GAO: Defense Contractors Owe $3 Billion In US Taxes
Wednesday February 11, 7:35 pm ET
By John Godfrey, Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- More than 27,000 Defense Department contractors owe at least $3 billion in taxes, a General Accounting Office report to be released Thursday says.
Under procedures already authorized by a law allowing the Defense Department to levy up to 15% of each contract to satisfy tax debts, the department could have collected at least $100 million of those tax debts in 2002, the GAO found.
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Instead, it collected just $687,000.
The report is the subject of a hearing to be held at 9:30 a.m. EST (1430 GMT) Thursday by the Senate Government Affairs Subcommittee on Investigations.
Subcommittee Chairman Norm Coleman, R-Minn., said the Defense Department may be great at defending the country but it needs to do a better job of protecting its taxpayers.
"These contractors are not only shortchanging the government, they are also cheating their employees and the American people," Coleman said to reporters at a briefing in advance of the hearing.
Part of the problem is because the IRS can't publicly disclose taxpayer information, it can't tell the Defense Department whether any of its contractors are delinquent.
But there is a system in place to deal with these privacy requirements, Sen. Carl Levin (News) , D-Mich., said in a briefing previewing the report's findings.
The IRS sends to the Financial Management System - the federal government's main financial clearing house - a list of delinquent taxpayers. Proposed contractor payments by the Defense Department and every other federal department and agency are sent to FMS, then matched to this list. If taxes are owed, FMS docks up to 15% of the payment and then sends the rest of the money.
"When they are using it, it's working fine," said Levin, who is the highest ranking Democrat on Coleman's subcommittee.
But GAO found that most of the Defense Department's contracts are pouring through the cracks. Just one in 16 of the department's payment systems are connected to FMS.
The Defense Department says it plans to get those systems connected to FMS, a promise congressional staff greeted skeptically. GAO noted that during its investigation the Defense Department said it had 15 such systems, but by the time the report was being finalized, the department said it had 17 of them.
Mostly Small Contracts Involved
The GAO used data mining techniques to find the contractors who owed the most taxes or who owed taxes and held the most contracts.
Because of the taxpayer privacy laws the names of the 47 businesses identified weren't disclosed, but Coleman, Levin and committee staff said it appears all were relatively small businesses.
In the 47 case studies, the amount of taxes owed ranged from over $10,000 to nearly $10 million. The amount paid to these contractors ranged from $100 to $ 4.7 million in 2002.
About 42% of the taxes owed were payroll taxes. Another 39% were corporate incomes taxes. The remaining 19% was excise taxes, unemployment taxes, individual taxes and other fees and taxes.
The most egregious case involved a base support and custodial service contractor which owed nearly $10 million in taxes, but was paid $3.5 million by the Defense Department in 2002.
Another contractor providing medical personnel in Defense facilities was paid $4.7 million in 2002 while owing nearly $6 million.
Coleman said some of the blame lies with the IRS for failing to issue tax levies in a timely manner. Some of those delays stem from a change in tax collection philosophy following a 1998 crackdown on alleged abuses at the agency.
Since then the IRS has shied from moving quickly to impose levies and has moved limited resources from tax law enforcement to customer service, Coleman said.
-By John Godfrey, Dow Jones Newswires; 202-862-6601; John.Godfrey@dowjones.com
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