Federal Manager's Daily Report

Department of Defense and Internal Revenue Service records

show that over 27,000 contractors owed about $3 billion in


unpaid taxes as of September 30, 2002, and DoD has not used

the Debt Collection Improvement Act of 1996 to assist IRS

in levying 15 percent of ongoing contract payments to

debtors to offset what’s owed, the General Accounting

Office has said.

It said DoD could have collected $100 million in fiscal

2002 if, along with IRS, it had utilized the levy process

authorized by the Taxpayer Relief Act of 1997, and that

giving federal business to such contractors puts tax-paying

ones at a disadvantage and forfeits government resources.

GAO found abusive or potentially criminal activity through

its audit and investigation of 47 DoD contractors that

primarily owed payroll taxes (Social Security, Medicare,

and income taxes) dating back to the early 1990s, and who

instead diverted the money for personal gain or used it

to fund the business.

For example, two businesses failed to remit millions in

taxes while their owners borrowed nearly $1 million each

from their companies to purchase cars, homes and a boat.

In several case studies IRS was not pursuing contractors

because it had too great a workload and in other cases

IRS had frozen collection activity for some reason and had

failed to restart it, said GAO. The report called on the

Office of Management and Budget to develop overall

direction prohibiting federal contract awards to businesses

and individuals that abuse the tax system.