GAO Finds Federal Contractors Abusing Tax System

Thousands of private contractors doing business with the federal government have piled up "substantial amounts" of unpaid federal taxes, according to past investigations by the Government Accountability Office (GAO). Specifically, GAO estimated that about 27,000 Department of Defense contractors, 33,000 civilian agency contractors, and 3,800 General Services Administration contractors owed about $3 billion, $3.3 billion, and $1.4 billion in unpaid taxes, respectively.

In light of these past investigations, the GAO recently conducted an in-depth investigation of 122, mainly small federal contractors and in all cases, found "abusive and potentially criminal activity related to the federal tax system." The contractors provided goods and services to the federal government ranging from landscaping to support for weapons systems and other sensitive programs. Keeping in mind that your tax dollars were paying them, what did these contractors do wrong?

These contractors had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. A number of owners or officers of the 122 federal contractors owned significant personal assets, including a sports team, multimillion dollar houses, a high-performance airplane, and luxury vehicles. Several owners gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. -- Report GAO-07-742T (.pdf)

For example:

• A provider of custodial services to the DOD who owes over $1 million in taxes bought a boat, several cars, and a home outside the country.

• A contractor providing, of all things, security services to the GSA who owes over $9 million in unpaid taxes made cash withdrawals to fund an unrelated business and purchased a men's gold bracelet worth over $25,000.

The full GAO report lists more, equally disturbing examples of tax abuse by contractors.

GAO's advice to Congress? Make them pay their taxes. "Enhanced contractor requirements to pay their taxes would likely increase contractor tax compliance and federal revenues." We can hope.

Also See:
GAO Issues Another Gloomy U.S. Fiscal Outlook
GAO: EPA's Implementation of Air Toxics Program Inadequate
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