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Scofflaw contractors owe billions in Taxes: GAO.

About 33,000 civilian agency contractors owe $3.3 billion in unpaid federal taxes, and a federal program designed to collect the money is not working, the Government Accountability Office found.

"Thousands of civilian agency contractors throughout the federal government abused the federal tax system with little consequence," the report said.

GAO said a closer examination of 50 companies, most of them small, found "abusive and potentially criminal activity" by every one of them, with unpaid taxes running into the hundreds of thousands or even millions of dollars and going back as far as five years. The Internal Revenue Service has agreed to review those cases.

The most common violation: failure to pay income taxes that had been withheld from employees' paychecks, which is a felony.

The investigators said the Treasury Department's Financial Management Service, which pays most civilian agency contractors' bills, was not aware of many of the tax scofflaws, even though it also is responsible for collecting overdue taxes.

The GAO report was a follow-up to its investigation last year that found 27,000 defense contractors owed $3 billion in unpaid taxes.

"One of the principal problems we identified was that many federal contractors provided false tax identification numbers when they registered with the government," said Sen. Norm Coleman (R-MN), chairman of the Permanent Investigations Subcommittee of the Senate Homeland Security and Government Reform Committee. The subcommittee asked for the GAO investigation and held a hearing June 16 on its findings.

Coleman said he and others have introduced legislation to ensure that contractors' tax ID numbers are validated by the IRS. Richard Gregg, commissioner of Treasury's Financial Management Service, said the agency will begin validating taxpayer ID numbers in October.

GAO said Treasury could have collected several hundred million dollars in overdue taxes if it had full authority to deduct those taxes from payments to the contractors. But the investigators also cited "a lack of proactive oversight and management" of the tax collection program by the Financial Management Service.

GAO recommended that FMS withhold payment from contractors who have not provided an accurate taxpayer ID number or company name. FMS disagreed with the recommendation. In prepared testimony to the subcommittee, FMS Commissioner Gregg said that could hurt contractors who do not owe back taxes. But he said the agency will step up its efforts to monitor contractor compliance.

The report is GAO-05-637, available at
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Publication:Set-Aside Alert
Date:Jun 24, 2005
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