Lawmakers yesterday pressed for a crackdown on federal contractors that cheat the tax system, citing a congressional investigation uncovering $3.3 billion in unpaid taxes by 33,000 companies and individuals.

At a hearing of the Senate Governmental Affairs' permanent subcommittee on investigations, members of both parties decried what they called a broken system that fails to prevent tax cheats from receiving federal funds. They suggested a variety of legislative and regulatory changes may be needed to fix it.

In particular, senators broached the idea of giving government officials the chance to know, before they sign a contract, if they're negotiating with people who are abusing the tax system.

"We have to correct this upfront so that there is a review that prevents contractors from receiving federal contracts in the first place if they're cheating on their taxes," said the committee's chairwoman, Sen. Susan Collins (R-Maine).

But Internal Revenue Service Commissioner Mark W. Everson cautioned that such efforts risk infringing on taxpayer privacy. Right now, IRS confidentiality rules prevent disclosure of tax information, even to the government officials who oversee contracts.

Everson said this issue "is one that gets at that very real conflict between two public policy priorities" -- guarding taxpayer privacy while also protecting the government from tax cheats.

A report released at the hearing by the Government Accountability Office focused on 50 cases and in each one found evidence of "abusive and potentially criminal activity." The report looked exclusively at contractors that work with civilian agencies. A report last year found similar problems with Pentagon contractors.

Among the cases in yesterday's report were a business owner who used employee payroll tax withholdings to build a house overseas and one who serially opened and closed businesses when the tax bills piled up. All the while, the contractors were paid by the government.

Congress has tried before to clean up the system. Legislation five years ago would have given contracting officers the ability to check with the IRS to determine if prospective contractors were abusing the tax system. But the bill died after procurement officials and some business groups complained such a check would slow down the acquisition process.

Stan Z. Soloway, president of a trade group for contractors called the Professional Services Council, said he's leery of widening access to tax information for companies and individuals that have never been convicted of a crime. "I would hesitate to make a contracting official out in the field have to master the intricacies of tax law," he said.

Everson stressed there's a major difference between being delinquent and being guilty of a tax crime. But subcommittee Chairman Norm Coleman (R-Minn.) said he is concerned the IRS may not be doing enough to investigate potential criminals.

Of 47 examples of defense contractors abusing the tax system that the GAO brought to the committee last year, none has been prosecuted, Everson said, and only three are the subjects of active criminal investigations. Under questioning from Coleman, Everson said his staff would take another look at last year's cases, as well as the 50 new cases GAO identified yesterday.

Sen. Carl M. Levin (D-Mich.) raised the possibility of requiring contractors to disclose any tax problems to the government before they receive federal work. In addition, he called on the Treasury Department's Financial Management Service to do a better job collecting money from delinquent companies before they get paid.

FMS Commissioner Richard L. Gregg contended that some of the suggested reforms went too far because they would inadvertently "stop payments for people who do not owe taxes and there will be an uproar."

Sens. Norm Coleman (R-Minn.), left, and Carl M. Levin (D-Mich.) see a problem with contractors who do work for the government evading their federal tax obligations.Sen. Susan Collins (R-Maine) advocates a review of whether federal contractors are cheating on their taxes.