The Government Accountability Office (GAO) has released a study concluding that many companies that contract with the federal government have been avoiding paying taxes.

The GAO told a House subcommittee on April 19 that more than 50,000 federal contractors were delinquent with respect to their taxes, including 27,000 Department of Defense contractors, 33,000 civilian agency contractors and 3,800 General Services Administration contractors – if the GSA sounds familiar, they awarded many of the Hurricane Katrina contracts. The total owed was more than $8 billion (yes, with a b) – and the GAO testified that number was likely understated as the liabilities do not include a number of contractors who have failed to file tax returns or report the full amount of taxes due.

The GAO conducted in-depth investigations of 122 federal contractors and “in all cases found abusive and potentially criminal activity related to the federal tax system” and many were found to be involved in nontax offenses including embezzlement, fraud, and money laundering. More often than not, the GAO found that these contractors had not forwarded payroll taxes withheld from their employees to the IRS (a felony in the US), while continuing to pay themselves well. A number of contractors did not pay taxes while continuing to accrue considerable personal assets. In one instance, the federal contractor purchased a sports team (the name of the team wasn’t given at testimony).

It was noted that contractors may owe taxes and still receive government contracts. Under the current rules, companies and individuals with unpaid taxes are not prohibited from receiving contracts from the federal government; I find this particularly interesting since many governments, including state and local governments, do have such a prohibition. Absent voluntary disclosure of outstanding tax obligations, the IRS imposes restrictions on tax disclosure that make it difficult to know, at the time that the contract is awarded, that a contractor may have unsatisfied tax obligations.

The GAO noted that at least two councils have recommended that prospective contractors with the federal government should be required to certify whether or not they have, within a 3-year period preceding a federal contract, 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. Additionally, 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.

Testimony delivered before the House represented years’ worth of investigations. Despite similar reports in February 2004, June 2005 and March 2006, no significant changes have been made in the way that the federal contracts are awarded.

The GAO also presented the following anonymous examples of contractors with unpaid taxes:

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

Case 1
Nature of work: Base support and custodial services for DOD
Federal payments: Over $1 million
Unpaid federal tax: 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 2
Nature of work: Research services for Department of Defense
Federal payments: Up to $100,000
Unpaid federal tax: 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 3
Nature of work: Vehicle repair services for Department of Defense
Federal payments: Over $100,000
Unpaid federal tax: 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 4
Nature of work: Health-care-related services for Departments of Veterans Affairs and Health and Human Services;
Federal payments: Over $100,000;
Unpaid federal tax: 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 5
Nature of work: Security guard services to Departments of Homeland Security and Veterans Affairs;
Federal payments: Over $100,000
Unpaid federal tax: 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 6
Nature of work: Armed security guard services to several federal agencies including the Department of Justice and the Environmental Protection Agency;
Federal payments: Over $100,000;
Unpaid federal tax: 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 7
Nature of work: Payroll and temporary employment services to the Department of Housing and Urban Development
Federal payments: Over $1 million;
Unpaid federal tax: 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 8
Nature of work: Security services under a GSA contract;
Federal payments: Over $1 million;
Unpaid federal tax: 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 9
Nature of work: Emergency supplies under a GSA contract;
Federal payments: Up to $100,000;
Unpaid federal tax: 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 10
Nature of work: Human resource services under a GSA contract;
Federal payments: Over $100,000;
Unpaid federal tax: 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.)

The amazing bit about that, if you look at the numbers, is that IRS could easily target these contractors for enforcement. The money is clearly there. And yet, they don’t. Instead, IRS makes sweeping policy announcements about targeting the middle class for audits (link is to NYTimes article, requires free registration) while we are losing more than $8 billion in uncollected tax revenue to unmonitored federal contracts. How much is that exactly? Consider this: if you spent $100 a minute every minute of every day it would take more than 152 years to deplete $8 billion. Or just a couple of years of government contracts.

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Author

Kelly Erb is a tax attorney and tax writer.

Comments

  1. I would be very concerned with Systems Application & Technologies, Inc http://www.sa-techinc.com. Mr Adams and DeZavala were involved in EEO problems in the past and the Air Force won’t have anything to do with them. See:
    EEOC v. Systems Application & Technologies,Inc. CV-04-7702 GAF (RCx) (C.D. Cal. May 11, 2005)

    EDWARDS AIR FORCE BASE – A private company that formerly provided security at NASA Dryden Flight Research Center has agreed to pay $237,000 and provide training to settle a sexual-harassment lawsuit lawsuit n. a common term for a legal action by one person or entity against another person or entity, to be decided in a court of law, sometimes just called a “suit.” The legal claims within a lawsuit are called “causes of action.” (See: cause of action, case, suit). Systems Application & Technologies Inc. lost its Dryden contract last year after the federal government filed a lawsuit accusing a male SA Tech manager of touching four male SA Tech security employees on their thighs, shoulders, neck or crotch crotch (krch)n.
    The angle or region of the angle formed by the junction of two parts or members, such as two branches, limbs, or legs.
    , and of making sexual remarks. Under the lawsuit settlement, the company will be required to hire an equal employment opportunity consultant and to train its employees on sexual harassment sexual harassment n. unwanted sexual approaches (including touching, feeling, groping) and/or repeated unpleasant, degrading and/or sexist remarks directed toward an employee with the implied suggestion that the target’s employment status, promotion or favorable treatment depend upon a positive response and/or “cooperation., including same-sex harassment.
    Supervisors will also be held accountable if they fail to properly forward sexual-harassment complaints made by their workers, Noh said.
    The company must post a toll-free number for employees to use in making complaints, she said.
    Because Maryland-based SA Tech no longer works at Dryden, the training and other anti-harassment steps will be imposed at the company’s Oxnard office and a second small California office.
    The $237,000 will be split among the four employees, who apparently no longer work for SA Tech, Noh said. The manager no longer works for the company, she said.
    The lawsuit was filed last September by the agency, alleging that the incidents occurred from 2000 to 2002. NASA was not named in the lawsuit.
    SA Tech had worked at Dryden for six years before its contract ended in October, Dryden spokesman Alan Brown said. It had 24 employees providing security at Dryden.
    NASA officials were not made aware of the alleged harassment before the EEOC filed its lawsuit, Brown said. NASA vigorously pursues a workplace free of harassment.

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