GAO

United States Government Accountability Office

A

Testimony

Before the Permanent Subcommittee on Investigations, 

Committee on Homeland Security and Governmental 

Affairs, U.S. Senate

For Release on Delivery

Expected at 9:30 a.m. EDT

Thursday, June 16, 2005 

FINANCIAL 

MANAGEMENT

Thousands of Civilian 

Agency Contractors Abuse 

the Federal Tax System 

with Little Consequence

Statement of 

Gregory D. Kutz

Managing Director, Forensic Audits and Special 

Investigations 

Steven J. Sebastian

Director, Financial Management and Assurance

John J. Ryan

Assistant Director, Forensic Audits and Special 

Investigations 

GAO-05-683T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-683T.

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-05-683T, a testimony 

before the Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate 

June 16, 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. GAO 

investigated 50 civilian agency contractors with abusive and potentially 

criminal activity. For example, businesses did not forward payroll taxes 

withheld from their employees to IRS. Willful failure to remit payroll taxes is 

a felony under U.S. law. Furthermore, several individuals owed multiple 

businesses with unpaid federal taxes—one owned about 20 businesses that 

did not fully pay taxes on over 300 returns. Some diverted payroll taxes for 

personal gain or to fund their businesses, such as building a house, 

purchasing other real property, and increasing the salary of the company’s 

officer/owner. These contractors worked for a number of federal agencies 

including the Departments of Justice and Homeland Security, and the 

National Aeronautics and Space Administration. 

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 over 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’s analysis of civilian agency, IRS, FMS, public, and other records. 

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 were included in the levy program, 

FMS collected only $16 million. For example, about $171 billion of unpaid 

federal taxes was not sent to the levy program to be offset against payments 

because of statutory requirements or IRS policy exclusions such as claims of 

financial hardship or bankruptcy. 

Tens of billions of dollars in federal payments were not matched against tax 

debts for potential levy because FMS did not proactively manage and 

oversee the levy program. Until GAO brought it to FMS’s attention, FMS was 

unaware that $40 billion of contractor payments had not been submitted for 

potential levy. FMS also did not identify payment files that lacked contractor 

taxpayer identification numbers, names, or both, resulting in another 

$21 billion that could not be levied. FMS also excluded billions of dollars 

from levy because of what it considered limitations in its automated systems 

without taking steps to overcome those limitations. Furthermore, civilian 

agency purchase card payments to contractors totaling nearly $10 billion 

could not be levied. 

Tax abuses by contractors working 

for the Department of Defense, 

which GAO previously reported on, 

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) determine whether 

there are indications of abusive or 

potential criminal activity by 

contractors with unpaid tax debts, 

and (3) identify any statutory or 

policy impediments and control 

weaknesses that impede tax 

collections under the Federal 

Payment Levy Program (FPLP). 

What GAO Recommends

In its report (GAO-05-637), on 

which this testimony is based, GAO 

makes 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 recommended that 

IRS review the 50 case study 

contractors identified in the report, 

and if warranted, pursue collection 

or criminal investigation. 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 disagreed with FMS’s 

assessment and reiterated support 

for its recommendations. 
Page 1 GAO-05-683T 

Mr. Chairman, Members of the Subcommittee, Senator Collins, Senator 

Lieberman, and Senator Akaka:

Thank you for the opportunity to discuss payments to civilian agency 

contractors that abuse the federal tax system. Our related report, released 

today and developed at the request of this Subcommittee, and Senators 

Collins, Lieberman, and Akaka, describes problems we identified in the 

management of the Federal Payment Levy Program (FPLP), in particular 

the program’s collection of levies from civilian agency contractors with 

unpaid taxes.1

 These problems illustrate the overall challenges the federal 

government experiences in managing the federal tax system in a way that 

contributes to taxpayers’ perception of the tax system’s fairness, i.e., their 

perception that their friends, neighbors, and business competitors are 

complying with the tax laws and actually paying their taxes. These 

challenges are exacerbated by our identification, in our testimony at a 

hearing on February 12, 2004, of fraud, waste, and abuse among certain 

Department of Defense (DOD) contractors that owed billions of dollars in 

unpaid taxes. Because of these problems, you asked us to perform an audit 

and related investigation of civilian agency contractors to determine 

whether, and to what extent, civilian agency contractors also have unpaid 

federal taxes. 

With some exceptions, civilian agency contractors receive disbursements 

from the Department of Treasury’s Financial Management Service (FMS).2

FMS is also the federal government’s central debt collection agency. Since 

July 2000, FMS has operated the FPLP in conjunction with the Internal 

Revenue Service (IRS) to collect unpaid federal taxes, including tax debt 

owed by businesses and individuals who contract with civilian agencies. 

Under the FPLP, specified payments to federal contractors are compared 

with tax debt data—updated on a weekly basis by IRS—using the Treasury 

Offset Program (TOP), a centralized debt collection program operated by 

FMS. When payment data are sent to TOP, it electronically compares the

1

 GAO, Financial Management: Thousands of Civilian Agency Contractors Abuse 

the Federal Tax System with Little Consequence, GAO-05-637 (Washington, D.C.: 

June 16, 2005).

2

 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.
Page 2 GAO-05-683T 

names and taxpayer identification numbers (TINs)3 on the payment files 

with the control names (first four characters of the names) and TINs of the 

debtors listed in TOP. If there is a match on a debt for which IRS has 

completed all legal notification requirements for levy, the federal payment 

is reduced (levied) to help satisfy the unpaid federal taxes. In fiscal year 

2004, FMS collected $16 million from levying payments to civilian agency 

contractors.

Today, we will summarize our work on why substantial payments that FMS 

made on behalf of civilian agencies to contractors with tax debt were not 

levied. Our testimony will provide a perspective on (1) the magnitude of 

unpaid federal taxes owed by civilian agency contractors, (2) the statutory 

and policy impediments and control weaknesses that impeded tax 

collections under the FPLP, and (3) abusive or criminal activity by civilian 

agency contractors related to the federal tax system. In addition, we will 

summarize our work covered in a separate draft report, which we have 

transmitted to FMS and IRS for their comments, on the progress FMS has 

made on obtaining reciprocal agreements with states so that payments to 

contractors made by the states could be levied for unpaid federal taxes. 

Summary Our analysis of FMS and IRS records showed that about 33,000 civilian 

agency contractors who owed over $3.3 billion in unpaid federal taxes 

received payments from numerous federal agencies during fiscal year 2004. 

During the same period, the federal government missed many 

opportunities to collect some of the unpaid federal taxes owed by these 

civilian agency contractors. We estimate that if there were no legal or 

administrative provisions that excluded a significant amount of tax debt 

from the levy program, and if all contractor payments for which FMS 

maintains detailed information were subjected to a 15 percent levy to 

satisfy all the unpaid taxes of those civilian contractors, IRS and FMS could

3

 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 3 GAO-05-683T 

collect hundreds of millions of dollars annually.4 However, during fiscal 

year 2004, FMS collected only $16 million from the FPLP, leaving a tax levy 

collection gap totaling hundreds of millions of dollars. 

A significant portion of the levy collection gap arises because only a 

fraction of unpaid tax debts is included in the levy program and matched 

against payments. Specifically, because of legal requirements and IRS 

policy provisions, only 37 percent of the unpaid tax debts are included in 

the FPLP. In addition, only about 30 percent of the debt included in the 

FPLP is actually ready for immediate levy. While the exclusion of unpaid 

federal taxes from the levy program is justified in some circumstances, it 

nevertheless results in significant losses in the collection of revenue from 

levies. In a later report, we will examine the accuracy and reasonableness 

of the IRS exclusions.

The remaining levy collection gap exists because of a lack of proactive 

oversight and management of the levy program by FMS. For example, FMS 

was not aware that it did not submit tens of billions of dollars in payments 

to the levy program for matching against tax debts. These included 

payments without payment type code and payments from certain agency 

paying units. Even when FMS was aware that many payments from agency 

payment files did not contain TINs, without which a match could not be 

made between the payment file and the tax debts, FMS did not address this 

deficiency. Consequently, these payments had no possibility of being levied. 

Furthermore, FMS decided to exclude tens of billions of dollars in 

payments from the levy program without determining whether the cost of 

making changes to its automated systems and other efforts necessary to 

include them in the levy program would exceed the potential benefits, 

specifically increased tax collections and improved compliance. We 

estimate that if FMS addresses its control and related weaknesses, it could 

collect an estimated $50 million more from the FPLP annually. 

Furthermore, FMS has not addressed other challenges in the levy program 

that further limit its effectiveness at collecting unpaid taxes. These 

challenges include levying contractors paid with government purchase

4

 Our estimate was derived by analyzing data from FMS’s Payments, Claims, and Enhanced 

Reconciliation (PACER) system, which maintains detailed data on payments made via 

checks and Automated Clearing House. PACER payment data for fiscal year 2004 contained 

about 12.9 million contractor payments valued at $247 billion. As will be discussed later, 

PACER does not maintain detailed information related to $191 billion in payments made via 

Fedwire—payments requiring same-day settlement. 
Page 4 GAO-05-683T 

cards and fully implementing, with IRS, the increased 100 percent levy 

provision authorized in 2004.5

 Furthermore, as will be communicated in a 

separate report, a draft of which was transmitted to FMS and IRS for 

comment on June 7, 2005, FMS and the states are not collecting debt, 

including unpaid taxes, on behalf of one another through the offset of 

contractor payments.6

 These mutually beneficial tax collection activities 

are not occurring because FMS has not actively pursued avenues to 

encourage states to enter into reciprocal agreements with the federal 

government to collect each other’s taxes. Officials at the 17 states we 

contacted informed us that they were not aware that such a debt collection 

opportunity exists, but all expressed interest in pursuing this opportunity. 

We also found numerous instances of abusive or potentially criminal 

activity related to the federal tax system during our audit and investigation 

of 50 civilian agency contractor case studies.7

 The 50 case studies involved 

mostly small companies—many of them closely held by the owners and 

officers—with unpaid payroll taxes. These payroll taxes included Social 

Security, Medicare, and individual income taxes withheld from employees’ 

paychecks. We found that these contractors did not fulfill their role as 

“trustees” and forward these amounts to IRS. Rather, by diverting the 

money for personal gain or to fund their business, these contractors 

potentially committed a criminal felony. For example, one of the 

contractors used the payroll taxes not remitted to IRS to build a house 

overseas. A few contractors were involved in more than one business, all of 

which had unpaid tax debts. One case study contractor is one of a group of

5

 The American Jobs Creation Act of 2004 contains a provision authorizing 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. 

Pub. L. No. 108-357, § 887(a), 118 Stat. 1418, October 22, 2004, to be codified at 26 U.S.C. 

§ 6331 (h)(3).

6

 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).

7

 A case study consists in some cases of multiple related entities, some or all of which owe 

tax debts. 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 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. 
Page 5 GAO-05-683T 

20 businesses that owed $13 million in unpaid taxes covering over 300 tax 

periods.8

 Another case study contractor had a 20-year history of opening a 

business, failing to remit to IRS the taxes withheld from employees, and 

then closing the business, only to repeat the cycle again and incur 

additional tax debts almost immediately. 

As discussed in our report released today, we are making 18 

recommendations to FMS to improve collections under the FPLP and 

1 recommendation to IRS 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 a name 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. In our related report on 

state participation in the levy program, a draft of which has been sent to 

FMS and IRS for comment, we are also making three additional 

recommendations to FMS to increase state participation in the collection of 

unpaid federal and state taxes. 

Civilian Contractors 

Owe Billions of Dollars 

in Unpaid Federal 

Taxes

As was the case at the Department of Defense, thousands of civilian agency 

contractors throughout the federal government abused the federal tax 

system with little consequence. Our analysis of FMS and IRS records 

indicated 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. This amount is likely 

understated because, first, we intentionally limited the population of 

contractors with unpaid tax debts to debts and payments that were

8

 A “tax period” varies by tax type. For example, the tax period for payroll and excise taxes 

is 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.
Page 6 GAO-05-683T 

significant and agreed upon, 9 and second, because the disbursement files 

we received from FMS were not complete, i.e., they did not always contain 

the information we needed to determine whether the contractors owed 

federal taxes. For example, contractors receiving $17 billion in payments 

from FMS could not be identified because of blank or obviously erroneous 

TINs in the payment files submitted to FMS by the civilian agencies. 

Without an accurate TIN, we could not determine whether the contractor 

had unpaid federal taxes and, if so, the amount of unpaid taxes owed by the 

contractor. Similarly, as we have seen from our annual audits of IRS’s 

financial statements, the taxpayer account database we received from IRS 

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.10 The IRS database does not reflect the amounts owed by 

businesses and individuals that have not filed tax returns and for which IRS 

has not assessed the tax amounts due. 

The over $3.3 billion in unpaid taxes owed by these civilian agency 

contractors ranged from a small amount owed by an individual for a 

single tax period to a group of related businesses owing about $13 million 

for over 300 tax periods. The type of unpaid taxes varied and consisted of 

payroll, corporate income, individual income, and other types of taxes. As 

shown in figure 1, 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. 

9

 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 had 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 to arrive at our 

estimate of about 33,000 contractors with $3.3 billion in tax debts.

10 GAO, Financial Audit: IRS’s Fiscal Years 2004 and 2003 Financial Statements, GAO-05-

103 (Washington, D.C.: Nov. 10, 2004).
Page 7 GAO-05-683T 

Figure 1: Type of Federal Tax Debt Owed by Civilian Contractors

Unpaid payroll taxes include amounts that an employer withholds from an 

employee’s wages for federal income taxes, Social Security, and 

Medicare—but does not remit to IRS—and the related matching 

contributions of the employer for Social Security and Medicare. Employers 

who do not remit payroll taxes to the federal government are subject to 

civil and criminal penalties. Because employers are responsible for holding 

payroll taxes withheld from employees “in trust” for the federal 

government and making a federal tax deposit in that amount,11 the 

employer is liable for the amounts not forwarded to the federal 

government, as well as the employer’s matching Social Security and 

Medicare contributions. Willful failure to remit payroll taxes is a criminal 

felony offense punishable by imprisonment of not more than 5 years,12

11 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).

12 26 U.S.C. § 7202.

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 8 GAO-05-683T 

while the failure to properly segregate payroll taxes can be a criminal 

misdemeanor offense punishable by imprisonment of up to a year.13 The 

law imposes no penalties upon an employee for the employer’s failure to 

remit payroll taxes, since the employer is responsible for submitting the 

amounts withheld. However, individuals may be held personally liable for 

the withheld amounts not remitted to IRS and assessed a civil monetary 

penalty known as a trust fund recovery penalty (TFRP).14

A substantial amount of the unpaid federal taxes shown in IRS records as 

owed by civilian contractors has been outstanding for several years. As 

reflected in figure 2, over half of the unpaid taxes owed by civilian 

contractors was for tax periods prior to calendar year 2000.15

13 26 U.S.C. § 7215 and 26 U.S.C. §7512 (b).

14 26 U.S.C. § 6672.

15 The 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.
Page 9 GAO-05-683T 

Figure 2: Civilian Contractors’ Unpaid Federal Taxes by Tax Periods through 2003

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

has shown, as unpaid taxes age, the likelihood of collecting all or a portion 

of the amount owed decreases.16 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. Furthermore, there is 

generally a 10-year statutory collection period beyond which IRS is 

prohibited from attempting to collect tax debt.17 Consequently, if the 

contractors owed federal taxes beyond the 10-year statutory collection 

period, the older tax debt typically would not be available for collection

16 GAO, Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments Are 

Owed, GAO/AIMD/GGD-99-211 (Washington, D.C.: Aug. 2, 1999).

17 The 10-year time period may be suspended, including for periods during which the 

taxpayer is involved in a collection due process appeal, a litigation, a pending offer in 

compromise or an installment agreement. Accordingly, figure 2 includes unpaid federal 

taxes that are for tax periods prior to 1995.

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 10 GAO-05-683T 

because the debt would have been removed from IRS’s records. We were 

unable to determine the amount of unpaid tax debts of federal contractors 

that had been removed because of the statutory collection period’s 

expiration. 

Millions in Unpaid 

Federal Taxes Are Not 

Collected 

A large levy collection gap exists between the potential levy amount we 

estimated and the amount FMS actually collected under the FPLP. 

According to our estimate, if there were no legal or administrative 

provisions that removed a substantial amount of tax debt from the levy 

program, and if all contractor payments for which FMS maintained detailed 

information 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 4 percent 

of the maximum levy collection we estimated. Because almost two-thirds 

of unpaid federal taxes are excluded from the FPLP because of statutory 

requirements and IRS policies, FMS and IRS will never be able to 

completely close the levy collection gap. Additionally, FMS’s lack of 

oversight and proactive management of the levy program further impeded 

the government’s ability to close the levy collection gap, leading to at least 

$50 million in lost levy collections from civilian agency contractors during 

fiscal year 2004. Until FMS corrects the deficiencies in its oversight and 

management of the levy program, the federal government will continue to 

miss opportunities to collect unpaid taxes through the FPLP.

Billions of Dollars in Unpaid 

Taxes Excluded from 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 

and $100 billion as being excluded because of policy decisions. As shown 

in figure 3, this leaves only 37 percent ($98 billion out of $269 billion) 

in unpaid taxes that IRS sent to FMS to be included in the FPLP for 

potential collection. Furthermore, IRS had completed all legal notification 

requirements for immediate levy on only 30 percent the amount of unpaid 

tax debts in the FPLP as of September 30, 2004. Consequently, 70 percent 

of those tax debts sent over for levy were still not eligible to have 

payments levied. 
Page 11 GAO-05-683T 

Figure 3: Levy Status of Unpaid Federal Taxes 

According to IRS records, bankruptcy and taxpayer agreements, 

including installment or offer in compromise agreements,18 each account 

for about a quarter of the $71 billion in statutory exclusions. Another 

38 percent—$27 billion—is due to IRS not having completed all initial 

taxpayer notifications required by law before a tax debt could be referred 

to the FPLP. These are cases that IRS refers to as being in notice status. 

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 the tax debtor 

demanding payment of the tax debt. Upon receipt of each notice, the 

debtors have a minimum of 30 days to respond and have a number of 

different options, including appealing the tax debt if they disagree with the 

tax assessment, entering into a payment arrangement, applying for a 

hardship determination,19 or paying the tax debt in full. Each time the 

debtor responds to a notice, IRS must make a determination on how to 

18 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.

19 In these instances, the tax debtors demonstrate to IRS that making any payments at all 

would result in a significant financial hardship.

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 12 GAO-05-683T 

dispose of the response, for example, whether to accept or reject an 

installment agreement if one is offered, before proceeding further with 

another notice or collection action. The process of notification, response, 

disposition, and further notification could occur up to four times. Until 

the series of notifications is complete, the tax debt is excluded from the 

levy program. 

In addition to legal restrictions, $100 billion in tax debts is excluded 

because of IRS policy decisions. According to IRS data as of April 2005, 

slightly over half ($51 billion) of all policy exclusions were due to IRS’s 

determination that the tax debtor was in financial hardship.20 Other policy 

exclusions include debts belonging to debtors who are working with IRS to 

voluntarily comply and debtors under active criminal investigation, among 

others. The amount excluded for policy reasons remained substantial even 

after IRS added more than $28 billion to the levy program by reducing the 

number of policy exclusions in response to recommendations we made in 

our previous report on DOD contractors.21

In addition to the above, our past financial audits have indicated that IRS’s 

records contain coding errors that affect the accuracy of taxpayers’ 

account information, resulting in lost opportunities to collect outstanding 

taxes. The effective management of these codes is critical because if the 

codes used to exclude tax debts from the levy program (such as codes 

identifying a contractor as being in bankruptcy or having an installment 

agreement) erroneously remain in the system for long periods, tax debts 

may be needlessly excluded from the levy program. 

Billions More in Tax Debts 

Referred to FMS Were Not 

Leviable 

FMS’s records indicate that as of September 30, 2004, about 70 percent of 

the tax debt in the FPLP was still not immediately leviable because IRS had 

not completed all the legal notification requirements necessary for levying 

to begin. Before levying a payment or any other asset, IRS is required to 

send the debtor an additional notice of intent to levy—known as a 

collection due process notice—that notifies the debtor of the impending 

levy. IRS gives the debtor up to 10 weeks to either resolve the debt or file 

20 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.

21 GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax System 

with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12, 2004).
Page 13 GAO-05-683T 

an appeal. The debtor has the same response options as in the initial notice 

phase. In addition, the taxpayer can file a collection due process appeal. 

Once IRS completes action on the response or if the tax debtor does not 

respond, IRS codes the tax debt in the FPLP for immediate levy. Payments 

cannot be levied until this process is complete.

Prior to 1998, IRS was authorized to levy a payment immediately upon 

matching a tax debt with a federal payment as long as the collection due 

process notice had been sent. 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 currently waits a minimum of 10 weeks for 

the tax debtor to respond to the collection due process notice before it 

proceeds with levy, thereby causing the federal government to miss levying 

some contractor payments. The joint task force established after our 

previous audit22 has supported making the due process for the federal 

payment levy program a postlevy process.23 This would allow IRS to levy 

payments when first identified and provide contractors with procedural 

due process remedies afterward. To further reduce the payments lost to 

levy because of the time required for the collection due process to run its 

course, 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. 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. 

22 In response to recommendations made in our audit of DOD contractors with unpaid 

federal tax debt, the Federal Contractor Tax Compliance Task Force was established with 

representatives from DOD, the Defense Finance and Accounting Service, IRS, FMS, the 

General Services Administration, the Office of Management and Budget, and the 

Department of Justice. The joint task force agreed to work together to ensure that federal 

contractors pay their taxes and that appropriate enforcement actions, including levies, are 

taken to collect delinquent tax accounts. 

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

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

Oct. 26, 2004).
Page 14 GAO-05-683T 

FMS’s Management and 

Oversight of FPLP Resulted 

in Missed Opportunities to 

Levy Billions in Contractor 

Payments 

We found that FMS disbursed tens of billions of dollars in payments 

without subjecting them to the levy process because of a lack of proactive 

oversight. As shown in table 1, the reasons for payments not being 

subjected to the levy process were that (1) agency payment station codes 

were not loaded into TOP, (2) payments contained blank or obviously 

inaccurate TINs, (3) payments contained blank or invalid names, and 

(4) payments contained invalid payment types. In general, FMS was not 

aware of these omissions until we brought them to its attention.

Table 1: Payments Submitted to TOP That Could Not be Levied 

Source: GAO’s analysis of FMS data.

Notes: The 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.

First, we found that FMS did not update the TOP database to accept 

$40 billion in payments from about 150 agency paying stations.24 If a paying 

station is not in the TOP database, that location is excluded from the levy 

program; thus payments from that location are not matched against unpaid 

federal taxes for potential levy. Of the $40 billion not sent to TOP, we 

determined that approximately $9 billion in payments was made to civilian 

contractors with tax debts, none of which could be or were levied. 

Dollars in billions

Types of payments Amount

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

Payment containing invalid payment types 5

24 These stations are generally referred to by their Treasury Agency Location Codes (ALC). 

The ALC is used to identify transactions, documents, and reports processed through the 

Treasury Department 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 15 GAO-05-683T 

Second, FMS disbursed over $17 billion to civilian agency contractors 

without TINs or with obviously inaccurate TINs in the payment files 

submitted to it by civilian agencies. Valid TIN information is critical to the 

levy program because payments lacking this information cannot be 

matched against tax debts. The Debt Collection Improvement Act of 199625

requires executive agencies to obtain TINs from contractors and to include 

TINs on certified payment vouchers submitted to the Treasury Department 

for payment.26 While Treasury has exempted as a matter of policy a limited 

number of vendors from the TIN requirements, the exemptions are rare and 

are generally limited to foreign companies providing goods and services for 

federal agencies in a foreign country or companies performing classified 

work. According to FMS officials, FMS tabulates certain payment records 

with obviously inaccurate TINs by agency and encourages agencies to send 

payment files with valid TINs in case of noncompliance.27 However, FMS 

does not enforce the TIN requirement by rejecting agency payments with 

blank or obviously inaccurate TINs or requiring the agencies to certify that 

such payments meet one of the TIN exclusion criteria. As a result, agencies 

continue to submit payment requests without TINs, and consequently, 

these payments cannot be levied to collect unpaid federal taxes. 

Third, FMS disbursed nearly $3.8 billion in fiscal year 2004 to contractors 

whose name was not properly contained in the agency-submitted payment 

files. Instead, the name field in the payment file was either blank or 

contained numeric characters only.28 The lack of a proper name could have 

been detected if FMS had conducted a cursory review of the payment files

25 Pub. L. No. 104-134, 110 Stat. 1321-358, Apr. 26, 1996.

26 31 U.S.C. §7701(c) and (d).

27 Tabulation is performed for the standard payment types sent through the levy program, 

that is, payments known as type B. Type A and Fedwire payments are not tabulated or 

monitored. Type A payments are payments where the agency certifies the payment in the 

same file that contains detailed payment information. For type B payments, agencies send 

FMS the certification for the payment separately from the detailed payment information. 

ACH-CTX payments (a specific kind of type B payment) are payments 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.

28 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. 
Page 16 GAO-05-683T 

submitted by the agencies. For example, our review readily identified that 

most of the payment files submitted by the Department of State (State) 

did not contain valid contractor names. 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 State. According to a State 

Department official, State likely had names on its payment files since the 

1980s, but a programming error had resulted in the names not being in the 

disbursement file sent to FMS. While disbursements could be made without 

a name—as disbursements are made electronically via direct deposit into 

the contractor’s bank account—valid name information is critical because 

the levy program requires a match between both the name and TIN for a 

levy to occur. 

Last, during fiscal year 2004, FMS disbursed about $5 billion via checks to 

civilian agency contractors on the basis of agency-submitted payment 

files that did not contain data in the payment-type field. FMS uses the 

payment-type field to determine if the payment is subject to the levy 

program. If the payment-type field is blank, FMS does not attempt to match 

the payment to unpaid tax debts for potential levy. 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. 

After we brought this to FMS’s attention, an official stated that FMS 

planned to establish a new centralized program to monitor the 

completeness of agency information. 

Management Decisions 

Excluded Tens of Billions 

More in Payments from the 

Levy Program 

In addition to payments not included in the levy program because oversight 

was lacking, FMS and IRS also made decisions that caused tens of billions 

of dollars more in contractor payments not to be subject to potential levy 

collection. Specifically, we found that while FMS disbursed funds using a 

number of payment mechanisms—including payments known as type A, 

type B (including ACH-CTX), and Fedwire—FMS has taken actions to 

include only disbursements made via type B in the levy program. Even 

then, ACH-CTX—a specialized type B payment—is excluded from the levy 

program. We also found that FMS does not levy payments to collect the 

unpaid federal taxes owed by individuals because a small possibility exists 

that an individual TIN and name may be the same as the TIN and name of 

an unrelated business. Consequently, IRS instructed FMS not to levy 

contractor payments to individuals because it did not want to mistakenly 

levy payments of individuals to pay the debt of an unrelated business. 
Page 17 GAO-05-683T 

Although it is responsible for administering the levy program, FMS could 

not quantify the magnitude of federal contractor payments excluded from 

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. Our work, based on limited data, indicates that at a minimum, 

$26 billion in payments was made via type A and ACH-CTX that were not 

subject to the levy process. The $26 billion, although likely understated, 

represents almost 11 percent of all contractor disbursements recorded in 

FMS’s PACER database. In addition, FMS disbursed approximately 

$191 billion in Fedwire payments,29 but was not able to identify the value 

of payments made to contractors via Fedwire that it did not send to the 

levy program. 

FMS excluded these payments from the levy program because including 

them would require programming changes to its automated systems or 

other efforts. 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.30

At that time, FMS was developing a new payment system that it estimated 

would be completed as early as 2003 and therefore decided not to make the 

system changes. However, at the time of our audit, the new system was still 

not fully deployed. Consequently, over the last 4 years, the federal 

government has lost an unknown amount of 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. 

29 This amount does not include $66 billion in certain benefit payments. 

30 FMS officials stated that it could take additional programming time to prepare TOP to 

receive type A payment information from other systems. For example, FMS conducted a 

study in 2001 and estimated that it would take about 6 hours of programming and 1 to 3 days 

of testing to make the system changes necessary to one system to include type A payments 

in TOP for levy.
Page 18 GAO-05-683T 

FMS Faces Challenges in 

Addressing Other Program 

Limitations 

FMS faces other management challenges in matching TINs and names, 

levying purchase cards, and implementing the 100 percent levy provision of 

the American Jobs Creation Act of 2004. Specifically, almost $2 billion of 

contractor payments could not be levied because the TIN and payee name 

in the payment files did not match with the TIN and “control name” with 

which IRS provided TOP. 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. If TOP finds a TIN match between the payment file and the 

file provided by IRS, but cannot find the control name (first four characters 

of the IRS name) anywhere within the name field of the payment file, TOP 

reports only the mismatch to IRS, but does not levy payments to collect 

delinquent tax debts. After we brought this to FMS’s and IRS’s attention, 

IRS began working with FMS to increase the number of control names—up 

to 10 additional control names per business—it sends to TOP. 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. 

We also found that nearly $10 billion in federal payments made via 

purchase cards to contractors in fiscal year 2004 are not subject to levy 

because the government payment is made to the bank that issues the 

purchase card instead of the contractor doing business with the 

government. FMS officials have acknowledged the need to address this 

challenge but stated that FMS faces 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 a purchase card. In the meantime, the use of 

purchase cards for federal acquisition purposes continues to increase. 

Until this challenge is thoroughly examined by FMS and IRS and until 

solutions are identified, the federal government will continue to be unable 

to levy or otherwise collect from tens of billions of dollars in payments 

made to civilian contractors through this mechanism. 

Finally, FMS has not fully implemented a new provision, authorized by 

Congress in October 2004, which increased the maximum levy percentage 

from 15 percent to 100 percent of payments to contractors with unpaid 

taxes. Our analysis indicated that if no legal or procedural provisions 

excluded tax debts from the levy program, a levy of up to 100 percent on 

all contractor payments would result in FMS’s collecting as much as
Page 19 GAO-05-683T 

$800 million31 annually from civilian contractors. However, because the 

provision provides for increasing the levy percentage on payments to 

vendors for “goods and services” sold or leased to the government, IRS has 

determined that the legal language excluded 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 at present do not 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 disbursements made directly 

by FMS. According to FMS and IRS officials, a specific legislative change 

is being sought to subject real estate payments to the new 100 percent 

levy requirement.

FMS Has Not Taken Action 

to Establish Reciprocal 

Agreements with States 

As discussed in a separate product,32 developed at the request of this 

committee and transmitted to FMS for review and comment on June 7, 

2005, FMS has not pursued agreements with the states that could result in 

the federal and state government’s collecting—through the offset of 

contractor payments—unpaid tax debts on behalf of each other. The Debt 

Collection Improvement Act of 1996 authorizes these collections if a state 

enters into a reciprocal agreement with FMS that allows the state and FMS 

to collect unpaid debt from each other’s payments, including payments to 

their contractors. Despite the potential benefits, the federal government 

has not yet established any reciprocal agreements with states to offset 

contractor payments. According to FMS officials, states have not expressed 

interest in executing such agreements. In fact, the state debt collection 

officials we contacted,33 and officials at the Federation of Tax 

Administrators and at the National Association of State Auditors,

31 This assumes that the tax debts and payment amount remain constant in future years.

32 GAO-05-697R.

33 We contacted debt collection officials of the following 17 states: California, Connecticut, 

Georgia, Illinois, Hawaii, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, New 

Jersey, New York, North Carolina, Pennsylvania, South Carolina, and Virginia. Collectively, 

the 17 states received over 75 percent of FMS’s collections from the federal tax refund offset 

program as well as over 75 percent of the federal collections from the State Income Tax 

Levy Program.
Page 20 GAO-05-683T 

Comptrollers, and Treasurers, informed us that they had not pursued 

reciprocal agreements because they were not aware that this debt 

collection avenue exists. The state officials all expressed interest in 

obtaining more information on potential agreements and in assessing the 

potential benefits of such agreements. 

Our review indicated that many federal contractors paid through FMS have 

unpaid state tax debt. Our analysis of FMS’s payment records found that 

FMS disbursed a total of about $1.8 billion to over 4,600 federal contractors 

with state tax debt—primarily tax debt owed by individuals—in fiscal year 

2004. These contractors owed approximately $17 million in state tax debt. 

According to our analysis, if states had reciprocal agreements with FMS, 

the states could have collected over half of the outstanding state tax debt 

from these federal contractors in a single year. 

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 50 case-study 

contractors typically operate in wage-based industries, providing security, 

building maintenance, professional services, health care, and personnel 

services for the Departments of Homeland Security, Justice, and Veterans 

Affairs, and the National Aeronautics and Space Administration, to name a 

few. The contractors are mostly small—many of them, closely held by the 

owners and officers. In table 2, and on the following pages, we summarize 

10 of these businesses. The amount of unpaid taxes associated with these 

10 case studies ranged from nearly $400,000 to over $18 million. We found 

that some case-study contractors had large amounts of unpaid taxes 

because they were “multiple abusers,” i.e., they were one of a group of 

related companies that owed taxes. Several “multiple abusers” among 

these 10 cases studies owed taxes for more than 50 tax periods; in one 

case, a group of about 20 related businesses owed nearly $13 million over 

more than 300 tax periods. It was also not surprising to find that a few of 

the business owners among these case studies also owed individual income 

taxes. Furthermore, we determined that 9 of the 10 case studies had unpaid 

state and local taxes significant enough that state and local tax taxing 

authorities had filed tax liens against them. 

Our investigations revealed that some owners had substantial personal 

assets—including commercial real estate, a sports team, or multiple luxury 

vehicles—yet their businesses failed to remit the payroll taxes withheld 

from employees’ salaries. Several owners owned homes worth over 

$1 million—one owner had over $3 million and another had over 
Page 21 GAO-05-683T 

$30 million in real estate holdings. Others informed our agents that they 

diverted payroll taxes they had not remitted to IRS for personal gain or to 

fund their business, while others were engaged in activities that also 

indicated that they might have diverted 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 for income tax 

purposes of more than $2 million. In one case, even though the business 

owed IRS for unpaid payroll taxes withheld from employees’ salaries, the 

business was involved in a joint venture to spend millions on additional 

facilities and new technologies, some of which will take place outside the 

United States. In addition, we found that 3 of the 50 case studies involved 

owners or officers who had been either convicted or indicted for non-taxrelated criminal activities or were under IRS investigation. We are referring 

the 50 cases detailed in our report to IRS so that it can determine whether 

additional collection action or criminal investigation is warranted. 

Table 2: Civilian Agency Contractors with Unpaid Federal Taxes

Case 

study

Goods, services, 

or nature of work 

and agencies to 

whom they were 

provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments

1 Health-carerelated 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. 

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.
Page 22 GAO-05-683T 

3 Health-carerelated 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 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 an assessed value of 

over $2 million.

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 for 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-carerelated 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 the late 1990s, the officer who had been 

assessed the 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.

(Continued From Previous Page)

Case 

study

Goods, services, 

or nature of work 

and agencies to 

whom they were 

provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments
Page 23 GAO-05-683T 

Source: GAO’s 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.

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. 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.

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 2000s. 

• 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 also 

declared large losses but doubled the salary of one officer to over 

$750,000. 

• 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 the 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 

whom they were 

provided 

Fiscal year

2004 FMS

paymentsa

Unpaid

federal tax

amountb Comments
Page 24 GAO-05-683T 

The following provides illustrative detailed information on several of 

these cases.

Case 1: This case includes many related companies that provide health 

care services for 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 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. Furthermore, since the company started owing 

taxes, the owner had sold real estate valued at over $1 million. The 

executives of these entities 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, the 

owner’s individual income tax debt totaled more than $400,000, bringing 

the total tax debt of this case study contractor to over $9 million. One 

business provides nursing care services for the Department of Veterans 

Affairs, for which it was paid over $200,000 during fiscal year 2004. An 

officer of the company has been assessed a multimillion-dollar trust fund 
Page 25 GAO-05-683T 

penalty for willful failure to remit payroll taxes and was recently arrested 

on fraud charges. Our investigative work indicates that an owner made 

multiple cash withdrawals, each valued at tens of thousands of dollars, in 

the early 2000s while owing payroll taxes and that these 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 for 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. 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 

for 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. 

Concluding Comments 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. 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 

not exercised effective and proactive oversight and management of the 

program. Overall, the problems we discuss throughout our companion 

report issued today paint a picture of a program badly in need of 

management overhaul. Until FMS takes decisive actions to improve 
Page 26 GAO-05-683T 

oversight and management of the program, there will be a persistent loss of 

collections and contractors will continue to be able to abuse the tax system 

with little consequence.

Furthermore, by failing to pay taxes on their income or diverting the 

payroll taxes withheld from their employee’s 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. Over time, this could lead to further erosion in taxpayers’ confidence 

in the fairness of the nation’s tax system, leading to increased rates of 

noncompliance with the nation’s tax laws. Federal contractors should be 

held to a high 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. 

Our companion report includes 18 recommendations to FMS and one to 

IRS. Our recommendations to FMS address the need to improve 

implementation of the FPLP so that FMS can increase by tens of millions of 

dollars annually the amount levied from payments to contractors with 

unpaid federal taxes, including the need to identify and correct payments 

made to contractors without valid taxpayer identification numbers and 

implement procedures to provide reasonable assurance that all eligible 

payments are submitted for levy. Our recommendation to IRS calls for it to 

investigate and, if warranted, pursue collection or criminal investigation of 

the 50 case study contractors identified in the report. In written comments 

on a draft of the companion report, IRS agreed with our findings and 

recommendations, and pointed to efforts that it has taken to deal with 

contractors who abuse the federal tax system. FMS partially agreed with 

our recommendations. However, while not disputing the substance of our 

findings, FMS disagreed that its management of the program was 

ineffective. FMS stated that it believed that it had provided excellent 

leadership of the levy program, that the weaknesses we cited in the 

companion report were the result of difficult management choices, and 

that the responsibility for managing the levy program rests with IRS. FMS 

also disagreed with our conclusion that it had not fully implemented the 
Page 27 GAO-05-683T 

100 percent levy provision. FMS also did not agree with two of our 

recommendations, specifically, that it should withhold payments to 

vendors without names in the agency payment files and that it work with 

IRS to explore options to levy payments or otherwise collect outstanding 

tax debt from contractors paid by purchase card vendors. 

We continue to believe that the problems we discuss throughout the 

companion report paint a picture of a program badly in need of 

management overhaul. Although IRS has a key responsibility to refer tax 

debts, FMS has an equally key responsibility to make all payments available 

for levy. We continue to believe that all of our recommendations constitute 

valid and necessary courses of action, especially in light of the identified 

weaknesses and the slow progress that FMS has made to maximize 

collections since the passage of the Debt Collection Improvement Act more 

than 8 years ago.

Mr. Chairman; Members of the Subcommittee; and Senators Collins, Levin, 

and Akaka, this concludes our prepared statement. We would be pleased to 

answer any questions you may have.

Contacts and 

Acknowledgment

For future contacts regarding this testimony, please contact Gregory D. 

Kutz at (202) 512-9095 or kutzg@gao.gov, Steven J. Sebastian at 

(202) 512-3406 or sebastians@gao.gov, or John J. Ryan at (202) 512-9587 or 

ryanj@gao.gov. Individuals making key contributions to this testimony 

included, 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, David Shoemaker, Sid Schwartz, Esther 

Tepper, Tuyet-Quan Thai, Wayne Turowski, Matt Valenta, Scott Wrightson, 

and Mark Yoder.

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