a

GAO

United States Government Accountability Office

Report to Congressional Requesters

June 2005 FINANCIAL 

MANAGEMENT

Thousands of Civilian 

Agency Contractors 

Abuse the Federal Tax 

System with Little 

Consequence

GAO-05-637
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

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. 

Highlights of GAO-05-637, a report to 

congressional requesters 

June 2005

FINANCIAL MANAGEMENT 

Thousands of Civilian Agency 

Contractors Abuse the Federal Tax 

System with Little Consequence 

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 taxes—one 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 others agencies. 

Examples of Abusive and Potentially Criminal Activity 

Business 

Unpaid tax 

amount 

Fiscal year 2004 

FMS payments Contractor activity 

Health care $18 million $300,000 

Purchased multimillion-dollar properties 

while not paying millions in payroll taxes 

Consulting $1 million $200,000 

Doubled salary of one officer/owner to over 

$750,000 while not remitting payroll taxes 

Temporary 

help $900,000 $1 million 

A pattern of nearly 20 years of closing 

businesses with tax debts, opening new 

ones, and incurring more tax debts 

Security $400,000 $200,000 

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. 

GAO’s 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 FMS’s 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. 

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 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 

FMS’s assessment and reiterates 

support for all of its 

recommendations. 
Page i GAO-05-637 Civilian Contractor Tax Abuse

Contents

Letter 1

Results in Brief 4

Background 9

Civilian Contractors Have Billions of Dollars in Unpaid 

Federal Taxes 14

Legal Requirements and IRS Policy Decisions Contribute to the Levy 

Collection Gap 22

Lack of FMS Oversight and Proactive Management Further 

Contribute to the Levy Collection Gap 30

Civilian Agency Contractors Involved in Abusive and Potentially 

Criminal Activity Related to the Federal Tax System 44

Conclusions 54

Recommendations for Executive Action 54

Agency Comments and Our Evaluation 57

Appendixes

Appendix I: Scope and Methodology 64

Appendix II: Contractors with Unpaid Federal Taxes 69

Appendix III: Comments from the Internal Revenue Service 78

Appendix IV: Comments from the Financial Management Service 81

Appendix V: Staff Acknowledgments 85

Tables Table 1: Payments Not Matched against Tax Debts for 

Potential Levy 31

Table 2: Types of Goods and Services Provided by Civilian Agency 

Contractors in Case Studies 45

Table 3: Civilian Agency Contractors with Unpaid Federal 

Taxes 48

Table 4: Civilian Agency Contractors with Unpaid Federal Taxes 69

Figures Figure 1: Levy Process 12

Figure 2: Type of Debt Owed by Civilian Contractors as of 

September 30, 2004 17

Figure 3: Civilian Contractors’ Unpaid Federal Taxes by Tax 

Periods through 2003 by Calendar Year 18

Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005 23

Figure 5: IRS Statutory Exclusions as of April 2005 24
Contents

Page ii GAO-05-637 Civilian Contractor Tax Abuse

Figure 6: IRS’s Policy Exclusions from the Levy Program as of 

April 2005 26

Figure 7: Purchase Card Expenditures by Civilian Agencies—

Fiscal Years 1997-2004 42

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

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Page 1 GAO-05-637 Civilian Contractor Tax Abuse

United States Government Accountability Office

Washington, D.C. 20548

A

June 16, 2005 Letr

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.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.2

 In our report and during a related 

congressional hearing,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 abusive4

 and

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.
Page 2 GAO-05-637 Civilian Contractor Tax Abuse

potentially criminal5 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 

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).
Page 3 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 4 GAO-05-637 Civilian Contractor Tax Abuse

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.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 

levies7

 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.

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.
Page 5 GAO-05-637 Civilian Contractor Tax Abuse

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,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 

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.
Page 6 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 7 GAO-05-637 Civilian Contractor Tax Abuse

Our audit and investigation of 50 case study contractors9 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 

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.
Page 8 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 9 GAO-05-637 Civilian Contractor Tax Abuse

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,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.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.

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).
Page 10 GAO-05-637 Civilian Contractor Tax Abuse

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.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 

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.
Page 11 GAO-05-637 Civilian Contractor Tax Abuse

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.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.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.

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).
Page 12 GAO-05-637 Civilian Contractor Tax Abuse

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.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

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).

Treasury Offset

Program database

(debt data)

IRS Does

payee owe

tax

debt? 

Has IRS

notified

payee of

levy?

Source: GAO.

Federal

agency

FMS

Disbursement

with no levy

Levy

taken on

payment

Payee

IRS

Notified of

levy

Notified of

levy and

receives levy

Debtor

files

No No

Yes Yes

Payment

files

Data match

Payment

information

matched against

debtor file

F NI ANCIAL MANAGEMENT SERVICE

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

DOD

Pay to: John Doe

Amount of Payment

Date

$Amount

0100

1100

0110 0100

1100

0110
Page 13 GAO-05-637 Civilian Contractor Tax Abuse

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 shortterm 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.
Page 14 GAO-05-637 Civilian Contractor Tax Abuse

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, 2004.16 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 2004.17 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 200418 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.

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).
Page 15 GAO-05-637 Civilian Contractor Tax Abuse

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 

period19 to a group of related businesses owing about $13 million for over 

300 tax periods.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.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).22

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.
Page 16 GAO-05-637 Civilian Contractor Tax Abuse

Willful failure to remit payroll taxes is a criminal felony offense23

punishable by imprisonment of not more than 5 years, while the failure to 

properly segregate payroll taxes can be a criminal misdemeanor offense24

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.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.

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).
Page 17 GAO-05-637 Civilian Contractor Tax Abuse

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

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 2000.26

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.

37%

45%

6%

12%

Individual income tax

$0.2 billion

Other tax

$0.4 billion

Payroll taxes

$1.2 billion

Corporate income tax

$1.5 billion

Source: GAO analysis of IRS and FMS data as of September 30, 2004.
Page 18 GAO-05-637 Civilian Contractor Tax Abuse

Figure 3: Civilian Contractors’ Unpaid Federal Taxes by Tax Periods through 2003 by 

Calendar Year

Prompt collection of unpaid taxes is vital because, as our previous work27

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. 28 Consequently, if the contractors owe federal taxes

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. 

46%

33%

5%

16% 2003

$0.5 billion 

Prior to 1990

$0.2 billion

1990-1999

$1.5 billion

2000-2002

$1.1 billion

Source: GAO analysis of IRS and FMS data as of September 30, 2004.
Page 19 GAO-05-637 Civilian Contractor Tax Abuse

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-to29

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 both30 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 

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.
Page 20 GAO-05-637 Civilian Contractor Tax Abuse

contractor. Additionally, we eliminated contractors with tax debt that 

received payments of $100 or less during fiscal year 2004.31

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,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 

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).
Page 21 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 22 GAO-05-637 Civilian Contractor Tax Abuse

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,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 billion34 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.

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.
Page 23 GAO-05-637 Civilian Contractor Tax Abuse

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

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.

37%

37%

26%

In levy program

$98 billion

Policy exclusions

$100 billion

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

Statutory exclusions

$71 billion
Page 24 GAO-05-637 Civilian Contractor Tax Abuse

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)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

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.

38% 24%

28%

10%

Installment or OIC

$20 billion

Other

$7 billion

Notice status

$27 billion

Bankruptcy

$17 billion

Source: GAO analysis of unaudited IRS data as of April 2005.
Page 25 GAO-05-637 Civilian Contractor Tax Abuse

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,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 

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.
Page 26 GAO-05-637 Civilian Contractor Tax Abuse

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

Since our 2004 report on DOD contractors who abuse the tax system,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

37 GAO-04-95.

51%

7%

40%

Tax administration

$7 billion

Other policy exclusions

$40 billion

Hardship

$51 billion

2% Criminal investigation

$2 billion

Source: GAO analysis of unaudited IRS data.
Page 27 GAO-05-637 Civilian Contractor Tax Abuse

being actively pursued by IRS officials for collection (i.e., those excluded 

for tax administration purposes).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.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 

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.
Page 28 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 29 GAO-05-637 Civilian Contractor Tax Abuse

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.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.

40 Federal Contractor Tax Compliance Task Force, Report to Senate Committee on 

Governmental Affairs Permanent Subcommittee on Investigations (Washington, D.C.: 

Oct. 26, 2004).
Page 30 GAO-05-637 Civilian Contractor Tax Abuse

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 2004.41 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.

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. 
Page 31 GAO-05-637 Civilian Contractor Tax Abuse

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

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.

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.

Dollars in billions

Cause of payment not being levied Amount excluded

Payments submitted to TOP that could not be levied

Payments where the agency payment station has not been 

loaded in TOP 

$40

Payments containing blank or obviously inaccurate TINs 17

Payments containing blank or invalid names 4

Payments containing invalid payment types 5

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 paymentsa

)

Unknown amount

Payments to individuals 2
Page 32 GAO-05-637 Civilian Contractor Tax Abuse

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,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

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.
Page 33 GAO-05-637 Civilian Contractor Tax Abuse

stations we identified as being excluded from the levy program.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 program44 because 

payments lacking this information cannot be matched against tax debts. 

The DCIA45 requires executive agencies to obtain TINs from contractors 

and to include TINs on certified payment vouchers, which are submitted to 

Treasury.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 threequarters 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.

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).
Page 34 GAO-05-637 Civilian Contractor Tax Abuse

FMS officials stated that FMS tabulates payment records with obviously 

inaccurate TINs by agency47 to compile a monthly TIN Compliance Report. 

This report is used to monitor agencies that send in payment requests with 

obviously inaccurate TINs.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.

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.
Page 35 GAO-05-637 Civilian Contractor Tax Abuse

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.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.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 

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).
Page 36 GAO-05-637 Civilian Contractor Tax Abuse

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 agencysubmitted payment files that did not contain data in the payment type field 

during fiscal year 2004. FMS uses the payment type field in the agencysubmitted 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.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 

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.
Page 37 GAO-05-637 Civilian Contractor Tax Abuse

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.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 billion53

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.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.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 

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.
Page 38 GAO-05-637 Civilian Contractor Tax Abuse

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.56 FMS’s TOP implementation plan, dated January 2005, called for 

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.
Page 39 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 40 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 41 GAO-05-637 Civilian Contractor Tax Abuse

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.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.

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.
Page 42 GAO-05-637 Civilian Contractor Tax Abuse

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

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. 

Dollars in billions

Fiscal year

Source: GAO analysis of GSA data.

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004
Page 43 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 44 GAO-05-637 Civilian Contractor Tax Abuse

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.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 nonprobability 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 2004.59 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.

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.
Page 45 GAO-05-637 Civilian Contractor Tax Abuse

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

Source: GAO analysis of civilian agency and public records.

Type of business Number

Building maintenance 6

Communications 2

Consulting 2

Health care 12

Manufacturing 5

Personnel services 2

Professional services 6

Sanitation 2

Security services 2

Transportation 3

Other 8

Total 50
Page 46 GAO-05-637 Civilian Contractor Tax Abuse

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.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 

60 The remaining two case study contractors were either individuals or sole proprietorships 

that filed personal income tax returns.
Page 47 GAO-05-637 Civilian Contractor Tax Abuse

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.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.

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

further details.
Page 48 GAO-05-637 Civilian Contractor Tax Abuse

Table 3: Civilian Agency Contractors with Unpaid Federal Taxes 

Case 

study

Goods, 

services, or 

nature of work 

and agencies to 

which they 

were provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments

1 Health care 

related services 

to Departments 

of Veterans’ 

Affairs and 

Health and 

Human Services 

 Over

$300,000

Over

$18 million

• 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. 

2 Waste collection 

services to the 

Department of 

Justice 

 Over

$700,000

Over

$2 million

• 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.

3 Health care 

related services 

to the 

Department of 

Veterans Affairs

Nearly

$250,000

 Over

$9 million

• 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.

4 Waste collection 

services to the 

Department of 

Veterans Affairs 

Over $10,000 Nearly

$13 million

• 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.
Page 49 GAO-05-637 Civilian Contractor Tax Abuse

5 Payroll and 

temporary 

employment 

services to the 

Department of 

Housing and 

Urban 

Development 

 Over

$1 million

Nearly

$900,000

• 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.

6 Health care 

related services 

to Department of 

Veterans Affairs

Nearly

$300,000

Over

$10 million

• 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.

7 Security guard 

services to 

Departments of 

Homeland 

Security and 

Veterans Affairs

 Over

$200,000

Over

$400,000

• 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

and agencies to 

which they 

were provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments
Page 50 GAO-05-637 Civilian Contractor Tax Abuse

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.

8 Consulting 

services to the 

Smithsonian 

Institution 

 Over

$200,000

Over

$1 million

• 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. 

9 Armed security 

guard services to 

several agencies 

including the 

Department of 

Justice and the 

Environmental 

Protection 

Agency

About

$500,000

Nearly

$400,000

• 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. 

10 Building 

maintenance, 

lawn and garden, 

and sanitary 

services to 

Department of 

Transportation 

 Over

$300,000

Nearly

$400,000

• 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

and agencies to 

which they 

were provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments
Page 51 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 52 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 53 GAO-05-637 Civilian Contractor Tax Abuse

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.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.

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).
Page 54 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 55 GAO-05-637 Civilian Contractor Tax Abuse

• 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,
Page 56 GAO-05-637 Civilian Contractor Tax Abuse

• 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.
Page 57 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 58 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 59 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 60 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 61 GAO-05-637 Civilian Contractor Tax Abuse

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 
Page 62 GAO-05-637 Civilian Contractor Tax Abuse

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 

http://www.gao.gov.

Please contact Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov or 

Steven J. Sebastian at (202) 512-3406 or 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.

Gregory D. Kutz

Managing Director

Forensic Audits and Special Investigations

Steven J. Sebastian

Director

Financial Management and Assurance
Page 63 GAO-05-637 Civilian Contractor Tax Abuse

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
Page 64 GAO-05-637 Civilian Contractor Tax Abuse

Appendix I

Scope and Methodology ApApenednxidexiIs

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.1

 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.

1

 PACER data indicated FMS also disbursed about $6 billion on behalf of Department of 

Defense, primarily to health insurance providers.
Appendix I

Scope and Methodology

Page 65 GAO-05-637 Civilian Contractor Tax Abuse

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 abated2

 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 information3

 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.

2

 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).

3

 As discussed earlier in the report, FMS does not maintain historical data on Fedwire 

payments.
Appendix I

Scope and Methodology

Page 66 GAO-05-637 Civilian Contractor Tax Abuse

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 NASA4

 and the

4

 NASA cases include NASA credit card payments.
Appendix I

Scope and Methodology

Page 67 GAO-05-637 Civilian Contractor Tax Abuse

Departments of Homeland Security (Transportation Security 

Administration), Justice, State,5

 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 entities6

 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.7

 To determine whether contractors with no TINs 

5

 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.

6

 We define related entities as entities that share common owner(s) or officer(s), a common 

TIN, or a common address. 

7

 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).
Appendix I

Scope and Methodology

Page 68 GAO-05-637 Civilian Contractor Tax Abuse

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.
Page 69 GAO-05-637 Civilian Contractor Tax Abuse

Appendix II

Contractors with Unpaid Federal Taxes ApendxiI

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

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments

11 Professional 

and clerical 

services

Multiple 

departments, 

including the 

Department of 

Homeland 

Security (DHS)

 Over $1.5 million Over $1 million • 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.

12 Consulting 

service 

Multiple agencies 

including the 

Department of 

the Interior 

(Interior) and the 

Small Business 

Administration 

Over $200,000 Over $300,000 • 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.
Appendix II

Contractors with Unpaid Federal Taxes

Page 70 GAO-05-637 Civilian Contractor Tax Abuse

13 Temporary help DHS Nearly $50,000 Over $600,000 • 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.

14 Nursing care 

facilities

Department of 

Veterans Affairs 

(VA)

 Nearly $200,000 Over $4 million • 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.

15 Building 

maintenance 

services 

Multiple 

departments 

including 

Departments of 

Agriculture, 

Homeland 

Security, the 

Interior, the 

Treasury, and 

Veterans Affairs

Over $4 million Over $700,000 • 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.

16 Moving and 

storage 

DHS and the 

Department of 

State

 Over $200,000 Nearly $700,000 • 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. 

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 71 GAO-05-637 Civilian Contractor Tax Abuse

17 Business 

training and 

support 

services

Multiple 

departments 

including DHS 

and the 

Departments of 

Justice and the 

Interior 

 Nearly $130,000 Nearly $1.5 million • 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.

18 Tour services DHS Over $20,000 Nearly $800,000 • 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. 

19 TelecommunicationsDHS Over $400,000 Nearly $300,000 • 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.

20 Nonprofit social 

service

Department of 

Justice (Justice)

 Over $70,000 Nearly $900,000 • 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.

21 Ministry Justice Nearly

$1.3 million

 Over $400,000 • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 72 GAO-05-637 Civilian Contractor Tax Abuse

22 Freight Multiple 

departments 

including Interior, 

Justice, and 

Treasury

 Over $300,000 Over $300,000 • 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.

23 Court reporter Justice Over $25,000 Over $400,000 • 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.

24 Aircraft and 

space parts

NASA Over $100,000 Nearly $200,000 • 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.

25 Electro-optic 

equipment 

DHS and NASA Nearly $700,000 Over $1 million • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 73 GAO-05-637 Civilian Contractor Tax Abuse

26 Acquisition and 

financial 

support 

Multiple 

departments, 

including Health 

and Human 

Services (HHS), 

Transportation 

(Transportation), 

as well as NASA 

 Over $3 million Nearly $400,000 • 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.

27 Computer 

software 

Multiple agencies 

including HHS, 

Justice, Treasury, 

and NASA

 Over $300,000 Over $50,000 • Payments were not levied because of an 

IRS statutory exclusion.

• FY 2004 maximum levy collections 

estimated at $46,000.

28 Logistics and 

engineering 

services

Agriculture and 

NASA

 Over $650,000 Over $2 million • 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.

29 Casino NASA, Interior, 

and Agriculture

Over $35,000 Over $1.5 million • 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.

30 Manufacturing NASA (including 

credit cards)

 More than

$600,000,

$30,000 of which

is credit card

payments

 Nearly $200,000 • 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.

31 Medical doctor VA Over $180,000 Nearly $700,000 • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 74 GAO-05-637 Civilian Contractor Tax Abuse

32 Engineering Treasury Over $500,000 Nearly $2 million • 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.

33 Plumbing, 

heating, and air 

conditioning 

Multiple 

departments 

including Labor, 

Treasury, and VA

Over $130,000 Over $300,000 • 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.

34 Janitorial Agriculture and 

VA 

 Over $700,000 Over $300,000 • 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.

35 Building 

construction

HHS and VA Over $1.5 million Over $200,000 • 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.

36 Health care 

services

VA Over $40,000 Nearly $300,000 • 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.

37 Public relations HHS Nearly $280,000 Over $300,000 • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 75 GAO-05-637 Civilian Contractor Tax Abuse

38 TelecommunicationsCommerce, 

Treasury, and 

HHS

 Over $1 million Over $300,000 • 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. 

39 Building 

maintenance

HHS and State Over $1.1 million Nearly $1 million • 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.

40 Medical, 

dental, and 

hospital 

equipment

Executive Office 

of the President 

and Agriculture

 Over $900,000 Nearly $2 million • 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.

41 Health care 

services

VA Over $60,000 Over $500,000 • 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.

42 Automotive 

manufacturer

Agriculture Over $60,000 Over $1 million • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 76 GAO-05-637 Civilian Contractor Tax Abuse

43 Support and 

managerial 

services

Treasury Over $90,000 Nearly $400,000 • 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.

44 Health care 

services

VA Over $200,000 Nearly $2 million • 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. 

45 Ambulance 

services

VA and 

Agriculture

 Over $20,000 Over 600,000 • 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.

46 Taxi services VA Over $40,000 Over $600,000 • Company in litigation status since the mid1990s, 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.

47 Home health 

care services

VA Over $200,000 Nearly $3 million • 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.

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Appendix II

Contractors with Unpaid Federal Taxes

Page 77 GAO-05-637 Civilian Contractor Tax Abuse

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

48 Residential 

care 

Justice Nearly $770,000 Nearly $9 million • 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.

49 Building 

maintenance

Social Security 

Administration

Over $330,000 Over

$400,000

• 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.

50 Special trade 

contractor 

Justice and 

Treasury

 Over $400,000 Over $100,000 • 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 

(Continued From Previous Page)

Case 

study

Goods, 

services, or 

nature of work 

Agencies 

making 

payments

Fiscal year

2004 civilian

agency

payments

Unpaid federal tax

amount at 9/30/04 Comments
Page 78 GAO-05-637 Civilian Contractor Tax Abuse

Appendix III

Comments from the Internal Revenue Service ApendxiI
Appendix III

Comments from the Internal Revenue Service

Page 79 GAO-05-637 Civilian Contractor Tax Abuse
Appendix III

Comments from the Internal Revenue Service

Page 80 GAO-05-637 Civilian Contractor Tax Abuse
Page 81 GAO-05-637 Civilian Contractor Tax Abuse

Appendix IV

Comments from the Financial Management 

Service ApendxiIV
Appendix IV

Comments from the Financial Management 

Service

Page 82 GAO-05-637 Civilian Contractor Tax Abuse
Appendix IV

Comments from the Financial Management 

Service

Page 83 GAO-05-637 Civilian Contractor Tax Abuse
Appendix IV

Comments from the Financial Management 

Service

Page 84 GAO-05-637 Civilian Contractor Tax Abuse
Page 85 GAO-05-637 Civilian Contractor Tax Abuse

Appendix V

Staff Acknowledgments ApendxiV

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)
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