Financial Management: Thousands of GSA Contractors Abuse the Federal Tax System
Published: 2006-03-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In February 2004 and again in June 2005, GAO testified that some Department of Defense (DOD) and civilian agency federal contractors abused the federal tax system with little consequence. Previous problems we identified with contractors with unpaid taxes have led to concerns over whether any interagency contractors, such as those on the General Services Administration's (GSA) federal supply schedule, failed to pay their taxes. GSA, through its federal supply schedule and other interagency contracts, arranges for federal agencies to purchase billions of dollars of goods and services directly from private vendors. GAO was asked to determine if GSA contractors, including both contractors that were paid by GSA and GSA interagency contractors, have unpaid federal taxes, and if so, to (1) determine the magnitude of tax debts owed by GSA contractors; (2) identify examples of GSA contractors that have tax debts and are also engaged in potentially abusive, fraudulent, or criminal activities; and (3) determine whether GSA screens contractors for tax debts and criminal activities prior to awarding contracts and at the exercise of any government contract options.
section_title: What GAO Found
paragraphs: Over 3,800 GSA contractors had tax debts totaling about $1.4 billion as of June 30, 2005. This represented approximately 10 percent of the number of GSA contractors during fiscal year 2004 and the first 9 months of fiscal year 2005. GAO investigated 25 GSA contractors with abusive and potentially criminal activity. These businesses had not forwarded payroll taxes withheld from their employees and other taxes to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Furthermore, some company owners diverted payroll taxes for personal gain or to fund their businesses. These contractors worked for a number of federal agencies including the departments of Defense, Justice, and Homeland Security. A number of owners or officers of the 25 GSA contractors have significant personal assets, including commercial properties, houses worth over $1 million, and luxury vehicles. In addition, several of the owners of these GSA contractors gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed. Neither federal law, as implemented by the Federal Acquisition Regulation (FAR), nor GSA policies require contracting officers to specifically consider tax debts in making contracting decisions either at initial award or when considering options to extend. In addition, federal law generally prohibits the disclosure of taxpayer data, and consequently contracting officers have no access to tax data directly from the IRS. GSA contractors that do not pay tax debts could have an unfair competitive advantage in costs because they may have lower costs than tax compliant contractors on government contracts. This is especially true in wage-based businesses that provide homogenous types of goods and services. GAO's investigation identified instances in which contractors with tax debts won awards based on price differential over tax compliant competing contractors.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss General Services Administration  (GSA) contractors that have abused the federal tax system while doing  business with the federal government. In hearings held by this  subcommittee in February 2004 and again in June 2005, we testified that  some Department of Defense (DOD) and civilian agency federal  contractors abused the federal tax system with little consequence. In 2005,  we designated interagency contracting, in which GSA plays a prominent  role, as a new high-risk area. This designation is partly based on the fact  that interagency contracting tends to create an incentive for the agency  awarding the contracts to focus more on increasing contracting volume  that generate fees than on compliance with sound contracting policy and  required procedures (see app. II for further details on GSA’s contracting  role).
This testimony continues a body of work which has identified federal  contractors with unpaid taxes. Our prior work gave rise to concerns over  whether GSA interagency contractors, such as those on GSA’s federal  supply schedule, have also failed to pay their fair share of taxes. As a  result, you asked us to determine if GSA contractors have unpaid federal  taxes, and if so, to (1) determine the magnitude of tax debts owed by GSA  contractors; (2) identify examples of GSA contractors that have tax debts  and are also engaged in potentially abusive, fraudulent, or criminal  activities; and (3) determine whether GSA screens contractors for tax  debts and criminal activities prior to awarding contracts and at the  exercise of any government contract options.
To identify GSA contractors with unpaid federal taxes, we obtained and  analyzed the Internal Revenue Service (IRS) tax debt data as of June 30,  2005. We matched the identities of contractors with IRS tax debts to  federal contractors that were either paid or awarded contracts by GSA to  contract with federal agencies during fiscal year 2004 and the first 9  months of fiscal year 2005. To illustrate indications of abuse or potentially  criminal activity, based on our data mining, we selected 25 GSA  contractors for a detailed audit and investigation. For these 25 contractors,  we reviewed copies of automated tax transcripts and other tax records  (for example, revenue officer’s notes) and performed additional searches  of criminal, financial, and public records. To determine whether GSA  contracting officers are required to consider tax debts or other criminal  activities, we examined the Federal Acquisition Regulation (FAR) and GSA  regulations, policies and procedures for conducting responsibility  determinations on prospective contractors. We also discussed acquisition  policies and procedures used to award contracts with GSA officials and, as  part of these discussions, we determined whether contracting officers  specifically consider tax debts or perform background investigations in  determining whether a prospective contractor is a responsible source  before the contract is awarded and before the option to extend the  contract is exercised. For details on our scope and methodology, see  appendix I.
We conducted our audit work from June 2005 through January 2006 in  accordance with U.S. generally accepted government auditing standards.  We performed our investigative work in accordance with standards  prescribed by the President’s Council on Integrity and Efficiency.
subsections: section_title: Magnitude of Unpaid Taxes of GSA Contractors
paragraphs: Over 3,800 GSA contractors had about $1.4 billion in unpaid federal taxes  as of June 30, 2005. This represents approximately 10 percent of GSA  contractors during fiscal year 2004 and the first 9 months of fiscal year  2005. We took a conservative approach to identifying the amount of tax  debt owed by GSA contractors, and therefore the amount is likely  understated.
subsections: section_title: Characteristics of Contractors’ Unpaid Federal Taxes
paragraphs: As shown in figure 1, 85 percent of the approximately $1.4 billion in unpaid  taxes owed by GSA contractors was comprised of corporate income and  payroll taxes. The other 15 percent of taxes included excise,  unemployment, individual income, and other types of taxes. Unlike our  previous reports on contractors with tax debts, a larger percentage of  taxes owed by GSA contractors was comprised of corporate income taxes,  which are unpaid amounts that corporations owe on the income of their  business. This was due to a handful of GSA contractors that owed a  significant amount of corporate income tax debts as of June 2005.  Excluding this handful of cases, payroll taxes make up about 40 percent of  the outstanding taxes owed by GSA contractors.
Unpaid payroll taxes include amounts that an employer withholds from an  employee’s wages for federal income taxes, Social Security, and  Medicare—but does not remit to IRS—and the related matching  contributions of the employer for Social Security and Medicare.  Employers who do not remit payroll taxes to the federal government are  subject to civil and criminal penalties.
The amount of unpaid federal taxes we identified among GSA  contractors—$1.4 billion—is likely understated. First, to avoid  overestimating the amount owed by government contractors, we  intentionally limited our scope to tax debts that were affirmed by either  the contractor or a tax court for tax periods prior to 2005. We did not  include the most current tax year because recently assessed tax debts that  appear as unpaid taxes may involve matters that are routinely resolved  between the taxpayer and IRS, with the taxes paid, abated, or both within  a short period. We eliminated these types of debt by focusing on unpaid  federal taxes for tax periods prior to calendar year 2005 and eliminating  tax debt of $100 or less.
Also limiting the completeness of our estimate of the unpaid federal taxes  of GSA contractors is the fact that the IRS tax database reflects only the  amount of unpaid taxes either reported by the contractor on a tax return  or assessed by IRS through its various enforcement programs. The IRS  database does not reflect amounts owed by businesses and individuals  that have not filed tax returns and for which IRS has not assessed tax  amounts due. During our review, we identified instances from our case  studies in which GSA contractors failed to file tax returns for a particular  tax period and, therefore, were listed in IRS records as having no unpaid  taxes for that period. Further, our analysis did not attempt to account for  businesses or individuals that purposely underreported income and were  not specifically identified by IRS. According to IRS, underreporting of  income is the largest component of the estimated $345 billion annual gross  tax gap. IRS estimates that underreporting accounts for more than 80  percent of the total gross tax gap. Consequently, the true extent of unpaid  taxes for these businesses and individuals is not known.
section_title: GSA Contractors Involved in Abusive and Potentially Criminal Activity Related to the Federal Tax System
paragraphs: As discussed previously, businesses with employees are required by law to  collect, account for, and transfer income and employment taxes withheld  from employees’ wages to IRS. Businesses that fail to remit payroll taxes  to the federal government are liable for the amounts withheld from  employees, and IRS can assess a trust fund recovery penalty (TFRP) equal  to the total amount of taxes not collected or not accounted for and paid  against individuals who are determined by IRS to be “willful and  responsible” for the nonpayment of withheld payroll taxes. In addition to  civil penalties, criminal penalties exist for an employer’s failure to turn  over withheld employee payroll taxes to IRS. Willful failure to remit  payroll taxes is a criminal felony offense punishable by imprisonment of  not more than 5 years, while the failure to properly segregate payroll  taxes can be a criminal misdemeanor offense punishable by imprisonment  of up to a year.
Our audit and investigation of the 25 case-study business contractors  showed substantial abuse or potential criminal activity as all had unpaid  payroll taxes and have diverted those funds for personal or business use.  The 25 case-study contractors typically operate in wage-based industries,  providing security, building maintenance, computer services, and  personnel services for GSA and the departments of Defense, Homeland  Security, Justice, and Veterans Affairs. The types of contracts that were  awarded to these contractors included products and/or services related to  law enforcement, disaster relief, and national security. The amount of  unpaid taxes associated with these case studies ranged from  approximately $100,000 to over $9 million. Furthermore, we determined  that several of the case studies had unpaid state and local taxes where  state and local taxing authorities had filed multiple tax liens against them.  Subsequent to the award of the most recent contract by GSA, one case  study company and its owner were debarred from future federal contracts  for illegal activity unrelated to their failure to pay their payroll taxes.
Table 1 highlights 10 case studies with unpaid taxes. Our investigations  revealed that, despite their companies owing substantial amounts of taxes  to the IRS, some owners had substantial personal assets—including  commercial real estate, interest in a chain store, or multiple luxury  vehicles. Further, several owners owned homes worth over $1 million.
See appendix III for the details on the other 15 GSA contractor case  studies. We are referring the 25 cases detailed in our report to IRS so that  it can determine whether additional collection action or criminal  investigation is warranted.
The following provides illustrative detailed information on several of these  cases.
Case 1: This contractor provides emergency supplies for civilian agencies.
At the same time the company was not paying its taxes, the company made  a loan to a company officer for hundreds of thousands of dollars. The  company subsequently filed for bankruptcy owing a substantial amount of  federal and state taxes. After the company came out of bankruptcy, the  company again failed to remit all of its taxes, including payroll taxes. IRS  assessed a trust fund recovery penalty against the company and the owner  for willful failure to remit payroll taxes.
Case 2: The company provided security services for a civilian agency. Our  investigative work indicates that an owner of the company made multiple  cash withdrawals, totaling close to $1 million, while the contractor owed  payroll taxes. The company’s owner used the cash withdrawals to fund an  unrelated business and purchase a men’s gold bracelet worth over $25,000.  The company’s owner has been investigated for fraud.
Case 4: The company provides security services for a civilian agency. Our  investigative work indicates that the owner of the company did not make  tax deposits because the company did not have the funds to pay employee  costs or other business expenses. However, we found that the company  owner owns multiple properties worth over $1 million. The owner also  owes IRS approximately $200,000 for personal income taxes.
section_title: Tax Debts Are Generally Not Considered When Awarding Contracts
paragraphs: Federal law implemented in the FAR, and GSA internal policies do not  require GSA contracting officers to examine tax debt when awarding  contracts, nor do they provide guidance as to what role, if any, tax debt  should play in determining whether prospective contractors meet the  general criteria of responsible contractors. Also, due to a statutory  restriction on disclosure of taxpayer information, even if tax debts  specifically were to be considered in the awarding of contracts, no  coordinated or independent mechanism exists for contracting officers to  obtain complete information on contractors that have unpaid tax debt.  Therefore, GSA does not screen contractors for tax debts prior to  awarding contracts to GSA-paid contractors and GSA interagency  contractors, and ultimately, contractors with unpaid federal taxes receive  contracts from the federal government.
subsections: section_title: Contractors with Federal Tax Debts Are Not Explicitly Prohibited from Doing Business with the Federal Government
paragraphs: Federal law implemented in the FAR and GSA internal policies do not  expressly prohibit a contractor with unpaid federal taxes from being  awarded contracts from the federal government. Although the FAR  requires that federal agencies only do business with responsible  contractors, it does not specifically require federal agencies to deny the  award of contracts to businesses and individuals that have unpaid taxes,  unless the contractor was specifically debarred or suspended by a  debarring official for specific actions, such as conviction for tax evasion.
As part of the contractor responsibility determination for prospective  contractors, the FAR requires contracting officers to determine whether a  prospective contractor meets several specified standards, including  adequate financial resources and a satisfactory record of integrity and  business ethics. However, the FAR does not require contracting officers to  consider tax debt in making this determination. Similarly, GSA policies in  implementing the FAR do not provide any additional guidance to GSA  contracting officers on whether or how tax debts should be considered  when making a determination of financial responsibility. According to  GSA officials, contracting officers may consider delinquent tax debts as  part of their overall determination of a prospective contractor’s financial  capability; however, the focus of such evaluation is on determining  whether the contractor has the financial capability to deliver the products  and services. Thus, there is no expectation that the contracting officer will  consider tax compliance when evaluating whether companies have the  integrity or ethics to perform the contract. In addition, according to GSA  officials, the determination for financial capability of the contract is only  applicable when awarding new contracts. Thus, if the contractor does not  pay its tax debts after the contract award, no consideration of this will be  made by GSA contracting officers for the duration of the contract or at the  subsequent exercise of any options to extend, which for certain GSA  Supply Schedule contracts can last up to 20 years.
The FAR specifies that unless compelling reasons exist, agencies are  prohibited from soliciting offers from, or awarding contracts to,  contractors that are debarred, suspended, or proposed for debarment for  various reasons, including tax evasion. Conviction for tax evasion is cited  as one of the causes for debarment, while commission, i.e., indictment, for  tax evasion is cited as a cause for suspension. However, the deliberate  failure to remit taxes, in particular payroll taxes, while a felony offense,  will likely not result in a company being debarred or suspended unless the  contractor was indicted or convicted of the crime. During our work, we  found that none of the contractors described in this testimony, nor the 97  contractors we reported in our previous work, have been charged with tax  evasion, despite having abusive and potentially criminal activities related  to the tax system.
section_title: Restrictions on Tax Data Hamper Making Contractor Responsibility Determinations
paragraphs: Current law restricts contracting officers’ access to tax debt information  unless reported by prospective contractors themselves or disclosed in  public records. Consequently, contracting officers do not have ready  access to information on unpaid tax debts to assist in making contractor  responsibility determinations with respect to financial capability, ethics,  and integrity.
Contracting officers do not have a coordinated and independent  mechanism to obtain accurate tax debt information on contractors that  abuse the tax system. Federal law does not permit IRS to disclose  taxpayer information, including tax debts. Thus, unless the taxpayer  provides consent, certain tax debt information can only be discovered  from public records when IRS files a federal tax lien against the property  of a tax debtor. However, contracting officers are not required to obtain  credit reports, which provides public record information, and when credit  reports are obtained, GSA contracting officers generally focus on the  contractor’s credit score and not necessarily any liens or other public  information. In addition, public record information is limited because IRS  does not file tax liens on all tax debtors, and, while IRS has a central  repository of tax liens, contracting officers do not have access to that  information. Further, the listing of a federal tax lien in the credit reports of  businesses or individuals may not be a reliable indicator of a contractor’s  tax indebtedness because of deficiencies in IRS’s internal controls that  have resulted in IRS not always releasing tax liens from property when the  tax debt has been satisfied.
Unless reported by prospective contractors themselves, contracting  officers face significant difficulties obtaining or verifying tax compliance  information on prospective contractors. For example, in one contractor  file we reviewed, a GSA official did inquire about a federal tax lien with a  prospective contractor. The prospective contractor provided  documentation to GSA demonstrating the satisfaction of the tax liability  covered by that lien. However, because the GSA official could not obtain  information from the IRS on tax debts, this official was not aware that the  contractor had other unresolved tax debts unrelated to this particular tax  lien.
section_title: GSA Contractors Not Required to Undergo Further Determination of Responsibility or Background Investigation
paragraphs: GSA interagency contractors are not only approved to do business with  GSA, but with all federal agencies. The FAR does not require agencies that  use contracts awarded by other agencies to perform additional  background or other investigation to validate the awarding agencies’  determination that the contractors are responsible. Agency officials at the  four agencies at which we inquired—the departments of Justice, State, and  Veterans Affairs, and the National Aeronautics and Space  Administration— generally stated that they did not perform additional  background or other investigations when using contractors selected for  interagency contracts. These officials informed us that they had assumed  GSA performed all the screening necessary to ensure that the contractors  were responsible contracting sources. Consequently, when GSA awards  interagency contracts to contractors with tax debt, contractors with tax  debts will be given an opportunity to do business with other federal  agencies for the duration of the GSA contract.
section_title: Contractors with Tax Debts Have Unfair Cost Advantage in Contract Competition
paragraphs: GSA contractors with tax debts have an unfair advantage in costs when  competing with contractors that pay their taxes. This is particularly true  for wage-based industries that provide relatively basic types of goods and  services, such as security and moving services. The most egregious abuse,  not remitting employee payroll taxes, saved these companies over 15  percent of the employee’s wages. Clearly, contractors that do not pay their  taxes do not bear the same costs that tax compliant contractors have  when competing on contracts. As a result, when in direct competition for  homogenous types of goods and services in wage-based businesses, these  contractors could offer prices for their goods and services that are lower  than their tax compliant competitors. Our investigations showed that some  GSA contractors that did not fully pay their payroll taxes were issued task  orders based solely on price over competing contractors that did not have  any tax debts. The following provides information on these cases.
Case 1: A GSA Schedule contractor was competitively awarded a task  order from the GSA schedule in the late 1990s to provide temporary  personnel services over another GSA contractor that was compliant with  its taxes. The task order award was based solely on the hourly cost of the  temporary employee. At the time, the contractor had owed taxes for at  least 10 years. This contractor had a history of incurring payroll taxes on  one company, then upon being assessed a trust fund recovery penalty on  that company but making little or no payments, closing that company and  starting another. The owner later renewed the contract under a new  company name and Taxpayer Identification Number.
Case 2: A GSA Schedule contractor was issued two competitive task  orders for services related to moving office furniture and equipment. On  both task orders, the contractor’s offer for services was significantly less  than three competing offers on the first order and two competing offers on  the second order. The contractor owed about $700,000 in unpaid taxes  (mostly payroll taxes) while its competitors did not owe any unpaid taxes.  Because the contractor did not pay its payroll taxes, a significant cost in a  wage-based business, the contractor’s cost structure provided the  contractor more flexibility in setting its price in the competition for federal  contracts.
section_title: Concluding Comments
paragraphs: There is widespread concern today about contractor fraud and related  ethics problems in federal government contracting. However, except for  contractors charged with or convicted of tax evasion, no laws or policies  exist today that prevent GSA contractors with abusive and potentially  criminal activity related to the federal tax system from being awarded  contracts and doing business with federal agencies. Aside from any  general concerns about the federal government doing business with  contractors that do not pay their taxes, allowing these contractors to do  business with the federal government while not paying their taxes could  create an unfair competitive advantage for these contractors. In essence,  the current contract award process fails to encourage contractors to pay  these taxes. This causes a disincentive to contractors to pay their fair  share of taxes, and could lead to further erosion in compliance with the  nation’s tax system.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) determine the magnitude of tax debts owed by  GSA contractors; (2) identify examples of GSA contractors that have tax  debts and are also engaged in potentially abusive, fraudulent, or criminal  activities; and (3) determine whether GSA screens contractors for tax  debts and criminal activities prior to awarding contracts and at the  exercise of any government contract options.
To identify the magnitude of unpaid taxes owed by GSA contractors, we  first identified the federal contractors that were either GSA interagency  contractors or that were paid by GSA. To identify GSA-paid contractors,  we obtained from the Department of the Treasury’s Financial Management  Service (FMS) the Payments, Claims, and Enhanced Reconciliation  (PACER) database containing all Automated Clearing House (ACH) and  check payments made by FMS on behalf of GSA to federal contractors  during fiscal year 2004 and the first 9 months of fiscal year 2005. To  identify contractors screened by GSA’s Federal Supply Service (FSS), we  obtained and analyzed GSA data on Multiple Award Schedule (MAS)  contracts and other FSS award contracts as recorded in the Federal  Supply Service Automated Supply System (FSS-19). To identify  contractors screened by GSA’s Public Buildings Service (PBS), we  obtained and analyzed GSA data from its Pegasys and FPDS-NG systems.  To identify contractors screened by GSA’s Federal Technology Service, we  obtained and analyzed GSA data from its Pegasys system.
To identify GSA contractors with unpaid federal taxes, we obtained and  analyzed the Internal Revenue Service (IRS) unpaid assessment data as of  June 30, 2005. We matched the GSA screened and/or paid contractor  records to the IRS unpaid assessment data using the taxpayer  identification number (TIN) field. We also matched data obtained from  competing bidders (those who were not awarded the task order) to the  IRS assessment database using the TIN field to determine whether they  owed tax debt. To avoid overestimating the amount owed by contractors  with unpaid tax debts and to capture only significant tax debts, we  excluded from our analysis tax debts and payments meeting specific  criteria to establish a minimum threshold in the amount of tax debt and in  the amount of payments to be considered when determining whether a tax  debt is significant. The criteria we used to exclude tax debts are as  follows:  tax debts that IRS classified as compliance assessments or memo accounts  for financial reporting,  tax debts from calendar year 2005 tax periods, and    contractors with total unpaid taxes of $100 or less.
The criteria above were used to exclude tax debts that might be under  dispute or generally duplicative or invalid, and tax debts that are recently  incurred. Specifically, compliance assessments or memo accounts were  excluded because these taxes have neither been agreed to by the  taxpayers nor affirmed by the court, or these taxes could be invalid or  duplicative of other taxes already reported. We excluded tax debts from  calendar year 2005 tax periods to eliminate tax debt that may involve  matters that are routinely resolved between the taxpayer and IRS, with the  taxes paid or abated within a short period. We further excluded tax debts  of $100 or less because they are insignificant for the purpose of  determining the extent of taxes owed by GSA contractors.
To identify indications of abuse or potentially criminal activity, we  selected 25 GSA contractors for a detailed audit and investigation. The 25  contractors were chosen using a non-representative selection approach  based on our judgment, data mining, and a number of other criteria.  Specifically, we narrowed the 25 contractors with unpaid taxes based on  the amount of unpaid taxes, number of unpaid tax periods, amount of  payments reported by GSA and FMS, indications that owner(s) might be  involved in multiple companies with tax debts, and selection of  contractors doing business with a variety of federal agencies.
We obtained copies of automated tax transcripts and other tax records  (for example, revenue officer’s notes) from IRS as of June 30, 2005, and  reviewed these records to exclude contractors that had recently paid off  their unpaid tax balances and considered other factors before reducing the  number of businesses to 25 case studies. We performed additional  searches of criminal, financial, and public records. In cases where record  searches and IRS tax transcripts indicate that the owners or officers of a  business are involved in other related entities that have unpaid federal  taxes, we also reviewed the related entities and the owner(s) or officer(s),  in addition to the original business we identified. For the selected 25  cases, our investigators also contacted some contractors, performed  interviews, and reviewed contract files to determine the extent of price  competition and to identify bidders on competitively awarded contracts.
To determine the extent to which contracting officers are to consider tax  debts or other criminal activities, we examined the Federal Acquisition  Regulation (FAR) and GSA policies and procedures for conducting  responsibility determinations on prospective contractors, including  specific guidance on responsibility determinations and periodic reviews  focusing on the quality of contract awards. We discussed acquisition  policies and procedures used to award contracts with officials from the  Office of Chief Acquisition, FSS, FTS, and PBS. As part of these  discussions, we asked whether contracting officers specifically consider  tax debts or perform background investigations to determine whether a  prospective contractor is a responsible source before the contract is  awarded. We also discussed with GSA officials whether any review is  performed by the contracting officer at the option to extend the contract.  Additionally, we interviewed an official from GSA’s Kansas City Credit and  Finance Center to determine how the center makes financial  determination recommendations and the role, if any, that tax debts have  on that recommendation.
To obtain an understanding of what steps other federal agencies take to  screen GSA supply schedule contractors for tax debts or other criminal  activities, we interviewed procurement agency officials at selected civilian  agencies (including the National Aeronautics and Space Administration  and the departments of Justice, State, and Veterans Affairs). We selected  these agencies based on a number of criteria, including national security  concerns and amount of payments to contractors, especially those with  tax debts. As part of these discussions, we determined the level of reliance  agencies placed on GSA’s contractor qualification determinations in  awarding contracts, even for sensitive contracts such as security, to  contractors that have been approved by GSA as responsible sources.
We conducted our audit work from June 2005 through January 2006 in  accordance with U.S. generally accepted government auditing standards,  and we performed our investigative work in accordance with standards  prescribed by the President’s Council on Integrity and Efficiency.
subsections: section_title: Data Reliability Assessment
paragraphs: For the IRS unpaid assessments data, we relied on the work we performed  during our annual audits of IRS’s financial statements. While our financial  statement audits have identified some data reliability problems associated  with the coding of some of the fields in IRS’s tax records, including errors  and delays in recording taxpayer information and payments, we  determined that the data was sufficiently reliable to address this report’s  objectives. Our financial audit procedures, including the reconciliation of  the value of unpaid taxes recorded in IRS’s masterfile to IRS’s general  ledger, identified no material differences.
For Payments, Claims, and Enhanced Reconciliation (PACER) database,  we interviewed FMS officials responsible for the database and reviewed  documentation provided by FMS supporting quality reviews on its  databases. In addition, we performed electronic testing of specific data  elements in the database that we used to perform our work.
To help ensure reliability of GSA-provided data, we interviewed GSA  officials concerning the reliability of the data provided to us. In addition,  we performed electronic testing of specific data elements in the databases  that we used to perform our work and performed other procedures to  ensure the completeness of the contract data provided by GSA. We also  reviewed the results of the GSA Inspector General’s audit of the system’s  internal controls completed in support of GSA’s fiscal year 2004  consolidated and combined financial statements.
Based on our discussions with agency officials, review of agency  documents, and our own testing, we concluded that the data elements  used for this testimony were sufficiently reliable for our purposes.
section_title: Appendix II: Background
paragraphs: As the federal government’s principal business agent, General Services  Administration’s (GSA) activities and programs are diverse and have  governmentwide implications. Through its supply schedules and  governmentwide acquisition contracts, GSA arranges for federal agencies  to purchase billions of dollars of goods and services directly from private  vendors. In addition, its telecommunication and computer services and  real estate activities involve huge sums of money and extensive interaction  with the private sector.
GSA provides goods and services and develops policy through a network  of 11 regional offices and a central office in Washington, D.C. GSA’s  programs are generally run by its three service components—Federal  Supply Service (FSS), Federal Technology Service (FTS), and Public  Buildings Service (PBS).
FSS assists federal agencies in acquiring a full range of products— including over 4 million commonly used commercial items, ranging from  furniture, computers, tools, equipment, and motor vehicles. FSS also  supports agencies in acquiring services, such as professional consulting,  travel, transportation, and property management. FSS has followed a self- service business model, using contracts, called supply schedule contracts,  that are designed to be flexible, simple to use, and consistent with  commercial buying practices. FSS negotiates master contracts with  vendors, seeking discounts off commercial list prices that are at least as  favorable as the discounts offered to those vendors’ most favored  customers. Federal agencies can then use these supply schedule contracts  to issue task orders from which goods and services are acquired.
FTS provides customers with telecommunications products and  services—voice, data, and video—and a full range of IT products and  services. Unlike FSS, FTS has followed a full-service business model,  providing assisted procurement services to help agencies define and fill  their IT and telecommunications requirements. FTS is a major user of the  FSS supply schedule contracts as well as a range of contract vehicles FTS  and other federal agencies have awarded—commonly known as  governmentwide acquisition contracts.
PBS is the primary property manager for the federal government, utilizing  government buildings and privately owned leased facilities. In order to  meet the office space needs for federal agencies, GSA hires and manages  private sector professionals, such as architects, engineers, and contractors  to design, renovate, and construct federal buildings. In addition, GSA  leases space in cities and small towns when leasing is the practical answer  to meeting federal space needs.
From a financing standpoint, GSA is unusual among federal agencies in  that most of its funding does not come from direct appropriations from  Congress. Instead, GSA’s funding comes from fees GSA charges agencies  for the goods and services provided and the rents from its buildings. As  such, GSA must encourage other agencies to acquire goods and services  from the contracts GSA has awarded to help cover its operating costs. In  fiscal year 2004, GSA reported revenues of approximately $20 billion to  cover the costs of its operations.
section_title: Appendix III: Contractors with Unpaid Taxes
paragraphs: Table 1 in the main portion of this testimony provides data on 10 detailed  case studies. Table 2 shows the remaining case studies that we audited  and investigated. As with the 10 cases discussed in the body of this  testimony, we also found substantial abuse or potentially criminal activity  related to the federal tax system during our review of these 15 case  studies. The case studies involving businesses with employees primarily  involved unpaid payroll taxes. Several of the companies negotiated an  installment or repayment agreement with the Internal Revenue Service  (IRS) but subsequently defaulted on that agreement.