GAO - Defense Contractor Tax Abuse

[Steve Taylor <steve@miltoxproj.org>]

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Yesterday the General Accounting Office released a new report on tax abuse =
by defense contractors. According to DOD and IRS records, over 27,000 defen=
se contractors owe about $3 billion in unpaid taxes, yet many continue to r=
eceive new DOD contacts and payments. Some cases involve abusive and potent=
ially criminal activity. The report - titled "Financial Management: Some DO=
D Contactors Abuse the Federal Tax System with Little Consequence" - is ava=
ilable as GAO-04-95 on the GAO site at www.gao.gov

Report highlights are pasted below.

Steve Taylor
National Organizer
Military Toxics Project
207-783-5091 (phone)
www.miltoxproj.org
"Networking for Environmental Justice"


February 2004

FINANCIAL MANAGEMENT
Some DOD Contractors Abuse the
Federal Tax System with Little
Consequence

What GAO Found

DOD and IRS records showed that over 27,000 contractors owed about
$3 billion in unpaid taxes as of September 30, 2002. DOD has not fully
implemented provisions of the Debt Collection Improvement Act of 1996
that would assist IRS in levying up to 15 percent of each contract
payment to offset a DOD contractor's federal tax debt. We estimate that
DOD could have collected at least $100 million in fiscal year 2002 had it
and IRS fully utilized the levy process authorized by the Taxpayer Relief
Act of 1997. As of September 2003, DOD had collected only about
$687,000 in part because DOD provides contractor payment information
from only 1 of its 16 payment systems to TOP. DOD had no formal plans
at the completion of our work to provide payment information from its
other 15 payment systems to TOP.

Furthermore, we found abusive or potentially criminal activity related to
the federal tax system through our audit and investigation of 47 DOD
contractors. The 47 contractors provided a variety of goods and services,
including parts or support for weapons and other sensitive military
programs. The businesses in these case studies owed primarily payroll
taxes with some dating back to the early 1990s. These payroll taxes
included amounts withheld from employee wages for Social Security,
Medicare, and individual income taxes. However, rather than fulfill their
role as "trustees" and forward these amounts to IRS, these DOD
contractors diverted the money for personal gain or to fund the business.

For example, owners of two businesses each borrowed nearly $1 million
from their companies and, at about the same time, did not remit millions
of dollars in payroll taxes. One owner bought a boat, several cars, and a
home outside the United States. The other paid over $1 million for a
furnished home. Both contractors received DOD payments during fiscal
year 2002, but one went out of business in 2003. The business, however,
transferred its employees to a relative's company (also with unpaid
taxes) and recently received DOD payments on a previous contract.

IRS's continuing challenges in collecting unpaid federal taxes also
contributed to the problem. In several case studies, IRS was not
pursuing DOD contractors due to resource and workload management
constraints. For other cases, control breakdowns resulted in IRS
freezing collection activity for reasons that were no longer applicable.
Federal law does not prohibit contractors with unpaid federal taxes from
receiving federal contracts. OMB is responsible for providing overall
direction to governmentwide procurement policies, regulations, and
procedures, and is in the best position to develop policy options for
prohibiting federal government contract awards to businesses and
individuals that abuse the tax system.

Why GAO Did This Study

GAO was asked to determine
(1) the magnitude of unpaid federal
taxes owed by Department of
Defense (DOD) contractors,
(2) whether indications exist of
abuse or criminal activity by DOD
contractors related to the federal
tax system, (3) whether DOD and
the Internal Revenue Service (IRS)
have effective processes and
controls in place to use the
Treasury Offset Program (TOP) in
collecting unpaid federal taxes
from DOD contractors, and
(4) whether DOD contractors with
unpaid federal taxes are prohibited
by law from receiving contracts
from the federal government.

What GAO Recommends

GAO makes recommendations to
DOD for complying with statutory
guidance and supporting IRS
efforts in collecting unpaid taxes,
to IRS for improving the
effectiveness of collection
activities, and to the Office of
Management and Budget (OMB) to
develop options for prohibiting
federal contract awards to
businesses and individuals that
abuse the federal tax system. DOD
and IRS partially agreed; OMB did
not agree. DOD and OMB also did
not agree with GAO's matters for
congressional consideration that
DOD report on its collections
through TOP and OMB report on
policy options developed and
actions taken against contractors
that abuse the federal tax system.
GAO reiterated support for its
recommendations as well as for its
suggestions to Congress.

www.gao.gov/cgi-bin/getrpt?GAO-04-95

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Gregory D. Kutz
at (202) 512-9095 or kutzg@gao.gov, or
Steven J. Sebastian at (202) 512-3406.
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<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2>Yesterday the Gene=
ral
Accounting Office released a new report on tax abuse by defense contractors=
.
According to DOD and IRS records, over 27,000 defense contractors owe about=
 $3
billion in unpaid taxes, yet many continue to receive new DOD contacts and=

payments. Some cases involve abusive and potentially criminal activity. The=

report - titled "Financial Management: Some DOD Contactors Abuse the Federa=
l Tax
System with Little Consequence" - is available as GAO-04-95 on the GAO site=
 at
<A href=3D"http://www.gao.gov";>www.gao.gov</A></FONT></STRONG></DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2></FONT></STRONG>&n=
bsp;</DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2>Report highlights =
are pasted
below.</FONT></STRONG></DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2></FONT></STRONG>&n=
bsp;</DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2>Steve Taylor<BR>Na=
tional
Organizer<BR>Military Toxics Project<BR>207-783-5091 (phone)<BR><A
href=3D"http://www.miltoxproj.org";>www.miltoxproj.org</A><BR>"Networking fo=
r
Environmental Justice"</FONT></STRONG></DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000 size=3D2></FONT></STRONG>&n=
bsp;</DIV>
<DIV><STRONG><FONT face=3DArial color=3D#008000
size=3D2></FONT></STRONG>&nbsp;</DIV><FONT face=3DArial color=3D#008000 siz=
e=3D2><FONT
face=3DHelvetica-Bold color=3D#ffffff size=3D1>
<DIV align=3Dleft><FONT color=3D#000000 size=3D2><STRONG>February
2004</STRONG></FONT></DIV>
<DIV align=3Dleft><STRONG><FONT color=3D#000000
size=3D2></FONT></STRONG>&nbsp;</DIV></FONT><FONT face=3DHelvetica size=3D5=
>
<DIV align=3Dleft><FONT face=3DArial color=3D#000000 size=3D2><STRONG>FINAN=
CIAL
MANAGEMENT</STRONG></FONT></DIV></FONT><FONT face=3DHelvetica-Bold size=3D5=
>
<DIV align=3Dleft><FONT color=3D#000000 size=3D2><STRONG>Some DOD Contracto=
rs Abuse
the</STRONG></FONT></DIV>
<DIV align=3Dleft><FONT color=3D#000000 size=3D2><STRONG>Federal Tax System=
 with
Little</STRONG></FONT></DIV>
<DIV align=3Dleft><FONT color=3D#000000
size=3D2><STRONG>Consequence</STRONG></FONT></DIV>
<DIV align=3Dleft><STRONG><FONT color=3D#000000 size=3D2></FONT></STRONG>&n=
bsp;</DIV>
<DIV align=3Dleft><STRONG><FONT color=3D#000000 size=3D2>What GAO
Found</FONT></STRONG></DIV></FONT></FONT>
<DIV><STRONG><FONT face=3DArial color=3D#008000
size=3D2></FONT></STRONG>&nbsp;</DIV><FONT face=3DCentury-Book size=3D3>
<DIV align=3Dleft><FONT face=3DArial size=3D2>DOD and IRS records showed th=
at over
27,000 contractors owed about</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>$3 billion in unpaid taxes as=
 of
September 30, 2002. DOD has not fully</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>implemented provisions of the=
 Debt
Collection Improvement Act of 1996</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>that would assist IRS in levy=
ing up to
15 percent of each contract</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>payment to offset a DOD contr=
actor's
federal tax debt. We estimate that</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>DOD could have collected at l=
east $100
million in fiscal year 2002 had it</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>and IRS fully utilized the le=
vy process
authorized by the Taxpayer Relief</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>Act of 1997. As of September =
2003, DOD
had collected only about</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>$687,000 in part because DOD =
provides
contractor payment information</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>from only 1 of its 16 payment=
 systems to
TOP. DOD had no formal plans</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>at the completion of our work=
 to provide
payment information from its</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>other 15 payment systems to=

TOP.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>Furthermore, we found abusive=
 or
potentially criminal activity related to</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>the federal tax system throug=
h our audit
and investigation of 47 DOD</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>contractors. The 47 contracto=
rs provided
a variety of goods and services,</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>including parts or support fo=
r weapons
and other sensitive military</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>programs. The businesses in t=
hese case
studies owed primarily payroll</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>taxes with some dating back t=
o the early
1990s. These payroll taxes</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>included amounts withheld fro=
m employee
wages for Social Security,</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>Medicare, and individual inco=
me taxes.
However, rather than fulfill their</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>role as "trustees" and fo=
rward these
amounts to IRS, these DOD</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>contractors diverted the mone=
y for
personal gain or to fund the business.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>For example, owners of two bu=
sinesses
each borrowed nearly $1 million</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>from their companies and, at =
about the
same time, did not remit millions</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>of dollars in payroll taxes. =
One owner
bought a boat, several cars, and a</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>home outside the United State=
s. The
other paid over $1 million for a</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>furnished home. Both contract=
ors
received DOD payments during fiscal</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>year 2002, but one went out o=
f business
in 2003. The business, however,</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>transferred its employees to =
a
relative's company (also with unpaid</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>taxes) and recently received =
DOD
payments on a previous contract.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>IRS's continuing challenges=
 in
collecting unpaid federal taxes also</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>contributed to the problem. I=
n several
case studies, IRS was not</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>pursuing DOD contractors due =
to resource
and workload management</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>constraints. For other cases,=
 control
breakdowns resulted in IRS</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>freezing collection activity =
for reasons
that were no longer applicable.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>Federal law does not prohibit=

contractors with unpaid federal taxes from</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>receiving federal contracts. =
OMB is
responsible for providing overall</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>direction to governmentwide p=
rocurement
policies, regulations, and</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>procedures, and is in the bes=
t position
to develop policy options for</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>prohibiting federal governmen=
t contract
awards to businesses and</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>individuals that abuse the ta=
x
system.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2><STRONG>Why GAO Did This
Study</STRONG></FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial><FONT size=3D2><FONT face=3DArial
size=3D2></FONT></FONT></FONT>&nbsp;</DIV><FONT face=3DCentury-Book size=
=3D2>
<DIV align=3Dleft><FONT face=3DArial>GAO was asked to determine</FONT></DIV=
>
<DIV align=3Dleft><FONT face=3DArial>(1) the magnitude of unpaid
federal</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial>taxes owed by Department of</FONT></DI=
V>
<DIV align=3Dleft><FONT face=3DArial>Defense (DOD) contractors,</FONT></DIV=
>
<DIV align=3Dleft><FONT face=3DArial>(2) whether indications exist of</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>abuse or criminal activity by DOD</FON=
T></DIV>
<DIV align=3Dleft><FONT face=3DArial>contractors related to the federal</FO=
NT></DIV>
<DIV align=3Dleft><FONT face=3DArial>tax system, (3) whether DOD and</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>the Internal Revenue Service (IRS)</FO=
NT></DIV>
<DIV align=3Dleft><FONT face=3DArial>have effective processes and</FONT></D=
IV>
<DIV align=3Dleft><FONT face=3DArial>controls in place to use the</FONT></D=
IV>
<DIV align=3Dleft><FONT face=3DArial>Treasury Offset Program (TOP) in</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>collecting unpaid federal taxes</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>from DOD contractors, and</FONT></DIV>=

<DIV align=3Dleft><FONT face=3DArial>(4) whether DOD contractors with</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>unpaid federal taxes are
prohibited</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial>by law from receiving contracts</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>from the federal government.</FONT></D=
IV>
<DIV align=3Dleft><FONT face=3DArial></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial><STRONG>What GAO
Recommends</STRONG></FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial></FONT>&nbsp;</DIV>
<DIV align=3Dleft><FONT face=3DArial>GAO makes recommendations to</FONT></D=
IV>
<DIV align=3Dleft><FONT face=3DArial>DOD for complying with statutory</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>guidance and supporting IRS</FONT></DI=
V>
<DIV align=3Dleft><FONT face=3DArial>efforts in collecting unpaid
taxes,</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial>to IRS for improving the</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial>effectiveness of collection</FONT></DI=
V>
<DIV align=3Dleft><FONT face=3DArial>activities, and to the Office of</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>Management and Budget (OMB) to</FONT><=
/DIV>
<DIV align=3Dleft><FONT face=3DArial>develop options for prohibiting</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>federal contract awards to</FONT></DIV=
>
<DIV align=3Dleft><FONT face=3DArial>businesses and individuals that</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>abuse the federal tax system. DOD</FON=
T></DIV>
<DIV align=3Dleft><FONT face=3DArial>and IRS partially agreed; OMB did</FON=
T></DIV>
<DIV align=3Dleft><FONT face=3DArial>not agree. DOD and OMB also did</FONT>=
</DIV>
<DIV align=3Dleft><FONT face=3DArial>not agree with GAO's matters for</FO=
NT></DIV>
<DIV align=3Dleft><FONT face=3DArial>congressional consideration that</FONT=
></DIV>
<DIV align=3Dleft><FONT face=3DArial>DOD report on its collections</FONT></=
DIV>
<DIV align=3Dleft><FONT face=3DArial>through TOP and OMB report on</FONT></=
DIV>
<DIV align=3Dleft><FONT face=3DArial>policy options developed and</FONT></D=
IV>
<DIV align=3Dleft><FONT face=3DArial>actions taken against contractors</FON=
T></DIV>
<DIV align=3Dleft><FONT face=3DArial>that abuse the federal tax system.</FO=
NT></DIV>
<DIV align=3Dleft><FONT face=3DArial>GAO reiterated support for its</FONT><=
/DIV>
<DIV align=3Dleft><FONT face=3DArial>recommendations as well as for its</FO=
NT></DIV>
<DIV align=3Dleft><FONT face=3DArial>suggestions to Congress.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial></FONT>&nbsp;</DIV></FONT><FONT face=
=3DHelvetica
size=3D1>
<DIV align=3Dleft><FONT face=3DArial size=3D2><A
href=3D"http://www.gao.gov/cgi-bin/getrpt?GAO-04-95";>www.gao.gov/cgi-bin/ge=
trpt?GAO-04-95</A></FONT></DIV>
<DIV align=3Dleft>&nbsp;</DIV></FONT><FONT face=3DHelvetica size=3D1>
<DIV align=3Dleft><FONT face=3DArial size=3D2>To view the full product, inc=
luding the
scope</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>and methodology, click on the=
 link
above.</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>For more information, contact=
 Gregory D.
Kutz</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>at (202) 512-9095 </FONT></FO=
NT><FONT
face=3DArial size=3D2>or kutzg@gao.gov, </FONT><FONT face=3DHelvetica size=
=3D1><FONT
face=3DArial size=3D2>or</FONT></DIV>
<DIV align=3Dleft><FONT face=3DArial size=3D2>Steven J. Sebastian at (202)=

512-3406.</FONT></DIV></FONT></FONT></BODY></HTML>

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