It's bad enough that tax cheats deprive the federal government of hundreds of billion of dollars in much-needed revenue each year. But many of those cheats actually work for the federal government as contractors, according to prepared testimony being given to the Senate Governmental Affairs Committee Tuesday by the Government Accountability Office (GAO), the auditing arm of Congress. In fact, more than 3,800 contractors that do business with the General Services Administration have tax debts totaling about $1.4 billion The GSA is the giant organization that spends about $20 billion annually to provide other agencies in the federal government with practically everything they need to keep their bureaucracies humming: office furniture, phones, cars, computers, rental space, you name it.
The GAO review of Internal Revenue Service records and GSA contracts for 2004 and 2005 found that about 10% of the vendors under contract with the agency, or over 3,800, had cheated on their taxes. In most cases, the scofflaws didn't pay their corporate income tax or company owners lined their pockets with the IRS payroll taxes they'd collected from their employees for Social Security, Medicare and individual income taxes. One contractor who provided $1 million worth of security services to the federal government from 2003 to 2005 also had unpaid taxes of over $9 million; the owner had gambled away $100,000 and bought a $25,000 men's gold bracelet with the payroll taxes he was supposed to send to the IRS. Another GSA contractor delinquent on over $2 million in taxes owned several luxury cars and homes worth more that $1 million.
Fixing the problem isn't apparently that easy, either. The GAO report noted that federal law "does not require GSA contracting officers to examine tax debt when awarding contracts." And even if a contracting officer wanted to check the tax status of a vendor he'd have a difficult time doing so because federal law also restricts his access to IRS tax records, according to the GAO.
No wonder that the GAO uncovered similar problems only two years ago. The same congressional watchdogs found over 27,000 defense contractors doing business with the Pentagon that owed $3 billion in back taxes. Since that report in 2004, the Pentagon and other federal agencies have increased the amount of back taxes recovered from contractors by over 600%, according to Republican Sen. Norm Coleman of Minnesota, chairman of the Investigations Subcommittee. A GSA spokesman says his agency "takes the issue of unpaid contractor taxes very seriously and all federal contractors should be held to high standards." He said GSA is working with the IRS to improve the crosschecking of contractor records with tax information. Even so, Coleman concludes: "It is simply unacceptable that tax cheats who owe the government millions in back taxes get millions from American taxpayers."
And cheating on taxes isn't just an easy way for companies to line their pockets — it's also good business. The report points out that "GSA contractors with tax debts have an unfair advantage in costs when competing with contractors that pay their taxes." Not remitting payroll taxes to the IRS, for example, can save the cheater 15% in expenses so "these contractors could offer prices for their goods and services that are lower than their tax compliant competitors," according to the report. Which means that in holding out for the lowest bidder, the federal government may well unwittingly be acting, yet again, penny wise and pound foolish.