(ACH) and check payments made by FMS on behalf of GSA to federal
contractors during fiscal year 2004 and the first 9 months of fiscal
year 2005.[Footnote 28] To identify contractors screened by GSA's
Federal Supply Service (FSS), we obtained and analyzed GSA data on
Multiple Award Schedule (MAS) contracts and other FSS award contracts
as recorded in the Federal Supply Service Automated Supply System (FSS-
19). To identify contractors screened by GSA's Public Buildings Service
(PBS), we obtained and analyzed GSA data from its Pegasys and FPDS-NG
systems. To identify contractors screened by GSA's Federal Technology
Service, we obtained and analyzed GSA data from its Pegasys system.
To identify GSA contractors with unpaid federal taxes, we obtained and
analyzed the Internal Revenue Service (IRS) unpaid assessment data as
of June 30, 2005. We matched the GSA screened and/or paid contractor
records to the IRS unpaid assessment data using the taxpayer
identification number (TIN) field. We also matched data obtained from
competing bidders (those who were not awarded the task order) to the
IRS assessment database using the TIN field to determine whether they
owed tax debt. 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 are
as follows:
* tax debts that IRS classified as compliance assessments or memo
accounts for financial reporting,[Footnote 29]
* tax debts from calendar year 2005 tax periods, and:
* contractors with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid, and tax debts that are
recently incurred. 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 tax
debts from calendar year 2005 tax periods to eliminate tax debt that
may involve matters that are routinely resolved between the taxpayer
and IRS, with the taxes paid or abated within a short period. We
further excluded tax debts of $100 or less because they are
insignificant for the purpose of determining the extent of taxes owed
by GSA contractors.
To identify indications of abuse or potentially criminal activity, we
selected 25 GSA contractors for a detailed audit and investigation. The
25 contractors were chosen using a non-representative selection
approach based on our judgment, data mining, and a number of other
criteria. Specifically, we narrowed the 25 contractors with unpaid
taxes based on the amount of unpaid taxes, number of unpaid tax
periods, amount of payments reported by GSA and FMS,[Footnote 30]
indications that owner(s) might be involved in multiple companies with
tax debts, and selection of contractors doing business with a variety
of federal agencies.
We obtained copies of automated tax transcripts and other tax records
(for example, revenue officer's notes) from IRS as of June 30, 2005,
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 25 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 31] that have unpaid federal taxes, we also reviewed
the related entities and the owner(s) or officer(s), in addition to the
original business we identified. For the selected 25 cases, our
investigators also contacted some contractors, performed interviews,
and reviewed contract files to determine the extent of price
competition and to identify bidders on competitively awarded contracts.
To determine the extent to which contracting officers are to consider
tax debts or other criminal activities, we examined the Federal
Acquisition Regulation (FAR) and GSA policies and procedures for
conducting responsibility determinations on prospective contractors,
including specific guidance on responsibility determinations and
periodic reviews focusing on the quality of contract awards. We
discussed acquisition policies and procedures used to award contracts
with officials from the Office of Chief Acquisition, FSS, FTS, and PBS.
As part of these discussions, we asked whether contracting officers
specifically consider tax debts or perform background investigations to
determine whether a prospective contractor is a responsible source
before the contract is awarded. We also discussed with GSA officials
whether any review is performed by the contracting officer at the
option to extend the contract. Additionally, we interviewed an official
from GSA's Kansas City Credit and Finance Center to determine how the
center makes financial determination recommendations and the role, if
any, that tax debts have on that recommendation.
To obtain an understanding of what steps other federal agencies take to
screen GSA supply schedule contractors for tax debts or other criminal
activities, we interviewed procurement agency officials at selected
civilian agencies (including the National Aeronautics and Space
Administration and the departments of Justice, State, and Veterans
Affairs). We selected these agencies based on a number of criteria,
including national security concerns and amount of payments to
contractors, especially those with tax debts. As part of these
discussions, we determined the level of reliance agencies placed on
GSA's contractor qualification determinations in awarding contracts,
even for sensitive contracts such as security, to contractors that have
been approved by GSA as responsible sources.
We conducted our audit work from June 2005 through January 2006 in
accordance with U.S. 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 unpaid assessments data, we relied on the work we performed
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 was sufficiently reliable to
address this 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 Payments, Claims, and Enhanced Reconciliation (PACER) database, we
interviewed FMS officials responsible for the database and reviewed
documentation provided by FMS supporting quality reviews on its
databases. In addition, we performed electronic testing of specific
data elements in the database that we used to perform our work.
To help ensure reliability of GSA-provided data, we interviewed GSA
officials concerning the reliability of the data provided to us. In
addition, we performed electronic testing of specific data elements in
the databases that we used to perform our work and performed other
procedures to ensure the completeness of the contract data provided by
GSA. We also reviewed the results of the GSA Inspector General's audit
of the system's internal controls completed in support of GSA's fiscal
year 2004 consolidated and combined financial statements.
Based on our discussions with agency officials, review of agency
documents, and our own testing, we concluded that the data elements
used for this testimony were sufficiently reliable for our purposes.
[End of section]
Appendix II: Background:
As the federal government's principal business agent, General Services
Administration's (GSA) activities and programs are diverse and have
governmentwide implications. Through its supply schedules and
governmentwide acquisition contracts, GSA arranges for federal agencies
to purchase billions of dollars of goods and services directly from
private vendors. In addition, its telecommunication and computer
services and real estate activities involve huge sums of money and
extensive interaction with the private sector.
GSA provides goods and services and develops policy through a network
of 11 regional offices and a central office in Washington, D.C. GSA's
programs are generally run by its three service components--Federal
Supply Service (FSS), Federal Technology Service (FTS), and Public
Buildings Service (PBS).[Footnote 32]
FSS assists federal agencies in acquiring a full range of products--
including over 4 million commonly used commercial items, ranging from
furniture, computers, tools, equipment, and motor vehicles. FSS also
supports agencies in acquiring services, such as professional
consulting, travel, transportation, and property management. FSS has
followed a self-service business model, using contracts, called supply
schedule contracts, that are designed to be flexible, simple to use,
and consistent with commercial buying practices. FSS negotiates master
contracts with vendors, seeking discounts off commercial list prices
that are at least as favorable as the discounts offered to those
vendors' most favored customers. Federal agencies can then use these
supply schedule contracts to issue task orders from which goods and
services are acquired.
FTS provides customers with telecommunications products and services--
voice, data, and video--and a full range of IT products and services.
Unlike FSS, FTS has followed a full-service business model, providing
assisted procurement services to help agencies define and fill their IT
and telecommunications requirements. FTS is a major user of the FSS
supply schedule contracts as well as a range of contract vehicles FTS
and other federal agencies have awarded--commonly known as
governmentwide acquisition contracts.
PBS is the primary property manager for the federal government,
utilizing government buildings and privately owned leased
facilities.[Footnote 33] In order to meet the office space needs for
federal agencies, GSA hires and manages private sector professionals,
such as architects, engineers, and contractors to design, renovate, and
construct federal buildings. In addition, GSA leases space in cities
and small towns when leasing is the practical answer to meeting federal
space needs.
From a financing standpoint, GSA is unusual among federal agencies in
that most of its funding does not come from direct appropriations from
Congress. Instead, GSA's funding comes from fees GSA charges agencies
for the goods and services provided and the rents from its buildings.
As such, GSA must encourage other agencies to acquire goods and
services from the contracts GSA has awarded to help cover its operating
costs. In fiscal year 2004, GSA reported revenues of approximately $20
billion to cover the costs of its operations.
[End of section]
Appendix III: Contractors with Unpaid Taxes:
Table 1 in the main portion of this testimony provides data on 10
detailed case studies. Table 2 shows the remaining case studies that we
audited and investigated. As with the 10 cases discussed in the body of
this testimony, we also found substantial abuse or potentially criminal
activity related to the federal tax system during our review of these
15 case studies. The case studies involving businesses with employees
primarily involved unpaid payroll taxes. Several of the companies
negotiated an installment or repayment agreement with the Internal
Revenue Service (IRS) but subsequently defaulted on that agreement.
Table 2: GSA Contractors with Unpaid Federal Taxes:
Case study: 11;
Nature of work: Commercial research;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Nearly $400,000;
Comments:
* Company repeatedly underpaid its payroll taxes since the 1990s and
owes payroll tax debt for more than 15 tax periods;
* Company diverted payroll taxes to fund business;
* Company negotiating offer in compromise with IRS;
* Owner owns a million dollar home;
* Multiple state tax liens totaling more than $50,000 filed against the
company.
Case study: 12;
Nature of work: Management consulting services;
Contract payments from October 2003 to June 2005: At least; $1 million;
Unpaid federal tax: Nearly $200,000;
Comments:
* Company in active repayment agreement with IRS;
* Company awarded grants by Department of Housing and Urban
Development.
Case study: 13;
Nature of work: Financial Related Services;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $1 million;
Comments:
* Company tax debts cover more than 10 tax periods beginning in the
1990s;
* Tax debt is primarily unpaid payroll taxes.
Case study: 14;
Nature of work: Web site development services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $200,000;
Comments:
* Company sporadically made payroll tax payments in the early 2000s;
* Company negotiated installment agreement in 2000s but subsequently
defaulted on the agreement within the next year.
Case study: 15;
Nature of work: Information technology services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $2 million;
Comments:
* Tax debt is unpaid payroll taxes covering nearly 15 tax periods;
* The company is a chronic nonfiler of payroll taxes and repeatedly
fails to remit payroll tax deposits;
* IRS initiated litigation against company.
Case study: 16;
Nature of work: Data processing services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $100,000;
Comments:
* Tax debt is unpaid payroll taxes covering about 10 tax periods;
* Company attempted to establish installment agreement after offer in
compromise for about $50,000 was rejected by IRS;
* IRS assessed a Trust Fund Recovery Penalty against owner.
Case study: 17;
Nature of work: Elevator services;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $800,000;
Comments:
* Company repeatedly underpaid its payroll taxes since the early 2000s;
* Company entered into installment agreement with the IRS but
subsequently defaulted;
* IRS assessed owner Trust Fund Recovery Penalties of more than
$300,000 for willful failure to pay payroll taxes;
* Multiple state and local tax liens totaling more than $200,000 filed
against the company.
Case study: 18;
Nature of work: Security services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $2 million;
Comments:
* Company negotiated installment agreement with IRS but frequently late
in payments;
* Bank closed company's checking account because of suspected check
kiting;
* Owner owns million-dollar lakeside residence;
* Multiple federal and state tax liens totaling over $2 million filed
against the company since early 2000s.
Case study: 19;
Nature of work: Facilities management services;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $500,000;
Comments:
* Business affiliated with one other related entity with over $500,000
in unpaid taxes;
* Tax debt largely consists of payroll taxes;
* Company negotiated installment agreement with IRS in 2000s but
defaulted on agreement the following year;
* Owner leasing a luxury vehicle.
Case study: 20;
Nature of work: Manufacturing fixtures;
Contract payments from October 2003 to June 2005: At least $1 million;
Unpaid federal tax: Over $100,000;
Comments:
* Owner owns commercial property worth nearly $2 million;
* IRS assessed a Trust Fund Recovery Penalty against owner for willful
failure to pay payroll taxes;
* Multiple state and county tax liens filed against the company.
Case study: 21;
Nature of work: Computer consulting services;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $100,000;
Comments:
* The company has not remitted payroll taxes or filed payroll tax
returns to the IRS since early 2000s;
* IRS reported company's tax debts to Treasury for continuous levy on
federal contractor payments.
Case study: 22;
Nature of work: Security services;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Over $3 million;
Comments:
* Tax debt is primarily unpaid payroll taxes covering nearly 15 tax
periods;
* Company attempted offer in compromise but was rejected by IRS;
* Owner owned commercial properties and a yacht.
Case study: 23;
Nature of work: Communication equipment;
Contract payments from October 2003 to June 2005: Up to $100,000;
Unpaid federal tax: Nearly $900,000;
Comments:
* Tax debt is primarily unpaid payroll taxes from the 1990s;
* Company offered IRS to settle debt for about a third of what it owed,
but IRS rejected the compromise offer;
* Owner convicted of money laundering;
* Multiple state tax liens filed against company totaling over
$100,000.
Case study: 24;
Nature of work: Computer processing services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $1.7 million;
Comments:
* Company and IRS agreed to compromise debt in 2000s for about half of
what it owed but the company defaulted on the agreement (no payments
were made);
* Company has not filed payroll tax returns subsequent to compromise
agreement;
* IRS assessed trust fund recovery penalty on owner for willful failure
to remit payroll taxes;
* Company officer was arrested for assault.
Case study: 25;
Nature of work: Human resources services;
Contract payments from October 2003 to June 2005: At least $100,000;
Unpaid federal tax: Over $100,000;
Comments:
* Company affiliated with one other related entity that owed about $100
thousand in payroll taxes;
* Company negotiated installment agreement in early 2000s but
subsequently defaulted;
* Company went out of business in 2000s;
* Owner owns commercial property worth over $1 million, multiple
residential properties, and a boat.
Source: GAO's analysis of IRS, FMS, GSA, public, and other records.
[End of table]
FOOTNOTES
[1] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb.
12, 2004), and Financial Management: Thousands of Civilian Agency
Contractors Abuse the Federal Tax System with Little Consequence, GAO-
05-683T (Washington, D.C.: June 16, 2005).
[2] See GAO, High-Risk Series, An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[3] Interagency contracts are those in which one federal agency
(typically GSA) awards the contract, such as a federal supply schedule
contract, and other federal agencies use the contracts, frequently
paying a fee to do so.
[4] See GAO, Financial Management: Some DOD Contractors Abuse the
Federal Tax System with Little Consequence, GAO-04-95 (Washington,
D.C.: Feb. 12, 2004), and Financial Management: Thousands of Civilian
Agency Contractors Abuse the Federal Tax System with Little
Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005).
[5] For purposes of this report, GSA contractors include both
contractors that were paid by GSA and GSA interagency contractors. GSA-
paid contractors are contractors paid by GSA finance centers for goods
and services. These goods and services may be used by GSA internally or
may be purchased by GSA for the benefit of other agencies (such as GSA
global supply purchases of commercial items for sale to federal
agencies). GSA interagency contractors are contractors awarded
contracts by GSA (such as federal supply schedule and governmentwide
acquisition contracts) from which agencies routinely acquire services
and products for their procurement needs.
[6] 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.
[7] Because many GSA contractors are interagency contractors, some of
the approximately 3,800 contractors described in this report may also
have been included in our reports concerning DOD and civilian federal
contractors that abuse the federal tax system.
[8] Payroll taxes are amounts that employers 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. Employers are
responsible for remitting payroll taxes to IRS and are liable for any
outstanding balance.
[9] 26 U.S.C. § 7202.
[10] 26 U.S.C. § 7215 and 26 U.S.C. §7512 (b).
[11] FAR 2.101; 9.104-1.
[12] Our estimate of GSA contractors with tax debt as of June 30, 2005,
(1) excluded tax debts that have not been agreed to by the tax debtor
or affirmed by the court, (2) tax debts from calendar year 2005, and
(3) tax debts of $100 or less.
[13] We eliminated from our analysis all tax debt coded by IRS as not
having been agreed to by the taxpayer (for example, by filing a balance
due return) or a tax court. For financial reporting, those cases are
referred to as compliance assessments.
[14] 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.
[15] 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.
[16] 26 U.S.C. § 6672.
[17] 26 U.S.C. § 7202.
[18] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b).
[19] 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.
[20] GSA provides guidance to GSA contracting officers in the General
Services Administration Acquisition Manual (GSAM), Acquisition Letters,
and Procurement Information Bulletins.
[21] The FAR does not require a responsibility determination when an
agency exercises options to extend a contract. For one contract file we
reviewed, the contractor filed for bankruptcy prior to GSA's action to
extend. GSA exercised the option without consideration of the
bankruptcy. GSA subsequently could not recover over $100,000 in audit
disallowances pursuant to the bankruptcy ruling.
[22] Prior to awarding a contract, contracting officers are required to
consult a governmentwide list, called the Excluded Parties List System
(EPLS), of contractors that have been debarred, suspended, or declared
ineligible for government contracts, and review the prospective
contractor's self-certification of debarment and suspension.
[23] GAO-04-95, GAO-05-637.
[24] 26 U.S.C. § 6103.
[25] For example, contractors must provide IRS consent to validate
taxpayer identification numbers (TINS) provided by the contractors in
the Central Contractor Registration system. GSA officials stated that
the contractor is not registered into the system until the TIN is
validated with IRS records.
[26] Under section 6321 of the Internal Revenue Code, IRS has the
authority to file a lien upon all property and rights to property,
whether real or personal, of a delinquent taxpayer.
[27] GAO, IRS Lien Management Report: Opportunities to Improve
Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10,
2005).
[28] Although the GSA Kansas City finance center does make contractor
payments on behalf of other agencies, they were able to identify those
payments made for GSA contracts.
[29] Under federal accounting standards, unpaid assessments require
taxpayer or court agreement to be considered federal taxes receivables.
Compliance assessments and memo accounts are not considered federal
taxes receivable because they are not agreed to by taxpayers or the
courts.
[30] Amount of payments reported by FMS and amounts reported by GSA
could differ because contractors that have been pre-approved by GSA to
do business with the government also receive payments from disbursing
entities other than FMS, for example, Department of Defense or the U.S.
Army Corps of Engineers.
[31] We define related entities as entities that share common owner(s)
or officer(s), a common TIN, or a common address.
[32] GSA is in the process of merging FSS and FTS into a new service
component called Federal Acquisition Service.
[33] Over 30 other executive branch agencies, including DOD and the
departments of State, Veterans Affairs, and Transportation, have some
level of authority to purchase, own, or lease office space or buildings.
