Government contractors who owe millions of dollars in back taxes bought luxury cars, boats and multimillion-dollar properties. Some failed to pay taxes but gambled company money.
It could be “a new reality TV show, lifestyles of rich and famous tax deadbeats,” said Sen. Norm Coleman, R-Minn.
One in 10 companies contracting with the General Services Administration from October 2003 through June 2005 owed back taxes, Coleman’s panel, the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, learned Tuesday. Their debts total $1.4 billion.
“In an age of increasingly tight fiscal discipline, that $1.4 billion could be put towards our homeland security, our children’s education or job-training programs,” Coleman said. “It adds insult to injury that these tax deadbeats are actually paid enormous amounts of money every year from American tax coffers.”
Three hearings have shown government contractors owing $7.7 billion in taxes. The studies, conducted by the Government Accountability Office, showed Pentagon contractors owed $3 billion in taxes and non-defense contractors owed $3.3 billion.
The unpaid taxes include corporate income, personal income, payroll, excise and other taxes. Willfully failing to transfer payroll taxes withheld from employee paychecks to the federal government is a felony offense.
Among the worst offenders with General Service Administration contracts, an emergency supplies provider got $100,000 in contract payments while owing more than $700,000 in taxes. The company made large loans to a company officer, and the owner had a million-dollar home and a luxury vehicle. The company had a federal tax lien when it won the contract.
A security services company got at least $1 million in payments while owing more than $2 million in taxes. The company negotiated an agreement to pay its back taxes, but it frequently pays late. A bank closed the company’s checking account for suspected check kiting. The owner has a million-dollar lakeside home.
A public communications company got $100,000 in payments while owing more than $2 million in mostly payroll taxes. The company owner owns residential properties worth about $1 million and made about $500,000 in cash withdrawals at casinos.
Tax privacy laws prevented the investigators from naming the delinquent contractors. Those same privacy protections prevent the Internal Revenue Service from sharing some tax information with government agencies negotiating contracts.
Senators said agencies do not ask potential contractors enough about their tax situation. The GSA asks applicants whether they have been indicted or convicted of tax evasion, but that does not catch many companies with poor tax records.
“One of the main problems here is that contractors are being allowed into the system in the first place and are being awarded contracts even though they owe taxes,” said Sen. Carl Levin, D-Mich.
Senators said contractors should be asked about their tax debts and state and federal liens. Under federal law and agency policy, GSA officials do not have to look at tax debts to determine a company’s fitness for doing government business.
IRS Commissioner Mark Everson said he would support the creation of a central database so agencies could check for federal tax liens, information already released to the public but not collected in one place. He also asked lawmakers to make the failure to file a tax return a felony.
A government has a program to recoup some unpaid taxes from payments to federal contractors. The Federal Payment Levy Program collected $7 million from federal contractors in 2003, and the collections grew to more than $42 million last year.
Contractors that do not pay taxes may have an unfair advantage because they do not bear the same costs as companies complying with the tax laws. In a few cases, the GAO found that scofflaws beat the competition with lower prices to win contracts.