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entitled 'Recovery Act: Thousands of Recovery Act Contract and Grant
Recipients Owe Hundreds of Millions in Federal Taxes' which was
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
April 2011:
Recovery Act:
Thousands of Recovery Act Contract and Grant Recipients Owe Hundreds
of Millions in Federal Taxes:
GAO-11-485:
GAO Highlights:
Highlights of GAO-11-485, a report to congressional requesters.
Why GAO Did This Study:
The American Recovery and Reinvestment Act (Recovery Act), enacted on
February 17, 2009, appropriated $275 billion to be distributed for
federal contracts, grants, and loans. As of March 25, 2011, $191
billion of this $275 billion had been paid out.
GAO was asked to determine if Recovery Act contract and grant
recipients have unpaid federal taxes and, if so, to (1) determine, to
the extent possible, the magnitude of known federal tax debt which is
owed by Recovery Act contract and grant recipients; and, (2) provide
examples of Recovery Act contract and grant recipients who have known
unpaid federal taxes.
To determine, to the extent possible, the magnitude of known tax debt
owed by Recovery Act contract and grant recipients, GAO identified
contract and grant recipients from [hyperlink,
http://www.recovery.gov] and compared them to known tax debts as of
September 30, 2009, from the Internal Revenue Service (IRS). To
provide examples of Recovery Act recipients with known unpaid federal
taxes, GAO chose a nonrepresentative selection of 30 Recovery Act
contract and grant recipients, which were then narrowed to 15 based on
a number of factors, including the amount of taxes owed and the number
of delinquent tax periods. These case studies serve to illustrate the
sizable amounts of taxes owed by some organizations that received
Recovery Act funding and cannot be generalized beyond the cases
presented. This report contains no recommendations.
What GAO Found:
At least 3,700 Recovery Act contract and grant recipients—including
prime recipients, subrecipients, and vendors—are estimated to owe more
than $750 million in known unpaid federal taxes as of September 30,
2009, and received over $24 billion in Recovery Act funds. This
represented nearly 5 percent of the approximately 80,000 contractors
and grant recipients in the data from [hyperlink,
http://www.Recovery.gov] as of July 2010 that GAO reviewed. Federal
law does not prohibit the awarding of contracts or grants to entities
because they owe federal taxes and does not permit IRS to disclose
taxpayer information, including unpaid federal taxes, to federal
agencies unless the taxpayer consents. The estimated amount of known
unpaid federal taxes is likely understated because IRS databases do
not include amounts owed by recipients who have not filed tax returns
or understated their taxable income and for which IRS has not assessed
tax amounts due. In addition, GAO’s analysis does not include Recovery
Act contract and grant recipients who are noncompliant with or not
subject to Recovery Act reporting requirements.
GAO selected 15 Recovery Act recipients for further investigation. For
the 15 cases, GAO found abusive or potentially criminal activity,
i.e., recipients had failed to remit payroll taxes to IRS. Federal law
requires employers to hold payroll tax money “in trust” before
remitting it to IRS. Failure to remit payroll taxes can result in
civil or criminal penalties under U.S. law. The amount of unpaid taxes
associated with these case studies were about $40 million, ranging
from approximately $400,000 to over $9 million. IRS has taken
collection or enforcement activities (e.g., filing of federal tax
liens) against all 15 of these recipients. GAO has referred all 15
recipients to IRS for further investigation, if warranted.
Table: Examples of Recovery Act Contract and Grant Recipients with
Unpaid Taxes:
Nature of Work: Construction;
Total Recovery Act awards: Over $1 million;
Known unpaid federal taxes: Over $700,000;
Comments: Company primarily owes payroll taxes from the mid 2000s. The
company generally did not make any federal tax deposits during that
time. Company executive admitted to IRS to paying other creditors
while neglecting to pay federal payroll taxes.
Nature of Work: Health Care;
Total Recovery Act awards: Over $100,000;
Known unpaid federal taxes: Over $4 million;
Comments: Nonprofit organization owes payroll taxes primarily from the
mid-2000s. On multiple occasions, the nonprofit organization submitted
dishonored checks to IRS for payment of federal taxes.
Nature of Work: Security;
Total Recovery Act awards: Over $100,000;
Known unpaid federal taxes: Over $9 million;
Comments: Company primarily owes payroll taxes from the mid 2000s. IRS
records indicate that the company paid other creditors and expenses
while not paying federal taxes. Department of Labor has cited company
for violating federal labor laws.
Source: GAO analysis of IRS known tax debts as of 9/30/09 and
Recovery.gov records as of 7/30/10.
[End of table]
View [hyperlink, http://www.gao.gov/products/GAO-11-485] or key
components. For more information, contact Gregory Kutz at (202) 512-
6722 or kutzg@gao.gov.
[End of section]
Contents:
Letter:
Background:
Recovery Act Contract and Grant Recipients Are Estimated to Owe More
Than $750 Million in Known Unpaid Federal Taxes:
Examples of Recovery Act Contract and Grant Recipients Involved in
Abusive Activity Related to the Federal Tax System:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Recovery Accountability and
Transparency Board:
Related GAO Products:
Table:
Table 1: Examples of Recovery Act Contract and Grant Recipients with
Known Unpaid Taxes:
Figures:
Figure 1: Recovery Act Contract and Grant Recipients' Known Unpaid
Taxes by Tax Type:
Figure 2: Known Unpaid Taxes of Recovery Act Contract and Grant
Recipients by Tax Year:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 28, 2011:
The Honorable Carl Levin:
Chairman:
The Honorable Tom Coburn, M.D.
Ranking Member:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles Grassley:
Ranking Member:
Committee on the Judiciary United States Senate:
Individuals, businesses, and other entities owed the U.S. government
about $330 billion in known unpaid taxes, including interest and
penalties, as of September 30, 2010, according to the Internal Revenue
Service (IRS). IRS enforcement of the nation's tax laws continues to
be on our High-Risk List.[Footnote 1] In addition, the American
Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated $275
billion to be distributed for federal contracts, grants, and
loans.[Footnote 2] According to Recovery.gov data on federal spending,
as of March 25, 2011, about $191 billion of that had been paid out.
Because of the potential that some recipients also have unpaid federal
taxes you asked us to investigate this issue.
This is the first in a series of reports to respond to your request.
In this report, we (1) determined, to the extent possible, the
magnitude of known tax debt owed by Recovery Act contract and grant
recipients; and (2) provided examples of Recovery Act contract and
grant recipients who have known unpaid federal taxes.[Footnote 3]
To determine, to the extent possible, the magnitude of known tax debt
owed by Recovery Act contract and grant recipients, we obtained and
analyzed quarterly spending reports submitted by contractors and
grantees[Footnote 4] to [hyperlink, http://www.recovery.gov]
(Recovery.gov) through July 2010.[Footnote 5] We also obtained known
tax debt data from IRS as of September 30, 2009.[Footnote 6] To
determine the extent to which Recovery Act contract and grant
recipients had known unpaid federal taxes, we used the taxpayer
identification number (TIN) as a unique identifier, and electronically
matched IRS's tax debt data to the population of Recovery Act contract
and grant recipients.[Footnote 7] We included only those tax debts
from tax year 2008 and before to eliminate tax debt that may involve
matters that are routinely resolved between the taxpayers and IRS,
with the taxes paid or abated within a short time.
To identify examples, we selected 30 Recovery Act fund recipients for
a detailed audit and investigation, which we then narrowed to 15. This
nonrepresentative selection of 15 Recovery Act contract or grant
recipients were selected primarily based on such factors as the (1)
amount of known unpaid federal taxes (including income, payroll, and
other taxes); (2) number of delinquent tax periods; (3) location of
the recipient; and (4) potential disclosure issues.[Footnote 8]
Because we considered the number of delinquent tax periods in
selecting these 15 recipients, we were more likely to select
recipients who owed primarily payroll taxes; our prior work has shown
delinquent payroll taxes to be an indicator of potential abusive or
criminal activity.[Footnote 9] Our investigators also contacted
several of the recipients and conducted interviews. These case studies
serve to illustrate the sizeable amounts of taxes owed by some
organizations that received Recovery Act funding and cannot be
generalized beyond the cases presented. A more detailed description of
the scope and methodology related to our audit and investigative work
supporting this report is provided in appendix I.
We conducted this forensic audit and related investigations from July
2010 through April 2011. We performed this forensic audit in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
audit findings and conclusions based on our audit objectives. We
believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives. We performed
our related investigative work in accordance with standards prescribed
by the Council of the Inspectors General on Integrity and Efficiency.
Background:
The Recovery Act was enacted to help preserve and create jobs and
promote economic recovery, invest in technology to spur technological
advances, and invest in infrastructure to provide long-term economic
benefits, among other things. The act was a response to significant
weakness in the economy; in February 2011, the Congressional Budget
Office (CBO) estimated the net cost as $821 billion.
Congress and the administration built into the Recovery Act numerous
provisions to increase transparency and accountability, including
requiring recipients of some funds to report quarterly on a number of
measures.[Footnote 10] To implement these requirements, the Office of
Management and Budget (OMB) worked with the newly established Recovery
Board to deploy a nationwide system at [hyperlink,
http://www.federalreporting.gov] (FederalReporting.gov) for collecting
data submitted by the recipients of funds.[Footnote 11] OMB set the
specific time line for recipients to submit reports and for agencies
to review the data. Recipients are required to submit the reports in
the month after the close of a quarter, and, by the end of the month,
the data are to be reviewed by federal agencies for material omissions
or significant reporting errors before being posted to the publicly
accessible Recovery.gov. [Footnote 12] The Recovery Board's goals for
this Web site were to promote accountability by providing a platform
to analyze Recovery Act data and serving as a means of tracking fraud,
waste, and abuse allegations by providing the public with accurate,
user-friendly information.
The reporting requirements apply only to nonfederal recipients of
funding, including all entities receiving Recovery Act funds directly
from the federal government such as state and local governments,
private companies, educational institutions, nonprofits, and other
private organizations. OMB guidance, consistent with the statutory
language in the Recovery Act, states that these reporting requirements
apply to recipients who receive funding through the Recovery Act's
discretionary appropriations, not recipients receiving funds through
entitlement programs, such as Medicaid, or tax programs. Individuals
are also not required to report.
Federal Laws and Regulations Regarding Tax Debtors Receiving Federal
Contracts and Grants:
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
Federal Acquisition Regulation (FAR), a responsible prospective
contractor is a contractor that meets certain specific criteria,
including having adequate financial resources and a satisfactory
record of integrity and business ethics.[Footnote 13] 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 and does not currently require contracting officers to
determine if federal contractors have unpaid federal 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.
On May 22, 2008, the Civil Agency Acquisition Council and the Defense
Acquisition Regulations Council amended the FAR by adding conditions
regarding delinquent federal taxes and the violation of federal
criminal tax laws. The FAR rule requires offerors on federal contracts
to certify whether or not they have, within a 3-year period preceding
the offer, been convicted of or had a civil judgment rendered against
them for, among other things, violating federal criminal tax law, or
been notified of any delinquent federal taxes greater than $3,000 for
which the liability remains unsatisfied. This certification is made
through the Online Representations and Certifications Application
(ORCA) Web site, orca.bpn.gov.
Neither federal law nor current governmentwide policies for
administering federal grants or direct assistance prohibit applicants
with unpaid federal taxes from receiving grants and direct assistance
from the federal government. OMB Circulars provide only general
guidance with regard to considering existing federal debt in awarding
grants. Specifically, the Circulars state that if an applicant has a
history of financial instability, or other special conditions, the
federal agency may impose additional award requirements to protect the
government's interests.[Footnote 14] The Circulars require grant
applicants to self-certify in their standard government application
(SF 424) whether they are currently delinquent on any federal debt,
including federal taxes. There is no requirement for federal agencies
to take into account an applicant's delinquent federal debt, including
federal tax debt, when assessing applications. No assessment of tax
debt is required by OMB on a sampling or risk-based assessment.
Federal Payment Levy Program:
To improve the collection of unpaid taxes, Congress, in the Taxpayer
Relief Act of 1997,[Footnote 15] authorized IRS to collect delinquent
tax debt by continuously levying (offsetting) up to 15 percent of
certain federal payments made to tax debtors.[Footnote 16] The
payments include federal employee retirement payments, certain Social
Security payments, selected federal salaries, contractor, and other
vendor payments. Subsequent legislation increased the maximum
allowable levy amount to 100 percent for payments to federal
contractors and other vendors for goods or services sold or leased to
the federal government.[Footnote 17] The continuous levy program, now
referred to as the Federal Payment Levy Program (FPLP), was
implemented in 2000. Under the FPLP, each week IRS sends the
Department of the Treasury's Financial Management Service (FMS) an
extract of its tax debt files. These files are uploaded into the
Treasury Offset Program.[Footnote 18] FMS sends payment data to this
offset program to be matched against unpaid federal taxes. If there is
a match and IRS has updated the weekly data sent to the offset program
to reflect that it has completed all statutory notifications, the
federal payment owed to the debtor is reduced (levied) to help satisfy
the unpaid federal taxes.
In creating the weekly extracts of tax debt to forward to FMS for
inclusion in the offset program, IRS uses the status and transaction
codes in the master file database to determine which tax debts are to
be included in or excluded from the FPLP. Cases may be excluded from
the FPLP for statutory or policy reasons. Cases excluded from the FPLP
for statutory reasons include tax debt that had not completed IRS's
notification process, or tax debtors who filed for bankruptcy
protection or other litigation, who agreed to pay their tax debt
through monthly installment payments, or who requested to pay less
than the full amount owed through an offer in compromise.[Footnote 19]
Cases excluded from the FPLP for policy reasons include those tax
debtors whom IRS has determined to be in financial hardship, those
filing an amended return, certain cases under criminal investigation,
and those cases in which IRS has determined that the specific
circumstances of the cases warrant excluding it from the FPLP.
Recovery Act Contract and Grant Recipients Are Estimated to Owe More
Than $750 Million in Known Unpaid Federal Taxes:
At least 3,700 recipients of Recovery Act contracts and grants are
estimated to owe $757 million in known unpaid federal taxes as of
September 30, 2009, though this amount is likely understated for
reasons discussed below.[Footnote 20] This represented nearly 5
percent of the approximately 80,000 contract and grant recipients in
the Recovery.gov data as of July 2010 that we reviewed. These
approximately 3,700 recipients received over $24 billion through
Recovery Act contracts and grants.
As indicated in figure 1, corporate income taxes comprised $417
million, or about 55 percent, of the estimated $757 million of known
unpaid federal taxes. Payroll taxes comprised $207 million, or about
27 percent, of the taxes owed by Recovery Act contract and grant
recipients we reviewed. Unpaid payroll taxes included amounts that
were withheld from employees' wages for federal income taxes, Social
Security, and Medicare but not remitted to IRS, as well as the
matching employer contributions for Social Security and Medicare. The
remaining $133 million was from other unpaid taxes, including excise
and unemployment taxes.
Figure 1: Recovery Act Contract and Grant Recipients' Known Unpaid
Taxes by Tax Type:
[Refer to PDF for image: pie-chart]
Corporate income taxes: $417 million (55%);
Payroll taxes: $207 million (27%);
Other taxes: $133 million (18%).
Source: GAO analysis of Recovery.gov award data as of July 30, 2010,
and known tax debt data from IRS as of September 30, 2009.
[End of figure]
Employers are subject to civil and criminal penalties if they do not
remit payroll taxes to the federal government. When an employer
withholds taxes from an employee's wages, the employer is deemed to
have a responsibility to hold these amounts "in trust" for the federal
government until the employer makes a federal tax deposit in that
amount. When these withheld amounts are not forwarded to the federal
government, the employer is liable for these amounts as well as the
employer's matching Federal Insurance Contribution Act contributions
for Social Security and Medicare. Individuals within the business
(e.g., corporate officers) may be held personally liable for the
withheld amounts not forwarded[Footnote 21] and assessed a civil
monetary penalty known as a trust fund recovery penalty (TFRP).
Failure to remit payroll taxes can also be a criminal felony offense
punishable by imprisonment of not more than 5 years,[Footnote 22]
while the failure to properly segregate payroll taxes can be a
criminal misdemeanor offense punishable by imprisonment of up to a
year.[Footnote 23]
A substantial amount of the estimated unpaid federal taxes shown in
IRS records owed by Recovery Act contract and grant recipients had
been outstanding from several tax years. As reflected in figure 2,
about 65 percent of the estimated $757 million in unpaid taxes were
for tax periods from tax years 2003 through 2008, and about 35 percent
of the estimated unpaid taxes were for tax periods prior to that.
[Footnote 24]
Figure 2: Known Unpaid Taxes of Recovery Act Contract and Grant
Recipients by Tax Year:
[Refer to PDF for image: pie-chart]
Prior to 2003: $265 million (35%);
2003 through 2007: $338 million (45%);
2008: $154 million (20%).
Source: GAO analysis of Recovery.gov award data as of July 30, 2010,
and known tax debt data from IRS as of September 30, 2009.
[End of figure]
Our previous work has shown that as unpaid taxes age, the likelihood
of collecting all or a portion of the amounts owed decreases.[Footnote
25] This is, in part, because of the continued accrual of interest and
penalties on the outstanding tax debt, which, over time, can dwarf the
original tax obligation. The estimated amount of unpaid federal taxes
reported above does not include all tax debts owed by Recovery Act
recipients because of statutory provisions that give IRS a finite
period under which it can seek to collect unpaid taxes. Generally,
there is a 10-year statutory collection period beyond which IRS is
prohibited from attempting to collect tax debt.[Footnote 26]
Consequently, if the Recovery Act recipients owe federal taxes beyond
the 10-year statutory collection period, the older tax debt may have
been removed from IRS's records. We were unable to determine the
amount of tax debt that had been removed.
Our analysis found that most of the estimated tax debt owed by these
Recovery Act recipients could not be collected through the FPLP
because the stimulus payments were not directly paid by the federal
government to recipients that owed taxes or the recipient's data were
not sent to the levy program. Specifically,
* The federal government disbursed many of these payments to the
states or other prime contractors or grantees who then disbursed the
funds to subrecipients and vendors. Specifically, our analysis found
that approximately half of the approximately 3,700 recipients were
subrecipients or vendors, who were estimated to owe about $315 million
in federal taxes. Because the federal government did not make the
payments directly to the recipients, these payments would not be
subject to FPLP. In addition, some grant payments are paid through
federal payment systems such as Automated Standard Application for
Payments (ASAP) that do not interface with FPLP, and therefore would
not be subject to levy.[Footnote 27]
* Most of the approximately 3,700 tax debtors were not reported to
FPLP for collection action, for either a statutory or policy reason.
[Footnote 28] Our analysis found that nearly a quarter of the
approximately 3,700 Recovery Act recipients were reported to FPLP. The
federal taxes associated with these recipients was approximately $98
million.
As mentioned above, the amount of known unpaid federal taxes we
identified is likely understated for several reasons. First, the IRS
taxpayer data reflected only the amount of known unpaid taxes either
reported by the taxpayer on a tax return or assessed by IRS through
its various enforcement programs. Thus the known unpaid tax debt did
not include entities that did not file tax returns or underreported
their income. According to IRS's most recent estimate, underreporting
of income accounted for more than 80 percent of the estimated $345
billion annual gross tax gap.[Footnote 29] Second, our analysis does
not include Recovery Act contract and grant recipients who are
noncompliant with or not subject to Recovery Act reporting
requirements. Our analysis does not include contract and grant
recipients that were not registered in the Central Contractor
Registration (CCR).[Footnote 30] Because Recovery.gov does not contain
TINs, we used CCR to identify the TIN for each contract and grant
recipient. We were not able to match about 17,000 of the 80,000
recipients in Recovery.gov to the CCR database. As such, those 17,000
recipients were not included in our analysis.
Examples of Recovery Act Contract and Grant Recipients Involved in
Abusive Activity Related to the Federal Tax System:
For the 15 cases of Recovery Act recipients with outstanding tax debt
that we selected for a detailed audit and investigation, we found
abusive or potential criminal activity related to the federal tax
system.[Footnote 31] Specifically, the 15 recipients we investigated
owed delinquent payroll taxes. As discussed previously, businesses and
organizations with employees are required by law to collect, account
for, and transfer income and employment taxes withheld from employees'
wages to IRS; failure to do so may result in civil or criminal
penalties. These 15 recipients--8 contract and 7 grant recipients--
received about $35 million in Recovery Act funds. The 15 case study
recipients typically operate in industries, such as construction,
engineering, security, and technical services. The amount of known
unpaid taxes associated with these case studies is about $40 million,
ranging from approximately $400,000 to over $9 million. IRS has taken
collection or enforcement activities (e.g., filing of federal tax
liens, assessment of a TFRP) against all 15 of these recipients. In
addition, IRS records indicate that at least one of the entities is
under criminal investigation.
Table 1 highlights the 15 recipients with known unpaid taxes. We have
referred all 15 recipients to IRS for criminal investigation, if
warranted.
Table 1: Examples of Recovery Act Contract and Grant Recipients with
Known Unpaid Taxes:
Case study: Case 1;
Nature of work: Construction;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $700,000;
Comments:
* Company primarily owes payroll taxes from the mid-2000s. The company
generally did not make any federal tax deposits during that time;
* Company received multiple Recovery Act awards;
* At the same time that the company was not paying its federal tax
deposit, a company executive had hundreds of thousands of dollars in
casino transactions;
* According to IRS records, a company executive admitted to paying
other creditors while neglecting to pay payroll taxes. IRS assessed a
TFRP against a key executive for failure to pay payroll taxes;
* IRS established an installment agreement with the company to make
monthly payments of over $1,000;
* Federal government awarded the company millions of dollars in
nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this company.
Case study: Case 2;
Nature of work: Construction;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $1 million;
Comments:
* Company primarily owes payroll taxes;
* On multiple occasions, the company either failed to file required
quarterly payroll tax returns or filed late;
* IRS assessed a TFRP against two officers for failure to pay payroll
taxes but the TFRP was appealed;
* IRS filed federal tax liens against this company.
Case study: Case 3;
Nature of work: Construction;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $1 million;
Comments:
* Company primarily owes payroll taxes from the late 1990s and the
early 2000's;
* The company received multiple awards under the Recovery Act but none
were prime contracts or prime grant awards;
* Company had been cited multiples times by Department of Labor for
labor law violations;
* IRS filed federal tax liens against this company.
Case study: Case 4;
Nature of work: Construction;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Nearly $400,000;
Comments:
* Company owes payroll taxes. The company generally did not make any
federal tax deposits in the early to mid-2000s. According to IRS
records, the company owner claimed that it did not submit taxes
because of a lack of competent bookkeeping;
* The company submitted dishonored checks to IRS for payment of taxes;
* At the same time the company owed taxes, the company purchased about
$200,000 in vehicles and equipment;
* IRS established an installment agreement with the company to make
monthly payments of $10,000 after the company made a $100,000 down
payment. As part of this agreement, IRS agreed to not file federal tax
liens. According to IRS records, the company claimed they would have
gone out of business if a lien was filed because the prime government
contractor would have canceled the contract;
* IRS assessed a TFRP against the owner for failure to pay payroll
taxes.
Case study: Case 5;
Nature of work: Construction;
Total Recovery Act awards[A]: Under $100,000;
Known unpaid federal taxes[B, C]: Over $2 million;
Comments:
* Company owes mostly payroll taxes from the mid-2000s;
* Company loaned hundreds of thousands of dollars to company officers
at the same time the company was not paying its taxes;
* IRS assessed a TFRP against key officers for failure to pay payroll
taxes;
* Company recently entered into negotiations with IRS to repay the
debt over a 5-year period;
* The federal government awarded hundreds of thousands of dollars in
nonstimulus funds to the company in the late 2000s;
* IRS filed federal tax liens against this company.
Case study: Case 6;
Nature of work: Electrical services;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $1 million;
Comments:
* Company primarily owes payroll taxes. Company is also delinquent in
filing recent quarterly tax returns;
* IRS agreed to an installment agreement because the company was a
major subcontractor on an important project. According to IRS records,
it was "in the public's best interest that they complete [the] work."
However, the company subsequently defaulted on the installment
agreement, including the submission of dishonored checks;
* IRS records noted that the company was uncooperative;
representatives of the company refused to return collections-related
phone calls;
* IRS filed federal tax liens against this company.
Case study: Case 7;
Nature of work: Engineering services;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $6 million;
Comments:
* Company generally did not make any federal tax deposits or file
quarterly tax returns in the early 2000s. Company has generally not
made any federal tax deposits or filed quarterly tax returns for the
last several years;
* IRS records indicated that this company is an extreme case of
noncompliance, which the company attempted to hide by failing to file
required tax returns;
* Company made an offer in compromise to IRS for about 15 percent of
the taxes owed, to be paid over 5 years. IRS denied the offer because
the company did not respond to IRS' request for financial information;
* At the same time the company was not paying all of its employment
taxes, the company purchased three new cars totaling about $90,000. In
addition, the company paid its three officers about $700,000;
* IRS filed federal tax liens against this company.
Case study: Case 8;
Nature of work: Engineering services;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $2 million;
Comments:
* Company primarily owes payroll taxes for the last several years;
* Company received multiple Recovery Act awards;
* IRS records showed that this company defaulted on an installment
agreement but was subsequently approved for a new installment
agreement for tens of thousands of dollars per month;
* IRS assessed a TFRP worth nearly $900,000 against the CEO for
failure to pay payroll taxes;
* IRS did not initially place liens on the company because of the
earlier installment agreement. According to IRS records, the company
deals mainly with government contracts and they claimed a lien would
have placed them out of business. IRS has since filed federal tax
liens against this company.
Case study: Case 9;
Nature of work: Health care;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $1 million;
Comments:
* Nonprofit organization owes mainly payroll taxes for over 25 periods
since the late 1990s. Nonprofit organization was also delinquent in
filing quarterly tax returns for most of those periods;
* IRS established an installment agreement for the nonprofit
organization to pay approximately $1,000 per month toward over $1
million in unpaid taxes. The agreement defaulted after the
organization missed required monthly payments. However, IRS
subsequently reinstated the repayment agreement;
* IRS filed federal tax liens against this organization.
Case study: Case 10;
Nature of work: Health care;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $4 million;
Comments:
* Nonprofit organization owes payroll taxes primarily from the mid-
2000s;
* Nonprofit organization stated that it did not make timely federal
tax deposits because state and federal agencies were slow on their
payments;
* IRS established an installment agreement with the nonprofit
organization for monthly payments of about $100,000. The nonprofit
organization subsequently defaulted;
* On multiple occasions, the nonprofit organization submitted
dishonored checks to IRS for payment of federal taxes;
* According to IRS records, at the time the nonprofit organization was
not paying its federal taxes, the president of the organization was
paid an annual salary that was considered very high for the area that
it serves;
* Nonprofit organization proposed a long-term offer in compromise of
about 2 million dollars to be paid in installments over approximately
10 years. IRS denied the offer in compromise because the offered terms
were not acceptable and a long-term agreement was not in the
government's best interest;
* IRS assessed TFRP's on over five individuals. Most of these
individuals have appealed the assessments;
* Federal government awarded the nonprofit organization hundreds of
thousands of dollars in nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this organization.
Case study: Case 11;
Nature of work: Municipality;
Total Recovery Act awards[A]: Under $100,000;
Known unpaid federal taxes[B, C]: Over $1 million;
Comments:
* Municipality primarily owes payroll taxes. Municipality did not make
any tax payments for at least 5 periods during the mid-2000s;
* Municipality had a history of late filings of required tax returns;
* According to IRS records, IRS had determined that certain debts owed
by this municipality were uncollectible;
* IRS filed federal tax liens against this municipality.
Case study: Case 12;
Nature of work: Security;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $9 million;
Comments:
* Company primarily owes payroll taxes from the mid-2000s;
* IRS records indicated that the company paid other creditors and
expenses while neglecting to pay federal payroll taxes;
* According to IRS, the company was uncooperative and had a history of
missing deadlines and repeatedly filing appeals;
* Department of Labor had cited company for violating federal labor
laws;
* IRS assessed a multimillion dollar TFRP against a company executive.
Case study: Case 13;
Nature of work: Social services;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $800,000;
Comments:
* Nonprofit organization primarily owes payroll taxes from the mid to
late 2000s;
* The nonprofit organization's major sources of income are Medicare
and Medicaid;
* Nonprofit organization submitted a request for an installment
agreement of over $10,000 per month. IRS was in the process of
reviewing the request to determine if it could be granted;
* Federal government awarded the nonprofit organization millions of
dollars in nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this organization.
Case study: Case 14;
Nature of work: Social services;
Total Recovery Act awards[A]: Over $1 million;
Known unpaid federal taxes[B, C]: Over $2 million;
Comments:
* Nonprofit organization primarily owes payroll taxes from the mid to
late 2000s. Nonprofit organization did not make any federal tax
deposits for several periods;
* On multiple occasions, the nonprofit organization defaulted on
installment agreements with IRS. IRS records also indicated that the
nonprofit organization may have submitted an offer in compromise to
delay IRS collection efforts;
* An executive was assessed a TFRP. IRS records indicated that this
executive was responsible for numerous questionable business expenses.
In addition, the executive had numerous transactions with casinos
totaling hundreds of thousand of dollars each year. IRS records also
indicated that IRS assessed a TFRP on this executive for another
entity that went defunct;
* IRS records indicated that the nonprofit organization failed to meet
employee payroll obligations on numerous occasions in the late 2000s;
* According to one executive, the nonprofit received millions of
dollars in government grants;
* IRS filed federal tax liens against this organization.
Case study: Case 15;
Nature of work: Technical services;
Total Recovery Act awards[A]: Over $100,000;
Known unpaid federal taxes[B, C]: Over $4 million;
Comments:
* Company owes payroll taxes from the mid to late 2000s. For several
periods, the company did not make any tax deposits. According to IRS
records, the company claimed it did not make tax deposits because the
government did not give the company an abatement on its taxes[D];
* IRS assessed a TFRP against a company executive, who owns real
estate valued at an estimated $4 million. This executive also
purchased a luxury vehicle at the same time the company was not paying
its payroll taxes. The company executive reported hundreds of
thousands of dollars in adjusted gross income in a recent tax return;
* IRS established an installment agreement with the company to make
monthly payments of tens of thousands of dollars. IRS records
indicated that the company provided unique and essential services to
the government;
* Federal government awarded the company millions of dollars in
nonstimulus funds in the late 2000s;
* IRS filed federal tax liens against this company.
Source: GAO's analysis of IRS and Recovery.gov records.
Note: All dollar amounts are rounded.
[A] Total Recovery Act awards are based on contractor and grantee
recipient reports as of July 2010.
[B] Rounded known unpaid tax amount as of September 30, 2009. Known
unpaid tax amount does include penalty and interest.
[C] Generally, there is a 10-year statutory collection period beyond
which IRS is prohibited from attempting to collect tax debt.
Consequently, if the Recovery Act recipients owe federal taxes beyond
the 10-year statutory collection period, the older tax debt may have
been removed from IRS's records. However, the 10-year time limit may
be suspended and include periods during which the taxpayer is involved
in a collection due process appeal, litigation, a pending offer in
compromise, or an installment agreement. As a result, unpaid tax
amounts may include taxes that are for tax periods from more than 10
years ago.
[D] Abatements are reductions in the amount of taxes owed and can
occur for a variety of reasons, such as to correct errors made by IRS
or taxpayers or to provide relief from interest and penalties.
[End of table]
Our analysis and investigation found that only 1 of these 15 Recovery
Act recipients was subject to the new FAR requirement for
certification of tax debts in relation to their Recovery Act awards.
Because that contractor was current on its repayment agreement, the
contractor was not required to disclose its tax debts. The other 14
recipients were grant recipients or contract subrecipients. However, 1
of the 14 companies that recently filed an Online Representations and
Certifications Application (ORCA) improperly stated that the company
had not been notified of any delinquent federal taxes (greater than
$3,000) within the preceding 3 years. We did not identify any
circumstances (e.g., current repayment agreement) that would allow the
company to make such certification.
Agency Comments and Our Evaluation:
We provided a draft of our report to FMS, IRS, and the Recovery
Accountability and Transparency Board (Recovery Board) for review and
comment. FMS and IRS provided technical comments which were
incorporated into this report. IRS further noted that it had taken
enforcement and collection actions in all of the 15 cases we
investigated. This included filing federal tax liens to protect the
government's interest in 13 of the 15 cases, and investigating and
asserting the TFRP in 12 of the 15 cases. Of the 15 cases, 6 have
established installment agreements to pay their outstanding tax
liabilities. Except in cases of bankruptcy or where it has been
determined that there is currently no meaningful collection potential,
IRS is actively investigating and pursuing collection in the remaining
cases.
We received written comments on a draft of this report from the RATB
Director, Accountability (see appendix II). The Director stated that,
as we acknowledged in our report, federal law places considerable
restrictions on the disclosure of taxpayer information by IRS to other
federal entities, including the Recovery Board. He further stated that
should such access to such taxpayer information be made available to
the Recovery Board, they could more proactively work to prevent fraud,
waste, and abuse of government funds. As far back as 1992, we have
said that Congress should consider whether tax compliance should be a
prerequisite for receiving a federal contract.[Footnote 32] In 2004,
we recommended that the Director of OMB develop and pursue policy
options (in accordance with restrictions on the disclosure of taxpayer
information) for prohibiting federal contract awards to contractors in
cases in which abuse to the federal tax system has occurred and the
tax owed is not contested. Options could include designating such tax
abuse as a cause for governmentwide debarment and suspension or, if
allowed by statute, authorizing IRS to declare such businesses and
individuals ineligible for government contracts.[Footnote 33] We
continue to support efforts to implement this recommendation.
As agreed with your offices, unless you publicly release its contents
earlier we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies of this report to the
Secretary of the Treasury, the Commissioner of the Financial
Management Service, the Commissioner of Internal Revenue, the Chairman
of the Recovery Accountability and Transparency Board and other
interested parties.
The report is also available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov]. If you have any questions concerning
this report, please contact Gregory D. Kutz at (202) 512-6722 or
kutzg@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report.
Signed by:
Gregory D. Kutz:
Director:
Forensic Audits and Investigative Service:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to: (1) determine, to the extent possible, the
magnitude of known tax debt which is owed by Recovery Act contract and
grant recipients; and (2) provide examples of Recovery Act contract
and grant recipients who have known unpaid federal taxes.[Footnote 34]
To determine, to the extent possible, the magnitude of known tax debt
owed by Recovery Act contract and grant recipients, we obtained and
analyzed quarterly recipient reports submitted by contractors and
grantees, as available through [hyperlink, http://www.recovery.gov]
(Recovery.gov) through July 2010.[Footnote 35] Specifically, we
obtained all contract and grant recipient reports from the fourth
quarterly submission, and all reports from prior quarterly submissions
that were marked as "final" by the recipients.[Footnote 36] Since
Recovery.gov data do not contain taxpayer identification numbers
(TINs) required for comparisons against IRS tax debt data, we obtained
the Central Contractor Registry (CCR)[Footnote 37] database in order
to obtain the TINs for Recovery Act contract and grant
recipients.[Footnote 38] We matched the Data Universal Numbering
System (DUNS) number available in the quarterly recipient reports with
CCR to obtain the TINs for the Recovery Act contract and grant
recipients.[Footnote 39] We were not able to match about 17,000
recipients in Recovery.gov to the CCR database. As such, those 17,000
recipients were not included in our analysis.
We obtained and analyzed known tax debt data from the Internal Revenue
Service (IRS) as of September 30, 2009. Using the TIN we
electronically matched IRS's tax debt data to the population of
Recovery Act contract and grant recipient TINs. To avoid
overestimating the amount owed by Recovery Act contract and grant
recipients with known unpaid tax debts and to capture only significant
tax debts, we excluded from our analysis tax debts meeting specific
criteria to establish a minimum threshold in the amount of tax debt to
be considered when determining whether a tax debt is significant. The
criteria we used to exclude tax debts are as follows:
* tax debts IRS classified as compliance assessments or memo accounts
for financial reporting,[Footnote 40]
* known tax debts from calendar year 2009 tax periods, and,
* recipients with total known unpaid taxes of $100 or less.
The criteria above were used to exclude known tax debts that might be
under dispute or generally duplicative or invalid, and known 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 known tax debts from calendar year 2009 tax periods to
eliminate tax debt that may involve matters that are routinely
resolved between the taxpayers and IRS, with the taxes paid or abated
within a short time. We excluded tax debts of $100 or less because
they are insignificant for the purpose of determining the extent of
known taxes owed by Recovery Act recipients. Using these criteria, we
identified at least 3,700 Recovery Act recipients with federal tax
debt.
To provide examples of Recovery Act recipients who have known unpaid
federal taxes, we selected 15 of the approximately 3,700 Recovery Act
recipients for a detailed audit and investigation. The 15 recipients
were chosen using a nonrepresentative selection approach based on data
mining. Specifically, we narrowed the 3,700 recipients with known
unpaid taxes to 30 cases based on (1) the amount of known unpaid taxes
(including income, payroll, and other taxes); (2) the number of
delinquent tax periods; (3) location; and (4) potential disclosure
issues. Because we considered the number of delinquent tax periods in
selecting these 15 recipients, we were more likely to select
recipients who owed primarily payroll taxes; our prior work has shown
delinquent payroll taxes to be an indicator of potential abusive or
criminal activity. For these 30 cases, we obtained and reviewed copies
of automated tax transcripts and other tax records (for example,
revenue officer's notes) from IRS as of October 2010, and reviewed
these records to exclude contractors or grantees that had recently
paid off their unpaid tax balances and considered other factors before
reducing the number of Recovery Act recipients to 15 case studies. We
did not evaluate the status of collections activities related to
penalties assessed against recipient organization officers, only those
assessed against the recipient organization itself. Our investigators
also contacted several of the recipients and conducted interviews.
These case studies serve to illustrate the sizeable amounts of taxes
owed by some organizations that received Recovery Act funding and
cannot be generalized beyond the cases presented.
We conducted this forensic audit and related investigation from July
2010 through April 2011. We performed this forensic audit in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
audit findings and conclusions based on our audit objectives. We
performed our related investigative work in accordance with standards
prescribed by the Council of the Inspectors General on Integrity and
Efficiency.
Data Reliability Assessment:
For the IRS unpaid assessments data, we relied on the work we
performed during our annual audit of IRS's financial statements. While
our financial statement audits have identified some data reliability
problems associated with tracing IRS's tax records to source records
and including errors and delays in recording taxpayer information and
payments,[Footnote 41] we determined that the data were sufficiently
reliable to address this report's objectives.
In previous GAO reports, we have reported that fieldwork and initial
review and analysis of recipient data from [hyperlink,
http://www.recovery.gov] indicated that there were a range of
reporting and quality issues, such as erroneous or questionable data
entries.[Footnote 42] However, the problems identified in our previous
reviews have been associated with job data fields that are not
relevant to this review. In addition, for the purposes of this review,
we limited the population of recipient data we reviewed to records
showing continuity in reporting as demonstrated by consistency in
reporting over multiple periods and by excluding certain records
containing known data inconsistencies. Therefore, we determined that
the data were sufficiently reliable to address our engagement
objectives.
[End of section]
Appendix II: Comments from the Recovery Accountability and
Transparency Board:
Recovery Accountability and Transparency Board:
1717 Pennsylvania Avenue NW, Suite 700:
Washington, DC 20006-4614:
April 4, 2011:
Gregory Kutz:
Director:
Forensic Audits and Investigative Services:
U.S Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Mr. Kutz:
The Recovery Accountability and Transparency Board is providing these
written comments in response to the Draft GAO Report titled "Recovery
Act: Thousands of Recovery Act Contract and Grant Recipients Owe
Hundreds of Millions in Federal Taxes (GA0-11-485)."
As GAO's report acknowledges, federal law places considerable
restrictions on the ability of the Internal Revenue Service (IRS) to
disclose taxpayer information to other federal agencies.[Footnote 1]
Accordingly, the Recovery Board, which was established to conduct
oversight of Recovery Act expenditures, does not have access to IRS
tax information — even where such information relates to recipients of
Recovery Act funds. This unavoidable reality has been raised
repeatedly by the Treasury Inspector General for Tax Administration,
J. Russell George, who as a member of the Recovery Board has worked to
support our fraud- and waste-prevention efforts since the Recovery
Board's inception more than two years ago. This lack of access to
relevant taxpayer data also affects Inspector General offices that
oversee Recovery Act programs.
The Recovery Board is pleased that GAO, in performing its analysis,
utilized recipient data published on our public-facing website,
Recovery.gov. Although federal tax laws prevent the Recovery Board
from performing such an analysis, we note that our efforts in
providing transparency of Recovery Act funds have allowed GAO's
oversight to proceed, resulting in this analysis that will ideally
lead to agency program improvements and less overall waste.
While GAO's report provides an extrapolation for illustrative purposes
from a small sample size, the analysis does highlight a potentially
large problem. Yet multiple solutions exist. For example, the Recovery
Act and its implementing regulations require reporting only one level
below the prime recipient.[Footnote 2] A requirement for further in-
depth reporting on the use of taxpayer dollars could provide much more
transparency — and accountability — of these funds.
Access to the very same tax information utilized by GAO in its
analysis could likewise greatly assist the Recovery Board in its
mission of preventing fraud, waste, and abuse of Recovery funds. The
Recovery Board could compare recipient reports to the unpaid tax data
and determine whether recipients of Recovery funds owed money to the
federal government. We could also utilize the unpaid tax data and a
host of other risk-relevant data to create a risk-based model upon
which government agencies could rely in making their own expenditure
determinations. Through such a proactive approach, the Recovery Board
could further engage its tools to prevent fraud and waste of
government funds, rather than merely detect problems after they occur.
As reflected in GAO's report appendix, the issue of federal money
being awarded to federal tax delinquents is longstanding and has been
examined by GAO for more than a decade. As a result, the Recovery
Board encourages GAO to make recommendations on ways Congress or the
administration could prevent those with delinquent federal tax debt
from obtaining federal awards through contracts, grants or other
assistance. As GAO states, federal law does not prohibit a contractor
with unpaid federal taxes from receiving contracts from the
government. Similarly, federal regulations do not require contracting
officers to specifically consider tax delinquencies when determining
whether an entity is responsible to do business with the government
unless it was specifically suspended or debarred for certain actions,
such as tax evasion. Additionally, there are no laws or governmentwide
policies that prohibit the award of grants or other federal
assistances to applicants with unpaid federal taxes.
The Board appreciates the opportunity to provide written comments on
this important issue.
Sincerely,
Signed by:
John P. Higgins:
Director, Accountability:
Footnotes:
[1] See, e.g., 26 U.S.C. § 6103. One of the rare exceptions to the
general prohibition on tax data disclosure is the ability of the IRS
to disclose such information to GAO. See, e.g., id. at § 6103; IRS
Manual 11.3.23.1 et seq., available at [hyperlink,
http://www.irs.gov/irm/part11/irm_11-003-023.html].
[2] See, e.g., American Recovery and Reinvestment Act of 2009, Pub.
Law No. 111-5, § 1512(c) (Feb. 17, 2009); FAR Subpart 4.15 ("American
Recovery and Reinvestment Act—Reporting Requirements"); 2 C.F.R. Part
176 ("Award Terms for Assistance Agreements That Include Funds Under
the American Recovery and Reinvestment Act of 2009, Public Law 111-5").
[End of section]
Related GAO Products:
Medicare: Thousands of Medicare Providers Abuse the Federal Tax
System. [hyperlink, http://www.gao.gov/products/GAO-08-618].
Washington, D.C.: June 13, 2008.
Tax Compliance: Federal Grant and Direct Assistance Recipients Who
Abuse the Federal Tax System. [hyperlink,
http://www.gao.gov/products/GAO-08-31]. Washington, D.C.: November 16,
2007.
Tax Compliance: Thousands of Organizations Exempt from Federal Income
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. [hyperlink,
http://www.gao.gov/products/GAO-07-1090T]. Washington, D.C.: July 24,
2007.
Tax Compliance: Thousands of Organizations Exempt from Federal Income
Tax Owe Nearly $1 Billion in Payroll and Other Taxes. [hyperlink,
http://www.gao.gov/products/GAO-07-563]. Washington, D.C.: June 29,
2007.
Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax
System. [hyperlink, http://www.gao.gov/products/GAO-07-742T].
Washington, D.C.: April 19, 2007.
Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax
System. [hyperlink, http://www.gao.gov/products/GAO-07-587T].
Washington, D.C.: March 20, 2007.
Internal Revenue Service: Procedural Changes Could Enhance Tax
Collections. [hyperlink, http://www.gao.gov/products/GAO-07-26].
Washington, D.C.: November 15, 2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and
Other Federal Taxes. [hyperlink,
http://www.gao.gov/products/GAO-06-887]. Washington, D.C.: July 28,
2006.
Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and
Other Federal Taxes. [hyperlink,
http://www.gao.gov/products/GAO-06-755T]. Washington, D.C.: May 25,
2006.
Financial Management: Thousands of GSA Contractors Abuse the Federal
Tax System. [hyperlink, http://www.gao.gov/products/GAO-06-492T].
Washington, D.C.: March 14, 2006.
Financial Management: Thousands of Civilian Agency Contractors Abuse
the Federal Tax System with Little Consequence. [hyperlink,
http://www.gao.gov/products/GAO-05-683T]. Washington, D.C.: June 16,
2005.
Financial Management: Thousands of Civilian Agency Contractors Abuse
the Federal Tax System with Little Consequence. [hyperlink,
http://www.gao.gov/products/GAO-05-637]. Washington, D.C.: June 16,
2005.
Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence. [hyperlink,
http://www.gao.gov/products/GAO-04-414T]. Washington, D.C.: February
12, 2004.
Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence. [hyperlink,
http://www.gao.gov/products/GAO-04-95]. Washington, D.C.: February 12,
2004.
Debt Collection: Barring Delinquent Taxpayers From Receiving Federal
Contracts and Loan Assistance, [hyperlink,
http://www.gao.gov/products/GAO/T-GGD/AIMD-00-167], Washington, D.C.:
May 9, 2000.
Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty
Assessments Are Owed. [hyperlink,
http://www.gao.gov/products/GAO/AIMD/GGD-99-211]. Washington, D.C.:
August 2, 1999.
Tax Administration: Federal Contractor Tax Delinquencies and Status of
the 1992 Tax Return Filing Season. [hyperlink,
http://www.gao.gov/products/GAO/T-GGD-92-23]. Washington, D.C.: March
17, 1992.
[End of section]
Footnotes:
[1] GAO's 2011 High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-11-394T] (Washington, D.C.: February
2011).
[2] Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009).
[3] For the purposes of this report, we refer to prime recipients,
subrecipients, and vendors as recipients of Recovery Act funds.
[4] Specifically, we obtained all of the fourth quarterly contract and
grant recipient reports made available on July 30, 2010, as well as
all reports from prior quarterly submissions that were marked as
"final" by the recipients.
[5] [hyperlink, http://www.recovery.gov] is a Web site created under
the Recovery Act in order to track and publicly disclose the projects
and activities for which Recovery Act funds were expended or obligated
and information concerning the amount and use of funds by nonfederal
recipients. It includes spending at the prime recipient level, as well
as certain subrecipients.
[6] 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.
[7] 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.
[8] The length of a delinquent tax period is dependent on the type of
tax owed. For instance, income taxes are assessed on an annual basis;
payroll taxes are assessed on a quarterly basis.
[9] We considered activity to be abusive when a recipient'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.
[10] Section 1512 of the Recovery Act requires recipients of some
recovery funds to report on those funds each calendar quarter.
[11] The Recovery Act established the Recovery Board to coordinate and
conduct oversight of covered funds to prevent fraud, waste, and abuse.
In addition, the Board established three committees drawn from the 12
inspectors general on the Board. Recovery Act, div. A, §§ 1521-1525,
123 Stat. 289-93.
[12] This process of Web-based publication of funding and expenditure
data was pioneered through the establishment of USASpending.gov, which
was created in response to the Federal Funding Accountability and
Transparency Act of 2006. The 2006 act requires that OMB "ensure the
existence and operation of a single searchable website, accessible by
the public at no cost to access, that includes [a variety of specified
data] for each federal award." A federal award includes for this
purpose federal financial assistance and expenditures in the form of
grants, subgrants, loans, awards, cooperative agreements, or any other
forms of financial assistance, as well as contracts, subcontracts,
purchase orders, task orders, and delivery orders. The decision to
include Web-based publication in the Recovery Act, although somewhat
duplicative of the 2006 act, expands the reporting of project
description data and shifts the burden of reporting data, in part, to
the recipients of federal funds. Expansion of the reporting of federal
agency data is consistent with the principles of transparency,
participation, and collaboration promoted by the administration's open
government initiative, as established by the President's Memorandum on
Transparency and Open Government, January 21, 2009, and the Open
Government Directive issued by the Director of the Office of
Management and Budget, December 8, 2009.
[13] FAR 9.104.
[14] In contrast, Section 3720B of title 31 of the United States Code
makes federal debtors, other than tax debtors, ineligible to receive
federal loans or loan insurance as specified by standards prescribed
by the Secretary of the Treasury. In addition, governmentwide policies
for managing federal loan, loan guarantees, and other credit programs
promulgated in OMB Circular No. A-129, Policies for Federal Credit
Programs and Non-Tax Receivables (November 2000) specifically require
agencies to determine if an applicant is delinquent on any federal
debt, including tax debt, and specify using credit bureaus as a
screening tool.
[15] Pub. L. No. 105-34, 111 Stat. 788, 923-924 (Aug. 5, 1997).
[16] 26 U.S.C. § 6331(h).
[17] 26 U.S.C. § 6331(h)(3).
[18] The Treasury Offset Program is an automated process administered
by the Department of the Treasury's FMS in which certain federal
payments are withheld or reduced (offset) to collect delinquent tax
and nontax debts owed to federal agencies, including IRS. For the
FPLP, FMS matches federal payments to the tax-debt records sent to it
by IRS, and when a match occurs, FMS offsets (levies) the federal
payments and transmits the amount levied to IRS to reduce the tax
debtor's outstanding debt and sends the residual to the debtor.
[19] An offer in compromise is an agreement between a tax debtor and
IRS that resolves the tax debtor's tax debt by accepting less than
full payment.
[20] Our analysis of Recovery Act recipients with known tax debt as of
September 30, 2009, excluded (1) tax debts that have not been agreed
to by the tax debtor or affirmed by the court, i.e., tax debts that
IRS classified as compliance assessments or memo accounts for
financial reporting; (2) tax debts from calendar year 2009 tax
periods; and (3) tax debts of $100 or less.
[21] 26 U.S.C. § 6672.
[22] 26 U.S.C. § 7202.
[23] 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b).
[24] 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. A tax period may not always correspond to the
age of the tax debt, as when a tax form is filed years after the due
date or when IRS assesses additional taxes to earlier tax periods.
[25] GAO, Internal Revenue Service: Recommendations to Improve
Financial and Operational Management, [hyperlink,
http://www.gao.gov/products/GAO-01-42] (Washington, D.C.: Nov. 17,
2000).
[26] The 10-year time limit may be suspended and include periods
during which the taxpayer is involved in a collection due process
appeal, litigation, a pending offer-in-compromise, or an installment
agreement. As a result, figure 2 may include taxes that are for tax
periods from more than 10 years ago.
[27] ASAP currently plans to implement an interface with FPLP in 2014.
[28] As previously discussed, cases excluded from the FPLP for
statutory reasons include tax debt that have not completed IRS's
notification process, or tax debtors who filed for bankruptcy
protection or other litigation, who agreed to pay their tax debt
through monthly installment payments, or who requested to pay less
than the full amount owed through an offer in compromise. Cases
excluded from the FPLP for policy reasons include those tax debtors
whom IRS has determined to be in financial hardship, those filing an
amended return, certain cases under criminal investigation, and those
cases in which IRS has determined that the specific circumstances of
the cases warrant excluding it from the FPLP.
[29] The tax gap, estimated to be about $345 billion for tax year 2001
(the most recent estimate made), represents the net amount of
noncompliance with the tax laws. According to IRS, underreporting of
tax liability accounts for 82 percent of the gap, and nonfiling and
underpayment of taxes comprised the rest of the net tax gap.
[30] The Central Contractor Registration (CCR) is the primary
registrant database for the U.S. federal government. According to the
Federal Acquisition Regulation (FAR) 4.1102, prospective contractors
shall be registered in the CCR database prior to award of a contract
or agreement. Entities applying for grant awards from the federal
government also need to register in CCR. All Recovery Act prime
recipients were to register in the CCR database.
[31] We considered activity to be abusive when a recipient'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.
[32] GAO, Tax Administration: Federal Contractor Tax Delinquencies and
Status of the 1992 Tax Return Filing Season, [hyperlink,
http://www.gao.gov/products/GAO/T-GGD-92-23] (Washington, D.C.: Mar.
17, 1992).
[33] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, [hyperlink,
http://www.gao.gov/products/GAO-04-95] (Washington, D.C.: Feb. 12,
2004)
[34] For the purposes of this report, we refer to prime recipients,
subrecipients, and vendors as recipients of Recovery Act funds.
[35] [hyperlink, http://www.recovery.gov] is a Web site created under
the Recovery Act in order to track and publicly disclose the projects
and activities for which Recovery Act funds were expended or obligated
and information concerning the amount and use of funds by nonfederal
recipients.
[36] The first recipient reports filed in October 2009 cover activity
from February 2009 through September 30, 2009. The second quarterly
recipient reports were filed in January 2010 and cover activity
through December 31, 2009. The third quarterly recipient reports were
filed in April 2010 and cover activity through March 31, 2010. The
fourth quarterly recipient reports were filed in July 2010 and cover
activity through June 30, 2010.
[37] The Central Contractor Registration (CCR) is the primary
registrant database for the U.S. federal government. According to the
Federal Acquisition Regulation (FAR) 4.1102, prospective contractors
shall be registered in the CCR database prior to award of a contract
or agreement. Entities applying for grant awards from the federal
government also need to register in CCR. All Recovery Act prime
recipients were to register in the CCR database. Registrants are
responsible for keeping their information current and must renew their
CCR records annually.
[38] 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.
[39] A DUNS number is a unique nine-digit identification number
assigned to firms by Dun & Bradstreet, Inc. A business must have a
DUNS number to register in both the CCR database and to submit
Recovery Act recipient reports. A subrecipient also needs a DUNS
number for recipient reporting but is not required to register in CCR.
[40] 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.
[41] GAO, Financial Audit: IRS's Fiscal Years 2010 and 2009 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-11-142],
(Washington, D.C.: Nov. 10, 2010).
[42] GAO, Recovery Act: Opportunities to Improve Management and
Strengthen Accountability over States' and Localities' Uses of Funds,
[hyperlink, http://www.gao.gov/products/GAO-10-999] (Washington, D.C.:
Sept. 20, 2010); Recovery Act: States' and Localities' Uses of Funds
and Actions Needed to Address Implementation Challenges and Bolster
Accountability, [hyperlink, http://www.gao.gov/products/GAO-10-604]
(Washington, D.C.: May 26, 2010); Recovery Act: One Year Later,
States' and Localities' Uses of Funds and Opportunities to Strengthen
Accountability, [hyperlink, http://www.gao.gov/products/GAO-10-437]
(Washington, D.C.: Mar. 3, 2010); and Recovery Act: Recipient Reported
Jobs Data Provide Some Insight into Use of Recovery Act Funding, but
Data Quality and Reporting Issues Need Attention, [hyperlink,
http://www.gao.gov/products/GAO-10-223] (Washington, D.C.: Nov. 19,
2009).
[End of section]
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