Contractors evade taxes to the tune of $3 billion, GAO reports

Federal civilian contractors owe more than $3 billion in unpaid taxes, according to an unreleased Government Accountability Office (GAO) report provided to The Hill.

The report, requested by Senate Permanent Subcommittee on Investigations Chairman Norm Coleman (R-Minn.), ranking member Carl Levin (D-Mich.) and other committee members, will be made public during a committee hearing today.

In its findings, the GAO uncovered 33,000 examples of tax evasion among federal civilian contractors. Together, the contractors owe $3.3 billion in unpaid taxes — mostly in payroll taxes — and continue to receive lucrative contracts from agencies such as the Departments of Justice, Homeland Security and Veterans Affairs.

“The widespread tax cheating by federal contractors will end,” Coleman said in a statement. “Step by step we are identifying and closing the loopholes that have allowed federal contractors to cheat on their taxes.”

The hearing is the second in what is likely to be a series of hearings on the subject. The first, in February 2004, focused on defense contractors.

In 2004, Coleman voiced concern that more needed to be done to improve the levy system used to collect taxes from delinquent contractors. Now, according to a counsel associated with the investigation, Coleman and Levin are considering legislation that would make it impossible for contractors who have defaulted on their taxes to receive new government contracts.

“Under the circumstances, we must bar certain companies and individuals from receiving federal contracts,” Coleman said. In addition, Coleman suggested that there should be a method that allows agencies to find out whether a contractor has a history of tax evasion.

The GAO report highlights 50 of the 33,000 cases as particularly egregious examples. According to the report, the Treasury Department’s Financial Management Services (FMS) collected only $16 million of the $50 million it was owed in unpaid taxes in fiscal year 2004.

In one case, a healthcare contractor for the government was paid $300,000 in fiscal year 2004 while owing $18 million in taxes. Failure to pay payroll taxes did not stop the contractor from buying multimillion-dollar properties, other residential and commercial properties and a “fleet” of luxury vehicles, according to the report.

In another example, a contractor repeatedly declared bankruptcy to avoid paying taxes. The contractor subsequently reopened the same business in the same location and continued to receive federal contracts.

The names of the 50 contractors — 49 businesses and two individuals — were not included in the GAO report because of IRS privacy statutes.

The GAO recommended that the FMS improve the system used to levy contractors, which is “in serious need of full implementation,” according to the senior investigator. The GAO also encouraged the IRS to pursue criminal investigation of the 50 cases highlighted in the report.

None of the 47 cases investigated by the GAO last year has been referred for prosecution, although a few are being investigated by the IRS, according to the senior Senate investigator.

The committee counsel suggested that both Coleman and Levin viewed the IRS’s lack of aggression toward the contractors as a problem and were likely to question IRS Commissioner Mark Everson closely on the subject during today’s hearing.