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.