Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence

The tax levy program was authorized by the Taxpayer Relief Act of 1997. The Treasury Offset Program (TOP), which is an automated systems based program, is used by Treasury to collect delinquent non-tax debts and to continuously levy federal payments to collect delinquent tax debts. In 2004, we reported that Department of Defense (DOD) was not levying millions of dollars in taxes because DOD had only incorporated one payment system into TOP and IRS policies and processes excluded millions of cases from potential levy. Defense Finance and Accounting Service (DFAS) has added all of its payment files into TOP for levy and offset. Further, DOD has implemented the 100 percent levy provision on all payment systems and centralized its locations to process levies issued by the IRS. Consequently, no further action is necessary.

The tax levy program was authorized by the Taxpayer Relief Act of 1997. The Treasury Offset Program (TOP), which is an automated systems based program, is used by Treasury to collect delinquent non-tax debts and to continuously levy federal payments to collect delinquent tax debts. In 2004, we reported that Department of Defense (DOD) was not levying millions of dollars in taxes because DOD had only incorporated one payment system into TOP and IRS policies and processes excluded millions of cases from potential levy. Defense Finance and Accounting Service (DFAS) has added all of its payment files into TOP for levy and offset. In addition, DOD has implemented the 100 percent levy provision on all payment systems and centralized its locations to process levies issued by the IRS. Consequently, no further action is necessary.

The tax levy program was authorized by the Taxpayer Relief Act of 1997. The Treasury Offset Program (TOP), which is an automated systems based program, is used by Treasury to collect delinquent non-tax debts and to continuously levy federal payments to collect delinquent tax debts. In 2004, we reported that Department of Defense (DOD) was not levying millions of dollars in taxes because DOD had only incorporated one payment system into TOP and IRS policies and processes excluded millions of cases from potential levy. Defense Finance and Accounting Service (DFAS) has added all of its payment files into TOP for levy and offset. It has also implemented the 100 percent levy provision on all payment systems and centralized its locations to process levies issued by the IRS. Consequently, no further action is necessary.

The tax levy program was authorized by the Taxpayer Relief Act of 1997. The Treasury Offset Program (TOP), which is an automated systems based program, is used by Treasury to collect delinquent non-tax debts and to continuously levy federal payments to collect delinquent tax debts. In 2004, we reported that Department of Defense (DOD) was not levying millions of dollars in taxes because DOD had only incorporated one payment system into TOP and IRS policies and processes excluded millions of cases from potential levy. Defense Finance and Accounting Service (DFAS) has added all of its payment files into TOP for levy and offset. It has also implemented the 100 percent levy provision on all payment systems and centralized its locations to process levies issued by the IRS. Consequently, no further action is necessary.

In our review of Department of Defense (DOD) contractors who abuse the federal tax system, we found that the Internal Revenue Service (IRS) was excluding all cases in its Automated Collection System (ACS), one of the first steps in the IRS collection process, from the Financial Management Service's (FMS) automated Treasury Offset Program (TOP). FMS uses the TOP as the mechanism to collect tax levies through the Federal Payment Levy Program (FPLP). IRS was waiting a year before sending those cases to the Financial Management System's (FMS) automated Treasury Offset Program (TOP). By excluding those cases from the FPLP for a year, IRS did not consider about $13 billion in tax debt for levy through the FPLP. In response to our recommendation, IRS removed the one-year systemic block on both queue and deferred cases. Removing the block made those cases immediately available for matching with federal payments, which would make those payments subject to levy.

In our review of Department of Defense (DOD) contractors who abuse the federal tax system, we found that the Internal Revenue Service (IRS) was excluding cases from the Financial Management Service's (FMS) automated Treasury Offset Program (TOP). FMS uses the TOP as the mechanism to collect tax levies through the Federal Payment Levy Program (FPLP). Excluding cases prevented IRS from collecting taxes more efficiently. In response to our recommendations, IRS removed the Automated Collection System (ACS)exclusion for over $3.2 billion--nearly 50 percent--of the tax debt in its ACS inventory. By doing so, IRS made these billions of dollars in tax debt available for offest against federal payments, which made those payments subject to levy through the FPLP. Through this action, IRS made approximately $9 billion in tax debt available for offset against federal payments.

IRS changed its FPLP case exclusion and selection criteria to (1) retain tax debts in the FPLP until the IRS and the tax debtor have agreed on and finalized the terms of any Installment Agreements or Offers, (2) eliminate the FPLP exclusion on tax debts coded as criminal investigation cases except those under active investigation, (3) reduce the FPLP exclusion criteria for tax debts that are about to reach its statutory expiration date from three months to one month prior to expiration, (4) change the FPLP case selection criteria to make defaulted installment agreement cases with reversed financial hardship closing codes eligible for levy through the FPLP, and (5) exclude only the specific tax periods for which the tax debtor files a Collection Due Process Appeal, an amended return, or other claim rather than excluding the tax debtor's entire outstanding tax debt. These changes have resulted in making additional hundreds of millions of dollars and hundreds of thousands of tax debt accounts available for levy through the FPLP. Consequently, no further action is necessary.

In our reviews of federal contractors who abuse the federal tax system, we identified Department of Defense, civilian, and GSA contractors with abusive and potentially criminal activity. Many of these businesses had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to help fund their businesses. In 2004 and 2005, we referred 47 cases involving defense contractors, 50 cases involving civilian contractors, and 25 cases involving GSA contractors to the IRS. Susequently, IRS reported that of the total of 122 cases that were referred in 2004 and 2005, it had closed 62 cases (51 percent). Of these, 23 cases were full pay closures, and IRS determined that the remaining 39 cases were currently not collectible. These non-collectible cases involve defunct corporations or other taxpayers where it is judged that there is no potential, now or in the future, for collection. Of the 122 cases, IRS reported that it had closed 62 cases. Of those, 23 were closed because the taxpayer had full paid the debt and 39 were closed because IRS had determined them to be currently not collectible. An additional 17 cases were in IRS's active collection inventory. For the remaining cases, IRS reported that the taxpayer (1) was attempting to satisfy the debt by making payments through an installment agreement or has filed an offer-in-compromise, (2) had been determined by IRS to be in financial hardship and collection of the debt is in abeyance, (3) was in bankruptcy proceedings and IRS is prohibited from taking additional collection actions, or (4) was under criminal investigation.

One of the responsibilities of OMB--through its Office of Federal Procurement Policy (OFPP)--is to provide overall direction to shaping the government's procurement regulations. The OFPP, whose administrator is chair of the Federal Acquisition Regulation (FAR) Council; the Civilian Agency Acquisition Council; and the Defense Acquisition Regulations Council have responsibility for FAR changes. A final rule amending the FAR has been agreed to that will add conditions regarding delinquent Federal taxes to standards of contractor responsibility. Specifically, the FAR change--FAR 2006-011--will require the prospective contractor to self-certify that it has no civil tax judgment and/or convictions, no violation of Federal criminal tax laws, and no delinquent Federal taxes in an amount exceeding $3,000. As a result of this regulation change, federal contracts are to be awarded to only those contractors who are not delinquent on their federal taxes.