updated 6/16/2005 12:01:21 AM ET 2005-06-16T04:01:21

Thousands of federal civilian contractors owe the government $3.3 billion in unpaid taxes, according to congressional investigators.

The government was faulted for mismanaging a program that withholds payment from delinquent contractors.

“The widespread tax cheating by federal contractors will end,” said Sen. Norm Coleman, R-Minn., who requested the investigation.

The report by the Government Accountability Office, Congress’ investigative arm, found that 33,000 civilian contractors owed the government $3.3 billion.

The results were to be discussed at a hearing Thursday of the Senate Homeland Security and Governmental Affairs’ Permanent Subcommittee on Investigations. Coleman is the subcommittee chairman.

Last year, the agency found in a similar report for defense contractors that 27,000 of them owed $3 billion in unpaid taxes.

In its latest report, the Treasury Department’s Financial Management Service bureau came under criticism. The bureau is responsible for government payments as well as debt collection.

The GAO concluded that the bureau has poorly managed a program that authorizes agencies to withhold 15 percent from payments to delinquent contractors.

“We estimate that if the FMS deficiencies we identified were corrected, FMS could have collected at least $50 million more than it did in fiscal year 2004,” the GAO said.

Among other recommendations, investigators said the agency should match contractor names on payment records to Internal Revenue Service tax records. Also, the agency should take advantage of a 2004 law that allows withholding of up to 100 percent of payments to delinquent contractors.

FMS Commissioner Dick Gregg said in a statement that the agency is working with the IRS and other agencies to subject delinquent contractors to the withholding program.

“On a broader scale, FMS has a track record that clearly demonstrates leadership with respect to the government-wide collection of debts,” he said.

Exemptions add to problem
Also contributing to the problem, the GAO found, are exemptions that exclude delinquent taxpayers from the payment-withholding program. Examples include taxpayers in bankruptcy and those working with the IRS to comply voluntarily.

The GAO credited the IRS for tightening those exemptions after its report last year on defense contractors. It said collections from the payment-withholding program have increased as a result.

The GAO audited 50 cases as part of its latest investigation, choosing companies with unpaid taxes of more than $100,000 and federal payments of more than $10,000.

“We found abusive and potentially criminal activity related to the federal tax system for all 50 cases that we audited and investigated,” the GAO said.

It found that all 48 that filed business tax returns collected taxes from employees but did not send them to the IRS.

“Rather, these companies diverted the money to fund business operations, for personal gain, or for other purposes,” the GAO said.

Because of privacy laws, the GAO does not identify any of the delinquent taxpayers, a restriction that also hampers federal agencies from knowing they are dealing with delinquent contractors.

But the GAO reported that some owners of the delinquent companies had “substantial personal assets,” including $30 million in real estate, a sports team and multiple luxury vehicles.

IRS Commissioner Mark W. Everson said in a statement, “As the GAO report notes, the IRS has significantly improved collections from federal contractors, but there is a long way to go ... Securing funding for additional collections personnel as requested in the president’s FY 2006 budget is essential if we are really going to solve this problem.”

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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