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United States Government Accountability Office:
Washington, DC 20548:
April 21, 2006:
The Honorable Norm Coleman:
Chairman:
Permanent Subcommittee on Investigations:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
Subject: Responses to Post Hearing Questions:
Dear Chairman Coleman:
This letter responds the request by you and Senator Akaka for
additional information related to the Subcommittee's March 14,
2006 hearing entitled GSA Contractors Who Cheat on Their Taxes
and What Should Be Done about It. Enclosed are our responses to
the supplemental questions you submitted for the record. Our
responses are based largely on information contained in our
published reports and testimonies related to Department of
Defense, civilian agency, and GSA contractors with unpaid taxes
and reflect our views based on that information.
If you have any further questions or would like to discuss
these responses, please call Gregory Kutz at (202) 512-7455, or
Steve Sebastian at 202-512-9521.
Sincerely yours,
Signed By:
Gregory D. Kutz:
Managing Director:
Forensic Audits and Special Investigations:
Signed By:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Enclosure-1:
Responses to Supplemental Questions for the Record:
Submitted by:
Senator Norm Coleman:
Permanent Subcommittee on Investigations:
Hearing on:
GSA Contractors who Cheat on their Taxes and What Should Be
Done About It:
March 14, 2006:
1. For each of the 25 GSA contractor cases identified at the
hearing, please indicate whether the contractor had:
* an outstanding federal tax lien,
* an outstanding state tax lien,
* a trust fund recovery penalty assessed,
* been indicted for tax evasion,
* been convicted of tax evasion,
* been indicted for any criminal tax offense, or:
* been convicted for any tax offense.
The tax related offenses should include an indictment or
conviction charged under 26 U.S.C. 7202, 26 U.S.C. 7203, 26
U.S.C. 7206(1) or 18 U.S.C. 371.
Answer:
As requested, table 1 below provides detailed data on the 25
GSA contractors with unpaid tax debt as they relate to (1)
federal tax liens, (2) state tax liens, (3) trust fund recovery
penalties assessed, (4) indictments for tax evasion, (5)
convictions for tax evasion, (6) indictments for any criminal
tax offense and (7) conviction for any criminal tax offense.
Table 1. GSA Contractors with Unpaid Federal Taxes:
Case study; 1;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?; No;
Indicted for any criminal tax offense?; No;
Convicted for any criminal tax offense? No.
Case study; 2;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 3;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 4;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 5;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 6;
Federal tax lien?: No;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 7;
Federal tax lien?: Yes;
State tax lien?: No;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 8;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 9;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 10;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 11;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 12;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 13;
Federal tax lien?: No;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 14;
Federal tax lien?: Yes;
State tax lien?; Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 15;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 16;
Federal tax lien?: Yes;
State tax lien?: No;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 17;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 18;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 19;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 20;
Federal tax lien?: No;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 21;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 22;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 23;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: No;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 24;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Case study; 25;
Federal tax lien?: Yes;
State tax lien?: Yes;
Trust fund recovery penalty assessed?: Yes;
Indicted for tax evasion?: No;
Convicted of tax evasion?: No;
Indicted for any criminal tax offense?: No;
Convicted for any criminal tax offense? No.
Source: Internal Revenue Service and public records:
[End of table]
2. Of the 40,000 GSA contractors GAO reviewed, how many failed
to file tax returns?
Answer:
The Internal Revenue Service (IRS) does not maintain a database
of companies that failed to file tax returns. Without such a
database, we were not able to determine the extent to which the
40,000 GSA contractors failed to file tax returns. However,
through our extensive review of tax transcripts, revenue
officer's notes, and other tax records, we were able to
determine that at least four of the 25 case study companies we
investigated did not file tax returns.
Responses to Supplemental Questions for the Record:
Submitted by:
Senator Daniel Akaka:
Permanent Subcommittee on Investigations:
Hearing on:
GSA Contractors who Cheat on their Taxes and What Should Be
Done About It:
March 14, 2006:
1. Mr. Kutz, your testimony from last November described the
missed opportunities to levy billions of dollars because of
FMS's management and oversight deficiencies. Please describe
the steps that the Financial Management Service (FMS) has taken
to correct data quality problems such as payments where the
agency payment station was not loaded into the system; payments
contained inaccurate Taxpayer Identification Numbers; or
payments that contained blank or invalid names. Also, please
explain if the situation that you described last November has
improved based on changes implemented by FMS.
Answer:
The Department of Treasury's Financial Management Service (FMS)
has made significant progress in implementing our
recommendations for correcting data quality problems in their
payment process. The following is a synopsis of our
recommendations from our report[Footnote 1] and FMS's actions
to address those recommendations.
* In June 2005, we reported that FMS did not update its
Treasury Offset Program (TOP) database to capture payments from
about 150 agency paying stations, resulting in $40 billion of
fiscal year 2004 civilian agency contractor payments being
excluded from potential levy. We recommended that FMS update
the TOP database to include payments from all agency locations
and develop and implement a monitoring process to ensure that
TOP's list of agency paying locations is consistently updated.
FMS has updated the TOP database to include all agency paying
locations in TOP for potential levy. FMS also developed and
implemented procedures to monitor agency paying locations to
ensure that the TOP list is consistently updated.
* In June 2005, we also reported that FMS disbursed payments
without proper TINS, vendor names, and payment types. We
recommended that FMS monitor payment files to ensure that the
payment files contain all the proper information necessary for
offset and notify agencies of any deficiencies noted from this
monitoring. In response to our recommendation, FMS issued a
bulletin to the heads of government departments and agencies
reminding agencies of the requirement for payment files to be
accurate and complete. FMS also began issuing monthly "report
card" letters to the agencies' Chief Financial Officers that
provided information on the agency's compliance with TIN and
payee name. According to FMS officials, the implementation of
these steps has resulted in agencies making substantial
progress in providing complete and accurate payment files to
FMS. According to Treasury, the reported compliance rates for
TINS and payee names are about 99 percent which is
significantly higher than the compliance rate of about 80
percent prior to the implementation of our recommendations.
2. Based on data collected during your investigation last year,
I understand that the unpaid federal tax for civilian
contractors was $1.5 billion between the period of 1990 and
1999. Between the period of 2000 to 2002, the amount was $1.1
billion, and for 2003, the amount was $500,000,000. At first
glance, this data shows a terrible trend of an ever increasing
rate of tax delinquency among civilian contractors. Should we
interpret this trend to mean that the tax delinquency problem
among federal contractors is getting worse over time? Or, does
this trend just mean that the capability to identify tax
delinquency is getting better? Furthermore, if the trend is in
fact true, are there any additional steps to include new
legislation, besides your previous recommendations that we
should take to stop this wave of irresponsibility?
Answer:
Based on the limited data we have, it is not possible to
conclude whether the tax delinquency problem among civilian
contractors is getting worse over time. The tax debt amount is
affected by both the accumulation of interest and penalties
(making the tax debt bigger) and the collection of taxes
(making the tax debt smaller) over time. Additionally, the
amounts you note represent only those taxes specifically
identified by IRS as being owed by contractors. These numbers
do not consider the magnitude of additional tax debt that may
be owed by contractors which IRS has not specifically
identified, such as amounts owed by contractors who have not
filed tax returns. Because of these offsetting factors, it is
difficult to draw a conclusion about whether the situation is
getting better or worse based simply on the date of the tax
module alone. However, we believe that the sheer magnitude of
tax debts owed by civilian contractors that we were able to
identify does indicate a problem. As for additional steps that
could be taken, besides our previous recommendations, as you
suggest in question number 4, the Federal Acquisitions
Regulations could be modified to require contracting officers
to require a review of tax delinquency before the issuance of a
contract.
3. Mr. Kutz, in our subcommittee hearing last year I spoke
about the lack of effort on the part of FMS to collect state
tax debts from federal payments. Do you believe any progress
has been made on this issue since your last report? And, please
describe any barriers to progress on the part of the states or
FMS.
Answer:
In July 2005, we reported that the federal government and
states have not taken any action to collect unpaid debt through
reciprocal agreements. As a result, we recommended that FMS
notify states of the opportunity to enter into reciprocal
agreements with the federal government to collect delinquent
debts through offsets of federal and state payments, and assess
the cost and potential benefits of developing reciprocal
agreements with the states to collect delinquent debts through
offsets of federal and state payments. FMS has made limited
progress in implementing our recommendations. According to FMS
officials, FMS conducted a conference call last year with state
officials to describe how reciprocal agreements can be
established with the federal government to collect delinquent
debts through the offset of federal payments. FMS officials
also stated that they obtained debt and payment information
from two states, New Jersey and Maryland, to perform analysis
on whether it would be beneficial to enter into reciprocal
agreements. Based on this analysis, they found potential
benefit in the offset of federal and state payments. FMS
officials stated that they are continuing to look at this issue
to determine the operational and legal issues that need to be
resolved in order to implement our recommendations. However,
until FMS implements reciprocal agreements with states, FMS and
the states will continue to miss opportunities to collect
outstanding debts through the reciprocal offsetting of payments.
4. You testified that the Federal Acquisitions Regulations
(FAR) do not specifically require a review of tax delinquency
before the issuance of a contract. Should FAR be changed to
require such a review? If so, how would the tax delinquency
information be made available to contracting officers since
they are generally prohibited from viewing taxpayer information?
Answer:
In our 2004 report on Department of Defense contractors that
abuse the federal tax system,[Footnote 2] we recommended that
the Director of Office of Management and Budget (OMB) develop
and pursue policy options for prohibiting federal contract
awards to contractors in cases in which abuse to the federal
tax system has occurred and the tax owed is not contested. In
this recommendation, we stated that options could include
designating such tax abuse as a cause for governmentwide
debarment and suspension or, if allowed by statute, authorizing
IRS to declare such businesses and individuals ineligible for
government contracts. However, OMB has not implemented this
recommendation. Currently, FAR does not specifically require
contracting officers to take into account a contractor's tax
debt when assessing whether a prospective contractor is a
responsible party and therefore should be awarded a contract.
As a result, neither GSA nor other federal agencies perform
reviews to determine whether prospective contractors have
unpaid taxes at the time a contract is awarded.
Another policy option is to change federal law, as implemented
by the Federal Acquisition Regulation, and require the
contracting officer's responsibility review to include an
assessment of contractor tax delinquency before issuance of a
contract. In addition to the general concerns about the federal
government doing business with delinquent taxpayers, allowing
these contractors to do business with the federal government
creates an unfair competitive advantage over the vast majority
of contractors who pay their taxes. This causes a disincentive
to contractors to pay their fair share of taxes, and could lead
to further erosion in compliance with the nation's tax system.
However, certain issues would need to be considered in
implementing such a provision, including ensuring the accuracy
of taxpayer information, timely communication of the tax status
of a prospective contractor to the contracting officer, and the
legal barriers that currently prevent IRS from disclosing
taxpayer information. This latter issue could be addressed
through a requirement that prospective contractors certify that
they do not owe any tax debts and provide consent to IRS to
provide information on their tax status to the contracting
officer. In addition, other issues would need to be addressed,
such as developing a standard on what constitutes abuse of the
federal tax system and the ability to expedite the negotiation
of contracts as quickly as possible.[Footnote 3]
(192208):
[End of section]
FOOTNOTES
[1] Financial Management: Thousands of Civilian Agency
Contractors Abuse the Federal Tax System with Little
Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005).
[2] GAO, Financial Management: Some DOD Contractors Abuse the
Federal Tax System with Little Consequence, GAO-04-95
(Washington, D.C.: Feb. 12, 2004).
[3] We considered activity to be abusive when a contractor's
actions or inactions, though not illegal, took advantage of the
existing tax enforcement and administration system to avoid
fulfilling federal tax obligations and were deficient or
improper when compared with behavior that a prudent person
would consider reasonable.