a

GAO

United States General Accounting Office

Report to Congressional Requesters

February 2004 FINANCIAL 

MANAGEMENT

Some DOD 

Contractors Abuse the 

Federal Tax System 

with Little 

Consequence

GAO-04-95
DOD and IRS records showed that over 27,000 contractors owed about 

$3 billion in unpaid taxes as of September 30, 2002. DOD has not fully 

implemented provisions of the Debt Collection Improvement Act of 1996 

that would assist IRS in levying up to 15 percent of each contract 

payment to offset a DOD contractor’s federal tax debt. We estimate that 

DOD could have collected at least $100 million in fiscal year 2002 had it 

and IRS fully utilized the levy process authorized by the Taxpayer Relief 

Act of 1997. As of September 2003, DOD had collected only about 

$687,000 in part because DOD provides contractor payment information 

from only 1 of its 16 payment systems to TOP. DOD had no formal plans 

at the completion of our work to provide payment information from its 

other 15 payment systems to TOP. 

Furthermore, we found abusive or potentially criminal activity related to 

the federal tax system through our audit and investigation of 47 DOD 

contractors. The 47 contractors provided a variety of goods and services, 

including parts or support for weapons and other sensitive military 

programs. The businesses in these case studies owed primarily payroll 

taxes with some dating back to the early 1990s. These payroll taxes 

included amounts withheld from employee wages for Social Security, 

Medicare, and individual income taxes. However, rather than fulfill their 

role as “trustees” and forward these amounts to IRS, these DOD 

contractors diverted the money for personal gain or to fund the business.

For example, owners of two businesses each borrowed nearly $1 million 

from their companies and, at about the same time, did not remit millions 

of dollars in payroll taxes. One owner bought a boat, several cars, and a 

home outside the United States. The other paid over $1 million for a 

furnished home. Both contractors received DOD payments during fiscal 

year 2002, but one went out of business in 2003. The business, however, 

transferred its employees to a relative’s company (also with unpaid 

taxes) and recently received DOD payments on a previous contract. 

IRS’s continuing challenges in collecting unpaid federal taxes also 

contributed to the problem. In several case studies, IRS was not 

pursuing DOD contractors due to resource and workload management 

constraints. For other cases, control breakdowns resulted in IRS 

freezing collection activity for reasons that were no longer applicable. 

Federal law does not prohibit contractors with unpaid federal taxes from 

receiving federal contracts. OMB is responsible for providing overall 

direction to governmentwide procurement policies, regulations, and 

procedures, and is in the best position to develop policy options for 

prohibiting federal government contract awards to businesses and 

individuals that abuse the tax system.

GAO was asked to determine 

(1) the magnitude of unpaid federal 

taxes owed by Department of 

Defense (DOD) contractors, 

(2) whether indications exist of 

abuse or criminal activity by DOD 

contractors related to the federal 

tax system, (3) whether DOD and 

the Internal Revenue Service (IRS) 

have effective processes and 

controls in place to use the 

Treasury Offset Program (TOP) in 

collecting unpaid federal taxes 

from DOD contractors, and 

(4) whether DOD contractors with 

unpaid federal taxes are prohibited 

by law from receiving contracts 

from the federal government. 

GAO makes recommendations to 

DOD for complying with statutory 

guidance and supporting IRS 

efforts in collecting unpaid taxes, 

to IRS for improving the 

effectiveness of collection 

activities, and to the Office of 

Management and Budget (OMB) to 

develop options for prohibiting 

federal contract awards to 

businesses and individuals that 

abuse the federal tax system. DOD 

and IRS partially agreed; OMB did 

not agree. DOD and OMB also did 

not agree with GAO’s matters for 

congressional consideration that 

DOD report on its collections 

through TOP and OMB report on 

policy options developed and 

actions taken against contractors 

that abuse the federal tax system. 

GAO reiterated support for its 

recommendations as well as for its 

suggestions to Congress. 

www.gao.gov/cgi-bin/getrpt?GAO-04-95

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory D. Kutz 

at (202) 512-9095 or kutzg@gao.gov, or 

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

Highlights of GAO-04-95, a report to 

congressional requesters 

February 2004

FINANCIAL MANAGEMENT 

Some DOD Contractors Abuse the 

Federal Tax System with Little 

Consequence 
Page i GAO-04-95 DOD Contractor Tax Abuse

Contents

Letter 1

Results in Brief 3

Background 6

DOD Contractors Owe Billions in Unpaid Federal Taxes 13

DOD and IRS Are Not Collecting Millions in Unpaid Federal Taxes 

from Contractors 19

DOD Contractors Involved in Abusive or Potentially Criminal 

Activity Related to the Federal Tax System 32

Contractors with Unpaid Taxes Are Not Prohibited by Law from 

Receiving Contracts from the Federal Government 41

Conclusions 44

Matters for Congressional Consideration 45

Recommendations for Executive Action 45

Agency Comments and Our Evaluation 47

Appendixes

Appendix I: Scope and Methodology 53

Appendix II: DOD Contractors with Unpaid Federal Taxes 56

Appendix III: Comments from the Department of Defense 61

Appendix IV: Comments from the Internal Revenue Service 66

Appendix V: GAO Contacts and Staff Acknowledgments 68

GAO Contacts 68

Acknowledgments 68

Tables Table 1: Types of Goods and Services Provided by DOD 

Contractors in Case Studies 33

Table 2: DOD Contractors with Unpaid Federal 

Taxes—Business 35

Table 3: DOD Contractors with Unpaid Federal 

Taxes—Individual 39

Table 4: DOD Contractors with Unpaid Federal 

Taxes—Business 56

Table 5: DOD Contractors with Unpaid Federal 

Taxes—Individual 59

Figures Figure 1: Fiscal Year 2002 Federal Contract Award Amounts by 

Agency 7

Figure 2: DOD Contractor Unpaid Taxes by Tax Type 14
Contents

Page ii GAO-04-95 DOD Contractor Tax Abuse

Figure 3: DOD Contractor Unpaid Taxes by Fiscal Year 16

Abbreviations

ACS Automated Collection System

CAPS Computerized Accounts Payable System

CCR Central Contractor Registration

DCIA Debt Collection Improvement Act of 1996

DCMA Defense Contract Management Agency

DFAS Defense Finance and Accounting Service

DLIS Defense Logistics Information Service

DOD Department of Defense

DOE Department of Energy

EIN employer identification number

FAR Federal Acquisition Regulation

FICA Federal Insurance Contribution Act

FMS Financial Management Service

FPLP Federal Payment Levy Program

GSA General Services Administration

IAPS Integrated Accounts Payable System

IRS Internal Revenue Service

MOCAS Mechanization of Contract Administration Services

NASA National Aeronautics and Space Administration

OMB Office of Management and Budget

OSI Office of Special Investigations

SSA Social Security Administration 

SSN Social Security number

TFRP trust fund recovery penalty

TIN tax identification number

TOP Treasury Offset Program

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Page 1 GAO-04-95 DOD Contractor Tax Abuse

United States General Accounting Office

Washington, D.C. 20548

A

February 12, 2004 Letr

The Honorable Norm Coleman

Chairman

The Honorable Carl Levin

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

The Honorable Janice D. Schakowsky

House of Representatives

In fiscal year 2002, the Department of Defense (DOD) awarded contracts 

totaling nearly $165 billion. This is nearly two-thirds of the federal 

government’s contracting activity. Since 1990, we have periodically 

reported on federal programs and operations that are high risk due to their 

greater vulnerabilities to fraud, waste, and abuse. Lasting solutions to highrisk problems offer the potential to save billions of dollars, dramatically 

improve service to the American public, strengthen public confidence and 

trust in the performance and accountability of our national government, 

and ensure the ability of the government to deliver on its promises.

DOD and the Internal Revenue Service (IRS) face a variety of high-risk 

challenges. Of the 26 areas on our governmentwide “high risk” list, 6 are 

DOD program areas, and the department shares responsibility for 3 other 

high-risk areas that are governmentwide in scope. Financial management, 

1 of the 6 DOD high-risk program areas, has weaknesses, including the lack 

of effective and efficient asset management and accountability, unreliable 

estimates of environmental and disposal liabilities, lack of accurate budget 

and cost information, nonintegrated and proliferating financial 

management systems, and fundamental flaws in the overall control 

environment. As we have documented in numerous reports, DOD’s 

financial management problems leave it highly vulnerable to fraud, waste, 

and abuse. IRS high-risk areas include financial management weaknesses 

and difficulties in collecting unpaid taxes. Both areas continue to expose 

the federal government to significant losses of tax revenue and 

disproportionately increase the burden on compliant taxpayers to fund 

government activities. This report addresses issues related to three highrisk areas: DOD and IRS financial management and IRS collection of 

unpaid taxes.
Page 2 GAO-04-95 DOD Contractor Tax Abuse

For the last several years, Congress and others have expressed concern 

that declines in IRS compliance and collections programs are eroding 

taxpayer confidence in the fairness of our federal tax system. As of 

September 30, 2002, IRS had confirmed unpaid taxes, including interest and 

penalties, totaling $249 billion nationwide,1 of which nearly $49 billion 

represented unpaid payroll taxes. 

As you requested, this report addresses (1) the magnitude of unpaid federal 

taxes owed by DOD contractors, (2) whether DOD and IRS have effective 

processes and controls in place to use the Treasury Offset Program (TOP)2

and Federal Payment Levy Program (FPLP)3 in collecting unpaid federal 

taxes from DOD contractors, (3) whether indications exist of abuse or 

criminal activity by DOD contractors related to the federal tax system, and 

(4) whether DOD contractors with unpaid federal taxes are prohibited by 

law from receiving federal contracts.

Our work was performed from March 2003 through September 2003 in 

accordance with generally accepted government auditing standards. The 

investigative portion of our work was completed in accordance with 

investigative standards established by the President’s Council on Integrity 

and Efficiency. Details on our scope and methodology are included in 

appendix I. The results of 17 of the 47 case studies we audited and 

investigated are shown in tables 2 and 3. The results of the other 30 case 

studies are included in appendix II.

1

 U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of the Treasury, GAO-03-109 (Washington, D.C.: January 2003).

2

 Treasury established TOP as part of implementing its responsibilities under the Debt 

Collection Improvement Act of 1996. Treasury created TOP to centralize the process by 

which certain federal payments are withheld or reduced to collect delinquent nontax debts 

owed to federal agencies.

3

 A provision in the Taxpayer Relief Act of 1997 authorized IRS to continuously levy up to 15 

percent of certain federal payments made to delinquent taxpayers. IRS established its 

continuous levy program, now referred to as FPLP, to collect federal tax debt. In this report, 

we refer to FPLP as the levy program. Levy is the legal process by which IRS orders a third 

party to turn over property in its possession that belongs to the delinquent taxpayer named 

in a notice of levy.
Page 3 GAO-04-95 DOD Contractor Tax Abuse

Results in Brief Some DOD contractors abuse the federal tax system with little 

consequence.4

 DOD and IRS records showed that about 27,100 contractors 

registered in DOD’s Central Contractor Registration (CCR) system had 

nearly $3 billion in unpaid federal taxes as of September 30, 2002, of which 

78 percent was over a year old. Of these contractors, over 25,600 were 

businesses5

 that primarily owed unpaid payroll taxes. These taxes include 

amounts that a business withholds from an employee’s wages for federal 

income taxes, Social Security, Medicare, and the related matching 

contributions of the employer for Social Security and Medicare. The other 

approximately 1,500 contractors were primarily individuals who owed but 

had not paid income taxes on their business profits or individual income.

We estimate that DOD, which functions as its own disbursing agent, could 

have offset payments and collected at least $100 million in unpaid taxes in 

fiscal year 2002 if it had fully assisted IRS in effectively levying contractor 

payments. In the 6 years since passage of the Taxpayer Relief Act of 1997, 

DOD has collected only about $687,000. DOD collections to date relate to 

its recently implemented TOP payment reporting process for its contract 

payment system, which, according to DOD records, disbursed over 

$86 billion to contractors in fiscal year 2002. DOD did not, however, have 

formal plans or a schedule at the completion of our work for reporting 

payment information to TOP for its 15 vendor payment systems, which 

disbursed another $97 billion to contractors in fiscal year 2002. DOD 

officials contend it would be difficult to implement a TOP reporting 

process for vendor payments because the systems are decentralized in 22 

different payment locations. In addition, DOD did not have an 

organizational structure in place to implement a TOP reporting process. 

Unless DOD establishes processes to assist IRS in identifying payments 

4

 In this report, a DOD contractor abused the federal tax system when payroll taxes withheld 

from employee wages were not remitted to IRS for 1 year or more. We considered activity 

to be abusive when a contractor’s actions or inactions, though not illegal, took advantage of 

the existing tax enforcement and administration system to avoid fulfilling federal tax 

obligations and were deficient or improper when compared with behavior that a prudent 

person would consider reasonable.

5

 A tax identification number (TIN) is a unique nine-digit identifier assigned to each business 

and individual that files a tax return. For businesses, the employer identification number 

(EIN) assigned by IRS serves as the TIN. For individuals, the Social Security number (SSN) 

assigned by the Social Security Administration (SSA) serves as the TIN. Contractors 

register their TINs in the CCR database in either the TIN/EIN field or the SSN field. In our 

report, a contractor completing the TIN/EIN field is referred to as a business, while a 

contractor completing the SSN field is referred to as an individual.
Page 4 GAO-04-95 DOD Contractor Tax Abuse

from DOD systems that IRS could levy for unpaid federal taxes, the federal 

government will miss opportunities to collect hundreds of millions of 

dollars in unpaid taxes owed by DOD contractors.

IRS faces a number of high-risk challenges. Due to resource and workload 

management constraints, IRS established policies that either exclude or 

delay putting a significant number of cases into the levy program. In 

addition to policy constraints, inaccurate or outdated information in IRS 

systems prevent cases from entering the levy program. Our review of IRS 

collection efforts against DOD contractors selected for audit and 

investigation indicated that IRS attempts to work with the businesses and 

individuals to achieve voluntary compliance, pursuing enforcement actions 

such as levies of federal contract payments later rather than earlier in the 

collection process. For many of our case study contractors, this resulted in 

businesses and individuals continuing to receive federal contract payments 

without making any payments on their unpaid federal taxes.

We also found numerous instances of abusive or potentially criminal6

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

of 47 DOD contractor case studies. The 34 case studies involving 

businesses with employees had primarily unpaid payroll taxes, some dating 

to the early 1990s and some for as many as 62 tax periods.7

 However, 

rather than fulfill their role as “trustees” and forward these amounts to IRS, 

these DOD contractors diverted the money for personal gain or to fund 

their businesses. The other 13 case studies involved individuals who had 

unpaid income taxes dating as far back as the 1980s. These 47 DOD 

contractors provided a wide variety of goods and services, including 

building maintenance, construction, consulting, catering, dentistry, and 

funeral services. Several of these contractors provided parts or services 

supporting weapons and other sensitive military programs.

6

 We characterized as “potentially criminal” any activity related to federal tax liability that 

may be a crime under a specific provision of the Internal Revenue Code. Depending on the 

potential penalty provided by statute, the activity could be a felony (punishable by 

imprisonment of more than 1 year) or a misdemeanor (punishable by imprisonment of 1 

year or less). Some potential crimes under the Internal Revenue Code constitute fraud 

because of the presence of intent to defraud, intentional misrepresentation or deception, or 

other required legal elements. 

7

 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 5 GAO-04-95 DOD Contractor Tax Abuse

Federal law does not prohibit a contractor with unpaid federal taxes from 

receiving contracts from the federal government. At this juncture, the 

criteria calling for federal agencies to do business only with responsible 

contractors do not require contracting officers to consider a contractor’s 

tax noncompliance, unless the contractor has been suspended or debarred 

for tax evasion. Further, the federal government has no coordinated 

process for identifying and determining the businesses and individuals that 

abuse the federal tax system and for conveying that information to 

contracting officers for use before awarding contracts. The Office of 

Federal Procurement Policy in the Office of Management and Budget 

(OMB) is responsible for providing overall direction to governmentwide 

procurement policies, regulations, and procedures and may be in the best 

position to facilitate discussions between DOD, IRS, and other affected 

agencies. Options could include designating such tax abuse as a cause for 

governmentwide debarment and suspension or, if allowed by statute, 

authorizing IRS to declare such businesses and individuals ineligible for 

government contracts.

We are making recommendations to DOD to immediately provide its 

contractor payment information to TOP and to IRS to use the levy program 

as one of the first steps in the collection process. We are making a 

recommendation to OMB to develop and pursue policy options for 

prohibiting contract awards to contractors that abuse the federal tax 

system, including any necessary legislation. We also suggest that Congress 

consider requiring DOD to periodically report to Congress on its progress 

in implementing the Debt Collection Improvement Act of 1996 (DCIA) and 

providing its payment information for each of its contract and vendor 

payment systems to TOP, including details of actual collections by system 

and in total for all contract and vendor payment systems during the 

reporting period. In addition, Congress may wish to require that OMB 

report to Congress on progress in developing and pursuing options for 

prohibiting federal contract awards to businesses and individuals that 

abuse the federal tax system, including periodic reporting of actions taken 

against contractors.

DOD and IRS partially agreed with our recommendations while OMB did 

not agree. In addition, DOD and OMB disagreed with our matters for 

congressional consideration. DOD did not agree that a requirement is 

necessary for DOD to report to Congress on its progress in implementing 

the DCIA. We believe that such reporting to Congress is necessary to 

facilitate oversight since DOD, until recently, had taken little action to 

implement the offset provisions of DCIA since its passage more than 7 
Page 6 GAO-04-95 DOD Contractor Tax Abuse

years ago. We continue to believe that Congress may wish to consider such 

oversight as the federal government is missing opportunities to collect 

hundreds of millions of dollars in unpaid taxes owed by DOD contractors. 

In oral comments, OMB questioned the need for developing or pursuing 

additional mechanisms to prohibit federal contract awards to “tax 

abusers.” OMB’s comments provide us no basis to change our 

recommendation. We believe that OMB should assume a leadership role in 

ensuring that contractors that abuse the tax system are prohibited from 

receiving federal contracts. See the “Agency Comments and Our 

Evaluation” section of this report for a more detailed discussion of agency 

comments. We have reprinted the DOD and IRS written comments in 

appendixes III and IV.

Background As the largest purchaser of goods and services in the federal government, 

DOD awarded contracts valued at nearly $165 billion in fiscal year 2002. 

Within the federal government, DOD represented about two-thirds of the 

federal contract spending reported in fiscal year 2002, as shown in figure 1. 

Spending at the next three largest federal agencies, the Department of 

Energy (DOE), the General Services Administration (GSA), and the 

National Aeronautics and Space Administration (NASA), represented only 

about half of the remaining 34 percent of federal contract awards during 

the same period.
Page 7 GAO-04-95 DOD Contractor Tax Abuse

Figure 1: Fiscal Year 2002 Federal Contract Award Amounts by Agency

In 1998, DOD established the CCR database as the primary repository for 

contractor information shared with other agencies. With minor exceptions, 

contractors are required to register in the CCR database prior to award of a 

DOD contract. In addition to a one-time registration process, contractors 

are required to keep all registered information current, and must confirm 

the registered information is accurate and complete annually. The CCR 

database contains a wide variety of contractor information including 

contractor name, address, points of contact, electronic payment 

information, and tax identification number (TIN). As of June 2003, the CCR 

database contained almost 224,000 active contractor registrations. DOD; 

NASA; the Departments of the Treasury, Transportation, and the Interior; as 

well as the Office of Personnel Management currently use CCR to register 

contractors. According to CCR officials, while some contractors engage in 

business with more than one agency (e.g., DOD and NASA), prospective 

and current DOD contractors represented the majority of CCR 

registrations. On October 1, 2003, a final rule change to the Federal 

Acquisition Regulation (FAR) was announced8

 that generally requires all 

federal contractors to register in the CCR database.

8

 Federal Acquisition Regulation; Central Contractor Registration, 68 Fed. Reg. 56,669 (2003) 

(to be codified at 48 C.F.R. pts. 1, 2, 4, 13, 32, and 52).
Page 8 GAO-04-95 DOD Contractor Tax Abuse

Unlike most federal agencies that rely on the Department of the Treasury’s 

Financial Management Service (FMS) for issuing payments, DOD has its 

own disbursing authority. The Defense Finance and Accounting Service 

(DFAS) has overall payment responsibility for goods and services 

purchased by DOD. As part of a reorganization in April 2001, DFAS 

separated its commercial payment services into two areas—contract pay 

and vendor pay. Contract pay handles invoices for formal, long-term 

contracts that are typically administered by the Defense Contract 

Management Agency (DCMA). These contracts tend to cover complex, 

multiyear purchases with high-dollar values, such as major weapon 

systems. The single DOD automated system9

 used in contract pay 

disbursed over $86 billion to contractors in fiscal year 2002. While 

somewhat of a misnomer, vendor pay10 is handled by 15 DOD payment and 

disbursing systems operating in 22 DFAS offices, and cumulatively 

disbursed another $97 billion to contractors during fiscal year 2002.

Overhauling DOD’s financial management represents a major challenge 

that goes far beyond financial accounting to the very fiber of the 

department’s range of business operations and management culture. Of the 

26 areas on our governmentwide “high-risk” list, 6 are DOD program areas, 

and the department shares responsibility for 3 other high-risk areas that are 

governmentwide in scope. Financial management, one of the 6 DOD 

program areas, has weaknesses, including the lack of effective and efficient 

asset management and accountability, unreliable estimates of 

environmental and disposal liabilities, lack of accurate budget and cost 

information, nonintegrated and proliferating financial management 

systems, and fundamental flaws in the overall control environment. As we 

have documented in numerous reports, DOD’s financial management 

problems leave it highly vulnerable to fraud, waste, and abuse.

In our high-risk list, IRS also shares responsibility for three areas that are 

governmentwide in scope, as well as two IRS program areas pertinent to 

this report: IRS financial management and collection of unpaid taxes. In 

both of these areas, weaknesses continue to expose the federal 

government to significant losses of tax revenue, and compliant taxpayers 

bear the increased burden of financing the government’s activities. IRS 

9

 Mechanization of Contract Administration Services. 

10 The vendor pay systems include payments for contracts not administered by DCMA, plus 

miscellaneous noncontractual payments such as utilities.
Page 9 GAO-04-95 DOD Contractor Tax Abuse

attempts to identify businesses and individuals that do not pay the taxes 

they owe through its various enforcement programs. However, inadequate 

financial and operational information has rendered IRS unable to develop 

reliable cost-based performance information for its tax collection and 

enforcement programs, and to judge whether the agency is appropriately 

allocating available resources among competing management priorities. 

As of September 2002, IRS had an inventory of known unpaid taxes,11

including interest and penalties, totaling $249 billion, of which $112 billion 

has some collection potential and thus is at risk.12

Our recent testimonies and reports have highlighted large and pervasive 

declines in IRS compliance and collection programs. These programs 

generally experienced larger workloads, smaller staffing, and fewer 

numbers of cases closed per employee from 1996 through 2001. By the end 

of fiscal year 2001, IRS was deferring collection action for about one of 

three tax delinquencies assigned to the collection programs. In a 

September 2002 report to the IRS Oversight Board, former IRS 

Commissioner Rossotti said that IRS has been facing a growing compliance 

workload at the same time that resources were declining. He said the 

result is a "huge gap" between the number of taxpayers that are not filing, 

not reporting, or not paying what they owe and IRS’s capacity to deal with 

them.

In addition, we reported in 1999 that nearly 2 million businesses owed 

about $49 billion in payroll taxes, which was about 22 percent of the total 

outstanding balance of IRS unpaid tax assessments.13 As of September 30, 

2002, the amount of unpaid payroll taxes remained about the same (nearly 

$49 billion). In our 1999 report, we noted that according to IRS records, 

IRS had assessed $15 billion in penalties against approximately 185,000 

individuals found to be willful and responsible for the nonpayment of 

payroll taxes withheld from employees. We reported that much of this 

11 As of September 2003, IRS had an inventory of known unpaid taxes totaling $246 billion of 

which $120 billion has some collection potential but only $20 billion of which is considered 

currently collectible. This inventory includes unpaid taxes that IRS is attempting to collect 

and unpaid taxes that IRS knows are due but for which it has decided not to pursue 

collection. Total unpaid taxes also include an unknown amount of unpaid taxes that IRS has 

not identified and are therefore not in the IRS inventory.

12 GAO-03-109.

13 U.S. General Accounting Office, Unpaid Payroll Taxes: Billions in Delinquent Taxes and 

Penalty Assessments Are Owed, GAO/AIMD/GGD-99-211 (Washington, D.C.: Aug. 2, 1999).
Page 10 GAO-04-95 DOD Contractor Tax Abuse

amount was not being collected, and that businesses and individuals owing 

payroll taxes received significant federal benefits and other federal 

payments.

The Taxpayer Relief Act of 199714 enhanced IRS’s ability to collect unpaid 

federal taxes by authorizing IRS to continuously levy up to 15 percent of 

certain federal payments made to businesses and individuals. The 

continuous levy program, now referred to as FPLP, was implemented in 

July 2000. This program provides an automated process for serving tax 

levies and collecting unpaid taxes through Treasury’s FMS and its TOP 

process.

14 Taxpayer Relief Act of 1997 § 1024, 26 U.S.C. § 6331(h) (2000).
Page 11 GAO-04-95 DOD Contractor Tax Abuse

Treasury established the TOP as part of implementing the DCIA.15 

Congress passed DCIA to maximize the collection of delinquent nontax 

debts owed to federal agencies. TOP centralizes the process by which 

certain federal payments are withheld or reduced to collect delinquent 

debts, and as part of that program, FMS has a centralized database of debts 

that DCIA requires federal agencies to refer to FMS.16 Under the 

regulations implementing DCIA, disbursing agencies, including DOD and 

others that independently disburse rather than having it done on their 

behalf by FMS, are required to compare their payment records with the 

TOP database.17 If a match occurs, the disbursing agency must offset the 

payment, thereby reducing or eliminating the nontax debt.

FMS assists IRS in implementing FPLP through a feature of the TOP 

process, thus enabling IRS to electronically serve a tax levy. For payments 

disbursed by FMS on behalf of most federal agencies, the amount to be 

levied and credited to IRS is deducted before FMS disburses the payment. 

For payments disbursed directly by other federal agencies, such as DOD, 

FMS identifies the amount to be levied from the disbursing agency’s 

payment information and notifies the disbursing agency to deduct the levy 

amount before payment is made.18

As a practical matter, FMS cannot honor a tax levy through TOP unless the 

disbursing agency has fulfilled its DCIA responsibilities to compare 

payment records with the TOP database.19 When a disbursing agency 

provides FMS with payment information for comparison with the TOP 

database, FMS has an opportunity to notify the disbursing agency of an IRS 

levy. To the extent disbursing agencies are not providing payment 

information to TOP, the implementation of FPLP is hindered.

15 Pub. L. No. 104-134, 110 Stat. 1321 (1996).

16 31 U.S.C. § 3716(c)(6) (2000).

17 31 C.F.R. § 285.5 (c)(2) (2003).

18 U.S. General Accounting Office, Tax Administration: Millions of Dollars Could Be 

Collected If IRS Levied More Federal Payments, GAO-01-711 (Washington, D.C.: July 20, 

2001).

19 31 U.S.C. § 3716(c)(1)(A) (2000) and 31 C.F.R. § 285.5(c)(2) (2003).
Page 12 GAO-04-95 DOD Contractor Tax Abuse

DCIA also requires agencies to refer certain debt to Treasury for 

centralized collection.20 FMS reported that the debt referrals to TOP 

totaled more than $186 billion as of September 2002. Of this amount, $81 

billion were federal tax debt, $71 billion were child support debt, $3 billion 

were state tax debt, and $31 billion were federal nontax debt (e.g., student 

loans).

Under the levy process, IRS supplies FMS with an electronic file containing 

unpaid tax information for inclusion in the TOP database. FMS compares 

the TIN and name on federal payment records with the TIN and name on 

unpaid tax records provided by IRS. When FMS identifies a business or 

individual with unpaid taxes that is scheduled to receive a federal payment, 

it informs IRS, which issues a notice of intent to levy to the delinquent 

taxpayer (unless the notice was previously sent).21 Once a notice of 

impending levy is received, the delinquent taxpayer has several options for 

action and a minimum of 30 days to respond.22 The options are as follows:

• The taxpayer may disagree with IRS’s assessment and collection of tax 

liability, and appeal the action by requesting a hearing with the IRS 

Office of Appeals. Generally, IRS must suspend any levy actions while 

the hearing and related appeals are pending.

• The taxpayer may elect to pay the debt in full.

• The taxpayer may negotiate with IRS to establish an alternative payment 

arrangement, such as an installment agreement or an offer in 

compromise.23 IRS is precluded from continuing with a levy action 

while it considers a taxpayer’s proposed installment agreement or offer 

in compromise.

20 31 U.S.C. § 3711(g)(1) (2000).

21 IRS must give the taxpayer written notice 30 days before initiating a levy or seizure action. 

26 U.S.C. § 6330(a) (2000).

22 Before receiving a notice of intent to levy, a taxpayer typically receives several balance 

due notices as part of the IRS standard notification process.

23 Installment agreements allow the full payment of the debt in smaller, more manageable 

amounts. An offer in compromise approved by IRS allows a delinquent taxpayer to settle 

unpaid debt for less than the full amount due.
Page 13 GAO-04-95 DOD Contractor Tax Abuse

• The taxpayer may apply to IRS for a hardship determination, for which a 

business or individual demonstrates to IRS that making any payment 

would result in a significant financial hardship. In such cases, IRS may 

agree to delay collection action until the taxpayer’s financial condition 

improves.

If the delinquent taxpayer does not respond to the levy notice, IRS will 

instruct FMS to proceed with the continuous levy and reduce all scheduled 

payments by up to 15 percent, or the exact amount of tax owed if it is less 

than 15 percent of the payment, until the tax debt is satisfied. Since the 

inception of the levy program in July 2000, IRS has used it to collect $76 

million in tax debt, including over $60 million in tax debt during fiscal year 

2002, by directly levying federal payments. In earlier reviews,24 we 

estimated that IRS could use the levy program to potentially recover 

hundreds of millions of dollars in tax debt.

DOD Contractors Owe 

Billions in Unpaid 

Federal Taxes

The federal government pays billions of dollars to DOD contractors that 

abuse the federal tax system. Further, as of September 2002, businesses 

and individuals registered in DOD’s CCR database owed nearly $3 billion in 

unpaid federal taxes. Data reliability issues with respect to DOD and IRS 

records prevented us from identifying an exact amount. Consequently, the 

total amount of unpaid federal taxes owed by DOD contractors is not 

known.

Magnitude of Unpaid 

Federal Taxes Owed by 

DOD Contractors

DOD and IRS records showed that the nearly $3 billion in unpaid federal 

taxes is owed by about 27,100 contractors registered in CCR. This 

represents almost 14 percent of the contractors registered as of February 

2003. Of this number, over 25,600 were businesses that primarily had 

unpaid payroll taxes.25 Many also had unpaid federal unemployment taxes. 

The other approximately 1,500 contractors were primarily individuals who 

did not pay income taxes on their business profits or individual income. 

24 U.S. General Accounting Office, Tax Administration: Federal Payment Levy Program 

Measure, Performance, and Equity Can Be Improved, GAO-03-356 (Washington, D.C.: Mar. 

6, 2003); Tax Administration: IRS’ Levy of Federal Payments Could Generate Millions of 

Dollars, GAO/GGD-00-65 (Washington, D.C.: Apr. 7, 2000); and GAO-01-711.

25 Payroll taxes consist of income and employment taxes (i.e., Federal Insurance 

Contribution Act (FICA) contributions—Social Security and Medicare) withheld from an 

employee’s wages, as well as the employer’s matching FICA contributions.
Page 14 GAO-04-95 DOD Contractor Tax Abuse

The amount of unpaid taxes for DOD contractors registered in CCR ranged 

from a small amount owed by an individual for a single tax period to 

millions of dollars owed by a business over more than 60 tax periods. The 

type of unpaid taxes owed by these contractors varied and consisted of 

payroll, corporate income, excise, unemployment, individual income, and 

other types of taxes. In the case of unpaid payroll taxes, an employer 

withheld federal taxes from an employee’s wages, but did not send the 

withheld payroll taxes or the employer’s required matching amount to IRS. 

As shown in figure 2, about 42 percent of the total tax amount owed by 

DOD contractors was for unpaid payroll taxes.

Figure 2: DOD Contractor Unpaid Taxes by Tax Type
Page 15 GAO-04-95 DOD Contractor Tax Abuse

Employers are subject to civil and criminal penalties if they do not remit 

payroll taxes to the federal government. When an employer withholds 

taxes from an employee’s wages, the employer is deemed to have a 

responsibility to hold these amounts “in trust” for the federal government 

until the employer makes a federal tax deposit in that amount.26 To the 

extent these withheld amounts are not forwarded to the federal 

government, the employer is liable for these amounts, as well as the 

employer’s matching Federal Insurance Contribution Act (FICA) 

contributions. Individuals within the business (e.g., corporate officers) 

may be held personally liable for the withheld amounts not forwarded and 

assessed a civil monetary penalty known as a trust fund recovery penalty 

(TFRP).27 Failure to remit payroll taxes can also be a criminal felony 

offense28 punishable by imprisonment of more than a year, while the failure 

to properly segregate payroll taxes can be a criminal misdemeanor 

offense29 punishable by imprisonment of up to a year. 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. 

The Social Security and Medicare trust funds are subsidized or made whole 

for unpaid payroll taxes by the general fund, as we discussed in a previous 

report.30 Over time, the amount of this subsidy is significant. As of 

September 1998, the last date on which information was readily available, 

the estimated cumulative amount of unpaid taxes and associated interest 

for which the Social Security and Medicare trust funds were subsidized by 

the general fund was approximately $38 billion.31

Based on our case study analysis, we found that contractors with unpaid 

federal taxes provide a wide range of goods and services to DOD, including 

26 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) (2000).

27 26 U.S.C. § 6672 (2000).

28 26 U.S.C. § 7202 (2000).

29 26 U.S.C. § 7215 (2000).

30 GAO/AIMD/GGD-99-211.

31 The estimate includes both FICA and Self-Employment Contribution Act taxes, but does 

not include federal income tax withholdings. Accrued interest is included in this amount 

because assessments distributed to the trust funds earn interest at Treasury-based interest 

rates, similar to the rates used to develop IRS’s interest accruals.
Page 16 GAO-04-95 DOD Contractor Tax Abuse

building maintenance, catering, construction, consulting, custodial, 

dentistry, music, and funeral services. Several of these contractors 

provided parts or services related to aircraft components for several DOD 

and civilian programs.

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

owed by DOD contractors had been outstanding for several years. As 

reflected in figure 3, 78 percent of the nearly $3 billion in unpaid taxes was 

over a year old as of September 30, 2002, and 52 percent of the unpaid taxes 

was for tax periods prior to September 30, 1999.

Figure 3: DOD Contractor Unpaid Taxes by Fiscal Year

Our previous work32 has shown that as unpaid taxes age, the likelihood of 

collecting all or a portion of the amount owed decreases. This is due, in 

part, to the continued accrual of interest and penalties on the outstanding 

tax debt, which, over time, can dwarf the original tax obligation.

32 U.S. General Accounting Office, Internal Revenue Service: Recommendations to Improve 

Financial and Operational Management, GAO-01-42 (Washington, D.C.: Nov. 17, 2000); 

Internal Revenue Service: Composition and Collectibility of Unpaid Assessments, 

GAO/AIMD-99-12 (Washington, D.C.: Oct. 29, 1998); and GAO/AIMD/GGD-99-211.
Page 17 GAO-04-95 DOD Contractor Tax Abuse

DOD Contractor Unpaid 

Taxes Are Likely 

Understated

Although the nearly $3 billion in unpaid federal taxes owed by DOD 

contractors as of September 30, 2002, is a significant amount, it may not 

reflect the true amount of unpaid taxes owed by these businesses and 

individuals. Data integrity issues with DOD’s contractor database and the 

nature of IRS’s taxpayer account database prevented us from identifying 

the true extent of DOD contractor unpaid taxes.

For example, we found that some contractors providing goods and services 

to DOD could not be identified. We analyzed the TINs reported by 

contractors in the CCR database. A TIN field33 is completed during a CCR 

registration, and contractors are responsible for the TIN’s accuracy. During 

our review, we found that the CCR database included nearly 4,900 

employer identification numbers (EIN) that did not match the IRS Master 

Files.34 Our examination also identified some invalid TINs35 that were 

either all the same digit (e.g., 999999999) or an unusual series of digits (e.g., 

123456789). Invalid TINs in the CCR database prevented us from 

determining if the contractor had unpaid taxes.36 We recently 

recommended to IRS and OMB that options to routinely validate all TINs in 

the CCR be considered, and use of contractor and TIN information from 

CCR be required for tax reporting by all federal agencies.37

As previously mentioned, some contractors that received DOD payments 

were not registered in CCR. Our analysis of fiscal year 2002 disbursements 

totaling almost $20 billion through one DFAS vendor payment system38

33 Contractors register their TINs in the CCR database into either the TIN/EIN field 

(business) or the SSN field (individual).

34 IRS Master Files are data files that contain tax return filing histories for businesses and 

individuals.

35 In this report, an invalid TIN refers to a missing TIN, a TIN with more or less than nine 

numeric characters, a TIN that includes an alpha character, or a TIN that does not match or 

cannot be found in IRS or SSA records.

36 We referred this matter to our Office of Special Investigations because we were concerned 

that some contractors may be registering in CCR with invalid TINs to avoid federal taxes or 

debt collection.

37 U.S. General Accounting Office, Tax Administration: More Can Be Done to Ensure 

Federal Agencies File Accurate Information Returns, GAO-04-74 (Washington, D.C.: Dec. 5, 

2003).

38 One Bill Pay, formerly known as Standard Accounting and Reporting System.
Page 18 GAO-04-95 DOD Contractor Tax Abuse

identified payments totaling about $1 billion with a TIN that did not match 

a contractor TIN in the CCR database. We also identified contractor 

payments totaling over $4 billion that lacked TINs in the same DFAS 

system. Missing TINs in the DOD payment record prevented us from 

determining if the payees were contractors with unpaid taxes. DOD 

financial management regulations require that after reasonable efforts to 

obtain the TIN have been unsuccessful, federal income tax at 31 percent 

should be withheld and the balance of the payment forwarded to the payee. 

Another factor that contributes to understating the amount of unpaid 

federal taxes owed by DOD contractors is that the IRS taxpayer account 

database reflects only the amount of unpaid taxes either reported by the 

taxpayer on a tax return or assessed by IRS through its various 

enforcement programs. The IRS database does not reflect amounts owed 

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

IRS has not assessed tax amounts due. During our review, we identified 

instances in which a DOD contractor failed to file tax returns for a 

particular tax period and, therefore, was listed in IRS records as having no 

unpaid taxes. Consequently, the true extent of unpaid taxes for these 

businesses and individuals is not known. 

It is important to note that timing issues could result in some DOD 

contractors that we identified with unpaid taxes having already paid the 

amounts due. For example, some very recent amounts that appear as 

unpaid taxes through a matching of DOD and IRS records may involve 

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

taxes paid, abated, or both39 within a short period. Also, it should be noted 

that some assessments developed by IRS through third party information 

may be overstated due to a lack of taxpayer information (e.g., deductions). 

Similarly, as we have previously reported,40 IRS records contain errors that 

affect the accuracy of taxpayer account information, and lead to both lost 

opportunities to collect outstanding taxes and a burden on taxpayers 

because IRS continues to pursue amounts from taxpayers that are no 

longer owed. Consequently, some of the nearly $3 billion may not reflect 

true unpaid taxes, although we cannot quantify this amount. Nonetheless, 

39 Abatements are reductions in the amount of taxes owed and can occur for a variety of 

reasons, such as to correct errors made by IRS or taxpayers or to provide relief from 

interest and penalties. 26 U.S.C. § 6404 (2000).

40 U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2002 and 2001 

Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).
Page 19 GAO-04-95 DOD Contractor Tax Abuse

we believe the nearly $3 billion represents a reasonable yet conservative 

estimate of unpaid federal taxes owed by DOD contractors.

DOD and IRS Are Not 

Collecting Millions in 

Unpaid Federal Taxes 

from Contractors 

We estimate that DOD, which functions as its own disbursing agent, could 

have levied payments and collected at least $100 million in unpaid taxes in 

fiscal year 2002 if it and IRS had worked together to effectively levy 

contractor payments. However, in the 6 years since the passage of the 

Taxpayer Relief Act of 1997, DOD has collected only about $687,000. DOD 

collections to date relate to DFAS payment reporting associated with 

implementation of the TOP process in December 2002 for its 

Mechanization of Contract Administration Services (MOCAS) contract 

payment system, which disbursed over $86 billion to DOD contractors in 

fiscal year 2002. DFAS had no plans or schedule at the completion of our 

review to report payment information to TOP for any of its 15 vendor 

payment systems, which disbursed another $97 billion to DOD contractors 

in fiscal year 2002.

IRS’s continuing challenges in pursuing and collecting unpaid taxes also 

hinder the government’s ability to take full advantage of the levy program. 

For example, due to resource constraints, IRS has established policies that 

either exclude or delay referral of a significant number of cases to the 

program. The IRS review process for taxpayer requests, such as 

installment agreements or certain offers in compromise, which IRS is 

legally required to consider, often takes many months, during which time 

IRS excludes these cases from the levy program. In addition, inaccurate or 

outdated information in IRS systems prevents cases from entering the levy 

program. Our audit and investigation of 47 DOD contractor case studies, 

discussed in detail later in this report, also show IRS continuing to work 

with businesses and individuals to achieve voluntary compliance and 

taking enforcement actions, such as levies of federal contractor payments, 

later in the collection process.

From a governmentwide perspective, making payments to federal 

contractors without requiring the businesses or individuals to meet their 

tax obligations through methods such as levying payments to collect 

unpaid taxes is not a sound business practice. Until DOD begins to fulfill 

its responsibilities under DCIA by fully assisting IRS in its attempts to levy 

contractor payments and IRS fully utilizes its authority under the Taxpayer 

Relief Act of 1997, the federal government will continue to miss 

opportunities to collect on hundreds of millions of dollars in unpaid federal 

taxes owed by DOD contractors.
Page 20 GAO-04-95 DOD Contractor Tax Abuse

DOD Is Not Fully Assisting 

in the Collection of Unpaid 

Taxes Owed by Its 

Contractors

Although it has been more than 7 years since the passage of DCIA, DOD has 

not fully assisted IRS in using its continuous levy authority for the 

collection of unpaid taxes by providing FMS with all DFAS payment 

information. IRS’s continuous levy authority authorizes the agency to 

collect federal tax debts of businesses and individuals that receive federal 

payments by levying up to 15 percent of each payment until the debt is 

paid. Under TOP, FMS matches a database of debtors (including those with 

federal tax debt) to certain federal payments (including payments to DOD 

contractors). When a match occurs, the payment is intercepted, the levied 

amount is sent to IRS, and the balance of the payment is sent to the debtor. 

The TOP database includes federal tax and nontax debt, state tax debt, and 

child support debt. All disbursing agencies are to compare their payment 

records with the TOP database.41 Since DOD has its own disbursing 

authority, once DFAS is notified by FMS of the amount to be levied, it 

should deduct this amount from the contractor payment before it is made 

to the payee and forward the levied amount to the Department of the 

Treasury. By fully participating in the TOP process, DOD will also aid in the 

collection of other debts, such as child support and federal nontax debt 

(e.g., student loans).

At the completion of our work, DOD had no formal plans or schedule to 

begin providing payment information from any of its 15 vendor payment 

systems to FMS for comparison with the TOP database. These 15 payment 

systems disbursed almost $97 billion to DOD contractors in fiscal year 

2002. DFAS officials contend that it would be difficult to provide this 

payment information to TOP because the systems are decentralized and 

nonintegrated in 22 different payment locations. As we have previously 

reported, DOD’s business systems environment is stovepiped and not well 

integrated. DOD recently reported that its current business operations 

were supported by approximately 2,300 systems in operation or under 

development, and requested approximately $18 billion in fiscal year 2003 

for the operation, maintenance, and modernization of its business 

systems.42 In addition, DFAS did not have an organizational structure in 

place to implement the TOP payment reporting process. DOD recently 

41 31 C.F.R. § 285.5(c)(2) (2003).

42 U.S. General Accounting Office, DOD Business Systems Modernization: Continued 

Investment in Key Accounting Systems Needs to Be Justified, GAO-03-465 (Washington, 

D.C.: Mar. 28, 2003) and DOD Business Systems Modernization: Important Progress Made 

to Develop Business Enterprise Architecture, but Much Work Remains, GAO-03-1018

(Washington, D.C.: Sept. 19, 2003).
Page 21 GAO-04-95 DOD Contractor Tax Abuse

communicated a timetable for implementing TOP reporting for its vendor 

payment systems with completion targeted for March 2005. Until DOD 

establishes processes to provide information from all payment systems to 

TOP, the federal government will continue missing opportunities to collect 

hundreds of millions of dollars in unpaid taxes owed by DOD contractors.

Although DFAS recently began providing payment information to TOP from 

its largest payment system, total collections to date have been minimal. In 

December 2002, DFAS began providing FMS with payment information for 

its MOCAS contract payment system, which disbursed over $86 billion to 

contractors in fiscal year 2002. According to IRS, from December 2002 

through September 2003, DOD collected about $687,000 in unpaid taxes 

from contractor payments.43 However, our analysis of IRS records for DOD 

contractors receiving fiscal year 2002 payments from MOCAS showed that 

these contractors owed about $750 million in unpaid federal taxes as of 

September 30, 2002.

As mentioned previously, IRS records showed that over 27,100 contractors 

in DOD’s CCR database owed nearly $3 billion in unpaid federal taxes as of 

September 30, 2002. We reviewed payment transactions in five of the 

largest DOD disbursement systems covering about 72 percent of the fiscal 

year 2002 disbursements, or almost $131 billion, from DFAS contract and 

vendor payment systems. Contractors paid through these five DOD 

automated systems represented at least $1.7 billion of the nearly $3 billion 

in unpaid federal taxes shown on IRS records. We estimate that DOD could 

have offset contractor payments to collect at least $100 million of this

43 Although over $1 million was levied during this period, FMS refunded $353,500 to the 

contractors due to a processing error. FMS levied the DOD payments prior to IRS issuing a 

levy to FMS and prior to the statutory pre-levy notification letter to the taxpayer. 

Consequently, FMS was required to refund some collections. DFAS implemented the levy 

process near the beginning of our review; therefore, we did not test controls over the 

process.
Page 22 GAO-04-95 DOD Contractor Tax Abuse

amount in fiscal year 2002 if DOD had been fulfilling its responsibilities 

under DCIA to compare its payment records with the TOP database.44

IRS Policies Exclude Cases 

from the Levy Program

Although the levy program could provide a highly effective and efficient 

method of collecting unpaid taxes from contractors that receive federal 

payments, IRS policies restrict the number of cases that enter the program 

and the point in the collection process they enter the program. For each of 

the collection phases listed below, IRS policy either excludes or severely 

delays putting cases into the levy program.45

• Phase 1: Notify taxpayer of unpaid taxes, including a demand for 

payment letter.

• Phase 2: Place the case into the Automated Collection System (ACS) 

process. The ACS process consists primarily of telephone calls to the 

taxpayer to arrange for payment.

• Phase 3: Move the case into a queue of cases awaiting assignment to a 

field collection revenue officer.

• Phase 4: Assign the case to field collections where a revenue officer 

attempts face-to-face contact and collection.

44 We estimated this potential collection amount using the assumptions that all unpaid 

federal taxes were referred to Treasury FMS for inclusion in the TOP database, and all fiscal 

year 2002 DFAS payment information was provided to FMS for matching against the TOP 

database. The collection amount was calculated on 15 percent of the payment amount up to 

the amount of unpaid taxes. Our analysis did not account for any exclusion allowed by the 

levy program, such as cases where the contractor had entered bankruptcy, made alternative 

arrangements to pay, or demonstrated to IRS that making payments on the outstanding tax 

debt would result in a financial hardship. However, although federal agencies are required 

to obtain contractor TINs by 31 U.S.C. § 7701(c)(1), many DOD contractor payment 

transactions do not include TINs; therefore, the total amount of unpaid federal taxes owed 

by contractors and potential collections through FPLP is not known.

45 Although cases may move through the phases sequentially, it is not necessary that they do 

so. Cases begin in the notice phase, but they move back and forth between various phases 

and may, for example, enter the queue or Automated Collection System phases repeatedly. 

There are also other status phases into which a case might enter that are not presented here.
Page 23 GAO-04-95 DOD Contractor Tax Abuse

As of September 30, 2002, IRS listed $81 billion of cases in these four 

phases: 17 percent were in notice status, 17 percent were in ACS, 26 

percent were in field collection, and 40 percent were in the queue awaiting 

assignment to the field. At the same time these four phases take place, 

sometimes over the course of years, DOD contractors with unpaid taxes 

continue to receive billions of dollars in contract payments. IRS excludes 

cases in the notification phase from the levy program to ensure proper 

notification rules are followed. However, as we previously reported, once 

proper notification has been completed, IRS continues to delay or exclude 

from the levy program those accounts placed in the other three phases.46 

IRS policy is to exclude accounts in the ACS phase primarily because 

officials believed they lack the resources to issue levy notices and respond 

to the potential increase in telephone calls from taxpayers responding to 

the notices. Additionally, IRS excludes the majority of cases in the queue 

phase (awaiting assignment to field collection) from the levy program for 1 

year. Only after cases await assignment for over a year does IRS allow 

them to enter the levy program.47 Finally, IRS excludes most accounts from 

the levy program once they are assigned to field collection because revenue 

officers said that the levy action could interfere with their successfully 

contacting taxpayers and resolving the unpaid taxes. 

These policy decisions, which may be justified in some cases, result in IRS 

excluding millions of cases from potential levy. IRS officials who work on 

ACS and field collection inventories can manually unblock individual cases 

they are working in order to put them in the levy program. However, by 

excluding cases in the ACS and field collection phases, IRS records 

indicate it excluded as much as $34 billion of cases from the levy program 

as of September 30, 2002. In January 2003, IRS unblocked and made 

available for levy those accounts identified as receiving federal salary or 

annuity payments. However, other accounts remain blocked from the levy 

program. IRS stated that it intended to unblock a portion of the remaining 

accounts sometime in 2005. Additionally, $32 billion of cases are in the 

queue, and thus under existing policy, would be excluded from the levy

46 GAO-03-356.

47 IRS sends tax debt notifications at least once each year. When IRS initiated the levy 

program, it blocked all cases entering the queue for 1 year to ensure that at least one notice 

would be sent before the case entered the levy program. IRS officials stated that they intend 

to change this policy in early 2004.
Page 24 GAO-04-95 DOD Contractor Tax Abuse

program for the first year each case is in that phase. IRS policies along 

with its inability to more actively pursue collections, both of which IRS has 

in the past attributed to resource constraints, combine to prevent many 

cases from entering the levy program. Since IRS has a statutory limitation 

on the length of time it can pursue unpaid taxes, generally 10 years from 

the date of the assessment, these long delays greatly decrease the potential 

for IRS to collect the unpaid taxes.48

We identified specific examples of IRS not actively pursuing collection in 

our audit and investigation of 47 selected cases involving DOD contractors. 

For example, IRS used a special code within its automated systems to 

block collection action for almost 10 months for one DOD contractor that 

owed nearly $260,000 in unpaid taxes. Specifically, IRS closed collection 

actions against this case (using an administrative transaction code it refers 

to as 530-39) citing resource and workload management considerations. 

IRS is not currently seeking collection of about $14.9 billion of unpaid taxes 

because of this administrative code—about 5 percent of its overall 

inventory of unpaid assessments as of September 30, 2002. Once IRS 

reversed the special code, it placed the contractor into its queue of cases 

awaiting assignment for collection action. The contractor remained in the 

queue, awaiting assignment, from October 2001 through the time of our 

review in May 2003—19 months. DOD paid this contractor over $110,000 in 

fiscal year 2002, missing opportunities to collect as much as $17,000 

through the 15 percent levy.

For another DOD contractor, IRS coded the individual within its automated 

systems in 1999 as having financial hardship and therefore unable to pay. 

This code put collection activities on hold until the individual’s adjusted 

gross income (per subsequent tax return filings) exceeded a certain 

threshold. At the same time, IRS entered a code to prevent further 

collection actions because of its own resource constraints. IRS automated 

systems are designed to automatically reverse the financial hardship code 

when the adjusted gross income exceeds a certain threshold. That reversal 

would put the contractor back into the IRS collection system. However, 

before that occurred, the contractor stopped filing tax returns in 1997 and 

the IRS resource constraint code had the unintended effect of IRS not 

48 The 10-year period can be extended or suspended under a variety of circumstances, such 

as agreements by the taxpayer to extend the collection period, bankruptcy litigation, and 

court appeals. Consequently, some tax assessments can and do remain on IRS’s records for 

decades.
Page 25 GAO-04-95 DOD Contractor Tax Abuse

attempting to obtain the unfiled tax returns. This combination of codes 

effectively stopped collection action from taking place for this contractor 

and created a catch–22 situation since one code prevents IRS from 

pursuing the individual until a filed tax return reports higher income and 

the other code prevents IRS from pursuing the individual to obtain nonfiled tax forms. DOD paid this individual nearly $220,000 in 2002 and 

almost $700,000 since 1999. If an effective 15 percent levy had been in 

place, the government could have collected over $30,000 of the unpaid 

taxes in 2002. Because of the individual’s failure to file, the true amount of 

unpaid taxes is not known, but could be significantly greater than the over 

$160,000 currently reflected in IRS records.

Some cases repeatedly enter the queue awaiting assignment to a field 

collection revenue officer and remain there for long periods. For example, 

one DOD contractor had gone between ACS and the queue awaiting 

assignment since 1998. This individual’s case entered the queue three times 

but was never assigned. As of May 2003, this case spent almost 3 and a half 

years in the queue. Moving a case in and out of the queue affects its 

eligibility for the levy program. For another contractor involving over 

$100,000 in unpaid taxes, IRS put the case into ACS in July 2000. As noted 

previously, IRS routinely blocks ACS cases from entering the levy program. 

Nine months later, in April 2001, IRS moved this case from ACS into the 

queue to await assignment to a revenue officer. Again, in accordance with 

IRS policy, IRS excludes cases in the queue from entering the levy program 

for 1 year. After 1 year, the case was referred to the levy program, so this 

case took about 21 months from the time it initially went to ACS until it was 

moved into the levy program. The contractor received over $350,000 in 

federal payments from 1999 to 2002, and current payments would not be 

subject to the 15 percent levy because DOD is not reporting information 

from the vendor payment system to TOP.

IRS Delays in Processing 

and Inaccurate Records 

Exclude Cases from the 

Levy Program

In addition to excluding cases for various operational and policy reasons as 

described above, IRS excludes cases from the levy program for particular 

taxpayer events, such as bankruptcy, litigation, or financial hardship, as 

well as when taxpayers apply for an installment agreement or an offer in 

compromise. When one of these events takes place, IRS enters a code in its 

automated system that excludes the case from entering the levy program. 

Although these actions are appropriate, IRS may lose opportunities to 

collect through the levy program if the processing of agreements is not 

timely or prompt action is not taken to cancel the exclusion when the 

event, such as a dismissed bankruptcy petition, is concluded.
Page 26 GAO-04-95 DOD Contractor Tax Abuse

Delays in processing taxpayer documents and errors in taxpayer records 

are long-standing problems at IRS and can harm both government interests 

and the taxpayer. In 2002, the IRS Taxpayer Advocate Service49 reported 

that over 65 percent of all offers in compromise take longer than 6 months 

to process. Similarly, in our audits of IRS financial statements, we reported 

on delays in processing offers in compromise. In those audits, we 

identified delays in processing that were outside IRS’s control (such as 

taxpayer failure to provide appropriate documentation to support the 

offer), as well as delays caused by IRS inactivity.50 These findings are 

consistent with an earlier IRS internal audit report that found, in a majority 

of cases sampled, that IRS had periods of inactivity that lasted 60 days or 

more.51 Similarly, past audits have identified instances in which inaccurate 

records allowed tax refunds to be released to citizens who owe taxes and 

other cases in which IRS erroneously assessed millions of dollars due to 

inaccurate records.52 Our audit of cases involving DOD contractors with 

unpaid federal taxes indicates that problems persist in the timeliness of 

processing taxpayer applications and in the accuracy of IRS records.

In our review of DOD contractors with unpaid federal taxes, we identified a 

number of cases in which the processing of DOD contractor applications 

for an offer in compromise or an installment agreement was delayed for 

long periods, thus blocking the cases from the levy program and potentially 

reducing government collections. For example, in one case, a DOD 

contractor with nearly $400,000 in unpaid federal taxes applied for an offer 

in compromise in mid-1999, but IRS did not reject the offer until July 

2000—over a year later. In this same case, the individual filed for an 

installment agreement in March 1999, but it took IRS over 2 years—until 

mid-2001—to reject the proposed agreement. During this period, the 

individual’s account was blocked from potential levying. From 1999 to 

2001, DOD paid this individual over $200,000 in contract payments. Had 

49 The Taxpayer Advocate Service is an IRS program that provides an independent system to 

ensure that tax problems that have not been resolved through normal channels are promptly 

and fairly handled. 

50 U.S. General Accounting Office, Internal Revenue Service: Recommendations to Improve 

Financial and Operational Management, GAO-01-42 (Washington, D.C.: Nov. 17, 2000).

51 Review of the Offers in Compromise Program (Reference No. 091603, Dec. 7, 1998), 

performed by what is now the Office of the Treasury Inspector General for Tax 

Administration.

52 GAO-01-42.
Page 27 GAO-04-95 DOD Contractor Tax Abuse

DOD been reporting its payments to TOP during this period and had IRS 

not blocked the account for a potential levy, a 15 percent levy of these 

payments could have generated over $30,000 in collections for the 

government.

In another example, there was both a long delay by IRS in deciding whether 

to accept a DOD contractor’s proposed installment agreement as well as a 

failure to properly reverse the codes once a decision was made. The case 

had a levy block due to a proposed installment agreement submitted by the 

business in mid-2000. As mentioned above, under IRS regulations, once a 

code is entered into the system indicating that a taxpayer has applied for or 

is currently under an offer in compromise or installment agreement, the 

case is automatically blocked from the levy program. IRS rejected the 

installment agreement offer after a year. However, IRS had not properly 

reversed the code in its systems that indicated an installment agreement 

application was pending, as of our review in May 2003. Consequently, this 

account with over $60,000 in unpaid taxes was inappropriately excluded 

from the levy program for 2 years. Meanwhile, this business received 

nearly $30,000 in payments from DOD while the statutory period in which 

IRS had to collect the unpaid taxes continued to run. 

We found that inaccurate coding at times prevented both IRS collection 

action and cases from entering the levy program. Because the coding 

within a taxpayer’s account determines whether the account will enter the 

levy program, effective management of these codes is critical. If these 

blocking codes remain in the system for long periods, either because IRS 

delays processing taxpayer agreements or because IRS fails to input or 

reverse codes after processing is complete, cases may be needlessly 

excluded from the levy program.

For example, as of May 2003, one DOD contractor had been assigned to 

field collection since the spring of 1996. However, the case entered 

bankruptcy, thus blocking it from the levy program and preventing all 

collection action on the case. Although the bankruptcy was settled in 1998, 

the case was never released for collection action. IRS had incorrectly 

entered a reversal code, causing the case to remain in bankruptcy status 

and therefore blocking it from the levy program. On the basis of our 

review, IRS was attempting to reverse the bankruptcy code and begin 

collection action against the case. Similarly, in another case, a DOD 

contractor entered into an installment agreement with IRS in the spring of 

1999, at which time IRS posted the appropriate code to block other 

collection activities. The individual defaulted on the agreement, after 
Page 28 GAO-04-95 DOD Contractor Tax Abuse

making three payments, in 1999. However, IRS did not post the code 

required to cancel the installment agreement, leaving the individual’s 

account blocked from collection activities, such as the levy program. If the 

correct code had been posted, IRS systems would have automatically put 

the individual in the levy program in late 2000 when IRS implemented the 

program. 

IRS Subordinates Use of the 

Levy Program to Other 

Collection Efforts

Although the nation’s tax system is built upon voluntary compliance, when 

businesses and individuals fail to pay voluntarily, the government has a 

number of enforcement tools to compel compliance or elicit payment. Our 

review of DOD contractors with unpaid federal taxes indicates that 

although the levy program could be an effective, reliable collection tool, 

IRS is not using the program as a primary tool for collecting unpaid taxes 

from federal contractors. For the cases we audited, IRS subordinated the 

use of the levy program in favor of negotiating voluntary tax compliance 

with the business or individual.

We recently recommended that IRS study the feasibility of submitting all 

eligible unpaid federal tax accounts to FMS on an ongoing basis for 

matching against federal payment records under the levy program, and use 

information from any matches to assist IRS in determining the most 

efficient method of collecting unpaid taxes, including whether to use the 

levy program. Although IRS raised concerns that increasing the use of the 

levy program would increase workload for its staff and would entail 

excessively high computer programming costs, it agreed to study the 

feasibility of such an arrangement.53 The study was not completed at the 

time of our review.

For the DOD contractors we audited and investigated, IRS attempts to gain 

voluntary compliance often resulted in minimal or no actual collections. 

For example, one case involved a sole proprietorship that had gross 

revenue of over $40 million in 2001, about 10 percent of which came from 

DOD contract payments. Although this business worked primarily for 

federal agencies, it failed to remit payroll and unemployment taxes and had 

accumulated unpaid federal taxes of nearly $10 million. Even with the 

mounting tax debt, revenue officers continued working to get the business 

to make payments, including executing an installment agreement, on which 

53 GAO-03-356.
Page 29 GAO-04-95 DOD Contractor Tax Abuse

the business defaulted. After defaulting, IRS did not put the case into the 

levy program. In November 2002, the revenue officer put a 1-year 

collection hold on the business to see if it could restructure, cut costs, and 

become profitable so that it could enter into another installment agreement 

to voluntarily pay the tax debt. Throughout this period, the business rarely 

paid its taxes on time or in full (essentially additional payroll taxes), yet the 

business continued to operate and increase the amount of unpaid federal 

taxes owed. In this case, IRS did not levy the business’s assets because it 

thought a levy would cause the business to fail. However, the state in 

which the business operated seized funds from the business’s bank account 

in early 2003 to partially settle the business’s state tax debt. This caused 

the business to cease operations in early 2003, leaving IRS with a 

potentially uncollectible debt of nearly $10 million.

As another example, shortly after one business in our selection of DOD 

contractors defaulted on an installment agreement, it requested and 

received another installment agreement. The business promised to make 

current tax payments. However, after only a few months the business was 

not paying its current tax liabilities (essentially additional payroll taxes) 

and had fallen behind on the installment agreement. Even without the 

business accumulating more debt, the installment agreement required the 

business to make monthly payments for 13 years. Given the business’s 

history of default, failure to pay its current tax debt, and default on the 

current agreement, indications were the business would not fulfill this 

obligation. However, instead of canceling this long-term payment plan and 

preventing the business from accumulating additional debt due to its 

failure to remit current quarterly payroll taxes, IRS reinstated the 

installment agreement and declined to put a lien on the business’s 

properties. The business again defaulted on the installment agreement less 

than 2 months after initiation, and at the time of our review, IRS was 

negotiating with the business for yet another installment agreement.

Challenges for IRS 

Collections

The nation’s tax system is rooted in the doctrine of its citizens voluntarily 

complying with the tax laws. IRS has a difficult task in maintaining a 

balance between this key doctrine and effectively fulfilling its role as the 

nation’s tax collector. The philosophical thrust of this doctrine can, 

however, negatively affect IRS’s ability to collect what is legitimately owed 

to the government. If IRS fails or is limited in its ability to act quickly and 

aggressively against businesses and individuals that repeatedly fail to pay 

the taxes they owe, it runs the risk of not fulfilling its mission. IRS also 

risks further weakening voluntary compliance as declines in enforcement 
Page 30 GAO-04-95 DOD Contractor Tax Abuse

programs may erode taxpayer confidence in the fairness of our federal tax 

system and may create the perception that there is little risk in 

noncompliance. The potential revenue losses and the threat to voluntary 

compliance make the collection of unpaid taxes a high-risk area. Congress 

and others have been concerned that declines in IRS enforcement 

programs are eroding taxpayer confidence in the fairness of our tax 

system. 

Prompt collection is important because, as discussed earlier, IRS generally 

has a finite period under which to seek collection for unpaid taxes. 

Generally, there is a 10-year statutory collection period beyond which IRS 

is prohibited from attempting to collect. Unless the collection period is 

extended, IRS removes unpaid taxes that exceed this statutory period from 

its records. Even if a case is not actively worked for extended periods, the 

collection period continues to move toward expiration, reducing IRS’s 

opportunity to collect the amount due.

The levy program could help IRS take prompt enforcement action and 

operate more efficiently. In addition, from a governmentwide perspective, 

paying billions of dollars to DOD contractors that at the same time have 

substantial unpaid taxes is not a sound business practice. Withholding up 

to 15 percent of these payments is an effective collection method and is 

authorized by law. Additionally, the levy program can assist other 

collection activities. For example, in one case the levy helped IRS collect 

against a DOD contractor it was unable to locate. The IRS revenue officers 

tried without success for 5 years to contact this business owner. However, 

after placing a lien on the owner’s assets and putting the case into FPLP, 

which began to levy payments from the business’s contract with another 

federal agency, the contractor was ready to cooperate with IRS.

As the above case indicates, the levy program can have a far greater impact 

on the tax program than just the dollars levied. We reported in the past that 

businesses and individuals are more likely to pay voluntarily when faced 

with a notice of intent to levy.54 Our audit of DOD contractors also found 

this to be true. For example, IRS issued a levy notice to one DOD 

contractor in the spring of 2003. After complaining that the levy would 

force it into bankruptcy, the contractor agreed to begin making voluntary 

installment payments. IRS accepted this offer and therefore did not levy. 

At the time of our review in May 2003, IRS had received two payments from 

54 GAO-03-356.
Page 31 GAO-04-95 DOD Contractor Tax Abuse

the contractor to begin paying the liability from its earliest tax period. In 

addition, the business paid two tax deposits for current (2003) periods of 

over $160,000. This sequence of events indicates that, as we reported 

previously, the threat of IRS levy action often brings about tax payments 

and greater taxpayer compliance and fairness to those that do pay their 

taxes. 

In a previous report, we estimated that after receiving a notice of intent to 

levy, about 29 percent of taxpayers take action that enables IRS to remove 

them from the active inventory of unpaid taxes or move them to an inactive 

status. Specifically, we estimated that subsequent to receiving a levy 

notice, about 19 percent of the taxpayers resolved their liability and were 

removed from the active inventory, while about 10 percent obtained 

determinations of financial hardship.55 By reclassifying some active 

accounts to an inactive status and removing others, the levy program helps 

IRS prioritize its inventory of unpaid taxes more efficiently and enables IRS 

to focus more of its resources on unpaid accounts that have more 

collection potential. 

As described above, the advantages of the levy program to IRS in assisting 

its collection efforts are clear given its claims of resource constraints. 

However, IRS’s current implementation strategy appears to make the levy 

program one of the last collection tools IRS uses. Changing the program to 

(1) remove the policies that work to unnecessarily exclude cases from 

entering the levy program and (2) promote the use of the levy program to 

make it one of the first collection tools could allow IRS—and the 

government—to reap the advantages of the program earlier in the 

collection process.

55 GAO-03-356.
Page 32 GAO-04-95 DOD Contractor Tax Abuse

DOD Contractors 

Involved in Abusive or 

Potentially Criminal 

Activity Related to the 

Federal Tax System 

To determine whether there are instances of abusive or potentially criminal 

activity by DOD contractors related to the federal tax system, we selected 

47 case study businesses and individuals that had unpaid taxes and were 

receiving DOD contractor payments in fiscal year 2002. We excluded cases 

that IRS categorized as “compliance assessment,”56 business cases with 

total unpaid taxes under $10,000, and individual cases with total unpaid 

taxes under $5,000. Our selection was based upon a business or individual 

having a large number of unpaid tax periods, owing large tax debt, and 

receiving DOD contractor payments. For more information on our criteria 

for the selection of the 47 case studies, see appendix I.

For all 47 cases that we audited and investigated, we found abusive or 

potentially criminal activity related to the federal tax system. Thirty-four of 

these case studies involved businesses with employees who had unpaid 

payroll taxes dating as far back as the early 1990s, some for as many as 62 

tax periods. However, rather than fulfill their role as “trustees” of this 

money and forward it to IRS, these DOD contractors diverted the money 

for other purposes. To reiterate, the diversion of payroll taxes for personal 

or business use is potentially criminal activity. The other 13 case studies 

involved individuals that had unpaid income taxes dating as far back as the 

1980s. We are referring the 47 cases detailed in this report to IRS for 

evaluation and additional collection action or criminal investigation.

Nature of Business for Case 

Study Contractors

DOD is a large and complex organization with a budget of about $400 

billion and operations across the world. Because DOD contracts for a large 

variety of goods and services, it is not surprising that we found DOD 

contractors that have unpaid taxes from a large number of industries. 

Table 1 shows a breakdown for our 47 contractor case studies by the type 

of goods and services provided to DOD.

56 For financial reporting, IRS classifies its unpaid tax debts as either (1) federal taxes 

receivable (taxes due from taxpayers for which IRS can support the existence of a 

receivable through taxpayer agreement or a favorable court ruling), (2) compliance 

assessments (where neither the taxpayer nor the court has affirmed that the amounts are 

owed), or (3) write-offs (which are unpaid assessments that IRS does not expect to collect 

because of factors such as taxpayer death, bankruptcy, or insolvency).
Page 33 GAO-04-95 DOD Contractor Tax Abuse

Table 1: Types of Goods and Services Provided by DOD Contractors in Case Studies

Source: GAO analysis of DOD and public records.

a

Includes goods and services such as uniform manufacturing, courier services, medical personnel 

services, funeral services, weapon parts, and computer equipment.

Examples of Abusive or 

Potentially Criminal Activity 

Related to the Federal Tax 

System by Businesses

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

collect, account for, and transfer income and employment taxes to IRS, 

which the employer withholds from an employee’s wages. IRS refers to 

these withheld payroll taxes as trust fund taxes because the employer 

holds the employee’s money “in trust” until the employer makes a federal 

tax deposit in that amount. Businesses that fail to remit payroll taxes to the 

federal government are liable for the amounts withheld from employees, 

and IRS can assess a TFRP57 equal to the total amount of taxes not 

collected or not accounted for and paid over against individuals who are 

determined by IRS to be “willful and responsible” for the nonpayment of 

withheld payroll taxes. Typically, these individuals are the officers of a 

corporation, such as a president or treasurer. As we have found in previous 

reviews, collections of TFRP assessments from officers are generally 

minimal.

Type of business Number

Maintenance/construction services 8

Custodial services 4

Aircraft-related goods supplier 4

Research services 3

Consulting services 3

Music services 2

Dentist 2

Training services 2

Information technology personnel services 2

Othera 17

Total 47

57 26 U.S.C. § 6672 (2000).
Page 34 GAO-04-95 DOD Contractor Tax Abuse

In addition to civil penalties, criminal penalties exist for an employer’s 

failure to turn over withheld employee payroll taxes to IRS. The act of 

willfully failing to collect or pay over any tax is a felony.58 Additionally, the 

failure to comply with certain requirements for the separate accounting 

and deposit of withheld income and employment taxes is a misdemeanor.59

Our audit and investigation of the 34 case study business contractors 

showed substantial abuse or potential criminal activity as all had unpaid 

payroll taxes and all diverted funds for personal or business use. In table 2, 

and on the following pages, we highlight 13 of these businesses and 

estimate the amounts that could have been collected through the levy 

program based on fiscal year 2002 DOD payments. For these 13 cases, the 

businesses owed unpaid taxes for a range of 6 to 30 quarters (tax periods). 

Eleven of these cases involved businesses that had unpaid taxes in excess 

of 10 tax periods, and 5 of these were in excess of 20 tax periods. The 

amount of unpaid taxes associated with these 13 cases ranged from about 

$150,000 to nearly $10 million; 7 businesses owed in excess of $1 million. 

In these 13 cases, we saw some cases where IRS filed tax liens on property 

and bank accounts of the businesses, and a few cases where IRS collected 

minor amounts through the levying of non-DOD federal payments. We also 

saw 1 case in which the business applied for an offer in compromise, which 

IRS rejected on the grounds that the business had the financial resources to 

pay the outstanding taxes in their entirety, and 2 cases in which the 

business is entered into, and subsequently defaulted on, installment 

agreements to pay the outstanding taxes. In 5 of the 13 cases, IRS assessed 

the owners or business officers with TFRPs, yet no collections were 

received from these penalty assessments.

58 26 U.S.C. § 7202 (2000).

59 26 U.S.C. § 7215 (2000).
Page 35 GAO-04-95 DOD Contractor Tax Abuse

Table 2: DOD Contractors with Unpaid Federal Taxes—Business 

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments

1 Base support and 

custodial services:

provides dining, trash 

removal, security, 

cleaning, and recycling 

programs on military 

bases

Nearly

$10 million

$527,000 $3.5 million State tax authorities levied the business 

bank account. The owner borrowed nearly 

$1 million from the business. The owner 

bought a boat, several cars, and a home 

outside the United States. The business 

was dissolved in 2003 and transferred its 

employees to a relative’s business, where it 

submitted invoices and received payments 

from DOD on a previous contract through 

August 2003.

2 Engineering research 

services: conducts 

studies for DOD

Over

$1 million

$58,000 $390,000 The owner paid $1 million to purchase a 

house and furnishings in the mid-1990s. At 

around the same time, the owner borrowed 

nearly $1 million from the business, and the 

business stopped paying its taxes in full. 

DOD awarded the business contracts 

totaling over $600,000.

3 Aircraft-related goods:

manufactures structural 

parts for DOD aircraft

Nearly

$2 million

$50,000 $336,000 The business received over 30 DOD 

contracts from 1997 through 2002 totaling 

nearly $2 million.

4 Research services: 

provides research for 

DOD

Over

$700,000

$13,000 $86,000 DOD awarded the business a contract in 

2002 for nearly $800,000. Owner has over 

$1 million in loans related to cars, real 

estate, and recreational activities, and 

owner also has a high-performance 

airplane.

5 Janitorial services:

provides custodial 

services at a DOD facility 

Over

$3 million

$108,000 $719,000 The business did not make tax payments 

after early 2001, and it made only partial 

payments prior to that dating back to the 

mid-1990s. The business also did not file 

corporate tax returns for 8 years.

6 Private security services:

provides security guards 

at military bases

Nearly

$6 million

$3,000 $21,000 One of the business’s officers, who owns a 

large boat, paid off a recreation-related loan 

in 1999. The business paid taxes while in 

bankruptcy, but largely stopped paying after 

emerging from bankruptcy.

7 Furniture sales and 

construction services:

sells and installs office 

furniture at military 

installations

Over

$150,000

$6,000 $38,000 The owners used the business to pay 

personal expenses, such as house 

mortgage and credit cards. One owner is a 

retired military officer.
Page 36 GAO-04-95 DOD Contractor Tax Abuse

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

Notes: Dollar amounts are rounded. The nature of unpaid taxes for businesses was primarily due to 

unpaid payroll taxes. A contractor registers in the CCR database with either an EIN or an SSN. In our 

report, any contractor registering with an EIN is referred to as a business, and any contractor 

registering with an SSN is referred to as an individual. An individual in CCR could be a business 

owner (i.e., sole proprietorship).

a

Unpaid tax amount as of September 30, 2002.

b

The estimated collections under an effective tax levy use the assumptions that all unpaid federal taxes 

are referred to TOP at Treasury FMS and all fiscal year 2002 DOD payment information is provided to 

TOP. The collection amount is calculated on 15 percent of the payment amount up to the amount of 

unpaid taxes.

c

DOD payments from MOCAS, One Bill Pay, Integrated Accounts Payable System (IAPS), 

Computerized Accounts Payable System (CAPS) Clipper, and CAPS Windows automated systems 

identified by GAO.

8 Custodial services:

provides janitorial and 

housekeeping services at 

military installations

Over

$800,000

$219,000 $1.5 million The business received numerous DOD 

contracts from 1998 through 2001 totaling 

nearly $12 million. The business is linked to 

potential check fraud.

9 Construction services:

provides housing 

management services 

including maintenance, 

repairs, and renovations, 

on military bases

Over

$1 million

$357,000 $2.4 million The business owes DOD tens of thousands 

of dollars for an overpayment in early 2000.

10 Base support services:

provides landscaping 

and snow removal at a 

military base

Nearly

$1 million

$33,000 $217,000 The business was awarded contracts from 

1999 through 2000 worth over $1 million. 

The business owes taxes dating back to the 

early 1990s.

11 Construction services:

provides repairs to 

aircraft hangars at a 

military base

Over

$700,000

$422,000 $2.8 million

12 Medical personnel 

services: provides

nursing, pharmacy, 

physical therapy, and 

other skilled medical 

personnel in DOD 

facilities

Nearly

$6 million

$698,000 $4.7 million Several federal and state tax liens have 

been placed against the owner.

13 Aircraft-related goods: 

manufactures aircraft 

components for several 

DOD and civilian 

programs 

Over

$400,000

$29,000 $194,000 The business was awarded numerous DOD 

contracts in a recent 4-year period totaling 

over $300,000.

(Continued From Previous Page)

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments
Page 37 GAO-04-95 DOD Contractor Tax Abuse

The following provides illustrative detailed information on several of these 

cases.

• Case # 1 - This base support contractor provided services such as trash 

removal, building cleaning, and security at U.S. military bases. The 

business had revenues of over $40 million in 1 year, with over 25 percent 

of this coming from federal agencies. This business’s outstanding tax 

obligations consisted of unpaid payroll taxes. In addition, the 

contractor defaulted on an IRS installment agreement. IRS assessed a 

TFRP against the owner. The business reported that it paid the owner a 

six figure income and that the owner had borrowed nearly $1 million 

from the business. The business also made a down payment for the 

owner’s boat and bought several cars and a home outside the country. 

The owner allegedly has now relocated his cars and boat outside the 

United States. This contractor went out of business in 2003 after state 

tax authorities seized its bank account. The business transferred its 

employees to a relative’s business, which also had unpaid federal taxes, 

and submitted invoices and received payments from DOD on a previous 

contract through August 2003.

• Case # 2 - This engineering research contractor received nearly 

$400,000 from DOD during 2002. At the time of our review, the 

contractor had not remitted its payroll tax withholdings to the federal 

government since the late 1990s. In 1996, the owner bought a home and 

furnishings worth approximately $1 million and borrowed nearly $1 

million from the business. The owner told our investigators that the 

payroll tax funds were used for other business purposes.

• Case # 3 - This aircraft parts manufacturer did not pay payroll 

withholding and unemployment taxes for 19 of 20 periods through the 

mid- to late 1990s. IRS assessed a TFRP against several corporate 

officers, and placed the business in FPLP in 2000. This business claims 

that its payroll taxes were not paid because the business had not 

received DOD contract payments; however, DOD records show that the 

business received over $300,000 from DOD during 2002.

• Case # 5 - This janitorial services contractor reported revenues of over 

$3 million and had received over $700,000 from DOD in a recent year. 

The tax problems of this business date back to the mid-1990s. At the 

time of our review, the business had both unpaid payroll and 

unemployment taxes of nearly $3 million. In addition, the business did 

not file its corporate tax returns for 8 years. IRS assessed a TFRP 
Page 38 GAO-04-95 DOD Contractor Tax Abuse

against the principal officer of the business in early 2002. This 

contractor employed two officers who had been previously assessed 

TFRPs related to another business.

• Case # 7 - This furniture business reported gross revenues of over 

$200,000 and was paid nearly $40,000 by DOD in a recent year. The 

business had accumulated unpaid federal taxes of over $100,000 at the 

time of our review, primarily from unpaid employee payroll taxes. The 

business also did not file tax returns for several years even after 

repeated notices from IRS. The owners made an offer to pay IRS a 

portion of the unpaid taxes through an offer in compromise, but IRS 

rejected the offer because it concluded that the business and its owners 

had the resources to pay the entire amount. At the time of our audit, IRS 

was considering assessing a TFRP against the owners to make them 

personally liable for the taxes the business owed. The owners used the 

business to pay their personal expenses, such as their home mortgage, 

utilities, and credit cards. The owners said they considered these 

payments a loan from the business. Under this arrangement, the owners 

were not reporting this company benefit as income so they were not 

paying income taxes, and the business was reporting inflated expenses.

• Case # 9 - This family-owned and operated building contractor 

provided a variety of products and services to DOD, and DOD provided 

a substantial portion of the contractor’s revenues. At the time of our 

review, the business had unpaid payroll taxes dating back several years. 

In addition to failing to remit the payroll taxes it withheld from 

employees, the business had a history of filing tax returns late, 

sometimes only after repeated IRS contact. Additionally, DOD made an 

overpayment to the contractor for tens of thousands of dollars. 

Subsequently, DOD paid the contractor over $2 million without 

offsetting the earlier overpayment.

• Case # 10 - This base support services contractor has close to $1 

million in unpaid payroll and unemployment taxes dating back to the 

early 1990s, and the business has paid less than 50 percent of the taxes it 

owed. IRS assessed a TFRP against one of the corporate officers. This 

contractor received over $200,000 from DOD during 2002.
Page 39 GAO-04-95 DOD Contractor Tax Abuse

Examples of Abuse of the 

Federal Tax System by 

Individuals

Individuals are responsible for the payment of income taxes, and our audit 

and investigation of 13 individuals showed significant abuse of the federal 

tax system similar to what we found with our DOD business case studies. 

In table 3, and on the following pages, we highlight four of the individual 

case studies. In all four cases, the individuals had unpaid income taxes. In 

one of the four cases, the individual operated a business as a sole 

proprietorship with employees and had unpaid payroll taxes. Taxes owed 

by the individuals ranged from four to nine tax periods, which equated to 

years. Each individual owed in excess of $100,000 in unpaid income taxes, 

with one owing in excess of $200,000. In two of the four cases, the 

individuals had entered into, and subsequently defaulted on, at least one 

installment agreement to pay off the tax debt.

Table 3: DOD Contractors with Unpaid Federal Taxes—Individual

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

Notes: Dollar amounts are rounded. Nature of unpaid taxes for individuals was primarily due to unpaid 

income taxes. A contractor registers in the CCR database with either an EIN or an SSN. In our report, 

any contractor registering with an EIN is referred to as a business, and any contractor registering with 

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments

14 Vehicle repair services:

provides repair and 

painting for military 

vehicles

Over

$100,000

$22,000 $147,000 The business was investigated for paying 

employee wages in cash. Despite a 

substantial tax liability, the owner recently 

purchased a home valued at over $1 million 

as well as a luxury sports car. The owner 

also owes a federal agency for child support.

15 Dentist: provides

dental services at a 

military facility

Over

$100,000

$12,000 $78,000 DOD recently increased the individual’s 

contract by over $80,000. The dentist’s 

credit history included several credit card 

accounts that were identified for collection 

action.

16 Dentist: provides 

dental services at a 

military facility

Over

$200,000

$11,000 $76,000 DOD awarded the individual a multiyear 

contract for over $400,000. This individual 

paid income tax for only 1 year since 1993. 

The individual previously had a business 

that owes over $100,000 in unpaid payroll 

and unemployment taxes going back to the 

early 1990s.

17 Training services:

conducts management 

and leadership courses

Over

$100,000

$2,000 $12,000 This individual has not paid income taxes for 

5 years.
Page 40 GAO-04-95 DOD Contractor Tax Abuse

an SSN is referred to as an individual. An individual in CCR could be a business owner (i.e., sole 

proprietorship). For cases selected as individuals, we reviewed both the owner and related business 

information, if it could be identified.

a

Unpaid tax amount as of September 30, 2002.

b

The estimated collections under an effective tax levy use the assumptions that all unpaid federal taxes 

are referred to TOP at Treasury FMS and all fiscal year 2002 DOD payment information is provided to 

TOP. The collection amount is calculated on 15 percent of the payment amount up to the amount of 

unpaid taxes.

c

DOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems identified by GAO.

The following provides illustrative detailed information on these four 

cases.

• Case # 14 - This individual’s business repaired and painted military 

vehicles. The owner failed to pay personal income taxes and did not 

send employee payroll tax withholdings to IRS. The owner owed over 

$500,000 in unpaid federal business and individual taxes. Additionally, 

the TOP database showed the owner had unpaid child support. IRS 

levied the owner’s bank accounts and placed liens against the owner’s 

real property and business assets. The business received over $100,000 

in payments from DOD in a recent year, and the contractor’s current 

DOD contracts are valued at over $60 million. In addition, the business 

was investigated for paying employee wages in cash. Despite the large 

tax liability, the owner purchased a home valued at over $1 million and a 

luxury sports car.

• Case # 15 - This individual, who is an independent contractor and 

works as a dentist at a military installation, had a long history of not 

paying income taxes. The individual did not file several tax returns and 

did not pay taxes in other periods when a return was filed. The 

individual entered into an installment agreement with IRS but defaulted 

on the agreement. This individual received $78,000 from DOD during a 

recent year, and DOD recently increased the individual’s contract by 

over $80,000.

• Case # 16 - This individual is another independent contractor who also 

works as a dentist on a military installation. DOD paid this individual 

over $200,000 in recent years, and recently signed a multiyear contract 

worth over $400,000. At the time of our review, this individual had paid 

income taxes for only 1 year since the early 1990s and had accumulated 

unpaid taxes of several hundred thousand dollars. In addition, the 

individual’s prior business practice owes over $100,000 in payroll and 

unemployment taxes for multiple periods going back to the early 1990s.
Page 41 GAO-04-95 DOD Contractor Tax Abuse

• Case # 17 - DOD paid this individual nearly $90,000 for presenting 

motivational speeches on management and leadership. This individual 

has failed to file tax returns since the late 1990s and had unpaid income 

taxes for a 5-year period from the early to mid-1990s. The total amount 

of unpaid taxes owed by this individual is not known because of the 

individual’s failure to file income tax returns for a number of years. IRS 

placed this individual in the levy program in late 2000; however, DOD 

payments to this individual were not levied because DFAS payment 

information was not reported to TOP as required.

See appendix II for details on the other 30 DOD contractor case studies.

Contractors with 

Unpaid Taxes Are Not 

Prohibited by Law 

from Receiving 

Contracts from the 

Federal Government

Federal law does not prohibit a contractor with unpaid federal taxes from 

receiving contracts from the federal government. Existing mechanisms for 

doing business only with responsible contractors do not prevent 

businesses and individuals that abuse the federal tax system from receiving 

contracts. Further, the government has no coordinated process for 

identifying and determining the businesses and individuals that should be 

prevented from receiving contracts and for conveying that information to 

contracting officers for use before awarding contracts. 

In previous work, we supported the concept of barring delinquent 

taxpayers from receiving federal contracts, loans and loan guarantees, and 

insurance. In March 1992, we testified on the difficulties involved in using 

tax compliance as a prerequisite for awarding federal contracts.60 In May 

2000, we testified in support of H.R. 4181 (106th Congress), which would 

have amended DCIA to prohibit delinquent federal debtors, including 

delinquent taxpayers, from being eligible to contract with federal 

agencies.61 Safeguards in the bill would have enabled the federal 

government to procure goods or services it needed from delinquent 

taxpayers for designated disaster relief or national security. Our testimony 

also pointed out implementation issues, such as the need to first ensure 

that IRS systems provide timely and accurate data on the status of taxpayer

60 U.S. General Accounting Office, Tax Administration: Federal Contractor Tax 

Delinquencies and Status of the 1992 Tax Return Filing Season, GAO/T-GGD-92-23

(Washington, D.C.: Mar. 17, 1992).

61 U.S. General Accounting Office, Debt Collection: Barring Delinquent Taxpayers From 

Receiving Federal Contracts and Loan Assistance, GAO/T-GGD/AIMD-00-167 (Washington, 

D.C.: May 9, 2000).
Page 42 GAO-04-95 DOD Contractor Tax Abuse

accounts. However, this legislative proposal was not adopted and there is 

no existing statutory bar on delinquent taxpayers receiving federal 

contracts.

Federal agencies are required by law to award contracts to responsible 

sources.62 This statutory requirement is implemented in the FAR, which 

requires that government purchases be made from, and government 

contracts awarded to, responsible contractors only.63 To effectuate this 

policy, the government has established a debarment and suspension 

process and established certain criteria for contracting officers to consider 

in determining a prospective contractor’s responsibility. Contractors 

debarred, suspended, or proposed for debarment are excluded from 

receiving contracts and agencies are prohibited from soliciting offers from, 

awarding contracts to, or consenting to subcontracts with these 

contractors, unless compelling reasons exist. Prior to award, contracting 

officers are required to check a governmentwide list of parties that have 

been debarred, suspended, or declared ineligible for government 

contracts,64 as well as to review a prospective contractor’s certification65 on 

debarment, suspension, and other responsibility matters. Among the 

causes for debarment and suspension is tax evasion.66 In determining

62 10 U.S.C. § 2305 (b) and 41 U.S.C. § 253b (2000).

63 48 C.F.R. § 9.103 (a).

64 Contractors included on the list as having been declared ineligible on the basis of 

statutory or regulatory procedures are excluded from receiving contracts under the 

conditions and for the period set forth in the statute or regulation. Agencies are prohibited 

from soliciting offers from, awarding contracts to, or consenting to subcontracts with these 

contractors under these conditions and for that period.

65 Such certification is required only for contracts exceeding the simplified acquisition 

threshold.

66 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.
Page 43 GAO-04-95 DOD Contractor Tax Abuse

whether a prospective contractor is responsible, contracting officers are 

also required to determine that the contractor meets several specified 

standards, including “a satisfactory record of integrity and business ethics.” 

Except for a brief period during 2000 through 2001, contracting officers 

have not been required to consider compliance with federal tax laws in 

making responsibility determinations.67

Neither the current debarment and suspension process nor the 

requirements for considering contractor responsibility effectively prevent 

the award of government contracts to businesses and individuals that 

abuse the tax system. Since most businesses and individuals with unpaid 

taxes are not charged with tax evasion, and fewer still convicted, these 

contractors would not necessarily be subject to the debarment and 

suspension process. None of the contractors described in this report were 

charged with tax evasion for the abuses of the tax system we identified.

A prospective contractor’s tax noncompliance, other than tax evasion, is 

not considered by the contracting officer before deciding whether to award 

a contract. Further, no coordinated and independent mechanism exists for 

contracting officers to obtain accurate information on contractors that 

abuse the tax system. Such information is not obtainable from IRS because 

of a statutory restriction on disclosure of taxpayer information.68 As we 

found in November 2002,69 unless reported by prospective contractors 

themselves, contracting officers face significant difficulties obtaining or 

verifying tax compliance information on prospective contractors.

67 In December 2000, a controversial revision to the FAR was issued that required 

contracting officers to consider a prospective contractor’s compliance with several areas of 

law, including tax, in determining a satisfactory record of integrity and business ethics. This 

revision was revoked in December 2001 after having been effectively suspended for many 

federal agencies earlier in 2001. 

68 26 U.S.C. § 6103 (2000).

69 U.S. General Accounting Office, Government Contracting: Adjudicated Violations of 

Certain Laws by Federal Contractors, GAO-03-163 (Washington, D.C.: Nov. 15, 2002). 
Page 44 GAO-04-95 DOD Contractor Tax Abuse

Moreover, even if a contracting officer could obtain tax compliance 

information on prospective contractors, a determination of a prospective 

contractor’s responsibility under the FAR when a contractor abused the tax 

system is still subject to a contracting officer’s individual judgment. Thus, a 

business or individual with unpaid taxes could be determined to be 

responsible depending on the facts and circumstances of the case. Since 

the responsibility determination is largely committed to the contracting 

officer’s discretion and depends on the contracting situation involved, 

there is the risk that different determinations could be reached on the basis 

of the same tax compliance information. On the other hand, if a 

prospective contractor’s tax noncompliance results in mechanical 

determinations of nonresponsibility, de facto debarment could result.

Further, a determination that a prospective contractor is not responsible 

under the FAR could be challenged.70

Because individual responsibility determinations can be affected by a 

number of variables, any implementation of a policy designed to consider 

tax compliance in the contract award process may be more suitably 

addressed on a governmentwide basis. The formulation and 

implementation of such a policy may most appropriately be the role of 

OMB’s Office of Federal Procurement Policy. The Administrator of Federal 

Procurement Policy provides overall direction for governmentwide 

procurement policies, regulations, and procedures. In this regard, OMB’s 

Office of Federal Procurement Policy is in the best position to develop and 

pursue policy options for prohibiting federal contract awards to businesses 

and individuals that abuse the tax system.

Conclusions Thousands of DOD contractors that failed in their responsibility to pay 

taxes continue to get federal contracts. Allowing these contractors to do 

business with the federal government while not paying their federal taxes 

creates an unfair competitive advantage for these businesses and 

individuals at the expense of the vast majority of DOD contractors that do 

pay their taxes. DOD’s failure to fully comply with DCIA and IRS’s 

continuing challenges in collecting unpaid taxes have contributed to this 

70 For example, if the prospective contractor is a small business, the nonresponsibility 

determination would be reviewed by the Small Business Administration, which could issue 

a Certificate of Competency stating that the prospective contractor is responsible for the 

purpose of receiving and performing a specific government contract. A determination of 

nonresponsibility could also be protested through the bid protest process.
Page 45 GAO-04-95 DOD Contractor Tax Abuse

unacceptable situation, and have resulted in the federal government 

missing the opportunity to collect hundreds of millions of dollars in unpaid 

taxes from DOD contractors. Working closely with IRS and Treasury, DOD 

needs to take immediate action to comply with DCIA and thus assist in 

effectively implementing IRS’s legislative authority to levy contract 

payments for unpaid federal taxes. Also, IRS needs to better leverage its 

ability to levy DOD contractor payments, moving quickly to use this 

important collection tool. Beyond DOD, the federal government needs a 

coordinated process for dealing with contractors that abuse the federal tax 

system, including taking actions to prevent these businesses and 

individuals from receiving federal contracts.

Matters for 

Congressional 

Consideration

In view of congressional interest in both tax collection and government 

contracting, Congress may wish to consider the following two actions.

Until such time as DOD is able to demonstrate that it is meeting its 

responsibilities under DCIA, including providing payment information to 

TOP for offsetting unpaid federal taxes, and to facilitate action by the 

department, Congress may wish to consider requiring that DOD report 

periodically to Congress on its progress in implementing DCIA for each of 

its contract and vendor payment systems. This report should include 

details of actual collections by system and in total for all contract and 

vendor payment systems during the reporting period.

In addition, Congress may wish to consider requiring that OMB report to 

Congress on progress in developing and pursuing options for prohibiting 

federal government contract awards to businesses and individuals that 

abuse the federal tax system, including periodic reporting of actions taken.

Recommendations for 

Executive Action

To improve collection of DOD contractor tax debt, we recommend that 

DOD take four corrective actions, IRS take four corrective actions, and 

OMB take one corrective action. 

To comply with the DCIA and support IRS efforts under the Taxpayer Relief 

Act of 1997 to collect unpaid federal taxes, we recommend that the 

Secretary of Defense direct the Under Secretary of Defense (Comptroller) 

to take four long- and short-term actions. For the long term, we 

recommend that the Under Secretary develop a formal plan to implement 

DCIA by providing payment information to TOP for all DFAS payment 
Page 46 GAO-04-95 DOD Contractor Tax Abuse

systems. At a minimum, the plan should designate officials responsible for 

implementing DCIA responsibilities for each payment system, including 

firm implementation dates for each payment system.

For the short term, we recommend that the Under Secretary

• collaborate with Treasury’s FMS to develop interim procedures for 

identifying active DOD contactors in TOP and 

• develop manual procedures so that the levy of contractor payments can 

be started immediately for all DOD payment systems.

For both the long and short term, we recommend that the Under Secretary 

devote sufficient resources to implementing all aspects of TOP and the 

DOD plan.

To help improve the effectiveness of IRS collection activities, we 

recommend that the Commissioner of Internal Revenue capitalize on the 

potential of the FPLP by taking the following three actions:

• using the levy program as one of the first steps in the IRS collection 

process,

• changing or eliminating policies that prevent businesses and individuals 

with federal contracts from entering the levy program, and

• evaluating the cost versus benefits of keeping businesses and 

individuals in the levy program once placed in the program until the 

taxes are fully paid.

We further recommend that the Commissioner of Internal Revenue 

evaluate the 47 referred cases detailed in this report and consider whether 

additional collection action or criminal investigation is warranted.

To help ensure that the federal government does not award contracts to 

businesses and individuals that have flagrantly disregarded their federal tax 

obligations (e.g., failed to remit payroll taxes for several tax periods or 

broken installment agreements), we recommend that the Director of OMB 

develop and pursue policy options for prohibiting federal contract awards 

to contractors in cases in which abuse to the federal tax system has 

occurred and the tax owed is not contested. Options could include 

designating such tax abuse as a cause for governmentwide debarment and 
Page 47 GAO-04-95 DOD Contractor Tax Abuse

suspension or, if allowed by statute, authorizing IRS to declare such 

businesses and individuals ineligible for government contracts. We further 

recommend that any option OMB develops should

• consider whether additional legislation is needed;

• minimize administrative burdens on contracting officials, for example, 

by distributing the names of abusive contractors debarred, suspended, 

or declared ineligible on the governmentwide list of excluded parties 

that contracting officers are already required to check before awarding 

contracts;

• fully comply with the statutory restriction on disclosure of taxpayer 

information; and

• address any necessary exceptions, such as when the goods or services 

cannot be obtained from other sources or for national security.

Agency Comments and 

Our Evaluation

We received written comments on a draft of this report from the Under 

Secretary of Defense (Comptroller) (see app. III) and the Commissioner of 

Internal Revenue (see app. IV).

DOD concurred with three of the four recommendations and partially 

concurred with the remaining recommendation. However, DOD disagreed 

with our matter for congressional consideration related to progress 

reporting. For the three recommendations with which it concurred, DOD 

stated that actions are under way to address our recommendations and 

provided a schedule of estimated implementation dates for all DFAS 

vendor payment systems. The schedule estimates completion of 17 vendor 

payment systems by March 2005. However, our report discusses 15 vendor 

pay systems because, during our review, DOD represented that there were 

only 15 vendor payment systems. We encourage DOD to continue to 

identify additional payment systems to be included in its implementation 

schedule. DOD added that it will devote the necessary resources to 

support the offset/levy program and will reevaluate the level of resources 

as the program progresses.

Although DOD concurred with our second recommendation regarding 

collaboration with Treasury for identifying active DOD contractors in TOP, 

the comments point out that for the one payment system that DOD has 

included in the levy program, the initial matches of contractors with the 
Page 48 GAO-04-95 DOD Contractor Tax Abuse

TOP database have been low. We did not review the methodology or 

process used by DFAS or by Treasury to make the matches. However, as 

stated in this report, we believe that an effective levy program at DOD 

would yield hundreds of million of dollars in tax collections. DOD further 

noted that it has been and will continue to be proactive in working with 

Treasury to generate as many collections as possible. With the exception of 

actions taken with the MOCAS system, this statement is not accurate. 

DOD’s comments in response to this report represent its initial schedule for 

reporting payment information to TOP for the 15 reported vendor payment 

systems through which it disbursed almost $97 billion to contractors in 

fiscal year 2002.

Regarding the partial concurrence to our third recommendation dealing 

with development of manual procedures as a short-term corrective action, 

DOD stated that its implementation plan has been accelerated to 6 months 

for most payments systems, and that DOD’s focus should remain on 

implementing a system-based process rather than temporary manual 

procedures. As previously mentioned, until the drafting of DOD’s 

comments to this report, there were no formal plans for reporting payment 

information to TOP for any of DOD’s vendor payment systems. Therefore, 

there was no plan for DOD to accelerate. In addition, we believe that given 

the magnitude of potential collections, it is unreasonable to wait for a 

systems solution, which may not be available for a long time. Manual 

procedures should be employed so that the offset of DOD payments can be 

started immediately.

Regarding the disagreement with the matters for congressional 

consideration, DOD stated that a requirement is not necessary for DOD to 

report to Congress on its progress in implementing the DCIA. We continue 

to believe that Congress may wish to consider such oversight since DOD 

has failed to fully implement the offset requirements of DCIA since its 

passage more than 7 years ago, and the federal government continues to 

miss opportunities to collect hundreds of millions of dollars in unpaid taxes 

owed by DOD contractors.

IRS agreed with the issues raised in the report with respect to DOD 

contractors that abuse the federal tax system, and agreed that FPLP can 

become a more effective tool for collecting delinquent federal taxes owed 

by businesses and individuals that receive federal payments, including 

DOD contractors. Although IRS did not explicitly agree or disagree with 

the recommendations in our report, it noted a number of actions that it had 

taken or was taking to address the issues raised in this report, including 
Page 49 GAO-04-95 DOD Contractor Tax Abuse

steps to accelerate the collection of delinquent taxes. Specifically, IRS 

noted that it had made enhancements to its Inventory Delivery System to 

identify certain businesses with payroll taxes as high-priority work and that 

such cases would bypass the ACS phase of the collection process. IRS 

pointed out that it had made improvements to the cycle time of a number of 

its collection processes and cited recent improvements in expediting 

processing of offers in compromise. IRS stated that it had reviewed the 

systemic blocks on its FPLP procedures and information systems and, 

based on this review, will be making changes to its information systems to 

modify a number of blocks on cases in the queue and certain ACS businessrelated cases. IRS will also work with DOD to ensure that contractor TINs 

in the CCR database are accurate and will work with both DOD and OMB in 

support of any changes they make with respect to how the federal 

government deals with contactors with unpaid taxes. Finally, IRS indicated 

that it would review the 47 case studies included in our report and take 

additional action as appropriate.

While IRS agreed with the issues raised in the report, it pointed out that the 

statutory requirements under which IRS must operate, coupled with 

concerns for taxpayer rights, sometimes require IRS to remove a taxpayer 

from FPLP or prevent it from taking any enforcement action. IRS added 

that such requirements and considerations require IRS to take a more 

balanced approach to FPLP versus a cost-benefit approach. We recognize 

the statutory environment in which IRS operates in its efforts to collect 

outstanding taxes and that statutory requirements affect how the FPLP is 

used. We continue to believe, however, that FPLP provides an effective, 

reliable means of ensuring at least some collections on unpaid taxes and 

that IRS needs to consider a more aggressive and likely administratively 

efficient approach, subject to legal requirements, for government 

contractors that fail to pay their tax debt.
Page 50 GAO-04-95 DOD Contractor Tax Abuse

On January 15, 2004, we received oral comments from representatives of 

OMB’s Office of Federal Procurement Policy, Office of Federal Financial 

Management, and Office of the General Counsel. OMB questioned the need 

for developing or pursuing additional mechanisms to prohibit federal 

contract awards to “tax abusers.” OMB said that defining “tax abuse” 

would not be a function of OMB and would be more appropriate for the 

Treasury Office of Tax Policy or Congress. In addition, officials said that 

current FAR guidance on responsibility (48 C.F.R. Subpart 9.1) as well as 

causes for suspension and debarment (48 C.F.R. Subpart 9.4) and the 

Nonprocurement Common Rule on Suspension and Debarment,71 recently 

updated November 26, 2003 (68 Fed. Reg. 66533), provide contracting 

officers and grant officers with ample discretion to consider tax-related 

problems as a criterion for making awards. Specifically, they noted that 

FAR 9.104-1(d) requires prospective contractors to have, among other 

things, satisfactory records of integrity and business ethics. Accordingly, 

they said, failure to pay taxes or abuse of the tax system would be a factor 

in making this determination.

OMB’s comments provide us no basis to change our recommendation that 

OMB develop and pursue policy options for prohibiting federal contract 

awards to contractors that abuse the tax system. While we agree with OMB 

that the definition of “tax abuse” should be developed in consultation with 

those government officials responsible for administering the nation’s tax 

laws, as the agency responsible for governmentwide procurement policy, 

we believe that OMB should assume a leadership role in ensuring that 

contractors that abuse the tax system are prohibited from receiving federal 

contracts.

As we discussed in this report, contracting officers have the discretion to 

consider tax-related concerns in making determinations as to a contractor’s 

responsibility, specifically as to its record of integrity and business ethics. 

However, contracting officers are not required to consider a prospective 

contractor’s tax noncompliance, other than tax evasion, in deciding 

whether to award a contract and, as all 47 case studies in our report clearly 

71 The Nonprocurement Common Rule is the procedure used by federal executive agencies 

to suspend, debar, or exclude individuals or entities from participation in nonprocurement 

transactions such as grants, cooperative agreements, scholarships, fellowships, contracts of 

assistance, loans, loan guarantees, subsidies, insurance, payments for specified use, and 

donation agreements.
Page 51 GAO-04-95 DOD Contractor Tax Abuse

illustrate, contracting officers are not doing so. There is no guidance for 

contracting officers on considering tax information, even if the information 

is legally available to them, nor is there any coordinated mechanism to help 

contracting officers obtain accurate information on contractors that abuse 

the tax system.

As OMB pointed out, the existing suspension and debarment process 

includes an “other” category that provides for consideration of matters of 

“so serious or compelling a nature” that they affect a contractor’s present 

responsibility. However, OMB did not explain how this effectively prevents 

awards to contractors that abuse the federal tax system or provide 

examples of such debarred or suspended contractors. Because the 

debarment and suspension process does not appear to be preventing 

federal awards to contractors that abuse the tax system, we continue to 

suggest that tax abuse be specifically designated or authorized as a cause 

for debarment, suspension, or ineligibility.

As agreed with your offices, unless you announce the contents of this 

report earlier, we will not distribute it until 30 days after its date. At that 

time, we will send copies to the Secretary of Defense; the Secretary of the 

Treasury; the Director, Office of Management and Budget; the 

Commissioner of the Financial Management Service; the Commissioner of 

Internal Revenue; the Under Secretary of Defense for Acquisition, 

Technology, and Logistics; the Under Secretary of Defense (Comptroller); 

the Director, Defense Finance and Accounting Service; the Director, 

Defense Logistics Agency; and interested congressional committees and 

members. We will make copies available to others upon request. In 

addition, this report will be available at no charge on the GAO web site at 

http://www.gao.gov. 
Page 52 GAO-04-95 DOD Contractor Tax Abuse

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

Ryan at (202) 512-9587 or ryanj@gao.gov, or Steven J. Sebastian at (202) 

512-3406 or sebastians@gao.gov if you or your staff have any questions 

concerning this report. 

Gregory D. Kutz

Director

Financial Management and Assurance

Robert J. Cramer 

Managing Director

Office of Special Investigations

Steven J. Sebastian

Director

Financial Management and Assurance
Page 53 GAO-04-95 DOD Contractor Tax Abuse

Appendix I

Scope and Methodology AAppenednxidexiIs

To identify DOD contractors, we obtained a copy of Department of 

Defense’s (DOD) Central Contractor Registration (CCR) database as of 

February 2003 from the Defense Logistics Information Service (DLIS) in 

Battle Creek, Michigan. Because DOD does not have all contractor 

information in a single automated system, the CCR database provided the 

best available source of DOD contractor information.

To identify DOD contractors with unpaid federal taxes, we matched 

contractor records from the CCR database to Internal Revenue Service 

(IRS) tax records using the tax identification number (TIN) fields, which 

resulted in about 27,100 matching records with nearly $3 billion in unpaid 

taxes. We used data mining software to select, match, summarize, and 

report on DOD and IRS records. We also identified over 5,000 contractors 

with potentially invalid TINs by matching the contractor employer 

identification number (EIN) and Social Security number (SSN) fields from 

CCR to IRS tax records, and by providing an electronic file of contractor 

SSNs from CCR to the Social Security Administration for matching against 

its records.

To evaluate DOD and IRS processes and controls over the collection of 

unpaid federal taxes, we discussed this issue and reviewed current policies 

and procedures with the Defense Finance and Accounting Service (DFAS), 

IRS, and Financial Management Service (FMS) officials. We did not audit 

the effectiveness of the DFAS process for providing Mechanization of 

Contract Administration Services (MOCAS) payment information to 

Treasury Offset Program (TOP). In December 2003, we obtained 

information from IRS on FPLP collections from MOCAS payments through 

September 2003. We visited the IRS Processing Center in Kansas City, 

Missouri, to help determine the effectiveness of the continuous levy 

program. In addition, we reviewed related laws and regulations governing 

the levy program and TOP process.

To determine the DOD business activity of the about 27,100 contractors, we 

obtained copies of fiscal year 2002 payment files for five of the largest DOD 

payment systems: MOCAS for Defense Contract Management Agency 

(DCMA) payments, One Bill Pay for Navy payments, Integrated Accounts 

Payable System (IAPS) for Air Force payments, and Computerized 

Accounts Payable System (CAPS) Clipper and CAPS Windows for Army 

and Marine Corps payments. These payment files represented about 72 

percent of the $183 billion disbursed to DOD contractors in fiscal year 

2002. The five payment files are used to detect payment fraud and 

overpayments by the DFAS Internal Review group with the DOD Operation 
Appendix I

Scope and Methodology

Page 54 GAO-04-95 DOD Contractor Tax Abuse

Mongoose program at the Defense Manpower Data Center in Seaside, 

California. Using TINs, we matched the about 27,100 contractors to the 

five fiscal year 2002 DOD payment files.1

 We also estimated the potential 

fiscal year 2002 collections under an effective tax levy program of at least 

$100 million using the assumptions that all unpaid federal taxes were 

referred by IRS to FMS for inclusion in the TOP database, and fiscal year 

2002 payment information from the five DOD payment files was provided 

to FMS for matching against the TOP database. The estimated collection 

amount under an effective tax levy program was calculated on 15 percent 

of the DOD contractor payments up to the amount of unpaid taxes.

To identify indications of abuse or potential criminal activity, we selected a 

group of DOD contractors as case studies for a detailed audit and 

investigation. To select the case studies, we used the about 27,100 

contractors described above and, using TINs, we matched the contractors 

to the five fiscal year 2002 DOD payment files. This matching yielded about 

8,500 active DOD contractors, which we further reduced based on the 

amount of unpaid taxes, number of unpaid tax periods, and DOD 

contractor payments. We reviewed the IRS tax records and excluded 

contractors that had recently paid off their unpaid tax balances or were 

categorized by IRS as compliance assessments, and considered other 

factors before reducing the number of cases for study to 47. We selected 34 

businesses and 13 individuals for further audit and investigation, and 

obtained copies of their automated tax transcripts from IRS as of May 2003. 

We reviewed the transcripts for any steps taken to resolve the unpaid taxes. 

We also obtained detailed tax records (e.g., tax returns, revenue officer 

notes, and collection and assessment files) and reviewed them at the IRS 

processing center in Kansas City, Missouri. We obtained additional 

information from IRS to determine what enforcement actions had been 

taken against these contractors. For the 47 case studies, we identified DOD 

contract awards using the DOD Electronic Document Access system, and 

had criminal, financial, and public record searches performed by our Office 

of Special Investigations (OSI). We provided the case study list to FMS to 

identify the tax and nontax debt in the TOP database. For some case 

studies, we contacted the responsible DOD contracting officers to inquire 

about the contractors’ goods or services, performance, and current DOD 

1

 Because TINs were missing in some DOD payment records, we populated the five payment 

files with TINs by matching payment records to contractor records in the CCR database 

using the DOD Commercial and Government Entity code. This procedure identified 

additional payments made to DOD contractors with unpaid federal taxes.
Appendix I

Scope and Methodology

Page 55 GAO-04-95 DOD Contractor Tax Abuse

contracts. OSI investigators contacted some contractors and performed 

interviews in California, the District of Columbia, Maryland, Michigan, 

Pennsylvania, Texas, and Virginia.

To determine whether DOD contractors with unpaid federal taxes are 

prohibited by law from receiving contracts from the federal government, 

we reviewed prior GAO work and relevant laws.

We performed our work at DOD headquarters in Arlington, Virginia; the 

DFAS office in Columbus, Ohio; the DLIS in Battle Creek, Michigan; the 

Defense Manpower Data Center in Seaside, California; IRS and FMS 

headquarters in Washington, D.C.; and the IRS processing center in Kansas 

City, Missouri.
Page 56 GAO-04-95 DOD Contractor Tax Abuse

Appendix II

DOD Contractors with Unpaid Federal Taxes ApendxiI

Tables 2 and 3 provide data on 17 detailed case studies. Tables 4 and 5 

show the 30 remaining business and individual case studies that we audited 

and investigated. As with the 17 cases discussed in the body of this report, 

we also found substantial abuse or potentially criminal activity related to 

the federal tax system during our review of these 30 case studies. The case 

studies involving businesses with employees primarily involved unpaid 

payroll taxes, some for as many as 62 tax periods. The case studies 

involving individuals primarily involved unpaid income taxes.

Table 4: DOD Contractors with Unpaid Federal Taxes—Business

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments

18 Television repair 

services: provides 

repairs at military 

hospital

Over

$160,000

$5,000 $32,000 • Contract for over $180,000 in late 1990s

• Long history of not remitting tax 

withholdings

• Several federal tax liens filed against the 

owner

19 Clothing manufacturer:

provides military 

uniforms for DOD agency

Over

$1 million

$137,000 $914,000 • Numerous DOD contract awards totaling 

over $10 million

• Offer in compromise, subsequently 

withdrawn

20 Courier service Over

$300,000

$5,000 $34,000 • DOD contract of over $30,000

• Bankruptcy filed

• Several tax liens filed against the business

21 Construction services: 

provides fencing 

installation, maintenance 

and renovations on 

military bases 

Nearly

$60,000

Nearly

$60,000

$1.1 million • Business cooperated with IRS only after 

being placed in Federal Payment Levy 

Program and being levied on payments 

from a participating federal agency; IRS 

received almost $25,000 from levied 

payments

• Has unpaid child support debt

• Two tax liens filed against business

22 Weapon parts 

manufacturer: supplies 

weapons parts and tools 

to various military 

organizations

Over

$400,000

$54,000 $363,000 • Nearly $1.9 million in DOD contracts

• IRS tax liens filed against business

23 Cleaning services:

provides cleaning and 

inspections of fire 

suppression systems

Over

$250,000

$6,000 $40,000 • Awarded over $200,000 in DOD contracts

• Several tax liens filed against business and 

its owner
Appendix II

DOD Contractors with Unpaid Federal Taxes

Page 57 GAO-04-95 DOD Contractor Tax Abuse

24 Computer equipment 

supplier: supplies

computer-related 

hardware to military 

services

Over

$500,000

$7,000 $45,000 • Over $1.3 million in DOD contracts

• Owes tens of thousands of dollars to a 

federal agency for a civil penalty for failing 

to meet its fiduciary duties under the 

employee retirement plan

• Several federal, state, and county tax liens 

filed against business

25 Information technology 

personnel services: 

provides support for 

various military 

organizations

Nearly

$1 million

$140,000 $932,000 • Federal payments received from three 

other federal agencies

• Multiple DOD contracts valued up to 

approximately $13 million

• Potential money laundering activities

• Defaulted on installment agreements

26 Aircraft-related goods: 

supplies aircraft 

maintenance equipment

Over

$1.5 million

$33,000 $221,000 • Nearly $2 million in DOD contracts

• Several federal and state tax liens filed 

against this business

• Several judgments were made against this 

contractor

27 Aircraft-related goods: 

supplies instruments to 

military services

Nearly

$300,000

$7,000 $48,000 • Numerous DOD contracts totaling over 

$350,000

28 Research services:

provides research for 

military service programs

Over

$400,000

$4,000 $30,000 • DOD contract for over $100,000

• Federal tax liens filed against business

29 Catering services Over

$60,000

$4,000 $29,000 • Several IRS tax liens and state tax liens 

filed against this business

30 Ammunition: 

manufactures 

ammunition 

Over

$2 million

$100 $1,000 • Over $8 million in DOD contracts

• Currently involved in a criminal 

investigation on product quality

31 Consulting services:

provides technical 

support services for 

military installations 

Nearly

$2 million

$410,000 $2.7 million • Nearly $30 million in DOD contracts

• Bankruptcy filed

• Federal and state tax liens filed

32 Moving services:

provides furniture and 

office equipment for 

military installations

Over

$50,000

Over

$50,000

$399,000 • Over $200,000 in DOD contracts

• Several federal and state tax liens filed

33 Power equipment:

manufactures power 

supplies and regulators 

for various military 

organizations

Over

$200,000

$86,000 $571,000 • Over $3 million in DOD contracts

• Tax lien filed against this business

• Several judgments filed against the 

business and its owner in the mid-1990s

(Continued From Previous Page)

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments
Appendix II

DOD Contractors with Unpaid Federal Taxes

Page 58 GAO-04-95 DOD Contractor Tax Abuse

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

Notes: Dollar amounts are rounded. Nature of unpaid taxes for businesses was primarily due to 

unpaid payroll taxes. A contractor registers in the CCR database with either an EIN or an SSN. In our 

report, any contractor registering with an EIN is referred to as a business, and any contractor 

registering with an SSN is referred to as an individual. An individual in CCR could be a business 

owner (i.e., sole proprietorship).

a

Unpaid tax amount as of September 30, 2002.

b

The estimated collections under an effective tax levy use the assumptions that all unpaid federal taxes 

are referred to TOP at Treasury FMS and all fiscal year 2002 DOD payment information is provided to 

TOP. The collection amount is calculated on 15 percent of the payment amount up to the amount of 

unpaid taxes.

c

DOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems identified by GAO.

34 Custodial services:

provides janitorial and 

housekeeping services at 

military installations 

Over

$5 million

$188,000 $1.3 million • About $4 million in DOD contracts

• Multiple bankruptcies filed

• Several federal and state tax liens filed 

against business

35 Construction services: 

provides construction 

services at military 

installations

Nearly

$150,000

$23,000 $152,000 • Bankruptcy filed in late 1990s

• IRS received over $70,000 from levied 

payments from agencies other than DOD

36 Funeral home: 

provides funeral services

Over

$360,000

$2,000 $14,000 • Continued to incur delinquent taxes after 

emerging from bankruptcy

37 Procurement services: 

obtains parts and 

equipment for various 

military organizations

Over

$100,000

$12,000 $81,000 • Several federal and state tax liens filed 

against this business and its owner

38 Information technology 

personnel services:

provides information 

technology support to 

military organizations 

Over

$1 million

$289,000 $1.9 million • Corporate officer assessed a trust fund 

recovery penalty

(Continued From Previous Page)

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments
Appendix II

DOD Contractors with Unpaid Federal Taxes

Page 59 GAO-04-95 DOD Contractor Tax Abuse

Table 5: DOD Contractors with Unpaid Federal Taxes—Individual

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

Notes: Dollar amounts are rounded. Nature of unpaid taxes for individuals was primarily due to unpaid 

income taxes. A contractor registers in the CCR database with either an EIN or an SSN. In our report, 

any contractor registering with an EIN is referred to as a business, and any contractor registering with 

an SSN is referred to as an individual. An individual in CCR could be a business owner (i.e., sole 

Case 

study

Goods or service and 

nature of DOD work

Unpaid 

federal tax 

amounta

Estimated 

fiscal year 2002 

collections under 

effective tax levyb

Fiscal year 

2002 DOD 

paymentsc Comments

39 Music services:

provides musicians and 

music services

Over

$30,000

$2,000 $16,000 • Over $50,000 in DOD contracts

• Debt for unpaid child support

• Individual has personal debt that has been 

turned over for collection action

40 Maintenance services: 

repairs shielded doors for 

secure areas

Over

$50,000

$4,000 $28,000 • Over $100,000 in DOD contracts

• Bankruptcies filed in mid-1990s

• Several court judgments filed against the 

contractor in the mid- to late 1990s

41 Music services: 

provides musicians for 

religious services 

Over

$160,000

$33,000 $217,000 • Individual has not filed an income tax 

return since 1997

• Defaulted on installment agreement in the 

late 1990s

42 Construction services: 

provides general carpentry, 

electrical, painting, and 

building repairs

Nearly

$70,000

$19,000 $130,000 • Over $100,000 in DOD contracts 

• Federal tax lien filed against this individual

43 Consulting services:

provides software 

development services

Over

$50,000

$8,000 $56,000 • Individual has personal credit accounts in 

collection 

• Federal tax lien filed against this individual

44 Training services: 

provides diversity and 

sexual harassment training

Over

$60,000

$13,000 $89,000 • Over $90,000 in DOD contracts

• Student loan debt

• Individual owes over $10,000 in past due 

debt

• Several civil judgments and state tax liens 

filed against contractor

45 Equipment maintenance:

provides maintenance and 

repair of boilers, 

generators, and 

compressors

Nearly

$260,000

$17,000 $113,000 • Individual owes over $10,000 in past due 

debt

• Defaulted on installment agreement

• One judgment against individual

46 Environmental engineering: 

prepares environmental 

reports

Over

$10,000

Over

$10,000

$286,000 • Owner is federal employee and reserve 

military officer

47 Consulting services:

provides advice to a military 

medical command

Nearly

$140,000

$13,000 $89,000 • Nearly $300,000 in DOD contracts

• Student loan debt with a federal agency

• Individual has several accounts with 

collection agency

• Federal tax lien filed against individual
Appendix II

DOD Contractors with Unpaid Federal Taxes

Page 60 GAO-04-95 DOD Contractor Tax Abuse

proprietorship). For cases selected as individuals, we reviewed both the owner and related business 

information, if it could be identified.

a

Unpaid tax amount as of September 30, 2002.

b

The estimated collections under an effective tax levy use the assumptions that all unpaid federal taxes 

are referred to TOP at Treasury FMS and all fiscal year 2002 DOD payment information is provided to 

TOP. The collection amount is calculated on 15 percent of the payment amount up to the amount of 

unpaid taxes.

c

DOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems identified by GAO.
Page 61 GAO-04-95 DOD Contractor Tax Abuse

Appendix III

Comments from the Department of Defense ApendxiI
Appendix III

Comments from the Department of Defense

Page 62 GAO-04-95 DOD Contractor Tax Abuse
Appendix III

Comments from the Department of Defense

Page 63 GAO-04-95 DOD Contractor Tax Abuse
Appendix III

Comments from the Department of Defense

Page 64 GAO-04-95 DOD Contractor Tax Abuse
Appendix III

Comments from the Department of Defense

Page 65 GAO-04-95 DOD Contractor Tax Abuse
Page 66 GAO-04-95 DOD Contractor Tax Abuse

Appendix IV

Comments from the Internal Revenue Service ApendxiIV
Appendix IV

Comments from the Internal Revenue Service

Page 67 GAO-04-95 DOD Contractor Tax Abuse
Page 68 GAO-04-95 DOD Contractor Tax Abuse

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Arthur W. Brouk, (214) 777-5633

Lawrence Malenich, (202) 512-9399

John J. Ryan, (202) 512-9587

Acknowledgments In addition to the individuals named above, Tida Barakat, Gary Bianchi, 

Ray Bush, William Cordrey, Francine DelVecchio, K. Eric Essig, Kenneth 

Hill, Jeff Jacobson, Shirley Jones, Jason Kelly, Rich Larsen, Tram Le, 

Malissa Livingston, Christie Mackie, Julie Matta, Dave Shoemaker, Wayne 

Turowski, Jim Ungvarsky, and Adam Vodraska made key contributions to 

this report.

(192092)
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