Thousands of Non-Defense Contractors Owe Taxes

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By Griff Witte and Robert O'Harrow Jr.
Washington Post Staff Writers
Thursday, June 16, 2005

Thousands of federal contractors working for civilian government agencies together owe more than $3 billion in unpaid taxes, according to a report to be released today by a Senate subcommittee.

In one case, the owner of a firm that provides security guards to the Department of Homeland Security transferred payroll taxes withheld from workers' paychecks to a foreign bank account instead of the government and used the money to build a house overseas.

The owner of another company, one that supplies health care services to the Department of Veterans Affairs and the Department of Health and Human Services, piled up more than $18 million in unpaid payroll taxes while buying multimillion-dollar properties and luxury vehicles.

And one contractor that furnishes temporary workers to the Department of Housing and Urban Development has owed back taxes for nearly two decades, simply closing businesses and starting new ones when the bills get too high.

In all, 50 cases closely examined by auditors with the Government Accountability Office involved "abusive and potentially criminal activity." Even so, the contractors still got paid.

The report does not identify any of the roughly 33,000 contractors by name or characterize them by size or location.

The GAO's findings will be the subject of hearings today before the Senate Governmental Affairs' permanent subcommittee on investigations. Sen. Norm Coleman (R-Minn.), the chairman, said yesterday in a statement that contractors that failed to pay payroll taxes "cheated not only the American people, but their own employees as well."

"Under these circumstances, we must bar certain companies and individuals from receiving federal contracts," he said. "When individuals or companies demonstrate flagrant disregard for the tax system through a pattern of repeated and continuing abuse, it is appropriate to publish their names and bar their receipt of federal contracts."

The businesses continued to get paid because contracting offices had almost no way of knowing they were dealing with tax scofflaws. Internal Revenue Service confidentiality rules prohibit disclosure of tax information, even to the government officials who oversee the contracts.

To help fix the problem, the GAO recommended changes at the Treasury Department's Financial Management Service, which is responsible for helping to collect delinquent taxes from contractors before they get paid. FMS Commissioner Richard L. Gregg acknowledged the need for improvement but said his bureau "has a track record that clearly demonstrates" it can do the job.

"I don't know what's more appalling, the actions of 33,000 contractors or the current system, which precludes federal agencies from knowing whether they are contracting with habitual tax delinquents," said a senior congressional aide who spoke only on condition of anonymity because the report had not been formally released.

"You think if there's anyone paying their taxes it should be contractors making money off of Uncle Sam," said Keith Ashdown, vice president for Taxpayers for Common Sense, a government watchdog group in the District. "It's outrageous."

But Stan Z. Soloway, president of a trade group for contractors called the Professional Services Council, said he suspects many of the contractors identified by the GAO are tiny operations that do not do much work for the government. "This is very far from an epidemic problem with government contractors that are really significant in the marketplace," Soloway said.

The report follows a similar one from February 2004 that found that 27,000 Pentagon contractors -- about 10 percent of the total -- owed $3 billion in back taxes. At the time, GAO investigators said, neither the Defense Department nor the IRS had done much to collect the money.

But collections are on the rise: This year, the government is on pace to save more than $17 million in money withheld from Pentagon contractors that are behind on their taxes.

Internal Revenue Commissioner Mark W. Everson said his agency has made progress in collecting such taxes, "but there is a long way to go." At today's hearing, senators are expected to press Everson on why contractors cited in last year's report have not been prosecuted.

Today's report was produced by a new Forensic Audits and Special Investigations Unit at the GAO, a team that relies on veteran federal investigators and high-tech data-mining tools.

For this report the unit matched an IRS database of unpaid taxes against one of contractor payments.

Gregory D. Kutz, the unit's managing director, said, "The findings are an example of the kinds of work that we expect to replicate in the future across the government."


© 2005 The Washington Post Company

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