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Testimony: 

Before the Subcommittee on Government Management, Organization, and 
Procurement, Committee on Oversight and Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 1:00 p.m. EST: 

Thursday, April 19, 2007: 

Tax Compliance: 

Thousands of Federal Contractors Abuse the Federal Tax System: 

Statement of Gregory D. Kutz, Managing Director: 
Forensic Audits and Special Investigations: 

GAO-07-742T: 

GAO Highlights: 

Highlights of GAO-07-742T, a testimony before the Subcommittee on 
Government Management, Organization, and Procurement, Committee on 
Oversight and Government Reform, House of Representatives 

Why GAO Did This Study: 

Since 1990, GAO has periodically reported on high-risk federal programs 
that are vulnerable to fraud, waste, and abuse. Two such high-risk 
areas are managing federal contracts more effectively and assessing the 
efficiency and effectiveness of federal tax administration. Weaknesses 
in the tax area continue to expose the federal government to 
significant losses of tax revenue and increase the burden on compliant 
taxpayers to fund government activities. Over the last several years, 
the Senate Permanent Subcommittee on Investigations requested GAO to 
investigate Department of Defense (DOD), civilian agency, and General 
Services Administration (GSA) contractors that abused the federal tax 
system. Based on that work GAO made recommendations to executive 
agencies including to improve the controls over levying payments to 
contractors with tax debt—many of which have been implemented—and 
referred 122 contractors to IRS for further investigation and 
prosecution. 

As requested, this testimony will highlight the key findings from prior 
testimonies and related reports. This testimony will (1) describe the 
magnitude of tax debt owed by federal contractors, (2) provide examples 
of federal contractors involved in abusive and potentially criminal 
activity related to the federal tax system, and (3) describe current 
law and proposed federal regulations for screening contractors with tax 
debts prior to the award of a contract. 

What GAO Found: 

In our previous audits and related investigations, we reported that 
thousands of federal contractors had substantial amounts of unpaid 
federal taxes. Specifically, about 27,000 DOD contractors, 33,000 
civilian agency contractors, and 3,800 GSA contractors owed about $3 
billion, $3.3 billion, and $1.4 billion in unpaid taxes, respectively. 
These estimates were understated because they excluded federal 
contractors that understated their income or did not file their tax 
returns; however, some contractors may be counted in more than one of 
these groups. 

As part of this work, we conducted more in-depth investigations of 122 
federal contractors and in all cases found abusive and potentially 
criminal activity related to the federal tax system. Many of these 122 
contractors were small, closely held companies that provided a variety 
of goods and services, including landscaping, consulting, catering, and 
parts or support for weapons and other sensitive programs for many 
federal agencies including the departments of Defense, Justice, and 
Homeland Security. These contractors 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. A number of owners or officers of the 122 federal 
contractors owned significant personal assets, including a sports team, 
multimillion dollar houses, a high-performance airplane, and luxury 
vehicles. Several owners gambled hundreds of thousands of dollars at 
the same time they were not paying the taxes that their businesses 
owed. 

Table: Examples of Abusive and Potentially Criminal Activity: 

Type of business: Custodial services for DOD; 
Unpaid tax debt: Over $1 million; 
Payments to contractor: Over $1 million; 
Contractor activity: Owner bought a boat, several cars, and a home 
outside the country. 

Type of business: Temporary help for civilian agency; 
Unpaid tax debt: Nearly $900,000; 
Payments to contractor: Over $1 million; 
Contractor activity: Owner followed pattern of over 20 years of closing 
businesses with tax debts, opening new ones, and incurring more tax 
debts. 

Type of business: Security under GSA contract; 
Unpaid tax debt: Over $9 million; 
Payments to contractor: Over $1 million; 
Contractor activity: Owner made cash withdrawals to fund an unrelated 
business and purchase a men's gold bracelet worth over $25,000. 

Source: Previous GAO testimonies. 

[End of table] 

Federal law, as implemented by the Federal Acquisition Regulation 
(FAR), does not now require contractors to disclose tax debts or 
contracting officers consider tax debts in making contracting 
decisions. Federal contractors that do not pay tax debts could have an 
unfair competitive advantage in costs because they have lower costs 
than tax compliant contractors on government contracts. GAO’s 
investigation identified instances in which contractors with tax debts 
won awards based on price differential over tax compliant contractors. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-742T]. 

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 kutzg@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss our past work on government 
contractors that have failed to pay their federal taxes. Our remarks 
today are based on work that we have performed over the last several 
years for the Senate Permanent Subcommittee on Investigations, 
Committee on Homeland Security and Governmental Affairs. In hearings 
held before that Subcommittee over the last several years,[Footnote 1] 
we testified that federal contractors at the Department of Defense 
(DOD), selected civilian agencies, and the General Services 
Administration (GSA) abused the federal tax system with little 
consequence. As requested, this testimony highlights the key findings 
from those testimonies and related reports. Specifically, this 
testimony will (1) describe the magnitude of tax debts that were owed 
by federal contractors at the time of our previous testimonies and 
related reports, (2) provide examples of federal contractors involved 
in abusive and potentially criminal activity related to the federal tax 
system, and (3) discuss current law and proposed changes to the Federal 
Acquisition Regulation (FAR) concerning contractor tax debt. 

To address our objectives, we reviewed prior findings from GAO audits 
of federal contractors that have abused the federal tax system. Our 
audit work was performed 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: 

In each of our audits and related investigations, we found thousands of 
federal contractors that had substantial amounts of unpaid federal 
taxes. Specifically, we testified that about 27,000 DOD contractors, 
33,000 civilian agency contractors, and 3,800 GSA contractors owed 
about $3 billion, $3.3 billion, and $1.4 billion in federal taxes, 
respectively.[Footnote 2] Much of the unpaid taxes were payroll 
taxes.[Footnote 3] However, each estimate of contractors' unpaid 
federal taxes is understated because IRS data do not reflect all 
amounts owed. Specifically, our estimates do not include amounts owed 
by contractors who have not filed tax returns or that have failed to 
report the full amount of taxes due (referred to as nonfilers and 
underreporters) and for which Internal Revenue Service (IRS) has not 
determined the amount owed. 

We conducted more in-depth case study investigations of 122 federal 
contractors that appeared to demonstrate abusive or potentially 
criminal activity related to the federal tax system. We found that, in 
fact, each of the 122 federal contractors was involved in abusive and 
potentially criminal activity related to the tax system. Many of these 
case-study contractors were small, closely held companies that operated 
in wage-based industries; such as security; building maintenance; 
computer services; and personnel services for GSA, DOD, and the 
Departments of Homeland Security, Justice, and Veterans Affairs. The 
types of contracts that were awarded to these federal contractors 
included products or services related to weapon components, space and 
aircraft parts, law enforcement, disaster relief, and national 
security. Many were established businesses (such as corporations) that 
owed payroll taxes that include amounts withheld from their employees. 
However, rather than fulfill their role as "trustees" of these funds 
and forward them to IRS as required by law, these federal contractors 
diverted the funds for other purposes.[Footnote 4] 

At the same time that they were not paying their federal taxes, many 
individuals associated with our 122 cases bought or owned significant 
personal assets, including a sports team, a high-performance airplane, 
commercial properties, multimillion dollar homes, and luxury vehicles. 
In one case, the owner of a federal contracting firm purchased a number 
of multimillion-dollar properties, an unrelated business, and a number 
of luxury vehicles while his business failed to remit to IRS a 
substantial amount of payroll taxes. Several owners also gambled 
hundreds of thousands of dollars at the same time they were not paying 
the federal taxes that their businesses owed. Further, several of the 
owners or officers of the businesses with unpaid federal taxes were 
investigated or indicted for nontax offenses such as embezzlement, 
fraud, and money laundering. 

Federal law does not prohibit a contractor with unpaid federal taxes 
from receiving contracts from the federal government. Currently, 
regulations calling for federal agencies to do business only with 
responsible contractors do not require contracting officers to consider 
a contractor's tax delinquency unless the contractor was specifically 
debarred or suspended by a debarring official for specific actions, 
such as conviction for tax evasion. According to the FAR, a responsible 
prospective contractor is a contractor that meets certain specific 
criteria,[Footnote 5] including having adequate financial resources and 
a satisfactory record of integrity and business ethics. However, the 
FAR does not currently require contracting officers to take into 
account a contractor's tax debt when assessing whether a prospective 
contractor is responsible. As a result, the FAR does not currently 
require contracting officers to determine if federal contractors have 
federal unpaid taxes at the time a contract is awarded. Further, 
federal law generally prohibits the disclosure of taxpayer data to 
contracting officers. Thus, contracting officers do not have access to 
tax data directly from IRS unless the contractor provides consent. In 
March 2007, the Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council proposed to amend the FAR to require 
prospective contractors to disclose whether they have, within a 3-year 
period preceding their offer, been notified of any delinquent taxes 
that remain unsatisfied or whether they have received notice of any tax 
lien filed against them that remains unsatisfied or has not been 
released.[Footnote 6] The proposed rule also includes, among other 
things, delinquent taxes and unresolved liens as causes for suspension 
or debarment. 

Finally, we also reported that for wage-based businesses that provide 
goods and services, federal contractors with unpaid federal taxes have 
an unfair advantage in price competition when competing against other 
businesses for federal contracts. Companies that do not pay their 
payroll tax, which is typically over 15 percent of the employees' 
wages, would have a significantly lower costs advantage and therefore 
have a substantive competitive advantage over their competitors. For 
example, we identified instances in which companies that had unpaid 
payroll taxes were competitively awarded contracts over companies that 
had paid their federal taxes. 

As result of the work we performed for the Senate Permanent 
Subcommittee on Investigations, Committee on Homeland Security and 
Governmental Affairs we made numerous recommendations to executive 
agencies to improve the controls over levying payments to contractors 
with tax debt, many of which the agencies have implemented. We also 
referred 122 contractors to IRS for further investigation and 
prosecution. 

Federal Contractors Owe Billions of Dollars in Unpaid Federal Taxes: 

In each of our audits and related investigations, we found thousands of 
federal contractors that owed billions of dollars of federal taxes. 
Specifically, 

* In February 2004, we testified that DOD and IRS records showed that 
about 27,000 DOD contractors owed nearly $3 billion in federal taxes. 
About 42 percent of this $3 billion represented unpaid payroll taxes. 

* In June 2005, we testified that about 33,000 civilian agency federal 
contractors owed over $3.3 billion in federal taxes. Over a third of 
the $3.3 billion represented unpaid payroll taxes. 

* In March 2006, we testified that over 3,800 GSA contractors owed 
about $1.4 billion in federal taxes. About one-fifth of the $1.4 
billion represented unpaid payroll taxes. 

Because federal contractors may do business with more than one federal 
agency, some federal contractors that owe tax debts may be included in 
more than one analysis concerning DOD, GSA, and civilian federal 
contractors that abuse the federal tax system. 

In each of our audits, we found that government contractors owed a 
substantial amount of unpaid payroll taxes. 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 fiduciary responsibility to 
hold these funds "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 employed by the contractor (e.g., 
owners or 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.[Footnote 7] Willful failure to remit 
payroll taxes can also be a criminal felony offense punishable by 
imprisonment of up to 5 years,[Footnote 8] while the failure to 
properly segregate payroll tax funds can be a criminal misdemeanor 
offense punishable by imprisonment of up to a year. [Footnote 9] 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 federal 
government's general fund. Thus, personal income taxes, corporate 
income taxes, and other government revenues are used to pay for these 
shortfalls to the Social Security and Medicare trust funds. 

Although each of our estimates for taxes owed by federal contractors 
was a significant amount, it understates the full extent of unpaid 
taxes owed by these contractors. The IRS tax database reflected only 
the amount of unpaid federal taxes either reported on a tax return or 
assessed by IRS through its various enforcement programs. The IRS 
database did not reflect amounts owed by businesses and individuals 
that have not filed tax returns and for which IRS has not assessed tax 
amounts due. Our analysis did not attempt to account for businesses or 
individuals that did not file required payroll or other tax returns or 
that purposely underreported income and were not specifically 
identified by IRS as owing the additional federal taxes. According to 
IRS, underreporting of income accounted for more than 80 percent of the 
estimated $345 billion annual gross tax gap.[Footnote 10] 

As result of the work we performed for the Senate Permanent 
Subcommittee on Investigations, Committee on Homeland Security and 
Governmental Affairs we made numerous recommendations to DOD and 
civilian agencies to improve their controls over levying payments to 
contractors with tax debt. Many of those recommendations have been 
implemented and have resulted in additional collections of unpaid tax 
debt. We also referred 122 contractors to IRS for further investigation 
and prosecution. 

Examples of Federal Contractors Involved in Abusive and Potentially 
Criminal Activity Related to the Federal Tax System: 

In our previous testimonies, we discussed the results of our in-depth 
audits and related investigations of 122 federal contractors with 
outstanding tax debt. For each of these 122 federal contractors, we 
found instances of abusive or potentially criminal activity related to 
the federal tax system.[Footnote 11] Many of our case study contractors 
were small, closely held companies that operated in wage-based 
industries, such as security, weapon components, space and aircraft 
parts, building maintenance, computer services, and personnel services. 
These 122 federal contractors provided goods and services to a number 
of federal agencies including DOD, GSA, the National Aeronautics and 
Space Administration, and the Departments of Homeland Security, 
Justice, and Veterans Affairs. The types of contracts that were awarded 
to these contractors also included products or services related to 
variety of government functions including law enforcement, disaster 
relief, and national security. 

Most of the contractors in our case studies owed payroll taxes, with 
some federal tax debts dating back nearly 20 years. However, rather 
than fulfilling their role as "trustees" and forwarding these funds to 
IRS, many of these federal contractors used the funds for personal gain 
or to fund their contractor operations. 

Our investigations also revealed that some owners or officers of our 
case study federal contractors with unpaid taxes were associated with 
other businesses that had unpaid federal taxes. For example, we 
reported that one of our case study contractors had a 20-year history 
of opening a business, failing to remit taxes withheld from employees 
to IRS, and then closing the business, only to start the cycle all over 
again and incur more tax debts almost immediately through a new 
business. We also found that a number of owners or officers of our case 
study contractors had significant personal assets, including a sports 
team, commercial properties, multimillion dollar houses, and luxury 
vehicles. Several owners also gambled hundreds of thousands of dollars 
at the same time they were not paying the taxes that their businesses 
owed. Despite owning substantial assets and gambling significant 
amounts of money, the owners or officers did not ensure the payment of 
the delinquent taxes of their businesses, and sometimes did not pay 
their own individual income taxes. Table 1 provides summary information 
on 10 of our 122 case study contractors that we discussed in our 
previous testimonies and related reports. 

Table 1: Summary Information on 10 Federal Contractors with Unpaid 
Federal Taxes: 

Case: Case 1; 
Nature of work: Base support and custodial services for DOD; 
Federal payments[A]: Over $1 million; 
Unpaid federal tax[B]: Nearly $10 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: Case 2; 
Nature of work: Research services for DOD; 
Federal payments[A]: Up to $100,000; 
Unpaid federal tax[B]: Over $700,000; 
Comments: 
* DOD awarded the business a contract in 2002 for nearly $800,000; 
* Owner had over $1 million in loans related to cars, real estate, and 
recreational activities; 
* Owner owned a high-performance airplane. 

Case: Case 3; 
Nature of work: Vehicle repair services for DOD; 
Federal payments[A]: Over $100,000; 
Unpaid federal tax[B]: Over $100,000; 
Comments: 
* The business was investigated for paying employee wages in cash; 
* Owner purchased million dollar home and luxury sports car while owing 
a substantial tax liability; 
* Owner owed child support. 

Case: Case 4; 
Nature of work: Health-care-related services for Departments of 
Veterans Affairs and Health and Human Services; 
Federal payments[A]: Over $100,000; 
Unpaid federal tax[B]: Over $18 million; 
Comments: 
* Business was affiliated with many other health care-related 
facilities, including nursing and convalescent homes; 
* Business and related entities owed taxes covering over 80 tax 
periods; 
* Owner purchased multimillion-dollar properties, an unrelated 
business, and a number of luxury vehicles at the same time the business 
was not fully paying its payroll taxes; 
* Owner owned other real estate holdings including residential and 
commercial properties valued in the tens of millions of dollars. 

Case: Case 5; 
Nature of work: Security guard services to Departments of Homeland 
Security and Veterans Affairs; 
Federal payments[A]: Over $100,000; 
Unpaid federal tax[B]: Over $400,000; 
Comments: 
* Business had not filed all required tax returns for several years; 
* Business owed taxes covering over 25 tax periods. Tax debt amount 
also included owner's individual income taxes totaling tens of 
thousands of dollars; 
* Owner had repeatedly failed to file personal income tax returns; 
* Owner diverted unpaid payroll taxes to a foreign bank account to 
build a house overseas. 

Case: Case 6; 
Nature of work: Armed security guard services to several federal 
agencies including the Department of Justice and the Environmental 
Protection Agency; 
Federal payments[A]: Over $100,000; 
Unpaid federal tax[B]: Nearly $400,000; 
Comments: 
* Business owed over $200,000 in payroll taxes for almost 10 tax 
periods; 
* Business did not file income tax returns in the early 2000s; 
* Officer of the business was convicted for stealing hundreds of 
thousands of dollars from the business; 
* The owner was indicted for embezzlement and money laundering. 

Case: Case 7; 
Nature of work: Payroll and temporary employment services to the 
Department of Housing and Urban Development; 
Federal payments[A]: Over $1 million; 
Unpaid federal tax[B]: Nearly $900,000; 
Comments: 
* The owner's history of delinquency stretched nearly 20 years and 
covered multiple businesses; 
* The owner typically incurred payroll taxes on one business, was 
assessed a trust fund penalty on that business but made no or little 
payments, closed the business, started another company, and repeated 
the same pattern. In at least one case, the owner closed the business 
and immediately established a new business with a similar name at the 
same address that provided the same services; 
* The owner rented office space in an expensive area of a major 
metropolitan city and purchased a luxury automobile at the same time 
the business was not remitting all of the payroll taxes. 

Case: Case 8; 
Nature of work: Security services under a GSA contract; 
Federal payments[A]: Over $1 million; 
Unpaid federal tax[B]: Over $9 million; 
Comments: 
* Business filed for bankruptcy in 2000s; 
* At the time business 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; 
* Business submitted false reports on a government contract; 
* Owner was investigated for fraud. 

Case: Case 9; 
Nature of work: Emergency supplies under a GSA contract; 
Federal payments[A]: Up to $100,000; 
Unpaid federal tax[B]: Over $700,000; 
Comments: 
* Business made large loans to a company officer at same time the 
business was not paying its taxes; 
* Business 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 business owed taxes; 
* Business had a federal tax lien at time GSA awarded a federal supply 
schedule contract. 

Case: Case 10; 
Nature of work: Human resource services under a GSA contract; 
Federal payments[A]: Over $100,000; 
Unpaid federal tax[B]: Over $400,000; 
Comments: 
* Owner owned multiple real properties and several luxury vehicles at 
the time the business owed taxes; 
* At the time owner did not remit all taxes owed to IRS, the owner made 
multiple, large cash withdrawals at gambling casinos; 
* Business obtained contract for hurricane relief efforts. 

Source: Previous GAO testimonies on federal contractors with tax 
debts.(GAO-04-414T, GAO-05-683T, and GAO-06-492T.) 

Notes: Dollar amounts are rounded. The information provided in this 
table has not been updated in the information provided from our 
original testimonies. 

[A] Federal payments represent payments made by federal agencies to 
federal contractors for goods and services. Payments for cases 1, 2, 
and 3 were made by four DOD contractor payment systems during fiscal 
year 2002. Payments for cases 4, 5, 6, and 7 were made by the 
Department of Treasury on behalf of other federal agencies during 
fiscal year 2004. Payments for cases 8, 9, and 10 were amounts reported 
by the Department of the Treasury and GSA from October 2003 through 
June 2004. 

[B] Unpaid tax amount for cases 1, 2, and 3 are as of September 30, 
2002. Unpaid tax amount for cases 4, 5, 6, and 7 are as of September 
30, 2004. Unpaid tax amount for cases 8, 9, and 10 are as of June 30, 
2005. 

[End of table] 

The following provides additional detailed information from our 
previous testimonies on case numbers 1, 4, and 8 summarized in table 1: 

Case # 1: In February 2004, we testified on a business that had nearly 
$10 million in unpaid federal taxes, and was contracted by DOD to 
provide services such as trash removal, building cleaning, and security 
at U.S. military bases. The contractor reported that it paid the owner 
a six figure income and that the owner had borrowed nearly $1 million 
from the business. The owner bought a boat, several cars, and a home 
outside the country. This contractor went out of business in 2003 after 
state tax authorities seized its bank account for failure to pay state 
taxes. The contractor subsequently transferred its employees to a 
relative's business, which also had unpaid federal taxes, and continued 
submitting invoices and receiving payments from DOD on the previous 
contract. 

Case # 4: In June 2005, we testified on a case that involved many 
related companies that provided health care services to the Department 
of Veterans Affairs (VA). During fiscal year 2004, these related 
companies received over $300,000 in federal contract payments. The 
related companies had different names, operated in a number of 
different locations, and used several different Taxpayer Identification 
Numbers (TIN).[Footnote 12] However, they shared a common owner and 
contact address. At the time they were paid by VA, the businesses 
collectively owed more than $18 million in unpaid federal taxes--of 
which nearly $17 million was unpaid federal payroll taxes dating back 
to the mid-1990s. During the early 2000s, at the time when the owner's 
business and related companies were still incurring payroll tax debts, 
the owner purchased a number of multimillion dollar properties, an 
unrelated business, and a number of luxury vehicles. Our investigation 
also determined that real estate holdings registered to the owner 
totaled more than $30 million. 

Case # 8: In March 2006, we testified on a GSA contractor that provided 
security services for a civilian agency. Our investigative work 
indicated that an owner of the company made multiple cash withdrawals, 
totaling close to $1 million, while owing payroll taxes. In addition, 
the company's owner also diverted the cash withdrawals to fund an 
unrelated business and purchased a men's gold bracelet worth over 
$25,000. The company's owner has been investigated for embezzlement and 
fraud. 

Contractors with Unpaid Taxes Are Not Prohibited from Receiving 
Contracts from the Federal Government: 

Federal law and regulations, as reflected in the FAR, do not prohibit 
contractors with unpaid federal taxes from receiving contracts from the 
federal government. Although the FAR provides that federal agencies are 
restricted to doing business with responsible contractors, it does not 
require federal agencies to deny the award of contracts to contractors 
that abuse the federal tax system, unless the contractor was 
specifically debarred or suspended by a debarring official for specific 
actions, such as conviction for tax evasion. 

The FAR specifies that unless compelling reasons exist, agencies are 
prohibited from soliciting offers from, or awarding contracts to, 
contractors who are debarred, suspended, or proposed for debarment for 
various reasons, including tax evasion.[Footnote 13] Conviction for tax 
evasion is cited as one of the causes for debarment and indictment for 
tax evasion is cited as a cause for suspension. The deliberate failure 
to remit taxes, in particular payroll taxes, is a felony offense, and 
could result in a company being debarred or suspended if the debarring 
official determines it affects the present responsibility of the 
government contractor. Most of the contractors in our case studies owed 
payroll taxes, for which willful failure to remit payroll taxes, a 
criminal felony offense,[Footnote 14] or failure to properly segregate 
payroll taxes, a criminal misdemeanor offense, may apply.[Footnote 15] 
At the time of our review, none of the 122 federal contractors 
described in our previous case study work were debarred from government 
contracts, despite conducting abusive and potentially criminal 
activities related to the tax system. 

As part of the contractor responsibility determination for prospective 
contractors, the FAR also requires contracting officers to determine 
whether a prospective contractor meets several specified standards, 
including determination as to whether a contractor has 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. 

Restrictions on IRS Tax Disclosure and Failure to Use Available Tools 
Hamper Consideration of Tax Debts in Contractor Qualification 
Determinations: 

Because of statutory restrictions on the disclosure of taxpayer 
information, even if contracting officers were required to consider tax 
debts in contractor qualification determinations, contracting officers 
do not currently have access to tax debt information unless reported by 
prospective contractors themselves or disclosed in public records. 
Consequently, unless a prospective contractor consents, contracting 
officers do not have ready access to information on unpaid tax debts to 
assist in making contractor qualification determinations with respect 
to financial capability, ethics, and integrity. 

Further, contracting officers do not routinely obtain and use publicly 
available information on contractor federal tax debt in making 
contractor qualification determinations. Federal law generally does not 
permit IRS to disclose taxpayer information, including tax 
debts.[Footnote 16] Thus, unless the taxpayer provides 
consent,[Footnote 17] certain tax debt information generally can only 
be discovered from public records when IRS files a federal tax lien 
against the property of a tax debtor.[Footnote 18] However, contracting 
officers are not required to obtain credit reports. In the instances 
where they are obtained, contracting officers generally focus on the 
contractor's credit score rather than any liens or other public 
information showing federal tax debts. However, while the information 
is available, IRS does not file tax liens on all tax debtors nor does 
IRS have a central repository of tax liens to which contracting 
officers have access. Further, the available information on tax liens 
may be of questionable reliability 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 19] 

Contractors with Tax Debts Have Unfair Advantage in Contract 
Competition: 

Federal contractors who owe tax debts have an unfair competitive 
advantage over contractors who pay their fair share. This is 
particularly true for federal contractors in wage-based industries, 
such as security and moving services. By not paying the employee taxes, 
these contractors keep their payroll tax, which is typically over 15 
percent of each employee's wages, thereby reducing the contractor's 
costs. In this way, contractors who do not pay their taxes do not bear 
the same costs that tax compliant contractors have when competing on 
contracts. As a result, tax delinquent contractors can set prices for 
their goods and services lower than their tax compliant competitors. 

In March 2006, we testified that we found some GSA contractors who did 
not fully pay their payroll taxes who were awarded contracts based on 
price over competing contractors that did not have any unpaid federal 
taxes. Federal contractors' tax debts were not considered in contract 
award decisions. For example, a GSA Schedule contractor was awarded two 
contracts for services related to moving office and equipment 
furniture. On both contracts, the contractor's offer for services was 
significantly less than three competing bids on the first contract and 
two competing bids on the second contract. The contractor owed about 
$700,000 in taxes (mostly payroll taxes) while its competitors did not 
owe any federal taxes. 

Proposed FAR Rule Would Require Prospective Contractors to Provide Tax- 
Related Certifications: 

The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (councils) have proposed to amend the FAR to 
require prospective contractors 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 violating any tax law or 
failing to pay any tax, or been notified of any delinquent taxes for 
which they still owe the tax. In addition, the prospective contractor 
will be required to certify whether or not they have received a notice 
of a tax lien filed against them for which the liability remains 
unsatisfied or the lien has not been released. The proposed rule also 
adds the following as additional causes for suspension or debarment: 
delinquent taxes, unresolved tax liens, and a conviction of or civil 
judgment for violating tax laws or failing to pay taxes. 

By issuing the proposed rule on tax delinquency, the councils have 
acknowledged the importance of delinquent tax debts in the 
consideration of contract awards. The proposed rule requires offerors 
to certify whether they have or have not, within a 3-year period 
preceding the offer, been notified of any unresolved or unsatisfied tax 
debt or liens. Contracting officers generally cannot verify whether 
prospective contractors certifying that they have not received notice 
of unresolved or unsatisfied tax debts actually owe delinquent federal 
taxes, unless that information is disclosed in public records or unless 
the offeror provides consent for IRS to disclose its tax records. In 
March 2006, we testified that in one contractor file we reviewed, a GSA 
official did ask the prospective contractor about a federal tax lien. 
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. 

Concluding Comments: 

Over the past several years, we have testified that thousands of 
federal contractors failed in their responsibility to pay billions of 
dollars of federal taxes yet continued to get federal contracts. This 
practice is inconsistent with the fundamental concept that those doing 
business with the federal government should be required to pay their 
federal taxes. With the serious fiscal challenges facing our nation, 
the status quo is no longer an option. Enhanced contractor requirements 
to pay their taxes would likely increase contractor tax compliance and 
federal revenues. Federal law seeking to achieve these objectives 
should provide flexibility to agencies, such as exceptions for 
contractors critical to national security. Due process and other 
safeguards should be built into the system to ensure that contractors 
that pay their federal taxes are not inadvertently denied federal 
contracts. We look forward to working with the Subcommittee on this 
important matter. 

Mr. Chairman and Members of the Subcommittee, this concludes our 
statement. We would be pleased to answer any questions you may have. 

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); Financial Management: Thousands of Civilian Agency 
Contractors Abuse the Federal Tax System with Little Consequence, GAO-
05-683T (Washington, D.C.: June 16, 2005); and Financial Management: 
Thousands of GSA Contractors Abuse the Federal Tax System, GAO-06-492T 
(Washington, D.C.: Mar. 14, 2006). 

[2] Because federal contractors may do business with more than one 
federal agency, some federal contractors that owe tax debts may be 
included in more than one analysis concerning DOD, GSA, and civilian 
federal contractors that abuse the federal tax system. Because our 
analysis for each segment covered different time periods, we cannot 
provide an overall number of federal contractors with tax debts and the 
magnitude of such debts. 

[3] Payroll taxes include amounts withheld from employee wages for 
Social Security, Medicare, and individual income taxes. 

[4] Willful failure to remit payroll taxes is a criminal felony offense 
while the failure to properly segregate payroll taxes can be a criminal 
misdemeanor offense. 26 U.S.C. §§ 7202, 7215 and 7512 (b). 

[5] FAR 2.101; 9.104-1 

[6] Representations and Certifications - Tax Delinquency, 72 Fed. Reg. 
15093 (proposed Mar. 30, 2007) (to be codified at 48 C.F.R. pts. 9 and 
52). 

[7] 26 U.S.C. § 6672. 

[8] 26 U.S.C. § 7202. 

[9] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b). 

[10] According to IRS, nonfilers and underpayment of taxes comprised 
the rest of the gross tax gap. 

[11] We considered activity to be abusive when a federal 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. 

[12] A TIN is a unique nine-digit identifier assigned to each business 
and individual that files a tax return. For businesses, the employer 
identification number assigned by IRS serves as the TIN. For 
individuals, the Social Security number, assigned by the Social 
Security Administration, serves as the TIN. 

[13] 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. 

[14] 26 U.S.C. § 7202. 

[15] 26 U.S.C. § 7215 and 26 U.S.C. §7512 (b). 

[16] 26 U.S.C. § 6103. 

[17] For example, contractors must provide IRS the consent to validate 
TINs provided by the contractors in the Central Contractor Registration 
system. GSA officials stated that a contractor is not registered into 
the system until the TIN is validated with IRS records. 

[18] 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. 

[19] GAO, IRS Lien Management Report: Opportunities to Improve 
Timeliness of IRS Lien Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 
2005) and GAO, Financial Audit: IRS's Fiscal Years 2006 and 2005 
Financial Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 2006).

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