United States Government Accountability Office

GAO Testimony 

Before the Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate

FINANCIAL 

MANAGEMENT 

Thousands of GSA 

Contractors Abuse the 

Federal Tax System 

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 

For Release on Delivery

Expected at 9:30 a.m. EST 

Tuesday, March 14, 2006

 

GAO-06-492T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 14, 2006

FINANCIAL MANAGEMENT 

Thousands of GSA Contractors Abuse 

Highlights of GAO-06-492T, a testimony the Federal Tax System 

before the Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate 

In February 2004 and again in June

2005, GAO testified that some

Department of Defense (DOD) and

civilian agency federal contractors 

abused the federal tax system with 

little consequence. Previous 

problems we identified with 

contractors with unpaid taxes have

led to concerns over whether any 

interagency contractors, such as 

those on the General Services

Administration’s (GSA) federal 

supply schedule, failed to pay their 

taxes. GSA, through its federal 

supply schedule and other 

interagency contracts, arranges for 

federal agencies to purchase 

billions of dollars of goods and 

services directly from private 

vendors. GAO was asked to

determine if GSA contractors, 

including both contractors that

were paid by GSA and GSA

interagency contractors, have 

unpaid federal taxes, and if so, to 

(1) determine the magnitude of tax 

debts owed by GSA contractors; 

(2) identify examples of GSA 

contractors that have tax debts and 

are also engaged in potentially

abusive, fraudulent, or criminal 

activities; and (3) determine 

whether GSA screens contractors

for tax debts and criminal activities 

prior to awarding contracts and at 

the exercise of any government

contract options. 

Over 3,800 GSA contractors had tax debts totaling about $1.4 billion as of 

June 30, 2005. This represented approximately 10 percent of the number of 

GSA contractors during fiscal year 2004 and the first 9 months of fiscal year 

2005. 

GAO investigated 25 GSA contractors with abusive and potentially criminal 

activity. These businesses had not forwarded payroll taxes withheld from 

their employees and other taxes to IRS. Willful failure to remit payroll taxes 

is a felony under U.S. law. Furthermore, some company owners diverted 

payroll taxes for personal gain or to fund their businesses. These contractors 

worked for a number of federal agencies including the departments of 

Defense, Justice, and Homeland Security. 

A number of owners or officers of the 25 GSA contractors have significant 

personal assets, including commercial properties, houses worth over 

$1 million, and luxury vehicles. In addition, several of the owners of these 

GSA contractors gambled hundreds of thousands of dollars at the same time 

they were not paying the taxes that their businesses owed. 

Examples of Abusive and Potentially Criminal Activity 

Type of 

Business 

Unpaid tax 

debt

Payments to 

contractor Contractor activity

Emergency 

supplies 

Over 

$700 ,000 

Up to 

$100,000

Company loaned hundreds of thousands of 

dollars to company officer at same time 

company was not paying its taxes. 

Security

services

Over 

$9 million

At least 

$1 million

Company owner made cash withdrawals to 

fund an unrelated business and purchase a

men’s gold bracelet worth over $25,000. 

Security

services

Nearly 

$2 million

At least

$1 million

Company repeatedly underpaid taxes to 

fund business while company owner 

reported personal income of nearly 

$1 million 

Source: GAO’s analysis of IRS, FMS, GSA, public, and other records. 

Neither federal law, as implemented by the Federal Acquisition Regulation 

(FAR), nor GSA policies require contracting officers to specifically consider 

tax debts in making contracting decisions either at initial award or when 

considering options to extend. In addition, federal law generally prohibits 

the disclosure of taxpayer data, and consequently contracting officers have

no access to tax data directly from the IRS. GSA contractors that do not 

pay tax debts could have an unfair competitive advantage in costs 

because they may have lower costs than tax compliant contractors on 

government contracts. This is especially true in wage-based businesses 

that provide homogenous types of goods and services. GAO’s 

investigation identified instances in which contractors with tax debts 

won awards based on price differential over tax compliant competing 

contractors. 

www.gao.gov/cgi-bin/getrpt?GAO-06-492T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory Kutz at 

(202) 512-7455 or Steve Sebastian at (202) 

512-3406. 
Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss General Services Administration

(GSA) contractors that have abused the federal tax system while doing 

business with the federal government. In hearings held by this 

subcommittee in February 2004 and again in June 2005,1

 we testified that 

some Department of Defense (DOD) and civilian agency federal 

contractors abused the federal tax system with little consequence. In 2005,

we designated interagency contracting, in which GSA plays a prominent 

role, as a new high-risk area.2

 This designation is partly based on the fact

that interagency contracting3

 tends to create an incentive for the agency

awarding the contracts to focus more on increasing contracting volume 

that generate fees than on compliance with sound contracting policy and 

required procedures (see app. II for further details on GSA’s contracting 

role). 

This testimony continues a body of work which has identified federal 

contractors with unpaid taxes. Our prior work gave rise to concerns over 

whether GSA interagency contractors, such as those on GSA’s federal 

supply schedule, have also failed to pay their fair share of taxes.4

 As a 

result, you asked us to determine if GSA contractors have unpaid federal

taxes,5

 and if so, to (1) determine the magnitude of tax debts owed by GSA 

 1

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

with Little Consequence, GAO-04-414T (Washington, D.C.: Feb. 12, 2004), and Financial

Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System 

with Little Consequence, GAO-05-683T (Washington, D.C.: June 16, 2005). 

2

 See GAO, High-Risk Series, An Update, GAO-05-207 (Washington, D.C.: January 2005). 

3

 Interagency contracts are those in which one federal agency (typically GSA) awards the 

contract, such as a federal supply schedule contract, and other federal agencies use the 

contracts, frequently paying a fee to do so. 

4

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

System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12, 2004), and

Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal

Tax System with Little Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005).

5

 For purposes of this report, GSA contractors include both contractors that were paid by

GSA and GSA interagency contractors. GSA-paid contractors are contractors paid by GSA 

finance centers for goods and services. These goods and services may be used by GSA 

internally or may be purchased by GSA for the benefit of other agencies (such as GSA 

global supply purchases of commercial items for sale to federal agencies). GSA interagency

contractors are contractors awarded contracts by GSA (such as federal supply schedule 

and governmentwide acquisition contracts) from which agencies routinely acquire services

and products for their procurement needs.

Page 1 GAO-06-492T 
contractors; (2) identify examples of GSA contractors that have tax debts 

and are also engaged in potentially abusive, fraudulent, or criminal 

activities; and (3) determine whether GSA screens contractors for tax 

debts and criminal activities prior to awarding contracts and at the 

exercise of any government contract options. 

To identify GSA contractors with unpaid federal taxes, we obtained and

analyzed the Internal Revenue Service (IRS) tax debt data as of June 30, 

2005. We matched the identities of contractors with IRS tax debts to 

federal contractors that were either paid or awarded contracts by GSA to 

contract with federal agencies during fiscal year 2004 and the first 9 

months of fiscal year 2005. To illustrate indications of abuse or potentially

criminal activity, based on our data mining, we selected 25 GSA 

contractors for a detailed audit and investigation. For these 25 contractors, 

we reviewed copies of automated tax transcripts and other tax records 

(for example, revenue officer’s notes) and performed additional searches

of criminal, financial, and public records. To determine whether GSA 

contracting officers are required to consider tax debts or other criminal 

activities, we examined the Federal Acquisition Regulation (FAR) and GSA 

regulations, policies and procedures for conducting responsibility 

determinations on prospective contractors. We also discussed acquisition 

policies and procedures used to award contracts with GSA officials and, as

part of these discussions, we determined whether contracting officers 

specifically consider tax debts or perform background investigations in 

determining whether a prospective contractor is a responsible source 

before the contract is awarded and before the option to extend the 

contract is exercised. For details on our scope and methodology, see 

appendix I. 

We conducted our audit work from June 2005 through January 2006 in 

accordance with U.S. generally accepted government auditing standards. 

We performed our investigative work in accordance with standards 

prescribed by the President’s Council on Integrity and Efficiency. 

During fiscal year 2004 and the first 9 months of fiscal year 2005, 

thousands of GSA contractors abused the federal tax system with little 

consequence.

6

 Specifically, our analysis of data provided by the 

Summary 

 6

 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-06-492T 
Department of Treasury’s Financial Management Service (FMS), GSA, and 

the IRS indicates that over 3,800 GSA contractors, or about 10 percent of 

all GSA contractors, had tax debts totaling about $1.4 billion as of June 30,

2005.

7

 The unpaid taxes included corporate income, payroll,8 excise, and 

unemployment taxes. 

We found instances of abusive or potentially criminal activity related to

the federal tax system through our audit and investigation of 25 GSA 

contractor case studies. These 25 contractors provided a variety of goods 

and services, including building maintenance, security services, and 

computer services. During fiscal year 2004 and the first 9 months of fiscal 

year 2005, the contractors were tasked by multiple agencies, including the

departments of Defense, Justice, Homeland Security, and Veterans Affairs 

to perform work under a GSA contract. 

The 25 contractors owed primarily payroll taxes, with some dating back to

the mid-1990s. These payroll taxes included amounts withheld from 

employee wages for Social Security, Medicare, and individual income 

taxes. However, rather than fulfilling their role as “trustees” and 

forwarding these amounts to IRS, many of these GSA contractors diverted 

the money for personal gain or to fund the business. Willful failure to remit 

payroll taxes is a criminal felony offense9

 while the failure to properly 

segregate payroll taxes can be a criminal misdemeanor offense.10 In one 

case study, the contractor did not pay its tax liability at the time the 

company was making a loan to a company officer for hundreds of 

thousands of dollars in the 1990s. The company subsequently filed for 

bankruptcy. After the company’s bankruptcy was discharged in the late

1990s, the company failed again to remit all of its payroll taxes. At the 

same time of owing payroll taxes, the company officer who received the 

loan acquired a luxury vehicle and purchased a residential property 

currently valued in the millions of dollars. Similarly, a number of owners 

 7

 Because many GSA contractors are interagency contractors, some of the approximately 

3,800 contractors described in this report may also have been included in our reports 

concerning DOD and civilian federal contractors that abuse the federal tax system.

8

 Payroll taxes are amounts that employers 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. Employers are

responsible for remitting payroll taxes to IRS and are liable for any outstanding balance. 

9

 26 U.S.C. § 7202. 

10 26 U.S.C. § 7215 and 26 U.S.C. §7512 (b). 

Page 3 GAO-06-492T 
or officers in the other 24 case studies had significant personal assets, 

including commercial properties, houses worth over $1 million, and luxury 

vehicles. Despite owning significant assets, the owners or officers did not

pay the delinquent taxes of their businesses, and sometimes did not pay 

hundreds of thousands of dollars of their own individual income taxes. 

Several owners also gambled hundreds of thousands of dollars at the same 

time they were not paying the taxes that their businesses owed. 

The Federal Acquisition Regulation (FAR) limits awards of contracts to 

responsible prospective contractors. A responsible prospective contractor

is a contractor that meets seven specific criteria,11 including adequate

financial resources and a satisfactory record of integrity and business 

ethics. However, neither federal law, as implemented by the FAR, nor GSA 

implementing policy specifically require contracting officers to take into 

account a contractor’s tax debt when assessing whether a prospective 

contractor is responsible. In policies issued to implement the FAR, GSA’s 

guidance does not discuss whether or how tax debts should be considered 

when making a determination of responsibility. We also found that the 

FAR does not require, and GSA has not issued a policy on, assessing a 

current contractor’s tax debts at the time the government exercises an 

option to extend a contract. As a result, no review is systematically 

performed by GSA to determine if such contractors have unpaid taxes at 

the time a contract is awarded or when an option to extend a contract is

exercised by the government. 

Due to the lack of specific responsibility criteria related to tax debts, 

limited GSA access to tax information, and lack of other procedures to 

assess contractor tax debts, GSA ultimately awarded contracts, including 

supply schedule contracts that other federal agencies may use to acquire 

services and products for their procurement needs, to businesses with 

significant tax debts. Federal law generally prohibits the disclosure of 

taxpayer data, and consequently contracting officers have no access to tax 

data directly from the IRS. Contracting officers can obtain some tax debt 

information by checking publicly available data sources to determine if 

IRS or state agencies have filed tax liens against a tax debtor’s assets. 

However, liens that IRS places on the company and/or its officers are not 

available at a single publicly available database, and IRS does not always 

file liens against tax debtors. 

 11 FAR 2.101; 9.104-1. 

Page 4 GAO-06-492T 
Finally, in wage-based businesses that provide homogeneous goods and 

services, GSA contractors that owe tax debts have an unfair advantage in 

price competition because they do not bear the same costs, such as payroll 

taxes, that tax compliant contractors do on government contracts. 

Over 3,800 GSA contractors had about $1.4 billion in unpaid federal taxes 

as of June 30, 2005.12 This represents approximately 10 percent of GSA 

contractors during fiscal year 2004 and the first 9 months of fiscal year 

2005. We took a conservative approach to identifying the amount of tax 

debt owed by GSA contractors, and therefore the amount is likely 

understated.

Magnitude of Unpaid 

Taxes of GSA 

Contractors 

Characteristics of 

Contractors’ Unpaid 

Federal Taxes 

As shown in figure 1, 85 percent of the approximately $1.4 billion in unpaid

taxes owed by GSA contractors was comprised of corporate income and 

payroll taxes. The other 15 percent of taxes included excise, 

unemployment, individual income, and other types of taxes. Unlike our 

previous reports on contractors with tax debts, a larger percentage of 

taxes owed by GSA contractors was comprised of corporate income taxes,

which are unpaid amounts that corporations owe on the income of their 

business. This was due to a handful of GSA contractors that owed a 

significant amount of corporate income tax debts as of June 2005. 

Excluding this handful of cases, payroll taxes make up about 40 percent of 

the outstanding taxes owed by GSA contractors. 

 12 Our estimate of GSA contractors with tax debt as of June 30, 2005, (1) excluded tax debts 

that have not been agreed to by the tax debtor or affirmed by the court, (2) tax debts from

calendar year 2005, and (3) tax debts of $100 or less. 

Page 5 GAO-06-492T 
Figure 1: Type of Federal Tax Debt Owed by GSA Contractors 

15%

19%

66%

Source: GAO analysis of GSA, Treasury, and IRS data as of June 30, 2005.

Other taxes $207 million

Payroll $274 million

Coporate $925 million

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. 

The amount of unpaid federal taxes we identified among GSA 

contractors—$1.4 billion—is likely understated. First, to avoid 

overestimating the amount owed by government contractors, we 

intentionally limited our scope to tax debts that were affirmed by either 

the contractor or a tax court for tax periods prior to 2005.

13 We did not 

include the most current tax year because recently assessed tax debts that 

appear as unpaid taxes may involve matters that are routinely resolved 

between the taxpayer and IRS, with the taxes paid, abated,14 or both within 

 13 We eliminated from our analysis all tax debt coded by IRS as not having been agreed to 

by the taxpayer (for example, by filing a balance due return) or a tax court. For financial 

reporting, those cases are referred to as compliance assessments.

14 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 6 GAO-06-492T 
a short period. We eliminated these types of debt by focusing on unpaid 

federal taxes for tax periods prior to calendar year 2005 and eliminating 

tax debt of $100 or less.15

Also limiting the completeness of our estimate of the unpaid federal taxes 

of GSA 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 from our case 

studies in which GSA contractors failed to file tax returns for a particular 

tax period and, therefore, were listed in IRS records as having no unpaid

taxes for that period. Further, our analysis did not attempt to account for 

businesses or individuals that purposely underreported income and were 

not specifically identified by IRS. According to IRS, underreporting of 

income is the largest component of the estimated $345 billion annual gross 

tax gap. IRS estimates that underreporting accounts for more than 80 

percent of the total gross tax gap. Consequently, the true extent of unpaid

taxes for these businesses and individuals is not known. 

As discussed previously, businesses with employees are required by law to

collect, account for, and transfer income and employment taxes withheld 

from employees’ wages to IRS. Businesses that fail to remit payroll taxes 

to the federal government are liable for the amounts withheld from 

employees, and IRS can assess a trust fund recovery penalty (TFRP) equal

to the total amount of taxes not collected or not accounted for and paid 

against individuals who are determined by IRS to be “willful and 

responsible” for the nonpayment of withheld payroll taxes.16 In addition to

civil penalties, criminal penalties exist for an employer’s failure to turn 

over withheld employee payroll taxes to IRS. Willful failure to remit 

payroll taxes is a criminal felony offense punishable by imprisonment of 

not more than 5 years,17 while the failure to properly segregate payroll 

GSA Contractors 

Involved in Abusive 

and Potentially 

Criminal Activity 

Related to the Federal 

Tax System

 15 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. 

16 26 U.S.C. § 6672. 

17 26 U.S.C. § 7202. 

Page 7 GAO-06-492T 
taxes can be a criminal misdemeanor offense punishable by imprisonment 

of up to a year.18

Our audit and investigation of the 25 case-study business contractors 

showed substantial abuse or potential criminal activity as all had unpaid 

payroll taxes and have diverted those funds for personal or business use. 

The 25 case-study contractors typically operate in wage-based industries, 

providing security, building maintenance, computer services, and 

personnel services for GSA and the departments of Defense, Homeland 

Security, Justice, and Veterans Affairs. The types of contracts that were 

awarded to these contractors included products and/or services related to

law enforcement, disaster relief, and national security. The amount of 

unpaid taxes associated with these case studies ranged from 

approximately $100,000 to over $9 million. Furthermore, we determined 

that several of the case studies had unpaid state and local taxes where 

state and local taxing authorities had filed multiple tax liens against them. 

Subsequent to the award of the most recent contract by GSA, one case 

study company and its owner were debarred from future federal contracts 

for illegal activity unrelated to their failure to pay their payroll taxes. 

Table 1 highlights 10 case studies with unpaid taxes. Our investigations 

revealed that, despite their companies owing substantial amounts of taxes 

to the IRS, some owners had substantial personal assets—including 

commercial real estate, interest in a chain store, or multiple luxury 

vehicles. Further, several owners owned homes worth over $1 million. 

See appendix III for the details on the other 15 GSA contractor case 

studies. We are referring the 25 cases detailed in our report to IRS so that 

it can determine whether additional collection action or criminal 

investigation is warranted. 

 18 26 U.S.C. § 7215 and 26 U.S.C. § 7512 (b). 

Page 8 GAO-06-492T 
Table 1: GSA Contractors with Unpaid Federal Taxes 

Case 

study Nature of work 

Contract 

payments from

October 2003 to

June 2005 

Unpaid 

federal tax Comments 

1 Emergency 

supplies

Up to $100,000 Over 

$700,000

• Company made large loans to a company officer at same time the 

company was not paying its taxes. 

• IRS assessed a Trust Fund Recovery Penalty against owner. 

• Company filed for bankruptcy protection owing substantial state 

and federal taxes. 

• The owner owned multiple real properties, including a million dollar 

home, and a luxury vehicle while company owed taxes. 

• Company had a federal tax lien at time GSA awarded a federal 

supply schedule contract. 

2 Security services At least 

$1 million 

Over

$9 million

• Company filed for bankruptcy in 2000s. 

• At the time company was not remitting all of its payroll taxes to 

IRS, the owner withdrew large amounts of funds from the company 

for personal use. 

• Owner used over $100,000 on gambling. 

• Company submitted false reports on a government contract. 

• Owner is being investigated for fraud. 

3 Building 

maintenance 

Up to $100,000 Over 

$700,000

• Company affiliated with two other related entities with tax debt. 

• Company filed for bankruptcy in 2000s. 

• Company did not file some recent payroll tax returns. 

• Owner made large cash withdraws totaling tens of thousands of 

dollars during the time little or no payroll taxes were remitted to 

IRS. 

• At the same time that the company was remitting little of its payroll 

taxes to IRS, the owner bought a luxury automobile, owned a

number of rental properties, and had partial ownership in a chain 

store. 

• Owner owes over $100,000 in personal income taxes. 

4 Security services At least 

$1 million 

Nearly

$2 million

• Tax debt is primarily unpaid payroll taxes. 

• Company repeatedly underpaid payroll taxes to fund company 

operations. 

• At the time company was underpaying payroll taxes, owner’s

reported personal income was nearly $1 million. 

• Company and IRS are negotiating installment agreement to pay 

unpaid taxes. 

• Owner owns residential property, commercial real estate, and land

worth over $1 million. 

• Owner owes over $200,000 in personal income taxes. 

5 Building 

maintenance 

Up to $100,000 Over

$2 million

• Company owes over $2 million in unpaid payroll taxes for more 

than 10 tax periods. 

• Owner used unremitted payroll taxes to fund the business. 

• Owner owns multiple commercial and residential properties. 

Page 9 GAO-06-492T 
Case 

study Nature of work 

Contract 

payments from

October 2003 to

June 2005 

Unpaid 

federal tax Comments 

6 Moving services At least 

$100,000 

Over

$2 million

• Company claimed payroll taxes were not paid due to employee 

embezzlement. 

• Company filed offer in compromise with IRS for about 5 percent of 

its outstanding tax balance, which IRS rejected. 

• The owners own homes cumulatively valued over $1 million and 

own several luxury vehicles. 

• Spouse of one of the owners recently received about $1.5 million 

in cash for sale of house. 

7 Building 

maintenance 

services

At least $100,000 Over 

$1 million

• Company owes payroll taxes for about 20 tax periods. 

• IRS placed federal tax liens on company from late 1990s to early 

2000s. 

• Owner owes over $250,000 in personal income taxes. 

8 Building 

maintenance 

services

At least 

$1 million 

Over

$100,000

• Almost all taxes owed are unpaid payroll taxes. 

• The owner maintains two residential properties valued at over 

$1million in total. 

• Federal and state tax liens were filed against the company.

9 Human resource

services 

At least $100,000 Over 

$400,000

• IRS reported company’s tax debts to Treasury for continuous levy 

on federal contractor payments. 

• Owner owns multiple real properties and several luxury vehicles. 

• At the time owner did not remit all taxes owed to IRS, the owner 

made multiple large cash withdraws at gambling casinos. 

• Company obtained contract for hurricane relief efforts. 

10 Public 

communications 

Up to $100,000 Over 

$2 million

• Almost all taxes owed are unpaid payroll taxes. 

• The owner owns residential properties valued at about $1 million. 

• At the time the company did not pay all of its payroll taxes, the 

owner made about $500,000 of cash withdrawals at gambling 

casinos. 

Source: GAO’s analysis of IRS, FMS, GSA, public, and other records. 

The following provides illustrative detailed information on several of these 

cases. 

• Case 1: This contractor provides emergency supplies for civilian agencies.

At the same time the company was not paying its taxes, the company made 

a loan to a company officer for hundreds of thousands of dollars. The 

company subsequently filed for bankruptcy owing a substantial amount of

federal and state taxes. After the company came out of bankruptcy, the 

company again failed to remit all of its taxes, including payroll taxes. IRS 

assessed a trust fund recovery penalty against the company and the owner 

for willful failure to remit payroll taxes. 

• Case 2: The company provided security services for a civilian agency. Our

investigative work indicates that an owner of the company made multiple

Page 10 GAO-06-492T 
cash withdrawals, totaling close to $1 million, while the contractor owed 

payroll taxes. The company’s owner used the cash withdrawals to fund an

unrelated business and purchase a men’s gold bracelet worth over $25,000.

The company’s owner has been investigated for fraud. 

• Case 4: The company provides security services for a civilian agency. Our 

investigative work indicates that the owner of the company did not make 

tax deposits because the company did not have the funds to pay employee 

costs or other business expenses. However, we found that the company 

owner owns multiple properties worth over $1 million. The owner also 

owes IRS approximately $200,000 for personal income taxes. 

Federal law implemented in the FAR, and GSA internal policies do not 

require GSA contracting officers to examine tax debt when awarding 

contracts, nor do they provide guidance as to what role, if any, tax debt 

should play in determining whether prospective contractors meet the 

general criteria of responsible contractors. Also, due to a statutory 

restriction on disclosure of taxpayer information, even if tax debts 

specifically were to be considered in the awarding of contracts, no 

coordinated or independent mechanism exists for contracting officers to 

obtain complete information on contractors that have unpaid tax debt. 

Therefore, GSA does not screen contractors for tax debts prior to 

awarding contracts to GSA-paid contractors and GSA interagency 

contractors, and ultimately, contractors with unpaid federal taxes receive 

contracts from the federal government. 

Federal law implemented in the FAR and GSA internal policies do not 

expressly prohibit a contractor with unpaid federal taxes from being 

awarded contracts from the federal government. Although the FAR 

requires that federal agencies only do business with responsible 

contractors, it does not specifically require federal agencies to deny the 

award of contracts to businesses and individuals that have unpaid taxes, 

unless the contractor was specifically debarred or suspended by a 

debarring official for specific actions, such as conviction for tax evasion. 

As part of the contractor responsibility determination for prospective 

contractors, the FAR requires contracting officers to determine whether a 

prospective contractor meets several specified standards, including 

adequate financial resources and a satisfactory record of integrity and 

business ethics. However, the FAR does not require contracting officers to

Tax Debts Are 

Generally Not 

Considered When 

Awarding Contracts 

Contractors with Federal 

Tax Debts Are Not 

Explicitly Prohibited from 

Doing Business with the 

Federal Government 

Page 11 GAO-06-492T 
consider tax debt in making this determination.19 Similarly, GSA policies in 

implementing the FAR do not provide any additional guidance to GSA 

contracting officers on whether or how tax debts should be considered 

when making a determination of financial responsibility.20 According to 

GSA officials, contracting officers may consider delinquent tax debts as 

part of their overall determination of a prospective contractor’s financial 

capability; however, the focus of such evaluation is on determining 

whether the contractor has the financial capability to deliver the products 

and services. Thus, there is no expectation that the contracting officer will

consider tax compliance when evaluating whether companies have the 

integrity or ethics to perform the contract. In addition, according to GSA 

officials, the determination for financial capability of the contract is only 

applicable when awarding new contracts.21 Thus, if the contractor does not 

pay its tax debts after the contract award, no consideration of this will be 

made by GSA contracting officers for the duration of the contract or at the 

subsequent exercise of any options to extend, which for certain GSA 

Supply Schedule contracts can last up to 20 years.

The FAR specifies that unless compelling reasons exist, agencies are 

prohibited from soliciting offers from, or awarding contracts to, 

contractors that are debarred, suspended, or proposed for debarment for 

various reasons, including tax evasion.22 Conviction for tax evasion is cited 

as one of the causes for debarment, while commission, i.e., indictment, for 

 19 The government may suspend a contractor suspected of tax evasion, upon adequate 

evidence, and debar a contractor for a conviction or civil judgment for commission of tax

evasion. Further, prospective contractors are required to certify in their bids or proposals 

whether they or their principals, within the preceding 3 years, were convicted or had civil 

judgments rendered against them for commission of tax evasion, and whether they or their 

principals are presently indicted or otherwise criminally or civilly charged with 

commission of tax evasion. 

20 GSA provides guidance to GSA contracting officers in the General Services 

Administration Acquisition Manual (GSAM), Acquisition Letters, and Procurement 

Information Bulletins. 

21 The FAR does not require a responsibility determination when an agency exercises 

options to extend a contract. For one contract file we reviewed, the contractor filed for 

bankruptcy prior to GSA’s action to extend. GSA exercised the option without 

consideration of the bankruptcy. GSA subsequently could not recover over $100,000 in

audit disallowances pursuant to the bankruptcy ruling.

22 Prior to awarding a contract, contracting officers are required to consult a 

governmentwide list, called the Excluded Parties List System (EPLS), of contractors that

have been debarred, suspended, or declared ineligible for government contracts, and 

review the prospective contractor’s self-certification of debarment and suspension. 

Page 12 GAO-06-492T 
tax evasion is cited as a cause for suspension. However, the deliberate 

failure to remit taxes, in particular payroll taxes, while a felony offense, 

will likely not result in a company being debarred or suspended unless the 

contractor was indicted or convicted of the crime. During our work, we 

found that none of the contractors described in this testimony, nor the 97 

contractors we reported in our previous work, have been charged with tax 

evasion,23 despite having abusive and potentially criminal activities related 

to the tax system. 

Current law restricts contracting officers’ access to tax debt information 

unless reported by prospective contractors themselves or disclosed in 

public records. Consequently, contracting officers do not have ready 

access to information on unpaid tax debts to assist in making contractor 

responsibility determinations with respect to financial capability, ethics, 

and integrity.

Contracting officers do not have a coordinated and independent 

mechanism to obtain accurate tax debt information on contractors that 

abuse the tax system. Federal law does not permit IRS to disclose 

taxpayer information, including tax debts.24 Thus, unless the taxpayer 

provides consent,25 certain tax debt information can only be discovered 

from public records when IRS files a federal tax lien against the property 

of a tax debtor.26 However, contracting officers are not required to obtain 

credit reports, which provides public record information, and when credit 

reports are obtained, GSA contracting officers generally focus on the 

contractor’s credit score and not necessarily any liens or other public 

information. In addition, public record information is limited because IRS

does not file tax liens on all tax debtors, and, while IRS has a central 

repository of tax liens, contracting officers do not have access to that 

information. Further, the listing of a federal tax lien in the credit reports of 

businesses or individuals may not be a reliable indicator of a contractor’s 

Restrictions on Tax Data 

Hamper Making 

Contractor Responsibility 

Determinations 

 23 GAO-04-95, GAO-05-637. 

24 26 U.S.C. § 6103. 

25 For example, contractors must provide IRS consent to validate taxpayer identification 

numbers (TINS) provided by the contractors in the Central Contractor Registration system. 

GSA officials stated that the contractor is not registered into the system until the TIN is 

validated with IRS records. 

26 Under section 6321 of the Internal Revenue Code, IRS has the authority to file a lien upon 

all property and rights to property, whether real or personal, of a delinquent taxpayer. 

Page 13 GAO-06-492T 
tax indebtedness because of deficiencies in IRS’s internal controls that 

have resulted in IRS not always releasing tax liens from property when the 

tax debt has been satisfied.27

Unless reported by prospective contractors themselves, contracting 

officers face significant difficulties obtaining or verifying tax compliance 

information on prospective contractors. For example, in one contractor 

file we reviewed, a GSA official did inquire about a federal tax lien with a 

prospective contractor. The prospective contractor provided 

documentation to GSA demonstrating the satisfaction of the tax liability 

covered by that lien. However, because the GSA official could not obtain 

information from the IRS on tax debts, this official was not aware that the 

contractor had other unresolved tax debts unrelated to this particular tax

lien. 

GSA interagency contractors are not only approved to do business with 

GSA, but with all federal agencies. The FAR does not require agencies that 

use contracts awarded by other agencies to perform additional 

background or other investigation to validate the awarding agencies’ 

determination that the contractors are responsible. Agency officials at the 

four agencies at which we inquired—the departments of Justice, State, and 

Veterans Affairs, and the National Aeronautics and Space 

Administration— generally stated that they did not perform additional 

background or other investigations when using contractors selected for 

interagency contracts. These officials informed us that they had assumed 

GSA performed all the screening necessary to ensure that the contractors 

were responsible contracting sources. Consequently, when GSA awards 

interagency contracts to contractors with tax debt, contractors with tax 

debts will be given an opportunity to do business with other federal 

agencies for the duration of the GSA contract. 

GSA Contractors Not 

Required to Undergo 

Further Determination of 

Responsibility or 

Background Investigation 

 27 GAO, IRS Lien Management Report: Opportunities to Improve Timeliness of IRS Lien

Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 2005). 

Page 14 GAO-06-492T 
GSA contractors with tax debts have an unfair advantage in costs when 

competing with contractors that pay their taxes. This is particularly true 

for wage-based industries that provide relatively basic types of goods and 

services, such as security and moving services. The most egregious abuse, 

not remitting employee payroll taxes, saved these companies over 15

percent of the employee’s wages. Clearly, contractors that do not pay their 

taxes do not bear the same costs that tax compliant contractors have 

when competing on contracts. As a result, when in direct competition for 

homogenous types of goods and services in wage-based businesses, these 

contractors could offer prices for their goods and services that are lower 

than their tax compliant competitors. Our investigations showed that some 

GSA contractors that did not fully pay their payroll taxes were issued task 

orders based solely on price over competing contractors that did not have 

any tax debts. The following provides information on these cases. 

Case 1: A GSA Schedule contractor was competitively awarded a task 

order from the GSA schedule in the late 1990s to provide temporary 

personnel services over another GSA contractor that was compliant with 

its taxes. The task order award was based solely on the hourly cost of the 

temporary employee. At the time, the contractor had owed taxes for at 

least 10 years. This contractor had a history of incurring payroll taxes on 

one company, then upon being assessed a trust fund recovery penalty on

that company but making little or no payments, closing that company and

starting another. The owner later renewed the contract under a new 

company name and Taxpayer Identification Number. 

Case 2: A GSA Schedule contractor was issued two competitive task 

orders for services related to moving office furniture and equipment. On 

both task orders, the contractor’s offer for services was significantly less 

than three competing offers on the first order and two competing offers on 

the second order. The contractor owed about $700,000 in unpaid taxes 

(mostly payroll taxes) while its competitors did not owe any unpaid taxes. 

Because the contractor did not pay its payroll taxes, a significant cost in a 

wage-based business, the contractor’s cost structure provided the 

contractor more flexibility in setting its price in the competition for federal 

contracts. 

There is widespread concern today about contractor fraud and related 

ethics problems in federal government contracting. However, except for 

contractors charged with or convicted of tax evasion, no laws or policies 

exist today that prevent GSA contractors with abusive and potentially 

criminal activity related to the federal tax system from being awarded 

Contractors with Tax 

Debts Have Unfair 

Cost Advantage in 

Contract Competition 

Concluding 

Comments 

Page 15 GAO-06-492T 
contracts and doing business with federal agencies. Aside from any 

general concerns about the federal government doing business with 

contractors that do not pay their taxes, allowing these contractors to do 

business with the federal government while not paying their taxes could 

create an unfair competitive advantage for these contractors. In essence, 

the current contract award process fails to encourage contractors to pay 

these taxes. This causes a disincentive to contractors to pay their fair 

share of taxes, and could lead to further erosion in compliance with the 

nation’s tax system. 

Page 16 GAO-06-492T 
Page 17 GAO-06-492T 

Appendix I: Objectives, Scope, and 

Methodology 

Our objectives were to (1) determine the magnitude of tax debts owed by 

GSA contractors; (2) identify examples of GSA contractors that have tax

debts and are also engaged in potentially abusive, fraudulent, or criminal 

activities; and (3) determine whether GSA screens contractors for tax 

debts and criminal activities prior to awarding contracts and at the 

exercise of any government contract options. 

To identify the magnitude of unpaid taxes owed by GSA contractors, we 

first identified the federal contractors that were either GSA interagency

contractors or that were paid by GSA. To identify GSA-paid contractors, 

we obtained from the Department of the Treasury’s Financial Management 

Service (FMS) the Payments, Claims, and Enhanced Reconciliation 

(PACER) database containing all Automated Clearing House (ACH) and 

check payments made by FMS on behalf of GSA to federal contractors 

during fiscal year 2004 and the first 9 months of fiscal year 2005.1

 To 

identify contractors screened by GSA’s Federal Supply Service (FSS), we 

obtained and analyzed GSA data on Multiple Award Schedule (MAS) 

contracts and other FSS award contracts as recorded in the Federal 

Supply Service Automated Supply System (FSS-19). To identify

contractors screened by GSA’s Public Buildings Service (PBS), we 

obtained and analyzed GSA data from its Pegasys and FPDS-NG systems. 

To identify contractors screened by GSA’s Federal Technology Service, we 

obtained and analyzed GSA data from its Pegasys system. 

To identify GSA contractors with unpaid federal taxes, we obtained and

analyzed the Internal Revenue Service (IRS) unpaid assessment data as of

June 30, 2005. We matched the GSA screened and/or paid contractor 

records to the IRS unpaid assessment data using the taxpayer

identification number (TIN) field. We also matched data obtained from 

competing bidders (those who were not awarded the task order) to the 

IRS assessment database using the TIN field to determine whether they 

owed tax debt. 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 are as 

follows: 

 1

 Although the GSA Kansas City finance center does make contractor payments on behalf 

of other agencies, they were able to identify those payments made for GSA contracts. 
• tax debts that IRS classified as compliance assessments or memo accounts 

for financial reporting,2

• tax debts from calendar year 2005 tax periods, and 

• contractors with total unpaid taxes of $100 or less. 

The criteria above were used to exclude tax debts that might be under 

dispute or generally duplicative or invalid, and tax debts that are recently 

incurred. 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 tax debts from 

calendar year 2005 tax periods to eliminate tax debt that may involve

matters that are routinely resolved between the taxpayer and IRS, with the 

taxes paid or abated within a short period. We further excluded tax debts 

of $100 or less because they are insignificant for the purpose of 

determining the extent of taxes owed by GSA contractors. 

To identify indications of abuse or potentially criminal activity, we 

selected 25 GSA contractors for a detailed audit and investigation. The 25

contractors were chosen using a non-representative selection approach 

based on our judgment, data mining, and a number of other criteria. 

Specifically, we narrowed the 25 contractors with unpaid taxes based on 

the amount of unpaid taxes, number of unpaid tax periods, amount of 

payments reported by GSA and FMS,3

 indications that owner(s) might be 

involved in multiple companies with tax debts, and selection of 

contractors doing business with a variety of federal agencies.

We obtained copies of automated tax transcripts and other tax records 

(for example, revenue officer’s notes) from IRS as of June 30, 2005, 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 25 case studies. We performed additional 

searches of criminal, financial, and public records. In cases where record 

 2

 Under federal accounting standards, unpaid assessments require taxpayer or court

agreement to be considered federal taxes receivables. Compliance assessments and memo 

accounts are not considered federal taxes receivable because they are not agreed to by

taxpayers or the courts. 

3

 Amount of payments reported by FMS and amounts reported by GSA could differ because 

contractors that have been pre-approved by GSA to do business with the government also 

receive payments from disbursing entities other than FMS, for example, Department of 

Defense or the U.S. Army Corps of Engineers.

Page 18 GAO-06-492T 
searches and IRS tax transcripts indicate that the owners or officers of a 

business are involved in other related entities4

 that have unpaid federal 

taxes, we also reviewed the related entities and the owner(s) or officer(s), 

in addition to the original business we identified. For the selected 25

cases, our investigators also contacted some contractors, performed 

interviews, and reviewed contract files to determine the extent of price 

competition and to identify bidders on competitively awarded contracts. 

To determine the extent to which contracting officers are to consider tax

debts or other criminal activities, we examined the Federal Acquisition 

Regulation (FAR) and GSA policies and procedures for conducting 

responsibility determinations on prospective contractors, including 

specific guidance on responsibility determinations and periodic reviews 

focusing on the quality of contract awards. We discussed acquisition 

policies and procedures used to award contracts with officials from the 

Office of Chief Acquisition, FSS, FTS, and PBS. As part of these 

discussions, we asked whether contracting officers specifically consider 

tax debts or perform background investigations to determine whether a 

prospective contractor is a responsible source before the contract is 

awarded. We also discussed with GSA officials whether any review is 

performed by the contracting officer at the option to extend the contract.

Additionally, we interviewed an official from GSA’s Kansas City Credit and 

Finance Center to determine how the center makes financial

determination recommendations and the role, if any, that tax debts have 

on that recommendation. 

To obtain an understanding of what steps other federal agencies take to 

screen GSA supply schedule contractors for tax debts or other criminal 

activities, we interviewed procurement agency officials at selected civilian 

agencies (including the National Aeronautics and Space Administration 

and the departments of Justice, State, and Veterans Affairs). We selected 

these agencies based on a number of criteria, including national security 

concerns and amount of payments to contractors, especially those with 

tax debts. As part of these discussions, we determined the level of reliance 

agencies placed on GSA’s contractor qualification determinations in 

awarding contracts, even for sensitive contracts such as security, to 

contractors that have been approved by GSA as responsible sources. 

 4

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

TIN, or a common address.

Page 19 GAO-06-492T 
We conducted our audit work from June 2005 through January 2006 in 

accordance with U.S. 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. 

For the IRS unpaid assessments data, we relied on the work we performed 

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 was sufficiently reliable to address this 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 Payments, Claims, and Enhanced Reconciliation (PACER) database,

we interviewed FMS officials responsible for the database and reviewed 

documentation provided by FMS supporting quality reviews on its 

databases. In addition, we performed electronic testing of specific data 

elements in the database that we used to perform our work. 

To help ensure reliability of GSA-provided data, we interviewed GSA 

officials concerning the reliability of the data provided to us. In addition, 

we performed electronic testing of specific data elements in the databases 

that we used to perform our work and performed other procedures to 

ensure the completeness of the contract data provided by GSA. We also 

reviewed the results of the GSA Inspector General’s audit of the system’s 

internal controls completed in support of GSA’s fiscal year 2004 

consolidated and combined financial statements. 

Based on our discussions with agency officials, review of agency 

documents, and our own testing, we concluded that the data elements 

used for this testimony were sufficiently reliable for our purposes. 

Data Reliability 

Assessment 

Page 20 GAO-06-492T 
Page 21 GAO-06-492T 

Appendix II: Background 

As the federal government’s principal business agent, General Services 

Administration’s (GSA) activities and programs are diverse and have 

governmentwide implications. Through its supply schedules and 

governmentwide acquisition contracts, GSA arranges for federal agencies

to purchase billions of dollars of goods and services directly from private 

vendors. In addition, its telecommunication and computer services and 

real estate activities involve huge sums of money and extensive interaction 

with the private sector. 

GSA provides goods and services and develops policy through a network 

of 11 regional offices and a central office in Washington, D.C. GSA’s 

programs are generally run by its three service components—Federal 

Supply Service (FSS), Federal Technology Service (FTS), and Public 

Buildings Service (PBS).1

FSS assists federal agencies in acquiring a full range of products—

including over 4 million commonly used commercial items, ranging from 

furniture, computers, tools, equipment, and motor vehicles. FSS also 

supports agencies in acquiring services, such as professional consulting, 

travel, transportation, and property management. FSS has followed a selfservice business model, using contracts, called supply schedule contracts, 

that are designed to be flexible, simple to use, and consistent with 

commercial buying practices. FSS negotiates master contracts with 

vendors, seeking discounts off commercial list prices that are at least as

favorable as the discounts offered to those vendors’ most favored 

customers. Federal agencies can then use these supply schedule contracts 

to issue task orders from which goods and services are acquired. 

FTS provides customers with telecommunications products and 

services—voice, data, and video—and a full range of IT products and 

services. Unlike FSS, FTS has followed a full-service business model, 

providing assisted procurement services to help agencies define and fill 

their IT and telecommunications requirements. FTS is a major user of the 

FSS supply schedule contracts as well as a range of contract vehicles FTS 

and other federal agencies have awarded—commonly known as 

governmentwide acquisition contracts. 

 1

 GSA is in the process of merging FSS and FTS into a new service component called 

Federal Acquisition Service. 
PBS is the primary property manager for the federal government, utilizing 

government buildings and privately owned leased facilities.2

 In order to 

meet the office space needs for federal agencies, GSA hires and manages 

private sector professionals, such as architects, engineers, and contractors 

to design, renovate, and construct federal buildings. In addition, GSA 

leases space in cities and small towns when leasing is the practical answer 

to meeting federal space needs. 

From a financing standpoint, GSA is unusual among federal agencies in

that most of its funding does not come from direct appropriations from 

Congress. Instead, GSA’s funding comes from fees GSA charges agencies

for the goods and services provided and the rents from its buildings. As 

such, GSA must encourage other agencies to acquire goods and services

from the contracts GSA has awarded to help cover its operating costs. In 

fiscal year 2004, GSA reported revenues of approximately $20 billion to

cover the costs of its operations. 

 2

 Over 30 other executive branch agencies, including DOD and the departments of State,

Veterans Affairs, and Transportation, have some level of authority to purchase, own, or

lease office space or buildings. 

Page 22 GAO-06-492T 
Page 23 GAO-06-492T 

Table 1 in the main portion of this testimony provides data on 10 detailed

case studies. Table 2 shows the remaining case studies that we audited

and investigated. As with the 10 cases discussed in the body of this 

testimony, we also found substantial abuse or potentially criminal activity 

related to the federal tax system during our review of these 15 case 

studies. The case studies involving businesses with employees primarily 

involved unpaid payroll taxes. Several of the companies negotiated an

installment or repayment agreement with the Internal Revenue Service 

(IRS) but subsequently defaulted on that agreement. 

Table 2: GSA Contractors with Unpaid Federal Taxes 

Case 

study Nature of work 

Contract 

payments from

October 2003 to

June 2005 

Unpaid 

federal tax Comments 

11 Commercial 

research 

At least $100,000 Nearly 

$400,000

• Company repeatedly underpaid its payroll taxes since the 1990s

and owes payroll tax debt for more than 15 tax periods. 

• Company diverted payroll taxes to fund business. 

• Company negotiating offer in compromise with IRS. 

• Owner owns a million dollar home. 

• Multiple state tax liens totaling more than $50,000 filed against 

the company. 

12 Management 

consulting services 

At least 

$1 million 

Nearly 

$200,000

• Company in active repayment agreement with IRS. 

• Company awarded grants by Department of Housing and Urban 

Development. 

13 Financial Related 

Services

Up to $100,000 Over $1 

million

• Company tax debts cover more than 10 tax periods beginning in 

the 1990s. 

• Tax debt is primarily unpaid payroll taxes. 

14 Web site 

development 

services 

At least $100,000 Over 

$200,000

• Company sporadically made payroll tax payments in the early 

2000s. 

• Company negotiated installment agreement in 2000s but 

subsequently defaulted on the agreement within the next year. 

15 Information 

technology services

At least $100,000 Over $2 

million

• Tax debt is unpaid payroll taxes covering nearly 15 tax periods. 

• The company is a chronic nonfiler of payroll taxes and repeatedly 

fails to remit payroll tax deposits. 

• IRS initiated litigation against company. 

16 Data processing 

services 

At least 

$1 million 

Over

$100,000

• Tax debt is unpaid payroll taxes covering about 10 tax periods. 

• Company attempted to establish installment agreement after offer 

in compromise for about $50,000 was rejected by IRS. 

• IRS assessed a Trust Fund Recovery Penalty against owner. 

Appendix III: Contractors with Unpaid Taxes 
Case 

study Nature of work 

Contract 

payments from

October 2003 to

June 2005 

Unpaid 

federal tax Comments 

17 Elevator services Up to $100,000 Over 

$800,000

• Company repeatedly underpaid its payroll taxes since the early 

2000s. 

• Company entered into installment agreement with the IRS but 

subsequently defaulted. 

• IRS assessed owner Trust Fund Recovery Penalties of more than 

$300,000 for willful failure to pay payroll taxes. 

• Multiple state and local tax liens totaling more than $200,000 filed 

against the company. 

18 Security services At least 

$1 million 

Over

$2 million

• Company negotiated installment agreement with IRS but 

frequently late in payments. 

• Bank closed company’s checking account because of suspected

check kiting. 

• Owner owns million-dollar lakeside residence. 

• Multiple federal and state tax liens totaling over $2 million filed 

against the company since early 2000s. 

19 Facilities

management 

services

At least 

$1 million 

Over

$500,000

• Business affiliated with one other related entity with over 

$500,000 in unpaid taxes. 

• Tax debt largely consists of payroll taxes. 

• Company negotiated installment agreement with IRS in 2000s but 

defaulted on agreement the following year. 

• Owner leasing a luxury vehicle. 

20 Manufacturing 

fixtures 

At least 

$1 million 

Over

$100,000

• Owner owns commercial property worth nearly $2 million. 

• IRS assessed a Trust Fund Recovery Penalty against owner for 

willful failure to pay payroll taxes. 

• Multiple state and county tax liens filed against the company. 

21 Computer

consulting services 

Up to $100,000 Over 

$100,000

• The company has not remitted payroll taxes or filed payroll tax 

returns to the IRS since early 2000s. 

• IRS reported company’s tax debts to Treasury for continuous levy 

on federal contractor payments. 

22 Security services Up to $100,000 Over

$3 million

• Tax debt is primarily unpaid payroll taxes covering nearly 15 tax 

periods. 

• Company attempted offer in compromise but was rejected by IRS.

• Owner owned commercial properties and a yacht. 

23 Communication 

equipment

Up to $100,000 Nearly 

$900,000

• Tax debt is primarily unpaid payroll taxes from the 1990s. 

• Company offered IRS to settle debt for about a third of what it 

owed, but IRS rejected the compromise offer.

• Owner convicted of money laundering. 

• Multiple state tax liens filed against company totaling over 

$100,000. 

Page 24 GAO-06-492T 
Case 

study Nature of work 

Contract 

payments from

October 2003 to

June 2005 

Unpaid 

federal tax Comments 

24 Computer

processing services 

At least $100,000 Over

$1.7 million

• Company and IRS agreed to compromise debt in 2000s for about 

half of what it owed but the company defaulted on the agreement 

(no payments were made). 

• Company has not filed payroll tax returns subsequent to 

compromise agreement. 

• IRS assessed trust fund recovery penalty on owner for willful 

failure to remit payroll taxes. 

• Company officer was arrested for assault. 

25 Human resources

services 

At least $100,000 Over 

$100,000

• Company affiliated with one other related entity that owed about 

$100 thousand in payroll taxes. 

• Company negotiated installment agreement in early 2000s but 

subsequently defaulted. 

• Company went out of business in 2000s. 

• Owner owns commercial property worth over $1 million, multiple 

residential properties, and a boat. 

Source: GAO’s analysis of IRS, FMS, GSA, public, and other records. 

Page 25 GAO-06-492T (192172) 
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