Recovery Act:

Thousands of Recovery Act Contract and Grant Recipients Owe Hundreds of Millions in Federal Taxes

GAO-11-686T: Published: May 24, 2011. Publicly Released: May 24, 2011.

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Gregory D. Kutz
(202) 512-9505


Office of Public Affairs
(202) 512-4800

This testimony discusses the results of our most recent report, which we are releasing today, on American Recovery and Reinvestment Act of 2009 (Recovery Act) contract and grant recipients that owe federal taxes. Collectively, individuals, businesses, and other entities owed the U.S. government about $330 billion in known unpaid taxes, including interest and penalties, as of September 30, 2010, according to the Internal Revenue Service (IRS). IRS enforcement of the nation's tax laws continues to be on our High-Risk List. The Recovery Act appropriated $275 billion to be distributed for federal contracts, grants, and loans. According to ( data on federal spending, as of March 25, 2011, about $191 billion of that amount had been paid out. As far back as 1992, we have said that Congress should consider whether tax compliance should be a prerequisite for receiving a federal contract. Federal law does not prohibit the awarding of contracts or grants to entities because they owe federal taxes and does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal agencies unless the taxpayer consents. Because of the potential that some Recovery Act recipients also have unpaid federal taxes you asked us to investigate this issue. This statement is based on our most recent report regarding tax delinquent federal contractors and grantees. Our report and my statement address two issues: (1) the magnitude of known tax debt owed by Recovery Act contract and grant recipients; and (2) examples of Recovery Act contract and grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt owed by Recovery Act contract and grant recipients, we identified contract and grant recipients from and compared them to known tax debts as of September 30, 2009, from IRS.

We found the following: (1) Thousands of Recovery Act contract and grant recipients owe hundreds of millions in federal taxes: At least 3,700 Recovery Act contract and grant recipients--including prime recipients, subrecipients, and vendors--are estimated to owe more than $750 million in known unpaid federal taxes as of September 30, 2009, and received over $24 billion in Recovery Act funds. This represented nearly 5 percent of the approximately 80,000 contractors and grant recipients in the data from as of July 2010 that we reviewed. The estimated amount of known unpaid federal taxes is likely understated because IRS databases do not include amounts owed by recipients who have not filed tax returns or understated their taxable income and for which IRS has not assessed tax amounts due. In addition, our analysis does not include Recovery Act contract and grant recipients who are noncompliant with or not subject to Recovery Act reporting requirements. Our analysis also does not include contract and grant recipients that were not registered in the Central Contractor Registration (CCR). Because does not contain taxpayer identification numbers (TIN), we used CCR to identify the TIN for each contract and grant recipient. We were not able to match about 17,000 of the 80,000 recipients in to the CCR database. As such, those 17,000 recipients were not included in our analysis. (2) Examples of Recovery Act recipients with unpaid federal taxes engaged in abusive or potentially criminal activity: For the 15 cases we selected for further review, we found abusive or potentially criminal activity, i.e., recipients had failed to remit payroll taxes to IRS. Federal law requires employers to hold payroll tax money "in trust" before remitting it to IRS. Failure to remit payroll taxes can result in civil or criminal penalties under U.S. law. The amount of unpaid taxes associated with these case studies were about $40 million, ranging from approximately $400,000 to over $9 million. IRS has taken collection or enforcement activities (e.g., filing of federal tax liens) against all 15 of these recipients. Our analysis and investigation found that only 1 of these 15 Recovery Act recipients was subject to the new Federal Acquisition Regulation requirement for certification of tax debts in relation to their Recovery Act awards. Because that contractor was current on its repayment agreement, the contractor was not required to disclose its tax debts. The other 14 recipients were grant recipients or contract subrecipients. However, 1 of the 14 companies that recently filed an Online Representations and Certifications Application improperly stated that the company had not been notified of any delinquent federal taxes (greater than $3,000) within the preceding 3 years. We did not identify any circumstances (e.g., current repayment agreement) that would allow the company to make such certification. We have referred all 15 recipients to IRS for further investigation, if warranted.

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