I participated in a hearing of the Senate's Permanent Subcommittee on Investigations (PSI), where we heard from GAO investigators who testified that the federal government had made payments in 2004 to 33,000 contractors who owed the government over $3 billion in back taxes. Most of these taxes were either corporate income taxes or payroll taxes (the money that employers withhold from their employees' pay and send to the federal government to fund Social Security and Medicare).
The 50 contractors investigated by the GAO were found to have engaged in abusive or potentially criminal activity. These tax delinquencies were not the result of legitimate hardship. In most cases, they were the result of these contractors willfully deciding to evade their obligations under our tax laws. These cases do not merely tell a story of how an unethical business, from time to time, can pull a fast one. In far too many cases, these contractors pulled fast ones repeatedly, chronically, and apparently without meaningful penalty.
For example, one firm that did business with the federal government, including the Department of Homeland Security, received $1.5 million in payments in 2004 while owing the government more than $1 million in taxes. We found that the firm had filed its taxes late many years, and had not paid any payroll taxes during several recent years. Instead, the company illegally diverted those taxes to address other cash flow problems. In another case, the GAO discovered that the owner of a business that provides temporary workers currently owes $900,000 in delinquent taxes. Through its investigation, GAO discovered that this contractor has a nearly 20-year history of closing businesses with tax debts, opening new ones, and incurring new tax debts.
Other contractors, such as a health care contractor that collected $300,000 in federal contract payments while owing the government over $18 million in taxes, spent the unpaid tax money on luxury items for the company's owners. Rather than pay their fair share of taxes on income derived from the taxes of others, they chose instead to inflate their own salaries, to purchase multi-million-dollar properties, and – in one case – to divert payroll taxes withheld from employees to an offshore bank to finance a luxury home overseas.
And in other cases, GAO found that some contractors with unpaid federal taxes had been convicted of crimes, such as embezzlement and money laundering, yet had been awarded government contracts. This is outrageous.
Allowing companies and individuals with tax debts to conduct business with, and receive full payment from, the federal government creates serious problems. First, it reduces federal revenues and contributes to our already serious deficit problem. Second, it distorts the federal contracting process by actually giving a "leg up" to contractors who cheat on their taxes. For instance, a company that fails to pay its payroll taxes has lower business costs than an identical firm that pays its taxes, and can therefore offer a lower price when bidding on a contract. And third, it raises serious questions about whether a contractor who cheats on his taxes will do a good job in performing on the federal contract.
This is unacceptable and must be addressed. Federal law allows government contracting officers to ban irresponsible contractors from obtaining federal contracts. Current law also allows the government to withhold (or levy) fifteen percent of any government payment to anyone who owes the federal government taxes. There are loopholes in the federal government's payment system, however, that allow firms that are seriously delinquent on their federal taxes to obtain federal contracts and collect full payment on them.
While not all of this money could have been levied (some of it has been spent or is the subject of other ongoing Internal Revenue Service collection actions), at least tens of millions of dollars in federal contract payments could have been withheld from these contractors if only the federal agencies responsible for paying contractors improved their management practices.
While the levy process should be strengthened, it would be an even better idea to keep dishonest individuals and firms from doing business with the federal government in the first place. One good proposal I've heard would be for federal contracting officers to be more active in using tax non-compliance as a basis for barring a contractor from obtaining government work. Another would be to require companies bidding on federal contracts to certify that they are current on their tax obligations.
We simply cannot allow contractors that get paid with taxpayer dollars to refuse to pay their fair share of taxes. While the vast majority of contractors are ethical, I will continue to work with my colleagues to ensure that federal agencies contract only with businesses and individuals who comply with our laws. ###