Financial Management:

Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence

GAO-05-637: Published: Jun 16, 2005. Publicly Released: Jun 16, 2005.

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Tax abuses by contractors working for the Department of Defense, on which GAO previously reported, have led to concerns about similar abuses by those hired by civilian agencies. GAO was asked to determine if similar problems exist at civilian agencies and, if so, to (1) quantify the amount of unpaid federal taxes owed by civilian agency contractors paid through the Financial Management Service (FMS), (2) identify any statutory or policy impediments and control weaknesses that impede tax collections under the Federal Payment Levy Program (FPLP), and (3) determine whether there are indications of abusive or potential criminal activity by contractors with unpaid tax debts.

FMS and IRS records showed that about 33,000 civilian agency contractors owed over $3 billion in unpaid federal taxes as of September 30, 2004. All 50 civilian agency contractors we investigated had abusive and potentially criminal activity. For example, businesses with employees did not forward payroll taxes withheld from their employees to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Further, several individuals own multiple businesses with unpaid federal taxes--one individual owns about 20 businesses that did not fully pay taxes related to over 300 returns. Some contractors purchased or owned millions of dollars of property while they did not remit payroll taxes. These activities were identified for contractors at the Departments of Justice, Homeland Security, and Veterans Affairs; the National Aeronautics and Space Administration; and others agencies. GAO's analysis indicates that if all tax debts owed by, and all payments made to, the 33,000 contractors were included in the FPLP, FMS could have collected hundreds of millions of dollars in fiscal year 2004. However, because only a fraction of all unpaid taxes and a portion of FMS payments are subjected to the levy program, FMS actually collected only $16 million from civilian contractors. For example, about $171 billion of unpaid federal taxes were not sent to the levy program to be offset against payments because of specific statutory requirements or IRS policy exclusions, such as debtors' claims of financial hardship or bankruptcy. Tens of billions of dollars in federal payments were not compared against tax debts for potential levy because FMS did not proactively manage and oversee the levy program. Until we brought it to FMS's attention, FMS did not know that it did not submit $40 billion of contractor payments from some civilian agencies for potential levy. FMS also did not identify payment files that did not contain contractor tax identification numbers, names, or both, resulting in $21 billion in payments to contractors that could not be levied. FMS also excluded billions of dollars from levy because of what it considered programming limitations without taking proactive steps to overcome those limitations. Further, civilian agency purchase card payments to contractors totaling $10 billion could not be levied. Improvements at FMS could result in tens of millions of dollars of additional levies annually.

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  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
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    Recommendations for Executive Action

    Recommendation: The Commissioner of Internal Revenue should evaluate the 50 referred cases detailed in this report and consider whether additional collection action or criminal investigations are warranted.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In our reviews of federal contractors who abuse the federal tax system, we identified Department of Defense, GSA, and other civil agency contractors with abusive and potentially criminal activity. Many of these businesses had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. In 2004, 2005, and 2006, we referred 47 cases involving defense contractors, 25 cases involving GSA contractors, and 50 cases involving other civil agency contractors, to the IRS and recommended that IRS consider whether additional collection action or criminal investigation was warranted. In November 2007, IRS reported that of the total of 122 cases that were referred in 2004 and 2005, it had closed 62 cases (51 percent)--23 cases were full pay closures and 39 cases were currently not collectible because they were defunct businesses or other taxpayers for whom IRS had judged that there is no potential, now or in the future, for collection. An additional 17 cases were in IRS's active collection inventory. For the remaining 43 cases, IRS reported that the taxpayer (1) was attempting to satisfy the debt by making payments through an installment agreement or has filed an offer-in-compromise, (2) had been determined by IRS to be in financial hardship and collection of the debt is in abeyance, (3) was in bankruptcy proceedings and IRS is prohibited from taking additional collection actions, or (4) was under criminal investigation. Based on these IRS actions, IRS has substantially addressed our recommendation to consider whether collection or other actions are warranted for the cases we referred to IRS.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to reject agency requests for payments with blank or obviously inaccurate names.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed nearly $3.8 billion to contractors whose payment files did not contain the name of the contractor receiving the payment. Our analysis of FMS payment data found that FMS made disbursements without contractor names totaling approximately $400 million to about 2,000 companies that had about $370 million in unpaid federal taxes. Consequently, those payments were not subject to levy through the Federal Payment Levy Program (FPLP) because both a name and a Tax Identification Number is required for FMS to match payments with federal debt in order to levy payments through the FPLP. As a result, FMS missed the opportunity to collect a portion of the unpaid taxes owed by those 2,000 companies. The blank name fields in the payment record occurred because FMS was not monitoring whether federal agencies were submitting proper names on their payment requests. We recommended that FMS (1) develop procedures to evaluate payment files to identify payments with blank or obviously inaccurate name fields, (2) notify agencies of deficiencies in payment files regarding blank or obviously inaccurate name fields, and (3) collaborate with agencies submitting payment files with blank or obviously inaccurate names in the name field to develop and implement procedures to capture the contractors' names in the payment files. In response to our recommendations, FMS developed and implemented an action plan that addresses our recommendations. Specifically, FMS (1) made changes in its disbursement systems to automatically hold and cancel contractor and vendor payment records that contain blank names and/or address lines, (2) developed a monthly monitoring of agencies' compliance with name requirements, (3) developed Payment Compliance Reporting Procedures and Guidance for agencies, and (4) developed a monthly "report card" letter to agency Chief Financial Officers that includes a copy of the agency's monthly compliance report and a reference to the need for complete and valid payment information, including complete and accurate names. Improved name compliance increases the likelihood that FMS can match a payment voucher to tax debt, thus increasing tax debt collections through the FPLP.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to collaborate with agencies submitting payment files with blank or obviously inaccurate names in the name field, including the State Department, to develop and implement procedures to capture the contractors' names in the payment files.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed nearly $3.2 billion on behalf of the State Department to contractors whose payment files did not contain the name of the contractor receiving the payment. Consequently, those payments were not subject to levy through the government's Federal Payment Levy Program (FPLP) because both a name and a Tax Identification Number is required for FMS to match payment requests to federal debt information in order to levy the payments. Officials of both the State Department and FMS were unaware that the State Department's contractor payment vouchers submitted to FMS for disbursement did not contain valid names until we brought the matter to their attention. At our request, the State Department investigated and found a programming error made sometime in the 1980s resulted in the wrong field being sent to FMS in the contractor name field. After we brought this deficiency to the attention of the State Department officials, it took action to correct the system programming error. As a result, FMS and the Internal Revenue Service (IRS) have additional opportunities to collect delinquent tax debt from State Department contractors through the FPLP.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to notify agencies of deficiencies in payment files regarding blank or obviously inaccurate name fields.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed nearly $3.8 billion to contractors whose payment files did not contain the name of the contractor receiving the payment. Our analysis of FMS payment data found that FMS made disbursements without contractor names totaling approximately $400 million to about 2,000 companies that had about $370 million in unpaid federal taxes. Consequently, those payments were not subject to levy through the Federal Payment Levy Program (FPLP) because both a name and a Tax Identification Number is required for FMS to match payments with federal debt in order to levy payments through the FPLP. As a result, FMS missed the opportunity to collect a portion of the unpaid taxes owed by those 2,000 companies. The blank name fields in the payment record occurred because FMS was not monitoring whether federal agencies were submitting proper names on their payment requests. We recommended that FMS (1) develop procedures to evaluate payment files to identify payments with blank or obviously inaccurate name fields, (2) notify agencies of deficiencies in payment files regarding blank or obviously inaccurate name fields, and (3) collaborate with agencies submitting payment files with blank or obviously inaccurate names in the name field to develop and implement procedures to capture the contractors' names in the payment files. In response to our recommendations, FMS developed and implemented an action plan that addresses our recommendations. Specifically, FMS (1) made changes in its disbursement systems to automatically hold and cancel contractor and vendor payment records that contain blank names and/or address lines, (2) developed a monthly monitoring of agencies' compliance with name requirements, (3) developed Payment Compliance Reporting Procedures and Guidance for agencies, and (4) developed a monthly "report card" letter to agency Chief Financial Officers that includes a copy of the agency's monthly compliance report and a reference to the need for complete and valid payment information, including complete and accurate names. Improved name compliance increases the likelihood that FMS can match a payment voucher to tax debt, thus increasing tax debt collections through the FPLP.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to evaluate payment files to identify payments with blank or obviously inaccurate name fields.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed nearly $3.8 billion to contractors whose payment files did not contain the name of the contractor receiving the payment. Our analysis of FMS payment data found that FMS made disbursements without contractor names totaling approximately $400 million to about 2,000 companies that had about $370 million in unpaid federal taxes. Consequently, those payments were not subject to levy through the Federal Payment Levy Program (FPLP) because both a name and a Tax Identification Number is required for FMS to match payments with federal debt in order to levy payments through the FPLP. As a result, FMS missed the opportunity to collect a portion of the unpaid taxes owed by those 2,000 companies. The blank name fields in the payment record occurred because FMS was not monitoring whether federal agencies were submitting proper names on their payment requests. We recommended that FMS (1) develop procedures to evaluate payment files to identify payments with blank or obviously inaccurate name fields, (2) notify agencies of deficiencies in payment files regarding blank or obviously inaccurate name fields, and (3) collaborate with agencies submitting payment files with blank or obviously inaccurate names in the name field to develop and implement procedures to capture the contractors' names in the payment files. In response to our recommendations, FMS developed and implemented an action plan that addresses our recommendations. Specifically, FMS (1) made changes in its disbursement systems to automatically hold and cancel contractor and vendor payment records that contain blank names and/or address lines, (2) developed a monthly monitoring of agencies' compliance with name requirements, (3) developed Payment Compliance Reporting Procedures and Guidance for agencies, and (4) developed a monthly "report card" letter to agency Chief Financial Officers that includes a copy of the agency's monthly compliance report and a reference to the need for complete and valid payment information, including complete and accurate names. Improved name compliance increases the likelihood that FMS can match a payment voucher to tax debt, thus increasing tax debt collections through the FPLP.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a taxpayer identification number (TIN) for each payment requiring a TIN by developing and implement procedures to review payments submitted by paying agencies to verify that each payment has either a TIN or a certification that the contractor is exempt from providing a TIN.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agency contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed over $17 billion in payments to civilian agency contractors without federal Tax Identification Numbers (TIN) or with obviously inaccurate TINs, such as TINs made up of all zeros or all 9s. Without a valid TIN, FMS was unable to collect outstanding tax debt on those payments on behalf of the Internal Revenue Service (IRS) through the Federal Payment Levy Program (FPLP). The FPLP is the mechanism FMS uses to levy federal payments to collect outstanding federal debt, including including tax debt. Integral to the effectiveness of this program is FMS's ability to compare the TIN on the payment to the TINs in the FMS debt file, which includes federal tax debt provided by IRS. Without a match, FMS is unable to levy the payment. Blank and obviously inaccurate TINs occurred because FMS did not have procedures in place to ensure that federal agencies meet the requirement of the Debt Collection Improvement Act of 1996 (DCIA) for ensuring that valid TINs are included on certified payment vouchers submitted by agencies to FMS for disbursement. We recommended that FMS enforce the DCIA requirement and develop and implement procedures to review payments submitted by agencies to verify that each payment has a proper TIN. In response to our recommendation, FMS developed and implemented procedures to perform monthly monitoring of agency TIN reporting compliance. Under these procedures, FMS provides monthly "report card" letters to agency Chief Financial Officers on their TIN compliance and references the need for complete and valid payment information. Improvements in TIN validity on payment vouchers increases the likelihood that FMS can match those TINs to the TINs contained on its debt file, thus increasing the potential for levies on federal payments to collect on federal debt, including tax debt.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a taxpayer identification number (TIN) for each payment requiring a TIN by enforcing requirements that federal agencies must include TINs on all payment vouchers submitted to FMS for disbursement or expressly indicate that the contractor meets one of the criteria that exempts the contractor from providing a TIN.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agency contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed over $17 billion in payments to civilian agency contractors without federal Tax Identification Numbers (TIN) or with obviously inaccurate TINs, such as TINs made up of all zeros or all 9s. Without a valid TIN, FMS was unable to collect outstanding tax debt on those payments on behalf of the Internal Revenue Service (IRS) through the Federal Payment Levy Program (FPLP). The FPLP is the mechanism FMS uses to levy federal payments to collect outstanding federal debt, including including tax debt. Integral to the effectiveness of this program is FMS's ability to compare the TIN on the payment to the TINs in the FMS debt file, which includes federal tax debt provided by IRS. Without a match, FMS is unable to levy the payment. Blank and obviously inaccurate TINs occurred because FMS did not have procedures in place to ensure that federal agencies meet the requirement of the Debt Collection Improvement Act of 1996 (DCIA) for ensuring that valid TINs are included on certified payment vouchers submitted by agencies to FMS for disbursement. In response to our recommendation, in fiscal year 2007, FMS developed and implemented procedures to perform monthly monitoring of agency TIN reporting compliance. Under these procedures, FMS provides monthly "report card" letters to agency Chief Financial Officers on their TIN compliance and references the need for complete and valid payment information. Improvements in TIN validity on payment vouchers increases the likelihood that FMS can match those TINs to the TINs contained on its debt file, thus increasing the potential for levies on federal payments to collect on federal debt, including tax debt.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payments from all paying locations are subjected to potential levy in TOP by developing and implementing a monitoring process to ensure TOP's list of agency paying locations is consistently updated.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that Treasury's Financial Management System (FMS) excluded about $40 billion of fiscal year 2004 civilian agency contractor payments from potential levy because it did not include all its paying stations in the Treasury Offset Program (TOP). TOP is the mechanism FMS uses to collect tax levies on behalf of the Internal Revenue Service (IRS) through the Federal Payment Levy Program (FPLP). Federal agencies may have multiple offices or locations that perform accounting for and preparation of payment information -- such offices or locations are referred to as agency payment locations or paying stations. For a payment to be matched against tax debts for the purpose of levy, the paying station from which the payment originates must be programmed into the TOP database. If a paying station is not in the TOP database, TOP considers that location to be excluded from the levy program. We found that FMS had not updated the TOP database to include all paying stations because it did not have an effective internal control system in place to ensure that it periodically monitored and updated TOP for all paying stations. As a result, approximately 150 paying stations were not included in the TOP database. We recommended that FMS (1) update the TOP database to include all applicable paying stations and (2) implement a monitoring process to ensure TOP's list of agency paying locations is consistently updated. In response to our recommendations, as of December 2005, FMS had added all missing paying stations to the TOP database and had developed procedures for quarterly updating agency paying stations' profiles in TOP. By taking these actions, FMS increased the potential for collection of outstanding tax debt owed by civilian agency contractors through the FPLP.

    Recommendation: To comply with the Debt Collection Improvement Act of 1996 (DCIA), further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payments from all paying locations are subjected to potential levy in the Treasury Offset Program (TOP) by updating the TOP database to include payments from all agency paying locations in TOP for potential levy.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that Treasury's Financial Management System (FMS) excluded about $40 billion of fiscal year 2004 civilian agency contractor payments from potential levy because it did not include all its paying stations in the Treasury Offset Program (TOP). TOP is the mechanism FMS uses to collect tax levies on behalf of the Internal Revenue Service (IRS) through the Federal Payment Levy Program (FPLP). Federal agencies may have multiple offices or locations that perform accounting for and preparation of payment information -- such offices or locations are referred to as agency payment locations or paying stations. For a payment to be matched against tax debts for the purpose of levy, the paying station from which the payment originates must be programmed into the TOP database. If a paying station is not in the TOP database, TOP considers that location to be excluded from the levy program. We found that FMS had not updated the TOP database to include all paying stations because it did not have an effective internal control system in place to ensure that it periodically monitored and updated TOP for all paying stations. As a result, approximately 150 paying stations were not included in the TOP database. We recommended that FMS (1) update the TOP database to include all applicable paying stations and (2) implement a monitoring process to ensure TOP's list of agency paying locations is consistently updated. In response to our recommendations, as of December 2005, FMS had added all missing paying stations to the TOP database and had developed procedures for quarterly updating agency paying stations' profiles in TOP. By taking these actions, FMS increased the potential for collection of outstanding tax debt owed by civilian agency contractors through the FPLP.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a payment type and thus, if appropriate, are subject to a levy, by instructing all agencies that they must indicate a payment type on all payments.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed $5 billion in payments using checks based on agency-submitted payment files that did not contain data in the payment type field. FMS uses the payment type field in the agency-submitted payment files to determine if the payment is required to be included in the Federal Payment Levy Program (FPLP), which is the mechanism FMS uses to collect tax levies for the Internal Revenue Service (IRS) from payments to tax debtors. As a result, none of the $5 billion in payments we identified as having a blank payment type field could have been levied to collect the contractors' unpaid federal taxes. We recommended that FMS (1) instruct all agencies that they must include a payment type on all payments and (2) develop and implement monitoring procedures to verify that all payments have payment type indicators. In response to our recommendation, FMS (1) informed agency Chief Financial Officers (CFO) in 2005 of the requirement to include payment type indicators in the payment record and published a Treasury Financial Manual Bulletin outlining the requirements for completing payment records, and (2) developed and implemented a monthly monitoring and compliance reporting process in 2006. As part of the monitoring process, FMS provides a monthly "report card" letter to agencies that use FMS disbursement services, which includes a report on the agency's compliance with the payment type indicator requirement. Improved documentation of payment type information in agency-submitted payment files increases FMS's ability to appropriately levy payments through the FPLP, thus increasing tax collections.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a payment type and thus, if appropriate, are subject to a levy, by implementing monitoring procedures to verify that all payments indicate payment type.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agencies' contractors that abuse the federal tax system, we found that in fiscal year 2004, Treasury's Financial Management Service (FMS) disbursed $5 billion in payments using checks based on agency-submitted payment files that did not contain data in the payment type field. FMS uses the payment type field in the agency-submitted payment files to determine if the payment is required to be included in the Federal Payment Levy Program (FPLP), which is the mechanism FMS uses to collect tax levies for the Internal Revenue Service (IRS) from payments to tax debtors. As a result, none of the $5 billion in payments we identified as having a blank payment type field could have been levied to collect the contractors' unpaid federal taxes. We recommended that FMS (1) instruct all agencies that they must include a payment type on all payments and (2) develop and implement monitoring procedures to verify that all payments have payment type indicators. In response to our recommendation, FMS (1) informed agency Chief Financial Officers (CFO) in 2005 of the requirement to include payment type indicators in the payment record and published a Treasury Financial Manual Bulletin outlining the requirements for completing payment records, and (2) developed and implemented a monthly monitoring and compliance reporting process in 2006. As part of the monitoring process, FMS provides a monthly "report card" letter to agencies that use FMS disbursement services, which includes a report on the agency's compliance with the payment type indicator requirement. Improved documentation of payment type information in agency-submitted payment files increases FMS's ability to appropriately levy payments through the FPLP, thus increasing tax collections.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges associated with implementing the authorized increase of the levy to 100 percent, by working with IRS to determine steps necessary to implement the increased levy percentage.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Not Implemented

    Comments: FMS officials stated that they attempted to get legislation allowing for 100 percent levy of vendor payments. FMS officials stated that they do not intend to modify their system to distinguish between the type of vendor payment.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges of collecting unpaid taxes of contractors paid using purchase cards, in conjunction with IRS, by monitoring payments to assess alternatives available to levy or otherwise collect unpaid taxes from those contractors.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: During our review of civilian agency contractors' compliance with federal tax laws, we identified thousands of federal contractors with substantial amounts of unpaid federal taxes. Specifically, we reported that about 33,000 civilian agency contractors owed about $3.3 billion in federal taxes. In our review, we found that federal contractors with federal debt, including tax debt, were not subject to having their payments offset or levied through the Financial Management Service's (FMS) automated offset and levy programs when the contractors are paid using a government purchase card. We recommended that Treasury's FMS, in conjunction with the Internal Revenue Service (IRS), address challenges of collecting unpaid taxes of contractors paid using purchase cards by assessing the extent to which contractors paid with purchase cards owe federal taxes and assessing alternatives to levy or otherwise collect unpaid taxes from those contractors. In response, FMS and IRS, in conjunction with GSA, developed a regulatory, programming, and operation process to add a Federal debt indicator, or "flag" on the Central Contractor Registration (CCR) for those contractors with delinquent tax debt. CCR is a governmentwide database of contractors used by federal agencies to identify information on potential federal contractors. This flag indicates to federal agencies that they must not use their Federal purchase cards as the method of payment for contracts awarded to those contractors. Instead, they must pay the contractor using a payment method that is subject to the FMS Treasury Offset Program and the Federal Levy Payment Program (FPLP). In December 2007, the defense and civilian Federal Acquisition Regulation (FAR) councils issued a proposed FAR change--FAR Case 2006-026--to implement the change in payment requirements. In March 2008, FMS and GSA completed required programming changes to match the CCR database and Federal debts that allows FMS to send CCR the flag indicator on a weekly basis. As a result of this change, FMS will enhance its capacity to levy payments to contractors with unpaid tax debt.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges of collecting unpaid taxes of contractors paid using purchase cards, in conjunction with IRS, by monitoring payments to assess the extent to which contractors paid with purchase cards owe federal taxes.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: During our review of civilian agency contractors' compliance with federal tax laws, we identified thousands of federal contractors with substantial amounts of unpaid federal taxes. Specifically, we reported that about 33,000 civilian agency contractors owed about $3.3 billion in federal taxes. In our review, we found that federal contractors with federal debt, including tax debt, were not subject to having their payments offset or levied through the Financial Management Service's (FMS) automated offset and levy programs when the contractors are paid using a government purchase card. We recommended that Treasury's FMS, in conjunction with the Internal Revenue Service (IRS), address challenges of collecting unpaid taxes of contractors paid using purchase cards by assessing the extent to which contractors paid with purchase cards owe federal taxes and assessing alternatives to levy or otherwise collect unpaid taxes from those contractors. In response, FMS and IRS, in conjunction with GSA, developed a regulatory, programming, and operation process to add a Federal debt indicator, or "flag" on the Central Contractor Registration (CCR) for those contractors with delinquent tax debt. CCR is a governmentwide database of contractors used by federal agencies to identify information on potential federal contractors. This flag indicates to federal agencies that they must not use their Federal purchase cards as the method of payment for contracts awarded to those contractors. Instead, they must pay the contractor using a payment method that is subject to the FMS Treasury Offset Program and the Federal Levy Payment Program (FPLP). In December 2007, the defense and civilian Federal Acquisition Regulation (FAR) councils issued a proposed FAR change--FAR Case 2006-026--to implement the change in payment requirements. In March 2008, FMS and GSA completed required programming changes to match the CCR database and Federal debts that allows FMS to send CCR the flag indicator on a weekly basis. As a result of this change, FMS will enhance its capacity to levy payments to contractors with unpaid tax debt.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should ensure that more payments are matched against tax debt in TOP, take actions necessary to incorporate IRS's expanded list of control names into TOP.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: During our review of civilian agency contractors who abuse the federal tax system, we found that potentially thousands of payments are not levied through the Federal Payment Levy Program (FPLP) because the tax identification numbers (TINs) and names in the Financial Management Service's (FMS) payment records do not match the TINs and name controls in its debt records. For a levy to take place, the TINs and name control in the payment record must match a TIN and name control in the debt record. Usually, the name control is the first four characters of an individual's last name or the first four characters of the business name. FMS data for fiscal year 2004 reflected that about $1.7 billion of payments made to contractors with unpaid taxes were not levied because the control name supplied by IRS for FMS's debt files did not match the payee name in FMS's payment records. We also found that IRS had more name controls in its records than it was submitting to FMS. To ensure that more payments are matched against tax debt, we recommended that FMS take actions necessary to incorporate IRS's expanded list of name controls into FMS's system. In January 2006, IRS increased the number of name controls associated with TINs that it sends to FMS for matching. As a result, IRS had added over 340,000 name controls on 95,000 taxpayers by November 2006. The increased number of name controls improves the potential to match tax debt with a federal payment flowing through FMS's payment system so that payments can be levied to help collect outstanding tax debts.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should collect unpaid taxes of individuals, make changes to TOP to levy contractor payments to collect the unpaid federal taxes owed by individuals.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In our audit of civilian agency contractors that abuse the federal tax system, we found that the Financial Management Service (FMS) did not levy contractor payments through the Federal Payment Levy Program (FPLP) to collect the unpaid federal taxes owed by individuals. Our analysis determined that individuals who were civilian agency contractors had $290 million in unpaid federal taxes also received federal payments totaling nearly $2 billion in fiscal year 2004. FMS's systems did not identify whether the payment was being made to a business or individual because federal agencies' payment records do not distinguish payments made to individuals, such as those who are self-employed or sole proprietors, from payments made to businesses. Due to its inability to distinguish between these two types of payments in FMS's system and the possibility of improperly levying payments, IRS decided that FMS should not match contractor payments to the tax debts of individuals. An improper levy could occur during the payment process because a business's tax identification number (TIN) and control name could be the same as an individual's Social Security number (the individual's TIN) and control name. For example, this would occur when FMS is making a payment to an individual if FMS matches the payment to a tax debt that is actually a business TIN and name rather than the individual's. However, the potential risk of an improper levy was small. Consequently, we recommended that FMS make the necessary changes to its Treasury Offset Program (TOP), which is the program FMS uses to levy federal payments to collect unpaid federal taxes to include unpaid federal taxes owed by individuals. In response to our recommendation and with IRS's concurrence, FMS modified TOP in fiscal year 2007 to begin levying contractor payments to individuals. FMS's initial match after making these changes identified approximately 1000 individuals with tax debts totaling $240,000 that were receiving federal payments. These payments can now be subjected to levy to collect on the outstanding taxes.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit Fedwire payments to TOP for potential levy.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: In response, in July 2007 FMS implemented an alternative control procedure to block tax delinquent contractors from receiving contract payments through its Fedwire system and instead is paying them through one of the payment methods already subject to the Treasury Offset Program and the FPLP. Consistent with the intent of our recommendation, this change will improve IRS' capacity to levy and collect tax debts from contractors.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit Automated Clearing House-Corporate Trade Exchange payments to TOP for potential levy.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: During our audit of civilian agency contractors who abuse the federal tax system, we found that Treasury's Financial Management Service (FMS) was not proactive in including many types of contractor payments, such as contractor electronic funds payments (ACH-CTX payments), in the Treasury Offset Program (TOP), which FMS uses to collect outstanding federal tax debt from federal payments through the Federal Payment Levy Program (FPLP). Specifically, we found that FMS had excluded about $11 billion in payments to civilian agency contractors from the FPLP during fiscal year 2004 by not including ACH-CTX payments. We recommended that FMS develop and implement procedures to submit ACH-CTX payments to TOP for potential levy. In response to our recommendation, FMS developed procedures and programming to include ACH-CTX payments in TOP. By including those payments, FMS can levy and collect tax debts from civilian agency payments to contractors who use FMS's ACH-CTX payment mechanism.

    Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit type A payments to TOP for potential levy.

    Agency Affected: Department of the Treasury: Financial Management Service

    Status: Closed - Implemented

    Comments: As part of our reporting on civilian agency contractors who abused the federal tax system (GAO-05-637), we determined that Treasury's Financial Management Service (FMS) did not include several types of payments in its federal payment levy program directed at collecting unpaid federal taxes. The FMS payment levy program is referred to as the Treasury Offset Program (TOP). Consequently, potentially billions of dollars were not subject to consideration as part of the levy program. One such type of excluded payments were Type A payments to civilian agency contractors. Type A contractor payments are those payments for which the agency both certifies and provides detailed supporting information for the payment in the same payment file. To further the federal government's efforts to collect unpaid federal taxes, GAO recommended that FMS develop and implement procedures to submit Type A payments for consideration for inclusion in its TOP process for potential levy. In response, as of January 2006, FMS implemented changes in its policies and procedures to include Type A payments for potential levy as part of TOP. Treasury's action to include Type A payments in its process for potential TOP levy, should improve FMS's ability to collect federal tax debts owed by civilian agency contractors.

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