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27–750 PDF 2006

S. Hrg. 109–418

GSA CONTRACTORS WHO CHEAT ON THEIR

TAXES AND WHAT SHOULD BE DONE ABOUT IT

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 14, 2006

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

ELISE J. BEAN, Minority Staff Director and Chief Counsel 

JAY JENNINGS, Senior Investigator 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coleman .............................................................................................. 1

Senator Levin .................................................................................................... 2

Senator Carper ................................................................................................. 10

Prepared statement: 

Senator Akaka .................................................................................................. 39

WITNESSES 

TUESDAY, MARCH 14, 2006

Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations Unit, U.S. Government Accountability Office, accompanied by Steven 

J. Sebastian, Director, Financial Management and Assurance Team, and 

John J. Ryan, Assistant Director, Forensic Audits and Special Investigations Unit .............................................................................................................. 13

Hon. Mark Everson, Commissioner, Internal Revenue Service, U.S. Department of the Treasury ........................................................................................... 27

Kathleen M. Turco, Acting Deputy Administrator, General Services Administration ................................................................................................................... 29

ALPHABETICAL LIST OF WITNESSES

Everson, Hon. Mark: 

Testimony .......................................................................................................... 27

Prepared statement with attachments ........................................................... 70

Kutz, Gregory D.: 

Testimony .......................................................................................................... 13

Prepared statement with attachments ........................................................... 40

Ryan, John J.: 

Prepared statement with attachments ........................................................... 40

Sebastian, Steven J.: 

Testimony .......................................................................................................... 13

Prepared statement with attachments ........................................................... 40

Turco, Kathleen M.: 

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 88

EXHIBITS 

1. Characteristics of Egregious Tax Abuse, chart prepared by the Majority 

Staff of the Permanent Subcommittee on Investigations (based on analysis of 97 GAO case studies). ........................................................................... 96

2. Nursing Home Owner Convicted of Failing To Pay Over $3 Million in 

Employees’ Taxes to IRS, February 9, 2006, press release of the United 

States Attorney’s Office, Northern District of California, U.S. Department 

of Justice ............................................................................................................ 97

3. Responses to supplemental questions for the record submitted to Gregory 

D. Kutz, Managing Director, Forensic Audit and Special Investigations, 

Government Accountability Office ................................................................... 990

4. Responses to supplemental questions for the record submitted to The 

Honorable Mark Everson, Commissioner, Internal Revenue Service, Department of the Treasury ................................................................................. 106

5. Responses to supplemental questions for the record submitted to Kathleen M. Turco, Acting Deputy Administrator, General Services Administration ................................................................................................................ 114

(1)

GSA CONTRACTORS WHO CHEAT ON THEIR 

TAXES AND WHAT SHOULD BE DONE ABOUT IT 

TUESDAY, MARCH 14, 2006

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:30 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Norm Coleman, 

Chairman of the Subcommittee, presiding. 

Present: Senators Coleman, Levin, and Carper. 

Staff Present: Raymond V. Shepherd III, Staff Director and Chief 

Counsel; Jay Jennings, Senior Investigator; Mary D. Robertson, 

Chief Clerk; Leland B. Erickson, Counsel; Mark L. Greenblatt, 

Counsel; Steven A. Groves, Counsel; Mark D. Nelson, Counsel; 

Brian M. White, Professional Staff Member; Cindy Barnes, Detailee 

(GAO); Joanna Ip Durie, Detailee (ICE); Elise J. Bean, Chief Counsel and Staff Director to the Minority; Eric J. Diamant, Detailee 

(GAO); Matt Schmitten, Intern; John Kilvington, (Senator Carper); 

and Tom Spangler, (Senator Akaka). 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. This hearing of the Permanent Subcommittee 

on Investigations is called to order. 

Good morning and welcome. This is the third Subcommittee 

hearing focusing on Federal contractors with unpaid tax debts. 

These are not your everyday tax delinquents, but rather contractors who receive millions of dollars from American taxpayers, yet 

refuse to pay their fair share. 

Just a note, I am going to walk through both what we are going 

to talk about today, and give a little history. But I do want to express my appreciation for the work of the Government Accountability Office. They really have done some outstanding work in this 

area, and as Chairman of this Subcommittee, I am very appreciative. 

And there are some things that have been done and others that 

continue to need to be done, but I also want to acknowledge the 

response of the IRS in dealing with these matters. I think we have 

come a long way in a short period of time. There is more work to 

be done. I am going to express some concerns in that area, but I 

do want to start off by expressing my appreciation. 

Senator Levin, I know that you have an Armed Services Committee hearing. I have a pretty full statement. Do you have time, 

2

or I would actually defer to you if you wanted to make a statement, 

and then do what you have to do? And then I will proceed from 

there. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Mr. Chairman, thank you for your usual courtesy 

in that regard, and I want to first just thank you for your leadership in this area, for your sticking with a very important subject. We have a huge tax gap in this country, estimated at about $350 

billion a year. That is the gap between the taxes that businesses 

and organizations and individuals owe the Federal Government 

and what they have actually paid. 

And when so many Americans fail to pay the taxes that they 

owe, it begins to undermine the fairness of our tax system, forcing 

honest taxpayers to make up the shortfall needed to pay for basic 

Federal protections—like Social Security, Medicare, and the weapons needed by our men and women on the front lines of our military. 

Today’s hearing focuses on one particular group that contributes to that $350 billion annual tax gap, the contractors who are awarded contracts by the General Services Administration and get paid 

with taxpayers’ dollars while, at the same time, failing to pay their 

taxes. 

And in testimony before this Subcommittee today, the Government Accountability Office, the GAO, will describe almost 4,000 

such civilian contractors who have dodged their tax obligations and 

accumulated tax debts to Uncle Sam totaling at least $1.4 billion 

and are still awarded government contracts. 

In related reports released over the last 2 years, the GAO found 27,000 DOD contractors with accumulated tax debts totaling $3 billion and 33,000 civilian contractors with accumulated tax debts totaling at least $3.3 billion. Those are huge numbers. Tens of thousands of companies receiving contracts and payments on those contracts from the Federal Government while owing billions of dollars 

in unpaid taxes, and it is just simply mind-boggling that this is allowed to continue. 

I want to join you, Mr. Chairman, in thanking our witnesses who 

are here today. Thanking the IRS and the other agencies, including 

the GSA, who are working hard to address this issue, which you 

have identified and the Subcommittee has investigated and continues to investigate and press for loophole closing and gap closing 

in this area. 

The kind of leadership that you have shown here is the kind that 

we are going to need to close this tax gap that exists for lots of reasons in many ways. In other parts of our Subcommittee work, we 

are going to try to close other parts of this tax gap, including the 

abuses that are exemplified when tax havens are utilized by taxpayers to avoid taxes to Uncle Sam. 

But this morning’s hearing is a very important one. It is a continuation of a series of hearings in this area, which you have 

chaired. I hope to be able to get back for some questions. I would 

ask unanimous consent that the balance of my statement be inserted in the record. 

Senator COLEMAN. Without objection. 

3

Senator LEVIN. Thank you again for yielding to me. 

[The prepared statement of Senator Levin follows:]

PREPARED STATEMENT OF SENATOR LEVIN 

The current tax gap in this country is about $345 billion per year. That $345 billion gap is the difference between the taxes that businesses, organizations, and individuals owe the federal government and what they’ve actually paid. When so many 

Americans fail to pay the taxes that they owe, it begins to undermine the fairness 

of our tax system, forcing honest taxpayers to make up the shortfall needed to pay 

for basic federal protections—like social security, Medicare, and the weapons needed 

by our men and women on the frontlines of our military. Today’s hearing focuses on one particular group that contributes to that $345 billion tax gap—contractors who are awarded contracts by the General Services Administration (GSA) and get paid with taxpayer dollars while, at the same time, failing to pay their taxes. In testimony before this Subcommittee today, the Government Accountability Office (GAO) will describe 3,800 such civilian contractors who 

have dodged their tax obligations and accumulated tax debts to Uncle Sam totaling 

at least $1.4 billion—and are still awarded government contracts. In related reports 

released over the last 2 years, GAO found 27,000 DOD contractors with accumulated tax debts totaling $3 billion and 33,000 civilian contractors with accumulated 

tax debts totaling at least $3.3 billion. Those are huge numbers—tens of thousands 

of companies receiving contracts and payments on those contracts from the federal 

government, while owing billions of dollars in unpaid taxes. It’s simply mind boggling that this is allowed to continue. 

Tax dodging by any federal contractor is not only unfair to the honest taxpayers 

left to make up the difference, but also to the honest companies that have to compete against the tax dodgers that aren’t paying what they owe, while honest companies do. 

One of the main problems here is that contractors are being allowed into the system in the first place and are being awarded contracts even though they owe taxes. 

There should be a red flag on any contract application by a company that owes back 

taxes and a requirement for them to explain the circumstances. Tax dodgers should 

not receive contracts to begin with—their tax debts should be paid before more contracts are awarded, or, at a minimum, until arrangements are made for them to 

repay the back taxes they owe. 

Tax chiseling by federal contractors is not a new story, but it is particularly galling when engaged in by folks who make their living directly from taxpayer dollars. 

In 1997, Congress enacted the Taxpayer Relief Act which, in part, authorized federal agencies to withhold 15 percent of any federal payment going to a person with 

an outstanding tax debt. The goal was to stop taxpayer dollars from being paid to 

a tax deadbeat, unless a portion was withheld off the top to reduce that person’s 

tax debt. In 2004, we increased the percentage that can be withheld from a contract 

payment to up to 100 percent. 

The Taxpayer Relief Act sought to apply a common sense principle to government 

operations: to offset the taxpayer dollars sent to people who haven’t paid their tax 

bills by directing a percentage of the total be withheld to reduce their tax debt. That 

common sense principle isn’t always easy to apply in a government that has hundreds of thousands of contractors on the books, but it must be applied and the computer capability to apply that principle exists today. 

Until recently, the federal tax levy program was not an effective tool to stop contractor tax deadbeats. But under this Subcommittee’s scrutiny, it is improving. The 

clearest proof is the increase in back taxes collected from federal contractors. In 

2003, the tax levy program collected $7 million. In 2005, it collected $42 million, 

a six-fold increase in two years. That’s a little progress, anyway, though still far 

from the $100 million per year projected by GAO as the minimum that should be 

collected. 

One reason for this progress is the Federal Contractor Tax Compliance Task 

Force, which was formed after the Subcommittee’s first hearing on this topic in 

2004, and which has worked hard to improve the tax levy program. These improvements include the following:

• A few years ago, DOD, which issues more contract dollars than any other federal agency, had only 1 out of 16 payment systems integrated into the tax 

levy program. Now, 18 out of 20 systems are routinely screened for tax levies.

• Prior to 2006, many federal contractors failed to submit valid Taxpayer Identification Numbers (TINs) to the federal government. Without a TIN, the federal government can’t perform the computer matches needed to identify tax 

4

deadbeats. Last year, in response to the urging of this Subcommittee, the IRS 

developed a consent-based TIN verification system, requiring taxpayers to 

allow verification of their TINs as a condition of competing for Federal contracts. The program started October 31, 2005 and by the end of the year, 16 

percent of the 380,000 contractors registered in the Central Contractor Registry (CCR) had validated their TINs. By October 31, 2006, 100 percent will 

have gone through the TIN validation process. Hopefully, the days of missing 

or false TINs will then be behind us, greatly strengthening the effectiveness 

of the Federal Payment Levy Program matching process.

• Another milestone is a new effort to identify those federal contractors who 

have failed to file any tax return. Until recently, the tax levy program had 

focused only on contractors who have filed tax returns. For the first time last 

year, a file containing all awarded contracts from DOD and GSA for the past 

year was matched against IRS data to identify contractors who are non-filers. 

An analysis is now being conducted on the data to determine appropriate next 

actions.

• Still another gap in the tax levy program has been federal contractors who 

are paid by purchase cards, meaning either credit cards or debit cards. To 

date, these contract payments, which total about $10 billion annually, have 

been excluded from the tax levy program. That doesn’t make sense. In response to the Subcommittee’s request, the task force has completed a study 

of this problem and recommended blocking payments over $2,500 via purchase cards to contractors with an active tax debt. The Task Force is now developing a process to create an indicator that a contractor is not eligible to 

be paid by purchase card and must be paid by check or electronic transfer, 

payment mechanisms which are already subject to the tax levy program.

Each of these steps is moving us toward a more effective tax levy program, but 

a lot more needs to be done, including stopping contractors that have tax debt from 

receiving a contract in the first place. We should be stopping these contractors before they get in the door. 

Most federal contractors provide valuable goods or services, and do so while paying their taxes. Other contractors stuff taxpayer dollars in their pockets with one 

hand, while stiffing Uncle Sam with the other. This tax dodging hurts honest taxpayers, honest businesses, and our country as a whole. Effective use of the federal 

tax levy program is necessary to help keep the tax dodgers from succeeding. 

I commend Senator Coleman for his leadership and sustained effort on this important issue. I look forward to the testimony today.

Senator COLEMAN. And Senator Levin, I want to thank you again 

for your leadership in this area. You really pointed the way, and 

it has been a privilege for me to continue moving with you in this 

direction in a very bipartisan way. 

And you are right. Average folks, taxpaying citizens of this country, they pay their fair share. They live up to their obligations, and 

they are the ones that are hurt by this. A greater burden falls on 

them. 

In some of these cases, the type of taxes that aren’t paid, payroll 

taxes, you are not only ripping off the government, you are ripping 

off your employees, who had the money taken out of their pay. Instead of then submitting it and it covers things like Social Security 

and Medicare, things of that nature, what we see—and we have 

seen in this investigation—is unscrupulous folks, contractors using 

it for their own purposes. 

So a lot of folks are hurt in this, but you have had the vision for 

a long time, and I just wanted to applaud you for that. 

Senator LEVIN. Thank you so much. 

Senator COLEMAN. What I am going to do is first get a sense of 

the problem through review of a handful of disturbing cases. We 

have one contractor that provides security services for the Federal 

Government that was paid more than $1 million from American 

5

taxpayers over the past 2 years, even though he owes more than 

$12 million in payroll taxes. 

The last few years, as his company failed to turn over payroll 

taxes that were withheld from employees’ paychecks, the owner 

made large cash withdrawals from the company for his personal 

use. I believe more than $100,000 of that money GAO investigators 

indicated was spent on gambling. 

And again, we are talking about, in this case, payroll taxes. So 

the employees, part of their wages are being withheld. But instead 

of being forwarded, as they should be, to Uncle Sam, they are put 

in someone’s pocket. 

Another contractor provides public communications services to 

the Federal Government and was paid $100,000 and owes more 

than $2 million in payroll taxes. And while he kept his employees’ 

payroll taxes, the owner purchased residential property valued at 

$1 million and made numerous cash withdrawals totaling $500,000 

at casinos. 

A third contractor sells emergency supplies, was paid $100,000 

by the Federal Government while simultaneously owing more than 

$700,000 in back taxes. The IRS assessed a penalty against the 

owner for failing to remit payroll taxes and imposed a Federal tax 

lien that was in effect when the contractor received a Federal contract. While refusing to pay his employees’ payroll taxes, the owner 

made several real estate purchases, including a home worth over 

a million dollars. 

And sadly, these are just the tip of the iceberg. The Subcommittee’s efforts, in concert with the work of the Government Accountability Office, has revealed that 3,800 Federal contractors who contract with the General Services Administration owe back taxes totaling $1.4 billion. 

In an age of increasingly tight fiscal discipline, that $1.4 billion 

could be put toward our homeland security, our children’s education, our job training programs. It adds insult to injury that 

these tax deadbeats are actually paid enormous amounts of money 

every year from American tax coffers, and I think that is a good 

phrase, ‘‘tax deadbeats’’ being paid enormous amount of money 

every year. 

Our hearing today will address why these tax cheats were able 

to do business with the government in the first place and what we 

need to do to put a stop to it. This hearing continues our longstanding investigation of Federal contractors who cheat on taxes. 

In February 2004, the Subcommittee held a hearing that examined Federal contractors doing business with the Department of 

Defense, and we looked at over $3 billion being owed there. In 

2005, the Subcommittee looked at unpaid taxes by civilian contractors for various Federal civilian agencies. And the total there was 

$3.3 billion, and that is with a ‘‘B,’’ that had not been paid. 

So this now is the third hearing. This focuses on GSA contractors 

that provide a vast array of products and services to the Federal 

Government, ranging from office supplies, furniture, communications equipment, security services, automobiles, office space, and 

landscaping. We will also explore how to fix the problem so that 

these contractors cannot continue to fleece American taxpayers. 

6

There is an old adage that states if you want to have the right 

answer, you have to ask the right question. When it comes to Federal contractors, we have been asking the wrong questions, perhaps 

not asking enough questions. 

The Federal Government has been trying, since the year 2000, 

to identify tax cheats by asking Federal contractors actually a very 

narrow question. Whether they have been indicted or convicted of 

tax evasion in the last 3 years. It is a very specific crime. 

The Subcommittee’s investigation has shown, however, that this 

question is simply too narrow to weed out tax delinquent contractors. The simple fact is that not all tax frauds result in a conviction 

for tax evasion. Indeed, there is a broad spectrum of tax-related 

violations that are utterly ignored by our contracting review process. As a result, many Federal contractors continue to receive contracts even though they owe massive amounts in back taxes. 

Take the case of Jack Easterday, who is the owner of nine nursing homes and a computer software firm in California. Just a few 

weeks ago, Mr. Easterday was convicted of 47 counts of failing to 

turn over $3 million in payroll taxes that he had withheld in trust 

for his employees. He used the money for personal gain. Paid himself and his wife an average salary of more than $338,000 between 

1998 and 2004, and purchased a 10,000 square foot home for 

$750,000 in 1997. 

He purchased a dining room table and chairs that seated 22 people, along with a 24-place setting of Limoges china. He purchased 

a Rolex watch for $16,340. He owned a sailboat and jet skis. He 

was living like Louis XIV, compliments of the American taxpayer. 

Mr. Easterday was convicted of willfully failing to account for 

and turn over payroll taxes, but he was not convicted of tax evasion, which is a different violation of the code. Consequently, Mr. 

Easterday can honestly represent that he has not been indicted for 

or convicted of tax evasion in the last 3 years and, therefore, potentially would remain eligible to contract with the Federal Government in the future. 

Mr. Easterday is just 1 of 97 known cases of egregious tax abuse 

by Federal contractors that were identified by this Subcommittee 

with the assistance of the GAO. These 97 contractors are the worst 

of the worst, yet none of the 97 contractors has been indicted or 

convicted of tax evasion. Therefore, every single one of those worst 

of the worst would be potentially able to slip their tax violations 

through our contracting personnel. 

On the other hand, if we asked those 97 contractors, including 

Mr. Easterday, the right questions, we would know that they were 

tax deadbeats before we gave them contracts. Clearly, we are not 

asking the right questions, and we are not asking broad enough 

questions. 

That is only half the problem. The other half is that there is no 

verification of the tax-related representations that contractors 

make. Even though we ask contractors if they have been indicted 

for or convicted of tax evasion, we do not identify those who lie. 

Neither the Internal Revenue Service nor the Department of Justice currently provides GSA with lists of persons or companies who 

have been indicted for or convicted of tax evasion. Therefore, GSA 

7

has no method to verify whether contractors’ representations are 

true. 

Clearly, we must not only ask the right questions, we also need 

to verify the truth of the answers that we receive. Until this problem is rectified, the Federal Government is likely to be awash in 

Federal contractors who are cheating on their taxes. 

But there is good news to report as well. The principal objective 

of this Subcommittee’s investigation is to increase the effectiveness 

of the Federal Payment Levy Program under which a portion of 

Federal contractors’ payments are levied to pay off their outstanding tax debt. 

When we started in 2003, levies on Federal contractors amounted to $7 million. Substantial credit is due to the GAO and the Commissioner of the IRS, the Administrator of GSA, the Secretary of 

Defense, the Commissioner of the Financial Management Service, 

whose support led to the establishment of the Federal Contractor 

Tax Compliance Task Force. The task force has addressed and resolved several problems that inhibit levies, and it is continuing to 

work on a number of additional problems. 

And I started off this hearing by saying I appreciate their hard 

work, and I applaud their success. To date, the notable accomplishments of these efforts include the establishment of a taxpayer identification number verification program in the Central Contractor 

Registration, IRS’s release of $28 billion in additional tax debt for 

levy purposes, and the creation and testing of a Federal contractor 

nonfiling program. 

All of these improvements are designed to increase the number 

of levies on Federal contractors’ payments, and the results demonstrate that we are succeeding. But the task force’s work is not 

finished. The Financial Management Service must find a way to 

impose levies on all Federal contractor payments, especially those 

that are made with purchase cards. 

The task force needs to develop procedures to ensure that all 

Federal contractors are registered in the Central Contractor Registration. Further, the task force needs to develop procedures to ensure that all Federal agencies use the validated name and taxpayer 

identification number from the Central Contractor Registration for 

all tax-related purposes. 

I expect that today’s hearing will add to the task force’s to-do 

list. Specifically, the tax-related questions and the Representations 

and Certifications Application need to be revised, and processes 

need to be developed to verify contractors’ tax-related statements. 

On the first panel this morning, we will hear from the GAO representatives on the results of our request to determine if there are 

tax delinquent Federal contractors working for the General Services Administration who are on the GSA’s general schedule. 

To date, their hard work has resulted in the identification of 

57,000 Federal contractors who owe $6.3 billion. I want to repeat 

that. To date, their hard work has resulted in the identification of 

57,000 Federal contractors who owe $6.3 billion in unpaid taxes, including 97 contractors who flagrantly abused the tax system and 

who have been referred to the IRS for further investigation. 

On the second panel, we will hear from the Commissioner of the 

IRS and the Acting Deputy Administrator of GSA concerning the 

8

actions they have taken or plan to take to ensure that Federal contractors who abuse the tax system are identified and that those 

who owe tax have their contract payments levied. 

I would like to make it clear I am pleased with the results that 

the Federal Contractor Tax Compliance Task Force has achieved to 

date. I applaud the Commissioner of the IRS, the Administrator of 

GSA, and other participants for their active support of the task 

force’s work. 

However, I am concerned that only 1 of the 97 cases of potential 

fraud identified by the Subcommittee have been prosecuted. This 

is well below the infamous baseball Mendoza line. 

In closing, it is simply unacceptable that tax cheats who owe the 

government billions in back taxes get millions of dollars from the 

government. This Subcommittee will continue to aggressively pursue this matter until the Federal Government tightens its procedures to ensure that these tax deadbeats are prohibited from receiving lucrative government contracts. 

[The prepared statement of Senator Coleman follows:]

Good morning and welcome to today’s hearing. This is the third Subcommittee 

hearing focusing on federal contractors with unpaid tax debts. These are not your 

everyday tax delinquents, but rather contractors who receive millions of dollars from 

American taxpayers and yet refuse to pay their fair share of taxes. 

Some of these tax-delinquent contractors fraudulently used withheld payroll taxes 

for their business or personal use. Keep in mind that payroll taxes include 

withholdings from employees’ wages for Social Security, Medicare, and individual 

income taxes. These contractors, like all employers, hold these wages in trust for 

their employees and are required to remit them to the IRS. Rather than fulfilling 

their legal obligations, these contractors have diverted the money for their own personal gain. An investigation by the Government Accountability Office in conjunction 

with this Subcommittee uncovered numerous contractors who bought luxury cars, 

boats, and multi-million dollar properties, even though they owed hundreds of thousands of dollars in unpaid taxes. 

To get a sense of the problem, let’s review of handful of disturbing cases: 

• One contractor that provides security services for the federal government was 

paid more than $1 million from the American taxpayers over the past two 

years, even though he owes more than $12 million in payroll taxes. Over the 

last few years, as his company failed to turn over payroll taxes it withheld 

from its employees paychecks, the owner made large cash withdrawals from 

the company for his personal use. More than $100,000 of that money was 

spent gambling. 

• Another contractor who provides public communications services to the federal government was paid $100,000 and owes more than $2 million in payroll 

taxes. While he kept his employees’ payroll taxes, the owner purchased a residential property valued at $1 million, and made numerous cash withdrawals 

totaling $500,000 at casinos. 

• A third contractor who sells emergency supplies was paid $100,000 by the 

federal government, while simultaneously owing more than $700,000 in back 

taxes. The IRS assessed a penalty against the owner for failing to remit payroll taxes and imposed a federal tax lien that was in effect when the contractor received a federal contract. While refusing to pay his employees’ payroll taxes, the owner made several real estate purchases, including a million 

dollar home. 

Sadly, these are just the tip of the iceberg. The Subcommittee’s efforts—in concert 

with the hard work of Government Accountability Office—have revealed that 3,800 

federal contractors who contract with the General Services Administration owe back 

taxes amounting to a $1.4 billion. In an age of increasingly tight fiscal discipline, 

that $1.4 billion could be put towards our homeland security, our children’s education, or job training programs. It adds insult to injury that these tax deadbeats 

are actually paid enormous amounts of money every year from American tax coffers. 

Our hearing today will address why these tax cheats were able to do business 

with the government in the first place, and what we need to do to put a stop to 

it. This hearing continues our long-standing investigation of federal contractors who 

cheat on their taxes. In February 2004, the Subcommittee held a hearing that examVerDate 0ct 09 2002 08:37 Jul 13, 2006 Jkt 027750 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 C:\DOCS\27750.TXT SAFFAIRS PsN: PAT
9

ined federal contractors doing business with the Department of Defense who owed 

$3 billion in unpaid taxes. In June 2005, the Subcommittee held a hearing that 

identified $3.3 billion dollars in unpaid taxes by civilian contractors at various federal civilian agencies. This third hearing will focus on GSA contractors who provide 

a vast array of products and services to the federal government, ranging from office 

supplies, furniture, communications equipment, security services, automobiles, office 

space and landscaping. We will also explore how to fix the problem so that these 

contractors cannot continue fleecing the American taxpayers. 

There is an old adage that states: ‘‘If you want the right answer, you have to ask 

the right question.’’ When it comes to federal contractors, we have been asking the 

wrong questions. The federal government has been trying since 2000 to identify tax 

cheats by asking federal contractors one narrow question—whether they have been 

indicted for or convicted of tax evasion in the last three years. The Subcommittee’s 

investigation has shown, however, that this question is simply too narrow to weed 

out tax-delinquent contractors. The simple fact is that not all tax frauds result in 

a conviction for tax evasion. Indeed, there is a broad spectrum of tax-related violations that are utterly ignored by our contracting review process. As a result, many 

federal contractors continue to receive contracts even though they owe a massive 

amount in back taxes. 

Take the case of Jack Easterday, who is the owner of nine nursing homes and 

a computer software firm in California. Just a few weeks ago, Mr. Easterday was 

convicted on 47 counts of failing to turn over as much as $3 million in payroll taxes 

that he had withheld in trust for his employees. He used the money for personal 

gain. He paid himself and his wife an average annual salary of more than $338,000 

between 1998 and 2004. He purchased a 10,000 square foot home for $750,000 in 

1997. He purchased a dining room table and chairs that seated 22 people along with 

a 24 place setting of Limoges china. He purchased a Rolex watch for $16,340. He 

owned a sailboat and jet skis. He was living like Louis XIV, compliments of the 

American taxpayer. 

Mr. Easterday was convicted of willfully failing to account for and turn over payroll taxes. More importantly, he was not convicted of tax evasion, which is a different violation of the code. Consequently, Mr. Easterday can honestly represent 

that he has not been indicted for or convicted of tax evasion in the last three years, 

and therefore, he would remain eligible to contract with the federal government in 

the future. 

Mr. Easterday is just one of the 97 known cases of egregious tax abuse by federal 

contractors that were identified by the Subcommittee, with the assistance of GAO. 

These 97 contractors are the worst of the worst. Yet, none of those 97 contractors 

has been indicted for or convicted of tax evasion. Therefore, every single one of those 

‘‘worst of the worst’’ would be able to slip their tax violations by our contracting personnel. On the other hand, if we had asked those 97 contractors, including Mr. 

Easterday, the right questions, we would have known that they were tax deadbeats 

before we gave them contracts. Clearly, we are asking the wrong questions. 

But that is only half of the problem. The other half is that there is no verification 

of the tax-related representations that contractors make. Even when we ask contractors if they have been indicted for or convicted of tax evasion, we do not identify 

those who lie. Neither the Internal Revenue Service nor the Department of Justice 

currently provides GSA with lists of persons or companies who have been indicted 

for or convicted of tax evasion. Therefore, GSA has no method to verify whether contractors’ representations are true. Clearly, we must not only ask the right questions, 

but also verify the truth of the answers we receive. Until this problem is rectified, 

the federal government is likely to be awash in federal contractors who are cheating 

on their taxes. 

But there is good news to report as well. The principal objective of this Subcommittee’s investigation is to increase the effectiveness of the Federal Payment 

Levy Program under which a portion of federal contractor’s payments are levied to 

pay off their outstanding tax debt. When the Subcommittee started this investigation in 2003, levies on federal contractors amounted to $7 million. In two short 

years, collections have grown to $42 million. Substantial credit is due GAO and the 

Commissioner of IRS, the Administrator of GSA, the Secretary of Defense, and the 

Commissioner of the Financial Management Service whose support led to the establishment of the Federal Contractor Tax Compliance Task Force. The Task Force has 

addressed and resolved several problems that inhibit levies and it is continuing its 

work on a number of additional problems. I appreciate their hard work and I applaud their success. 

To date, the notable accomplishments of these efforts include the establishment 

of a Taxpayer Identification Number Verification Program in the Central Contractor 

Registration, IRS’ release of $28 billion in additional tax debt for levy purposes, and 

10

the creation and testing of a federal contractor non-filing program. All of these improvements are designed to increase the number of levies on federal contractors’ 

payments and the results demonstrate that we are succeeding. 

But the Task Force’s work is not finished. The Financial Management Service 

must find ways to impose levies on all federal contractor payments, especially those 

that are made with purchase cards. The Task Force needs to develop procedures to 

ensure that all federal contractors are registered in the Central Contractor Registration. Further, the Task Force needs to develop procedures to ensure that all federal 

agencies use the validated name and Taxpayer Identification Number from the Central Contractor Registration for all tax-related purposes. I expect that today’s hearing will add to the Task Force’s to-do list. Specifically, the tax-related questions in 

the Representations and Certifications Application need to be revised, and processes 

need to be developed to verify contractors’ tax-related statements. 

On the first panel this morning, we will hear from GAO representatives on the 

results of our request to determine if there are tax-delinquent federal contractors 

working for the General Services Administration or who are on GSA’s General 

Schedule. To date, their hard work has resulted in the identification of 57,000 federal contractors who owe $6.3 billion in unpaid taxes, including 97 contractors who 

had flagrantly abused the tax system and have been referred to IRS for further investigation. 

On the second panel, we will hear from the Commissioner of IRS and the Acting 

Administrator of GSA concerning the actions they have taken or plan to take to ensure that federal contractors who abuse the tax system are identified and that those 

who owe tax have their contract payments levied. I would like to make it clear that 

I am pleased with the results that the Federal Contractor Tax Compliance Task 

Force has achieved to date. I applaud the Commissioner of IRS, the Administrator 

of GSA and other participants for their active support of the Task Force’s work. 

However, I am concerned that only one of the 97 cases of potential fraud identified 

by this Subcommittee has been prosecuted. This is well below the infamous baseball 

Mendoza line. 

In closing, it is simply unacceptable that tax cheats who owe the government millions in back taxes get millions of dollars from the government. This Subcommittee 

will continue to aggressively pursue this matter until the federal government 

tightens its procedures to ensure that these tax deadbeats are prohibited from receiving lucrative government contracts.

Senator COLEMAN. Senator Carper. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Thank you, Mr. Chairman. 

To our witnesses, welcome. We thank you for being here. We 

thank you for the work that you are doing on behalf of our country 

and our taxpayers. 

I have been over on the Senate floor just before I came over here, 

Mr. Chairman. And this hearing is actually especially well timed. 

I don’t know if it is just a coincidence or not. But we are debating 

this week whether to raise the debt ceiling of our country by over 

three quarters of a trillion dollars. 

This is a country where 5 years ago, we actually had a balanced 

budget. Actually, surpluses as far as the eye can see. And now, we 

look at these huge deficits that, frankly, don’t get a whole lot smaller unless you assume we are not going to be spending any money 

in Iraq in the future, or spending any money in Afghanistan in the 

future, or you assume that we are not going to do anything to fix 

the alternative minimum tax problem. 

If you make all of those assumptions, then maybe it looks like 

the deficit is getting smaller. Those aren’t very valid assumptions. 

And as a result, we know the deficit is not going to get a whole 

lot smaller at all. 

It turns out that the deficit last year was over $300 billion. And 

as the Chairman here knows and I think our witnesses know, the 

IRS has reported that last year there was a tax gap—monies owed 

11

to the Federal Government, to the Treasury from any number of 

sources, including contractors—but about a $290 billion tax gap. 

And one of the things that we ought to do and certainly doing 

through this hearing today is putting a spotlight on some of it, 

maybe about $6 billion. And while that may seem like it is relatively small, that is a lot of money compared to zero, which is 

what we have been collecting from these contractors. 

The President has actually put in his budget proposal for fiscal 

year 2007 some ideas that would enable IRS to go out and collect 

some of these monies that are owed. 

Senator Bayh—Evan Bayh—our colleague from Indiana has a 

proposal that I think he is going to introduce soon that has merit 

and would probably lead, if implemented, to collecting maybe another $15 billion per year, further reducing the tax gap. 

Senator Coburn and I, who lead another Subcommittee of this 

Committee focusing on financial management, are working on improper payments. And as it turns out, there is about roughly $50 

billion worth of improper payments that are made each year. Most 

of that is overpayments. A little bit of it is underpayments. But it 

is about $50 billion all told. 

That doesn’t include all the agencies. It doesn’t include, for example, DOD. But it is real money. And if we could even get half of 

it, it would make a difference in the amount of money that we are 

borrowing. 

The other thing is entitlement programs. I know particularly for 

folks on my side of the aisle, the entitlement programs are sacred. 

We don’t want to savage them. I sure don’t. Having said that, there 

are some of the entitlement programs, some aspects of some of the 

entitlement programs probably could be means tested without 

doing harm to upper middle income folks and, frankly, upper income people in our country. 

And also I would mention enhanced rescission powers, Mr. President—well, maybe some day Mr. President. [Laughter.] 

Today, though, it is just Mr. Chairman. 

I mention enhanced rescission powers. The President has asked 

for line-item veto powers. I think what he is asking for is maybe 

a bridge too far, but we actually passed in the House of Representatives legislation that I authored with a couple of our colleagues 

that provided for a 2-year test drive for line-item veto powers, 

where the President could propose rescinding spending if it was not 

authorized. 

If it was not authorized, he could propose to rescind it all in a 

particular line-item. If it was authorized, he could rescind up to 25 

percent of it. Either house could override the rescission with a 51 

percent majority. Just a bare majority. 

And I think if the President, the way we have crafted our proposal, if the President abused what new power we have given him, 

then after 2 years he would lose that power. And it is just really 

a 2-year test drive. I think it is probably just a better approach, 

if we are going to get into that, than simply taking up what the 

President has proposed. 

The other thing I would say, we are debating it right now over 

on the Senate floor, Pay-go. The idea that if Senator Carper or Senator Coleman want to increase spending for a particular proposal, 

12

we have to come up with an offset. If we want to cut taxes, if it 

has an adverse effect on the deficit, we have got to come up with 

an offset either on the spending side or on the revenue side. 

And if you put all of these things together, they actually would 

make a real difference. They would make a real difference in the 

fiscal management of our country. And a good place to start, frankly, is where we are today. 

And I am just delighted that we are holding this hearing. A 

chance to kind of gauge the success, the progress that is being 

made, and figure out what more we can do to get us heading in 

the right direction. 

Mr. Chairman, again, I am happy to be here with you, to sit at 

your side, and we welcome the testimony from our witnesses. 

Thank you. 

Senator COLEMAN. Thank you, Senator Carper. 

I do know the chart lays out $7.7 billion that Federal contractors 

owe the Federal Government. We are paying them money, and they 

owe us $7.7 billion. And then even for the Federal Government, 

$7.7 billion is a lot of money. 

I would like to welcome our first panel to this important hearing. 

Gregory Kutz, Managing Director of the Forensic Audits and Special Investigations Unit at the Government Accountability Office, 

accompanied by Steve Sebastian, a Director with the Financial 

Management and Assurance Team at the GAO, and also accompanied by Special Agent John Ryan, an Assistant Director with the 

Forensic Audits and Special Investigations Unit. Gentlemen, I welcome you back to the Subcommittee. 

GAO is here to testify on the latest information they have developed pursuant to our request for an investigation of Federal contractors who are not paying their taxes. The purpose of this hearing is to identify further corrective actions that can be taken to improve the effectiveness of the Federal Payment Levy Program. 

Again, it is good to see you gentlemen. I appreciate your hard 

work, which has resulted in the identification of more than 50,000 

Federal contractors who owe more than $6 billion in unpaid taxes 

in just our last two hearings. And then I look forward to hearing 

about the General Services Administration contractors who are not 

paying their taxes. 

I am particularly interested in knowing what we can do to identify these deadbeats before they are awarded Federal contracts. As 

you are aware, pursuant to Rule 6, all witnesses who testify before 

the Subcommittee are required to be sworn. I would ask you to 

please stand, raise your right hand. 

Do you swear the testimony you are about to give before this 

Subcommittee is the truth, the whole truth, and nothing but the 

truth, so help you, God? 

The WITNESSES. I do. 

Senator COLEMAN. You are acquainted with the timing system. 

One minute before the red light comes on, you will see the lights 

change from green to yellow. If you can sum up your testimony at 

that time, we will enter your entire written testimony into the 

record. 

And Mr. Kutz, I understand that you will be presenting the GAO 

statement this morning. Please proceed. 

13

1The combined prepared statement of Mr. Kutz, Mr. Sebastian, and Mr. Ryan appears in the 

Appendix on page 40. 

TESTIMONY OF GREGORY D. KUTZ,1 MANAGING DIRECTOR, 

FORENSIC AUDITS AND SPECIAL INVESTIGATIONS UNIT, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE, ACCOMPANIED BY 

STEVEN J. SEBASTIAN,1 DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE TEAM, AND JOHN J. RYAN,1 ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS UNIT 

Mr. KUTZ. Mr. Chairman, as you mentioned, this is the third 

time that we have been before this Subcommittee to discuss government contractors that have significant tax problems, and you 

have noted some of the progress that has been made and some of 

the other issues that remain. 

I commend you and the Subcommittee for holding this hearing 

and for your consistent and aggressive oversight of this important 

matter. Today, Mr. Sebastian is going to join me in doing the statement, and he will open, and then I will close. 

Mr. SEBASTIAN. Thank you, Mr. Kutz. 

Mr. Chairman, thank you for the opportunity to discuss issues 

surrounding Federal contractors with tax problems. We previously 

testified that thousands of DOD and civilian agency contractors 

abused the tax system with little or no consequence, and that serious impediments prevented the Federal Government from collecting hundreds of millions of dollars in outstanding taxes annually through the Federal Payment Levy Program. 

At those hearings, you expressed concern over how contractors 

who routinely abuse the tax system could continue to get government contracts, and you asked us to investigate the process GSA 

uses to screen contractors for government-wide business. Our bottom line today is that thousands of GSA-approved contractors 

abuse the tax system. 

Our testimony has two parts. First, I will discuss increased collections through the levy program, issues that prevent the Federal 

Government from effectively screening prospective contractors for 

tax problems, and the extent to which GSA contractors doing business with the Federal Government owe substantial tax debt. 

Second, Mr. Kutz will discuss egregious cases of tax abuse related to these contractors and how this has led to an unfair competitive advantage on the part of tax cheats. 

First, important progress has been made to increase the collection of taxes owed by contractors since you began focusing attention on the issue, as the posterboard illustrates. In fiscal year 2003, 

despite tens of thousands of Federal contractors owing billions of 

dollars in taxes, the levy program collected just $7 million. 

Numerous issues contributed to this low collection rate, including 

many of DOD’s payment systems not being matched against tax 

debt for levy, tens of billions of dollars in tax debt not being referred to the program, and deficiencies in FMS’s processes for 

matching Federal payments for levy. 

This Subcommittee’s continued focus on these matters has had a 

positive impact. For example, and as you mentioned, IRS reassessed and referred an additional $28 billion in tax debt to the levy 

14

program. DOD now includes many of its pay systems in the program. And FMS is working to address control deficiencies that excluded tens of billions of dollars in Federal payments from potential levy. 

Although we believe more can be collected, for fiscal year 2005, 

tax collections from contractors via the levy program increased to 

over $42 million. While some progress is being made on the back 

end, our testimony today sheds disturbing light on why contractors 

with outstanding taxes are able to routinely get Federal contracts. 

In reviewing how GSA screens prospective contractors, we found 

that neither Federal law nor GSA’s own policies require that tax 

debt be considered in making contract award decisions. The FAR 

does not require contracting officers to consider tax debt in determining whether a prospective contractor meets the requirements of 

a responsible source. Consequently, no consideration is given as to 

whether companies that do not pay their taxes have the integrity 

or ethics to perform the contract. 

Also statutory restrictions preclude contracting officers from having access to tax debt information unless furnished by the businesses themselves or disclosed in public records. Consequently, contracting officers do not have ready access to the tax status of prospective contractors in making qualification determinations. 

Not surprisingly, these limitations have led to a substantial number of businesses being cleared for government contracts who owe 

significant tax debt. Our work shows that over 3,800 GSA-approved 

contractors had over $1.4 billion in outstanding tax debt as of June 

2005. 

Mr. Kutz will now discuss the results of our investigation of 25 

egregious cases of tax abuse related to these contractors. 

Mr. KUTZ. Thank you. 

All 25 of the GSA contractors that we investigated had abusive 

and potentially criminal activity related to the Federal tax system. 

As you mentioned, our prior testimony highlighted 97 defense and 

civilian agency contractors that had similar problems. All 25 of the 

GSA contractors had, as you mentioned, Mr. Chairman, unpaid 

payroll taxes, which represent amounts withheld from employees’ 

wages for Federal income taxes, Social Security, and Medicare. 

However, rather than fulfill their roles as trustees of this money 

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

use in their business or for personal gain. Regardless of the cause, 

willful failure to remit payroll taxes to the IRS is a felony. 

Mr. Chairman, as you requested, we have pictures related to the 

25-case study GSA contractors for today’s hearing. Note that in 

some cases, we have altered the picture to protect individual identities. 

As shown on the posterboards, our investigations related to the 

lifestyles of the owners and officers of these contractors, and they 

revealed the following: Many million in multi-million dollar homes, 

numerous luxury vehicles; ownership of millions of dollars of commercial property, rental property, and land; hundreds of thousands 

of dollars spent gambling at casinos such as the Trump Taj Mahal 

in Atlantic City and the Bellagio in Las Vegas; and the purchase 

of a 20-karat diamond men’s bracelet. 

15

Diversion schemes by owners and officers included inflated salaries, millions of dollars of cash withdrawals, and substantial loans. 

Some owners were simply poor business managers. However, many 

clearly accumulated substantial personal wealth at the same time 

their companies failed to pay their taxes. 

Other issues related to these companies and their owners included check kiting, money laundering, embezzlement, and hundreds of thousands of dollars of unpaid personal income taxes. 

The companies we investigated were small to mid-sized and 

closely held. Some of the industries included security, building 

maintenance, and information technology. Ironically, these potential felons are doing business with the Departments of Defense, 

Justice, and Homeland Security. 

Our testimony also highlights two cases where contractors with 

unpaid taxes won awards based on price, beating out contractors 

that paid their fair share of taxes. This situation creates a disincentive for the vast majority of government contractors that pay 

their fair share and could result in further erosion in compliance 

with our Nation’s tax system. 

In conclusion, the real question today is why is the Federal Government doing business with these contractors? Further, at the 

Committee’s recent Katrina fraud hearing, a senior Justice Department official spoke of a zero tolerance policy for individuals that 

are caught stealing disaster money. In contrast, our investigations 

have shown a 100 percent tolerance policy for government contractors stealing payroll tax money. 

Mr. Chairman, this concludes our statement. We look forward to 

your questions. 

Senator COLEMAN. Thank you very much, Mr. Kutz. We could 

start a new reality TV show, ‘‘Lifestyles of Rich and Famous Tax 

Deadbeats.’’ [Laughter.] 

Can we talk first about competitive disadvantage or competitive 

advantage? And correct me if I am mistaken here, but essentially 

what you are saying is, in some of these cases is you believe that 

some of these tax deadbeats apply for a contract with an understanding that they are not going to be paying all of their taxes, and 

they can factor that into their bid? 

Mr. KUTZ. We don’t know about that. But when we looked at the 

two case studies, for example, they were wage-based type services—moving services, etc. And clearly, you have at least a 15 percent advantage where the payroll tax is not in the wage base. 

And also many of these companies were not paying their corporate income taxes, and many of the owners weren’t paying their 

personal income taxes. So for small, closely held companies, that 

would provide a significant cost advantage. 

Senator COLEMAN. Is there any information to indicate that folks 

have done this before or any kind of habitual conduct here? 

Mr. KUTZ. We have certainly seen evidence of this from work Mr. 

Sebastian and I have done of companies and owners. They would 

open up one company, shut it down. Open up another one. 

We have seen instances where individuals were involved with 

dozens of companies that did not pay their taxes, including payroll 

taxes. 

16

Senator COLEMAN. You also talked about Federal Acquisition 

Regulation requires government contracts with responsible contractors. And the situation that we have today is the questions that are 

taken into consideration, what is responsible, do not include whether there are existing tax liens, do not include whether there have 

been any kind of indictments, convictions for things such as failing 

to remit payroll taxes. Is that correct? 

Mr. KUTZ. That is correct. And I would agree with your opening 

statement that we are asking the wrong question. 

Senator COLEMAN. What question would you ask? 

Mr. KUTZ. Well, I think it needs to be a much broader question 

about compliance with the Federal tax system in whole, whether 

it be payroll taxes or other. And certainly, payroll taxes, in our 

view, would be the most egregious type of behavior that we have 

seen. 

Senator COLEMAN. And I am curious. To me, it seems pretty obvious. We are sitting here on March 14, 2006. We have been looking at this issue for a number of years. I mean, it is not rocket 

science. If you ask somebody a narrow question, you get a narrow 

answer. 

If you know that folks who are involved in this, and it is interesting because you actually identified a broad range of conduct. Not 

only did we see in some of these cases the failing to remit payroll 

taxes, but if you dig a little deeper, you have unpaid personal 

taxes. You have some instances of money laundering, check kiting, 

kind of a list of conduct here. 

Can you give me a sense as to why we haven’t been asking the 

broader questions? 

Mr. KUTZ. Well, Mr. Sebastian and I testified back in the late 

1990s on the issue. There was actually a bill, it was H.R. 4181, 

that would have amended the Debt Collection Improvement Act 

and would have barred these companies with egregious behavior 

from doing business with the government. And that was passed out 

of the House Government Reform Committee, but did not go any 

further. 

And so, again, I don’t know the full reason. There was a lot of 

pushback from the contract community and the procurement community at that time, including the Defense Department. But I 

would think that given that the vast majority of contractors do pay 

their fair share, that from a fairness perspective, they would probably like to see something done because they are having to compete 

with these people. 

Senator COLEMAN. And part of the whole purpose of the lien program is not to put people out of business. It is to put them on a 

schedule of paying off taxes. And in fact, if we, the government, are 

giving you additional contracts, but you have tax liens—let us say 

you weren’t even barred—we would be making sure that we get 

that money coming back. 

Mr. KUTZ. Whatever is done on the front end, you need to have 

an effective levy program on the back end. We certainly agree with 

that, and I think that there has been a lot of progress made in that 

area, as Mr. Sebastian showed and you mentioned in your opening 

statement. 

17

Senator COLEMAN. I will pursue this next line of inquiry with 

both the Commissioner and the Deputy Administrator. But talk to 

me about how we evaluate, find out whether, in fact, the information, the answers we are getting are correct. 

There seems to be a wall between the IRS and other agencies. 

I understand it is statutory. We will talk about that. Can you talk 

about the limitations that we have of checking the accuracy of contractors’ answers and then move me to a potential fixing of that situation? 

Mr. KUTZ. Certainly. Under the 6103 sharing rules, there are 

certainly limitations as to what can be shared. I mean, we have 

been asked, even on the companies that we have investigated, by 

the Defense Department and other agencies, ‘‘Can you tell me who 

they are?’’ And we can’t tell anybody who they are. We can certainly speak to the IRS about it, and IRS faces the same issue. And 

so, there is a sharing issue here. 

One of the possible solutions to that would be a contractor consent. Right now, we understand that contractors have to get into 

the Central Contract Registry, and have to allow a consent for a 

check of the taxpayer identification number with the Internal Revenue Service. 

And so, it would seem that you could possibly expand that, that 

if you want to do business with the government, you have to go 

through the Central Contract Registry, not only allowing a search 

for the taxpayer identification number, but also a search for any 

unpaid tax problems. That is one of several possible solutions. 

Senator COLEMAN. So today, just so I understand, we have—and 

we talked about this at our last hearing—to get the contractor consent to check to see that you got the taxpayer ID that you signed 

into the system. You are saying you have got to expand that to 

have a consent to identify any tax liens? 

Mr. KUTZ. Yes. That would certainly be—not tax liens, actual tax 

debt. 

Senator COLEMAN. Tax debt. 

Mr. KUTZ. Tax liens certainly is another piece of information you 

could get. We get that, in many cases, from public sources. So that 

is something you could get, potentially, now. 

Senator COLEMAN. I am trying to figure out, though, the practical way to do it. Tax liens are public information. 

Mr. KUTZ. Yes. 

Senator COLEMAN. Tax convictions are public information. Not 

just a conviction for tax evasion, but a conviction for failing to 

remit payroll taxes, that is public information. 

What is the bar in the system today? What prevents the GSA 

when they are contracting with an individual who has tax liens, 

substantial, X number of tax liens, who may, in fact, have tax convictions—what prevents them today from knowing that information 

when they make a determination that this is or is not a responsible 

contractor? 

Mr. KUTZ. I don’t think anything prevents them. Certainly our 

evidence, when we have looked at the situation, is that they are 

not doing it. And I think even if they were doing it, there would 

have to be specific guidelines out there as to what they were going 

to do with the information. 

18

I mean, what would be the criteria for not giving a contract or 

letting someone be on the GSA schedule? That would be something 

we think would have to be developed if this information was considered. 

Senator COLEMAN. I presume that the IRS has a central registry 

of all tax liens? Is that a presumption, fair presumption? 

Mr. SEBASTIAN. That is correct. 

Senator COLEMAN. Is that registry available to other government 

agencies to cross reference, see whether potential contractors are 

on that list? 

Mr. SEBASTIAN. No, I do not believe so. 

Senator COLEMAN. And is that a statutory problem? Is that a 

6103 problem, or is it a procedural problem? 

And I will pursue this line of inquiry with the Commissioner. 

But Mr. Sebastian, from your perspective, that list is out there. It 

has a full inventory of everybody who has a tax lien. I presume the 

IRS, if they do a contract, they probably run through that list. But 

my understanding is GSA doesn’t have access to that? 

Mr. SEBASTIAN. I am not certain what the prohibition would be 

because you are correct. This is information that is available in the 

public domain. If GSA or any contracting officer were to do a 

search of public records, they would be able to identify tax liens associated with the prospective contractor. 

Senator COLEMAN. Mr. Kutz, you talked about, post-Katrina, a 

zero tolerance for folks who are ripping off the system. But then 

we looked at instances here where folks aren’t remitting payroll 

taxes, and you talked about 100 percent tolerance. 

I want to step back a little. In the past, our last hearing, we 

identified 97 cases of egregious tax abuse. The sense I got from either you or Mr. Ryan that these were potentially criminal cases. To 

date, has there been one prosecution out of those 97? 

Mr. KUTZ. That is what IRS has represented to us. 

Senator COLEMAN. Can you give me your assessment of the aggressiveness in IRS dealing with the criminal aspect of these violations? 

Mr. KUTZ. Yes, and let me just give you that I think when you 

looked at the Katrina Hurricane, John Ryan and I have seen that 

they are prosecuting $2,000 check fraud cases. And here we see individuals with a million dollars of payroll tax money with no action. 

So I think what we are talking about here is on the criminal 

side. When we first looked at the 120 cases, we saw no criminal 

pursuit of any of the 120. Now that we have referred them to the 

IRS, we do believe that there is action going on. 

I would say, though, on the civil side, on the collection side, there 

is a lot of activity. For example, with respect to the 25 cases today, 

I believe at least 10 of them had trust fund penalty assessments 

against the owners and/or officers. 

And so, I think from a collection standpoint, we have seen some 

fairly aggressive action. On the criminal side, we haven’t seen that, 

and we are certainly looking to hear possibly what the commissioner would say about a strategy going forward as to how IRS 

would intend to pursue payroll tax cases here. 

19

Senator COLEMAN. And Mr. Ryan, have you been working with 

the IRS? Do they typically work, by the way, with the GAO where 

you have identified these cases, provide the information? Do you 

have regular contact with the criminal side with the IRS? 

Mr. RYAN. That is not the way it works, Senator. What has happened in the past is, is that we have identified the cases. We have 

referred them to the IRS. And quite honestly, right prior to your 

hearings, we usually get a call to find out what is going on. 

I have been in contact with the IRS criminal investigative group 

as of last week. They have provided a briefing as to the criminal 

investigations. To be honest, I had no expectations that the criminal investigative group would get back to us. They obviously have 

their job that they need to do. 

They need to work with the U.S. attorneys office. They need to 

decide what the strategy is going forward. Are they going to do parallel civil/criminal? That is up to the agency to decide the direction. 

But we give them the referral. My expectation is that they won’t 

get back to me, and they usually call right before the hearing. 

Senator COLEMAN. Do you have a sense—either you, Mr. Ryan, 

or Mr. Kutz—about any kind of deterrent effect of criminal prosecutions? Is that something that you think would make a difference? 

Mr. KUTZ. And again, I will let Mr. Ryan add to that. I think 

that is one of the strategies the Katrina fraud task force had, and 

we talked about that at the full Committee hearing. That is why 

they are going after the zero tolerance policy now so that, for future disasters, people may think twice about trying to steal disaster money. 

Certainly the case you talked about is a several million dollar 

payroll tax case. I would think that if a handful of those are successfully prosecuted that that would send a message that you are 

going to have more than collection actions taken in some cases if 

you have payroll tax problems. 

Mr. RYAN. I believe if the IRS works very closely with Department of Justice, and Department of Justice could get a message out 

to the U.S. attorneys offices about the importance of paying the 

payroll taxes, and there is emphasis by the U.S. attorneys in those 

particular districts to pursue those type of cases, I think it 

awakens everyone’s idea that there is a problem and that they 

need to go after it, and they are going to go after it. As you know, 

they can pursue it both civilly and criminally. 

Senator COLEMAN. Just a process question. The 25 cases that you 

have looked at here, there are no names attached to those. And 

that goes back to the appropriate privacy considerations that we 

have when dealing with tax issues. 

What access do you have to the names? How does it work when 

you are trying to dig into this, how are you able to identify these 

tax deadbeats? What kind of authority do you have to do that? 

Mr. KUTZ. Well, we work with your staff, with the Joint Committee on Taxation. We need to clear getting access to the taxpayer 

information with the Joint Committee on Taxation. 

Once we have that clearance, we have access to IRS what is 

called the unpaid tax assessment file. That is what we use data 

20

mining to match that against the disbursement activity and other 

activity to identify our cases. 

And hopefully, the 122 that we have pursued so far would be, as 

you mentioned, some of the worst of the worst because we used certain criteria in getting to those 122, such as the most number of 

payroll tax periods outstanding, the most dollars outstanding, and 

other things. 

We can only get to the criminal type activity in our investigations once we actually pick the contractors, and we can do criminal 

background checks. And then we do our lifestyle checks on them. 

And so, we don’t really have a systematic way of looking for the 

most interesting lifestyles. But as you can tell, we have found some 

fairly interesting ones so far. 

Senator COLEMAN. Hopefully, as a result of this, those lifestyles 

will be somewhat more restrained as their tax obligations are being 

met. 

Gentlemen, I want to thank you for your attendance today, and 

I will now call the second panel. 

Senator CARPER. Mr. Chairman, I have another hearing going on 

at this same time. I am trying to do justice to both. 

Again, we appreciate what you have shared with us today. Let 

me just ask you a couple of questions, and I don’t think I am going 

to be going over ground that the Chairman has already covered. 

But if I have, just bear with me, please. 

When I heard you giving your testimony, I thought I heard one 

of you saying there is no law—Federal law at least—that requires 

that taxes owed be considered when contracts were awarded. Is 

that what you said? 

Mr. SEBASTIAN. That is correct. 

Senator CARPER. Are you aware of states that might be doing 

things a little smarter? 

Mr. SEBASTIAN. I personally have not looked at what the State 

processes are with respect to contracting. So I am really not sure. 

Mr. KUTZ. Senator, I would say that 24 of the 25 case studies 

today had State and local tax liens also. So these are not only Federal unpaid tax cases. They are also State cases. 

Senator CARPER. Let me just follow up on that. Our Chairman 

was a mayor. I was a governor. And we still think a little bit as 

I call them recovering governors, recovering mayors. What are the 

implications, if any, for State revenues or for municipal revenues? 

Is it reasonable to assume that not only is the Federal Government, the Federal taxpayer being bilked, but the same is true of 

the State and local levels? 

Mr. SEBASTIAN. The presence of State tax liens would indicate 

that would be the case. Yes. 

Senator CARPER. OK. I am going to ask you, basically, what do 

we need to do? 

And when I say ‘‘we,’’ it is not just this Subcommittee. It is not 

just the Senate. It is not just the Congress—the House and the 

Senate. It is not just the Administration. It is not just the agencies. 

But when I say ‘‘we,’’ I am looking at more of a collective response. 

But let us start with us here in the Senate. What do we need to 

do? 

21

Mr. SEBASTIAN. I think one of the ideas that was presented a few 

minutes ago was a consent-type process, where a prospective contractor would agree or consent to a tax check as part of registering 

to do business with the Federal Government. That would then 

allow the IRS to share the tax status of the prospective contractor 

with the contracting officer because he essentially would get the 

consent from the prospective contractor. 

Now coupled with that, there would need to be some stringent 

guidelines that would be worked out as to what would constitute 

a serious noncompliance with the tax laws such that the contracting officer could make a determination that the prospective 

contractor was not a responsible source. 

Senator CARPER. All right. Mr. Chairman, I was just sitting here 

thinking somebody solved this problem. And it may be in Minnesota. It may be a State. Maybe your State. It might be a city or 

county in Minnesota. Maybe another State. I bet somebody solved 

this problem. 

And they probably figured out how to solve it in a way that is 

not hopelessly complex, maybe in a way that harnesses technology. 

Mr. KUTZ. Senator, one thing that some States do that we are 

aware of is they actually publish the names of individuals and companies that don’t pay their taxes. And again, that may or may not 

have had a lot of effect. 

And I think that what they would do is send notices to them, 

saying that if you don’t pay your taxes within a certain period of 

time, we are going to put your name on the Internet and publish 

it. And I think some of the States have had some experience of revenue coming in as a result of that. 

Senator CARPER. OK. Do we need to pass a law to provide for the 

kind of consent that you just mentioned? 

Mr. SEBASTIAN. Ultimately, you might need to consider legislation. It is one thing to publish guidelines and regulations. It is another thing to enforce them. And so, I think down the road, you 

may need to consider legislation to that effect. 

Senator CARPER. Mr. Chairman, I don’t know if you have given 

that any consideration. Have you talked about that in your Subcommittee? 

Senator COLEMAN. No. But today, I mean the whole purpose, 

there are two things that will come out of today. One is asking the 

right questions. Two is being able to verify, and part of verification 

is going to be process by which we get consent. 

So, certainly, that is what is on the table here, and I would like 

to hear the next panel to see whether there are some problems 

with that or why it can or can’t be done. 

Senator CARPER. Thank you. 

Just sort of thinking outside of the box, how might we better use 

technology in order to come up with a system whereby we collect 

more of the revenues that are owed, but we don’t end up with a 

system that is just hopelessly complex to administer and to operate? 

Mr. KUTZ. Well, one of the things, as we mentioned earlier and 

you may have been out, what is called the Central Contract Registry, which is where all contractors are supposed to register that 

do business with the government. Right now, our understanding is 

22

that is somewhat of a stovepipe system. It is not integrated with 

all of the systems at all of the agencies. 

Ultimately, it would seem the integration of that system with 

agency contract payment systems, possibly with the offset and levy 

program would facilitate more timely identification and levy of information. 

Certainly with respect to tax system modernization, any systems 

changes that could more timely identify payroll tax problems to get 

it in the hands of revenue officers before—in some of these cases, 

we see 10 or 15 years of payroll tax noncompliance. And it would 

seem that trying to get to those, if someone misses a payroll tax 

deposit, that is a huge red flag that they are either having cash 

flow problems or they are stealing the money. 

So it would seem something to get on the front end of that process is an important technological thing that would be useful. 

Senator CARPER. All right. Mr. Ryan, go ahead. I know you are 

dying to say something. 

Mr. RYAN. Actually, I believe Senator Coleman. Asking the right 

question, we have policies in the banking industry, ‘‘Know your 

customer.’’ Maybe we should have, ‘‘Know your contractor.’’

Maybe ask the right questions in regards to the TIN that you are 

using to do business, the TIN that you are using to pay your taxes, 

the TIN that you have ever done business with. The more information that we have, the more intelligence that we can gather, the 

better decisions that we can make. 

If you allow these contractors to continue on not paying their 

taxes, then the pressure is put on law enforcement at the end to 

do something from a criminal standpoint. The more you can do up 

front to cut this off, I think the better chance we have of recovering 

the funds, instead of trying to look at it from a criminal angle. 

And I just am a big believer in having the controls up front and 

utilizing law enforcement for a lot of things, but not collecting 

taxes at this point in regards to working out between collections 

and the criminal side. 

Senator CARPER. Mr. Chairman, I think there is a lot of wisdom 

in what Mr. Ryan just said. 

I have maybe one more question I would like to ask. And as more 

and more agency purchases, at least some of the smaller ones, are 

being made with purchase cards—and I think these cards work a 

whole lot like credit cards that we are all familiar with—I understand that it is difficult sometimes to collect back taxes from payments made using purchase cards. 

And I just want to know what are our options in this area, and 

what has the task force been working on in this regard, if at all? 

Mr. RYAN. I don’t know what the task force was working on, but 

working with credit cards pretty much my whole career, you are 

absolutely correct. One of the areas before you are awarding the 

contract is getting back to asking those questions. If you are going 

to disburse funds for someone, I guess you should really know who 

they are. You should know whether or not they have the tax problems before you get into the contracting area. 

The purchase card is not only a contract payment method, it is 

also an acquisition. So in some of the small purchases, you are 

going to have a problem with going to your commercial vendors. 

23

But when the purchase card is used to pay on contracts, I think 

the contracting officer should be involved before the contract is 

awarded and knowing exactly what the tax problem is with that 

payer. 

Mr. KUTZ. I think the actual mechanics of levying a purchase 

card payment are very difficult. I think that the better solution is 

to identify the contractors up front and not let the officers use credit cards to make the payments. Because if they can’t levy the credit 

card payment, you could at least levy a normal payment. 

So it would be possibly making sure that the people who are procuring the services don’t let the contractors use the purchase cards, 

require them to go through another payment process that you can 

levy. 

Senator CARPER. Do you agree with that, Mr. Sebastian? 

Mr. SEBASTIAN. Yes. 

Senator CARPER. OK. I also noted during your testimony, gentlemen, that you said that most of the companies that you have 

looked at in the work of the task force were small to mid-sized companies, closely held. Do I assume from that that none of them are 

publicly traded companies? 

Mr. KUTZ. I don’t believe any of the 120 were publicly traded 

companies. 

Mr. SEBASTIAN. I don’t believe so. 

Senator CARPER. All right. Good enough. We are grateful to you 

for your presence and testimony today, for your response to our 

questions, and for the good work that you are doing. 

Senator COLEMAN. I am going to do just a little follow-up. Mr. 

Sebastian, on a couple of occasions, you talked about needing strict 

standards for evaluating the impact of these liens. In fact, it was 

you, Mr. Kutz, who mentioned that on the House side, there had 

been an effort to actually prohibit folks who have liens from doing 

contracts. 

And my sense of the rationale for not doing that was that we 

don’t want to prohibit everyone who has a tax lien from being a 

Federal contractor. If they are making their payments, if they had 

some problem that could be explained, that perhaps they could still 

do this work. 

On the other hand, you get these pattern defenders, you get the 

serial offenders, you get folks that go way beyond just the tax lien. 

We want to somehow draw that line. What is a responsible contractor? 

Is there a way that we could set up a system—and maybe it goes 

to the consent, getting it early on—where they are not precluded 

if they have a lien from having a contract. But if there is a payment, right away, we know that if payroll taxes that first period 

or second period aren’t remitted that we could somehow step in? 

There could be an early warning system that would allow us to 

stop these folks from being in a position where, in the end, they 

owe millions of dollars, which is what we have today. 

Can you kind of walk me through that? Would there be a way, 

and that goes to Senator Carper’s question, a simple way using 

technology whereby folks who have a lien, have had a history here. 

But if they are still allowed to contract, that if—it is kind of like 

a parolee—you have got an X violation, you have got a problem. 

24

Can technology allow us to set up that early warning system? 

Are you aware of any systems where this is done? 

Mr. SEBASTIAN. Well, I will approach it from a couple of views. 

One would be the early warning that payroll tax deposits are 

missed. 

Back when Mr. Kutz and I did an initial study looking at payroll 

taxes and the enforcement over this area, the IRS did have what 

was called an FTD alert program, which conceptually would have 

alerted the IRS to any missed tax deposits and would have been 

an early warning, as Mr. Kutz had indicated, that there may be indications the company is in trouble or that someone is stealing. 

What we found, though, was that there were some significant deficiencies with regard to how that alert process was being run so 

that information was not getting into the hands of the field officers 

until quarters, even years after the initial tax deposits had been 

skipped. 

And not having looked at that program in a number of years, I 

am not sure whether they have made improvements, etc. But that 

would be one avenue of identifying whether you have got an early 

warning of missed deposits. 

For those contractors or individuals that want to do business 

that already have outstanding tax debt, I think the task force has 

already implemented a process with the Department of Defense 

and was considering doing so with civilian agencies, where the IRS 

would actually have information available at the time of contract 

award. 

That would essentially enable them to begin levying payments 

immediately upon the point in time that the contractor would receive the first payment. One of the issues that we raised in the previous studies looking at the Federal Payment Levy Program is the 

period of time it takes to actually provide appropriate statutory notice to the contractor that you are going to levy the payments. 

There is an appeals process, which can take months. In the mean 

time, payments are being missed. They are being made to the individual and are not being levied. 

So I think the actions that the task force has taken with respect 

to DOD, and I believe, again, they are expanding that to civilian 

agencies, to actually get information at the time of contract award 

would allow IRS to send the collection due process notices out to 

the contractor at that point in time, and they can begin levying the 

payments immediately. That will at least allow the government to 

collect some of those revenues. 

Also, I think to the extent that a taxpayer has entered into and 

is complying with the terms of an installment agreement that, in 

and of itself, would indicate that they are working to get themselves back into compliance and would be a factor that should be 

considered in determining whether you are dealing with a responsible source. 

Senator COLEMAN. But in fact, the new contract would also be 

subject to the installment process because that is what we are 

missing now? 

Mr. SEBASTIAN. Yes. 

Senator COLEMAN. We have a tax lien. We don’t know about it. 

We haven’t asked you the question. We haven’t identified it and 

25

whether you are or not paying it. If you are not paying it back, that 

would go to the question of whether it is a responsible party. If you 

are paying it back, certainly the new contract would also be subject 

to the levy program. 

Mr. SEBASTIAN. And that is why you would really have to consider going to a consent-type process, where the prospective contractor recognizes up front that to do business with the Federal 

Government, they will need to consent to a tax check. And that 

may essentially bring them to the table and negotiate for a payment process with the IRS. 

Senator COLEMAN. Thank you. Senator Carper, anything further 

at this point? 

Senator CARPER. Actually, I do have one thing. Sitting here listening to this conversation, it reminds me, as I was saying earlier, 

that some State, some county, some city probably already figured 

out how to solve this problem. 

As it turns out, I met with the management of a large credit card 

company last week, and they shared with me one of the things that 

they do to reduce the amount of bad debt, bad credit card debt that 

is out there. And what they have developed over time is software 

that enables them to intercede with their credit card holders. 

If they have a credit card holder, for example, who has traditionally been making all their payments, paying off everything, and 

then they stop doing that. And maybe they are paying part of it, 

and then less and less, and eventually getting to the point where 

they are not even making the minimum payment. The credit card 

company intercedes before they get to the point where the payment 

isn’t being made. 

Or the other things that trigger the intervention are if maybe 

this credit card was the only one that the consumer had, but then 

they got some other credit cards. And maybe they started using the 

credit cards of a subprime operations, subprime lenders. 

The credit card company—the initial one we are talking about 

here, the one I met with—they intercede early on, just to see. It 

is really an early warning system, and it has worked very well for 

them. And I am sure a variation of this could be developed to work 

for us. 

And if it works for them—I said somebody has already invented 

this wheel, and I think maybe I met with some of the inventors 

last week. 

Senator COLEMAN. What I find fascinating is this Subcommittee 

last week, we were looking at I think our 22nd Katrina hearing. 

We had folks from the inspector general’s office talking about 

things being lost in the pipeline. That was one of the problems. 

And my reaction was talk to FedEx. They will tell you where it is 

in the pipeline. 

Talk to any small business. If you order something, they can tell 

you exactly where. At AutoZone, here is where the carburetor is at 

this point in time. And they can tell you the city that it is in, how 

long it is going to take. 

The Federal Government has great resources. We should be able 

to use that technology, and this is another area. Talk to one of 

those credit card companies and see what we can do to establish 

an early warning system that would then not have us in a situaVerDate 0ct 09 2002 08:37 Jul 13, 2006 Jkt 027750 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 C:\DOCS\27750.TXT SAFFAIRS PsN: PAT
26

tion where we are looking at $2 million worth of unpaid taxes and 

another million dollars in continuing to contract with these folks. 

Gentlemen, thank you. I appreciate your testimony. 

We will now call the second and final panel of witnesses for this 

morning’s hearings. 

We have with us the Hon. Mark Everson, Commissioner of the 

Internal Revenue Service, and Kathleen M. Turco, the Acting Deputy Administrator of the General Services Administration. 

Mr. Everson, it is good to see you again. This is the third time 

we have gotten together to discuss Federal contractors not paying 

their taxes. 

As I stated in my opening statement, for preliminary comments 

in my opening statement, I believe we made a lot of progress, Commissioner, since we first began discussing this issue and having 

you before this Committee. I think it was in February 2004. 

I look forward to hearing what progress has been made since 

your last appearance in June 2005, and I am encouraged by the 

tremendous increase in tax collections from Federal contractors 

over the past 2 years. I believe that in regard to the Defense Department, if I recall the figures, I think we were collecting about 

$680,000 when we had our first hearing, and it is somewhere close 

to $20 million right now. I think that is about a 3,000 percent increase in collections. 

Mr. EVERSON. On a small base. 

Senator COLEMAN. Yes. But it shows progress, and I appreciate 

that. 

Senator CARPER. Mr. Chairman. I want to apologize to this 

panel. I am going to have to leave during your testimony. I very 

much appreciate your being here. And got a chance to work with 

Commissioner Everson a little bit before and mindful of the work 

that he is trying to do, and we look forward to partnering with both 

of you. Thank you. 

Senator COLEMAN. Thanks, Senator Carper. 

Commissioner, I still continue to be concerned about the criminal 

side, and we will talk about that a little bit. 

Ms. Turco, I welcome you to this hearing. I am disappointed that 

Mr. Bibb, the Acting Administrator, could not be here, but I appreciate your filling in for him. I would like your assurance that you 

are speaking on behalf of the Acting Administrator and that you 

will bring these matters that we discuss at this hearing directly to 

his attention. 

I look forward to discussing whether the Federal Government 

should be doing business with contractors who continue to abuse 

the tax system. I also want to know what can be done to identify 

tax delinquent Federal contractors on a regular basis and how you 

propose to deal with them. 

I understand that GSA has become a contributor member of the 

Federal Contractor Tax Compliance Task Force. And I know you 

recognize the importance of this work, and I appreciate your continuing support for this effort. 

Again, before we begin, pursuant to Rule 6, all witnesses who 

testify before this Subcommittee are required to be sworn. At this 

time, I would ask you to rise. Please raise your right hand. 

27

1The prepared statement of Mr. Everson appears in the Appendix on page 70. 

Do you swear the testimony you are about to give before the Subcommittee is the truth, the whole truth, and nothing but the truth, 

so help you, God? 

The WITNESSES. I do. 

Senator COLEMAN. Thank you. 

Commissioner Everson, we will have you go first, followed by Ms. 

Turco. You know the timing system. Your entire written statement 

will be entered into the record. You may proceed. 

TESTIMONY OF THE HON. MARK EVERSON,1 COMMISSIONER, 

INTERNAL REVENUE SERVICE, U.S. DEPARTMENT OF THE 

TREASURY 

Mr. EVERSON. Thank you, Mr. Chairman and Senator Carper. 

I want to start out introducing my mother. I have testified some 

30 times before Congress since I have had this job. She has not 

been here before. And I want to assure you that, to the best of my 

knowledge, she is not a delinquent Federal contractor. [Laughter.] 

If she has been doing it, it has been really quite cleverly disguised. 

Senator COLEMAN. Does this mean, Commissioner, that I have to 

really be nice to her son today because your mom is here? 

Mr. EVERSON. You do. You use everything you can when you are 

on this side of the table. Absolutely. [Laughter.] 

Senator CARPER. Mr. Commissioner, my parents used to say the 

apple, in this case me, didn’t fall too far from the tree. And I am 

really watching your mom’s lips very carefully to see if they move 

when you speak. [Laughter.] 

Welcome, Mr. Everson. 

Mr. EVERSON. OK. Well, thank you. 

Before turning to today’s subject, let me first say that I appreciate your strong support for strengthening the integrity of the tax 

system through enhanced enforcement. This Subcommittee has 

shown impressive leadership in combating abusive tax shelters and 

those who play fast and loose with the tax code, as has the counterpart Subcommittee where I was here just last week, as Senator 

Carper knows, on looking at EITC and erroneous payments. 

This includes the Subcommittee’s efforts on the KPMG investigation. I just want to once again—as I did at the press conference last 

August 29 with the attorney general—commend you, Mr. Chairman, Senator Levin, and the staff of the Subcommittee for just the 

outstanding work that was done contributing to that investigation, 

which really was a landmark event in terms of making sure that 

practitioners and others adhere to professional standards and follow the law. 

I also want to thank the Committee for the support it has provided to the Administration’s budget request for IRS enforcement 

activities. That is very important. It is a continuing subject and one 

that the more you weigh in, the better off we are. 

Turning to compliance by Federal contractors, Americans certainly have every right to expect that anybody doing business with 

the Federal Government pays their taxes. Contractors receiving 

28

Federal tax dollars shouldn’t cheat the very same taxpayers by 

passing on their tax bills to them. 

We take seriously the issue of Federal contractors being delinquent on their Federal tax obligations. As you know, for the past 

2 years, we have worked closely with other Federal agencies 

through the Federal Contractor Tax Compliance Task Force, and 

we were making progress. 

We have taken steps, as you indicated, to enhance the automated 

Federal Payment Levy Program. We removed some of the operational exclusions, as you mentioned, that have prevented tax 

debts from being available for levy to match payments to levies. 

A valid TIN and name are now required, and we have implemented the 100 percent continuous levy authority on defense contractors. We did that last April. And beginning last November, we 

began matching individual income tax debts and payroll trust fund 

penalties against contractor payments. 

As you have indicated, 122 delinquent contractor cases were referred to us by the GAO. We put these cases ahead of others in the 

queue to provide appropriate focus. Looking at the 122 cases as a 

whole, 74 are now closed. 

Of this number, 12 paid their obligation in full for slightly over $6 million; 48 are in bankruptcy, out of business, or not collectible 

because of hardship or liquidation; another 14 cases have installment agreements in place; 9 cases have been referred for criminal 

investigation. As you indicated, one recently resulted in actual conviction, a 47-count conviction. And two other cases are being referred to DOJ. 

That leaves almost 40 additional open cases. These cases that represent over $25 million owed by taxpayers are in the collection 

process. We are moving forward on a number of initiatives to combat delinquent Federal contractors beyond these cases, of course. 

We will continue to review potential changes in the exclusion policy criteria. Can we get that pool of potential taxes larger, as we 

have already done? This will make additional debts available for 

levy. And in July, we are going to take some steps that I gather 

will speed up the notice process, which will help us. 

I know that some Members of the Subcommittee, as you indicated, Mr. Chairman, would like for us to look at the front end of 

the process for ways to prevent delinquent contractors from ever 

receiving Federal contracts. Currently, a prospective contractor, as 

you have indicated, only has to answer one question. Some have 

suggested the list of questions be broadened. They urge that IRS 

get involved in verifying the answers, possibly on an annual basis. 

While I can certainly understand the motivation to do this, I am 

concerned that it could drive the IRS into the realm of procurement 

policy. 

Senator, it is similar to the conversation we had last week. A lot 

of tax administration is done on the back end. That is the way our 

system works. The degree to which you bring us forward, you run 

the risk in this day of great concerns on privacy of having the 

image of an ever-intrusive IRS. 

So there are some of the same considerations we got to with 

EITC or that we get to right now in the very important debate 

about proper immigration policy, where some are suggesting that 

29

1The prepared statement of Ms. Turco appears in the Appendix on page 88. 

our tax records be shared in order to have workplace enforcement 

of the immigration laws. 

We believe Congress can do several things to help us collect delinquent taxes from Federal contractors. We have proposed a 

change in the tax code to allow the IRS to implement the 100 percent levy on all vendor payments, not just for goods and services. 

Second proposal—we have actually made five proposals in the 

budget that strengthen information reporting and other areas, that 

go parallel to the request for additional monies. The second proposal would actually allow us to improse a levy for employment tax 

liabilities prior to a collection due process hearing. 

This is important. It gets at the issue you were just talking 

about. Right now, any time a payment is missed, it goes down a 

corridor where there are all sorts of procedural steps that need to 

be taken before we can do the levy. This proposal would treat the 

levy as comparable to our right. 

Right now, talking about States, if a State is going to issue a refund or we are going to issue a refund, there is a reciprocity as the 

ability to levy that refund by either one of the governmental levels. 

Then you can go back and challenge it with all appropriate due 

process, but we can get the money first and then go through the 

process. 

We would like to do the same thing on employment taxes because these pyramid. If somebody gets in trouble, they can use the 

government as a bank. They have no intention to necessarily break 

the law. They want to pay it back, but this 15 percent can be an 

important point. We would like to get after this with that change. 

The other proposal we would make would increase information 

reporting for certain government payments for property and services. We think this would be helpful in this contractor issue as 

well. 

Let me just close by repeating the point you have heard me make 

in the past. We want to vigorously attack noncompliance by contractors, but I would emphasize that consideration for taxpayer 

rights must be balanced with our desire that Federal contractors 

pay their taxes. Thank you. 

Senator COLEMAN. Thank you, Commissioner. Ms. Turco. 

TESTIMONY OF KATHLEEN M. TURCO,1 ACTING DEPUTY 

ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION 

Ms. TURCO. Thank you. 

Mr. Chairman, let me begin by saying that the General Services 

Administration takes very seriously the issue of contractors not 

paying their Federal taxes. We want to be in the vanguard of those 

agencies working to make certain that the American people are 

paid in full by all those who enjoy the privilege of doing business 

with the Federal Government. 

I will address the highlights of what I reported in my testimony. 

Let me begin with the pre-award phase of the contract award process. Prior to the award of a contract, GSA determines whether prospective contractors are responsible in accordance with the Federal 

Acquisition Regulation. 

30

The process GSA follows is specifically governed by the FAR, 

which requires that in order to be deemed responsible, a prospective contractor must have adequate financial resources, be able to 

comply with the delivery or performance schedule, have a satisfactory performance record, possess a satisfactory record on integrity 

and business ethics, possess the necessary organization, experience, 

and technical skills, have accounting and operations oversight, and 

have the production, construction, and technical equipment and facilities to perform the work required. 

A pre-award survey can be conducted if the contracting officer 

has reason to believe that one or more of the aforementioned factors are in doubt. An overall responsibility determination is also 

dependent on the contractor representations and certification statements. Contractors must provide and enter these into the FAR by 

using the Online Representations and Certification Application 

System. 

Furthermore, all agencies have access to the ORCA application 

system and can ascertain information on the contractor’s status. In 

turn, contracting officers must use the ORCA to obtain information 

on competing vendors prior to awarding a contract. 

This information includes a certification addressing whether or 

not the offeror or any principals within a 3-year period preceding 

this offer have been convicted of or had a civil judgment rendered 

against them for a number of offenses, including tax evasion. As 

has been discussed earlier, this may be too narrow a definition, Mr. 

Chairman, and we need to look at that. 

We have also integrated the ORCA system and the Central Contractor Registration, known as the CCR. The CCR data collected includes addresses, types of business line, socio-economic data, taxpayer identification numbers, points of contact, and electronic 

funds transfer information for payments. With the inclusion of the 

CCR data, we have expanded the government-wide use of the CCR 

and the TINs as part of our due diligence. 

In the fall of 2005, the CCR program began validating the TIN 

data. In order to complete CCR registration and qualify to bid for 

Federal Government contracts, the TIN and the taxpayer name 

combination must match exactly to the TIN and taxpayer name 

used in Federal tax reporting. Nonmatching vendors are notified to 

contact the IRS. The vendor is deemed nonactive, i.e., they don’t 

match. They cannot bid on any contracts. 

Another area that we have been addressing today is the use of 

the purchase card payments as part of GSA’s SmartPay Program 

and whether the card payments are subjected to levies pursuant to 

the Federal Payment Levy Program. We continue to examine a 

number of approaches to provide charge card information that may 

be of assistance in the levy issue. 

One approach involves development of more robust data sharing 

practices, possibly including a data warehouse within the GSA’s 

SmartPay Program. If developed, this approach could provide more 

granular commercial merchant identification data for use in the 

Federal levy process. We clearly have more work to do in this area, 

and we look forward to working with the task force in addressing 

how we can go about a data warehouse or other means in terms 

of improving or using the purchase card payments for offset. 

31

I hope my testimony has provided an adequate snapshot of what 

we are working on at GSA, and I am happy to answer any questions you might have. 

Senator COLEMAN. Thank you, Ms. Turco. 

Just the last point first, the Federal purchase card payments. At 

this point, it is my understanding that they are not subject to the 

Federal Payment Levy Program? 

Ms. TURCO. That is correct. 

Senator COLEMAN. And so, what we are talking about is similar 

to Senator Carper’s question, to make sure that those payments 

are subject to the levy program, just coming up with the right system? 

Ms. TURCO. Yes, sir. 

Senator COLEMAN. We appreciate and do look forward to your 

work in this area. 

In your testimony, I think you used the phrase, you were talking 

about things that can be looked at in determining whether somebody is a responsible contractor. And you talked about—I think you 

used the phrase—‘‘convicted of a number of offenses, including tax 

evasion.’’

When you say ‘‘number of offenses,’’ beyond tax evasion, are 

there other tax-related convictions or indictments that are questioned or that are referred to when dealing with potential contractors? 

Ms. TURCO. No. I think we only ask for tax evasion. 

Senator COLEMAN. Do you have any reaction? To me, it is kind 

of obvious that there are a whole range of other failures to submit 

payroll taxes just being one of a number of offenses. Has there 

been discussion before this hearing as to broadening the scope of 

those questions? 

Ms. TURCO. Well, Mr. Chairman, I think that was what the GAO 

folks were talking about in terms of expanding beyond tax evasion. 

I would say that this is part of the Federal Acquisition Regulation, 

and it could be that in terms of how we go about the process of submitting changes to the FAR that we may not have had full knowledge that, in fact, tax evasion is a very narrow question. 

And so, I think what we would like to do is to go back and work 

with the Chief Acquisition Officer at GSA as well as with the IRS 

as to whether or not we could expand the questions. 

Senator COLEMAN. Commissioner Everson. 

Mr. EVERSON. I just want to make a commercial for one thing 

that we are interested in. You may not be aware of this, Senator, 

but failure to file your income tax return is not a felony. 

So the basic issue of nonfiling, which represents about 10 percent 

of the tax gap, you wouldn’t even get at it. I suspect you wouldn’t 

be asking people to necessarily report on misdemeanors. I mean, 

how deep are you going to go with all of this? But we have said 

we think that ought to be a felony, and it is not. 

Senator COLEMAN. Some of these to me, Commissioner, seem like 

low-hanging fruit. I mean, it is pretty obvious that if you are asking people to make a determination as to business integrity and 

ethics, if you have a history, or in this case, you could have convictions—convictions, regardless of what the level of not submitting 

payroll tax—the Easterday case is a good example. 

32

You have got convicted, the charge was $3 million. I thought that the investigation showed about $18 million, somewhere between 

$15 million and $18 million, if not more, of Federal taxes not being 

remitted. That is pretty substantial. And not to be asking that 

question, to me, seems so narrow and blind that I would hope we 

would go back and then take a look at kind of the broad range of 

what things to ask about. 

And again, that is without making the judgment that these are 

automatically debars. I am not sure I want to look at that. It may 

be the size of the offense. It may be the repetitiveness of the offense. There are some folks who have a problem, and they then 

make all efforts to correct it. They sign up. They do payments, installment payments as part of the levy program. They meet their 

obligations. That is not the problem for me. 

If you are being directed to make a judgment about business integrity and ethics, you have got to be able to ask the questions that 

can help you make that evaluation. I would hope we would go back 

then, and clearly, this is something that absolutely needs to be 

done. 

A question about taxpayer identification—TINS, taxpayer identification numbers. When a contractor comes forward, they have a 

taxpayer identification number. Do the contractors have one taxpayer identification number, or do they change, do they have different numbers for different transactions? 

Mr. EVERSON. Well, it depends on how many different business 

entities they have established and what legal forms they have. But 

your taxpayer identification number doesn’t change for that entity. 

Senator COLEMAN. But if you have somebody who wants to game 

the system, and is it possible then to simply change the name of 

the business and have a different number? Is that possible? 

Mr. EVERSON. Well, you go through a proceeding. I think that if 

it was done for fraudulent purposes, which I would think would be 

pretty unusual, I suppose you could run into problems there. But 

again, if you look at particularly you go to larger businesses, it depends on what is in the tax return or what is not or what are the 

related party deals. It can be very different forms. 

Senator COLEMAN. How do we know if people have different taxpayer identification numbers? And here is what I am looking at. I 

am looking at cases that if we go back through these investigations, we clearly had some contractors who were gaming the system. 

Mr. EVERSON. Sure. 

Senator COLEMAN. And part of the gaming of the system is that 

they would create new companies. They would have obligations, 

and they would just create a new company and get a new contract. 

So I am dealing front end now, not back end. 

Mr. EVERSON. Yes. 

Senator COLEMAN. How do we know——

Mr. EVERSON. I don’t think that that would be——

Senator COLEMAN. How do we know whether folks have different 

taxpayer identification numbers? 

Mr. EVERSON. With a new business, I think you would have to 

ask questions. Again, this is a procurement question. It is not a tax 

question. 

33

The tax law here would follow the legal entity, who is the taxpayer, if you will? But if you are asking previous things that someone or officers or owners have done in their career, that is a different question. It is not a tax question, from my point of view. 

Senator COLEMAN. The challenge is to figure out how to get those 

who are gaming the system, how to hold them accountable up 

front. It is less of a problem if you stop them on the front end than 

you have got to deal with the back end, at the same time without 

making the system so burdensome that people can’t work their way 

through it, and then we talk about government bureaucracy. 

But somewhere I still think we have to look at the front end, ask 

the broader questions. At least have the information so that then 

you can render a judgment. 

And Commissioner, in regard to the way you operate, IRS, and 

what I am thinking here is that you may have a situation where 

some of the statutory prohibitions that others have, I am not sure 

whether they impact you. But if you do a contract, do you go back 

and check whether there are liens? Do you have the ability to just 

kind of go back and check, see whether there are tax liens? 

Mr. EVERSON. We do. I have the same ability that anybody else 

has. But 6103 information, as you say, is protected. So what you 

have to do is be extremely careful, Senator, on the use of that information. 

You have talked about liens. If something is public, an organization can go back and check the public record. They wouldn’t do it 

via us, if you will. That is the trick here or where you run into 

trouble because the legal interpretations on this have always been 

very conservative. So we do not, even if something has become public, open up that public record of the lien, if you will. 

And the difficult thing here for a procurement organization, 

which is even for us separate from the rest of our operation, is you 

would have to go and you would have to check at something like 

4,200 different counties and see whether the lien was placed somewhere. 

Senator COLEMAN. Well, I am trying to get a practical way to get 

access to public information. 

The IRS, do you probe contractors, or do you have the ability to 

look in greater depth at potential contractors than any other government agency? 

Mr. EVERSON. No, I wouldn’t say that we would interpret our authorities that way, and I don’t think we do. 

Senator COLEMAN. Do you have access in terms of information? 

My concern with tax liens are public information? 

Mr. EVERSON. Yes. 

Senator COLEMAN. But the question is, where do you have to look 

for that public information? 

Mr. EVERSON. Right. 

Senator COLEMAN. Is there a single source? Is there a single file? 

Do you have a single file of all taxpayers who have tax liens? 

Mr. EVERSON. Well, we have our systems where we have in all 

of our collection systems. And liens and levies, just to give you an 

idea of the volumes here, levies fell after the reforms of 1998. They 

went all the way down to something like 217,000. 

34

Last year, they were back over 2,700,000, I believe. Yes, that is 

the case. Same thing with liens. Liens declined to 170,000 in 1999. 

They are back up over 500,000. 

We have those, but again, that is protected information because 

those are centralized databases protected, as you say, under statute. Nobody else has any one-stop shopping to go find that. They 

have got to go and look elsewhere. 

Senator COLEMAN. Do you have an automated lien system database? 

Mr. EVERSON. We have a database that covers all the collections 

and which would enable you to go by taxpayer and see whether 

there is a lien on them. 

Senator COLEMAN. So when you have a potential contractor, you 

check the potential contractor and their taxpayer identification 

number? 

Mr. EVERSON. No, I am not saying we do that. That is not for 

tax enforcement purposes. That is a distinction. I would not do 

something at the IRS, use information that we have for personnel 

purposes, for hiring purposes, anything that would violate the principles of 6103 until you give me permission as the Congress to do 

that. 

Senator COLEMAN. Again, I am just dealing with public information, lien information. 

Mr. EVERSON. I will check and verify this. But I don’t believe we 

go to the step of checking with each of those 4,200 municipalities 

or the States or where there is a lien. 

Senator COLEMAN. This is more from a policy perspective now, 

not a process perspective. If liens are public information, would it 

be in the best interest of government to have a single database 

with liens that the GSA could then check to verify whether, in fact, 

there are liens? 

There are other steps you would have to go to in terms of the 

impact of those liens and what impact they would have on a potential contract. But just in terms of not having to go to X number of 

counties, courthouses——

Mr. EVERSON. Sure. That is a——

Senator COLEMAN. Is there anything from a policy perspective? 

Put your policy hat on. Understanding great reverence for privacy, 

for protecting identities. But we have public information. 

Mr. EVERSON. Yes. 

Senator COLEMAN. Taxpayer liens. Why shouldn’t there be a single database that the GSA or others can go to to determine whether a contractor does, in fact, have liens against them? 

Mr. EVERSON. I don’t have a problem with that from a tax point 

of view. That is a procurement question. And if GSA or the White 

House procurement officer would ask that a database like that 

would be developed, fair enough. And it is no different than the 

same question on convictions or other areas. 

Senator COLEMAN. Ms. Turco, any response to that? Would that 

be helpful if you had a single place that you could go to to determine whether, in fact, there were outstanding liens against a prospective contractor? 

35

Ms. TURCO. Yes, I think it would be. I think it would enhance 

in terms of the review process that we undertake with the contractors. 

Senator COLEMAN. Commissioner Everson, when you went 

through your list of those 97 cases, you indicated that some of the 

businesses are out of business? 

Mr. EVERSON. Yes. 

Senator COLEMAN. How do you verify that? 

Mr. EVERSON. I believe all of these cases, as you know from my 

commitment to you 2 years ago, were investigated by our criminal 

investigators. I am sure that they have checked that pretty closely. 

Senator COLEMAN. Would you go back and verify that? There 

seems to be some question about—again, this is the trust you have 

got to verify. 

Mr. EVERSON. Absolutely. It sounds like you have information 

that I don’t. So I am happy to take a look at that. And any case 

you have got, we will take a look at it. 

Senator COLEMAN. I would just ask if you have your folks go 

back and verify. 

Mr. EVERSON. I think you know, Senator, from the KPMG and 

other matters, when you give us something, we take a good look 

at it. 

Senator COLEMAN. And we appreciate that, Commissioner. 

And while touching on the verification issue, if I can go to you, 

Ms. Turco? One of the concerns we have in our investigation, we 

don’t see the verification of the tax-related answers that potential 

Federal contractors provide on the representation and certification 

application. Is there a verification process? 

Ms. TURCO. Chairman, no. There is not a verification process. It 

is a review process. The verification would be with the IRS. 

Senator COLEMAN. What I would like is for you to commit to 

work with the IRS and other member of the contractor tax compliance group to look at this verification issue. 

I just think so much of what we do is on the back end. Commissioner, so much of what you do is on the back end, and that is resource intensive. And if on the front end, we can kind of check 

some of this stuff out, get some of the miscreants and the deadbeats out of the system up front, it is less work for you, and it is 

less abuse to the system. 

Mr. EVERSON. Again, though, Senator, there is a big distinction 

between what is public information and what is not. And we have 

had this discussion in the past. Where do you draw the line between what is a legitimate tax challenge that a taxpayer is making 

versus something that is, as you have said, abusive or repetitive? 

And these are hard lines to draw and subject to a lot of interpretation. 

And the difficulty here and I am sure why GSA and others, it 

hasn’t evolved more on the procurement side, they are not tax experts. So you draw, getting into this, getting into the weeds here, 

it is a tough thing fraught with a lot of sensitivity for Americans 

of all stripes. 

Senator COLEMAN. But the pretty basic stuff, the most basic kind 

of elements of this whole thing is you have folks out there today 

who have liens, and they have liens because they have obligations 

36

that have not been met. So a determination has been made that 

this is your responsibility to meet that obligation. 

Mr. EVERSON. Yes. 

Senator COLEMAN. And unfortunately, then we have contracts 

going out to folks who really have no consideration and no knowledge of whether these folks have had a prior history, have had obligations. And as a result, we are paying contracts that are not subject to the liens, even though these people have some responsibility. 

Or in the worst case, to go beyond the liens, folks who may have 

been convicted of serious, serious tax violations. And again, we 

have no knowledge. 

And so, in the end, I don’t know how you can make a judgment 

about business integrity and business ethics when we don’t have 

the questions. We don’t have the information. Even when we get 

the answers, we don’t verify them. 

Mr. EVERSON. Sure. I agree with you entirely on the information 

that is public. 

Senator COLEMAN. Let me ask you a question. We talked about 

the government purchase cards. 

Mr. EVERSON. Yes. 

Senator COLEMAN. That was a concern of the Senator from Delaware. He has a lot of these operations in his State. So I appreciate 

that. [Laughter.] 

Mr. EVERSON. I haven’t heard from him yet on our proposal that 

credit card issuers report gross receipts for businesses to us. I may 

hear from him. He is big on the tax gap, but we will see what happens when I get there. I hope I will have his support. 

Senator COLEMAN. The question I have is I understand that the 

Financial Management Service identified about 8,000 contractors 

who owed about I think it was close to $750 million in taxes. And 

we only levy a small percentage of that, as I understand. 

Are you familiar with that? Can you help me understand the 

issue there of the difficulty in levying in those cases? 

Mr. EVERSON. With the purchase cards, I guess you have an 

intermediary there, and that is the problem. But my understanding, and perhaps my colleague can help me on this, is that 

the task force has looked at this, and they say that we can address 

this problem. 

I have it, and I covered it in the written testimony. I will just 

read that to you. The task force is currently pursuing an interim 

procedure to match debts in TOP with a CCR database maintained 

by the DOD. If a match is found, the CCR—that is the database 

itself—would be updated with a field that the contractor is not eligible to be paid by a purchase card program. 

So they would have to go down the other corridor for payment, 

and I guess they would be basically locked out of the purchase card 

program. But the teams that have looked at this seem to feel that 

that is a better approach as opposed to working on the purchase 

card, trying to intrude into the card workings itself. 

Senator COLEMAN. I appreciate the continued work in that area. 

It is certainly an area of concern. 

And let me kind of pull all this together, if I can. Clearly, this 

Chairman certainly believes—I can’t speak for all Members of the 

Subcommittee. But I would suspect that most Members of this SubVerDate 0ct 09 2002 08:37 Jul 13, 2006 Jkt 027750 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 C:\DOCS\27750.TXT SAFFAIRS PsN: PAT
37

committee would want us to take a more complete look at the contractor, this issue of contractor responsibility under the Federal Acquisitions Regulations, the FAR, to look in determining whether 

compliance with tax laws has taken place. 

That we go beyond limiting the questions to indictments or convictions for tax evasion. That we are able to look at noncompliance. 

That we look at the broader spectrum of tax violations, including 

some that we have talked about today. 

But in addition, and I think you mentioned, Commissioner 

Everson, there are folks here who have State, unsatisfied State tax 

liens that are involved in this that, clearly, we don’t look at. Unpaid outstanding tax debt, that is, that we don’t look at. 

And so, I would hope that we would put in place a system, and 

I would expect—more than hope, I would expect that we have in 

place a system that asks the broader questions and that provides 

ways to verify consistent with the deep concerns about privacy. But 

that we do those things particularly with the opportunities technology affords us to have in a central place information about tax 

liens and other things that are a matter of public record. 

And that would make it easy for those who are issuing contracts 

to be able to look at that and then to make some judgments and 

determinations on a policy perspective of the impact that those 

liens and those other obligations would have. So there is work to 

be done. I am an optimist, so I am going to end on the positive 

note. 

I really do appreciate what has been done so far. I think we have 

made great strides. And Commissioner, we have come a long way 

on this and other issues. You mentioned the KPMG and the sham 

tax transactions. I believe I remember not only do you have that 

statement there, but I think it was about $3 billion? With a ‘‘B,’’ 

$3 billion in additional revenues? 

Mr. EVERSON. The ‘‘Son of Boss?’’ Yes, the Son of Boss settlement 

is over $4 billion that we have at this stage. And we have others. 

We have just finished the application period for a global settlement 

initiative covering 21 transactions. A lot of good news there, too. 

So we are making some progress. I just thank you for your support on the budget and on some of these legislative proposals we 

have. I think those are very important, too, sir. 

Senator COLEMAN. Even for the Federal Government, millions 

and billions are real dollars. 

Mr. EVERSON. We go after it all, yes, sir. 

Senator COLEMAN. As I said earlier, this is the third in a series 

of hearings on tax delinquent Federal contractors. This Subcommittee will remain focused and vigilant on this issue. 

We are going to, in the next couple of days, have to make some 

tough votes about budgetary matters, and there are programs that, 

as a former mayor, I look at—for community development block 

grants and community service block grants. And the ag side, Food 

Stamps and a whole range of things, which we are talking in the 

billions that have a—low billions, a billion dollars or $2 billion—

that have a substantial impact on the quality of life of a lot of our 

citizens. 

And it greatly troubles me when I see billions being unpaid, and 

I think we have got to keep doing what we are doing. 

38

So I do appreciate the work that you have been doing and the 

work that you will continue to do, and we look forward to making 

further progress with the IRS and GSA, FMS, and the other relevant Federal agencies. 

Thank you very much. This hearing is now adjourned. 

[Whereupon, at 11:09 a.m., the Subcommittee was adjourned.] 

(39)

A P P E N D I X

PREPARED STATEMENT OF SENATOR AKAKA 

I wish to thank Chairman Coleman and Ranking Member Levin for bringing the 

extent of the problem of unpaid taxes by federal contractors into clear focus. I am 

proud to partner with you in finding viable solutions to contractor tax abuse which 

costs American taxpayers billions per year. The two preceding hearings held by this 

Subcommittee have yielded positive results—an increase in levies against tax cheaters; the creation of the Federal Contractor Tax Compliance Task Force; and stepped 

up investigations of non-compliant contractors. 

Despite such positive steps, there remains the nagging question of why should 

any federal contractor receive government funds if he or she fails to do what nearly 

84 percent of Americans do every year—pay taxes? Why isn’t there a zero tolerance 

policy when it comes to federal contractors who are either abusing or ignoring the 

tax system? 

Just last month, our full Committee heard from the head of the Department of 

Justice Hurricane Katrina Fraud Task Force who said a zero tolerance policy greatly aided in the prosecution of Katrina-related fraud cases. Given that many of the 

initial Katrina cases involved low-level dollar figures, a zero tolerance policy might 

work when we’re dealing with billions in unpaid taxes by federal contractors. 

Because of the PSI hearings—and what I believe is a real commitment from IRS 

Commissioner Everson—there has been a coordinated and cooperative effort to close 

the tax gap for federal contractors. I look forward to hearing from the Commissioner 

what he sees as the next steps in dealing with this pervasive problem. 

I do want to raise a couple of additional concerns that tie into today’s hearing. 

Knowing that the job of detecting—deterring—and prosecuting tax fraud rests with 

the IRS, I continue to oppose outsourcing the collection of unpaid taxes which I feel 

is as an inherently governmental job. Because contracting officers cannot access tax 

information, I want to know how the IRS is reviewing contractors who are competing for and being selected to receive these contracts. I am also curious whether 

individuals employed by contractors—those who will actually perform the work—

will be held to the identical performance and ethical standards as IRS employees. 

We know that IRS employees may be fired for breaking any of what’s called the 

twelve deadly sins. It’s unfair for contract employees to be held any less of a standard if they are doing such important work. 

I know from our hearings here and the Joint Committee on Taxation hearing I 

attended last May that Commissioner Everson is fully engaged in closing the gap 

between what is owed to the federal government and what gets paid to the federal 

government. But in doing so, we must make sure that IRS contractors fulfill their 

tax obligations. 

In closing, I also want to acknowledge the outstanding work being done by Mr. 

Kutz and his team at GAO. Sixteen years ago, GAO began its high risk list, and 

for 16 years the area of uncollected taxes has been on the list. In fact, GAO expanded the list to include the backlog of uncollected debts and the IRS’s ability to 

detect noncompliance of tax laws. I mention this, because tomorrow, my Subcommittee—Oversight of Government Management—will hold its sixth hearing in 

12 months on the GAO high risk list. Senator Voinovich and I, just as Senator Coleman and Senator Levin here, are working with GAO and selected agencies to resolve long- term, systemic problems. That is why I am so pleased to be a part of 

this continuing effort to ensure that federal contractors are not cheating the American people of their hard-earned money. 

Mr. Chairman and Senator Levin, I want to thank you for holding today’s hearing 

and for including in GAO’s ongoing review of tax delinquent contractors my special 

concern of whether a 1996 law that allows the federal government to withhold federal contractor payments for state debts is working. You understand that Minnesota 

and Michigan, like Hawaii, could use these uncollected state taxes to pay for state 

health and education programs. Thank you.

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