GAO - Defense Contractor Tax Abuse

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The following was posted by Steve Taylor <steve@miltoxproj.org>
___________________________________________________

Yesterday the General 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 Federal Tax System with Little
Consequence" - is available 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"

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

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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