United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Government 

Management, Organization, and Procurement, 

Committee on Oversight and Government 

Reform, House of Representatives 

TAX COMPLIANCE 

Thousands of Federal 

Contractors Abuse the 

Federal Tax System 

Statement of Gregory D. Kutz, Managing Director 

Forensic Audits and Special Investigations 

For Release on Delivery

Expected at 1:00 p.m. EST 

Thursday, April 19, 2007

 

GAO-07-742T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 19, 2007

TAX COMPLIANCE

Thousands of Federal Contractors Abuse 

the Federal Tax System Highlights of GAO-07-742T, a testimony 

before the Subcommittee on Government 

Management, Organization, and 

Procurement, Committee on Oversight 

and Government Reform, House of 

Representatives 

Since 1990, GAO has periodically 

reported on high-risk federal 

programs that are vulnerable to 

fraud, waste, and abuse. Two such

high-risk areas are managing

federal contracts more effectively 

and assessing the efficiency and

effectiveness of federal tax 

administration. Weaknesses in the 

tax area continue to expose the 

federal government to significant 

losses of tax revenue and increase

the burden on compliant taxpayers 

to fund government activities. 

Over the last several years, the 

Senate Permanent Subcommittee 

on Investigations requested GAO to

investigate Department of Defense 

(DOD), civilian agency, and 

General Services Administration

(GSA) contractors that abused the 

federal tax system. Based on that 

work GAO made recommendations

to executive agencies including to

improve the controls over levying

payments to contractors with tax 

debt—many of which have been

implemented—and referred 122

contractors to IRS for further 

investigation and prosecution. 

As requested, this testimony will 

highlight the key findings from 

prior testimonies and related 

reports. This testimony will 

(1) describe the magnitude of tax 

debt owed by federal contractors, 

(2) provide examples of federal 

contractors involved in abusive and 

potentially criminal activity related 

to the federal tax system, and (3) 

describe current law and proposed

federal regulations for screening

contractors with tax debts prior to

the award of a contract. 

In our previous audits and related investigations, we reported that thousands 

of federal contractors had substantial amounts of unpaid federal taxes. 

Specifically, about 27,000 DOD contractors, 33,000 civilian agency 

contractors, and 3,800 GSA contractors owed about $3 billion, $3.3 billion, 

and $1.4 billion in unpaid taxes, respectively. These estimates were 

understated because they excluded federal contractors that understated 

their income or did not file their tax returns; however, some contractors may 

be counted in more than one of these groups. 

As part of this work, we conducted more in-depth investigations of 122 

federal contractors and in all cases found abusive and potentially criminal 

activity related to the federal tax system. Many of these 122 contractors were

small, closely held companies that provided a variety of goods and services, 

including landscaping, consulting, catering, and parts or support for 

weapons and other sensitive programs for many federal agencies including 

the departments of Defense, Justice, and Homeland Security. These 

contractors had not forwarded payroll taxes withheld from their employees 

and other taxes to IRS. Willful failure to remit payroll taxes is a felony under 

U.S. law. Furthermore, some company owners diverted payroll taxes for 

personal gain or to fund their businesses. A number of owners or officers of 

the 122 federal contractors owned significant personal assets, including a 

sports team, multimillion dollar houses, a high-performance airplane, and 

luxury vehicles. Several owners gambled hundreds of thousands of dollars 

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

Examples of Abusive and Potentially Criminal Activity 

Type of Unpai

debt

Pay

business con

d tax ments to 

tractor Contractor activity 

Custodial 

services for 

DOD 

O

$1 million $1 million

, and a

hom

ver Over Owner bought a boat, several cars

e outside the country. 

Temporary 

agency 

Ne

$900,000 $1 million

n

i es with tax debts, opening 

new

help for 

civilian arly Over cl

Ow er followed pattern of over 20 years of 

os ng business

ones, and incurring more tax debts. 

Security

Over 

$9 mil

Ove

$1 m

Own

re en’s

o orth over $25,000.

under GSA 

contract lion

r un

illion g

er made cash withdrawals to fund an 

lated business and purchase a m

ld bracelet w

Source: Previous GAO testimonies. 

Federal law, as implemented by the Federal Acquisition Regulation (FAR), 

does not now require contractors to disclose tax debts or contracting 

officers consider tax debts in making contracting decisions. Federal 

contractors that do not pay tax debts could have an unfair competitive 

advantage in costs because they have lower costs than tax compliant 

contractors on government contracts. GAO’s investigation identified 

instances in which contractors with tax debts won awards based on price 

differential over tax compliant contractors. 

www.gao.gov/cgi-bin/getrpt?GAO-07-742T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory Kutz at 

(202) 512-7455 or kutzg@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss our past work on government 

contractors that have failed to pay their federal taxes. Our remarks today 

are based on work that we have performed over the last several years for 

the Senate Permanent Subcommittee on Investigations, Committee on 

Homeland Security and Governmental Affairs. In hearings held before that

Subcommittee over the last several years,1

 we testified that federal 

contractors at the Department of Defense (DOD), selected civilian 

agencies, and the General Services Administration (GSA) abused the 

federal tax system with little consequence. As requested, this testimony 

highlights the key findings from those testimonies and related reports. 

Specifically, this testimony will (1) describe the magnitude of tax debts 

that were owed by federal contractors at the time of our previous 

testimonies and related reports, (2) provide examples of federal 

contractors involved in abusive and potentially criminal activity related to

the federal tax system, and (3) discuss current law and proposed changes 

to the Federal Acquisition Regulation (FAR) concerning contractor tax 

debt. 

To address our objectives, we reviewed prior findings from GAO audits of 

federal contractors that have abused the federal tax system. Our audit 

work was performed in accordance with U.S. generally accepted 

government auditing standards. We performed our investigative work in 

accordance with standards prescribed by the President’s Council on 

Integrity and Efficiency.

In each of our audits and related investigations, we found thousands of 

federal contractors that had substantial amounts of unpaid federal taxes. 

Specifically, we testified that about 27,000 DOD contractors, 33,000 

civilian agency contractors, and 3,800 GSA contractors owed about $3 

Summary 

 1

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

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

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

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

Management: Thousands of GSA Contractors Abuse the Federal Tax System, 

GAO-06-492T (Washington, D.C.: Mar. 14, 2006). 

Page 1 GAO-07-742T 
billion, $3.3 billion, and $1.4 billion in federal taxes, respectively.2

 Much of 

the unpaid taxes were payroll taxes.3

 However, each estimate of 

contractors’ unpaid federal taxes is understated because IRS data do not 

reflect all amounts owed. Specifically, our estimates do not include 

amounts owed by contractors who have not filed tax returns or that have 

failed to report the full amount of taxes due (referred to as nonfilers and 

underreporters) and for which Internal Revenue Service (IRS) has not 

determined the amount owed. 

We conducted more in-depth case study investigations of 122 federal 

contractors that appeared to demonstrate abusive or potentially criminal 

activity related to the federal tax system. We found that, in fact, each of 

the 122 federal contractors was involved in abusive and potentially 

criminal activity related to the tax system. Many of these case-study 

contractors were small, closely held companies that operated in wagebased industries; such as security; building maintenance; computer 

services; and personnel services for GSA, DOD, and the Departments of 

Homeland Security, Justice, and Veterans Affairs. The types of contracts 

that were awarded to these federal contractors included products or 

services related to weapon components, space and aircraft parts, law 

enforcement, disaster relief, and national security. Many were established 

businesses (such as corporations) that owed payroll taxes that include 

amounts withheld from their employees. However, rather than fulfill their

role as “trustees” of these funds and forward them to IRS as required by 

law, these federal contractors diverted the funds for other purposes.4

At the same time that they were not paying their federal taxes, many 

individuals associated with our 122 cases bought or owned significant 

personal assets, including a sports team, a high-performance airplane, 

commercial properties, multimillion dollar homes, and luxury vehicles. In

one case, the owner of a federal contracting firm purchased a number of 

 2

 Because federal contractors may do business with more than one federal agency, some

federal contractors that owe tax debts may be included in more than one analysis

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

Because our analysis for each segment covered different time periods, we cannot provide 

an overall number of federal contractors with tax debts and the magnitude of such debts.

3

 Payroll taxes include amounts withheld from employee wages for Social Security,

Medicare, and individual income taxes. 

4

 Willful failure to remit payroll taxes is a criminal felony offense while the failure to 

properly segregate payroll taxes can be a criminal misdemeanor offense. 26 U.S.C. §§ 7202, 

7215 and 7512 (b). 

Page 2 GAO-07-742T 
multimillion-dollar properties, an unrelated business, and a number of 

luxury vehicles while his business failed to remit to IRS a substantial 

amount of payroll taxes. Several owners also gambled hundreds of 

thousands of dollars at the same time they were not paying the federal

taxes that their businesses owed. Further, several of the owners or officers 

of the businesses with unpaid federal taxes were investigated or indicted 

for nontax offenses such as embezzlement, fraud, and money laundering. 

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

receiving contracts from the federal government. Currently, regulations 

calling for federal agencies to do business only with responsible 

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

tax delinquency unless the contractor was specifically debarred or 

suspended by a debarring official for specific actions, such as conviction 

for tax evasion. According to the FAR, a responsible prospective 

contractor is a contractor that meets certain specific criteria,5

 including 

having adequate financial resources and a satisfactory record of integrity 

and business ethics. However, the FAR does not currently require 

contracting officers to take into account a contractor’s tax debt when 

assessing whether a prospective contractor is responsible. As a result, the 

FAR does not currently require contracting officers to determine if federal 

contractors have federal unpaid taxes at the time a contract is awarded. 

Further, federal law generally prohibits the disclosure of taxpayer data to

contracting officers. Thus, contracting officers do not have access to tax 

data directly from IRS unless the contractor provides consent. In March 

2007, the Civilian Agency Acquisition Council and the Defense Acquisition 

Regulations Council proposed to amend the FAR to require prospective 

contractors to disclose whether they have, within a 3-year period 

preceding their offer, been notified of any delinquent taxes that remain 

unsatisfied or whether they have received notice of any tax lien filed 

against them that remains unsatisfied or has not been released.

6

 The 

proposed rule also includes, among other things, delinquent taxes and 

unresolved liens as causes for suspension or debarment. 

Finally, we also reported that for wage-based businesses that provide 

goods and services, federal contractors with unpaid federal taxes have an 

unfair advantage in price competition when competing against other 

 5

 FAR 2.101; 9.104-1 

6

Representations and Certifications – Tax Delinquency, 72 Fed. Reg. 15093 (proposed Mar. 

30, 2007) (to be codified at 48 C.F.R. pts. 9 and 52). 

Page 3 GAO-07-742T 
businesses for federal contracts. Companies that do not pay their payroll

tax, which is typically over 15 percent of the employees’ wages, would 

have a significantly lower costs advantage and therefore have a 

substantive competitive advantage over their competitors. For example, 

we identified instances in which companies that had unpaid payroll taxes 

were competitively awarded contracts over companies that had paid their 

federal taxes. 

As result of the work we performed for the Senate Permanent

Subcommittee on Investigations, Committee on Homeland Security and

Governmental Affairs we made numerous recommendations to executive

agencies to improve the controls over levying payments to contractors 

with tax debt, many of which the agencies have implemented. We also 

referred 122 contractors to IRS for further investigation and prosecution. 

 

In each of our audits and related investigations, we found thousands of 

federal contractors that owed billions of dollars of federal taxes. 

Specifically,

• In February 2004, we testified that DOD and IRS records showed that 

about 27,000 DOD contractors owed nearly $3 billion in federal taxes. 

About 42 percent of this $3 billion represented unpaid payroll taxes. 

Federal Contractors 

Owe Billions of 

Dollars in Unpaid 

Federal Taxes 

• In June 2005, we testified that about 33,000 civilian agency federal 

contractors owed over $3.3 billion in federal taxes. Over a third of the 

$3.3 billion represented unpaid payroll taxes. 

• In March 2006, we testified that over 3,800 GSA contractors owed 

about $1.4 billion in federal taxes. About one-fifth of the $1.4 billion 

represented unpaid payroll taxes. 

Because federal contractors may do business with more than one federal

agency, some federal contractors that owe tax debts may be included in 

more than one analysis concerning DOD, GSA, and civilian federal 

contractors that abuse the federal tax system. 

In each of our audits, we found that government contractors owed a 

substantial amount of unpaid payroll taxes. 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 fiduciary responsibility to hold 

these funds “in trust” for the federal government until the employer makes 

a federal tax deposit in that amount. To the extent these withheld amounts 

Page 4 GAO-07-742T 
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 contributions for Social Security and Medicare. 

Individuals employed by the contractor (e.g., owners or 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.7

Willful failure to remit payroll taxes can also be a criminal felony offense 

punishable by imprisonment of up to 5 years,8

 while the failure to properly 

segregate payroll tax funds can be a criminal misdemeanor offense 

punishable by imprisonment of up to a year. 9

 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 federal government’s general 

fund. Thus, personal income taxes, corporate income taxes, and other 

government revenues are used to pay for these shortfalls to the Social

Security and Medicare trust funds. 

Although each of our estimates for taxes owed by federal contractors was 

a significant amount, it understates the full extent of unpaid taxes owed by

these contractors. The IRS tax database reflected only the amount of 

unpaid federal taxes either reported on a tax return or assessed by IRS 

through its various enforcement programs. The IRS database did not 

reflect amounts owed by businesses and individuals that have not filed tax 

returns and for which IRS has not assessed tax amounts due. Our analysis

did not attempt to account for businesses or individuals that did not file

required payroll or other tax returns or that purposely underreported 

income and were not specifically identified by IRS as owing the additional

federal taxes. According to IRS, underreporting of income accounted for 

more than 80 percent of the estimated $345 billion annual gross tax gap.10

As result of the work we performed for the Senate Permanent

Subcommittee on Investigations, Committee on Homeland Security and

Governmental Affairs we made numerous recommendations to DOD and 

 7

 26 U.S.C. § 6672. 

8

 26 U.S.C. § 7202. 

9

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

10 According to IRS, nonfilers and underpayment of taxes comprised the rest of the gross

tax gap. 

Page 5 GAO-07-742T 
civilian agencies to improve their controls over levying payments to 

contractors with tax debt. Many of those recommendations have been 

implemented and have resulted in additional collections of unpaid tax 

debt. We also referred 122 contractors to IRS for further investigation and 

prosecution. 

In our previous testimonies, we discussed the results of our in-depth 

audits and related investigations of 122 federal contractors with 

outstanding tax debt. For each of these 122 federal contractors, we found 

instances of abusive or potentially criminal activity related to the federal

tax system.11 Many of our case study contractors were small, closely held

companies that operated in wage-based industries, such as security, 

weapon components, space and aircraft parts, building maintenance, 

computer services, and personnel services. These 122 federal contractors 

provided goods and services to a number of federal agencies including 

DOD, GSA, the National Aeronautics and Space Administration, and the 

Departments of Homeland Security, Justice, and Veterans Affairs. The 

types of contracts that were awarded to these contractors also included 

products or services related to variety of government functions including

law enforcement, disaster relief, and national security. 

Examples of Federal 

Contractors Involved 

in Abusive and 

Potentially Criminal 

Activity Related to the 

Federal Tax System 

Most of the contractors in our case studies owed payroll taxes, with some

federal tax debts dating back nearly 20 years. However, rather than 

fulfilling their role as “trustees” and forwarding these funds to IRS, many 

of these federal contractors used the funds for personal gain or to fund 

their contractor operations. 

Our investigations also revealed that some owners or officers of our case 

study federal contractors with unpaid taxes were associated with other 

businesses that had unpaid federal taxes. For example, we reported that

one of our case study contractors had a 20-year history of opening a 

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

closing the business, only to start the cycle all over again and incur more 

tax debts almost immediately through a new business. We also found that

a number of owners or officers of our case study contractors had 

significant personal assets, including a sports team, commercial 

properties, multimillion dollar houses, and luxury vehicles. Several owners 

 11 We considered activity to be abusive when a federal contractor’s actions or inactions, 

though not illegal, took advantage of the existing tax enforcement and administration 

system to avoid fulfilling federal tax obligations and were deficient or improper when 

compared with behavior that a prudent person would consider reasonable. 

Page 6 GAO-07-742T 
also gambled hundreds of thousands of dollars at the same time they were 

not paying the taxes that their businesses owed. Despite owning 

substantial assets and gambling significant amounts of money, the owners

or officers did not ensure the payment of the delinquent taxes of their 

businesses, and sometimes did not pay their own individual income taxes. 

Table 1 provides summary information on 10 of our 122 case study 

contractors that we discussed in our previous testimonies and related 

reports. 

Page 7 GAO-07-742T 
Table 1: Summary Information on 10 Federal Contractors with Unpaid Federal Taxes 

Case Nature of work 

Federal 

paymentsa

Unpaid 

federal taxb

Comments

Case 1 Base support and 

custodial services 

for DOD 

Over $1 

million 

Nearly $10 

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. 

Case 2 Research services 

for DOD 

Up to 

$100,000 

Over

$700,000

• DOD awarded the business a contract in 2002 for nearly $800,000. 

• Owner had over $1 million in loans related to cars, real estate, and 

recreational activities. 

• Owner owned a high-performance airplane. 

Case 3 Vehicle repair 

services for DOD 

Over

$100,000 

Over

$100,000

• The business was investigated for paying employee wages in cash. 

• Owner purchased million dollar home and luxury sports car while 

owing a substantial tax liability.

• Owner owed child support. 

Case 4 Health-care-related 

services for 

Departments of

Veterans Affairs 

and Health and

Human Services

Over

$100,000 

Over $18 

million 

• Business was affiliated with many other health care-related facilities, 

including nursing and convalescent homes. 

• Business and related entities owed taxes covering over 80 tax 

periods. 

• Owner purchased multimillion-dollar properties, an unrelated

business, and a number of luxury vehicles at the same time the 

business was not fully paying its payroll taxes. 

• Owner owned other real estate holdings including residential and 

commercial properties valued in the tens of millions of dollars. 

Case 5 Security guard 

services to 

Departments of

Homeland Security 

and Veterans 

Affairs 

Over

$100,000 

Over

$400,000

• Business had not filed all required tax returns for several years. 

• Business owed taxes covering over 25 tax periods. Tax debt

amount also included owner’s individual income taxes totaling tens 

of thousands of dollars. 

• Owner had repeatedly failed to file personal income tax returns. 

• Owner diverted unpaid payroll taxes to a foreign bank account to 

build a house overseas. 

Case 6 Armed security

guard services to 

several federal

agencies including 

the Department of 

Justice and the

Environmental

Protection Agency 

Over

$100,000 

Nearly 

$400,000

• Business owed over $200,000 in payroll taxes for almost 10 tax 

periods. 

• Business did not file income tax returns in the early 2000s. 

• Officer of the business was convicted for stealing hundreds of 

thousands of dollars from the business. 

• The owner was indicted for embezzlement and money laundering. 

Page 8 GAO-07-742T 
Case Nature of work 

Federal 

paymentsa

Unpaid 

federal taxb

Comments 

Case 7 Payroll and 

temporary 

employment 

services to the 

Department of 

Housing and Urban 

Development 

Over $1 

million 

Nearly 

$900,000

• The owner’s history of delinquency stretched nearly 20 years and 

covered multiple businesses. 

• The owner typically incurred payroll taxes on one business, was 

assessed a trust fund penalty on that business but made no or little 

payments, closed the business, started another company, and 

repeated the same pattern. In at least one case, the owner closed 

the business and immediately established a new business with a 

similar name at the same address that provided the same services. 

• The owner rented office space in an expensive area of a major 

metropolitan city and purchased a luxury automobile at the same 

time the business was not remitting all of the payroll taxes. 

Case 8 Security services 

under a GSA 

contract 

Over $1 

million 

Over $9 

million

• Business filed for bankruptcy in 2000s. 

• At the time business was not remitting all of its payroll taxes to IRS, 

the owner withdrew large amounts of funds from the company for 

personal use. 

• Owner used over $100,000 on gambling. 

• Business submitted false reports on a government contract. 

• Owner was investigated for fraud. 

Case 9 Emergency supplies 

under a GSA 

contract 

Up to 

$100,000 

Over

$700,000

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

business was not paying its taxes. 

• Business filed for bankruptcy protection owing substantial state and 

federal taxes. 

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

home and a luxury vehicle, while business owed taxes. 

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

supply schedule contract. 

Case 10 Human resource 

services under a 

GSA contract 

Over

$100,000 

Over

$400,000

• Owner owned multiple real properties and several luxury vehicles at 

the time the business owed taxes. 

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

made multiple, large cash withdrawals at gambling casinos. 

• Business obtained contract for hurricane relief efforts. 

Source: Previous GAO testimonies on federal contractors with tax debts.(GAO-04-414T, GAO-05-683T, and GAO-06-492T.) 

Notes: Dollar amounts are rounded. The information provided in this table has not been updated in 

the information provided from our original testimonies. 

a

 Federal payments represent payments made by federal agencies to federal contractors for goods 

and services. Payments for cases 1, 2, and 3 were made by four DOD contractor payment systems 

during fiscal year 2002. Payments for cases 4, 5, 6, and 7 were made by the Department of Treasury 

on behalf of other federal agencies during fiscal year 2004. Payments for cases 8, 9, and 10 were 

amounts reported by the Department of the Treasury and GSA from October 2003 through June 

2004. 

b

 Unpaid tax amount for cases 1, 2, and 3 are as of September 30, 2002. Unpaid tax amount for 

cases 4, 5, 6, and 7 are as of September 30, 2004. Unpaid tax amount for cases 8, 9, and 10 are as 

of June 30, 2005. 

Page 9 GAO-07-742T 
The following provides additional detailed information from our previous 

testimonies on case numbers 1, 4, and 8 summarized in table 1: 

Case # 1: In February 2004, we testified on a business that had nearly $10 

million in unpaid federal taxes, and was contracted by DOD to provide 

services such as trash removal, building cleaning, and security at U.S. 

military bases. The contractor reported that it paid the owner a six figure 

income and that the owner had borrowed nearly $1 million from the 

business. The owner bought a boat, several cars, and a home outside the 

country. This contractor went out of business in 2003 after state tax 

authorities seized its bank account for failure to pay state taxes. The 

contractor subsequently transferred its employees to a relative’s business, 

which also had unpaid federal taxes, and continued submitting invoices 

and receiving payments from DOD on the previous contract. 

Case # 4: In June 2005, we testified on a case that involved many related 

companies that provided health care services to the Department of 

Veterans Affairs (VA). During fiscal year 2004, these related companies 

received over $300,000 in federal contract payments. The related 

companies had different names, operated in a number of different 

locations, and used several different Taxpayer Identification Numbers 

(TIN).12 However, they shared a common owner and contact address. At 

the time they were paid by VA, the businesses collectively owed more than 

$18 million in unpaid federal taxes—of which nearly $17 million was 

unpaid federal payroll taxes dating back to the mid-1990s. During the early 

2000s, at the time when the owner’s business and related companies were 

still incurring payroll tax debts, the owner purchased a number of 

multimillion dollar properties, an unrelated business, and a number of 

luxury vehicles. Our investigation also determined that real estate holdings 

registered to the owner totaled more than $30 million. 

Case # 8: In March 2006, we testified on a GSA contractor that provided 

security services for a civilian agency. Our investigative work indicated 

that an owner of the company made multiple cash withdrawals, totaling 

close to $1 million, while owing payroll taxes. In addition, the company’s

owner also diverted the cash withdrawals to fund an unrelated business 

 12A TIN is a unique nine-digit identifier assigned to each business and individual that files a 

tax return. For businesses, the employer identification number assigned by IRS serves as 

the TIN. For individuals, the Social Security number, assigned by the Social Security 

Administration, serves as the TIN. 

Page 10 GAO-07-742T 
and purchased a men’s gold bracelet worth over $25,000. The company’s 

owner has been investigated for embezzlement and fraud. 

Federal law and regulations, as reflected in the FAR, do not prohibit 

contractors with unpaid federal taxes from receiving contracts from the 

federal government. Although the FAR provides that federal agencies are 

restricted to doing business with responsible contractors, it does not 

require federal agencies to deny the award of contracts to contractors that 

abuse the federal tax system, unless the contractor was specifically 

debarred or suspended by a debarring official for specific actions, such as 

conviction for tax evasion. 

Contractors with 

Unpaid Taxes Are Not 

Prohibited from

Receiving Contracts 

from the Federal 

Government 

The FAR specifies that unless compelling reasons exist, agencies are 

prohibited from soliciting offers from, or awarding contracts to, 

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

various reasons, including tax evasion.13 Conviction for tax evasion is cited 

as one of the causes for debarment and indictment for tax evasion is cited 

as a cause for suspension. The deliberate failure to remit taxes, in 

particular payroll taxes, is a felony offense, and could result in a company 

being debarred or suspended if the debarring official determines it affects 

the present responsibility of the government contractor. Most of the 

contractors in our case studies owed payroll taxes, for which willful 

failure to remit payroll taxes, a criminal felony offense,14 or failure to 

properly segregate payroll taxes, a criminal misdemeanor offense, may 

apply.15 At the time of our review, none of the 122 federal contractors 

described in our previous case study work were debarred from 

government contracts, despite conducting abusive and potentially criminal 

activities related to the tax system. 

As part of the contractor responsibility determination for prospective 

contractors, the FAR also requires contracting officers to determine 

whether a prospective contractor meets several specified standards, 

including determination as to whether a contractor has adequate financial

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

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

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

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

14 26 U.S.C. § 7202. 

15 26 U.S.C. § 7215 and 26 U.S.C. §7512 (b). 

Page 11 GAO-07-742T 
resources and a satisfactory record of integrity and business ethics. 

However, the FAR does not require contracting officers to consider tax 

debt in making this determination. 

Because of statutory restrictions on the disclosure of taxpayer 

information, even if contracting officers were required to consider tax 

debts in contractor qualification determinations, contracting officers do 

not currently have access to tax debt information unless reported by 

prospective contractors themselves or disclosed in public records. 

Consequently, unless a prospective contractor consents, contracting 

officers do not have ready access to information on unpaid tax debts to 

assist in making contractor qualification determinations with respect to 

financial capability, ethics, and integrity. 

Further, contracting officers do not routinely obtain and use publicly 

available information on contractor federal tax debt in making contractor

qualification determinations. Federal law generally does not permit IRS to 

disclose taxpayer information, including tax debts.16 Thus, unless the 

taxpayer provides consent,17 certain tax debt information generally can 

only be discovered from public records when IRS files a federal tax lien 

against the property of a tax debtor.18 However, contracting officers are 

not required to obtain credit reports. In the instances where they are 

obtained, contracting officers generally focus on the contractor’s credit 

score rather than any liens or other public information showing federal tax 

debts. However, while the information is available, IRS does not file tax 

liens on all tax debtors nor does IRS have a central repository of tax liens 

to which contracting officers have access. Further, the available 

information on tax liens may be of questionable reliability because of 

Restrictions on IRS 

Tax Disclosure and 

Failure to Use 

Available Tools 

Hamper 

Consideration of Tax 

Debts in Contractor 

Qualification 

Determinations

 16 26 U.S.C. § 6103. 

17 For example, contractors must provide IRS the consent to validate TINs provided by the 

contractors in the Central Contractor Registration system. GSA officials stated that a 

contractor is not registered into the system until the TIN is validated with IRS records. 

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

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

Page 12 GAO-07-742T 
deficiencies in IRS’s internal controls that have resulted in IRS not always

releasing tax liens from property when the tax debt has been satisfied.19

Federal contractors who owe tax debts have an unfair competitive 

advantage over contractors who pay their fair share. This is particularly 

true for federal contractors in wage-based industries, such as security and 

moving services. By not paying the employee taxes, these contractors keep

their payroll tax, which is typically over 15 percent of each employee’s 

wages, thereby reducing the contractor’s costs. In this way, contractors 

who do not pay their taxes do not bear the same costs that tax compliant 

contractors have when competing on contracts. As a result, tax delinquent

contractors can set prices for their goods and services lower than their tax

compliant competitors.

Contractors with Tax 

Debts Have Unfair 

Advantage in Contract 

Competition 

In March 2006, we testified that we found some GSA contractors who did

not fully pay their payroll taxes who were awarded contracts based on 

price over competing contractors that did not have any unpaid federal 

taxes. Federal contractors’ tax debts were not considered in contract 

award decisions. For example, a GSA Schedule contractor was awarded 

two contracts for services related to moving office and equipment 

furniture. On both contracts, the contractor’s offer for services was 

significantly less than three competing bids on the first contract and two

competing bids on the second contract. The contractor owed about 

$700,000 in taxes (mostly payroll taxes) while its competitors did not owe 

any federal taxes. 

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

Releases, GAO-05-26R (Washington, D.C.: Jan. 10, 2005) and GAO, Financial Audit: IRS’s

Fiscal Years 2006 and 2005 Financial Statements, GAO-07-136 (Washington, D.C.: Nov. 9, 

2006). 

Page 13 GAO-07-742T 
The Civilian Agency Acquisition Council and the Defense Acquisition 

Regulations Council (councils) have proposed to amend the FAR to 

require prospective contractors to certify whether or not they have, within 

a 3-year period preceding the offer, been convicted of or had a civil 

judgment rendered against them for violating any tax law or failing to pay 

any tax, or been notified of any delinquent taxes for which they still owe 

the tax. In addition, the prospective contractor will be required to certify

whether or not they have received a notice of a tax lien filed against them

for which the liability remains unsatisfied or the lien has not been 

released. The proposed rule also adds the following as additional causes 

for suspension or debarment: delinquent taxes, unresolved tax liens, and a 

conviction of or civil judgment for violating tax laws or failing to pay 

taxes. 

By issuing the proposed rule on tax delinquency, the councils have 

acknowledged the importance of delinquent tax debts in the consideration 

of contract awards. The proposed rule requires offerors to certify whether 

they have or have not, within a 3-year period preceding the offer, been 

notified of any unresolved or unsatisfied tax debt or liens. Contracting 

officers generally cannot verify whether prospective contractors certifying 

that they have not received notice of unresolved or unsatisfied tax debts 

actually owe delinquent federal taxes, unless that information is disclosed 

in public records or unless the offeror provides consent for IRS to disclose 

its tax records. In March 2006, we testified that in one contractor file we 

reviewed, a GSA official did ask the prospective contractor about a federal 

tax lien. The prospective contractor provided documentation to GSA 

demonstrating the satisfaction of the tax liability covered by that lien. 

However, because the GSA official could not obtain information from the 

IRS on tax debts, this official was not aware that the contractor had other 

unresolved tax debts unrelated to this particular tax lien. 

Over the past several years, we have testified that thousands of federal 

contractors failed in their responsibility to pay billions of dollars of federal 

taxes yet continued to get federal contracts. This practice is inconsistent 

with the fundamental concept that those doing business with the federal

government should be required to pay their federal taxes. With the serious 

fiscal challenges facing our nation, the status quo is no longer an option. 

Enhanced contractor requirements to pay their taxes would likely increase 

contractor tax compliance and federal revenues. Federal law seeking to 

achieve these objectives should provide flexibility to agencies, such as 

exceptions for contractors critical to national security. Due process and 

other safeguards should be built into the system to ensure that contractors 

Proposed FAR Rule 

Would Require 

Prospective 

Contractors to 

Provide Tax-Related 

Certifications 

Concluding 

Comments 

Page 14 GAO-07-742T 
that pay their federal taxes are not inadvertently denied federal contracts.

We look forward to working with the Subcommittee on this important 

matter. 

Mr. Chairman and Members of the Subcommittee, this concludes our 

statement. We would be pleased to answer any questions you may have.

Page 15 GAO-07-742T (192246) 
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