The U.S. Government Accountability Office (GAO), an arm of Congress, testified before the U.S. Senate on June 16 that a study of government contractors shows that as many as 33,000 civilian contractors owe the Government more than $3 billion in unpaid taxes. GAO matched government contractor records with files of the Internal Revenue Service (IRS) to identify the contractors.
This is the second of a series of hearings conducted by the Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs that is looking into tax delinquency problems with federal contractors. The first hearing, in February 2004, examined the Defense Department’s failure to levy contractor payments for unpaid taxes owed by contractors doing business with DOD. The hearing in 2004 revealed that 27,000 defense contractors owed more than $3 billion in unpaid taxes. After the hearing, DOD focused on the problem and increased collections of previously unpaid taxes from its contractors by 2500 percent.
The GAO report (GAO-05-637) says that the unpaid taxes include corporate income, excise, unemployment, individual income and payroll taxes. While the amount owed the government exceeds $3 billion, only $16 million was levied against contractor payments for unpaid taxes in FY 2004. GAO charged that the Treasury Department’s Financial Management Service has not been proactive in levying collections against contractors.
GAO performed an audit and investigation of 50 contractors and found what it alleges are abusive and criminal activities. These companies were primarily operating in wage-based industries such as health care, personnel, security, computer consulting and building maintenance for agencies such as the Departments of Homeland Security, Justice and State. A number of these businesses had unpaid payroll taxes for which the contractor is a "trustee" and is obligated to forward withheld taxes to the IRS. GAO stated that willful failure to remit the taxes is a felony. The study also identified a number of contractors with unpaid taxes whose owners and or officers were convicted or indicted of criminal conduct. These companies, however, were continuing to perform contracts for the Government.
Senator Norm Coleman (R-Minnesota), chairman of the Permanent Subcommittee on Investigations, called for stepped up enforcement against the contractors. He called for more effective use of the federal tax levying process by the U.S. Department of Treasury to withhold payments from contractors to recover unpaid taxes. Prior to the hearing, Senator Coleman said that the Government also should bar the contractors from receiving further federal contracts and publish the names of the offending contractors.
As a result of these hearings, the GAO report and the Treasury Department’s commitment to assist levying efforts, federal contractors can expect closer scrutiny of their tax payments to the Government, potentially slower payments by the Treasury Department while it determines if levying of contract payments should be undertaken, increased use of suspension and debarment procedures for suspected unpaid taxes and pressure for criminal referrals to the Justice Department for unpaid taxes.
What Contractors Should Do: Contractors should examine their processes and actions for remitting tax and withholding payments to the IRS to ensure that all payments are timely and paid in full. If the examination identifies either shortcomings in the process or underpayment of owed taxes, the contractor should initiate an internal investigation to discover deficiencies in its procedures and the causes for any underpayment of taxes. Since tax underpayment can lead to criminal charges, care must be taken in performing the investigation and it should not be initiated without advice of counsel. Should the investigation identify matters of concern regarding unpaid taxes, the contractor may explore with advice of its counsel how to address the situation, such as making a voluntary disclosure to the government.
Given the heightened attention to unpaid taxes, contractors must examine their exposure to adverse actions by their agency customers. An agency may suspend a contractor "suspected, upon adequate evidence, of . . . Commission of any . . . offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor." Thus a contractor may be suspended even if there has been no criminal charge or conviction. During suspension, the agency may choose to discontinue contractor performance and may not award new contracts, place orders, add work, exercise options or extend current contracts.
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