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Report to Congressional Requesters: 

June 2005: 

Financial Management: 

Thousands of Civilian Agency Contractors Abuse the Federal Tax System 
with Little Consequence: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-637]: 

GAO Highlights: 

Highlights of GAO-05-637, a report to congressional requesters: 

Why GAO Did This Study: 

Tax abuses by contractors working for the Department of Defense, on 
which GAO previously reported, have led to concerns about similar 
abuses by those hired by civilian agencies. GAO was asked to determine 
if similar problems exist at civilian agencies and, if so, to (1) 
quantify the amount of unpaid federal taxes owed by civilian agency 
contractors paid through the Financial Management Service (FMS), (2) 
identify any statutory or policy impediments and control weaknesses 
that impede tax collections under the Federal Payment Levy Program 
(FPLP), and (3) determine whether there are indications of abusive or 
potential criminal activity by contractors with unpaid tax debts. 

What GAO Found: 

FMS and IRS records showed that about 33,000 civilian agency 
contractors owed over $3 billion in unpaid federal taxes as of 
September 30, 2004. All 50 civilian agency contractors we investigated 
had abusive and potentially criminal activity. For example, businesses 
with employees did not forward payroll taxes withheld from their 
employees to IRS. Willful failure to remit payroll taxes is a felony 
under U.S. law. Further, several individuals own multiple businesses 
with unpaid federal taxesone individual owns about 20 businesses that 
did not fully pay taxes related to over 300 returns. Some contractors 
purchased or owned millions of dollars of property while they did not 
remit payroll taxes. These activities were identified for contractors 
at the Departments of Justice, Homeland Security, and Veterans Affairs; 
the National Aeronautics and Space Administration; and other agencies. 

Examples of Abusive and Potentially Criminal Activity: 

Business: Health care; 
Unpaid tax amount: $18 million; 
Fiscal year 2004 FMS payments: $300,000; 
Contractor activity: Purchased multimillion-dollar properties while not 
paying millions in payroll taxes. 

Business: Consulting; 
Unpaid tax amount: $1 million; 
Fiscal year 2004 FMS payments: $200,000; 
Contractor activity: Doubled salary of one officer/owner to over 
$750,000 while not remitting payroll taxes. 

Business: Temporary help; 
Unpaid tax amount: $900,000; 
Fiscal year 2004 FMS payments: $1 million; 
Contractor activity: A pattern of nearly 20 years of closing businesses 
with tax debts, opening new ones, and incurring more tax debts. 

Business: Security; 
Unpaid tax amount: $400,000; 
Fiscal year 2004 FMS payments: $200,000; 
Contractor activity: Diverted payroll taxes to a foreign bank account 
to build a house overseas. 

Source: GAO analysis of civilian agency, IRS, FMS, public, and other 
records. 

[End of table] 

GAOs analysis indicates that if all tax debts owed by, and all 
payments made to, the 33,000 contractors were included in the FPLP, FMS 
could have collected hundreds of millions of dollars in fiscal year 
2004. However, because only a fraction of all unpaid taxes and a 
portion of FMS payments are subjected to the levy program, FMS actually 
collected only $16 million from civilian contractors. For example, 
about $171 billion of unpaid federal taxes were not sent to the levy 
program to be offset against payments because of specific statutory 
requirements or IRS policy exclusions, such as debtors claims of 
financial hardship or bankruptcy. 

Tens of billions of dollars in federal payments were not compared 
against tax debts for potential levy because FMS did not proactively 
manage and oversee the levy program. Until we brought it to FMSs 
attention, FMS did not know that it did not submit $40 billion of 
contractor payments from some civilian agencies for potential levy. FMS 
also did not identify payment files that did not contain contractor tax 
identification numbers, names, or both, resulting in $21 billion in 
payments to contractors that could not be levied. FMS also excluded 
billions of dollars from levy because of what it considered programming 
limitations without taking proactive steps to overcome those 
limitations. Further, civilian agency purchase card payments to 
contractors totaling $10 billion could not be levied. Improvements at 
FMS could result in tens of millions of dollars of additional levies 
annually. 

What GAO Recommends: 

GAO makes 18 recommendations to FMS to improve the FPLP and increase by 
tens of millions of dollars annually the amounts levied from payments 
to contractors with unpaid federal taxes. GAO also recommends that the 
Internal Revenue Service (IRS) review and, if warranted, pursue 
collection or criminal investigation of the 50 case study contractors 
identified in this report. IRS agreed and FMS partially agreed. FMS did 
not agree that it should withhold payments to contractors without names 
or work with IRS to address challenges related to levying purchase card 
payments. GAO disagrees with FMSs assessment and reiterates support 
for all of its recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-05-637. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Greg Kutz at (202) 512-
9095 or Steven Sebastian at (202) 512-3406. 

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes: 

Legal Requirements and IRS Policy Decisions Contribute to the Levy 
Collection Gap: 

Lack of FMS Oversight and Proactive Management Further Contribute to 
the Levy Collection Gap: 

Civilian Agency Contractors Involved in Abusive and Potentially 
Criminal Activity Related to the Federal Tax System: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Contractors with Unpaid Federal Taxes: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: Comments from the Financial Management Service: 

Appendix V: Staff Acknowledgments: 

Tables: 

Table 1: Payments Not Matched against Tax Debts for Potential Levy: 

Table 2: Types of Goods and Services Provided by Civilian Agency 
Contractors in Case Studies: 

Table 3: Civilian Agency Contractors with Unpaid Federal Taxes: 

Table 4: Civilian Agency Contractors with Unpaid Federal Taxes: 

Figures: 

Figure 1: Levy Process: 

Figure 2: Type of Debt Owed by Civilian Contractors as of September 30, 
2004: 

Figure 3: Civilian Contractors' Unpaid Federal Taxes by Tax Periods 
through 2003 by Calendar Year: 

Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005: 

Figure 5: IRS Statutory Exclusions as of April 2005: 

Figure 6: IRS's Policy Exclusions from the Levy Program as of April 
2005: 

Figure 7: Purchase Card Expenditures by Civilian Agencies--Fiscal Years 
1997-2004: 

Abbreviations: 

ACH: Automated Clearing House: 

ACH-CTX: Automated Clearing House-Corporate Trade Exchange: 

ACS: Automated Collection System: 

DCIA: Debt Collection Improvement Act of 1996: 

DOD: Department of Defense: 

EFT: electronic funds transfer: 

FICA: Federal Insurance Contribution Act: 

FMS: Financial Management Service: 

FPLP: Federal Payment Levy Program: 

IRS: Internal Revenue Service: 

NASA: National Aeronautics and Space Administration: 

PACER: Payments, Claims, and Enhanced Reconciliation: 

TFRP: trust fund recovery penalty: 

TIN: taxpayer identification number: 

TOP: Treasury Offset Program: 

Letter June 16, 2005: 

Congressional Requesters: 

The success of our tax system hinges on the public's perception of its 
fairness, including the extent to which taxpayers believe their 
friends, neighbors, and business competitors are complying with the tax 
laws and are actually paying their taxes. The Internal Revenue 
Service's (IRS) own data in this regard are not encouraging. IRS 
reported that the federal government does not receive hundreds of 
billions of dollars in taxes owed annually. Recent IRS data, released 
in March 2005, showed that the estimated net annual tax gap-- the 
difference between what taxpayers should pay on a timely basis and what 
IRS collected through voluntary compliance and enforcement activities--
ranged from $250 billion to nearly $300 billion.[Footnote 1]

A portion of the tax gap is owed by contractors receiving payments from 
the federal government. For example, in February 2004, we reported that 
some Department of Defense (DOD) contractors abuse the federal tax 
system with little consequence.[Footnote 2] In our report and during a 
related congressional hearing,[Footnote 3] we pointed out that based on 
our analysis of a limited number of DOD disbursement systems, more than 
27,000 DOD contractors owed nearly $3 billion in unpaid federal taxes. 
We also reported that some of these contractors were engaged in 
abusive[Footnote 4] and potentially criminal[Footnote 5] activities. 
Due to the significance of the issues raised at that hearing, you asked 
us to provide additional information about whether contractors for 
other federal agencies were engaged in similar tax abuses and to 
provide recommendations to increase the effectiveness and efficiency of 
tax revenue collections from federal contractors under the Federal 
Payment Levy Program (FPLP). 

This is the first in a series of reports to respond to your request. 
The specific objectives of this first audit and investigation were, to 
the extent possible, to (1) quantify the magnitude of unpaid taxes of 
contractors at federal civilian agencies that are paid through the 
Department of the Treasury's (Treasury) Financial Management Service 
(FMS); (2) identify some statutory or policy impediments and control 
weaknesses that impede tax collections under the FPLP; and (3) 
determine, using case studies, whether indications exist that federal 
contractors with unpaid taxes are engaged in abusive or potentially 
criminal activities. To identify the extent of such activities, we 
analyzed the tax debt and activity of entities with either the same 
owners or officers, common taxpayer identification numbers (TIN) or 
addresses, or other relationships as a group to identify patterns of 
abusive or potentially criminal activities. We will address issues 
surrounding the amount of tax debt IRS sends to the FPLP in subsequent 
reports. 

To meet our first two objectives, we (1) identified civilian agency 
contractors receiving federal payments that owe taxes by comparing the 
database of FMS contractor payments with the IRS database of unpaid 
taxes, (2) estimated the potential dollar amount that could be 
collected if all unpaid taxes owed by civilian contractors and all FMS 
payments to civilian contractors were subject to the FPLP, (3) reviewed 
major federal laws and regulations and FMS policies on the FPLP, and 
(4) interviewed FMS and IRS officials on processes and procedures 
related to the FPLP. To avoid overstating the tax debt and potential 
levy amount, we limited the population of tax debts from which we 
performed our analysis to tax debts that have been agreed to by the 
taxpayers or confirmed by the courts, tax debts for periods prior to 
calendar year 2004, tax debts of more than $100, and fiscal year 2004 
civilian contractor payments paid through FMS of more than $100. We 
used data mining techniques to meet our third objective--identifying 
civilian agency contractors engaged in abusive or potentially criminal 
activity. 

Although we were able to validate that the payment data provided by FMS 
reflected disbursements to contractors, we were unable to confirm that 
the disbursement data we received reflect all payments made to 
contractors. Specifically, FMS was unable to provide us with electronic 
disbursement data related to payments made to contractors through 
Fedwire, a large system used for payments requiring same-day 
settlement. Further, IRS's databases do not identify all unpaid federal 
taxes caused by a contractors' underreporting of income or failure to 
file taxes. Because of these problems, the FMS and IRS data we used 
will likely understate the magnitude of contractors with unpaid federal 
taxes and the potential levy collection. Further details on our scope 
and methodology are included in appendix I. 

Our work was performed from May 2004 through May 2005 in accordance 
with generally accepted government auditing standards. The 
investigative portion of our work was completed in accordance with 
investigative standards established by the President's Council on 
Integrity and Efficiency. The results of 10 case studies we 
investigated are shown in table 3. The results of another 40 case 
studies are included in appendix II. We requested comments on a draft 
of comments on a draft of this report from the Commissioner for 
Internal Revenue or his designee and from the Commissioner, Financial 
Management Service or his designee. We received written comments from 
the Internal Revenue Service and the Financial Management Service, 
which are reprinted in appendixes III and IV of this report. 

Results in Brief: 

As was the case at DOD, many contractors of civilian agencies 
throughout the federal government abuse the federal tax system with 
little consequence. Our analysis of FMS and IRS records showed that 
about 33,000 contractors that received substantial federal payments 
from civilian agencies during fiscal year 2004 owed a total of more 
than $3 billion in unpaid taxes. The unpaid taxes included corporate 
income, excise, unemployment, individual income, and payroll 
taxes.[Footnote 6] We estimate that if there were no legal or 
procedural impediments to levying contractor payments to satisfy unpaid 
federal taxes, IRS and FMS could collect hundreds of millions of 
dollars annually. Since FMS collected $16 million in levies[Footnote 7] 
from civilian contractors through the FPLP during fiscal year 2004, 
there is a significant tax levy collection gap. We also found evidence 
of abusive and potentially criminal activity on the part of contractors 
with unpaid tax debts. 

A substantial portion of the levy collection gap is attributable to 
legal requirements and policy decisions at IRS. Of IRS's approximately 
$269 billion in unpaid federal taxes as of April 2005, about $171 
billion is excluded from the levy program. Of this amount, about $71 
billion was excluded because of statutory provisions while another $100 
billion was excluded due to IRS policy decisions. This leaves 
approximately $98 billion in tax debt potentially subject to collection 
through the levy program. However, for 70 percent of the amount that 
IRS forwards to FMS for potential levy, IRS had not yet completed all 
of the legal notifications necessary for FMS to begin levying payments. 
As a result, only a small fraction of all unpaid federal taxes are 
eligible to be collected through the levy program. While the exclusion 
of unpaid federal taxes from the levy program is justified depending on 
the circumstances, it nevertheless results in the potential loss of 
hundreds of millions of dollars in tax collections. We will examine in 
detail in a later report the accuracy and reasonableness of the IRS 
exclusions. 

Weaknesses in internal controls and lack of proactive management at FMS 
further restricted the levy potential and contributed to the levy 
collection gap. We estimate that if the FMS deficiencies we identified 
were corrected, FMS could have collected at least $50 million more than 
it did in fiscal year 2004. Specifically, lack of oversight led to 
FMS's failure to update its levy database to include all agency paying 
stations, resulting in $40 billion in contractor payments--16 percent 
of all fiscal year 2004 contractor payments recorded in FMS's payment 
database--being inappropriately excluded from the levy program. Lack of 
oversight also resulted in payments being sent to the levy program 
without the necessary data required for levy. Payments with missing 
data included $17 billion in payments made to contractors without TINS 
and with obviously erroneous TINs,[Footnote 8] nearly $4 billion 
without valid contractor names, and $5 billion without proper payment 
type coding. A cursory review could have identified these deficiencies 
in agency-submitted payment files. With the exception of payments 
without TINs, FMS was not aware of these omissions until we brought 
them to its attention. Further, although FMS was aware that payments 
were made to contractors without TINs, FMS had not taken action to 
address this deficiency. FMS's failure to identify and enforce 
information requirements for disbursements reduced the amount of unpaid 
federal taxes that was collected through the FPLP. 

FMS has not been proactive in making changes necessary to maximize levy 
collections by adding tens of billions of dollars in payments that are 
currently excluded from the FPLP. These exclusions include about $26 
billion (11 percent of FMS's 2004 contractor disbursements) of certain 
categories of payments that FMS recorded in its payment database during 
fiscal year 2004, and an unknown but potentially material amount of 
Fedwire payments--payments requiring same-day settlement. FMS has not 
taken actions to include these payments in the levy program because of 
what it considers programming limitations. Similarly, FMS does not levy 
any contractor payments to collect taxes owed by individuals, including 
self-employed individuals and those with sole proprietorships. IRS and 
FMS decided not to levy contractors' payments to collect the unpaid 
federal taxes of contractors that file individual tax returns to avoid 
the possibility of mistakenly levying an individual's payment to 
satisfy an unrelated business's tax debt. Such an error could occur 
because a business and an individual could have identical TINs and 
similar names, and FMS's disbursement files do not distinguish between 
payments to businesses and payments to individuals. While FMS and IRS 
officials recognized that the potential risk of an improper levy 
resulting from an erroneous match of an individual's payment with a 
business's tax debt is probably small, they have only recently begun to 
take steps to allow the unpaid federal taxes of individuals to be 
collected under the levy program. 

Finally, FMS has not addressed other challenges in the levy program 
that further limit its effectiveness at collecting unpaid taxes. These 
challenges include (1) matching the contractor name on the payment 
record to the name in IRS's tax records, (2) levying contractors paid 
with government purchase cards, and (3) implementing the increased 100 
percent levy provision authorized in 2004. We found that nearly $2 
billion of payments to contractors with unpaid taxes could not be 
levied because of the requirement to match both the name and TIN in the 
payment records to the unpaid federal taxes in the Treasury Offset 
Program (TOP) database. FMS does not subject to levy the nearly $10 
billion of fiscal year 2004 federal payments to contractors made with 
purchase cards because the government payment is made to the bank that 
issued the purchase card, not the contractor doing business with the 
government. FMS officials stated that although they had met with 
certain bank officials and another federal agency regarding this issue, 
they had not yet determined how to collect federal debts from 
contractors paid with the purchase cards. Finally, FMS faces a 
significant challenge in implementing a provision of the American Jobs 
Creation Act of 2004, which allows the federal government to levy up to 
100 percent--up from a maximum of 15 percent--of specified payments for 
goods and services provided by contractors with unpaid federal taxes. 
FMS faces difficulty because civilian payment systems presently do not 
distinguish goods and services, which are subject to the increased 100 
percent levy provision, from real estate payments, which IRS has 
determined are not. Overall, until FMS improves its oversight and 
management of the FPLP and addresses these challenges, it will not be 
able to realize the full potential of the program. 

Our audit and investigation of 50 case study contractors[Footnote 9] 
paid through FMS identified numerous instances of abusive or 
potentially criminal activity. The subjects of the 50 case studies are 
mostly small companies--many of them closely held by the owners and 
officers--operating in wage-based industries. These companies provided 
building maintenance, computer, consulting, health care, personnel, 
security, and other services at numerous federal agencies, including 
agencies tasked with national security and law enforcement, such as the 
Departments of Homeland Security, Justice, and State. The 50 case 
studies included businesses that had unpaid payroll taxes (as well as 
corporate income, personal income, and other types of unpaid taxes). 
One group of related businesses had unpaid taxes in over 300 tax 
returns. Rather than fulfilling their role as "trustees" and forwarding 
these amounts as required by law to IRS, these contractors diverted the 
money for personal gain or to fund their businesses. Willful failure to 
remit payroll taxes is a felony. 

Some owners or officers of businesses with unpaid taxes also have 
individual tax debts and are associated with other businesses that have 
unpaid federal taxes. One case study contractor has a 20-year history 
of opening a business, failing to remit taxes withheld from employees 
to IRS, and then closing the business, only to start the cycle all over 
again and incur more tax debts almost immediately. We also found that a 
number of owners or officers in our case studies have significant 
personal assets, including a sports team, commercial properties, houses 
worth over $1 million, and luxury vehicles. Despite owning significant 
assets, the owners or officers did not ensure the payment of the 
delinquent taxes of their businesses, and sometimes did not pay their 
own individual income taxes. 

Through our case studies, we also found that some owners or officers of 
civilian agency contractors with unpaid federal taxes had been 
convicted or indicted of criminal conduct, such as embezzlement and 
money laundering. For example, an officer of one case study contractor 
was convicted for stealing hundreds of thousands of dollars from the 
company, and the company's owner was indicted for embezzlement. Some 
contractors included in our investigation stated that they diverted the 
payroll taxes that they did not remit to IRS for personal gain or to 
fund their businesses. One of the owners was using the payroll taxes 
not remitted to IRS to build a house overseas. 

Finally, to improve collections under the FPLP, we are making 18 
recommendations to the Commissioner of the Financial Management 
Service, including recommendations to include all payment categories in 
the levy program; ensure payments from all agency paying stations are 
subjected to potential levy; and verify that all payment files contain 
information needed to levy contractor payments, such as payment type, 
name, and TIN (where required). We are also recommending that FMS work 
with IRS to determine how to collect unpaid taxes from sole proprietors 
and contractors paid with government purchase cards and to determine 
the steps needed to implement the 100 percent levy authorized by the 
American Jobs Creation Act of 2004. In addition, we are making a 
recommendation to the Commissioner of Internal Revenue to review the 50 
case study companies and determine whether additional collection action 
or criminal investigation is warranted. 

IRS agreed and FMS partially agreed with our recommendations. FMS did 
not agree with our recommendations that it should withhold payments to 
contractors without names or work with IRS to explore options to levy 
or otherwise collect from purchase card payments. FMS also disagreed 
with our characterization of its management of the levy program but did 
not dispute the factual basis on which we based our findings and 
recommendations. We disagree with FMS's assessment and reiterate 
support for our recommendations. See the "Agency Comments and Our 
Evaluation" section of this report for a more detailed discussion of 
the agency comments. We have reprinted the IRS and FMS written comments 
in appendixes III and IV. 

Background: 

In its role as the nation's tax collector, IRS is responsible for 
collecting taxes, processing tax returns, and enforcing the nation's 
tax laws. Treasury's FMS is the central disbursing authority for 
civilian agencies. With limited exceptions,[Footnote 10] FMS processes 
most disbursements for civilian agencies in the executive branch. FMS 
is also the federal government's central debt collection agency. Since 
fiscal year 2000, FMS has operated the FPLP in conjunction with IRS to 
collect unpaid federal taxes, including tax debt owed by federal 
contractors. 

IRS's Collection of Unpaid Taxes: 

Since 1990, we have designated IRS's enforcement of tax laws as a 
governmentwide high-risk area.[Footnote 11] In attempting to ensure 
that taxpayers fulfill their obligations, IRS is challenged on 
virtually every front. While IRS's enforcement workload--measured by 
the number of taxpayer returns filed--has continually increased, until 
fiscal year 2005, the resources IRS has been able to dedicate to 
enforcing the tax laws have declined. Enforcement efforts are designed 
to increase compliance and reduce the tax gap. However, IRS recently 
reported that the gross tax gap, that is, the difference between what 
the taxpayers should pay on a timely basis and what they actually pay, 
exceed $300 billion annually. IRS estimated the gross tax gap to be 
between $312 billion and $353. IRS further reported that its 
enforcement activities, coupled with late payments, recover just $55 
billion of that amount, leaving a net tax gap of from $257 billion to 
$298 billion. Preliminary IRS estimates indicate that noncompliance is 
from 15 percent to 16.6 percent of taxpayers' true tax liability, which 
further fuels congressional and public concern that declines in IRS 
compliance and collections programs are eroding taxpayer confidence in 
the fairness of our federal tax system. 

FMS Disbursements: 

In fiscal year 2004, FMS made over 940 million disbursements totaling 
over $1.5 trillion. FMS's major disbursing activities include paying 
Social Security benefits, veterans' compensation, federal tax refunds, 
federal salaries and pensions, and contractor and miscellaneous 
payments. For statutory and logistical reasons, a limited number of 
other governmental agencies, such as DOD and the U.S. Postal Service, 
have their own authority to disburse funds. Those agencies that have 
the authority to disburse federal funds are referred to as Non-Treasury 
Disbursing Offices. 

Although FMS is the disbursing agent for most of the federal 
government, that is, it physically writes the checks or sends the 
electronic payments, it does so on the behalf of, and at the direction 
of, the various federal agencies. Federal agencies may have multiple 
offices or locations that perform accounting for and preparation of 
payment information, referred to by FMS as agency locations or paying 
stations.[Footnote 12] To generate a payment, an agency payment 
location sends FMS a payment file, along with an accompanying payment 
certification requesting that FMS disburse funds. Agencies typically 
send the certification and detailed payment information in an automated 
form, and FMS loads the payment data into its payment system. Once 
loaded, FMS verifies that all payment requests were properly authorized 
and certified and that the amount on the payment file agrees with the 
certification amount before processing the payments for disbursement. 

FMS disburses federal funds via three main mechanisms: electronic funds 
transfer (EFT) via Automated Clearing House (ACH), Fedwire, and checks. 
Fedwire is also an EFT that provides for immediate transfers of funds 
from the government's account in the Federal Reserve to the 
contractors' bank accounts. According to FMS records, of the 
approximately $1.5 trillion disbursed by FMS in fiscal year 2004, about 
66 percent was disbursed using ACH, 17 percent via Fedwire, and the 
remaining 17 percent as checks. 

Once payments are disbursed, payment information related to ACH and 
checks are sent to FMS's Payments, Claims, and Enhanced Reconciliation 
(PACER) system, which maintains payment data and provides federal 
payment agencies online access to these data. Among other payments, 
PACER contained about 12.9 million contractor payments valued at $247 
billion for fiscal year 2004. Unlike checks and ACH payments, detailed 
information regarding Fedwire payments is not sent to the PACER payment 
database. 

Treasury Offset and Federal Payment Levy Programs: 

In 1996, Congress passed the Debt Collection Improvement Act 1996 
(DCIA) to maximize the collection of delinquent nontax debts owed to 
federal agencies. As part of implementing its responsibilities under 
DCIA, Treasury established the TOP, to be administered by FMS, to 
centralize the process by which certain federal payments are withheld 
or reduced (offset) to collect delinquent nontax debts owed to federal 
agencies.[Footnote 13] Under the regulations implementing DCIA, FMS and 
other disbursing agencies are required to compare their payment records 
with debt recorded in the TOP database. If a match occurs, the 
disbursing agency must offset the payment, thereby reducing or 
eliminating the nontax debt. 

To improve collection of unpaid taxes, the Taxpayer Relief Act of 1997 
authorized IRS to continuously levy up to 15 percent of specified 
federal payments made to businesses and individuals with unpaid federal 
taxes.[Footnote 14] The continuous levy program, now referred to as 
FPLP, was implemented in July 2000. The FPLP provides for the levy of 
various federal payments, including federal employee retirement 
payments, certain Social Security payments, selected federal salaries, 
and contractor payments. For payments disbursed by FMS on behalf of 
most federal agencies, the amount to be levied and credited to IRS is 
deducted before FMS disburses the payment. In fiscal year 2004, IRS 
received $114 million through the FPLP for delinquent taxes, $16 
million of which was from payments to civilian contractors. 

IRS coordinated with FMS to utilize the TOP database as the means of 
collecting taxes under the FPLP. Each week IRS sends FMS an extract of 
its tax debt files containing updated account balances of tax debts 
that are already in TOP, the new tax debts that need to be added to 
TOP, and all taxes in TOP that need to be rescinded.[Footnote 15] These 
data are uploaded into TOP. For a payment to be levied through the 
FPLP, a debt has to exist in TOP and a payment has to be available. 
Figure 1 provides an overview of this process. 

Figure 1: Levy Process: 

[See PDF for image] 

[End of figure] 

FMS sends payment data to TOP to be matched against unpaid federal 
taxes. TOP electronically compares the names and TINs on the payment 
files to the control names (first four characters of the names) and 
TINs of the debtors listed in TOP. If there is a match and IRS has 
updated TOP to reflect that it has completed all legal notifications, 
the federal payment is reduced (levied) to help satisfy the unpaid 
federal taxes. 

Federal Contractor Tax Compliance Task Force: 

To address issues raised by our February 12, 2004, report and 
testimony, a multi-agency task force was established to help improve 
the FPLP. The task force includes representatives from the Department 
of Defense, Defense Finance and Accounting Service, IRS, FMS, General 
Services Administration (GSA), Office of Management and Budget, and 
Department of Justice. 

The objectives of the task force were to (1) identify and implement 
short-term and long-term operational changes to improve federal tax 
compliance of DOD contractors, including increasing the number of tax 
debts and the number of DOD contractor payments available for matching 
through TOP, and (2) identify potential changes that would enhance 
efforts to address federal contractor tax delinquencies and prevent 
future occurrences of tax abuse by federal contractors. 

The task force issued its report in October 2004. In its report, the 
task force identified actions and made recommendations to improve tax 
compliance of federal contractors, including maximizing the number of 
delinquent tax debts that IRS makes available for matching, maximizing 
DOD payment information available for matching, increasing the 
effectiveness of the matching and levy processes, and preventing 
federal contract awards to those who abuse the tax system. A number of 
the improvements identified by the task force have already been 
implemented. 

Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes: 

Our analysis indicates that the failure to pay taxes among DOD 
contractors also exists among civilian agency contractors and totaled 
billions of dollars. Our analysis of FMS and IRS records indicates that 
during fiscal year 2004, FMS made payments on behalf of civilian 
agencies to about 33,000 federal contractors with over $3.3 billion in 
unpaid federal taxes as of September 30, 2004.[Footnote 16] We estimate 
that if there were no legal or administrative impediments to the levy 
program--if all unpaid federal taxes were considered and all payments 
to these 33,000 contractors with unpaid federal taxes were subjected to 
the 15 percent levy--FMS could have collected as much as $350 million 
in unpaid federal taxes from civilian contractors during fiscal 
2004.[Footnote 17] Because some unpaid federal taxes are excluded due 
to statutory requirements, IRS and FMS would never be able to collect 
the entire amount. Over half of the $3.3 billion in tax debt was coded 
by IRS as being excluded from the levy program for statutory reasons, 
including contractors being in bankruptcy, having installment payment 
agreements, or awaiting the completion of the required legal 
notifications regarding the tax debt. However, many improvements can be 
made to lessen the tax levy collection gap. As will be discussed later 
in the report, the American Jobs Creation Act of 2004[Footnote 18] 
increased the maximum levy to 100 percent of any specified payments to 
contractors for goods and services provided the federal government. 
When implemented, the maximum levy amount that could be collected is 
even greater. 

Characteristics of Contractors' Unpaid Federal Taxes: 

The amount of unpaid taxes for these contractors paid through Treasury 
FMS ranged from a small amount owed by an individual for a single tax 
period[Footnote 19] to a group of related businesses owing about $13 
million for over 300 tax periods.[Footnote 20] Unpaid taxes owed by 
these contractors included payroll, corporate income, excise, 
unemployment, individual income, and other types of taxes. 

In the case of unpaid payroll taxes, employers withheld federal taxes 
from employees' wages, but did not send the withheld payroll taxes or 
the employers' matching amounts to IRS as required by law, instead 
diverting the money for personal gain or to fund their businesses. One 
IRS official acknowledged that frequently small businesses are 
undercapitalized and use the tax money as operating capital. However, 
employers are subject to civil and criminal penalties if they do not 
remit payroll taxes to the federal government. When an employer 
withholds taxes from an employee's wages, the employer is deemed to 
have a responsibility to deposit in a separate bank account these 
amounts held "in trust" for the federal government until making a 
federal tax deposit in that amount.[Footnote 21] To the extent these 
withheld amounts are not forwarded to the federal government, the 
employer is liable for these amounts, as well as the employer's 
matching Social Security contributions. Individuals within the business 
(e.g., corporate officers) may be held personally liable for the 
withheld amounts not forwarded, and they can be assessed a civil 
monetary penalty known as a trust fund recovery penalty 
(TFRP).[Footnote 22]

Willful failure to remit payroll taxes is a criminal felony 
offense[Footnote 23] punishable by imprisonment of not more than 5 
years, while the failure to properly segregate payroll taxes can be a 
criminal misdemeanor offense[Footnote 24] punishable by imprisonment of 
up to a year. The employee is not responsible for the employer's 
failure to remit payroll taxes since the employer is responsible for 
submitting the amounts withheld. The Social Security and Medicare trust 
funds are subsidized or made whole for unpaid payroll taxes by the 
general fund, as we discussed in previous reports.[Footnote 25] Over 
time, the amount of this subsidy is significant. 

As shown in figure 2, over a third of the total tax amount owed by 
civilian contractors was for unpaid payroll taxes and over 40 percent 
was for corporate income taxes. The remainder consisted of individual 
income taxes, and other taxes. As discussed later in our case studies, 
some of these contractors also owe state tax debts. 

Figure 2: Type of Debt Owed by Civilian Contractors as of September 30, 
2004: 

[See PDF for image] - graphic text:

Pie chart with four items. 

Corporate income tax: $1.5 billion: 45%; 
Payroll taxes: $1.2 billion: 37%; 
Other tax: $0.4 billion: 12%; 
Individual income tax: $0.2 billion: 6%. 

Source: GAO analysis of IRS and FMS data as of September 30, 2004. 

[End of figure] 

A substantial amount of the unpaid federal taxes shown in IRS records 
as owed by civilian contractors had been outstanding for several years. 
As reflected in figure 3, over half of the unpaid taxes owed by 
civilian contractors were for tax periods prior to calendar year 
2000.[Footnote 26]

Figure 3: Civilian Contractors' Unpaid Federal Taxes by Tax Periods 
through 2003 by Calendar Year: 

[See PDF for image] - graphic text:

Pie chart with four items. 

1990-1999: $1.5 billion: 46%; 
2000-2002: $1.1 billion: 33%; 
2003: $0.5 billion: 16%; 
Prior to 1990: $0.2 billion: 5%; 

Source: GAO analysis of IRS and FMS data as of September 30, 2004. 

[End of figure] 

Prompt collection of unpaid taxes is vital because, as our previous 
work[Footnote 27] has shown, as unpaid taxes age, the likelihood of 
collecting all or a portion of the amount owed decreases. This is due, 
in part, to the continued accrual of interest and penalties on the 
outstanding federal taxes, which, over time, can dwarf the original tax 
obligation. The amount of unpaid federal taxes reported above does not 
include all tax debts owed by the civilian agency contractors due to 
statutory provisions that give IRS a finite period under which it can 
seek to collect on unpaid taxes. Generally, there is a 10-year 
statutory collection period beyond which IRS is prohibited from 
attempting to collect tax debt. [Footnote 28] Consequently, if the 
contractors owe federal taxes beyond the 10-year statutory collection 
period, the older tax debt may have been removed from IRS's records. We 
were unable to determine the amount of tax debt that had been removed. 

While Substantial, the Amount of Unpaid Taxes of Civilian Contractors 
Is Likely Understated: 

The amount of unpaid federal taxes we identified among civilian agency 
contractors--$3.3 billion--is likely understated for three main 
reasons: (1) we intentionally limited our scope to contractors with 
agreed-to[Footnote 29] federal tax debt for tax periods prior to 2004 
that had substantial amounts of both unpaid taxes and payments from 
civilian agencies; (2) FMS disbursement files did not always contain 
the information we needed to determine whether the contractors owed 
federal taxes; and (3) the IRS taxpayer account database contains 
errors, and the database reflects only the amount of unpaid taxes 
either reported by the taxpayer on a tax return or assessed by IRS 
through its various enforcement programs. The IRS database does not 
reflect amounts owed by businesses and individuals that have not filed 
tax returns and for which IRS has not assessed tax amounts due. 

To avoid overestimating the amount owed by government contractors, we 
took a number of steps to exclude unpaid federal taxes that federal 
contractors recently incurred or that are not individually significant. 
For example, some recently assessed tax debts that appear as unpaid 
taxes through a matching of PACER and IRS records may involve matters 
that are routinely resolved between the taxpayer and IRS, with the 
taxes paid, abated, or both[Footnote 30] within a short period. We 
attempted to eliminate these types of debt by focusing on unpaid 
federal taxes for tax periods prior to calendar year 2004 and 
eliminating tax debt of $100 or less. We also eliminated all tax debt 
identified by IRS as not being agreed to by the contractor. 
Additionally, we eliminated contractors with tax debt that received 
payments of $100 or less during fiscal year 2004.[Footnote 31]

Regarding the completeness of FMS disbursement information, we found 
that some contractors paid through FMS could not be identified due to 
blank or obviously erroneous TINs, such as TINs made up of all zeros or 
all nines. The lack of TINs prevented us from determining whether 
contractors had unpaid federal taxes and, if so, the amount of unpaid 
taxes owed by the contractors. Additionally, as will be discussed in 
more detail in a later section of this report, FMS does not maintain 
detailed electronic payment information for a large disbursement 
system--Fedwire--that also makes disbursements to contractors, and thus 
the value of unpaid taxes associated with contractors paid through that 
system could not be determined. 

As we have previously reported,[Footnote 32] IRS records contain errors 
that affect the accuracy of taxpayer account information. Consequently, 
some of the $3.3 billion may not reflect true unpaid taxes, although we 
cannot quantify this amount. Nonetheless, we believe the $3.3 billion 
represents a conservative estimate of unpaid federal taxes owed by 
civilian contractors paid through FMS. 

Also limiting the completeness of our estimate of the unpaid federal 
taxes of civilian contractors is the fact that the IRS tax database 
reflects only the amount of unpaid taxes either reported by the 
contractor on a tax return or assessed by IRS through its various 
enforcement programs. The IRS database does not reflect amounts owed by 
businesses and individuals that have not filed tax returns and for 
which IRS has not assessed tax amounts due. During our review, we 
identified instances in which civilian contractors failed to file tax 
returns for a particular tax period and, therefore, were listed in IRS 
records as having no unpaid taxes for that period. Further, our 
analysis did not attempt to account for businesses or individuals that 
purposely underreported income and were not specifically identified by 
IRS. According to IRS, underreporting of income is the largest 
component of the roughly $300 billion tax gap. Preliminary IRS 
estimates show underreporting accounts for more than 80 percent of the 
total tax gap. Consequently, the true extent of unpaid taxes for these 
businesses and individuals is not known. 

Actual Levy Collections Significantly Less Than Maximum Potential Levy 
Amount: 

There is a large tax levy collection gap between the maximum potential 
levy we calculated and the amount FMS actually collected under the 
FPLP. We estimate that if there were no legal or administrative 
provisions that remove some tax debt from the levy program and if all 
PACER contractor payments were subjected to a 15 percent levy to 
satisfy all the unpaid taxes of those civilian contractors, FMS could 
have collected as much as $350 million in fiscal year 2004. However, 
during fiscal year 2004, FMS collected about $16 million from civilian 
contractors--or about 5 percent of the approximately $350 million 
maximum levy collection estimate we calculated. As discussed earlier in 
this report, because some unpaid federal taxes are excluded due to 
statutory requirements, IRS and FMS will never be able to close the 
levy collection gap completely. For example, over half of the $3.3 
billion in tax debt was coded by IRS as being excluded from the levy 
program for statutory reasons, including contractors being in 
bankruptcy, having installment agreements, or awaiting the completion 
of the required initial legal notifications. However, many improvements 
can be made to narrow the tax levy collection gap. 

We found that a vast majority of the collection gap is attributable to 
debts that are excluded from TOP because of current law and IRS 
policies. While we will provide an overview of the exclusions later in 
this report, we will examine in detail in a later report the accuracy 
and reasonableness of the exclusions and IRS's applications of those 
exclusions. The remaining gap--to be covered in detail in this report-
-between what could be collected and what was actually collected is 
attributable to the fact that not all FMS payments could be matched 
against unpaid federal taxes for levy. We estimate that the federal 
government could have collected at least $50 million more in unpaid 
federal taxes in fiscal year 2004 using the FPLP if all PACER 
contractor payments could be matched against tax debts in TOP. 

Legal Requirements and IRS Policy Decisions Contribute to the Levy 
Collection Gap: 

The actual collection of unpaid federal taxes from the levy program 
does not approach our maximum estimate largely because IRS excludes-- 
either for statutory or policy reasons--almost two-thirds of unpaid 
federal taxes from potential levy collection. Since we last reported on 
DOD contractors that abused the federal tax system,[Footnote 33] IRS 
has added about $28 billion in unpaid federal taxes to the levy program 
from categories it formerly excluded (from its total population of all 
tax debts). Despite these efforts, the amount that is excluded from the 
levy program is significant. Our analysis of all tax debt recorded by 
IRS--$269 billion[Footnote 34] in unpaid taxes--including amounts owed 
by civilian contractors, indicates that $171 billion was excluded from 
potential levy collection as of April 2005. For the civilian 
contractors in fiscal year 2004, these exclusions accounted for over 80 
percent of the levy collection gap. As shown in figure 4, $71 billion 
(26 percent) of all unpaid federal taxes are excluded from the levy 
program as a result of statutory requirements, while another $100 
billion (37 percent) of unpaid federal taxes are excluded due to IRS 
policy decisions, leaving approximately $98 billion (37 percent) 
potentially subject to collection through the levy program. While the 
exclusion of unpaid federal taxes from the levy program is justified 
depending on the circumstances, it nevertheless results in the loss of 
potentially hundreds of millions of dollars in tax collections from the 
levy program. 

Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005: 

[See PDF for image] - graphic text:

Pie chart with three items. 

Policy exclusions: $100 billion: 37; 
In levy program: $98 billion: 37%; 
Statutory exclusions: $71 billion: 26%. 

Source: GAO analysis of unaudited IRS data as of April 2005. 

[End of figure] 

In addition to not sending the majority of unpaid federal taxes to the 
levy program, FMS records indicate that as of September 30, 2004, about 
70 percent of the unpaid taxes that IRS submitted to TOP had not yet 
completed the collection due process requirements necessary to allow 
the levying of payments to begin. As a result, only a small portion of 
unpaid federal taxes is available for immediate levy. We will examine 
in detail in a later report the accuracy and reasonableness of the IRS 
exclusions and IRS's applications of those exclusions. What follows is 
a more detailed description of the amounts and types of unpaid taxes 
excluded from the FPLP for statutory and policy reasons, as well as a 
detailed discussion of the limitations associated with much of the 
unpaid federal taxes that are referred to the FPLP. 

A Substantial Portion of Unpaid Federal Taxes Are Legally Excluded from 
the Levy Program: 

According to IRS records, as of April 2005, IRS had coded about $71 
billion of unpaid federal taxes as being legally excluded from the levy 
program. As shown in figure 5, IRS records indicate that bankruptcy and 
taxpayer agreements--including installment or offer in compromise 
(OIC)[Footnote 35] agreements--each account for about a quarter of all 
statutory exclusions. Another $27 billion (38 percent) of the $71 
billion in statutory exclusions is due to IRS not having completed all 
initial taxpayer notifications required by law before a tax debt could 
be referred to TOP--these are cases that IRS refers to as being in 
notice status. 

Figure 5: IRS Statutory Exclusions as of April 2005: 

[See PDF for image] -graphic text: 

Pie chart with four items. 

Notice status: $27 billion: 38%; 
Installment or OIC: $20 billion: 28%; 
Bankruptcy: $17 billion: 24%; 
Other: $7 billion: 10%. 

Source: GAO analysis of unaudited IRS data as of April 2005. 

[End of figure] 

For tax debt in notice status--the first phase of IRS's collection 
process--IRS sends a series of up to four separate notices to tax 
debtors asking them to pay their tax debt. Upon receipt of each of the 
notices, the debtors have a minimum of 30 days to respond in various 
ways: 

* disagree with IRS's assessment and collection of tax liability and 
appeal the tax debt;

* negotiate with IRS to set up an alternative payment arrangement, such 
as an installment agreement or an offer in compromise;

* apply to IRS for a hardship determination, whereby tax debtors 
demonstrate to IRS that making any payments at all would result in a 
significant financial hardship; or: 

* elect to pay off the debt in full. 

Each time the debtor responds to a notice, the matter must be resolved 
before IRS can proceed with further notices or other collection 
actions. For example, IRS must determine whether to accept or reject an 
installment agreement or determine that the tax debtor is in financial 
hardship before proceeding with the collection process. During this 
entire notice phase, IRS is required to exclude the tax debt from the 
levy program. IRS does not begin further collection action, for 
example, the unpaid federal taxes are excluded from levy, until the 
series of initial notifications are complete. IRS also sends out an 
annual notification letter requesting payment of the unpaid federal 
taxes. 

IRS Policy Decisions Exclude Many Tax Debts from the Levy Program: 

In addition to legal restrictions, IRS makes policy and operational 
decisions that exclude about $100 billion in unpaid tax debts from the 
levy program. Categories of unpaid tax debts IRS has coded as being 
excluded due to policy decisions include those of tax debtors with 
financial hardship,[Footnote 36] tax debtors working with IRS to 
voluntarily comply, and tax debtors under active criminal 
investigation. Figure 6 shows that slightly over half ($51 billion) of 
all policy exclusions are due to IRS's determination that the tax 
debtor is in financial hardship. Another 40 percent ($40 billion) of 
the policy exclusions include tax debtors who are deceased and those 
tax debtors that have filed appeals, claims, or amended returns. About 
7 percent ($7 billion), referred to as tax administration exclusions, 
is excluded from the levy program because an IRS official is working to 
encourage the affected tax debtor to voluntarily pay the federal taxes 
owed. About 2 percent ($2 billion) are excluded due to active criminal 
investigations. 

Figure 6: IRS's Policy Exclusions from the Levy Program as of April 
2005: 

[See PDF for image] 

[End of figure] 

Since our 2004 report on DOD contractors who abuse the tax 
system,[Footnote 37] in which we recommended that IRS change or 
eliminate policies that prevent businesses and individuals with federal 
contracts from entering the levy program, IRS has taken specific 
actions to include more tax debt in the levy program. Specifically, IRS 
submitted an additional $28 billion to the levy program by removing 
many of the systemic exclusions for cases being actively pursued by IRS 
officials for collection (i.e., those excluded for tax administration 
purposes).[Footnote 38] As a result of these and other improvements 
(including DOD submitting more of its payments in the levy program), 
collections from contractor payments under the levy program increased 
over 200 percent in fiscal 2004 over fiscal 2003. Collections continued 
to increase in the first half of fiscal year 2005. 

Our past audits have indicated that IRS records contain coding errors 
that affect the accuracy of taxpayer account information--including 
exclusion categories. While we did not evaluate the appropriateness of 
the exclusion categories in this report, the categories used by IRS are 
only as good as the codes IRS has input into its systems.[Footnote 39] 
In our previous work on DOD contractors with tax debt, we found that 
inaccurate coding at times prevented both IRS collection action and 
cases from entering the levy program. Therefore, the effective 
management of these codes is critical because if these exclusion codes 
(such as codes identifying a contractor as being in bankruptcy or 
having an installment agreement) remain in the system for long periods, 
either because IRS delays processing taxpayer agreements or because IRS 
fails to input or reverse codes after processing is complete, cases may 
be needlessly excluded from the levy program. 

Most Tax Debt IRS Submits to the Levy Program Is Not Legally Ready for 
Levy: 

FMS records indicate that as of September 30, 2004, about 70 percent of 
the tax debt IRS sent to the levy program is not available for 
immediate levy because IRS has not completed all the necessary legal 
notifications before the levying of payments can begin. In addition to 
the initial series of notice letters that are sent out at the beginning 
of IRS's collection efforts, IRS is required to send the debtor an 
additional notice of intent to levy that includes information regarding 
the tax debtor's right to a hearing prior to levy action--also referred 
to as a collection due process notice. Although the tax debtor has up 
to 30 days to respond to this notice under the law, IRS has chosen to 
wait 10 weeks before proceeding with collection actions, such as 
levying. Until the due process notification and waiting period have 
been completed, a tax debt may be submitted to TOP but is not subject 
to immediate levy. For civilian contractors, IRS generally does not 
initiate the collection due process notifications until FMS identifies 
that the contractor is to receive a federal payment. 

Once the debtor receives the notice of impending levy, IRS gives the 
debtor up to 10 weeks to respond to the notice. As in the initial 
notice process, the debtor can respond to IRS by disagreeing with IRS's 
assessment (in this case, filing for a due process hearing), 
negotiating with IRS to set up an alternative payment arrangement, 
applying for a hardship determination, or making payment in full. If a 
tax debtor does not respond to IRS and take advantage of those options 
within the notification period, IRS will instruct FMS to start levying 
future payments. The tax debt in the levy program is then coded for 
immediate levy. For future payments, FMS will proceed with the 
continuous levy by reducing each scheduled payment to the tax debtor by 
15 percent--or the exact amount of tax owed if it is less than 15 
percent of the payment--until the tax debt is satisfied. 

Not having tax debt ready for levy results in the loss of millions of 
dollars of tax revenue for the federal government. For example, for our 
50 case studies we identified payments totaling $1.6 million in which 
the TIN of the contractor matched an IRS tax debt, but no levy was 
taken because IRS had not yet completed the collection due process 
activities. This situation contributes to these contractors facing 
little or no consequences for their abuse of the federal tax system. 
IRS has an automated process in place by which, once a match is made 
against a tax debt in the levy program, a due process notice is 
automatically sent to the contractor. However, the payments made 
between the time of the initial match and when IRS completes its due 
process notification process--usually 10 weeks--cannot be levied and 
the potential collections are lost to the federal government. 
Additionally, if the tax debtor files for a due process hearing once it 
receives the notice, the tax debt will continue to be excluded from 
levy until the process--which could take months--is complete. 

Prior to 1998, IRS was authorized to levy a payment immediately upon 
matching a tax debt with a federal payment so long as the collection 
due process notice had been sent. At that time, IRS did not have to 
wait before proceeding with the levy. This allowed the levy program to 
capture the payment before it was made to preserve the government's 
right to the payment while providing the contractor a postlevy due 
process. However, the IRS Restructuring and Reform Act of 1998 requires 
that debtors be afforded an opportunity for a collection due process 
hearing before a levy action can take place. To comply with this 
provision, IRS has chosen to wait a minimum of 10 weeks for the tax 
debtor to respond to the collection due process notice. However, IRS's 
10-week waiting period causes the federal government to miss levying 
some contractor payments. 

IRS has acknowledged that the delay in initiating the due process 
notice can result in lost collections and is investigating ways to 
begin the process earlier. The joint task force established after our 
previous audit has supported making the due process for the FPLP a 
postlevy process.[Footnote 40] This would allow IRS to levy payments 
when first identified and provide contractors with procedural due 
process remedies afterwards. To expedite the notification, IRS 
officials stated that they had begun matching new DOD contracts valued 
at over $25,000 against tax debt and sending out collection due process 
notifications at that time rather than waiting until payments are made. 
To address this same issue, the task force is also exploring avenues to 
combine the collection due process notice with the last of its initial 
notification letters sent to tax debtors. This would allow IRS to have 
all tax debt legally ready for levy prior to it being sent to TOP to be 
matched against federal payments. We fully support the task force's and 
IRS's efforts to increase the amount of tax debt that is ready for 
immediate levy. 

Lack of FMS Oversight and Proactive Management Further Contribute to 
the Levy Collection Gap: 

FMS has contributed to the tax levy collection gap by not taking a 
proactive stance in overseeing and managing the levy program. GAO's 
Standards for Internal Controls in the Federal Government considers a 
positive control environment--which includes the establishment of 
mechanisms to monitor or oversee program operations--to be the 
foundation for all other standards. For FMS, such management control 
and oversight is critical in its role as the federal government's debt 
collector and chief money disburser. However, because of a lack of 
oversight, FMS did not detect and have agencies correct obviously 
inaccurate information for tens of billions of dollars in payments to 
contractors, and therefore was not able to match these payments against 
tax debts for potential levy. Further, because of a lack of proactive 
management, FMS did not send tens of billions of dollars more in 
payments to the levy program. We estimate that these deficiencies 
resulted in at least $50 million in lost levy collections from civilian 
agency contractors during fiscal year 2004.[Footnote 41] Table 1 
provides a breakdown of the deficiencies that result in payments not 
being subject to levy. Further discussion of these deficiencies will be 
provided in detail later in this report. 

Table 1: Payments Not Matched against Tax Debts for Potential Levy: 

Dollars in billions. 

Cause of payment not being levied: Payments submitted to TOP that could 
not be levied: Payments where the agency payment station has not been 
loaded in TOP; 
Amount excluded: $40. 

Cause of payment not being levied: Payments submitted to TOP that could 
not be levied: Payments containing blank or obviously inaccurate TINs; 
Amount excluded: $17. 

Cause of payment not being levied: Payments submitted to TOP that could 
not be levied: Payments containing blank or invalid names; 
Amount excluded: $4. 

Cause of payment not being levied: Payments submitted to TOP that could 
not be levied: Payments containing invalid payment types; 
Amount excluded: $5. 

Cause of payment not being levied: Payments FMS does not submit to TOP: 
Certain categories of payments (at least $26 billion in certain types 
of payments and an unknown amount in Fedwire payments[A]); 
Amount excluded: Unknown amount. 

Cause of payment not being levied: Payments FMS does not submit to TOP: 
Payments to individuals; 
Amount excluded: $2. 

Source: GAO analysis of FMS data. 

Notes: The exclusion categories above cannot be added together to 
derive the total amount of excluded payments because many payments had 
multiple deficiencies, each of which would have prevented the payment 
from being levied. For example, some payments without TINs also have 
invalid names, and some payments originating from agency payment 
locations that were not entered into the TOP database were also payment 
categories FMS was not sending to the levy program. 

[A] During fiscal year 2004, Fedwire disbursed $191 billion, some of 
which was to contractors. FMS does not maintain detailed historical 
records and could not determine the value of contractor payments paid 
with Fedwire. 

[End of table]

In addition to these deficiencies, FMS also faces design challenges in 
the levy program that limit its effectiveness at collecting unpaid 
taxes. These challenges include the difficulty in matching the name of 
the contractor recorded in the payment files to the name recorded in 
IRS's tax records and the difficulty in levying vendors paid with 
government purchase cards. FMS also has not implemented a provision of 
the American Jobs Creation Act of 2004, which allows the federal 
government to levy up to 100 percent of payments to contractors with 
unpaid federal taxes. 

FMS Did Not Include All Agency Payments in the Levy Program: 

FMS has not updated its TOP database to capture payments from about 150 
agency paying stations,[Footnote 42] resulting in $40 billion of fiscal 
year 2004 civilian agency contractor payments being excluded from 
potential levy. Although effective internal control would generally 
include oversight of key agency functions, FMS did not perform the 
management oversight necessary to identify that a significant portion 
of all its disbursements were not included in the levy program. Of the 
$40 billion not sent to TOP, we determined that approximately $9 
billion in payments were made to civilian contractors with tax debts, 
none of which could be levied. 

Federal agencies may have multiple offices or locations that perform 
accounting for and preparation of payment information, referred to as 
agency payment locations or paying stations. For a payment to be 
matched against tax debts for the purpose of levy, the paying station 
from which the payment originates needs to be programmed into the TOP 
database. If a paying station is not in the TOP database, TOP considers 
that location to be excluded from the levy program, and thus payments 
from that location will not be matched against unpaid federal taxes for 
potential levy. The approximately 150 paying stations not included in 
TOP are paying stations for portions of a majority of federal 
departments, including the Departments of Homeland Security, the 
Interior, Justice, State, the Treasury, and Health and Human Services. 

An FMS official stated that at the time FMS implemented TOP in the 
1990s, it had a centralized monitoring system to verify that payments 
from all payment locations were included in TOP. According to the 
official, after the initial group of paying units was incorporated into 
TOP, FMS did not take steps to ensure that the TOP database was up to 
date and that payments from new payment locations were incorporated 
into TOP. FMS was unaware that a large percentage of its disbursements 
were being excluded from potential levy. Since we brought the problem 
to their attention, FMS officials stated that efforts are under way to 
update TOP for the paying stations we identified as being excluded from 
the levy program.[Footnote 43] The officials also stated that they plan 
to reinstate the centralized monitoring to ensure that paying stations 
are updated in TOP so that payments from these stations would be 
available for potential levy. 

FMS Disbursed Payments to Contractors without Proper TINs: 

During fiscal year 2004, FMS disbursed over $17 billion in payments to 
civilian agency contractors without TINs or with obviously inaccurate 
TINs. Valid TIN information is critical to the levy program[Footnote 
44] because payments lacking this information cannot be matched against 
tax debts. The DCIA[Footnote 45] requires executive agencies to obtain 
TINs from contractors and to include TINs on certified payment 
vouchers, which are submitted to Treasury.[Footnote 46] Without a 
proper TIN, payments cannot be levied. 

We found that payment records with blank or obviously inaccurate TINs 
in the TIN fields are prevalent in the payment files submitted to FMS 
by some agencies. For example, over half of payments at one agency and 
over three-quarters of payments at another agency were made to 
contractors that had blank or obviously erroneous TINs, such as TINs 
made up of all zeros or all 9s. While certain vendors are exempt from 
the requirements to have a TIN, the exemptions are rare and are 
generally limited to foreign companies providing goods and services to 
federal agencies in a foreign country or companies performing 
classified work. However, FMS does not gather information to determine 
whether the payments to contractors without TINs or with obviously 
inaccurate TINs are exempt from the TIN requirement or that all 
nonexempt payments include TINs. FMS officials stated that the 
responsibility for gathering and submitting TIN information was solely 
that of the paying agency. In subsequent audit efforts, we will 
evaluate selected agencies' controls over obtaining and submitting TIN 
information for all nonexempt payments. 

FMS officials stated that FMS tabulates payment records with obviously 
inaccurate TINs by agency[Footnote 47] to compile a monthly TIN 
Compliance Report. This report is used to monitor agencies that send in 
payment requests with obviously inaccurate TINs.[Footnote 48] According 
to FMS officials, in cases of significant noncompliance, FMS encourages 
agencies to send payment files with valid TINs. However, FMS does not 
enforce the TIN requirement by rejecting agency payments without TINs 
or requiring the agencies to certify that the payments not containing 
TINs meet one of the TIN exclusion criteria. As a result, agencies 
continue to submit payment requests without TINs, which cannot be 
levied to collect unpaid federal taxes. 

We found that some civilian agency contractors without TINs or with 
obviously inaccurate TINs in the agency payment files received payments 
during fiscal year 2004 and had unpaid federal taxes. For example, FMS 
paid about $700,000 to one contractor with an invalid TIN. Based on 
investigative work, we were able to determine that this contractor had 
failed to pay all its payroll taxes and owed more than $50,000 in 
unpaid taxes. Had the payment file contained a TIN and if the tax debt 
were subject to immediate levy, the government could have collected the 
full amount of unpaid taxes from this contractor during fiscal year 
2004. 

FMS Made Disbursements to Contractors without Proper Names: 

FMS made disbursements of nearly $3.8 billion in fiscal year 2004 to 
contractors whose payment files did not contain the name of the 
contractor receiving the payment. We found that instead of the 
contractor's name, the disbursement file name field was either blank or 
contained only numeric characters.[Footnote 49] The lack of a name on 
the payment file does not prevent the payment from occurring because 
FMS made these disbursements electronically via direct deposit into the 
contractors' bank accounts. However, valid name information is critical 
because the levy program requires a match between both the name and TIN 
for a levy to occur.[Footnote 50] The lack of a proper name could have 
been detected if FMS had conducted a cursory review of the payment 
files submitted by the agencies. 

For example, our review readily identified that most of the payment 
files submitted by the State Department did not contain valid 
contractor names. In addition, about $3.2 billion of the nearly $3.8 
billion we identified as payments made to contractors without names in 
the payment files were made on behalf of the State Department. Until we 
brought the matter to their attention, senior officials at both the 
State Department and FMS were not aware that the State Department's 
contractor payments did not contain valid names. At our request, a 
State Department official investigated and found that the department's 
payment systems did contain valid names but that a programming error 
resulted in the wrong field being sent to FMS as the name field. The 
official told us that the error in the payment file is not new because 
the structure of the payment file sent to FMS had remained the same 
since the 1980s. Once we brought this to the attention of State 
Department officials, they were quickly able to identify corrective 
actions, and according to the State Department, they have since 
corrected the deficiency. 

Our analysis of FMS payment data found that FMS made disbursements 
without contractor names, totaling approximately $400 million, to about 
2,000 companies that had about $370 million in unpaid federal taxes. 
FMS's failure to detect and correct missing names had a direct impact 
on the levy program. For example, one contractor with unpaid taxes 
received from the State Department payments totaling over $400,000, 
which could not be levied because of the missing name. The same 
contractor also received payments from other civilian agencies. 
However, because the contractor's name was included in the payment 
files from the other agencies, the levy program collected over $50,000 
from those payments. If FMS or the State Department had identified and 
corrected the name problem, an additional $60,000 in unpaid federal 
taxes from this contractor could have been collected through the levy 
program. 

FMS Made Payments without Proper Payment Type Codes: 

FMS disbursed $5 billion in payments using checks based on agency- 
submitted payment files that did not contain data in the payment type 
field during fiscal year 2004. FMS uses the payment type field in the 
agency-submitted payment files to determine if the payment is required 
to be included in the levy program. If a payment file record has a 
blank payment type field, it is not matched in the levy program to 
collect unpaid federal taxes. As a result, none of the $5 billion in 
payments we identified as having a blank payment type field could have 
been levied to collect the contractors' unpaid federal taxes. FMS 
lacked the oversight to detect that the payment files submitted by 
agencies were not adequately coded. After we brought this to 
management's attention, an FMS official stated that FMS planned to 
establish a new centralized program to monitor the completeness of 
agency information. 

FMS Has Not Taken Action to Include All Categories of Contractor 
Payments in the Levy Program: 

FMS has not been proactive in including many categories of payments in 
the levy program, and has therefore kept tens of billions of dollars in 
contractor payments from being subject to potential levy collection. 
FMS uses several payment mechanisms to make its disbursements. FMS 
payment mechanisms (payment categories) include what it refers to as 
type A, type B, which includes Automated Clearing House-Corporate Trade 
Exchange (ACH-CTX), and Fedwire.[Footnote 51] However, FMS has only 
taken action to include a portion of type B payments in the levy 
program. FMS has not taken action to include the other categories of 
payments due to what it considers to be programming limitations. 
Therefore, none of those payments can be levied to collect unpaid 
federal taxes. 

Although it is responsible for the levy program, FMS also could not 
quantify the magnitude of federal contractor payments that it was not 
sending to the levy program, nor could FMS estimate the amount of levy 
collections it was missing because it had not included all payment 
categories in the program. FMS officials estimated that FMS paid about 
$11 billion in contractor payments via ACH-CTX in fiscal year 2004, and 
our analysis identified at least $15 billion in type A contractor 
payments.[Footnote 52] The combined amount of those two categories-- 
$26 billion, though likely understated--represents almost 11 percent of 
all contractor disbursements recorded in FMS's PACER database. In 
addition, FMS disbursed approximately $191 billion[Footnote 53] in 
Fedwire payments, but FMS could not identify the value of Fedwire 
contractor payments that were not sent to the levy program. 

Type A Payments: 

FMS officials stated FMS had not included type A payments in the levy 
program because it is waiting for a new disbursement system to be 
deployed. Type A payments are payments whereby the agency certifies the 
payment in the same file that contains detailed payment 
information.[Footnote 54] Although FMS had performed some preliminary 
studies in 2001 regarding how to send type A payments to TOP, officials 
were unable to provide information regarding the cost of making system 
corrections.[Footnote 55] At that time, FMS was developing a new 
payment system that it estimated would be completed as early as 2003 
and therefore decided not to make the system changes. However, at the 
time of our audit, the new system was still not fully deployed. 
Consequently, over the last 4 years the federal government has lost the 
collections that could have been levied from those payments. FMS 
officials stated that FMS is continuing to focus on completing the 
deployment of a new disbursement system, which it now estimates will be 
fully operational in 2006, rather than including type A payments in its 
current system. FMS tentatively plans to incorporate type A payments 
into TOP in calendar year 2006 when its new system is scheduled to be 
operational. 

ACH-CTX Payments: 

FMS officials stated that FMS does not send ACH-CTX payments to TOP for 
levy. According to FMS officials, ACH-CTX can be used to pay multiple 
invoices to a single contractor. However, the structure of the ACH-CTX 
payments requires that the total payment amount disbursed to the 
contractor match exactly the total of the invoices that the payment is 
to cover. If a levy were to take place, the total payment amount would 
differ from the total amount of the invoices that support the payment. 
Consequently, FMS officials stated that they cannot levy a portion of 
the payment. Officials stated that although they could not separately 
identify them in the PACER database, FMS made about $11 billion in ACH- 
CTX payments to contractors during fiscal year 2004. 

FMS officials stated they had not developed an implementation plan or 
timeline to incorporate ACH-CTX contractor payments into the levy 
program. 

Fedwire Payments: 

As with type A payments, FMS officials stated that FMS is currently 
focused on completing a new disbursement system prior to incorporating 
Fedwire payments--payments requiring same-day settlement--into TOP. FMS 
officials recognized that Fedwire payments, as a whole, are not 
specifically exempt from levy, though individual Fedwire payments may 
be exempt. FMS officials stated that the decision to exclude Fedwire 
payments from the levy program was also based on the limited time 
window FMS has to send Fedwire payments to the Federal Reserve and the 
operational and system changes necessary to send those payments to 
TOP.[Footnote 56] FMS's TOP implementation plan, dated January 2005, 
called for incorporating Fedwire payments into TOP in calendar year 
2007, over 10 years after DCIA first required the establishment of a 
centralized offset program. However, FMS officials recently informed us 
that they are going to study the costs of submitting Fedwire payments 
to TOP and may not attempt to include them in the levy program. As a 
result, FMS officials stated that they no longer have a timeline to 
incorporate Fedwire payments into TOP. We recognize that submitting 
Fedwire to the levy program could result in a delay in disbursement, 
but until FMS fully explores and identifies options for submitting 
Fedwire payments through TOP, potentially billions of dollars may be 
disbursed to contractors with unpaid federal taxes without the 
possibility of being levied. 

FMS Does Not Offset Contractor Payments to Collect Tax Debts of 
Individuals: 

Because payment systems do not identify whether the payment is being 
made to a business or individual, FMS does not offset contractor 
payments to collect the unpaid federal taxes owed by individuals. Our 
analysis determined that civilian agency contractors with unpaid 
federal taxes who are individuals received payments totaling nearly $2 
billion while owing over $290 million in unpaid federal taxes. 

Agency payment records do not distinguish payments made to individuals, 
such as those who are self-employed or sole proprietors, from payments 
made to businesses. IRS decided that due to the lack of distinction 
between these two types of payments in FMS's system and the possibility 
of improperly levying payments, contractor payments should not be 
levied to satisfy the unpaid federal taxes of individuals. According to 
IRS, an improper levy could occur because a business's TIN could be the 
same as an individual's Social Security number (the individual's TIN). 
According to FMS officials, IRS instructed FMS not to match any 
contractor payments against unpaid federal taxes owed by individuals 
for potential levy following discussions between FMS and IRS. 

However, both FMS and IRS officials have indicated that the potential 
risk of an improper levy is small. For a levy to occur, a match must 
exist between the TIN and name in the payment files and the TIN and 
name control in the tax debt file. FMS indicated it has performed a 
study and found that only a small number of cases potentially have a 
business TIN and name that would match with an individual's TIN and 
name. After we met with IRS and FMS officials regarding this issue, IRS 
directed FMS to begin levying contractor payments against tax debts 
owed by individuals. FMS officials stated that they will need to make 
system changes to implement this action. 

FMS Faces Challenges in Addressing Other Program Limitations: 

FMS faces management challenges in addressing certain limitations in 
the levy program that result in reduced collections. Specifically, 
almost $2 billion of contractor payments could not be levied due to 
difficulties in matching both the name and TIN in the payment records 
to the tax debt in the TOP database. Additionally, nearly $10 billion 
in federal payments made via purchase cards to contractors are not 
subject to levy because the government payment is made to the bank, not 
the contractor doing business with the government. Finally, FMS faces 
challenges in implementing a provision contained in the American Jobs 
Creation Act of 2004, which provides for increasing the amount of levy 
to a maximum of 100 percent of payments to contractors with unpaid tax 
debts. 

Limitations in TIN/Name Match Reduces Levy Collections: 

Potentially thousands of payments are not levied every week because the 
TINs and names from the payment records do not match against the names 
and TINs in TOP for potential levy. Data from FMS's PACER and TOP 
databases indicate that about $1.7 billion of payments made to 
contractors with unpaid federal taxes in TOP could not be levied 
because the control name supplied by IRS did not match the payee name 
in PACER. As a result, none of these payments could be levied to 
collect delinquent tax debt. 

IRS provides TOP with both a TIN and a "control name" of both companies 
and individuals with unpaid federal taxes. In general, the control name 
is the first four characters of an individual's last name or the first 
four characters of the business name. TOP analyzes the name in the 
payment files to determine if it contains the IRS control name. If it 
identifies the control name (first four characters of the IRS name) 
anywhere within the name field of the payment file, TOP levies the 
payment to collect the unpaid taxes. If the control name is not found 
in the payment record's name field, TOP records the mismatch on a 
report that it sends to IRS to identify the mismatches. 

We reviewed an example of the report containing approximately 2,400 
different payments that could not be levied to identify some of the 
causes for the mismatches. We found that a number of payments were not 
levied because the payments were made using an individual's name and 
the business's TIN. The following hypothetical example based on an 
actual case illustrates the difficulty in matching names under the levy 
program. In one case, the payment was made to an individual doctor, J. 
Doctor, MD. However, the TIN provided was to the doctor's practice, 
Jenny Doctor, MD PA. For IRS, the control name of the business TIN was 
"JENN." As a result, although the TIN of the payment matched the TIN of 
the tax debt, the control name "JENN" did not appear within the payment 
name "J Doctor." Because the names did not match, the payments to this 
contractor were not levied. 

After we brought this to FMS's and IRS's attention, IRS began working 
with FMS to increase the number of control names it sends to TOP. 
According to IRS officials, IRS is taking action to begin sending up to 
10 additional business control names to FMS to be matched against 
payment data.[Footnote 57] IRS officials believed that this should 
increase the number of matches available under the levy program. IRS is 
also evaluating additional changes to increase the number of name 
controls that it sends to FMS for matching with payments to 
individuals. 

Billions of Dollars in Purchase Card Payments Are Not Levied: 

Due to the structure of the credit card program, whereby payments are 
made to the government purchase card bank and not directly to 
contractors with unpaid tax debts, none of the $10 billion in purchase 
card payments made during fiscal year 2004 were able to be offset or 
levied. FMS officials have acknowledged the need to address those 
challenges and stated that FMS has met with certain bank officials and 
another federal agency regarding how to approach the issues. However, 
they have not yet determined how to collect federal debts from 
contractors paid with the government purchase card. 

The Governmentwide Commercial Purchase Card Program was established to 
streamline federal agency acquisition processes by providing a low- 
cost, efficient vehicle for obtaining goods and services directly from 
contractors. Governmentwide efforts to promote increased use of 
purchase cards for small and routine purchases have dramatically 
increased purchase card spending. As shown in figure 7, purchase card 
expenditures by civilian agencies increased from nearly $3 billion in 
fiscal year 1997 to nearly $10 billion in fiscal year 2004. The use of 
purchase cards has accrued significant benefits to the federal 
government; however, contractors receiving payments through purchase 
cards are not currently subject to the levy program. 

Figure 7: Purchase Card Expenditures by Civilian Agencies--Fiscal Years 
1997-2004: 

[See PDF for image] 

[End of figure] 

All purchase card payments are made to one of the five banks that issue 
government purchase cards--Bank One, Bank of America, CitiBank, Mellon 
Bank, or US Bank. In accordance with standard credit card payment 
procedures, those banks are responsible for interfacing with Visa or 
MasterCard and the contractor's bank to pay for the goods or services 
provided. This payment process shields the identity of the contractor 
that is ultimately paid by the civilian agency receiving the goods or 
services from the levy program. Consequently, the disbursement file 
contains only the name of the purchase card issuing bank and its TIN 
and not the contractor that was actually doing business with the 
government. 

Without identifying the contractor doing business with the government, 
the federal government is unable to collect federal debts from payments 
to these contractors. To demonstrate the effect of payments to 
contractors using the purchase card, we obtained the National 
Aeronautics and Space Administration's (NASA) fiscal year 2004 purchase 
card transactions and compared the contractors from which NASA 
purchased goods and services to the IRS unpaid taxes database. During 
fiscal year 2004, NASA used purchase cards to pay about 12,000 
contractors nearly $80 million. According to IRS's data on unpaid tax 
debts, over 750 of those contractors had about $440 million in unpaid 
federal taxes. However, none of the purchase card payments made to 
these contractors could be levied to collect the unpaid federal taxes. 
In contrast, in analyzing the TOP database, we found that non-purchase 
card payments made during fiscal year 2004 to 49 of these same 
contractors were levied. 

FMS recognizes purchase card payments as a significant problem for the 
government's debt collection and lists the government purchase card 
program among the payment streams that need to be incorporated into 
TOP. FMS officials have stated they face both operational and legal 
issues to incorporate such payments into TOP and that the process of 
paying the purchase card issuing bank may prevent FMS from using TOP to 
collect from contractors paid with purchase cards. Until the challenge 
is thoroughly examined by FMS and IRS and solutions are identified, the 
federal government will continue to be unable to levy or otherwise 
collect from tens, if not hundreds, of billions of dollars in payments 
to civilian contractors. 

Statutory Authorization for Increased Levy Has Yet to Be Implemented: 

FMS has not fully implemented a new provision, authorized by Congress 
in 2004, that increased the maximum levy percentage on contractor 
payments. In October 2004, Congress passed the American Jobs Creation 
Act 2004 to increase the maximum continuous levy from 15 percent to up 
to 100 percent of payments to contractors with unpaid taxes. The act 
specifically increased the continuous levy on payments to vendors for 
"goods and services" sold or leased to the government. According to 
IRS, the legal language, which specified that goods and services be 
subject to the 100 percent levy provision, excludes real estate, such 
as rent payments, from the new levy requirement. This exclusion 
presents significant implementation challenges for FMS because the 
civilian agencies' payment systems cannot separately identify real 
estate transactions from other contractor payments. Without the ability 
to distinguish between these payments, FMS could not implement the new 
law for civilian payments in such a way as to exempt real estate 
transactions from the 100 percent levy. FMS officials stated they had 
recently been able to implement the 100 percent levy provision for 
certain DOD payments, but were unable to do so for their own 
disbursements. According to FMS and IRS officials, a specific 
legislative change is being sought to make real estate payments subject 
to the new 100 percent levy requirement. 

We estimate that increasing the levy percentage from 15 to 100 could 
cause a dramatic increase in collections. We performed a separate 
analysis of our maximum levy potential estimate as if there were no 
legal or administrative impediments--estimated at $350 million for a 15 
percent levy--and found that if a 100 percent levy rate had been 
applied in fiscal year 2004, FMS could have collected as much as $800 
million from civilian contractors if all payments had been matched 
against all tax debt.[Footnote 58]

Civilian Agency Contractors Involved in Abusive and Potentially 
Criminal Activity Related to the Federal Tax System: 

We found abusive and potentially criminal activity related to the 
federal tax system for all 50 cases that we audited and investigated. 
The case studies were selected from the population of about 33,000 
contractors that were receiving federal payments during fiscal year 
2004 and owed over $3.3 billion in unpaid federal taxes as of September 
30, 2004, using a non-probability selection approach. The basis for 
selecting each of the case study contractors was that they all had 
unpaid taxes totaling more than $100,000 and federal payments totaling 
more than $10,000. When our audit and investigative work indicated that 
the 50 contractors we originally selected were related to other 
entities--defined as entities sharing the same owner or officer or 
common addresses--we performed additional work to determine whether the 
related entities and the owners owed tax debts as of September 30, 
2004, and received other federal payments during fiscal year 
2004.[Footnote 59] While we were able to identify some related 
entities, in some cases other related entities might exist that we were 
not able to identify. In addition, we found that 3 of the 50 case 
studies involve owners or officers who had been either convicted or 
indicted for non-tax-related criminal activities, or were under IRS 
investigation. We are referring the 50 cases detailed in this report to 
IRS so that a determination can be made as to whether additional 
collection action or criminal investigations are warranted. For more 
information on our criteria for the selection of the 50 case studies, 
see appendix I. 

Nature of Business for Case Study Contractors: 

The federal government is a large and complex organization, consisting 
of 15 cabinet-level agencies--one defense and 14 civilian agencies--and 
numerous independent agencies, administrations, and other entities that 
collectively spent more than $2.5 trillion in fiscal year 2004. 
Civilian agencies operate throughout the country and in more than 250 
foreign countries, carrying out a multitude of missions and programs. 
Because civilian agencies contract for a large variety of goods and 
services to carry out functions as diverse as guarding the nation's 
borders, providing medical benefits to veterans, administering justice, 
and exploring space, it is not surprising that civilian agency 
contractors with unpaid taxes operate in a large number of industries. 
The industries are typically wage-based, while the 50 case studies are 
mostly small, many of them closely held by the owners and officers. 
Table 2 shows a breakdown for the 50 contractor case studies by the 
type of goods and services provided. 

Table 2: Types of Goods and Services Provided by Civilian Agency 
Contractors in Case Studies: 

Type of business: Building maintenance; 
Number: 6. 

Type of business: Communications; 
Number: 2. 

Type of business: Consulting; 
Number: 2. 

Type of business: Health care; 
Number: 12. 

Type of business: Manufacturing; 
Number: 5. 

Type of business: Personnel services; 
Number: 2. 

Type of business: Professional services; 
Number: 6. 

Type of business: Sanitation; 
Number: 2. 

Type of business: Security services; 
Number: 2. 

Type of business: Transportation; 
Number: 3. 

Type of business: Other; 
Number: 8. 

Type of business: Total; 
Number: 50. 

Source: GAO analysis of civilian agency and public records. 

[End of table]

Examples of Abusive or Potentially Criminal Activity Related to the 
Federal Tax System by Businesses: 

Our audits and investigations of the 50 case study business contractors 
showed substantial abuse and potential criminal activity related to the 
tax system. All 48 of the contractors in our case studies that file 
business tax returns had tax periods in which the contractors withheld 
taxes from their employees' paychecks but did not remit them to 
IRS.[Footnote 60] Rather, these companies diverted the money to fund 
business operations, for personal gain, or for other purposes. As 
discussed earlier in this report, businesses with employees are 
required by law to remit employment taxes to IRS or face potential 
civil or potential criminal penalties. Specifically, the act of 
willfully failing to collect or pay any tax is a felony while the 
failure to comply with certain requirements for the separate accounting 
and deposit of withheld income and employment taxes is a misdemeanor. 

Six of the case study businesses involved owners or officers who were 
"multiple abusers," those involved with a group of related companies 
that owed taxes. The owners or operators of some of these businesses 
not only failed to have their businesses pay taxes, but several also 
failed to pay their own individual income taxes, with three individuals 
having more than $100,000 in unpaid individual income taxes. The 
related businesses involving these multiple abusers repeatedly failed 
to pay taxes. For example, several groups of related businesses owed 
taxes for more than 50 tax periods--one group of about 20 businesses 
owed taxes for over 300 tax periods. One case study business owner 
(whose businesses received more than $1 million in federal payments in 
fiscal year 2004) has a pattern of opening a business, failing to remit 
at least some payroll taxes, closing the business, and then opening a 
new business to repeat the same pattern. The owner repeated this 
pattern for at least three businesses over nearly 20 years. 

Table 3 highlights 10 case studies with unpaid payroll tax debts. Nine 
of the 10 cases have unpaid payroll taxes of 10 tax periods or more. 
The amount of unpaid taxes associated with these 10 cases ranged from 
nearly $400,000 to $18 million--6 businesses owed more that $1 million 
in unpaid federal taxes. Our investigations revealed that some owners 
have substantial personal assets--including commercial real estate, a 
sports team, or multiple luxury vehicles--yet their businesses fail to 
remit the payroll taxes withheld from employees' salaries. Several 
owners owned homes worth over $1 million--one owner had over $3 million 
and another had over $30 million in real estate holdings. Others 
informed our agents that they diverted payroll taxes they did not remit 
to IRS for personal gain or to fund their business, while others were 
engaged in activities that indicated potential diversion of payroll 
taxes for personal gain. For example, one owner transferred the payroll 
taxes he withheld from employees to a foreign bank account and was 
using the money to build a home in that country, while another 
contractor doubled the salary of an officer in a 5-year period to over 
$750,000 at the same time that the business failed to remit payroll 
taxes and declared losses of more than $2 million. Another purchased a 
number of multimillion-dollar properties and an unrelated business at 
the same time that his many businesses owed taxes, while yet another 
owner purchased, within a 2-year period, four vehicles totaling nearly 
$200,000 after the owner's business started accumulating unpaid tax 
debts. 

IRS has taken some collection actions against the contractors in our 
case studies, but has not been successful at collecting the unpaid 
taxes. For example, we found that in all 10 cases shown in table 3, IRS 
has assessed trust fund penalties on the owners or officers for willful 
failure to remit to the government amounts they withheld from their 
employees' salaries.[Footnote 61] However, as we have previously 
reported, IRS seldom collects on trust fund penalties. As of September 
30, 2004, the balance on the trust fund penalties owed by the owners or 
officers of the 10 case studies was over $19 million. IRS has also 
taken some collection actions against all 10 contractors, such as 
placing liens on the assets of the companies or owners. Although some 
of the owner/officers had substantial assets, including expensive homes 
and luxury automobiles, the information we reviewed did not identify 
that IRS has performed seizures of these assets. However, we identified 
that 3 of the 10 owners or officers had been convicted or indicted for 
non-tax-related offenses or were under active IRS investigation for tax-
related offenses. 

Table 3: Civilian Agency Contractors with Unpaid Federal Taxes: 

Case study: 1; Goods, services, or nature of work and agencies to which 
they were provided: Health care related services to Departments of 
Veterans' Affairs and Health and Human Services; 
Fiscal year 2004 FMS payments[A]: Over $300,000; 
Unpaid federal tax amount[B]: Over $18 million; 
Comments: 
* Business is affiliated with many other health care-related 
facilities, including nursing and convalescent homes; 
* Taxes owed by related entities cover over 80 tax periods; 
* Since failing to fully remit all the taxes withheld from employees' 
paychecks starting in the late 1990s, the owner purchased multimillion-
dollar properties, an unrelated business, and a number of luxury 
vehicles; 
* Other real estate holdings include residential and commercial 
properties valued in the tens of millions of dollars. 

Case study: 2; Goods, services, or nature of work and agencies to which 
they were provided: Waste collection services to the Department of 
Justice; 
Fiscal year 2004 FMS payments[A]: Over $700,000; 
Unpaid federal tax amount[B]: Over $2 million; 
Comments: 
* Company and several other entities share the same address or 
executives; 
* Taxes owed by related entities cover over 40 tax periods and include 
individual income tax debt of one owner; 
* Since the late 1990s, about the same time that the company failed to 
pay all of its payroll taxes, the company regularly withdrew cash from 
its bank accounts. These withdrawals totaled several million dollars; 
* Since failing to fully remit all the payroll taxes withheld from 
employees' paychecks, one owner sold his residence for more than $1 
million. 

Case study: 3; Goods, services, or nature of work and agencies to which 
they were provided: Health care related services to the Department of 
Veterans Affairs; 
Fiscal year 2004 FMS payments[A]: Nearly $250,000; 
Unpaid federal tax amount[B]: Over $9 million; 
Comments: 
* Business is affiliated with three other related companies; 
* Taxes owed by related entities cover over 60 tax periods and include 
the owner's individual income tax debt totaling hundreds of thousands; 
* One entity is under IRS investigation. In addition, owner is 
suspected of fraudulent banking activity; 
* Since failing to pay taxes, officer spent tens of thousand of dollars 
on gambling; and one of the three companies had multiple withdrawals of 
cash from bank accounts--each totaling tens of thousands of dollars. 

Case study: 4; Goods, services, or nature of work and agencies to which 
they were provided: Waste collection services to the Department of 
Veterans Affairs; 
Fiscal year 2004 FMS payments[A]: Over $10,000; 
Unpaid federal tax amount[B]: Nearly $13 million; 
Comments: 
* Company is one of almost 20 related entities, all of which owed 
unpaid taxes--primarily payroll taxes; 
* Taxes owed by related entities cover over 300 tax periods; 
* The owner also owns a residential property located near a golf course 
and other commercial properties in several states with assessed value 
of over $2 million. 

Case study: 5; Goods, services, or nature of work and agencies to which 
they were provided: Payroll and temporary employment services to the 
Department of Housing and Urban Development; 
Fiscal year 2004 FMS payments[A]: Over $1 million; 
Unpaid federal tax amount[B]: Nearly $900,000; 
Comments: 
* Business related to three other entities; 
* Taxes owed by two related entities cover over 20 tax periods; 
* Some tax debts of remaining entities were not paid for so long that 
IRS is now legally prohibited from seeking collection; 
* The owner's history of delinquency stretches nearly 20 years and 
covered multiple businesses. Specifically, the owner typically incurs 
payroll taxes on one company, is assessed trust fund penalty on that 
company but makes no or little payments, closes company, starts another 
company, and repeats the same pattern; 
* For example, the owner filed for bankruptcy protection in the late 
1990s. In the early 2000s, after the court denied the owner's request 
for bankruptcy protection, the owner closed the company and immediately 
established a new business with a similar name at the same address that 
provides the same services; 
* The owner rents office space in an expensive area of a major 
metropolitan city and purchased a luxury automobile at the same time 
the company had filed for bankruptcy protection and was not remitting 
all of the payroll taxes. 

Case study: 6; Goods, services, or nature of work and agencies to which 
they were provided: Health care related services to Department of 
Veterans Affairs; 
Fiscal year 2004 FMS payments[A]: Nearly $300,000; 
Unpaid federal tax amount[B]: Over $10 million; 
Comments: 
* The company's delinquent taxes--primarily payroll taxes--cover 20 tax 
periods from the late 1990s; 
* IRS is investigating the company for potential criminal activity; 
* Since failing to pay payroll taxes in late 1990s, an officer assessed 
a trust fund violation purchased several vehicles totaling nearly 
$200,000; 
* Since the late 1990s, the company reported cumulative losses on its 
tax returns totaling about $5 million; 
* Despite these continued losses and accumulated tax debt, the company 
is involved in a multimillion-dollar joint venture. 

Case study: 7; Goods, services, or nature of work and agencies to which 
they were provided: Security guard services to Departments of Homeland 
Security and Veterans Affairs; 
Fiscal year 2004 FMS payments[A]: Over $200,000; 
Unpaid federal tax amount[B]: Over $400,000; 
Comments: 
* The company had not filed all required tax returns since the early 
2000s, and had been delinquent in payroll taxes almost continuously 
since the late 1990s; 
* Delinquent tax debts cover over 25 tax periods and include the 
owner's individual income taxes totaling tens of thousands of dollars. 
In addition, the owner repeatedly failed to file personal income tax 
returns; 
* The owner diverted unpaid payroll taxes to a foreign bank account to 
build a house overseas. 

Case study: 8; Goods, services, or nature of work and agencies to which 
they were provided: Consulting services to the Smithsonian Institution; 
Fiscal year 2004 FMS payments[A]: Over $200,000; 
Unpaid federal tax amount[B]: Over $1 million; 
Comments: 
* The business's unpaid federal taxes are primarily payroll taxes 
incurred in late 1990s and early 2000; 
* Unpaid tax debt balance covers more than 20 tax periods and includes 
hundreds of thousands of dollars in individual income tax debts owed by 
two officers; 
* During the same period that tax debt was incurred, the company 
declared large losses but doubled the salary of one officer to over 
three-quarters of a million dollars; 
* Officers own several luxury vehicles and multimillion-dollar 
properties in exclusive areas of a major metropolitan area; 
* The company is making payments on current installment agreement. 

Case study: 9; Goods, services, or nature of work and agencies to which 
they were provided: Armed security guard services to several agencies 
including the Department of Justice and the Environmental Protection 
Agency; 
Fiscal year 2004 FMS payments[A]: About $500,000; 
Unpaid federal tax amount[B]: Nearly $400,000; 
Comments: 
* Tax debt balance includes over $200,000 in payroll taxes owed for 
almost 10 tax periods; 
* In the early 2000s, company did not file income tax returns; 
* In mid-2000s, an officer of the company was convicted for stealing 
hundreds of thousands of dollars from the company; 
* The owner is under indictment for embezzlement and money laundering. 

Case study: 10; Goods, services, or nature of work and agencies to 
which they were provided: Building maintenance, lawn and garden, and 
sanitary services to Department of Transportation; 
Fiscal year 2004 FMS payments[A]: Over $300,000; 
Unpaid federal tax amount[B]: Nearly $400,000; 
Comments: 
* This business did not make any payroll tax deposits for several years 
from the late 1990s through the early 2000s; 
* Tax debt balance covers more than 30 tax periods and includes nearly 
$100,000 in personal tax debt of the officer; 
* The company is a chronic nonpayer of corporate tax debts and has not 
made any voluntary income tax payments since the mid-1990s; 
* The officer is also a chronic nonfiler of his individual income 
taxes. In one of those years, the officer reported net income of about 
$100,000 but paid no taxes. 

Source: GAO analysis of civilian agency, IRS, FMS, public, and other 
records. 

Notes: Dollar amounts are rounded for the tax debt, estimated maximum 
levy, and government payments. The nature of unpaid taxes for 
businesses was primarily due to unpaid payroll taxes. 

[A] Civilian agency vendor payments provided by FMS from its PACER 
system. 

[B] Unpaid tax amount as of September 30, 2004. 

[End of table]

The following provides illustrative detailed information on several of 
these cases. 

* Case 1: This case includes many related companies that provide health 
care services to the Department of Veterans Affairs, for which they 
received over $300,000 in payments during fiscal year 2004. The related 
companies have different names, operate in a number of different 
locations, and use at least several other TINs. However, they share a 
common owner and contact address. The businesses collectively owed more 
than $18 million in tax debts--of which nearly $17 million is unpaid 
federal payroll taxes dating back to the mid-1990s. IRS has assessed a 
multimillion-dollar trust fund penalty for willful failure to remit 
payroll taxes on each of two officers. During the early 2000s, at the 
time when the owner's business and related companies were still 
incurring payroll tax debts, the owner purchased a number of 
multimillion-dollar properties, an unrelated business, and a number of 
luxury vehicles. Our investigation also determined that real estate 
holdings registered to the owner totaled more than $30 million. 

* Case 2: This case comprises a number of related entities, all of 
which provide waste collection and recycling services. These entities 
received fiscal year 2004 payments from the Department of Justice 
totaling over $700,000, about half of which is from purchase card 
payments, while owing in aggregate over $2 million in tax debt. These 
taxes date to the late 1990s and consist primarily of payroll taxes. 
Despite the fact that the company reportedly used legally available 
means to repeatedly block federal efforts to file liens against the 
company, liens totaling more than $1 million exist against the company. 
IRS has also assessed trust fund penalties against the two officers. At 
the same time that the entities were incurring the tax debt, cash 
withdrawals totaling millions of dollars were made against the 
business's bank account. Further, since the company started owing 
taxes, the owner had sold real estate valued at over $1 million. The 
executives of these entities also drive late-model luxury or antique 
automobiles. Recently, the company started to make payments on its 
taxes. 

* Case 3: This case includes several nursing care facilities, three of 
which owed taxes--primarily payroll--totaling nearly $9 million. In 
addition, an owner's individual income tax debt totaled more than 
$400,000. One business provides nursing care services to the Department 
of Veterans Affairs, for which it was paid over $200,000 during fiscal 
year 2004. An officer of the company has been assessed a multimillion- 
dollar trust fund penalty for willful failure to remit payroll taxes 
and was recently arrested on fraud charges. Our investigative work 
indicates that an owner of the company made multiple cash withdrawals, 
each valued at tens of thousands of dollars, in the early 2000s while 
owing payroll taxes, and that those cash withdrawals were used for 
gambling. We further determined that cash transfers totaling over $7 
million were made in a 7-month period in the early 2000s. 

* Case 7: This contractor provided guard and armed security services to 
the Department of Homeland Security and the Department of Veterans 
Affairs, for which it was paid over $200,000 during fiscal year 2004. 
This business has a history of noncompliance with federal tax laws. 
Specifically, the business was consistently delinquent in paying its 
taxes since the late 1990s and has not filed all its income and payroll 
tax returns for a number of years in the late 1990s. The owner of this 
business also has not filed individual income tax returns for a number 
of years since the late 1990s. In the last 1-year period that the 
business made payroll tax deposits, the business reported that it owed 
nearly $80,000 in payroll taxes but made payments totaling less than 
$4,000--about one-twentieth of the taxes owed. At the same time that 
the owner withheld but failed to remit payroll taxes, the owner 
diverted the money into a foreign bank account to build a house 
overseas. 

* Case 8: During fiscal year 2004, this company provided consulting 
services to the Smithsonian Institution, for which it received over 
$200,000. Starting in the late 1990s, the company did not remit to the 
government all the money it withheld from its employees' salaries. 
However, at about the time the company was failing to remit the taxes, 
it nearly doubled one officer's salary to over $750,000. IRS assessed a 
trust fund penalty on the officers of this company for willfully 
failing to remit payroll taxes withheld from their employees' salaries. 
Those officers own homes valued at millions of dollars in exclusive 
neighborhoods in a large metropolitan area and several late-model 
luxury vehicles. 

Contractors Also Had Unpaid State or Local Tax Debt: 

In addition to problems with paying federal taxes, contractors in at 
least 9 of the 10 case studies had unpaid state and or local tax debt. 
We determined that the amount and severity of the unpaid state and or 
local taxes were significant enough for state and local tax authorities 
to file liens against those contractors. As we will be reporting in a 
related product, neither the states nor FMS has pursued potentially 
beneficial agreements to authorize the levying of federal payments, 
including contractor payments, to satisfy delinquent state tax 
debts.[Footnote 62]

Levy Collection: 

The 50 case studies we selected illustrate FMS's inability to collect 
the maximum levy amount. Although we found that payments to a number of 
contractors were not levied because IRS excluded their tax debts from 
TOP for at least a part of fiscal year 2004 for statutory or policy 
reasons, many others were not levied because of FMS's lack of effective 
oversight or proactive management of the levy program. One case study 
contractor in particular illustrated the problems associated with the 
levy program that we discussed earlier in this report. This contractor 
received $4 million during fiscal year 2004, but only about $600,000 of 
those payments were levied. Of the remaining $3.4 million that was not 
levied, about two-thirds was not levied because the tax debt was either 
not referred to TOP or it was referred to TOP but it was still in the 
notice process during the first 7 months of fiscal year 2004. The 
remaining one-third was not levied because the name provided in the 
payment files did not match the IRS control name in TOP or because 
payments were made using one of its specialized mechanisms. We estimate 
that if all the tax debt and all of the payments of the 50 case studies 
were subjected to a levy of 15 percent, FMS could have collected about 
$3.8 million in unpaid federal taxes in fiscal year 2004. In contrast, 
FMS actually collected $240,000 from these case study contractors. 

Conclusions: 

In the current environment of federal deficits and rising obligations, 
the federal government cannot afford to leave hundreds of millions of 
dollars in taxes uncollected each year. However, this is precisely what 
has been occurring with respect to the FPLP, which our work shows has 
largely failed to approach its potential. The levy program has thus far 
been inhibited from achieving its potential primarily because 
substantial tax debt is not subject to levy and because FMS, the 
nation's debt collector, has exercised ineffective oversight and 
management of the program. 

Further, by failing to pay taxes on their income or diverting the 
payroll taxes withheld from their employees' salaries to fund business 
operations or their own personal lifestyles, contractors with unpaid 
tax debts effectively decrease their operating costs. The lower 
operating costs provide these individuals and their companies with an 
unfair competitive advantage over the vast majority of companies that 
pay their fair share of taxes. Federal contractors should be held to a 
higher degree of responsibility to pay their fair share of taxes owed 
because they are being paid by the government, and the failure to 
effectively enforce the tax laws against them encourages noncompliance 
among other contractors as well. The federal government will continue 
to lose hundreds of millions of dollars in tax collections annually 
until actions are taken to send all payments to the levy program, 
ensure that all payments have the information necessary to allow them 
to be levied, and establish a proactive approach toward managing the 
levy program. 

Recommendations for Executive Action: 

To comply with DCIA, further implement the Taxpayer Relief Act, and 
support the federal government's efforts to collect unpaid federal 
taxes, we recommend that the Commissioner of the Financial Management 
Service take the following 18 actions: 

* To obtain reasonable assurance that payments from all paying 
locations are subjected to potential levy in TOP,

* update the TOP database to include payments from all agency paying 
locations in TOP for potential levy and: 

* develop and implement a monitoring process to ensure TOP's list of 
agency paying locations is consistently updated. 

* To obtain reasonable assurance that payment files contain a TIN for 
each payment requiring a TIN,

* enforce requirements that federal agencies must include TINs on all 
payment vouchers submitted to FMS for disbursement or expressly 
indicate that the contractor meets one of the criteria that exempts the 
contractor from providing a TIN and: 

* develop and implement procedures to review payments submitted by 
paying agencies to verify that each payment has either a TIN or a 
certification that the contractor is exempt from providing a TIN. 

* To obtain reasonable assurance that all payment files submitted by 
agencies contain a contractor's name, develop procedures to: 

* evaluate payment files to identify payments with blank or obviously 
inaccurate name fields;

* notify agencies of deficiencies in payment files regarding blank or 
obviously inaccurate name fields;

* collaborate with agencies submitting payment files with blank or 
obviously inaccurate names in the name field, including the State 
Department, to develop and implement procedures to capture the 
contractors' names in the payment files; and: 

* reject agency requests for payments with blank or obviously 
inaccurate names. 

* To obtain reasonable assurance that payment files contain a payment 
type and thus, if appropriate, are subject to a levy,

* instruct all agencies that they must indicate a payment type on all 
payments and: 

* implement monitoring procedures to verify that all payments indicate 
payment type. 

* To obtain reasonable assurance that all categories of eligible 
payments to contractors with unpaid federal taxes are subjected to the 
TOP levy process,

* develop and implement procedures to submit type A payments to TOP for 
potential levy,

* develop and implement procedures to submit ACH-CTX payments to TOP 
for potential levy, and: 

* develop and implement procedures to submit Fedwire payments to TOP 
for potential levy. 

* To collect unpaid taxes of individuals, make changes to TOP to levy 
contractor payments to collect the unpaid federal taxes owed by 
individuals. 

* To ensure that more payments are matched against tax debt in TOP, 
take actions necessary to incorporate IRS's expanded list of control 
names into TOP. 

* To address challenges of collecting unpaid taxes of contractors paid 
using purchase cards, in conjunction with IRS, monitor payments to: 

* assess the extent to which contractors paid with purchase cards owe 
federal taxes and: 

* assess alternatives available to levy or otherwise collect unpaid 
taxes from those contractors. 

* To address challenges associated with implementing the authorized 
increase of the levy to 100 percent, work with IRS to determine steps 
necessary to implement the increased levy percentage. 

Finally, we recommend that the Commissioner of Internal Revenue 
evaluate the 50 referred cases detailed in this report and consider 
whether additional collection action or criminal investigations are 
warranted. 

Agency Comments and Our Evaluation: 

We received written comments on a draft of this report from the 
Commissioner of Internal Revenue (see app. III) and the Commissioner of 
the Financial Management Service (see app. IV). 

Response from IRS and Our Evaluation: 

In responding to a draft of our report, IRS agreed that continued 
efforts are needed to improve and enhance the use of the levy program 
as a tool to deal with contractors that abuse the tax system. IRS noted 
that it had taken or was taking a number of actions toward this goal. 
For example, IRS stated that it had begun, with DOD's assistance, to 
issue collection due process notices to DOD contractors at the time of 
contract award rather than after a contract payment is made, thereby 
allowing IRS to levy more DOD contractor payments without delay. IRS 
stated that it planned to expand this process to contractors at other 
agencies later in 2005. IRS also stated that it is working to change 
its notice process so that more debts can be ready for levy at the time 
of inclusion in TOP. IRS reiterated the progress it has made to remove 
systematic exclusions, resulting in an additional $28 billion in tax 
debts being included in the FPLP, which we noted in our report. These 
actions have resulted in the federal government collecting, in the 
first 7 months of fiscal year 2005, $12.2 million in unpaid tax debts 
from civilian contractors--a nearly threefold increase from the same 
period in fiscal year 2004. IRS further stated that it would 
continuously evaluate its policies so that it does not unnecessarily 
exclude tax debts from the levy program. 

IRS concurred with our finding that the matching of the TIN and name of 
contractor payments against records of unpaid federal taxes could be 
improved, and stated that it will begin sending a greater number of 
control names--up to 10 variations of the contractor's name as recorded 
in IRS's files--to FMS to match against FMS's payment data. IRS also 
stated that it was working to develop a consent-based TIN verification 
system for contractors doing business with the federal government and 
that it anticipated implementation of this system later this year. We 
believe that the completion of these actions can significantly improve 
collections of outstanding federal tax debt through the levy program. 

With respect to the report's recommendations, IRS agreed to work with 
FMS and other agencies through the Federal Contractor Tax Compliance 
Task Force (FCTC) to conduct further analysis of the significant 
challenge presented by contractors paid with purchase cards. IRS also 
stated that as of April 2005, the 100 percent levy provision had been 
implemented with respect to DOD contractors paid through DOD's largest 
payment system, and that IRS was working with Treasury on a technical 
correction to allow the 100 percent levy on all federal contractors. 
Finally, IRS agreed with our recommendation to review the 50 
contractors discussed in our report to determine what additional 
actions are warranted. 

Response from FMS and Our Evaluation: 

In its response to a draft of our report, FMS generally agreed with 
many of our findings and recommendations. However, FMS stated that we 
mischaracterized its role in the levy process, and that primary 
responsibility rests with IRS. FMS also did not concur with our 
conclusions that its oversight and management of the program were 
ineffective. Additionally, FMS disagreed that it had not fully 
implemented the legislatively authorized increase in the maximum amount 
of contractor payments subject to levy. FMS also stated that it 
disagreed with our recommendation that it withhold payments that do not 
include a valid name and stated that it was not in a position to 
implement our recommendations with respect to working with IRS 
regarding issues associated with collecting outstanding federal tax 
debt from purchase card payments. Finally, FMS stated that the numbers 
and potential levy collection amounts presented in the report were 
confusing and could be misleading. 

We do not believe we mischaracterized FMS's role in the levy process. 
On its Web site, FMS states that it "serves as the government's central 
debt collection agency, managing the government's delinquent debt 
portfolio." In our opinion, the agency that is responsible for managing 
the government's delinquent debt portfolio needs to do so in a 
proactive manner, which we did not always find to be the case. While we 
agree that IRS has a key role in the levy process, many of the issues 
in our report touch at the heart of FMS's debt collection 
responsibilities and most of the weaknesses and challenges discussed in 
this report can only be addressed by FMS. For example, it was FMS that 
did not send billions of dollars of payments to the levy program 
because it had no monitoring mechanism in place to determine that over 
100 agency paying locations created since the late 1990s were not 
included in the levy program. Further, it was FMS that did not identify 
and inform agencies to correct payment information for tens of billion 
of dollars in payments that did not have the basic information 
necessary for the payments to be matched against outstanding federal 
tax debt for potential levy. These findings form the basis of our 
conclusion that FMS has not exercised effective oversight and 
management of the levy program. 

Despite the issues raised in our report, which FMS did not dispute, it 
disagreed that its management of the program was ineffective. FMS 
pointed to increased collections from the levy program in fiscal years 
2003, 2004, and 2005, to date, as evidence of excellent leadership and 
program management. However, the recent increase in collections in the 
levy program is primarily the result of actions stemming from the 
formation of the FCTC, which was created in response to issues we 
raised in our February 2004 report on DOD contractors that abused the 
tax system. Further, the actions that have led to the increased 
collections were taken by DOD and IRS. Finally, while collections have 
increased in the last 3 years, the annual totals to date have not been 
significant given the potential of the program and, in the context of 
the program's 8-year life, the annual increases have come about only 
very recently. 

In its response, FMS stated that it is not normally in a position to 
mandate changes to agencies. We disagree. FMS is in a unique position 
to identify and help correct many of the issues we identified in the 
program, some of which are relatively simple and could be quickly 
addressed. For example, it took the Department of State (State) about a 
month to correct the problem we identified with respect to missing 
names in the payment file it had been submitting to FMS for payment 
once we brought the matter to the department's attention. A programming 
error appears to have resulted in the names not being in the 
disbursement files sent to FMS. According to a State official, the 
department has likely had names of its payment files since the 1980s, 
and it did not know that the names were not getting to FMS. Because of 
State's responsiveness to our finding, FMS is now levying payments from 
State's contractors with unpaid taxes. Had FMS provided effective 
oversight and management of the debt collection program, it could have 
detected the problem years ago and worked with the State Department to 
correct it long before our audit. While we agree that agencies should 
be responsible for the completeness and accuracy of the payment files 
they send to FMS, we believe FMS should take a more proactive role in 
identifying issues that impede the program's ability to maximize 
collections and work with agencies to resolve such issues. 

In responding to our report, FMS disagreed with our conclusion that it 
had not implemented the provision of the American Jobs Creation Act of 
2004 authorizing an increase in the maximum amount of contractor 
payments subject to levy of up to 100 percent. FMS noted that it had 
made the changes necessary in the levy program to allow for levying at 
100 percent, but that it was unable to implement the provision because 
civilian agencies' payment records do not separately identify real 
estate transactions--which are not subject to the 100 percent levy-- 
from other contractor payments. Our report clearly indicates that the 
100 percent levy provision had not yet been fully implemented because 
of a number of challenges, including the determination by IRS that real 
estate transactions are not subject to the 100 percent levy provision, 
and that agency pay systems are presently unable to identify real 
estate transactions from other contractor payments. We also 
acknowledged in our report that a legislative change is being sought to 
subject real estate payments to the 100 percent levy provision. Our 
report describes this issue not as a weakness in the program but, 
rather, as another challenge that FMS faces in maximizing collections 
under the levy program. Our report also acknowledges that certain DOD 
payments are already being levied at the 100 percent maximum. 

FMS also did not concur with our recommendation to withhold payments 
that do not include a valid name in the payment record. However, FMS 
said it would improve monitoring and ensure agencies' compliance with 
the requirement to include names, TINs, and payment types on certified 
vouchers. This is in line with our recommendation, and we commend FMS 
for its willingness to increase efforts to enforce the requirements. As 
the State Department's prompt response to our findings indicates, when 
weaknesses are identified, such as records without payee names, 
agencies can take corrective actions, thereby making it unnecessary to 
withhold payments. However, FMS has had many years to require agencies 
to improve the data in their payment records but has, until now, not 
done so. As we point out in the report, in 1997 FMS proposed a rule 
that would require disbursing officials to reject agency payment 
requests that do not contain TINs (that is, withhold the payment), yet 
later rescinded the proposed rule and instead required agencies to 
submit to FMS implementation plans to achieve compliance with the TIN 
requirement. Although FMS requested the implementation plans in 1997, 
it has not been successful in gaining agency compliance. We believe 
that if FMS had been more proactive, the intervening years since 1997 
would have provided FMS and the agencies ample opportunities to take 
corrective action. As such, we continue to believe FMS needs to take 
stronger leadership in enforcing the requirements with respect to the 
completeness and accuracy of information in agency-submitted payment 
files. 

In its response, FMS accurately summarizes some of the challenges that 
we described in the draft report regarding levying government purchase 
card payments. These challenges are precisely why we recommended that 
FMS work with IRS and arrive at a solution to subjecting to potential 
levy or other form of collection the roughly $10 billion in annual 
purchase card payments made to civilian agency contractors. However, 
FMS suggested that we instead redirect the recommendation to have GSA 
work with IRS. In addition, FMS pointed out that the FCTC could also 
provide valuable assistance in determining the most efficient and 
effective means of addressing contractors that have unpaid taxes and 
are being paid via government purchase cards. While we agree that GSA 
could assist FMS and IRS with this challenge, at the same time, we 
believe that as the government's central debt collector, FMS should 
assume a leadership role in emerging issues such as the rise in 
purchase card payments, as it has significant implications with respect 
to its debt collection responsibilities. In our opinion, FMS is the 
only federal entity with the ability to identify which contractors that 
are receiving federal payments have leviable tax debt. This is a role 
FMS plays when it compares the TIN and the name on FMS payments to the 
list of contractors with unpaid taxes to determine whether the payment 
should be levied. If FMS worked with the five banks that currently 
issue government purchase cards to routinely obtain electronic files 
listing the contractors being paid with purchase cards, FMS could 
determine which government contractors that are paid with a government 
purchase card have unpaid taxes. Consequently, we continue to believe 
that FMS, in conjunction with IRS, would be in the best position to 
monitor purchase card payments and assess the extent to which 
contractors paid with purchase cards have unpaid federal taxes, and 
then to identify solutions to the challenges presented by purchase card 
payments. 

Finally, in its response, FMS stated that the numbers and potential 
levy collection amounts presented in the report are confusing and 
potentially misleading. Specifically, FMS stated that our reporting of 
the levy collection gap of $350 million was misleading as it suggested 
that FMS would be able to collect that amount through the levy program. 
In our report, we have taken care to clearly note that the levy 
collection gap is an indicator of the amount of tax debt civilian 
contractors owe that could be levied from the payments they get from 
the federal government if all payments for which we have information 
could be levied against all outstanding federal tax debt. We further 
note throughout the report that because some tax debts are excluded due 
to specific statutory requirements, IRS and FMS are presently 
restricted by law from collecting a significant portion of this 
estimated amount. We do, however, clearly identify that a portion of 
the levy collection gap--at least $50 million--that is directly 
attributable to weaknesses in internal controls and lack of proactive 
management at FMS. This amount is understated due to the unavailability 
of Fedwire information at FMS and because we were unable to estimate 
collections against many payments that did not contain valid TINs and 
payment types. FMS's response does not recognize that although IRS has 
a key responsibility to refer tax debts, FMS has an equally key 
responsibility--to make all payments available for levy. 

As agreed with your offices, unless you announce the contents of this 
report earlier, we will not distribute it until 30 days after its date. 
At that time, we will send copies to the Secretary of the Treasury, the 
Commissioner of the Financial Management Service, the Commissioner of 
Internal Revenue, and interested congressional committees and members. 
We will also make copies available to others upon request. In addition, 
this report will be available at no charge on the GAO Web site at 
[Hyperlink, http://www.gao.gov]. 

Please contact Gregory D. Kutz at (202) 512-9095 or [Hyperlink, 
kutzg@gao.gov] or Steven J. Sebastian at (202) 512-3406 or [Hyperlink, 
sebastians@gao.gov] if you or your staff have any questions concerning 
this report. Contact points for our Offices of Congressional Relations 
and Public Affairs may be found on the last page of this report. GAO 
staff who made major contributions to this report are listed in 
appendix V. 

Signed by: 

Gregory D. Kutz: 
Managing Director: 
Forensic Audits and Special Investigations: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

List of Requesters: 

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Norm Coleman: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Permanent Subcommittee on Investigations: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Daniel K. Akaka: 
Ranking Minority Member: 
Subcommittee on Oversight of Government Management, the Federal 
Workforce, and the District of Columbia: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

To identify the magnitude of unpaid taxes owed by contractors receiving 
payments from federal agencies disbursed by the Financial Management 
Service (FMS), we obtained information from both the Internal Revenue 
Service (IRS) and FMS. To identify taxes owed, we obtained IRS's unpaid 
assessment database as of September 30, 2004. To identify disbursements 
FMS made to contractors, we obtained from FMS extracts of the Payments, 
Claims, and Enhanced Reconciliation (PACER) database containing data on 
payments FMS made to contractors via Automated Clearing House (ACH) and 
by check during fiscal year 2004. PACER contains information such as 
payee and payment amount for disbursements FMS makes on behalf of 
federal agencies.[Footnote 63] To determine the amount of levies that 
have been collected and the amount of tax debt that has been referred 
to the Treasury Offset Program (TOP), we obtained from FMS the TOP 
database as of September 30, 2004. As discussed later in this appendix, 
we first performed work to assess the reliability of the data provided. 

To determine the value of unpaid taxes owed by contractors, we matched 
PACER disbursements coded as "vendor" to the IRS unpaid assessment 
database using the tax identification number (TIN) field in both 
databases. This match resulted in the identification of about 63,000 
contractors with more than $5.4 billion in unpaid federal taxes. To 
avoid overestimating the amount owed by contractors with unpaid tax 
debts and to capture only significant tax debts, we excluded from our 
analysis tax debts and payments meeting specific criteria to establish 
a minimum threshold in the amount of tax debt and in the amount of 
payments to be considered when determining whether a tax debt is 
significant. The criteria we used to exclude tax debts and payments are 
as follows: 

* tax debts that IRS classified as compliance assessments or memo 
accounts for financial reporting,

* tax debts from calendar year 2004 tax periods,

* contractors with total unpaid taxes of $100 or less, and: 

* contractors with cumulative fiscal year 2004 payments of $100 or 
less. 

The criteria above were used to exclude tax debts that might be under 
dispute or generally duplicative or invalid, tax debts that are 
recently incurred, and tax debts and payments that are insignificant 
for the Federal Payment Levy Program (FPLP). Specifically, compliance 
assessments or memo accounts were excluded because these taxes have 
neither been agreed to by the taxpayers nor affirmed by the court, or 
these taxes could be invalid or duplicative of other taxes already 
reported. We excluded calendar year 2004 tax debts to eliminate tax 
debt that may involve matters that are routinely resolved between the 
taxpayer and IRS, with the taxes paid or abated[Footnote 64] within a 
short period. We further excluded tax debts and cumulative fiscal year 
2004 payments of $100 or less because they are insignificant for the 
purpose of calculating potential levy collection. Using the above 
criteria, we identified about 33,000 contractors with over $3.3 billion 
in unpaid taxes as of September 30, 2004. 

To determine the potential fiscal year 2004 levy collections, we used 
15 percent of the payment or total tax debt amount, whichever is less. 
Our analysis was performed as if (1) all unpaid federal taxes were 
referred to FMS for inclusion in the TOP database and (2) all fiscal 
year 2004 disbursements for which FMS maintained detailed 
information[Footnote 65] were included in TOP for potential levy. 
Because some tax debts are excluded from the FPLP due to statutory 
exclusions, a gap will continue to exist between what could be 
collected and the maximum levy amount calculated. However, as discussed 
in the body of the report, the potential levy collection amount of $350 
million may be understated because we excluded, by design, specific tax 
debts and payment amounts from the calculation of levy, and missing 
data in FMS's disbursement information prevented us from providing the 
full magnitude of tax debts and potential levy collection. The American 
Jobs Creation Act of 2004 provided for a 100 percent levy on vendor 
payments for goods or services sold or leased to the federal 
government, effective October 2004. If unpaid tax debts and payments to 
contractors in future years remain consistent with fiscal year 2004 
patterns, we determined a potential future levy amount based on a levy 
ratio of 100 percent of payments or total tax debt amount, whichever is 
less. 

To determine the effect of IRS and FMS policies and procedures on the 
amounts actually collected through the FPLP, we conducted work at both 
agencies related to their respective roles in the implementation of the 
FPLP. At IRS, we interviewed agency officials and obtained 
documentation that detailed the statutory requirements and policy and 
administrative decisions that exclude certain tax debts from the FPLP. 
We did not evaluate the accuracy and reasonableness of these 
exclusions, which will be examined in detail in a later report. At FMS, 
we reviewed documentation and interviewed agency officials to obtain an 
understanding of FMS's FPLP policies, implementing guidance, operating 
procedures, and internal controls related to the TOP and disbursement 
operations. We also visited the San Francisco Regional Finance Center 
where we observed work flow processes. We obtained a copy of the TOP 
database as of September 30, 2004. The TOP database contains all debt, 
including tax debt, referred to it by federal agencies, including IRS. 
FMS uses the TOP database for levying contractor payments. As discussed 
later, we performed work to assess the reliability of data in TOP. 

To identify payments to contractors disbursed through the government 
purchase card, we obtained from the Bank of America the database of 
purchase card payments made by the National Aeronautics and Space 
Administration (NASA). We reconciled control totals for this data with 
Bank of America and the General Services Administration. We restricted 
purchase card data to one agency to demonstrate the magnitude and 
effect of issues surrounding levying purchase card payments. 

To identify indications of abuse or potential criminal activity, we 
selected 50 civilian contractors for a detailed audit and 
investigation. The 50 contractors were chosen using a nonprobability 
selection approach based on our judgment, data mining, and a number of 
other criteria. Specifically, we narrowed the 33,000 contractors with 
unpaid taxes based on the amount of unpaid taxes, number of unpaid tax 
periods, amount of FMS payments, indications that owner(s) might be 
involved in multiple companies with tax debts, and representation of 
these contractors across government. We specifically included 
contractors from NASA[Footnote 66] and the Departments of Homeland 
Security (Transportation Security Administration), Justice, 
State,[Footnote 67] and Veterans Affairs. These agencies were selected 
based on a number of criteria: national security concerns; amount of 
payments to contractors, especially those with tax debts; amount of 
payments made without TINs, names, or both; amount of levy collected; 
and amount of payments made with blank pay types. The reliability of 
TINs and contractor names, and whether the agencies' payment systems 
are sufficiently integrated to maximize levy collection, will also be 
covered in later work. 

We obtained copies of automated tax transcripts and other tax records 
(e.g., revenue officer's notes) from IRS as of December 2004 and 
reviewed these records to exclude contractors that had recently paid 
off their unpaid tax balances and considered other factors before 
reducing the number of businesses to 50 case studies. We performed 
additional searches of criminal, financial, and public records. In 
cases where record searches and IRS tax transcripts indicate that the 
owners or officers of a business are involved in other related 
entities[Footnote 68] that have unpaid federal taxes, we performed 
detailed audit and investigation on the related entities and the 
owner(s) or officer(s), and not just the original business we 
identified. In instances where related entities exist, we defined a 
case study to include all the related entities, and reported on the 
combined unpaid taxes and combined fiscal year 2004 payments for the 
original business and all the related entities. We identified civilian 
agency contract awards using the Federal Procurement Data System. Our 
investigators contacted some contractors and performed interviews. 

In addition, while assessing the reliability of the data provided by 
FMS, we identified nearly $17 billion in payments that contain either 
no TIN or an obviously inaccurate TIN.[Footnote 69] To determine 
whether contractors with no TINs or obviously inaccurate TINs had tax 
debts, we used investigative techniques to identify some of those 
contractors' TINs and, through comparison with the IRS records of 
unpaid taxes, we determined whether those contractors owed tax debts. 

On May 9, 2005, we requested comments on a draft of comments on a draft 
of this report from the Commissioner for Internal Revenue or his 
designee and from the Commissioner of the Financial Management Service 
or his designee. We received written comments from Commissioner of 
Internal Revenue dated May 27, 2005, and from the Commissioner of the 
Financial Management Service dated May 25, 2005, and reprinted those 
comments in appendixes III and IV of this report. We conducted our 
audit work from May 2004 through May 2005 in accordance with generally 
accepted government auditing standards, and we performed our 
investigative work in accordance with standards prescribed by the 
President's Council on Integrity and Efficiency. 

Data Reliability Assessment: 

For the IRS database we used, we relied on the work we perform during 
our annual audits of IRS's financial statements. While our financial 
statement audits have identified some data reliability problems 
associated with the coding of some of the fields in IRS's tax records, 
including errors and delays in recording taxpayer information and 
payments, we determined that the data were sufficiently reliable to 
address the report's objectives. Our financial audit procedures, 
including the reconciliation of the value of unpaid taxes recorded in 
IRS's masterfile to IRS's general ledger, identified no material 
differences. 

For PACER and TOP, we interviewed FMS officials responsible for the 
databases and reviewed documentation provided by FMS supporting quality 
reviews performed by FMS on its databases. In addition, we performed 
electronic testing of specific data elements in the databases that we 
used to perform our work. Based on our review of FMS's documents and 
our own testing, we concluded that the data elements used for this 
report are sufficiently reliable for the purpose of this report. In 
instances where we found problems with the data, such as data with 
missing TINs and names, we include those in this report. We also 
compared the PACER data to the President's budget and the TOP data to 
the IRS unpaid assessment file. 

[End of section]

Appendix II: Contractors with Unpaid Federal Taxes: 

Table 3 provides data on 10 detailed case studies. Table 4 provides 
details of the remaining 40 businesses we selected as case studies. As 
with the 10 cases discussed in the body of this report, we also found 
substantial abuse or potentially criminal activity related to the 
federal tax system during our review of these 40 case studies. The case 
studies primarily involve businesses with unpaid payroll taxes, some 
for as many as 35 tax periods. IRS has imposed trust fund penalties for 
willful failure to remit payroll taxes on the officers of 17 of the 40 
case studies. In addition to owing federal taxes, 28 of these 40 case 
study contractors owed sufficient state tax debts to warrant state tax 
authorities to file liens against them. As we have done in the body of 
the report, in instances where the business we selected also had 
related entities, we considered the business and all related entities 
as one case study and reported the civilian agency payments and unpaid 
federal tax amount for all related entities in the table. 

Table 4: Civilian Agency Contractors with Unpaid Federal Taxes: 

Case study: 11; 
Goods, services, or nature of work: Professional and clerical services; 
Agencies making payments: Multiple departments, including the 
Department of Homeland Security (DHS); 
Fiscal year 2004 civilian agency payments: Over $1.5 million; 
Unpaid federal tax amount at 9/30/04: Over $1 million; 
Comments: 
* Filed multiple tax returns late. For several years in the early 
2000s, the company remitted no payroll taxes to IRS; 
* Firm's primary client is the federal government; 
* Has existing contracts in FY 2005 with the federal government; 
* Diverted payroll taxes to fund business due to cash flow problems. 

Case study: 12; 
Goods, services, or nature of work: Consulting service; 
Agencies making payments: Multiple agencies including the Department of 
the Interior (Interior) and the Small Business Administration; 
Fiscal year 2004 civilian agency payments: Over $200,000; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Repeatedly under paid its payroll taxes since the late 1990s and owes 
payroll tax debt for more than 15 tax periods; 
* Officer has mortgages of over $1 million; 
* Has existing contracts in FY 2005 with the federal government. 

Case study: 13; 
Goods, services, or nature of work: Temporary help; 
Agencies making payments: DHS; 
Fiscal year 2004 civilian agency payments: Nearly $50,000; 
Unpaid federal tax amount at 9/30/04: Over $600,000; 
Comments: 
* Several other related entities--one of which is bankrupt--also have 
tax debt; 
* Not in the FPLP because of IRS exclusion policy; 
* Invalid name in payment files, thus levy cannot be taken even if debt 
is unblocked; 
* The owner attempted to negotiate repayment of IRS taxes so owner 
could start a new multimillion-dollar business; 
* FY 2004 maximum levy collections estimated at $7,000. 

Case study: 14; 
Goods, services, or nature of work: Nursing care facilities; 
Agencies making payments: Department of Veterans Affairs (VA); 
Fiscal year 2004 civilian agency payments: Nearly $200,000; 
Unpaid federal tax amount at 9/30/04: Over $4 million; 
Comments: 
* Not in the levy program because of IRS exclusion policy; 
* Joint target of a federal and state criminal investigation for 
fraudulent financial activities; 
* Defaulted on several federal government loans; 
* Millions in trust fund penalties assessed on officer; 
* One of the related entities closed by state due to health code 
violations in 2004; 
* FY 2004 maximum levy collections estimated at over $25,000. 

Case study: 15; 
Goods, services, or nature of work: Building maintenance services; 
Agencies making payments: Multiple departments including Departments of 
Agriculture, Homeland Security, the Interior, the Treasury, and 
Veterans Affairs; 
Fiscal year 2004 civilian agency payments: Over $4 million; 
Unpaid federal tax amount at 9/30/04: Over $700,000; 
Comments: 
* Levy not collected on other payments because name different from IRS 
control name and payments made using specialized payment mechanism not 
submitted to TOP; 
* Payroll tax returns frequently filed late; 
* FY 2004 maximum levy collections estimated at $630,000, compared to 
nearly $100,000 actually collected. 

Case study: 16; 
Goods, services, or nature of work: Moving and storage; 
Agencies making payments: DHS and the Department of State; 
Fiscal year 2004 civilian agency payments: Over $200,000; 
Unpaid federal tax amount at 9/30/04: Nearly $700,000; 
Comments: 
* Not in levy program due to pending appeal against a tax assessment; 
* The owner has a vacation home as well as a primary residence; 
* FY 2004 maximum levy collections estimated at over $33,000. 

Case study: 17; 
Goods, services, or nature of work: Business training and support 
services; 
Agencies making payments: Multiple departments including DHS and the 
Departments of Justice and the Interior; 
Fiscal year 2004 civilian agency payments: Nearly $130,000; 
Unpaid federal tax amount at 9/30/04: Nearly $1.5 million; 
Comments: 
* Business generally did not pay payroll taxes; 
* In the early 2000s, business failed to remit most of taxes owed to 
IRS; 
* Levy of $1,500 collected but payments over $100,000 not levied during 
FY 2004 because the name in the payment database did not match with IRS 
name; 
* FY 2004 maximum levy collections estimated at nearly $20,000. 

Case study: 18; 
Goods, services, or nature of work: Tour services; 
Agencies making payments: DHS; 
Fiscal year 2004 civilian agency payments: Over $20,000; 
Unpaid federal tax amount at 9/30/04: Nearly $800,000; 
Comments: 
* Business frequently did not pay payroll taxes; 
* In the FPLP but no levies collected during FY 2004 because FMS does 
not include the payment category used by the agency in the TOP system; 
* FY 2004 maximum levy collections estimated at $3,000. 

Case study: 19; 
Goods, services, or nature of work: Telecommunications; 
Agencies making payments: DHS; 
Fiscal year 2004 civilian agency payments: Over $400,000; 
Unpaid federal tax amount at 9/30/04: Nearly $300,000; 
Comments: 
* Officers assessed penalties for willful failure to remit payroll 
taxes; 
* Over $1,000 collected from levies in FY 2004, but many payments not 
levied because they had no name or were made via a payment category FMS 
does not include in TOP; 
* FY 2004 maximum levy collections estimated at $60,000. 

Case study: 20; 
Goods, services, or nature of work: Nonprofit social service; 
Agencies making payments: Department of Justice (Justice); 
Fiscal year 2004 civilian agency payments: Over $70,000; 
Unpaid federal tax amount at 9/30/04: Nearly $900,000; 
Comments: 
* Delinquency dates to late 1990s; 
* Owes taxes for more than 20 tax periods; 
* Officers have been assessed more than $200,000 for willful failure to 
remit payroll taxes related to 10 tax periods; 
* Not in the levy program because of IRS exclusion policy and because 
FMS had not included the agency paying location in TOP; 
* FY 2004 maximum levy collections estimated at $11,000. 

Case study: 21; 
Goods, services, or nature of work: Ministry; 
Agencies making payments: Justice; 
Fiscal year 2004 civilian agency payments: Nearly $1.3 million; 
Unpaid federal tax amount at 9/30/04: Over $400,000; 
Comments: 
* Owes on more than 10 tax periods; 
* Typically made partial or no payments on payroll taxes. For example, 
in 2001, withheld about $180,000 from employees but remitted nothing; 
* Over $50,000 collected from levies in FY 2004. However, some periods 
not in TOP due to a pending tax claim; 
* FY 2004 maximum levy collections estimated at nearly $195,000. 

Case study: 22; 
Goods, services, or nature of work: Freight; 
Agencies making payments: Multiple departments including Interior, 
Justice, and Treasury; 
Fiscal year 2004 civilian agency payments: Over $300,000; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Did not file several years of early 2000s tax returns until April 
2004; 
* Did not remit any payroll taxes withheld from employees since early 
2000s; 
* Owes tax debt on more than 20 tax periods; 
* The owner had drug-related criminal activity; 
* Levy started in September 2004, but prior to that no levies collected 
in FY 2004 because of IRS exclusion policy; 
* FY 2004 maximum levy collections estimated at $46,000. 

Case study: 23; 
Goods, services, or nature of work: Court reporter; 
Agencies making payments: Justice; 
Fiscal year 2004 civilian agency payments: Over $25,000; 
Unpaid federal tax amount at 9/30/04: Over $400,000; 
Comments: 
* Consistently owed unpaid payroll taxes from late 1990s through 2002; 
* Consistently reported losses or no income; 
* Two owners assessed hundreds of thousands in penalties for willful 
failure to remit payroll taxes; 
* New installment agreement in 2004, for which $2,000 had been 
received; 
* No levies collected in FY 2004; 
* FY 2004 maximum levy collections estimated at nearly $4,000. 

Case study: 24; 
Goods, services, or nature of work: Aircraft and space parts; 
Agencies making payments: NASA; 
Fiscal year 2004 civilian agency payments: Over $100,000; 
Unpaid federal tax amount at 9/30/04: Nearly $200,000; 
Comments: 
* Owes more than 10 tax periods; 
* Did not pay any IRS payroll taxes withheld from employees for five 
periods; 
* Companies did not file income taxes for several years in the early 
2000s; 
* Over $7,000 collected from levies in FY 2004. Levy less than 
estimated because some tax debt excluded due to IRS exclusion policy; 
* FY 2004 maximum levy collections estimated at nearly $17,000. 

Case study: 25; 
Goods, services, or nature of work: Electro-optic equipment; 
Agencies making payments: DHS and NASA; 
Fiscal year 2004 civilian agency payments: Nearly $700,000; 
Unpaid federal tax amount at 9/30/04: Over $1 million; 
Comments: 
* Withheld more than $500,000 from employees one year in early 2000s 
but remitted less than $50,000 to IRS; 
* Received nearly $900,000 in grants; 
* Payments not levied due to pending installment agreement; 
* FY 2004 maximum levy collections estimated at nearly $105,000. 

Case study: 26; 
Goods, services, or nature of work: Acquisition and financial support; 
Agencies making payments: Multiple departments, including Health and 
Human Services (HHS), Transportation (Transportation), as well as NASA; 
Fiscal year 2004 civilian agency payments: Over $3 million; 
Unpaid federal tax amount at 9/30/04: Nearly $400,000; 
Comments: 
* Not in the levy program because of IRS exclusion policy; 
* Has an existing contract in FY 2005 with the federal government; 
* FY 2004 maximum levy collections estimated at nearly $380,000. 

Case study: 27; 
Goods, services, or nature of work: Computer software; 
Agencies making payments: Multiple agencies including HHS, Justice, 
Treasury, and NASA; 
Fiscal year 2004 civilian agency payments: Over $300,000; 
Unpaid federal tax amount at 9/30/04: Over $50,000; 
Comments: 
* Payments were not levied because of an IRS statutory exclusion; 
* FY 2004 maximum levy collections estimated at $46,000. 

Case study: 28; 
Goods, services, or nature of work: Logistics and engineering services; 
Agencies making payments: Agriculture and NASA; 
Fiscal year 2004 civilian agency payments: Over $650,000; 
Unpaid federal tax amount at 9/30/04: Over $2 million; 
Comments: 
* Payroll taxes owed since early 2000s; 
* Multiple cash withdrawals totaling tens of thousands of dollars each; 
* Penalties were assessed on an officer of the company for failure to 
remit payroll taxes; 
* FY 2004 maximum levy collections estimated at $98,000. 

Case study: 29; 
Goods, services, or nature of work: Casino; 
Agencies making payments: NASA, Interior, and Agriculture; 
Fiscal year 2004 civilian agency payments: Over $35,000; Unpaid federal 
tax amount at 9/ 30/04: Over $1.5 million; 
Comments: 
* Large penalty for intentional disregard for requirement to file 
accurate information returns; 
* Annual net income $6 million to over $30 million over the past 10 
years; 
* One payment not levied because tax debt not turned on for immediate 
levy in TOP; 
* FY 2004 maximum levy collections estimated at $5,000. 

Case study: 30; 
Goods, services, or nature of work: Manufacturing; 
Agencies making payments: NASA (including credit cards); 
Fiscal year 2004 civilian agency payments: More than $600,000, $30,000 
of which is credit card payments; 
Unpaid federal tax amount at 9/30/04: Nearly $200,000; 
Comments: 
* Subsidiary of international defense- related group; 
* Taxes owed mostly interest and penalties; 
* Company noted as having problems with filing tax returns; 
* Levies totaling nearly $6,600 collected, but maximum levy was not 
collected because majority of tax debts were not in TOP; 
* FY 2004 maximum levy collections estimated at nearly $100,000 not 
including amounts paid to contractor via government purchase card. 

Case study: 31; 
Goods, services, or nature of work: Medical doctor; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $180,000; 
Unpaid federal tax amount at 9/30/04: Nearly $700,000; 
Comments: 
* Tax debt dates back to early 1990s; 
* Contractor payments not levied to pay tax debt of individuals; 
* FY 2004 maximum levy collections estimated at $27,000. 

Case study: 32; 
Goods, services, or nature of work: Engineering; 
Agencies making payments: Treasury; 
Fiscal year 2004 civilian agency payments: Over $500,000; 
Unpaid federal tax amount at 9/30/04: Nearly $2 million; 
Comments: 
* Owner did not file personal income tax return for 2 years in early 
2000s; 
* Payments were not levied because of an IRS statutory exclusion; 
* FY 2004 maximum levy collections estimated at $75,000. 

Case study: 33; 
Goods, services, or nature of work: Plumbing, heating, and air 
conditioning; 
Agencies making payments: Multiple departments including Labor, 
Treasury, and VA; 
Fiscal year 2004 civilian agency payments: Over $130,000; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Substantial payments made to IRS in early FY 2005 to settle tax debt; 
* No levies collected in FY 2004 because of IRS exclusion policy; 
* FY 2004 maximum levy collections estimated at nearly $20,000. 

Case study: 34; 
Goods, services, or nature of work: Janitorial; 
Agencies making payments: Agriculture and VA; 
Fiscal year 2004 civilian agency payments: Over $700,000; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Almost all of the taxes owed are unpaid payroll taxes that company 
withheld from employees but failed to remit; 
* No levies collected in FY 2004 because of an installment agreement, 
which is an IRS statutory exclusion; 
* FY 2004 maximum levy collections estimated at $107,000. 

Case study: 35; 
Goods, services, or nature of work: Building construction; 
Agencies making payments: HHS and VA; 
Fiscal year 2004 civilian agency payments: Over $1.5 million; 
Unpaid federal tax amount at 9/30/04: Over $200,000; 
Comments: 
* Payroll taxes owed since the late 1990s; 
* No levies collected in FY 2004 because of a tax claim; 
* FY 2004 maximum levy collections would have completely paid off the 
tax debt. 

Case study: 36; 
Goods, services, or nature of work: Health care services; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $40,000; 
Unpaid federal tax amount at 9/30/04: Nearly $300,000; 
Comments: 
* Bankruptcy filed in late 1990s dismissed prior to 2004; 
* Offer-in-compromise not rejected for 2 years, which resulted in 
payments being excluded from levy program for almost two years; 
* Installment agreement requested immediately after offer-in-compromise 
rejected. No levies collected in FY 2004 because of an installment 
agreement; 
* FY 2004 maximum levy collections estimated at $6,500. 

Case study: 37; 
Goods, services, or nature of work: Public relations; 
Agencies making payments: HHS; 
Fiscal year 2004 civilian agency payments: Nearly $280,000; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Multiple federal and state tax liens and judgments; 
* Unpaid payroll taxes since early 2000s; 
* Officer assessed penalty for willful failure to pay payroll taxes; 
penalty paid in full the year it was assessed; 
* No levies collected in FY 2004; 
* FY 2004 maximum levy collections estimated at nearly $42,000. 

Case study: 38; 
Goods, services, or nature of work: Telecommunications; 
Agencies making payments: Commerce, Treasury, and HHS; 
Fiscal year 2004 civilian agency payments: Over $1 million; 
Unpaid federal tax amount at 9/30/04: Over $300,000; 
Comments: 
* Company owed payroll taxes back to the late 1990s; 
* Over $10,000 collected from levies in FY 2004; 
* FY 2004 maximum levy collections estimated at $211,000. 

Case study: 39; 
Goods, services, or nature of work: Building maintenance; 
Agencies making payments: HHS and State; 
Fiscal year 2004 civilian agency payments: Over $1.1 million; 
Unpaid federal tax amount at 9/30/04: Nearly $1 million; 
Comments: 
* Company owed payroll taxes back to the late 1990s; 
* Defaulted on installment agreement in early 2000s; 
* Company filed an offer-in-compromise with IRS, which IRS rejected; 
* Officers were assessed trust fund penalties for willfully failing to 
pay payroll taxes withheld from employees; 
* About $50,000 collected from levies in FY 2004; 
* FY 2004 maximum levy collections estimated at $176,000. 

Case study: 40; 
Goods, services, or nature of work: Medical, dental, and hospital 
equipment; 
Agencies making payments: Executive Office of the President and 
Agriculture; 
Fiscal year 2004 civilian agency payments: Over $900,000; 
Unpaid federal tax amount at 9/30/04: Nearly $2 million; 
Comments: 
* In the early 2000s, company collected more than $600,000 in payroll 
taxes from employees that were not remitted to IRS; 
* Company filed for bankruptcy in the late 1990s; 
* About $6,000 collected from levies in FY 2004; 
* FY 2004 maximum levy collections estimated at $139,000. 

Case study: 41; 
Goods, services, or nature of work: Health care services; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $60,000; 
Unpaid federal tax amount at 9/30/04: Over $500,000; 
Comments: 
* Payroll taxes owed for almost every period since 2000; 
* In the early 2000s, defaulted on an installment agreement after 10 
months; 
* An officer assessed trust fund penalties for willfully failing to 
remit payroll taxes withheld from employees; 
* No payments levied during FY 2004; 
* FY 2004 maximum levy collections estimated at $10,000. 

Case study: 42; 
Goods, services, or nature of work: Automotive manufacturer; 
Agencies making payments: Agriculture; 
Fiscal year 2004 civilian agency payments: Over $60,000; Unpaid federal 
tax amount at 9/ 30/04: Over $1 million; 
Comments: 
* Contractor in levy program during many months in 2004, but no levy 
was taken because the name did not match with IRS name for levy; 
* FY 2004 maximum levy collections estimated at $10,000. 

Case study: 43; 
Goods, services, or nature of work: Support and managerial services; 
Agencies making payments: Treasury; 
Fiscal year 2004 civilian agency payments: Over $90,000; 
Unpaid federal tax amount at 9/30/04: Nearly $400,000; 
Comments: 
* Business in bankruptcy since late 1990s that was discharged in 2004; 
* No payments levied in FY 2004; 
* FY 2004 maximum levy collections estimated at $14,000. 

Case study: 44; 
Goods, services, or nature of work: Health care services; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $200,000; 
Unpaid federal tax amount at 9/30/04: Nearly $2 million; 
Comments: 
* Payroll taxes owed for taxes in late 1990s and early 2000s; 
* Payments were not levied because the business was in notice status, 
which is an IRS statutory exclusion; 
* FY 2004 maximum levy collections estimated at $31,000. 

Case study: 45; 
Goods, services, or nature of work: Ambulance services; 
Agencies making payments: VA and Agriculture; 
Fiscal year 2004 civilian agency payments: Over $20,000; 
Unpaid federal tax amount at 9/30/04: Over 600,000; 
Comments: 
* Since the late 1990s, the company had annual revenue exceeding $10 
million but repeatedly reported tax losses; 
* Company under bankruptcy protection since early 2000s; 
* No payments levied in FY 2004 due to IRS exclusion policy; 
* FY 2004 maximum levy collections estimated at $3,000. 

Case study: 46; 
Goods, services, or nature of work: Taxi services; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $40,000; 
Unpaid federal tax amount at 9/30/04: Over $600,000; 
Comments: 
* Company in litigation status since the mid-1990s, which prevented any 
payments from being levied; 
* An officer assessed trust fund penalties for willfully failing to pay 
payroll taxes withheld from employees; 
* Officer placed on an installment agreement in 2004; 
* FY 2004 maximum levy collections estimated at $6,000. 

Case study: 47; 
Goods, services, or nature of work: Home health care services; 
Agencies making payments: VA; 
Fiscal year 2004 civilian agency payments: Over $200,000; 
Unpaid federal tax amount at 9/30/04: Nearly $3 million; 
Comments: 
* No payments levied in FY 2004 due to an installment agreement for 
which contractor is making payments; 
* IRS had to construct payroll tax returns for five periods (over 1 
year) because the company did not file quarterly payroll tax returns; 
* FY 2004 maximum levy collections estimated at $31,000. 

Case study: 48; 
Goods, services, or nature of work: Residential care; 
Agencies making payments: Justice; 
Fiscal year 2004 civilian agency payments: Nearly $770,000; 
Unpaid federal tax amount at 9/30/04: Nearly $9 million; 
Comments: 
* Multiple withdrawals of cash from late 1990s to 2001 totaling several 
million dollars; 
* An officer assessed trust fund penalties for willfully failing to 
remit payroll taxes; 
* The agency location code was not in TOP so no levies would have been 
possible; 
* FY 2004 maximum levy collections estimated at $115,000. 

Case study: 49; 
Goods, services, or nature of work: Building maintenance; 
Agencies making payments: Social Security Administration; 
Fiscal year 2004 civilian agency payments: Over $330,000; 
Unpaid federal tax amount at 9/30/04: Over $400,000; 
Comments: 
* Company under bankruptcy protection in 2004; 
* Officers assessed trust fund penalties for willfully failing to remit 
payroll taxes; 
* No payments levied in FY 2004; 
* FY 2004 collections under effective levy estimated at nearly $50,000. 

Case study: 50; 
Goods, services, or nature of work: Special trade contractor; 
Agencies making payments: Justice and Treasury; 
Fiscal year 2004 civilian agency payments: Over $400,000; 
Unpaid federal tax amount at 9/30/04: Over $100,000; 
Comments: 
* Tax debt dated to the late 1990s; 
* Penalty assessed on officers being paid; 
* Business current on installment agreement; 
* FY 2004 maximum levy collections estimated at $65,000. 

Source: GAO analysis of civilian agency, IRS, FMS, public, and other 
records. 

[End of table]

[End of section]

Appendix III: Comments from the Internal Revenue Service: 

DEPARTMENT OF THE TREASURY: 
INTERNAL REVENUE SERVICE: 
COMMISSIONER: 

WASHINGTON, D.C. 20224: 

May 27, 2005: 

Mr. Steven J. Sebastian:
Director, Financial Management and Assurance: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Sebastian: 

We have reviewed your report entitled, "Financial Management: Some 
Civilian Agency Contractors Abuse the Tax System with Little 
Consequence" (GAO-05-637) and agree that we must continue to improve 
and enhance the use of the Federal Payment Levy Program (FPLP) as a 
tool to deal with contractors who abuse the federal tax system. 

We appreciate your acknowledgment of the significant progress we have 
made in the past year to improve the effectiveness of the FPLP. In 
March 2004, the Internal Revenue Service (IRS), Financial Management 
Services (FMS) and the Department of Defense (DOD) established the 
Federal Contractor Tax Compliance Task Force (FCTC) to recommend and 
implement actions to ensure federal contractors pay their taxes and 
that we take appropriate enforcement actions, including levies, to 
collect unpaid taxes. The collaborative efforts of the federal agencies 
represented on the FCTC task force have already resulted in tremendous 
benefits as evidenced by the improved program results. The IRS removed 
many of the systemic exclusions that had prevented tax debts from being 
available for levy through the FPLP. Consequently, as of April 2005, 
$98 billion in tax debts were included in the FPLP, an increase of $28 
billion over the prior year. Total FPLP collections in FY 2005 through 
April exceeded $109 million compared to $50 million during the same 
period of FY 2004. A similar comparison for collections from federal 
contractors shows an even more significant increase --$23 million 
through April 2005 compared to $5.4 million through April 2004. From 
civilian contractors, the subject of your report, we have collected 
$12.2 million in FY 2005 compared to $4.7 million in the same period of 
FY 2004. 

We are pleased with the results to date, and we continue to work with 
FMS and other federal agencies on the FCTC to pursue further 
enhancements to the FPLP. For example, we already have implemented a 
data exchange with the DOD that enables issuance of the Collection Due 
Process (CDP) notice at the time of contract award rather than after a 
contract payment is made. As a result, IRS will be in a position to 
levy an increased number of contractor payments without a delay. We 
plan to expand this process to all federal contractors later this year. 
As you noted, we are working with Treasury on a legislative proposal to 
allow a post-levy CDP process on federal payments to contractors. If 
enacted, this change will further improve our ability to levy earlier 
on an increased number of contractor payments. In addition, we are 
working to change our business tax collection process to combine the 
CDP notice with the final notice making more debts ready for levy at 
the time of inclusion in the Treasury Offset Program (TOP). 

In order to increase the number of name and Taxpayer Identification 
Number (TIN) matches with FMS, in January 2006, the IRS will begin 
sending FMS up to ten additional business control names for each 
account to be matched against payment data. We are also developing a 
consent-based TIN verification system that will require contractors 
interested in doing business with the federal government to consent to 
validation of their name and TIN as a condition of registration in the 
Central Contract Registration (CCR) database. We anticipate 
implementation of this process later this year. 

We agree that the use of purchase cards to pay federal vendors presents 
a significant challenge. As you noted, the purchase card program yields 
significant savings and efficiencies for the government-wide 
procurement system. However, due to the complexity of the purchase card 
payment process, vendors are paid in a manner that prevents the offset 
of other debts, including taxes. We will partner with FMS and the other 
agencies through the FCTC to conduct further analysis of this issue. 

On April 15, 2005, we implemented the recently enacted 100 percent levy 
provision on certain DOD contracts paid through the largest DOD payment 
system. This provision will be implemented with respect to the 
remaining DOD vendor payment systems in July 2005. We are also working 
with Treasury on a technical correction which would allow the 100 
percent levy on payments made to all federal vendors, not only vendors 
of goods and services. We will continue to partner with FMS on full 
implementation of this provision. 

While we have taken significant actions to increase the dollars 
available for levy, as you acknowledge in your report, a substantial 
amount of tax debt ($71 billion) is excluded from the levy program for 
statutory reasons. These excluded debts include those for taxpayers who 
are in bankruptcy, have an installment agreement or have not yet 
received their appeal rights prior to levy. The IRS must continue to 
honor these statutory taxpayer rights as enacted by Congress. Another 
$99 billion is excluded from the levy program due to IRS policy 
including, as an example, tax debts of taxpayers who are experiencing a 
financial hardship. We continuously evaluate these policy exclusions to 
ensure that they are no broader than necessary. 

In response to your recommendation, we are reviewing our case actions 
on the 50 contractor businesses and individuals identified in your 
report and will evaluate what additional actions are warranted. We 
believe the FPLP is an effective automated process for serving tax 
levies and collecting unpaid taxes. We will continue to pursue further 
opportunities to improve the FPLP and deal with contractors who abuse 
the tax system. 

If you have any questions, please contact me or call Brady R. Bennett, 
Director, Collection, Small Business/Self Employed Division at (202) 
283-7660. 

Sincerely,

Signed by: 

Mark W. Everson: 

[End of section]

Appendix IV: Comments from the Financial Management Service: 

DEPARTMENT OF THE TREASURY: 
FINANCIAL MANAGEMENT SERVICE: 
COMMISSIONER: 

WASHINGTON, D.C. 20227: 

May 25, 2005: 

Mr. Steven J. Sebastian:
Director, Financial Management and Assurance: 
U.S. Government Accountability Office:
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Sebastian: 

Thank you for the opportunity to comment on the May 2005 draft audit 
report titled "FINANCIAL MANAGEMENT: Some Civilian Agency Contractors 
Abuse the Tax System with Little Consequence (GAO-05-637)." We 
acknowledge that with any successful program, there are still 
opportunities for improvement. Although I agree with many of the 
recommendations presented in this draft report, I have concerns 
regarding the following aspects of this report. 

1. Management Oversight of the Levy Program: 

I disagree with the draft report's conclusion that the Financial 
Management Service (FMS) has ineffectively managed oversight of the 
levy program. FMS and the Internal Revenue Service (IRS) have very 
successfully implemented a phased-in approach of this program over the 
last several years. Collections increased 49% from FY 2002 (first full 
year of the Levy Program) to FY 2003, and another 27% from FY 2003 to 
FY 2004. Through seven months of FY 2005, FMS has collected over $115 
million in tax debts, more than in any prior full year of this program. 
Much of this success is attributable to the work of the Federal 
Contractor Tax Compliance Task Force (FCTC). The FCTC is a joint task 
force consisting of the IRS, Department of Defense (DOD), Department of 
Justice, General Services Administration (GSA), Office of Management 
and Budget, and FMS. As a result of this task force: (1) more debts 
were loaded into the Treasury Offset Program (TOP) database; (2) more 
debts were made available earlier by the IRS for collection; and (3) 
improvements were made in the accuracy of name and taxpayer 
identification number (TIN) information in the Central Contractor 
Registration (CCR) database. These and other changes will significantly 
contribute to the continued rapid growth of the program. 

In addition, throughout the report, the Government Accountability 
Office (GAO) mischaracterizes FMS' role in the levy process. The 
Federal Payment Levy Program (FPLP) is not exclusively an FMS program. 
It is a program to collect delinquent taxes, the primary responsibility 
for which rests with the IRS. FMS has no statutory role in the 
collection of delinquent tax and has no authority to make 
determinations regarding outstanding tax obligations or the method of 
collecting those obligations. For example, the draft report charges FMS 
with failing to levy vendor payments to collect individual tax debt. 
IRS, which makes all determinations regarding what debts are subject to 
levy, expressly instructed FMS not to levy vendor payments to collect 
individual tax debts, and we have complied with its instructions. 
Accordingly, we have modified our systems to support the requirements 
of IRS. 

I believe that FMS has provided excellent leadership and program 
management to the debt collection program, both non-tax and tax debt. 
Virtually every trend line shows strong increases in collections for 
the past several years. Yet, managing any program is also about making 
choices and determining priorities. FMS has made such choices in 
managing our part of the tax levy program. We have allocated resources 
to the highest management priorities to increase collections, but also 
to ensure that the proper management controls are in place. Further, 
FMS has long been an advocate of legislative or procedural changes that 
would allow agencies to improve their debt collection referrals to us. 
While FMS has demonstrated leadership, we are also not normally in a 
position to mandate changes by agencies or to direct agency resources. 

2. Withholding Payments: 

At this time, I am opposed to GAO's recommendation to withhold 
payments. Instead, we plan to work with Federal Program Agencies (FPAs) 
on improving compliance before we consider rejecting payments. As the 
Government's chief disbursing office, FMS ensures that certified 
payments submitted to FMS are disbursed timely and accurately. Pursuant 
to 31 U.S.C. 3528, it is certifying officials at the FPAs who are 
responsible for the information (name, TIN, payment type) on the 
payment voucher and for ensuring that the payment is legally 
authorized. 

Rather than withholding payments that do not include names, which could 
unduly interfere with the timely disbursement of federal funds to 
thousands of contractors who do not owe tax debts, we believe a better 
approach is to increase our efforts to monitor and ensure agencies' 
compliance with the requirement to include names, TINS, and payment 
types on certified vouchers. Within the next week, FMS will be sending 
a letter to all Chief Financial Officers enlisting their support in 
this endeavor. It is our view that this approach will most effectively 
address any underlying barriers to agency compliance. Withholding 
payments should only be considered as a last resort. We therefore plan 
to evaluate this approach over the next year and, at the end of that 
time, determine whether withholding payments is warranted. 

3. Implementing 100% Levy for Vendor Payments: 

I disagree with the draft report's conclusion that we failed to 
implement 100% levy as authorized in the American Jobs Creation Act of 
2004, enacted October 2004. In November 2004 FMS made the programming 
changes and was fully prepared to implement the 100 percent levy based 
on its existing vendor payment guidance to the agencies. Subsequently, 
in review of the statute, IRS determined that Treasury could not fully 
implement this new version of the law without revisions. Where the law 
could be implemented, FMS, IRS, and DOD have done so, effective April 
29, 2005. Since then, DOD reports that on the two files they matched 
with FMS for 100 percent levy, it collected $432,000 as compared to 
$100,000 that it would have collected at 15 percent. 

4. Government Purchase Card Program: 

I agree with GAO's concern that the government purchase card program 
does not facilitate tax levy of payments to contractors. It is my view, 
however, that the GAO recommendations should be redirected to GSA and 
IRS. In addition, the FCTC could provide valuable assistance in 
determining the most efficient and effective means of addressing 
vendors who have unpaid taxes and are paid via the government purchase 
card. 

The FPLP model does not work for credit cards. When a purchase is made 
using a purchase card, there is no point in the process where FMS has 
in its possession property belonging to the vendor. IRS levies FMS to 
collect from payments disbursed by FMS or an authorized disbursement 
officer. Credit card payments to vendors are not processed through FMS 
or an authorized disbursement official. Because FMS does not issue 
payments to contractors paid with purchase cards, or have information 
regarding which vendors are receiving purchase card payments, FMS is 
not in a position to implement the recommendations. 

5. Misleading and Confusing Amounts in the Draft Report: 

Throughout the draft report there is a confusing mix of numbers. At 
some points the draft report discusses the overall tax gap, at other 
points the report discusses taxes that might be collectible by tax levy 
and at other times the report discusses amounts that might be 
collectible by tax levy from contractors. In addition, GAO provides 
estimates of the amount that FMS could have potentially collected 
compared to what was actually collected even though it is clear that 
the "potential" amount was not sent to us for levy in the first place. 
For example, on page 26 of the report, GAO states: "We estimate that if 
there were no legal or administrative provisions that remove some tax 
debt from the levy program and if all PACER contractor payments were 
subjected to a 15 percent levy .., FMS could have collected as much as 
$350 million in fiscal year 2004." In the next paragraph, GAO goes on 
to say: "We found that a vast majority of the collection gap is 
attributable to debts that because of current law and IRS policies, are 
excluded from TOP." I believe that on one hand suggesting that FMS 
could have collected $350 million in fiscal year 2004 and then later 
acknowledging that most of the debts to realize that amount of 
collections were not sent to FMS for levy because of current law and 
IRS policies is misleading. There are other similar instances in the 
report of GAO showing large hypothetical or potential tax levy amounts 
only to later state that only a small percentage was available to FMS 
for levy purposes. While I recognize that GAO wants to portray the full 
dimensions of the tax gap and the use of tax levy in narrowing that 
gap, I believe that indicating that FMS could collect large amounts 
from tax levy except for certain constraints gives an overall 
impression that FMS has the authority to remove those constraints even 
though that is not normally true. 

Thank you for the opportunity to comment on this draft GAO report. If 
you have any questions or wish to discuss these comments in more 
detail, I can be reached on (202) 874-7000, or you may contact Marty 
Mills on (202) 874-3810 or Judy Tillman on (202) 874-6780. 

Sincerely,

Signed by: 

Richard L. Gregg: 

cc: Donald V. Hammond: 
Fiscal Assistant Secretary: 
U.S. Department of the Treasury: 

[End of section]

Appendix V: Staff Acknowledgments: 

Acknowledgments: 

The following individuals made major contributions to this report: 
Beverly Burke, Ray Bush, Richard Cambosos, William Cordrey, Francine 
Delvecchio, F. Abe Dymond, Paul Foderaro, Alison Heafitz, Kenneth Hill, 
Aaron Holling, Jason Kelly, John Kelly, Rich Larsen, Tram Le, Mai 
Nguyen, Kristen Plungas, Rick Riskie, John Ryan, David Shoemaker, Sid 
Schwartz, Esther Tepper, Tuyet-Quan Thai, Wayne Turowski, Matt Valenta, 
Scott Wrightson, and Mark Yoder. 

(192152): 

FOOTNOTES

[1] These data were released to the public as part of a National 
Research Program sample of 46,000 individual tax returns for calendar 
year 2001. The tax gap amount also includes an estimate for corporate 
tax debt based on IRS's 1988 compliance research. 

[2] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 
12, 2004). 

[3] GAO, Financial Management: Some DOD Contractors Abuse the Federal 
Tax System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb. 
12, 2004). 

[4] We considered activity to be abusive when a contractor's actions or 
inactions, though not illegal, took advantage of the existing tax 
enforcement and administration system to avoid fulfilling federal tax 
obligations and were deficient or improper when compared with behavior 
that a prudent person would consider reasonable. 

[5] We characterized as potentially criminal any activity related to 
federal tax liability that may be a crime under a specific provision of 
the Internal Revenue Code. Depending on the potential penalty provided 
by statute, the activity could be a felony (punishable by imprisonment 
of more than 1 year) or a misdemeanor (punishable by imprisonment of 1 
year or less). 

[6] Payroll taxes are amounts that businesses withheld from employees' 
wages for federal income taxes, Social Security, and Medicare but 
failed to remit to IRS, as well as the related employer matching 
contributions for Social Security and Medicare taxes. 

[7] Levy generically refers to seizure of property to collect a debt. 
For tax debt, it is the legal process by which IRS orders a third party 
(e.g., FMS) to turn over property in its possession (e.g., the federal 
payment) that belongs to the tax debtor named in a notice of levy. 
Overall, the reduction of federal payments to satisfy debt is referred 
to as an offset. 

[8] A TIN is a unique nine-digit identifier assigned to each business 
and individual that files a tax return. For businesses, the employer 
identification number assigned by IRS serves as the TIN. For 
individuals, the Social Security number assigned by the Social Security 
Administration serves as the TIN. 

[9] In instances where our work indicates that the owners or officers 
of the business are involved in other related entities that have unpaid 
federal taxes, we performed detailed audit and investigation on the 
related entities, the owners or officers, and not just the original 
business we identified. In instances where related entities exist, we 
defined a case study to include all the related entities, and reported 
on the combined unpaid taxes and combined fiscal year 2004 payments for 
all the related entities. 

[10] A few civilian agencies, such as the U.S. Postal Service, have 
their own disbursing authority and do their own disbursements. Although 
DOD has its own disbursement authority, some DOD payments are made 
through FMS. 

[11] Additionally, we designated IRS's financial management and systems 
modernization as high-risk areas in 1995. See GAO, High-Risk Series: An 
Overview, GAO/HR-95-1 (Washington, D.C.: February 1995). In 2005, two 
of IRS's high-risk areas--collection of unpaid taxes and earned income 
credit noncompliance--were consolidated to make a single high-risk area 
called enforcement of tax laws. Also in 2005, IRS's high-risk areas of 
business systems modernization and financial management were merged 
into a single high-risk area called business systems modernization. See 
GAO, High-Risk Series, An Update, GAO-05-207 (Washington, D.C.: January 
2005). 

[12] The Treasury agency location code (ALC) is used to identify 
transactions, documents, and reports processed through Treasury by a 
specific accounting point or station, within an agency or bureau of a 
federal department or independent agency. The use of the ALC, also 
referred to as the accounting station symbol, enables Treasury to 
reconcile deposits and disbursements. 

[13] In addition, for certain federal payments, TOP collects child 
support debts and state income tax debts on behalf of the states. 

[14] Taxpayer Relief Act of 1997  1024, 26 U.S.C.  6331(h) (2000). 

[15] Debts are rescinded for a variety of reasons. For example, IRS 
will rescind a debt if the debtor is subject to a bankruptcy stay or if 
other reasons justify the rescission (such as when debt is paid in 
full, compromised, or otherwise satisfied). 

[16] Our initial matches of civilian contractor payments made during 
fiscal year 2004 with IRS tax debt as of September 30, 2004, identified 
about 63,000 contractors that had tax debt totaling $5.4 billion. We 
excluded from our preliminary estimates tax debts that have not been 
agreed to by the tax debtor or affirmed by the court, tax debts from 
calendar year 2004, tax debts of $100 or less, and fiscal year 2004 FMS 
payments of $100 or less. 

[17] This figure represents the potential levy that could be collected 
if there were no legal or administrative impediments, that is, if all 
payments, for which we have information, could be levied against all 
IRS tax debt. This potential amount is likely understated because of 
data limitations in the payment files and other issues, some of which 
are discussed in this report. 

[18] Pub. L. No. 108-357,. 887(a), 118 Stat. 1418, October 22, 2004, 
to be codified at 26 U.S.C.  6331 (h)(3). 

[19] A "tax period" varies by tax type. For example, the tax period for 
payroll and excise taxes is generally one quarter of a year. The 
taxpayer is required to file quarterly returns with IRS for these types 
of taxes, although payment of the taxes occurs throughout the quarter. 
In contrast, for income, corporate, and unemployment taxes, a tax 
period is 1 year. As described later in this report, a case study 
consists in some cases of multiple related entities, some or all of 
which owe tax debts. The number of tax periods and the accumulated tax 
debts we are reporting reflect the accumulated tax periods and tax 
debts of all related entities. 

[20] IRS and FMS cannot collect from payments made to one related 
company to satisfy the unpaid federal taxes of another related company. 

[21] The law further provides that withheld income and employment taxes 
are to be held in a separate bank account considered to be a special 
fund in trust for the federal government. 26 U.S.C.  7512(b). 

[22] 26 U.S.C.  6672. 

[23] 26 U.S.C.  7202. 

[24] 26 U.S.C.  7215 and 26 U.S.C.  7512 (b). 

[25] GAO, Internal Revenue Service: Recommendations to Improve 
Financial and Operational Management, GAO-01-42 (Washington, D.C.: Nov. 
17, 2000); Internal Revenue Service: Composition and Collectibility of 
Unpaid Assessments, GAO/AIMD-99-12 (Washington, D.C.: Oct. 29, 1998); 
and Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty 
Assessments Are Owed, GAO/AIMD/GGD-99-211 (Washington, D.C.: Aug. 2, 
1999). 

[26] Tax period may not always correspond to the age of the tax debt, 
as when a tax form is filed years after the due date or when IRS 
assesses additional taxes to earlier tax periods. 

[27] GAO/AIMD/GGD-99-211. 

[28] The 10-year time may be suspended including for periods during 
which the taxpayer is involved in a collection due process appeal, 
litigation, or a pending offer in compromise or installment agreement. 
As a result, Fig. 3 includes taxes that are for tax periods from more 
than 10 years ago. 

[29] We eliminated from our analysis all tax debt coded by IRS as not 
having been agreed to by the taxpayer (by filing a balance due return) 
or a tax court. For financial reporting, those cases are referred to as 
compliance assessments. 

[30] Abatements are reductions in the amount of taxes owed and can 
occur for a variety of reasons, such as to correct errors made by IRS 
or taxpayers or to provide relief from interest and penalties. 26 
U.S.C.  6404. 

[31] The $3.3 billion shown in our analysis includes only amounts of 
tax debt owed by civilian contractors paid through FMS's PACER 
database. Amounts owed by the owners, officers, or related business 
entities that were not paid through FMS are not included in the $3.3 
billion estimate of tax debt. We include this additional tax debt in 
later discussions of our case study contractors. 

[32] GAO, Financial Audit: IRS's Fiscal Years 2002 and 2001 Financial 
Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002). 

[33] GAO-04-95. 

[34] IRS's 2004 financial statements reported $237 billion in total 
unpaid assessments. IRS eliminates from financial reporting certain tax 
debt, including, among others, TFRP assessed against officers or owners 
of companies to collect the federal taxes withheld by the business from 
their employees but not remitted to the federal government. IRS does 
not report these debts to eliminate double counting both the business 
tax debt and the officer's assessment of those taxes. 

[35] Installment agreements allow for payments on the debt in smaller, 
more manageable amounts. An offer in compromise approved by IRS allows 
a tax debtor to settle unpaid tax debt for less than the full amount 
due. 

[36] According to IRS, financial hardship can be either a statutory 
exclusion (under 26 U.S.C. 6343(e)) or policy exclusion, depending on 
when and who makes the determination. For reporting on the FPLP, IRS 
categorizes hardship cases as policy exclusions. 

[37] GAO-04-95. 

[38] This was done automatically within IRS's tax database based on 
various transaction and status codes. IRS previously blocked all cases 
assigned to its Automated Collection System (ACS) and its field 
collection function. The ACS process consists primarily of telephone 
calls to the tax debtor to arrange for payment. Cases assigned to field 
collections are those for which a revenue officer attempts face-to-face 
contact and collection. Even though unblocked as a group, IRS officials 
who work on ACS and field collection inventories can manually block 
individual cases they are working in order to remove them from the levy 
program. 

[39] The process of sending cases to the levy program is driven by the 
various status codes IRS enters into its tax records--such as codes 
identifying a case as being in bankruptcy or having an installment 
agreement. 

[40] Federal Contractor Tax Compliance Task Force, Report to Senate 
Committee on Governmental Affairs Permanent Subcommittee on 
Investigations (Washington, D.C.: Oct. 26, 2004). 

[41] This estimate is based on all contractor payments recorded in 
PACER during fiscal year 2004 being sent to TOP to be matched against 
the tax debt in TOP as of September 2004. Due to the unavailability of 
information at FMS, our estimate does not include an estimate of the 
amount that could be collected from sending Fedwire payments to TOP. 
Additionally, we were unable to estimate collections against many 
payments because of blank or invalid TIN information in FMS's payment 
records. The estimate of a minimum of $50 million represents our total 
estimate of potential levy collections from civilian contractors less 
FMS's actual collections during fiscal year 2004. 

[42] These stations are generally referred by their Treasury Agency 
Location Code (ALC). The ALC is used to identify transactions, 
documents, and reports processed through Treasury by a specific 
accounting point or station, within an agency or bureau of a federal 
department or independent agency. Using the ALC enables Treasury to 
reconcile deposits and disbursements. 

[43] An FMS official also noted that some of the agency paying stations 
we identified only disbursed categories of payments that FMS does not 
currently submit to the levy program, such as type A and ACH-CTX 
payments. 

[44] GAO, Tax Administration: More Can Be Done to Ensure Federal 
Agencies File Accurate Information Returns. GAO-04-74 (Washington, 
D.C.: Dec. 5, 2003). 

[45] Pub. L. No. 104-134, 110 Stat. 1321-358, April 26, 1996. 

[46] 31 U.S.C.  7701(c) and (d). 

[47] Tabulation is performed for the standard payment types sent 
through the levy program, that is, payments known as type B. Type A 
payments--which are payments that the agency certifies the payment in 
the same file that contains detailed payment information--and Fedwire 
payments are not tabulated or monitored. 

[48] In 1997, Treasury proposed a rule that would require disbursing 
officials to reject agency payment requests that do not contain TINs. 
Upon review of the comments received in response to the proposed rule, 
FMS rescinded the proposed rule, and instead required agencies to 
submit to FMS implementation plans to achieve compliance with the TIN 
requirement. FMS's responsibility includes monitoring payment vouchers 
to ensure that agencies are meeting compliance goals and time frames as 
identified in the implementation reports. 

[49] In addition, we identified numerous payee names that contained 
only a single alphabetic character in the name field. We did not 
include these in our analysis of payments with improper name fields. 

[50] GAO, Tax Administration: Millions of Dollars Could Be Collected If 
IRS Levied More Federal Payments. GAO-01-711 (Washington, D.C.: July 
20, 2001). 

[51] For type B payments, agencies send FMS the certification for the 
payment separately from the detailed payment information. Type A 
payments are payments in which the agency certifies the payment in the 
same file that contains detailed payment information. ACH-CTX payments 
(a specific kind of type B payment) are ones whereby agencies can pay 
multiple invoices to a single contractor using a single ACH-CTX 
payment. Fedwire is a processing system designed for high-dollar, low- 
volume payments that must be received by payees the same day as 
originated by the agency. 

[52] FMS officials could not identify type A or ACH-CTX payments in its 
disbursement databases and therefore could not determine the amount 
disbursed during fiscal year 2004 through type A. Based on data 
provided by FMS on the payment locations that make only type A 
payments, we determined that type A payments totaled at least $15 
billion during fiscal year 2004. This number is understated because a 
number of other locations made both type A and type B payments, but the 
amount of type A payments made by these locations is not estimable. 

[53] This amount does not include $66 billion in certain benefit 
payments. 

[54] The typical payment mechanism involves the certification being 
sent to FMS separately from detailed payment information. This type of 
payment, known as type B, is sent to TOP for levy. 

[55] FMS estimated that it would take about 6 hours of programming and 
1 to 3 days of testing to make changes necessary in one system to send 
type A payments to TOP. FMS officials stated that it could take 
additional programming time to prepare other systems to send type A 
payment information to TOP. However, FMS officials stated they did not 
know what additional programming might be required or the potential 
cost thereof. 

[56] FMS officials stated that they performed a statistical match on 
Fedwire payments for 1 month in 2003. FMS officials stated that because 
few of these Fedwire payments had valid TINs, a small amount would have 
been offset. FMS did not maintain the detailed transactions for this 
statistical match for our review. 

[57] Once a match is made against the TIN in a contractor payment, FMS 
would match the name against all of the control names provided by IRS 
to determine if there is a match for potential levy. 

[58] This estimate is based on all contractor payments recorded in 
PACER during fiscal year 2004 being matched against all contractor tax 
debt as of September 30, 2004. Due to the unavailability of information 
at FMS, our estimate does not include an estimate of the amount that 
could be collected from sending Fedwire payments to TOP. Additionally, 
we were unable to estimate collections against many payments due to 
blank or invalid TIN information in FMS's payment records. 

[59] IRS and FMS cannot collect from payments made to one related 
company to satisfy the unpaid federal taxes of another related company. 

[60] The remaining two case study contractors were either individuals 
or sole proprietorships that filed personal income tax returns. 

[61] Overall, IRS assessed trust fund penalties in 27 of our 50 case 
studies. See app. II for further details. 

[62] GAO, Debt Collection: State and Federal Governments Are Not Taking 
Action to Collect Unpaid Tax Debt through Reciprocal Agreements, GAO- 
05-697R (Washington, D.C.: to be issued). 

[63] PACER data indicated FMS also disbursed about $6 billion on behalf 
of Department of Defense, primarily to health insurance providers. 

[64] Abatements are reductions in the amount of taxes owed and can 
occur for a variety of reasons, such as to correct errors made by IRS 
or taxpayers or to provide relief from interest and penalties. 26 
U.S.C.  6404 (2000). 

[65] As discussed earlier in the report, FMS does not maintain 
historical data on Fedwire payments. 

[66] NASA cases include NASA credit card payments. 

[67] Our ability to identify Department of State (State) contractors 
was significantly limited by the fact that the PACER database did not 
identify the name of any State contractors. Consequently, we identified 
only one State contractor for a case study selection. We were able to 
identify that contractor because the contractor was paid by FMS on 
behalf of (i.e., conducted work for) another agency. 

[68] We define related entities as entities that share common owner(s) 
or officer(s), a common TIN, or a common address. 

[69] We termed obviously inaccurate TINs as those that fail to meet at 
least some of the TIN validation rules. For example, the TIN contained 
all the same digits (e.g., 999999999) or an unusual series of digits 
(e.g., 123456789). 

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