[Senate Hearing 109-189]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-189
 
                CIVILIAN 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

                             FIRST SESSION

                               __________

                             JUNE 16, 2005

                               __________



       Printed for the use of the Committee on Homeland Security
                        and Governmental Affairs


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                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
   Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                      Trina D. Tyrer, Chief Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
TOM COBURN, Oklahoma                 DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island      THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                  C. Jay Jennings, Senior Investigator
        Elise J. Bean, Minority Staff Director and Chief Counsel
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coleman..............................................     1
    Senator Levin................................................     5
    Senator Collins..............................................    10
    Senator Akaka................................................    11

                               WITNESSES
                        Thursday, June 16, 2005

Gregory D. Kutz, Managing Director, Forensic Audits and Special 
  Investigations, U.S. Government Accountability Office, 
  accompanied by Steven J. Sebastian, Director, Financial 
  Management and Assurance, U.S. Government Accountability 
  Office; and John J. Ryan, Assistant Director, Forensic Audits 
  and Special Investigations, U.S. Government Accountability 
  Office.........................................................    14
Hon. Mark W. Everson, Commissioner, Internal Revenue Service, 
  U.S. Department of the Treasury................................    30
Richard L. Gregg, Commissioner, Financial Management Service, 
  U.S. Department of the Treasury................................    32

                     Alphabetical List of Witnesses

Everson, Hon. Mark W.:
    Testimony....................................................    30
    Prepared statement with attachments..........................    76
Gregg, Richard L.:
    Testimony....................................................    32
    Prepared statement...........................................    91
Kutz, Gregory D.:
    Testimony....................................................    14
    Prepared statement...........................................    47
Ryan, John J.:
    Testimony....................................................    14
    Prepared statement...........................................    47
Sebastian, Steven J.:
    Testimony....................................................    14
    Prepared statement...........................................    47

                                EXHIBITS

 1. GThe Federal Payment Levy Program Does Not Screen All 
  Contractor Payments, chart prepared by the Majority Staff of 
  the Permanent Subcommittee on Investigations...................    96
 2. GU.S. Government Accountability Office (GAO) Report to 
  Congressional Requesters, FINANCIAL MANAGEMENT--Thousands of 
  Civilian Agency Contractors Abuse the Federal Tax System With 
  Little Consequence, June 2005, GAO-05-637......................    97
 3. GFederal Contractor Tax Compliance Task Force Report, 
  September 2004.................................................   186
 4. GResponses to supplemental questions for the record submitted 
  to Gregory D. Kutz, Managing Director, Forensic Audit and 
  Special Investigations and Steven J. Sebastian, Director, 
  Financial Management and Assurance, Government Accountability 
  Office.........................................................   211
 5. GResponses to supplemental questions for the record submitted 
  to The Honorable Mark Everson, Commissioner, Internal Revenue 
  Service, Department of the Treasury............................   224
 6. GResponses to supplemental questions for the record submitted 
  to Richard L. Gregg, Commissioner, Financial Management 
  Service, Department of the Treasury............................   234


 CIVILIAN CONTRACTORS WHO CHEAT ON THEIR TAXES AND WHAT SHOULD BE DONE 
                                ABOUT IT

                              ----------                              


                        THURSDAY, JUNE 16, 2005

                                     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 9:34 a.m., in 
room 563, Dirksen Senate Office Building, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coleman, Collins, Levin, and Akaka.
    Staff Present: Raymond V. Shepherd, III, Staff Director and 
Chief Counsel; C. Jay Jennings, Senior Investigator; Mary D. 
Robertson, Chief Clerk; Mark Greenblatt, Counsel; Steven 
Groves, Counsel; Mark Nelson, Counsel; Brian White, 
Professional Staff Member; Katherine Russell, Detailee (FBI); 
Richard Fahy, Detailee (ICE); Caitlin Foley, Intern; Corey 
Bakken, Intern; Elise J. Bean, Staff Director/Chief Counsel to 
the Minority; Eric J. Diamant, Detailee, GAO; John Lavinsky, 
Intern; Audrey Soffer, Intern; Alec Rogers (Senator Collins); 
Richard Kessler and Robert Westerbrook (Senator Akaka).

              OPENING STATEMENT OF SENATOR COLEMAN

    Senator Coleman. This hearing of the Permanent Subcommittee 
on Investigations is called to order. Good morning. Good 
morning to Chairman Collins. It is great to be with you and 
Ranking Member Levin. Welcome to today's hearing.
    This hearing is about tax cheats, not your everyday tax 
delinquents but rather Federal contractors who do not pay their 
fair share of taxes even though they receive billions of 
dollars from American taxpayers each year. The Subcommittee's 
efforts, in concert with the hard work of the Government 
Accountability Office (GAO), have revealed that 33,000 Federal 
contractors at civilian agencies owe back taxes amounting to a 
whooping $3.3 billion. Some of these delinquent contractors 
provide crucial services to some of our most critical agencies, 
such as the Department of Justice and the Department of 
Homeland Security.
    To get a sense of the problem, let us review a handful of 
egregious cases. A contractor for the Justice Department was 
paid more than $700,000 this year, even though it owes more 
than $2 million in back taxes. Over the last few years, as the 
company refused to pay its proper share of taxes, it withdrew 
literally millions of dollars from its bank accounts.
    A contractor that provides security guard services to the 
Department of Homeland Security owes more than $400,000 in 
unpaid taxes. In addition to the company's tax debt, the owners 
repeatedly failed to file individual income taxes and diverted 
the employees' payroll taxes to a foreign bank account to build 
a house overseas. Despite that, the Federal Government paid 
this company more than $200,000 last year.
    A health care company that provides services to the 
Departments of Veterans' Affairs and Health and Human Services 
was paid more than $300,000 from the Federal Government this 
year alone. That company owes more than $18 million in back 
taxes. While the company was cheating the American taxpayers, 
the owner of the company brought multi-million dollar 
properties and a fleet of luxury cars.
    These are just a handful of the 33,000 government 
contractors that failed to play by the rules. Our hearing today 
will show just how widespread the problem is. We will also 
examine the considerable obstacles that prevent the government 
from collecting back taxes from Federal contractors.
    But first, it would be helpful to review how we got here. 
Last year, this Subcommittee with the GAO uncovered disturbing 
evidence that the Defense Department had 27,000 contractors who 
had $3 billion in unpaid taxes. To make matters worse, GAO 
determined that the government's program to collect unpaid 
taxes from Federal contractors, which is called the Federal 
Payment Levy Program, simply wasn't working. The Federal 
Payment Levy Program should have collected more than $100 
million from these contractors. Unfortunately, instead of the 
$100 million it should have collected, it obtained a paltry 
$680,000.
    In February of last year, I requested the IRS, Financial 
Management Service, Department of Defense, and other affected 
agencies to establish the Federal Contractor Tax Compliance Tax 
Force, which would identify and resolve problems that 
frustrated the Federal Payment Levy Program. I am pleased to 
report that as a direct result of the tax force's efforts, tax 
levy collections from defense contractors have increased 
dramatically.
    For instance, in all of 2003, back taxes recovered from 
defense contractors amounted to a mere $680,000. In the first 7 
months of this year, however, that number has risen to more 
than $11.5 million. At that rate, the government will recover 
$17.2 million in unpaid taxes by the end of 2005. That is an 
increase of more than 2,500 percent in just 2 years.
    One of the principal problems we identified was that many 
Federal contractors provided false Taxpayer Identification 
Numbers when they register with the government. To remedy this 
problem, Senator Levin and I, and other interested Senators, 
introduced the Central Contractor Registry Act to ensure that 
Federal contractors' Taxpayer Identification Numbers would be 
validated by the IRS.
    In light of the problems found with defense contractors, we 
asked GAO to determine if similar problems also existed in 
other Federal departments and agencies. In response to our 
request, GAO has conducted an extensive analysis and prepared 
an alarming report, which we are releasing today. As I 
mentioned earlier, GAO's report reveals that 33,000 civilian 
contractors who receive billions of dollars from the U.S. 
Government in contract payments each year currently owe $3.3 
billion in unpaid taxes. Even worse, most of these contractors 
withheld payroll taxes in trust for their employees and then 
failed to pay those taxes to the Internal Revenue Service. As a 
result, they cheated not only the American people, but their 
own employees, as well.
    Some of these contractors fraudulently used the withheld 
taxes for business or personal use. GAO investigators found 
contractors who bought luxury cars, multi-million-dollar 
properties, and vacation homes even though they owed hundreds 
of thousands of dollars in unpaid taxes.
    One significant problem is Section 6103 of the Internal 
Revenue Code, which is designed to promote tax compliance by 
protecting honest taxpayers from having their names and other 
personal information disclosed. That privacy provision has been 
turned on its head and covers tax cheats who do not file their 
returns or do not pay their taxes. These tax cheats act with 
impunity because Section 6103 prevents the IRS from disclosing 
their identities. As a result, Federal contract officers cannot 
determine if a contractor owes taxes before signing a contract.
    Even the President of the United States is not immune from 
contracting with a tax cheat. In one case examined by the GAO, 
the Executive Office of the President contracted with a 
medical, dental, and hospital equipment company that owes 
nearly $2 million in unpaid taxes. In 2004, the company was 
paid over $900,000. While the Financial Management Service 
collected $6,000 in unpaid tax from some of these payments, it 
was not screening all such payments and, therefore, missed the 
opportunity to collect an additional $133,000 from this 
company.
    This is but one of the 50 worst examples that GAO 
identified in their investigation. Many of these documents 
demonstrate a continuing pattern of fraud and abuse in which 
some contractors use every available means to delay or avoid 
paying their taxes. In fact, 27 of the 50 cases GAO 
investigated demonstrated a pattern of avoidance.
    For example, over a 20-year period, one contractor has 
repeatedly not paid taxes and accumulated tax debt of more than 
$900,000. He declared bankruptcy and reopened his business 
under a new name. In 2004, the Federal Government paid this 
delinquent contractor more than $1 million.
    In another case, a building maintenance company that owes 
nearly $1 million in unpaid tax, entered into an installment 
agreement with the IRS and then defaulted on that agreement. 
The company then made the IRS an offer in compromise to settle 
the tax debt. IRS rejected the offer and this company has 
avoided any tax levy for more than 5 years.
    In another case, the IRS entered into an installment 
agreement with a court reporting service with the Department of 
Justice who owes over $400,000 in unpaid tax. Last year, the 
company paid a mere $2,000 pursuant to the agreement. At that 
rate, I think the tax debt will be paid off in about 200 years.
    Other examples that GAO identified involve potential fraud 
that included an armed guard service company that has contracts 
with the Department of Justice and the Environmental Protection 
Agency and owes nearly $400,000 in unpaid taxes. In 2004, the 
company was paid about $500,000. The owner of this company is 
under indictment for embezzlement and money laundering.
    A doctor who works for the Veterans' Administration owes 
nearly $700,000 in unpaid taxes and was paid over $180,000 in 
2004. The doctor's payments should have been levied to collect 
$27,000. However, none of the payments were levied.
    A building maintenance services company that has numerous 
contracts with Federal agencies, including the Department of 
Treasury, owes over $700,000 in unpaid taxes. The company was 
paid over $4 million in 2004. Nearly $100,000 was offset for 
its unpaid taxes. However, they should have been levied for 
$630,000.
    Under these circumstances, we must bar certain companies 
and individuals from receiving Federal contracts. When 
individuals or companies demonstrate flagrant disregard for the 
tax system through a pattern of continued and repeated tax 
abuse, it is appropriate to publish their names and bar their 
receipt of Federal contracts. GAO's report that is being 
released today found serious problems in the contractor payment 
system that permit these abuses to continue.
    For instance, GAO found that the Financial Management 
Service (FMS), which makes payments to contractors for the 
Federal Government, does not check all contractor payments to 
determine if taxes are owed. In addition, contractor payments 
that should be checked have inaccurate or incomplete 
information and cannot be matched to the Internal Revenue 
Service's list of delinquent taxpayers. FMS failed to 
adequately update agency location codes and ensure that 
agencies submitted payment documentation that was complete and 
valid. As a result, the FMS did not match these payments and 
irrevocably lost the opportunity to collect an additional $50 
million in back taxes.
    FMS is the lead agency for the Federal Payment Levy 
Program. FMS should not hide behind the mantra that FMS is 
simply the paying agent for the Federal Government and must 
rubber stamp Federal agencies' payments. This position 
completely abdicates FMS's true leadership and managerial 
responsibilities for the program. I am concerned that FMS has 
placed the payment of contractors ahead of recognized 
accounting principles that require complete and accurate 
documentation.
    Let me be clear. The system in place requires FMS to 
identify tax cheats and levy their payments. The contracting 
agency and GSA have no ability to identify the tax cheats or to 
bar them from doing business with the government. When FMS 
fails to do its job, the system fails, and the system and FMS 
are failing today.
    As the government's paying agency, FMS has clear 
responsibility for ensuring adherence to basic requirements 
that must be met before making disbursements. I fully expect 
Commissioner Gregg and FMS to aggressively resolve the 
shortcomings identified by GAO.
    FMS must assure that contractors are screened up front and 
pay their taxes. FMS must be sure that agency documentation is 
complete before disbursements are made and must regularly 
update agency location codes. FMS must take the lead on 
requiring civilian agencies and departments to register their 
contractors in the Central Contract Registry, as required by 
the Federal Acquisition Regulations and directed by the Office 
of Management and Budget. Without this proper exercise of 
responsibility, billions of taxpayer dollars will continue to 
be paid to delinquent contractors without being levied. This is 
simply not acceptable.
    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 
civilian departments and agencies. Last year, their hard work 
resulted in the identification of 27,000 Department of Defense 
(DOD) contractors who owe $3 billion in unpaid taxes, including 
47 contractors that had flagrantly abused the tax system.
    On the second panel, we will hear from the IRS and FMS 
concerning actions they have taken or plan to take to ensure 
that civilian contractors pay the taxes they owe. 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 and that the Commissioners of IRS and FMS have agreed to 
continue the work of the task force.
    A lengthy statement, but a lot of information here, and I 
appreciate the indulgence of my colleagues as I went through 
that.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Mr. Chairman, thank you, first of all, for 
your leadership on this issue. It has been critically important 
in the progress that we have made. You and your staff and our 
staffs have worked very closely together on this and we are 
making some progress, but as you pointed out, we have got a 
long way to go, but without your leadership, we wouldn't have 
gotten to where we are.
    The current annual tax gap in this country is about $300 
billion, and that $300 billion gap is the difference between 
the taxes that businesses, organizations, and individuals owe 
the Federal Government and what they have 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 
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 $300 billion tax gap, government 
contractors who get paid with taxpayer dollars while at the 
same time failing to pay their taxes.
    In a report released today, the GAO describes 33,000 
civilian contractors who have dodged their tax obligations and 
have accumulated tax debts to Uncle Sam totaling at least $3.3 
billion. In a related report released last year, GAO found 
27,000 DOD contractors with accumulated tax debts totalling $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 is simply mind-boggling that this is allowed to 
continue.
    Tax dodging by any Federal contractor is unfair, not only 
to the honest taxpayers left to make up the difference, but it 
is also unfair to honest companies that have to compete against 
the tax dodgers that aren't paying their fair share.
    The main responsibility here has got to be with FMS, as our 
Chairman has said. There should be a red flag on any contract 
where a company owes back taxes, and there should be monies 
withheld from any payments on that contract until those back 
taxes are paid.
    There are some tax dodgers who simply should not receive 
contracts to begin with, since tax debts should be paid before 
more contracts are awarded or, at a minimum, until arrangements 
are made to pay the back taxes.
    GAO tells us that about $1.2 billion, or 37 percent of the 
unpaid taxes owed by the civilian contractors involve payroll 
taxes. Now, what that means is that contractors fail to send to 
the IRS sums withheld from employees' wages for Federal, Social 
Security, and Medicare taxes. The failure to send those payroll 
taxes to the IRS is more than a debt that is owed to the 
Federal Government. It is a crime, since payroll funds withheld 
from employees' wages are held in trust, and it is illegal for 
companies not to send those funds to the government.
    Another $1.5 billion, or 40 percent of the total, involve 
unpaid corporate income taxes.
    All of the $3.3 billion are unpaid taxes which a court has 
determined or the taxpayer has admitted are owed to the 
government. The taxes at issue here are not disputed amounts, 
in other words.
    The GAO also took a closer look at 50 of the contractors 
with unpaid taxes and found egregious examples of companies 
dodging taxes, sometimes for years, and in some cases spending 
money meant for payroll taxes on luxuries for themselves, such 
as expensive homes or cars. Despite those abuses, those 
contractors kept getting contracts and payments on those 
contracts using taxpayers' dollars.
    The Chairman has identified a number of specific cases, and 
I am not going to repeat those, but they are part of my entire 
statement which will be made part of the record, Mr. Chairman, 
with your order.
    Senator Coleman. Without objection.
    [The prepared statement of Senator Levin follows:]

                  PREPARED STATEMENT OF SENATOR LEVIN

    The current annual tax gap in this country is about $300 billion. 
That $300 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 makeup 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 $300 billion tax gap--government contractors who get paid with 
taxpayer dollars while, at the same time, failing to pay their taxes. 
In a report released today, GAO describes 33,000 civilian contractors 
who have dodged their tax obligations and accumulated tax debts to 
Uncle Sam totaling at least $3.3 billion. In a related report released 
last year, GAO found 27,000 DOD contractors with accumulated tax debts 
totaling $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 unfair--not only to the 
honest taxpayers left to make up the difference, but it's also unfair 
to the honest companies that have to compete against the tax dodgers 
that aren't paying their fair share.
    The main responsibility here has got to be with FMS, as our 
Chairman has said. There should be a red flag on any contract where a 
company owes back taxes and there should be monies withheld from any 
payments on these contracts until those back taxes are paid. Some 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 pay the back taxes.
    GAO tells us that about $1.2 billion, or 37% of the unpaid taxes 
owed by civilian contractors, involve payroll taxes. What that means is 
that contractors failed to send to the IRS sums withheld from 
employees' wages for federal, Social Security, and Medicare taxes. The 
failure to send those payroll taxes to the IRS is more than a debt owed 
to the federal government--it is a crime, since payroll funds withheld 
from employees' wages are held in trust, and it is illegal for 
companies not to send those funds to the government. Another $1.5 
billion, or 40% of the total, involve unpaid corporate income taxes. 
All of the $3.3 billion are unpaid taxes which a court has determined 
or the taxpayer has admitted are owed to the government. The taxes at 
issue here are not disputed amounts, in other words.
    GAO also took a closer look at 50 of the contractors with unpaid 
taxes and found egregious examples of companies dodging taxes, 
sometimes for years, and, in some cases, spending money meant for 
payroll taxes on luxuries for themselves such as expensive homes or 
cars. Despite those abuses, those contractors kept getting contracts 
and payments on those contracts using taxpayer dollars. For example, 
one contractor owing $1 million in unpaid taxes was paid $1.5 million 
in FY2004 by the Department of Homeland Security and other federal 
agencies. Another contractor owing $900,000 had a 20-year history of 
opening a business, failing to remit payroll taxes to the IRS, closing 
the business, and then repeating the cycle. On and on, while continuing 
to get more government contracts.
    Tax chiseling by federal contractors is not a new story. 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. Last year, we 
increased the percentage that can be withheld from a contract payment 
to up to 100%.
    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.
    The Financial Management Service or FMS in the Treasury Department 
took until July 2000 to establish an automated tax levy program under a 
larger Treasury Offset Program that handles offsets from government 
payments for a variety of reasons. It took another two years--until the 
end of 2002--for DOD to follow suit.
    GAO estimates that, last year, the tax levy program for civilian 
contractors ought to have collected a minimum of $50 million, but FMS 
actually collected only about $16 million, or just over 30% of the 
projected total. The GAO report spells out a number of reasons why this 
collection rate is so low.
    First, out of the $250 billion in contractor payments last year, 
the GAO determined that $100 billion was made in ways that made it 
virtually impossible for a payment to result in a computer match and 
tax levy. About $66 billion of those payments were made with payment 
forms filled out by various federal agencies that left out key 
information. The FMS shouldn't accept those payment forms, but they 
have so far. Key information is left out by agencies; nonetheless, 
checks are sent. That information which is left out includes the 
contractor's name or taxpayer identification number, which you have to 
have for a computer match. Another $10 billion was paid on government-
issued credit cards held by federal agencies, which means that the 
payments were directed to the bank administering the credit cards and 
the bank then paid the contractors, instead of direct payments to the 
relevant contractors. Since the agency payments did not name the 
contractors, they couldn't be matched against the IRS tax data. Still 
another $25 billion of payments were made through wire transfers that 
also were directed to banks instead of contractors, and so did not 
trigger any computer matches with IRS data. Each of these problems can 
and should be addressed to increase the chances for computer matches 
identifying contractors with unpaid taxes. It should not be difficult 
to simply red flag the contractor to say that no payment should be made 
to that contractor, through a bank or otherwise, without the deduction 
for back taxes being made.
    Second, of the $150 billion in contractor payments that were 
subjected to the tax levy computer matches, the GAO found that too many 
failed to result in an actual levy because the IRS had failed to mail a 
30-day notice to the relevant contractors warning them of an upcoming 
levy. After last year's hearing, to address the tax levy notice 
problem, the IRS initiated a new approach with DOD contractors. Instead 
of waiting for the first contract payment to mail a tax levy notice, 
the IRS instead evaluated the tax status of contractors as soon as they 
were awarded a contract and immediately sent tax levy notices to those 
contractors with unpaid taxes. This new approach apparently resulted in 
the mailing of 6,000 accelerated notices. That's a bit of progress, 
although we have to wait to see the extent to which this new approach 
solves the notice problem and it needs to be applied to civilian 
contractors as well.
    Other approaches to the notice problem should also be considered. 
One possibility that should be explored is combining tax levy notices 
with the tax delinquency notices that are already mailed to contractors 
with unpaid taxes. Another possibility would be to amend the Prompt 
Payment Act to allow FMS and DOD to delay contract payments to tax 
delinquent contractors until the 30-day tax levy notice period expires 
and a levy can properly be placed on their payments. Another approach 
is to include a contract provision in the original contract that simply 
says if you owe back taxes, you waive your right to a levy notice. 
Alternatively, we can modify the law to say that notices of levies are 
not required on those contracts where back taxes are owed.
    Federal contractors should not be allowed to get away with cheating 
on their taxes. Dodging taxes is never acceptable, but it is 
particularly galling when engaged in by folks who make their living 
from taxpayer dollars.
    It is clear that we can make major progress in the tax levy program 
and ensure that deadbeat contractors start paying their tax debts. That 
progress has already begun. After the Subcommittee's hearing last year 
on DOD contractors, the IRS, DOD and FMS formed a joint task force to 
improve the DOD tax levy program. In the span of about a year, using 
improvements initiated by this task force, DOD has increased its 
collections from $1 million in 2003, to a likely total in 2005 of $17 
million. While $17 million is still far short of the $100 million that 
GAO thinks DOD ought to be collecting each year, and even farther from 
the $3 billion owed by DOD contractors, it is a start.
    The improvements made in the DOD tax levy program include the 
following:

      FMS and DOD have automated the tax levy computer matching 
system for 18 out of DOD's 20 payment systems, up from just 1 system in 
2004. The final 2 DOD payment systems are scheduled for automation 
during 2005.
      FMS is now conducting tax levy computer matches twice per 
week instead of once per week, resulting in more computer matches.
      The IRS has cleaned up the tax levy database by removing 
$27 billion of uncollectable tax debt.
      The IRS has eliminated a policy that delayed tax levies 
on federal contractors for one year or until an IRS revenue agent was 
assigned to the relevant case.
      The IRS is now checking the tax status of DOD contractors 
as soon as a contract is awarded, instead of waiting for the first 
contract payment, so that tax levy notices can be mailed earlier.
      In October, DOD will begin requiring everyone who files 
an application with the Central Contractor Register to become a 
potential bidder on federal contracts to consent to having their 
taxpayer identification numbers validated by the IRS. The end result 
will be a more accurate and complete database of contractor TINs.

    Each of these steps is moving us toward a more effective tax levy 
program, but a lot more needs to be done, including ensuring timely tax 
levy notices, barring payments to contractors using agency forms that 
lack key information needed for tax levy computer matches, and barring 
contractors with unpaid taxes from getting paid via government-issued 
credit cards or wire transfers. Even better would be putting a hold on 
contract awards to contractors owing an undisputed amount of unpaid 
taxes.
    Last year, Senator Coleman and I introduced legislation to improve 
the tax levy program by strengthening taxpayer identification numbers. 
We reintroduced this bill in this Congress as S. 679. In the meantime, 
the IRS, DOD and FMS have voluntarily taken some of the steps called 
for in that bill, which we appreciate. Senator Coleman and I are now 
planning to introduce a more comprehensive bill to address the broader 
spectrum of problems that impede the tax levy program.
    Most federal contractors provide valuable goods or services, and do 
so while paying their taxes. Other contractors, however, take payment 
in taxpayer dollars, while dodging the taxes owed to Uncle Sam. 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 dodger's hand out of the taxpayer's wallet.
    I commend Senator Coleman for his leadership on this important 
issue. I look forward to the testimony today.

    Senator Levin. Tax chiseling by Federal contractors is not 
a new story. As our Chairman pointed out, 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 taxpayers dollars from being paid to a tax deadbeat unless 
a portion was withheld off the top to reduce that person's tax 
debt. Last year, we increased the percentage that could be 
withheld from a contract payment to up to 100 percent.
    The Taxpayer Relief Act sought to apply a common sense 
principle to government operation, to offset the taxpayers' 
dollars sent to people who haven't paid their tax bill by 
directing a percentage of the total be withheld to reduce their 
tax debt. That common sense principle isn't always easy to 
apply when the government has hundreds of thousands of 
contractors on the books, but it must be applied, and the 
computer capability to apply that principle is here. This may 
have been difficult without computers, but this should not be 
so difficult now that we have computers.
    There are a number of reasons why the collection rate is 
low, and I am just going to spend a minute or two on some of 
these reasons. We have made progress, as the Chairman has 
pointed out, but we still have a low collection rate from these 
contractors.
    First, out of the $250 billion in contractor payments last 
year, the GAO determined that $100 billion was made in ways 
that made it virtually impossible for a payment to result in a 
computer match and a tax levy. About $66 billion of those 
payments were made with payment forms filled out by various 
Federal agencies that left out key information. Well, the FMS 
shouldn't accept those payment forms, but they so far have. Key 
information left out by agencies. Nonetheless, checks are sent. 
That information which is left out includes the contractor's 
name or a Taxpayer Identification Number, which you have to 
have for a computer match.
    Another $10 billion was paid on government-issued credit 
cards held by Federal agencies, which means that the payments 
were directed to the bank administering the credit cards and 
the bank then paid the contractors, instead of the agencies' 
making direct payments to relevant contractors. It should not 
be difficult to simply red flag a contract and to say that no 
payment should be made on that contract to a bank or otherwise, 
or wire transferred, or in any other way, without the deduction 
for back taxes being made.
    Now, of the $150 billion in contractor payments that were 
subjected to tax levy computer matches, the GAO found that too 
many failed to result in an actual levy, because the IRS had 
failed to mail a 30-day notice to the relevant contractors 
warning them of an upcoming levy. That should be easily 
correctable with a contract provision in the original contract 
that simply says, if you owe back taxes, you waive your right 
to contest a levy, or we will modify the law if necessary to 
say that notices of levies are not required in those contracts 
where back taxes are owing.
    So progress has been made, but we have got a long way to 
go, and Federal contractors should not be allowed to get away 
with cheating on their taxes. Dodging taxes is never 
acceptable, but it is particularly galling when engaged in by 
folks who make their living from taxpayer dollars.
    Mr. Chairman, again, I thank you for your leadership. You 
have been doing critically important work, and I commend you 
for it.
    Senator Coleman. Thank you, Senator Levin, and my thanks to 
you and your staff for the strong partnership. It has been a 
very bipartisan effort and hopefully we are getting some 
results.
    Chairman Collins.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. Thank you, Mr. Chairman. Let me join 
Senator Levin in commending you for your leadership on this 
issue, but let me also commend Senator Levin. I know the two of 
you have worked very closely on this important investigation.
    I am pleased to join you today for the second hearing on 
government contractors who cheat on their taxes. Federal 
contractors have an obligation to operate according to the 
highest ethical standards. That is not just my opinion, that is 
the law. The law requires bidders for Federal contractors to be 
found to be responsible. I don't understand how a contractor 
who is delinquent on Federal taxes could meet the standard of 
being a responsible bidder.
    The Subcommittee's investigation reveals a shocking lack of 
such ethical standards. At our first hearing last year, we 
learned that civilian contractors doing business with the 
Department of Defense owed an estimated $3 billion in back 
taxes at the end of fiscal year 2002. At that time, the GAO 
advised us that this problem of tax delinquency and 
noncompliance may not be confined to the Department of Defense, 
and indeed, further investigation demonstrates clearly that it 
is not.
    The estimated tax delinquency of contractors doing business 
with other government agencies, including key departments such 
as the Department of Homeland Security and NASA, may well be in 
excess of $3.3 billion. Among the 50 civilian agency 
contractors investigated by the GAO for the report we will 
discuss today, all were found to have engaged in abusive or 
potentially criminal activity.
    I think it is important for us to emphasize that these tax 
delinquencies were not the result of legitimate hardship. They 
were the result of these contractors willfully deciding that 
the laws of our country do not apply to them. Rather than pay 
their fair share of taxes on income derived from the taxes of 
others, they chose instead to inflate their own salaries, to 
purchase multi-million-dollar properties, and in some cases to 
divert payroll taxes withheld from employees. In one egregious 
case, they diverted that money to an offshore bank to finance a 
luxury home overseas. And like Senator Levin, I find the cases 
where payroll taxes were not remitted to be particularly 
outrageous. That isn't even the contractors' money. That is 
money that belongs to the employees and it is just totally 
unacceptable that this is occurring.
    The case studies described in the GAO report do not merely 
tell a story of how a business from time to time can pull a 
fast one. In far too many cases, contractors pull fast ones 
repeatedly, chronically, and apparently without meaningful 
penalty.
    One example particularly stood out to me. That is the owner 
of a business that provides temporary workers which currently 
owes $900,000 in delinquent taxes. Through its investigation, 
GAO discovered that this contractor has a nearly 20-year 
history of closing businesses with tax debts, opening up new 
ones, and then incurring new tax debts. In other cases, the GAO 
found that some contractors with unpaid Federal taxes had been 
convicted of crimes, such as embezzlement and money laundering, 
and yet they still received government contracts.
    Mr. Chairman, a system that permits participation by such 
contractors is a system in failure. I think it is important 
that we focus not just on the levy system, which is after the 
fact to catch those who fall through the cracks. We have to 
correct this up front so that there is a review that prevents 
contractors from receiving Federal contracts in the first place 
if they are cheating on their taxes.
    I very much look forward to hearing our witnesses today. I 
would especially like to note that Greg Kutz is here today in 
his first appearance as head of the GAO's new Forensic Audit 
and Special Investigations Unit. Earlier this year, Senator 
Lieberman and I encouraged the Comptroller General to establish 
this new unit so that we could focus more on agency and 
financial management of high-risk areas. I believe that this 
new unit is going to greatly improve our oversight capacity and 
I am very pleased that Mr. Kutz has been chosen to lead it.
    So thank you again, Mr. Chairman, for your attention and 
commitment to this matter of such importance. We simply cannot 
allow contractors that get paid with taxpayer dollars to refuse 
to pay their fair of Federal taxes. Thank you.
    Senator Coleman. Thank you, Senator Collins. Senator Akaka.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I thank 
you, Chairman Coleman, for holding this hearing and for your 
continued commitment to closing the gap between what Federal 
contractors owe in taxes and what is collected by the Federal 
Government.
    As our budget deficit increases and the national debt 
grows, it is essential that the Federal Government does 
everything possible to collect what is due. And when we hear 
guesses of the amount that is due, it is amazing. No business 
could survive very long with billions of dollars in accounts 
receivable and little success in collecting them.
    Exactly how much is owed? According to the Government 
Accountability Office, $3.3 billion in unpaid taxes is owed by 
33,000 civilian contractors. What is staggering is that this 
amount is in addition to another 27,000 DOD contractors who owe 
an additional $3 billion. That is a total of $6.3 billion in 
Federal tax debt owed by Federal contractors.
    I am particularly disturbed that two-thirds of the 
outstanding tax debt is for failure to remit payroll taxes. 
This is not about businesses that run into financial hardship 
and don't have money to pay taxes. No. This is about employers 
who collect money from employees in trust, pocket the money, 
and then continue to profit from Federal contracts. This has 
been mentioned by the Chairman of our full Committee.
    In investigative case studies, GAO found patterns of abuse 
with some contractors. While honest Americans are paying their 
taxes, these tax cheats open a business, profit from Federal 
contracts, steal the payroll taxes, close the business, then 
start all over again. In the meantime, they have purchased 
luxury cars, commercial real estate, and in one case, even a 
professional sports team.
    The Financial Management Service of the Treasury Department 
bills itself as the Federal Government's money manager. FMS is 
responsible for disbursing payments for most Federal agencies. 
FMS is also responsible for collecting money owed to Federal 
agencies by offsetting various types of payments that pass 
through FMS, including payments to civilian contractors.
    Since 1996, FMS has administered the Treasury Offset 
Program (TOP), to collect delinquent non-tax debts owed to 
Federal agencies. FMS collects delinquent tax debt on behalf of 
the Internal Revenue Service through the Federal Payment Levy 
Program. Under the levy program, IRS sends tax debts to TOP for 
collection. Today, we will learn if FMS is living up to its 
responsibilities as the government's money manager.
    Under TOP, the names and Taxpayer Identification Numbers 
(TINs), of debtors in an FMS database are matched against the 
names and TINs of recipients of Federal payments. If there is a 
match, the Federal payment is reduced or offset to satisfy that 
debt.
    The questions we ask today are, why aren't there more 
matches in TOP, and why was only $16 million collected last 
year from contractor payments?
    According to GAO, there are various reasons that prevent 
matching: No name, no TIN, an invalid TIN, and lack of an 
agency location code, to name a few. GAO estimates that FMS 
could collect $50 million, or three times more than what is 
collected now, If FMS simply exercised greater oversight to 
ensure that these data fields are complete and accurate. It 
should be as simple as no TIN, no money.
    In March 2004, I asked GAO to expand its original review of 
unpaid Federal taxes by contractors to determine how much FMS 
is collecting from Federal contractor payments for unpaid State 
taxes. I thank Chairman Coleman and Ranking Member Levin for 
extending this courtesy to me. The Debt Collection Improvement 
Act of 1996 allows FMS to collect State tax debts from Federal 
payments to contractors. Before FMS can do so, a State must 
enter into a reciprocal agreement with FMS that would require 
the State to collect unpaid Federal tax debt from State 
payments.
    The Federal Government and the States have worked together 
to collect unpaid tax debts from State and Federal tax refunds. 
In 2004, for example, FMS collected $229,000 on behalf of my 
home State of Hawaii. But there has not been similar leadership 
efforts by FMS to collect State tax debts from Federal 
contractor payments.
    According to GAO, FMS said that no States expressed 
interest. However, the States that were contacted by GAO said 
they were unaware of this provision and are interested in 
pursuing such agreements.
    I am pleased that Mr. Gregg, the head of FMS, is here with 
us today. I encourage you, Mr. Gregg, to do whatever is 
necessary to make this happen. While this hearing is about how 
a Federal program is being used to collect tax debt, the larger 
goal is to ensure that those who receive the benefit of Federal 
contracts act as good corporate citizens.
    Let me state this. Federal contractors must be held 
accountable for their actions. This is why, for example, I 
introduced the Federal Contractor Extra-Territorial 
Jurisdiction for Human Trafficking Offenses Act of 2005 just 
this week. My bill, S. 1226, closes a loophole in Federal 
criminal law and allows the prosecution in U.S. court of 
Federal contractors who engage in human trafficking overseas. 
And so we are looking at Federal contractors.
    I look forward, Mr. Chairman, to the testimony of our 
witnesses on the tax issue, and Mr. Chairman, I thank you so 
much for what you are doing in this regard. Thank you.
    Senator Coleman. Senator Akaka, thank you. I want to thank 
you for your keen interest in this area and all the focus that 
you have put on it. It has been extraordinarily helpful and it 
is greatly appreciated.
    And I want to thank Chairman Collins for her work in 
establishing the Office of Forensic Audits and Special 
Investigations. I would say, and we are going to get a chance 
to hear from Mr. Kutz in a little bit, but to him and to Mr. 
Ryan and Mr. Sebastian, we do appreciate the work that you have 
done. We have fought to continue the relationship that this 
Committee has and Subcommittee has with you to identify fraud, 
waste, and abuse. So I want to thank the Chairman. We are 
already reaping dividends from the focus that has been 
provided.
    I would like to welcome our first panel to this important 
hearing. Gregory Kutz, Managing Director, Forensic Audits and 
Special Investigations, Government Accountability Office; Steve 
Sebastian, Director of Financial Management and Assurance Team 
at GAO; and finally, John Ryan, Assistant Director of the 
Office of Forensic Audits and Special Investigations at GAO.
    GAO is here to testify on our request for investigation of 
civilian agency contractors who are abusing the Federal tax 
system by 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.
    It is good to see you gentlemen here again. I appreciate 
your hard work that has resulted in the identification of tens 
of thousands of Federal contractors who owe billions of dollars 
in unpaid taxes. I also appreciate your efforts and look 
forward to hearing about Federal contractors at civilian 
agencies who are not paying their taxes, including the problems 
you have identified with regard to collecting unpaid taxes from 
them.
    Before we begin, pursuant to Rule 6, all witnesses before 
the Subcommittee are required to be sworn. At this time, I 
would ask you all to please stand and raise your right hand.
    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?
    Mr. Kutz. I do.
    Mr. Sebastian. I do.
    Mr. Ryan. I do.
    Senator Coleman. As you are well aware, gentlemen, having 
been here before, we will be using a timing system today. When 
the green light turns to amber, give yourself about another 
minute to finish up. Your full statements will be entered into 
the record in their entirety.
    We will begin with Mr. Kutz, then Mr. Sebastian will be 
presenting the GAO statement this morning, as I understand. 
Gentlemen, please proceed.

 TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
 ACCOUNTABILITY OFFICE; ACCOMPANIED BY STEVEN J. SEBASTIAN,\1\ 
 DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT 
ACCOUNTABILITY OFFICE; AND JOHN J. RYAN,\1\ ASSISTANT DIRECTOR, 
  FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. Kutz. Mr. Chairman, Members of the Subcommittee, and 
Chairman Collins, thank you for the opportunity to discuss 
contractors with tax problems.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kutz, Mr. Sebastian, and Mr. Ryan 
appears in the appendix on page 47.
---------------------------------------------------------------------------
    Last year, we testified that DOD contractors were abusing 
the Federal tax system with little or no consequence. At that 
hearing, you expressed concerns that this was a governmentwide 
problem. Unfortunately, our bottom line today is that thousands 
of civilian agency contractors are also abusing the tax system.
    Our testimony has two parts. First, I will discuss 
contractors that abuse the tax system, and second, my 
colleague, Mr. Sebastian, will discuss why these contractors 
face few consequences.
    First, we found that 33,000 civilian agency contractors had 
over $3 billion of unpaid Federal taxes.\2\ We investigated the 
activity of 50 of these contractors, including the owners, 
officers, and any related businesses. For all 50 case studies, 
we found abusive and potentially criminal activity related to 
the Federal tax system.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 2, GAO Report entitled FINANCIAL MANAGEMENT--
Thousands of Civilian Agency Contractors Abuse the Federal Tax System 
With Little Consequence, which appears in the Appendix on page 97.
---------------------------------------------------------------------------
    Forty-eight of these case study contractors, as you have 
all mentioned, had unpaid payroll taxes, which represent 
amounts withheld from employee wages for individual income 
taxes, Social Security, and Medicare. However, rather than 
fulfill their role as trustees of this money and forward it to 
the IRS, these contractors diverted the money for the use of 
their business or for personal gain. Regardless of the cause, 
willful failure to remit payroll taxes is a felony.
    While these companies were stealing millions of dollars 
from the government, as shown on the posterboard, our 
investigations found the owners spending money on their own 
professional sports team, gambling, million-dollar homes, a 
shopping mall, luxury automobiles, and a recreational vehicle 
worth hundreds of thousands of dollars. Diversion schemes 
included the transfer of money to a foreign bank account, 
inflated salaries for the owners and officers, and millions of 
dollars of cash withdrawals.
    Some of the owners were simply poor business managers. 
However, others clearly accumulated substantial personal wealth 
at the same time their companies failed to pay their taxes.
    The companies that we investigated were small to mid-sized 
and were closely held. Industries included health care, 
building maintenance, manufacturing, security, and a casino. 
Ironically, these potential felons are doing business with the 
Departments of Homeland Security and Justice.
    Senators, let me end by saying that there is something 
fundamentally wrong with this picture. If we can't trust these 
contractors to pay their taxes, then how can we trust them to 
guard our Federal buildings, to manufacture parts for the Space 
Shuttle, or to provide health care for our veterans? Instead of 
these owners and officers doing time, the government is paying 
them millions of dollars for their time.
    Mr. Sebastian will now discuss why little has been done to 
deal with abusive contractors.
    Senator Coleman. Thank you, Mr. Kutz. Mr. Sebastian.
    Mr. Sebastian. Thank you, Mr. Kutz.
    Mr. Chairman, Members of the Subcommittee, and Chairman 
Collins, Federal law presently does not prohibit contractors 
with unpaid taxes from receiving government contracts. However, 
tools exist to assist in collecting unpaid taxes from 
contractors, most notably the Federal Payment Levy Program.
    Unfortunately, despite some progress, substantial amounts 
of potential tax collections under the program go uncollected 
each year. We estimate that in fiscal year 2004, the Federal 
Government could have collected as much as $350 million in 
outstanding taxes from contractors had all tax debt owed by 
civilian agency contractors been eligible for levy action, and 
all contractor payments disbursed by Treasury's Financial 
Management Service been subject to a 15 percent levy.
    In contrast, as you noted, FMS collected just $16 million 
in outstanding taxes from these contractors. This gap between 
potential and actual collections, which we refer to as the levy 
collection gap, results from both exclusions of substantial tax 
debt from the program and a lack of proactive oversight and 
management. I want to briefly discuss both components.
    First, of $269 billion in outstanding Federal taxes, only 
$35 billion, or 13 percent, is eligible for immediate levy 
action. The posterboard provides a graphic illustration of 
this. As it shows, $71 billion of tax debt, or about 26 
percent, is excluded because of statutory restrictions, such as 
bankruptcy. Another $100 billion, or about 37 percent, is 
excluded by IRS policy restrictions, including what IRS refers 
to as hardship cases.
    Of the $98 billion that is forwarded to the levy program, 
only 30 percent is actually eligible for immediate levy action. 
The other 70 percent is not eligible until IRS's collection due 
process is completed, which can take months and sometimes 
years.
    Second, with respect to FMS's oversight and management of 
the levy program, FMS failed to subject to levy tens of 
billions of dollars in payments it disbursed to contractors in 
fiscal year 2004 due to control breakdowns. For example, FMS 
erroneously excluded $40 billion in payments related to 150 
agency pay stations from its debt collection database for 
matching with outstanding taxes. Nine billion of this was paid 
to contractors with outstanding tax debt.
    And FMS paid $17 billion to contractors where Taxpayer 
Identification Numbers, or TINs, were not contained on agency 
payment files or were obviously invalid, and it paid another $4 
billion where contractor names were not included on those pay 
files. Without a valid TIN and name to match against the tax 
debt, these payments could not be levied.
    While inaccurate and incomplete information provided by 
agencies contributed to some of these omissions, FMS, as the 
Nation's debt collector, has a responsibility to actively 
identify and resolve issues that adversely impact the 
effectiveness of the levy program. FMS policy decisions have 
also led to at least tens of billions of dollars in additional 
disbursements to contractors being excluded from potential 
levy.
    Specifically, FMS uses several methods to disburse funds, 
but only payments made through one method are included in the 
levy program. FMS excluded the other payment methods because 
their inclusion would require system and process changes. 
However, FMS performed no study to determine whether the 
benefits from additional tax collections would outweigh the 
costs associated with such processing and system changes. This 
is like flying blind. The lack of proactive oversight and 
management of the program has resulted in the Federal 
Government forfeiting its ability to collect at least $50 
million more in annual tax collections through the levy 
program.
    FMS faces other challenges. Increasingly, the government is 
using purchase cards to pay contractors, $10 billion in fiscal 
year 2004. Because payments are made to the banks that issue 
the cards and not the contractors, the government doesn't 
presently have a means to levy such payments.
    Additionally, FMS and IRS have yet to fully implement the 
American Jobs Creation Act provision that authorizes the 
government to levy up to 100 percent of contractor payments to 
collect outstanding tax debt.
    In conclusion, allowing contractors to do business with the 
government while not paying their taxes creates an unfair 
competitive advantage for them at the expense of the vast 
majority of Federal contractors that fulfill their tax 
obligations. The levy program has thus far failed to achieve 
its potential, primarily because substantial tax debt is 
excluded and because FMS, the Nation's debt collector, has not 
exercised effective and proactive oversight and management of 
the program. As a result, the government has missed 
opportunities to collect substantial amounts of tax debt.
    We believe prompt implementation of the recommendations 
contained in our report released today will result in tens of 
millions of dollars in annual tax collections.
    Mr. Chairman, this concludes our statement. We would be 
pleased to answer any questions you or other Members of the 
Subcommittee may have.
    Senator Coleman. Thank you, gentlemen, and again, we do 
appreciate the work that you have done.
    Mr. Sebastian, you indicated that Federal law doesn't stop 
contractors from receiving contract payments even if they are 
not paying their Federal taxes. Should there be, in your 
opinion, or any of you, should there be a debarment option for 
egregious and repeated conduct for individuals? I think both of 
my colleagues talked about cases over, in one case, a 20-year 
period. Should there be a debarment, do you believe? I am going 
to ask the next panel the same question.
    Mr. Sebastian. Mr. Kutz and I actually testified on this 
issue a number of years ago. A bill was introduced that would 
have, in fact, barred such tax delinquents from entering into 
contracts, as well as receiving loans, grants, etc. The bill 
was actually voted out of the House Government Reform Committee 
and then languished, quite frankly.
    Certainly it is a policy option that the Congress could 
consider. I would caution you, as we have cautioned in the 
past, that there are a host of issues associated with 
implementing such a barring provision, including ensuring that 
the information related to tax delinquents is accurate and that 
the IRS would be able to respond to an inquiry within a matter 
of hours as opposed to the days or weeks that it would 
presently take. There are other issues with respect to the 
contracting community, trying to expedite the negotiation of 
contracts as quickly as possible. All of those would have to be 
considered.
    Mr. Kutz may be able to add more to that.
    Senator Coleman. Mr. Kutz.
    Mr. Kutz. Well, I think it is the difference between a 
preventive and a detective control. The levy program is after 
the money has been stolen, basically, when it comes to payroll 
taxes, so you are trying to collect it after it is out the 
door, versus you are talking about more preventive controls. 
Once someone has stolen from us once, let us not do business 
with them, so it is a valid policy option.
    Senator Coleman. And I would be generous. Not once, five 
times, whatever it is. Chairman Collins raised that in her 
statement. It is one thing to act after the fact, but when you 
have patterns of abuse, not to have the ability to say, hey, 
this person is not a responsible contractor----
    Mr. Kutz. Right, and the patterns are years and decades in 
some cases.
    Senator Coleman. Let me ask, Commissioner Gregg from FMS, 
in his written statement, he says our effective management of 
the levy program is demonstrated by the fact that through the 
first 8 months of this fiscal year, FMS has collected more 
taxes, $126 million on behalf of the IRS, than in any previous 
year. I don't want to get agencies fighting with each other, 
but I would like an honest assessment. Do you feel that, as we 
sit here today, that FMS has had an effective levy management 
program?
    Mr. Sebastian. Let me take a shot at that, and then Mr. 
Kutz can add to it. I think the information contained in our 
report and included in our oral statement would indicate that 
we believe that FMS has exercised less than effective oversight 
and management of the program, as evidenced by such omissions 
as $40 billion in payments related to 150 agency pay stations.
    Senator Coleman. The chart on the board,\1\ one of the 
comments, I believe it was Mr. Sebastian, in your testimony, 
you talked about payments that are made that do not go through 
the Treasury Offset Program. In other words, as I understand 
it, what you have is FMS makes contractor payments. If they go 
through the Treasury Offset Program, they can be screened for 
levies, whether people have tax obligations. The money then can 
be levied, 15 percent to the IRS, and the system is working.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1 which appears in the Appendix on page 96.
---------------------------------------------------------------------------
    But apparently there are a series of payments--Fedwire, 
purchase card, I believe you mentioned--that do not go through 
the Treasury Offset Program, that they go directly to the 
contractor, or in the purchase card, to the bank which then 
goes to the contractor. Can you explain to me why there isn't a 
Treasury Offset Program for these kinds of payments and what it 
would take to have a levy in place?
    Mr. Sebastian. With respect to the first three on the 
chart, the Fedwire, the automated clearinghouse, CTX, and Type 
A payments, the issue really comes down to a couple of things, 
primarily, the structure of the payment files that are sent 
forward. They currently are not compatible with the setup 
within the TOP database to affect a matching. So that would 
require some programming changes.
    Senator Coleman. So I want to correct myself. There is not 
a legal impediment. There is not a statutory impediment. This 
is a program change that could correct the situation, is that 
fair?
    Mr. Sebastian. That is correct. The added complexity with 
respect to the Fedwire payments, of which there were over $190 
billion disbursed in 2004, is that these are same-day payments. 
They are actually deposited into the payee's account within the 
same day. They are high dollar value, low-volume payments. Of 
that $190 billion, neither we nor FMS were ever able to get a 
handle on how much of that represented payments to contractors.
    Senator Coleman. Again, what would it take to get a better 
sense of whether there are some levy obligations here? Are 
these programming changes? Are these software changes?
    Mr. Sebastian. Programming and processing changes within 
FMS.
    Senator Coleman. And I suspect there is a cost-benefit 
analysis that one has to do here to say, what is the cost of 
the change and what is the benefit? Have you been able to do a 
cost-benefit analysis, even in a cursory fashion, to determine 
whether, in fact, if we make some programmatic changes to 
ensure that these payments go through the levy program it will 
be worth the price or the cost of the software changes?
    Mr. Sebastian. We were able to come up with estimates of 
the amount of contractor payments that were being sent through 
the CTX and the Type A. It was about $26 billion in contractor 
payments. And when we matched those payments against the 
outstanding tax debt within IRS, we were able to come up with 
some significant dollar values that will be added to the levy. 
That was actually a component of the $50 million that we 
computed FMS could collect above and beyond the $16 million it 
had collected.
    Senator Coleman. So again, in your judgment, there would be 
the cost-benefit analysis of what it would take to change the 
system versus the monies that would be collected, it would be 
the interest of the government to do the programmatic changes 
so that we could collect the levies and make sure a tax 
obligation is being taken care of, is that correct?
    Mr. Sebastian. There is clearly some benefit with respect 
to the additional revenue streams. What we don't have is 
information on what it would actually cost to facilitate such 
programming and processing changes.
    Mr. Kutz. One more thing I would add on the purchase card 
is that the payments to the banks actually would go through 
TOP, like Bank of America and CitiBank. But the payments to the 
contractors don't. The banks actually make the payments to the 
contractors.
    Senator Coleman. Mr. Kutz, let me ask you, we talked about 
having 50 cases here which I know you have labeled abusive and 
criminal, willful failure to remit payroll taxes, a felony. We 
had 47 cases, and I am going to ask the Commissioner about this 
when I have a chance to question him. Do we have a sense of 
whether there has been any criminal action or any criminal 
cases filed either in the 47 that you did with the Defense 
Department or even in these 50, any sense of whether that is 
being done?
    Mr. Kutz. Yes. I will let Special Agent Ryan follow up, but 
we don't see a lot of evidence that there has been any 
prosecutions or indictments at this point. There is some 
activity, but most of the activity seems to be recent. But it 
is interesting to look at some of the information we got back 
about some of the contractors that said that they were defunct 
or bankrupt. I think that kind of misses the point here in that 
the actual owners are the ones we are going after.
    So to the extent that there is a shell company--if we had 
stopped our investigation when we saw that there was a defunct 
company, we would have missed a lot of what we were reporting 
to you today. So there is something behind the defunct 
companies, because someone steals the money, shuts down the 
company, and moves on.
    Senator Coleman. And they are able to restart another 
company and do business with the government, aren't they?
    Mr. Kutz. Absolutely.
    Senator Coleman. I mean, that is one of the frustrations 
that we have here. Agent Ryan.
    Mr. Ryan. I would just like to add, Senator, that in the 
cases that we looked at, of the 47 in the first report, shortly 
after your hearing, the IRS did come over. They did review our 
work papers and indicated that there were 10, 12, or 14 cases 
that needed further investigation.
    After that, we really didn't hear from them until about 2 
months ago, when this hearing was announced, that we started to 
get some inquiry from the field from the agents that had the 
cases assigned to them. I don't believe that there was any 
action taken because the agents were never contacted by U.S. 
Attorneys' Offices, our work papers were never requested under 
discovery, and there were no subpoenas issued for potential 
witnesses.
    So with that, we are here today, like Mr. Kutz just said. I 
don't believe that at this stage of the game there has been a 
lot of action on those cases.
    Senator Coleman. I understand the sense that we should be 
looking at administrative remedies before criminal remedies. I 
was a prosecutor for many years, and if we can settle 
something, you don't have to file criminal charges.
    My concern is that in cases of clearly the most willful, 
the most abusive cases, if you don't use that authority, I 
think it sends the wrong signal. Again, if we could clearly 
identify cases of repetitive conduct, of clear fraud, of money 
going into personal pockets at the expense of both the employee 
and the government. So that is the frustration I have with what 
I am seeing and the lack of action that we are seeing in regard 
to these cases.
    Mr. Kutz. We concur. Certainly, we would believe that some 
prosecutions, possibly high-profile ones, in some of these 
cases would send a message out to people that this is not 
proper behavior.
    Senator Coleman. Thank you. Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    I want to go through the process a little bit with you. The 
IRS sends to FMS the list of people or companies that owe 
taxes, and that is done on a regular basis, I believe?
    Mr. Sebastian. Weekly.
    Senator Levin. Weekly. So FMS knows the names of companies 
that owe the government taxes.
    Mr. Sebastian. It has a control name sent over by the IRS 
along with the Taxpayer Identification Numbers, four 
characters, alpha characters.
    Senator Levin. It just has the four? OK. That list, then, 
when an agency enters into a contract, presumably could be 
compared by the FMS with the contract if they had that four-
digit identifier, is that correct? FMS could make that match 
before any payments are sent out to a contractor.
    Mr. Sebastian. If they had a listing of prospective 
contractors or contractors with that information.
    Senator Levin. Either one. If they got a list from an 
agency, we are about to enter into contracts with these 50 
people. Are any of those on your list, FMS? Could FMS tell the 
agency--are they allowed under current law--there is a notice 
of tax delinquency that has been sent, or they owe back taxes? 
Is that permitted under current law?
    Mr. Sebastian. Presently, I do not believe so.
    Senator Levin. Is there any reason why we shouldn't amend 
the law so that the FMS can be informed by the IRS of the list 
that was sent to them of contracts about to be entered into 
that X number are on the IRS delinquency list? Is there any 
reason that you can think of why we shouldn't allow FMS to be 
given that information by IRS?
    Mr. Sebastian. It is certainly a valid policy option for 
you all to consider.
    Senator Levin. We will ask IRS as to whether they would 
have a problem with that.
    So now you have a situation where payments are about to be 
sent out by the FMS to presumably either a company or a bank 
which is going to send money to that company. At that point, 
they make a match. For reasons I don't understand, the current 
law doesn't allow them to make the match before the contract is 
entered into, but we will go there with the next panel.
    Now you have payments going out. A significant number of 
those payments go to people who owe money on their taxes 
because the FMS doesn't have the TIN number, is that correct?
    Mr. Sebastian. That is correct.
    Senator Levin. And that is a decision which FMS has made, 
right? I mean, they get a form from an agency. If it doesn't 
have the number on it, they could tell the agency, you give us 
that number. They could do that under current law, right?
    Mr. Sebastian. Yes, they could. In fact, agencies are 
required under law to provide TINs.
    Senator Levin. But they don't do it at times, right?
    Mr. Sebastian. That is correct.
    Senator Levin. And the FMS up until now has not said, you 
give us a completed form or we are not going to pursue it.
    Mr. Sebastian. That is correct. They have not rejected 
payment requests for that reason.
    Senator Levin. That seems to me to be a fairly simple step. 
Otherwise, there is not going to be a match made in a lot of 
cases, because there is no number to match. The TIN number 
isn't on the form for the payment.
    Mr. Sebastian. Now, there are some exceptions with respect 
to the TIN requirement. For example, payments to a foreign 
company being made by a Federal agency would be exempt. But 
what would be required is a certification of those exempted 
entities from the TIN requirement.
    Senator Levin. There could be a note made of that.
    Mr. Sebastian. That is correct.
    Senator Levin. Now you have also got a situation--and 
sometimes these forms come in with no name of the contractor on 
it, either, is that correct?
    Mr. Sebastian. That is correct.
    Senator Levin. And FMS has the power under current law to 
reject the form from the agency. You give us a complete form, 
TIN number, name, or else we are not going to accept it.
    Mr. Sebastian. I am not aware of anything in law that would 
preclude them from doing that.
    Senator Levin. All right. Now, we also allow under current 
law the payments to be made to a bank, in effect, instead of 
directly to the contractor, is that correct?
    Mr. Sebastian. That is correct.
    Senator Levin. Is there any reason that you know of that we 
couldn't say that payments--assuming we can get the list from 
the IRS to the FMS of folks that are in arrears on taxes--that 
you cannot have that indirect payment made? You must, if you 
are on a delinquent list, have that payment go directly to you. 
The computer will not accept a check going to a bank, or a wire 
transfer, or use of another credit card, in effect, if that 
delinquent company is on the delinquency list. Is there any 
reason why we can't provide for that?
    Mr. Kutz. I would say the purchase--if you are talking 
about the purchase card----
    Senator Levin. Both.
    Mr. Kutz [continuing]. That is a little harder problem 
because the banks are involved and it is merchant banks and so 
it is a little more complex situation, which I think they have 
just begun to look at. So they may have looked at it before, 
but that is a harder one to do than the FMS process you have 
just described.
    Senator Levin. Well, explain to me why, if FMS has a list 
of companies that are deliquent--the law changes, and the IRS 
can give them the list of companies that are delinquent in 
their taxes--we couldn't simply say to the computer, you cannot 
send a payment owing by the government to that contractor that 
is on that list unless it is made directly to the contractor, 
which then means we can hold off the 15 percent or more for 
back taxes.
    Mr. Kutz. I believe you would have to share that 
information with the banks that are making the payments to the 
contractors in that case.
    Senator Levin. You would have to share the----
    Mr. Kutz. The information on tax problems with the actual 
bank who is making the payment to the contractor, because the 
contractor gets paid in a matter of days----
    Senator Levin. No, but I am not even allowing the payment 
to go to the bank. I am stopping the payment from going to the 
bank if there is a contractor that owes money.
    Mr. Kutz. It is just like your credit card, though. There 
is maybe a thousand vendors on one credit card bill. So if you 
stop the payment, you would be stopping the payments to 
everyone, not just the one. What happens--it is just like your 
credit card.
    Senator Levin. Isn't it FMS that is making the payment to 
the bank?
    Mr. Kutz. Yes.
    Mr. Sebastian. Correct.
    Senator Levin. On a contract.
    Mr. Kutz. Well, on a purchase card which is--again, it is 
just like your credit card statement. You might get a bill with 
200 charges on it that are going to go to contractors, so the 
bank is making the payment to the contractors.
    Senator Levin. I am missing something here, though, and I 
want to try to understand it. If a contractor is saying, send 
the payment owing me to a bank, that has to happen, right? 
Instead of sending it to me, send it to a bank. Apply it to a 
purchase card.
    Mr. Kutz. Yes. The bank gets paid and the bank pays the 
contractor, correct.
    Senator Levin. But that is at the request of the 
contractor, is it not?
    Mr. Sebastian. I think what you may be referring to is 
actually preventing a vendor with delinquent taxes from being 
able to get payment through a purchase card----
    Senator Levin. Exactly.
    Mr. Sebastian [continuing]. Stopping it before they 
actually get the purchase card.
    Senator Levin. Right. You just say that the vendor is on 
that list, which should exist, that FMS has of delinquent 
vendors, that payment can not go in directly. It cannot go to a 
bank. It must go directly to the vendor and then it is subject 
to the 15 percent.
    Mr. Kutz. It would seem possibly that the other agencies 
might need to be involved so that they would deny those 
contractors from using the purchase card, from being paid 
through a purchase card.
    Senator Levin. My time is up. There is a contractor out 
there, right?
    Mr. Kutz. Yes.
    Senator Levin. The money is owed that contractor.
    Mr. Kutz. Yes.
    Senator Levin. And the contractor must say, don't send it 
to me. Apply it to a purchase card. Isn't that what happens? 
Isn't that the decision of the contractor?
    Mr. Ryan. Senator, I think we are talking about apples and 
oranges here. I understand what you are saying. That would be 
more in line with using the card as a payment method in regard 
to a contract that is set up, as Senator Collins and Senator 
Coleman mentioned earlier, about identifying a contractor in 
the early stages before the contract is awarded. When the 
credit card is being used as a payment method, there can be a 
hold put on those payments.
    Senator Levin. That is what I am saying.
    Mr. Ryan. And there is also another method----
    Senator Levin. Albeit it at a slightly later stage. Their 
question was, why even issue the contract, which is a perfectly 
important question as far as I am concerned. But I am saying, 
after a contract has been issued, if that person is on the list 
that FMS has of delinquent contractors, why then can we not 
tell the computer--you may not apply the payment owing the 
contractor to the purchase card. You must send it directly to 
the contractor. We are not going to accept that request to send 
it to the bank.
    Mr. Ryan. I think that is an issue that is probably going 
to be addressed later on in regards to what you are talking 
about. But there is also another system called Power Track that 
is being used in the government in which there is a certain 
financial institution that is hired to handle the payment 
process. When receipt and acceptance comes in to pay on these 
bills, they would absolutely have the ability under your 
scenario to know who that contractor is before they would make 
the payment to that contractor. So the intermediary would be 
whoever the government would contract to handle that payment.
    Senator Levin. I don't know why FMS can't simply notify its 
computer that we have a list from IRS. These are the delinquent 
companies. You do not send a check to anybody except that 
company. It doesn't get wire transferred. It doesn't go through 
a credit card. It has to go to that company, and then that is 
subject to the withholding for back taxes. I don't know why the 
FMS can't get that list from IRS and then cannot tell its 
computer, only direct payments subject to withholding for back 
taxes.
    That is my question. I am not, perhaps too obviously, a 
high-tech guy, but I will see if my staff can explain this to 
me.
    Senator Coleman. Chairman Collins.
    Chairman Collins. I guess I shouldn't send you a Blackberry 
message? [Laughter.]
    Mr. Kutz, I want to go back to the issue that I raised in 
my opening statement. We have talked about some important 
reforms that would help with this unacceptable situation. One 
is improving the levy system. The second one is to strengthen 
the Federal Acquisition Regulations to allow firms engaged in 
tax evasion to be debarred. That has been, I am told, a 
recommendation of the joint task force.
    But I am still fixated on what we could do on the front end 
to prevent businesses or individuals with serious tax 
delinquencies from receiving Federal contracts in the first 
place. It is fine to have systems to take care of those who 
slip through the cracks and get contracts despite evading 
taxes, but we really ought to have a system that allows us to 
screen out potential contractors who have serious tax 
delinquencies. Do you have any recommendations in that regard?
    Mr. Kutz. That was what Mr. Sebastian mentioned earlier 
with the legislation from 2000 on the House side that would 
have barred contractors from doing business, and the process 
would have been the contracting officers would have checked 
with the IRS to determine whether a company had severe tax 
delinquencies, and if they did, that would have barred them 
from getting that contract. And that was--the procurement 
community at that point in time fought that legislation with 
the streamlined acquisition problems. They didn't want to have 
contracting officers spending their time looking to see what 
kind of people we were doing business with, quite honestly.
    Chairman Collins. I remember that bill being mentioned in 
testimony last year when I brought up this same frustration 
that I have. But are there technical reasons why that couldn't 
be done? Would it slow the procurement process in a way that 
would be unacceptable, or do you see that as a practical way 
for the contracting official to do a check with IRS? Is this a 
practical solution?
    Mr. Kutz. With respect to IRS, and the Commissioner can 
probably talk about that further. There are a couple of issues: 
The timeliness of the response of IRS back to the contracting 
officers, and, of course, the issue of accuracy. We don't want 
to prevent taxpaying contractors from doing business with the 
government. So we were concerned when we testified on that 
legislation in 2000 of timeliness and accuracy of data, and so 
with tax system modernization, I think that would be a question 
for the Commissioner. But aside from those things, it is an 
absolutely valid policy option. I think it is much easier to 
explain to the American taxpayer something like that than just 
relying on this levy program after they have already stolen the 
money.
    Chairman Collins. I certainly agree. You have done work now 
looking at delinquent contractors in the area of defense 
contracts and now civilian agency contracts. Have you come 
across any evidence that contractors who are evading tax 
obligations are receiving Federal grants?
    Mr. Kutz. Yes. Several of our case studies were receiving 
Federal grants, which is another outrageous situation, that 
sometimes the grants were larger than the amount of taxes that 
they owed and there was nothing done about that. Special Agent 
Ryan can add further to the two cases, I believe.
    Chairman Collins. Mr. Ryan.
    Mr. Ryan. Senator, in the cases that we investigated, we 
found out that after we conducted the interviews that the 
corporations did, in fact, receive grants. Some of the grants 
were from the Department of Energy, and as Mr. Kutz said, the 
grants were larger than the taxes that were owed. And I am not 
quite sure, but I don't think that the grants were ever levied.
    Mr. Kutz. And I believe the other one was with the 
Department of Homeland Security.
    Chairman Collins. That was going to be my next question, 
because you mentioned in your testimony that you had looked at 
the Department of Homeland Security. The Chairman mentioned the 
case of security guards being provided by a contractor with a 
serious tax problem. Are you finding even examples of 
contractors who have committed crimes of integrity, such as 
embezzlement, who are doing business with sensitive agencies 
like the Department of Homeland Security? I know you found that 
with some defense contractors from your last study.
    Mr. Kutz. Yes, and I think three of our 50 had been 
convicted of those types of crimes and had those types of 
issues in their background. Also, drug issues were involved 
with some of these folks. So certainly, it is a bit disturbing 
to see that the people who we are talking about today are 
guarding our Federal buildings, and if we can't trust them 
again to pay their taxes, it is very difficult to explain how 
we can trust them to guard our buildings. How do we know if we 
are dealing with who we think we are dealing with?
    So that gets back to the front-end controls you are talking 
about, trying to determine who we are doing business with 
before we let a contract.
    Chairman Collins. Mr. Chairman, I would suggest that this 
is a whole new area that we should look into because it is 
outrageous that a contractor is receiving contracts if there is 
a serious tax delinquency. But if they are receiving grants, in 
some ways, I think that is even worse and we need to do some 
further work in this area.
    I want to switch to another issue that troubles me greatly 
and that is the competitiveness of a contractor who isn't 
paying his taxes, who may even be withholding his employees' 
payroll taxes. Doesn't that business have a competitive 
advantage in competing for a contract? He may well be able to 
offer a better price because he is cheating on his taxes.
    Mr. Kutz. That is absolutely true, yes. When you think 
about wage-based industries, which is most of what we looked at 
here, it is a 15.3 percent advantage on the wage base. In 
addition to that, we identified many of the contractors, as 
some of you have mentioned, that owed corporate taxes. And so 
if you are not paying your corporate taxes, you are not paying 
your payroll taxes, and then we had a number of the officers 
and owners who had hundreds of thousands of dollars of 
individual income taxes that they owed. So this all presents a 
very unfair situation for the vast majority, as Mr. Sebastian 
said, of government contractors who do pay their taxes.
    Chairman Collins. This is not only unfair to the taxpayers, 
it is unfair to the legitimate businesses who are trying to 
compete for Federal contracts.
    Just one final quick question. In testimony submitted for 
the record, Mr. Everson has indicated that the administration 
is proposing to incentivize FMS to levy payments by allowing 
them to keep part of the levied funds. It strikes me as an odd 
situation to have to provide an incentive to FMS to do what it 
is designed to do, but maybe I am missing something. Mr. 
Sebastian, what is your view on that?
    Mr. Sebastian. I guess my only reaction to that is with 
respect to the levying of payments or offsetting of payments 
for non-tax debt, it is my understanding that FMS does, in 
fact, get a small user fee related to any collections coming 
out of that process. So it is not unique in terms of the 
services FMS has provided to other agencies for non-tax debt.
    Chairman Collins. Mr. Kutz, do you have a comment on 
expanding that?
    Mr. Kutz. Well, they are the Nation's tax debt collector 
and other debt collector, so it is part of their 
responsibilities. I would say anything that can help make this 
better, I would support certainly, and if it takes that--I am 
not sure it should need that, but if, in fact, something like 
that helps better incentivize the system so that you can 
collect tens and hundreds of millions of dollars more, we are 
looking for results either way.
    Chairman Collins. I must say that it seems odd to me to 
give an incentive to FMS when their job is to levy such 
payments. But perhaps the system is so broken that we need to 
consider that.
    Thank you, Mr. Chairman.
    Senator Coleman. Thank you, Senator Collins. Senator Akaka.
    Senator Akaka. Thank you, Mr. Chairman.
    Mr. Kutz, in your written testimony, you testified that FMS 
has not taken proactive action to notify States that they can 
enter into reciprocal agreements with the Federal Government to 
collect each other's debts through offsetting contractor 
payments. How does that fit into your overall findings related 
to FMS's overall management and oversight of the Federal 
Payment Levy Program and would pursuing reciprocal agreements 
with the States be beneficial to both them and the Federal 
Government?
    Mr. Kutz. Yes, I believe it is consistent with our finding 
of ineffective management oversight and control, and you see 
the posterboard Senator Coleman had up there and you could just 
add that as another example of FMS not being proactive in their 
approach here, and certainly evidence to other programs that 
have been--agreements with States have resulted in hundreds of 
millions of dollars of collections. So it would seem that there 
is a mutually beneficial situation here for the Federal 
Government and States to pursue this alternative.
    Senator Akaka. Thank you. Mr. Kutz, you have testified that 
civilian contractors owe billions of dollars in unpaid taxes. 
Some of this amount is not available for matching in the TOP 
database for various reasons, including legal restrictions or 
policy decisions. Other debt is not matched against Federal 
contractor payments in the TOP database because of various 
issues relating to the quality of the payment records. Some of 
these limitations are outside of FMS's direct span of control.
    My question to you is what specific improvements could FMS 
make to the levy program without additional legal authority to 
increase collections?
    Mr. Kutz. I would just say, overall, most of this is a 
management issue from the FMS side that would not require much 
more legislation. It really is a management issue. I would let 
Mr. Sebastian expand on that.
    Mr. Sebastian. I think Mr. Kutz is absolutely correct. The 
$50 million in additional tax collections that we identified, 
and recognize that would not be complete because of our own 
limitations with respect to data, is all within the power of 
the FMS to change without any legal modifications.
    With respect to the extensive tax debt that does not go 
over to the TOP program, as we pointed out in our written 
statement, a good percentage of that, about $71 billion, 
currently is legally restricted from going forward to the TOP 
program. Bankruptcy is one scenario. Another scenario would be 
where the IRS has not completed the process of notifying the 
taxpayer with respect to the amount due and giving that 
taxpayer the opportunity to appeal the tax debt.
    Senator Akaka. Mr. Sebastian, during the review, your team 
discovered that most of the payment files from the State 
Department did not have valid contractor names.
    Mr. Sebastian. That is correct.
    Senator Akaka. In fact, over $3.8 billion in contractor 
payment files that you found which did not have valid 
contractor names, of that $3.2 billion was from the State 
Department alone.
    Mr. Sebastian. Yes.
    Senator Akaka. How difficult was it for your team to find 
this error and how hard was it for the problem to be fixed?
    Mr. Sebastian. Unfortunately, a cursory review of that file 
disclosed the fact that there were no names included. So it did 
not take sophisticated techniques to identify that problem.
    We notified FMS as well as the State Department of the 
issue. The State Department was able to ascertain that they had 
incorrectly been providing the wrong field on their payment 
file that was going forward to FMS, and they had actually been 
doing this since the 1980's. They were able to effect a change 
almost immediately. So those payments should now be coming 
forward with contractor names and will be subject to levy.
    Senator Akaka. Mr. Sebastian, as noted in the GAO 
testimony, there are various reasons that prevent a match in 
TOP between a tax debt and a payment. One such reason is an 
invalid agency location code. Your team found that $40 billion 
of last year's contractor payments were not even sent to TOP 
for potential matching against debt because FMS does not have a 
current agency location code list in TOP.
    Is it true that FMS has a list of invalid agency location 
codes in its disbursement system, and if so, what would it take 
for FMS to update the TOP database? Do you know if FMS has, in 
fact, updated the list after GAO told them about this problem?
    Mr. Sebastian. I think part of the issue goes back to the 
fact that when the Treasury Offset Program and then the Federal 
Payment Levy Program were developed, in designing the TOP 
database, at that point in time, FMS put together a complete 
inventory of all agency location codes. Those codes were then 
loaded within the TOP database to effect a match.
    The problem was that there was no consistent oversight 
where when new agencies, such as the Department of Homeland 
Security, came into being that generated additional agency 
locations or paying stations, the agency location codes 
associated with those were entered into TOP. It would be a 
fairly simple process to update that and then continuously 
monitor it as new agency paying stations cropped up.
    My understanding is that FMS is in the process of 
developing some appropriate oversight for that to make sure 
that the inventory is maintained. I don't know whether they 
have updated TOP for all of the 150 paying location codes we 
identified.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Senator Coleman. Thanks, Senator Akaka.
    Senator Levin, I know you have to leave, but I want to 
defer to you if you have any follow-up questions you want to 
ask.
    Senator Levin. I just had one additional question. I have a 
lot, but one I am going to ask the panel. Is there any reason 
why we should not require people who are getting Federal 
contracts to represent on their contract which they sign that 
there are no outstanding tax delinquency notices against them, 
or if there are, to list them, to make a representation to the 
government which would then, if false, be the basis of action 
against them under the criminal code? Is there any reason why 
we shouldn't put that right in the contract?
    Mr. Kutz. I am not aware of any.
    Senator Levin. Is it in the contract, as far as you know, 
right now?
    Mr. Kutz. Not that we are aware of.
    Senator Levin. I think that would be a fairly simple step 
to take. That becomes a criminal misrepresentation. I am not 
saying that they don't owe taxes. I mean, people can owe taxes 
and they can be in dispute or they can owe taxes which are not 
in dispute. It is not a crime to owe taxes. It is a crime to 
owe trust fund taxes, payroll taxes.
    Mr. Kutz. Right.
    Senator Levin. That is a crime. But it is not a crime to 
owe taxes to the Federal Government. But it is a crime to 
misrepresent to get a contract whether you owe taxes. It seems 
to me that would be a fairly effective mechanism to get some of 
this money that is owing to us. Thank you.
    Senator Coleman. Thank you, Senator Levin.
    If there are no follow-up questions, I will excuse this 
panel. Thank you, gentlemen, for your outstanding work.
    We will now call the second panel. I would like to welcome 
our final panel of witnesses for this morning's important 
hearing. We have with us the Hon. Mark Everson, Commissioner of 
the Internal Revenue Service, and Richard Gregg, the 
Commissioner of the Treasury Department's Financial Management 
Service.
    Mr. Everson, it is good to see you again. We always 
appreciate you coming before this Committee and appreciate the 
cooperation we have been getting from the Internal Revenue 
Service on the investigative matters we have pursued. As you 
remember, in February 2004, you testified before the 
Subcommittee regarding IRS's plans to make $28 billion in 
additional tax debt available to the Federal Payment Levy 
Program. I look forward to hearing the results of this action 
as well as the status and results from implementing the Federal 
Contractor Tax Compliance Task Force recommendations, which I 
commented on in my opening statement and have been very 
appreciative of the work that has been done there. I would also 
be interested in knowing of any further action that IRS can 
take to improve the effectiveness of the Federal Payment Levy 
Program.
    Mr. Gregg, I also want to welcome you back and look forward 
to hearing how you will work with us to identify the problems 
identified by the GAO in their latest report on tax delinquent 
civilian contractors and Federal-State reciprocal tax 
collection efforts.
    I also want to thank you both for your participation in the 
Federal Contractor Tax Compliance Task Force. The continuing 
success of that effort would not have been possible without 
your personal involvement and commitment. While I recognize 
that a task force is a team effort, there are members who 
provide vision and direction to the effort. In that respect, I 
would also like to recognize Pam Watson, Fred Schindler, and 
Julie Schwartz of the IRS, Dean Balamaci and Paul McVicker of 
the FMS, Lisa Romney, Matt McGinnis, and Martha Stearns of the 
Department of Defense for their exceptional dedication to 
achieving the goals of that task force.
    Again, I sincerely thank both of you for being with us at 
this morning's hearing. As you are aware, all witnesses, 
pursuant to Rule 6, are required to be sworn before the 
Subcommittee. At this point, I ask you to raise your right hand 
and ask, do you swear that the testimony you will give before 
the Subcommittee is the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Mr. Everson. I do.
    Mr. Gregg. I do.
    Senator Coleman. You again are familiar with the timing 
system here. When the green light turns to amber, you have 
about a minute to sum up and your entire written statement will 
appear in the record in its entirety. I would ask that you 
limit your testimony to no more than 10 minutes and we will do 
10-minute rounds for the panel.
    Commissioner Everson, you will go first, followed by 
Commissioner Gregg. After you have given your testimony, we 
will turn to questions. Commissioner Everson.

 TESTIMONY OF HON. MARK W. EVERSON,\1\ COMMISSIONER, INTERNAL 
        REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Everson. Mr. Chairman, Senator Akaka, thank you for 
inviting me here today. First, let me say that I appreciate 
your strong support for strengthening the integrity of the 
Nation's tax system through enhanced enforcement activities. 
This Subcommittee has done important investigative and 
oversight work in a number of areas, particularly abusive tax 
shelters. And I thank you for the support you have offered for 
the Administration's budget request for IRS enforcement 
activities.
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    \1\ The prepared statement of Mr. Everson with attachments appears 
in the appendix on page 76.
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    As to today's subject, I welcome your continued interest in 
tax compliance by Federal contractors. Vigorous enforcement of 
the tax law will help reduce the tax gap. Earlier this year, we 
announced that the gross tax gap, the difference between what 
taxpayers should pay and what they actually pay on a timely 
basis, exceeds $300 billion per year. Even after IRS 
enforcement recoveries and late payments, the tax gap is over a 
quarter-trillion dollars per year. That is inexcusable.
    Average Americans pay their taxes honestly and accurately. 
They have every right to be confident that when they do so, 
neighbors and competitors are doing the same. To bolster public 
confidence in the tax system, the IRS has ramped up its audits 
of individuals, particularly high-income taxpayers and 
corporations. As you know, we are focusing more on abusive 
shelters and conducting more criminal investigations. We have 
collected over $3.7 billion in the settlement initiative for 
Son of Boss, a particularly egregious shelter of which this 
Subcommittee is well aware.
    To frame the discussion of tax collections from Federal 
contractors, let me share with you two charts.\2\ The first 
shows our overall enforcement revenues. Enforcement revenues 
are the direct revenues the IRS gets from collection, audit, 
and document matching programs. We are doing better, as you can 
see, up to $43 billion last year.
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    \2\ The charts referred to are attached to IRS Commissioner 
Everson's prepared statement which appears in the Appendix on page 87.
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    The biggest piece of enforcement revenues comes from 
collections. Levies are an important component of our 
collection program. This second chart traces the number of 
levies we have made over the same period.\3\ You can see how 
they disastrously decreased after enactment of the IRS 
Restructuring and Reform Act of 1998. They are now up 
considerably, but still well below historic levels.
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    \3\ The chart referred to appears in the Appendix on page 88.
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    As part of our broader collection efforts, we are 
particularly cognizant of the need to ensure tax compliance by 
Federal contractors. Simply stated, if someone wants to do 
business with the government, the people can and should demand 
that vendors are current with their Federal tax obligations.
    Since your hearing 16 months ago, we have taken a number of 
steps to assure monies owed are paid. Results are promising. 
Frankly, I think that the Subcommittee can take much of the 
credit for this progress, and I want you to know that we expect 
continued improvements in the future.
    When I appeared before this Subcommittee in February last 
year, I spoke about the establishment of a joint task force 
that you have mentioned. In March 2004, the IRS, FMS, and DOD 
established the Federal Contractor Tax Compliance Task Force. 
The new task force also includes representatives from GSA, OMB, 
and Justice. The task force has implemented several actions to 
ensure that Federal contractors pay their taxes and that we 
take appropriate enforcement actions, including levies, to 
collect unpaid taxes.
    We have both increased the pool of debt subject to levy and 
improved our collection procedures. Compared to January 2004, 
an additional $28 billion of tax is now subject to levy. We 
have improved and accelerated the collection process by 
increasing the frequency of matching activities. We have taken 
steps to streamline our notice process to ensure that all 
notice requirements, including due process notices, are met 
earlier in the collection process.
    The IRS and the Defense Department are working to implement 
a system to verify the name and Taxpayer Identification Number 
of each new potential contractor prior to contract award. 
Accurate records will ensure that delinquent contractors are 
identified and a portion of any vendor payment is levied and 
applied to the tax debt.
    As a result of these improvements, total collections 
through the Federal Payment Levy Program surpassed $126 million 
through May of this fiscal year. This is the whole program, 
which includes not just contractors. But you can see, this is 
the last 2 years. I guess that program sort of fell off the 
tracks. [Laughter.]
    This last piece here, this is just through 8 months only. 
So already we have surpassed--this is the contractor piece. 
This is the whole program, including Federal contractors and 
everybody. The difference between this and what we are talking 
about here is a lot of levies that come off of Social Security 
checks basically. So that is up already compared to a year ago. 
That is the overall program that is speeding collections.
    Now let us go to the contractors themselves. This is just 
what we are talking about today, the Federal contractors, DOD 
and civilian contractors are both in these numbers. Same thing, 
this shows that collections are dramatically up, and already in 
8 months we surpassed what we did in the whole fiscal year.
    You have suggested that the task force expand its mission 
to include civilian contractors as well as those used by DOD. 
We will do this. I have also charged the task force with 
reviewing all remaining operational exclusions from the levy 
program in hopes of further increasing the number of debts 
available for levy. The task force will take up the challenges 
identified in the GAO report.
    While we continue to vigorously attack non-compliance by 
contractors, I want to emphasize as I did last year that 
protecting taxpayer rights is a cornerstone of our collection 
process, even when it means collection action is delayed. 
Consideration for taxpayer rights must be balanced with our 
desire that Federal contractors pay their taxes. Thank you.
    Senator Coleman. Thank you, Commissioner Everson.
    Commissioner Gregg.

   TESTIMONY OF RICHARD L. GREGG,\1\ COMMISSIONER, FINANCIAL 
        MANAGEMENT SERVICE, U.S. DEPARTMENT OF TREASURY

    Mr. Gregg. Chairman Coleman, Members of the Subcommittee, I 
welcome the opportunity to discuss the role of the Financial 
Management Service in the collection of delinquent Federal tax 
debt owed by Federal contractors conducting business with 
civilian agencies.
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    \1\ The prepared statement of Mr. Gregg appears in the appendix on 
page 91.
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    Mr. Chairman, I believe that FMS has a track record that 
clearly demonstrates excellent leadership and program 
management with respect to the governmentwide collection of 
debts, both non-tax and tax. Since the inception of the Debt 
Collection Improvement Act of 1996, FMS has collected $24 
billion in delinquent debts that would otherwise have not been 
recovered. More importantly, for the past several years 
virtually every trend line shows increases in collections with 
more than $400 million collected in the tax levy program alone.
    Our effective management of the levy program is 
demonstrated by the fact that through the first 8 months of the 
fiscal year FMS has collected more tax debts, $126 million, on 
behalf of IRS than in any previous fiscal year. Of key interest 
to this Subcommittee, the collection of tax debts by levying 
vendor payments has increased to $26 million in the first 8 
months in fiscal year 2005 compared to $20.8 million in all of 
fiscal year 2004.
    We will continue to make improvements in fulfilling our 
responsibilities, recognizing that managing any program 
involves making choices and setting priorities. FMS has made 
such choices in managing our limited, but nonetheless 
important, tax levy program. We have allocated resources to the 
highest management priorities to maximize collection and ensure 
that proper management controls are in place. The growth of the 
debt collection program in general and the tax levy program in 
particular is a result of setting plans and priorities and then 
maintaining the focus and discipline to execute them.
    In my statement this morning I will use my time to discuss 
the actions FMS is taking in response to four key 
recommendations by the Government Accountability Office 
regarding the tax levy program and its use in the collection of 
tax debt owed by civilian contractors.
    The first one is the taxpayer identification number and 
names. GAO has recommended that FMS reject payment requests 
that do not contain the information necessary to carry out the 
levy program. Such action on the part of FMS has great 
potential to interfere with the timely disbursement of Federal 
funds to contractors who do not owe delinquent taxes. Even more 
importantly, it would blur important legal authorities and 
responsibilities.
    As the Federal Government's chief disbursing office, FMS 
ensures that certified payments submitted to FMS are disbursed 
in a timely and an accurate manner. The certifying officials at 
Federal program agencies are responsible for ensuring the 
accuracy and validity of the payment information, such as name, 
TIN, and payment type, and for ensuring that the payment is 
legally authorized. Federal law provides that the certifying 
official is responsible for the information contained on a 
certified voucher. Putting FMS in a position of picking and 
choosing which payments to disburse would, I believe, blur the 
critical distinction between the agency's certification 
authority and FMS disbursement authority.
    I believe a better approach is to step up our efforts to 
monitor and ensure agency compliance. A major step forward 
relates to the recommendation by the Federal Contractor Tax 
Compliance Task Force.\1\ In October, a program was implemented 
whereby as part of the contractor registration process a 
registering contractor's TIN number will be validated. If the 
TIN cannot be validated, with very few exceptions, the 
contractor will not be eligible to conduct business with DOD or 
any Federal agency.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3, Federal Contractor Tax Compliance Task Force 
Report, which appears in the Appendix on page 186.
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    As part of the stepped-up efforts, FMS has also been 
sending out reports on a monthly basis to all CFOs providing 
updates on their agency TIN, name, and payment type compliance. 
We will work closely with those agencies whose payment requests 
continue to contain incomplete information. This will also help 
compliance.
    In addition, FMS is working with the Federal Credit 
Council, a group of top executives of creditor agencies and the 
council's debt collection subcommittee regarding TIN, name and 
payment type compliance. We will evaluate this multifaceted 
approach after one year and determine at the time whether 
withholding payments should be reconsidered.
    GAO has recommended that FMS develop and implement 
procedures to include Type A, automated clearinghouse corporate 
tax exchange--that is ACH-CTX--and Fedwire payments in the levy 
process. FMS fully agrees with the goal of including all 
eligible contractor payments and I would like to update you on 
the actions taken to levy Type A payments and our plans to 
address ACH-CTX and Fedwire payments.
    Type A payments are often unanticipated and typically made 
by agencies that do not have the payment volume to support 
sending large-scale bulk payment files. Disaster relief 
payments are an example of Type A payments. FMS is currently 
implementing system changes that will allow us to begin levying 
these payments later this year and we expect to be fully 
operational next year.
    The Fedwire payment system is used for low volume, high 
dollar transactions that are deposited into a recipient's bank 
account on the same business day. This same-day payment 
requirement for Fedwire is in contrast to our normal electronic 
and check payments where FMS has more time to match the payment 
file against our debtor database. Because of Fedwire's same-day 
payment requirement, operational and program changes to include 
these payments in the levy process will be extremely difficult 
and would increase the risk of erroneous payments.
    While the dollar value of the payments that run through 
Fedwire is large, Federal agencies have advised us that only a 
small percentage of these payments are disbursed to Federal 
contractors. In the last several weeks, FMS has begun to work 
with agencies to identify more precisely the payments in the 
Fedwire portfolio. In the near future, FMS will make payment 
changes which will require agencies to identify in all 
instances the type of payments being made through Fedwire.
    In addition, we are developing new guidelines for all 
Federal agencies to submit contractor payment requests to 
payment systems that can be levied. We will notify agencies 
about these new guidelines in the next monthly letter to agency 
CFOs.
    Our approach should help to minimize the number of 
contractor payments going through Fedwire, but it does not 
resolve the larger issue of whether FMS's overall debt 
collection program can offset or levy the remaining Fedwire 
payments. Within the next year we will conduct an analysis of 
the payments going through Fedwire, the potential delinquent 
debt that could be collected if we are able to offset or levy 
those payments, and the determination of whether the additional 
amount of debts that could be collected warrant the program 
changes that would be needed to the Fedwire application.
    The ACH-CTX payments are used for multiple payments to the 
same payee or one payment with multiple invoices, and allow for 
transmitting with the payment complete remittance information. 
While this system is an appropriate and cost-effective way for 
agencies to make vendor payments, given the relatively small 
volume of payments going through ACH-CTX, the complexity of the 
payment file, and FMS's need to set priorities, we have not yet 
decided how to levy these payments. We will conduct an analysis 
of the ACH-CTX payments to determine the feasibility and the 
potential benefits of modifying the system.
    The purchase card program. I would like to address the 
matter of the collection of unpaid taxes of contractors that 
are paid using purchase cards. Simply stated, the purchase 
cards model does not fit the Federal payment levy process. When 
FMS is in receipt of a levy from IRS our legal obligation is to 
surrender any property in our possession that is subject to 
levy. When a purchase is made using a purchase card, however, 
FMS never has in its possession property belonging to the 
vendor. Credit card payments to vendors are not processed 
through FMS or any other authorized disbursing official.
    Mr. Chairman, FMS agrees with GAO recommendations that a 
thorough review of the purchase card program geared toward 
exploring options for incorporating the collection of both tax 
and non-tax debt is warranted. However, since the purchase card 
program is not an FMS program and we do not disburse purchase 
card payments to vendors or have information regarding what 
vendors receive credit card payments, FMS is not the proper 
government agency to lead this review. Government credit card 
programs are under the authority of the General Services 
Administration and we believe that working with GSA and IRS we 
can further explore the options.
    The American Jobs Creation Act of 2004 enacted last October 
authorized IRS to levy up to 100 percent of certain vendor 
payments. FMS modified its systems in November 2004, one month 
after the law was enacted, to implement this authority where 
100 percent levy is available. For example, IRS recently levied 
100 percent of some DFAS vendor payments and collected $432,000 
compared to $100,000 that would have been collected prior to 
the law's enactment. However, full use of this new authority 
has been delayed because the provision only permits 100 percent 
continuous levy for payments for ``goods and services'' and 
does not appear to apply to payments made for other kinds of 
property. FMS stands ready to work with IRS as it attempts to 
resolve this issue.
    Mr. Chairman, I would just like to echo the good work that 
has been done by the Federal Contractor Tax Compliance Task 
Force. I think we have made a lot of progress and I would 
support going forward with that. That concludes my remarks. I 
would be happy to answer any questions.
    Senator Coleman. Thank you, Commissioner Gregg. I do 
appreciate the work that is being done by the task force. I 
also want to say that I appreciate FMS agreeing with the goal 
of doing those things we can to make sure we limit the bypasses 
for the Treasury Offset Program. I understand some of the 
challenges faced with Fedwire and some of the volume issues 
with ACH-CTX. I just think it is important that we review these 
programs and in fact limit as best we can those dollars that 
are passing around the levy program. So let us continue the 
review on one of those areas.
    I have a question though about your concern with picking 
and choosing which type of payments to dispense. At least as I 
listened to your testimony--I think your approach is, let us 
work with the agencies to make sure that they do a better job. 
First, I take it you would agree with the presumption that any 
agency it makes sense to get the correct taxpayer 
identification number for anybody contracting with an agency.
    Mr. Gregg. Yes.
    Senator Coleman. So if we require that, and I think we have 
done it now--I think there is a voluntary system now, give us 
that. That would go a long way to getting that. As I understand 
it, in the past year four-fifths of the State Department's 
payment documents had no names, three-quarters of the 
Department of Education, and half of the Department of 
Transportation's payment documents had erroneous or no taxpayer 
identification numbers. Would those statements be correct from 
your perspective?
    Mr. Gregg. I am not sure where those numbers came from, Mr. 
Chairman. What I would say is that I reviewed a March 2005 
report, and while we still have a ways to go, many agencies are 
doing an outstanding job in getting tax ID numbers for contract 
payments. Many of them are at 95 to 99 percent. There are a 
handful of agencies, at least in the report that I saw, where 
the numbers are very small. Whether or not some of those may 
have legitimate reasons, security or other reasons, I am not 
sure. But I think in the last 2 years, the increase in tax ID 
numbers and the compliance has grown tremendously.
    Senator Coleman. I believe that those numbers came from the 
GAO report. My concern is this, that we still have evidence, 
for whatever reason--I am not pointing fingers at agencies, but 
that we are not getting the kind of compliance that we should 
have with the Debt Collection Improvement Act. FMS is the 
central player, in a position not to pick and choose who are 
winners or losers in this process, not to interfere with the 
disbursal of funds, but to say up front that unless we get 
names, unless we get taxpayer identification numbers, we are 
not processing these payments.
    How is that somehow interfering with the timely disbursal 
of funds or picking and choosing which payments are disbursed 
if we simply tell the agencies and the contractors that we are 
going to require this? This is the process that we are going to 
follow.
    Mr. Gregg. If we do that we certainly run the risk of not 
paying contractors who in fact do not owe taxes. That is an 
issue that I think is one that I would much prefer to go back 
to solving at the front end and not putting us in a position of 
saying--since this field is not complete, for some reason we 
are going to reject it. We make nearly one billion payments a 
year, Mr. Chairman, and 78 percent of those are electronic. I 
would note the speed with which those flow through and go out, 
and the fact that we actually match the great majority of those 
against our debtor database before they go out the door.
    The other thing is the legal responsibility of that 
certifying officer who says this is a legal payment that has to 
be made by the government. I would really find it very 
difficult for FMS to be in the questionable role of saying, 
this field did not have quite enough information and we are 
going to reject it.
    Senator Coleman. I am not going to debate this with you, 
Commissioner Gregg, but it appears to me that you are in a very 
central place here. I want to make sure that payments are made 
timely. I want to make sure that we are not harassing or 
abusing folks who are fulfilling all their obligations. But it 
appears to me when you do a contract with the Federal 
Government there are certain things you can be required to do. 
Senator Levin raised one by saying, maybe an affirmative 
statement about whether you owe any taxes. It is not a right to 
do business with the government. It is a contractual obligation 
of which we then have certain requirements, and one of the 
requirements should be to simply provide certain information 
that should allow us to get those folks who are abusing the 
system. Not hurting or slowing up anybody else.
    My problem is that we are relying now upon agencies, and I 
am reading GAO reports that say we are still getting three-
quarters of one, Department of Education, half of another 
department, not providing taxpayer identification numbers. At a 
certain point in time we have to get back to them also.
    But you are in a unique position here and my sense is that 
we are not being clear enough, and we are not being aggressive 
enough, and we are not being complete enough in getting this 
basic information that would allow the system to work. This 
system should not slow up payments. It simply puts in place 
saying, if there is a problem--based on a taxpayer ID number 
and a name. Two bits of information. Not hard to do. So again 
we are going to push this because we are not--the problem is 
the system today is not working. It is not working the way it 
should.
    Mr. Gregg. If I might, Mr. Chairman. I think it is working 
in the great majority of cases. I am not sure whether those are 
particular agency location codes so they may not be for the 
whole department. They may be subcomponents. But when I said in 
my statement that we are going to take a look at this within a 
year, one of the concerns is narrowing this down to making sure 
that we are dealing with contractor payments. Sometimes, as you 
heard from the GAO report, the field that identifies the type 
of payment may or may not be accurate. We are normally not in a 
position to know that.
    So if we can take a look at this to see what is going to 
happen with the voluntary provision that we are working on 
through the task force to get the information, and go back and 
see what agencies that we are sending out letters to every 
month say, here are problem areas. See where we are and then to 
see whether or not we can really hone in on contractor 
payments. If we were to go this route, give the agencies and 
contractors sufficient notice that this is what we are going to 
do, I would like the time, if I may, to study the issue and see 
what progress we can make.
    Senator Coleman. One final question to follow-up and, 
Commissioner, I may have to come back to you in a second round. 
But I believe that in 1997, as I recall in September 1997, the 
Department of Treasury published proposed regulations requiring 
a taxpayer identification number to be provided. The proposal 
required Federal agencies provide taxpayer identification 
numbers. That was 1997. That was then rejected. The final rule 
did not have that requirement. We went to a TIN implementation 
report. Now the GAO comes back and says we have $17 billion in 
payments to contractors that did not pass through the Treasury 
Offset Program because they had blank or invalid taxpayer 
identification numbers.
    So in 1997 we had something on the table that could have 
corrected this; and stepped back. Obviously we have the problem 
today. Do you intend them to go back and look at this 1997 
regulation and see if in fact we can be in a position where we 
actually require taxpayer identification numbers?
    Mr. Gregg. In fact I am the one who pulled that back when I 
first arrived at FMS. I thought it was too broad a brush. I 
would much rather focus--we are collecting $3 billion a year 
from our overall debt collection programs, so we are matching a 
lot of taxpayer names and numbers. If we were to do something, 
I would much prefer going in for a more finely-honed approach 
in dealing with contractors, I agree it is terrible that in 
fact they are doing business with the government and getting 
paid and owe debt. So I would not go with a broad brush 
approach. If we did something, I would focus it more on 
contractors.
    Senator Coleman. Commissioner, I will just ask one 
question, but I do want to come back to have some follow-up 
questions after Senator Akaka.
    This question about contractor debarment that has been 
raised, and it goes to Senator Collins' issue of, could we 
define a type of conduct, maybe a pattern of conduct--I 
understand the consequences of debarment and that there may be 
business folks who have some poor business practices and they 
need to be better educated and I am willing to work with them. 
But I worry in the egregious cases. Clearly what we saw with 
the Defense Department there were case of egregious abuse; what 
we have seen with the GAO and these civilian contractors of in 
some cases long term patterns of abuse.
    Do you think that it would make sense to have a contract 
debarment provision available to Federal agencies?
    Mr. Everson. I think that as the Chairman indicated, you 
want to get at this at the front end, so that is important. The 
other thing you want to do, frankly, is you want the IRS to do 
a better job of the collections process on an ongoing basis. I 
talked about the tax gap; it is terribly important that we get 
after the piece of it that is the non-payment. That is about 10 
percent of the total tax gap. Then you have this back end piece 
that we are talking about here today. I think we can make 
progress, frankly, on all of those areas.
    You are raising what I think is, frankly, a broader 
procurement question for OMB and Clay Johnson who runs the 
management side as to what procurement policy ought to be 
governmentwide. From my point of view, obviously anything you 
do to tighten up in this area sends a strong message. My 
overall concern is though that when you start to carve out 
contractors with different procedures, it can be problematic 
because people and businesses shift in and out of that role, if 
you will, and you want to make sure that you are doing, once 
again, the proper balancing of the taxpayer rights.
    Senator Coleman. Just one quick question. Are there any 
debarment mechanisms for drug offenses, for national security?
    Mr. Everson. There are debarment procedures--my 
recollection--I cannot totally take the Fifth on this since I 
did have that management job at OMB. There are very real 
debarment proceedings. If you look at what happened with some 
of the big corporate convictions, Enron, for instance, was 
debarred after it had its problems, and it is my recollection 
in other big outfits that does happen. So that is there and 
there is the possibility right now to go forward on that.
    But I think maybe I was responding more broadly. I think 
that the Senator was raising questions about looking at tax 
debts. But again, this is complicated, because as Senator Levin 
says, we had this conversation last year. You can have a very 
legitimate dispute with the government over a balance that is 
owed.
    I want to also say, not all the employment taxes that are 
owed are criminal. They have been characterized as criminal in 
this hearing today. I am a little disturbed by that. What 
happens is we are looking at, oftentimes, these smaller 
businesses and a lot of these businesses get in trouble. If you 
wandered around with our revenue officers who are trying to 
collect these monies, what happens is somebody really thinks 
they are going to make it and they say, I am just going to 
borrow this money to get through this next quarter, and then 
another quarter goes by, and then if we are not on them soon 
enough it keeps going and it pyramids. Now that is different 
from some of the matters that you have raised and the GAO has 
identified where there are willful patterns of abuse. But I do 
not want to paint all these 27,000 contractors or the ones last 
year as criminals. I think that is wrong.
    Senator Coleman. I think it would be correct to say that 
there are criminal penalties for this type of conduct. You 
still have to prove the case. You have to show intent. But 
there are certainly criminal penalties and I think that is what 
Senator Levin was referring to.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Mr. Gregg, in a March 2004 letter to the Chairman of this 
Subcommittee you indicated that your agency was closely 
monitoring actions it could take to aid in the collection of 
State tax debt, specifically with regard to the formation of 
reciprocal agreements under DCIA. However, GAO's June 2005 
draft report indicates that none of the States they contacted, 
and they contacted 17 of them in all, none of them had been 
contacted by FMS. Also none of the States were aware of the 
program, all of them expressed interest in participating.
    Can you reconcile this for us, the statement you made in 
March 2004 and also the GAO findings?
    Mr. Gregg. You mentioned that we are helping the State of 
Hawaii collect State tax debt, and when we got that authority 
we went out to every State and aggressively pushed that, and we 
still have four or five States that are not doing it. We were 
not actually looking for reciprocal agreements there. We were 
saying, we will, for a very modest fee, help you collect your 
State tax debts.
    So I would slightly differ--I do not disagree with what GAO 
said the answers were, but when you go out to States and start 
saying, here is what you have to do to be able to work with--
even to collect State tax debt, and then if we actually did 
reciprocal agreeing where we were looking to them to help us 
collect some of our Federal debt, I am pretty sure that the 
answer is not going to be, ``no problem, we will do it right 
away.'' They are going to want to take a hard look at what is 
the bottom line.
    On the State tax debt that we have collected, we have 
collected $200 million a year, clearly an obvious winner with 
minimal amount of effort from the States. But you get into 
States like California where finally, after pushing for about 4 
years, we finally got them to start the offset process for 
State tax debts. They are still not taking advantage of the 
whole thing. They are a very decentralized State.
    For example, the State of Michigan has disclosure issues, 
the State of Connecticut is building a new system. Those are 
the sort of things that you run into when you really start 
talking about, the fact that we have a database that is huge 
and if you are going to help us collect some of our Federal 
debts, here are the kinds of things you would have to do.
    Let me take one other point. We collect each year about 
$1.5 billion in child support payments. We do that through the 
offset program. Most of that, virtually all of that comes from 
offsetting tax refunds. They do have authority and we use it to 
collect from other payments that we have. We collected $2.6 
million in fiscal 2004. So you see, when you get out of the tax 
refund area, which is where the bulk of that money came from, 
and you get to these other payment systems such as Federal 
salary and vendor payments, the amounts are quite modest. And 
that has been in place for a while. It is $2.6 million versus 
$1.5 billion that we collected.
    So I guess my point is that we would certainly be willing 
to work with States if we thought that the cost benefit for 
both of us made sense. It is just one of those things that 
while we have recently broached it with some of the State 
organizations, we will have to wait and see whether or not 
there is a real interest, because there is going to be some 
expense and there is not as much gold in those hills as it 
might appear.
    Senator Akaka. Mr. Gregg, what would you say about working 
with States on these reciprocal agreements? Are you going to 
press it? Because the report we have had is that States are not 
aware of this. If you are going to press it, do you have a 
program on a timely basis?
    Mr. Gregg. We will begin to raise the issue with them, but 
they are going to have to look at what it is going to cost them 
to do this, and we are going to have to help them look and see 
what the possible return might be, because for some of these 
the return may be quite modest. As you know, all the States are 
strapped for money too, so if they are going to invest $50,000, 
$100,000 or $200,000 to change to do reprogramming or build a 
database to take any of our debts, it may well not be worth it 
for them. But we will continue to discuss it with them and see 
if there are areas that have potential.
    There is legislation, by the way, that was proposed last 
year that would do more, far more in this area than anything 
else that at least I think is in the GAO report, and that was 
legislation that we supported a couple of years ago which would 
allow for the collection of State tax debts even if someone had 
moved to a new State. Right now we are limited--the debt has to 
be owed in the State in which they currently live. If we have 
the authority to match for people who move to another State, we 
could collect considerably more money. That legislation was 
proposed I think in IRS legislation that did not get passed 
last year. So that would actually help a lot.
    Senator Akaka. These will have to be enforced and records 
need to be shared on that.
    Mr. Gregg, I am disappointed with FMS's leadership in the 
area of debt collection. While FMS should be proactive in this 
area, it seems that any improvements have been made in reaction 
to the good oversight work of Chairman Coleman, this 
Subcommittee, and GAO. Can you describe what FMS has done since 
2004 in the area of improving Federal debt collection that has 
not been in reaction to congressional oversight?
    Mr. Gregg. If you take everything off the table that the 
task force has been working on, maybe the list is not that 
long. I will say that it takes the IRS and FMS and others to 
make those a reality, so I think that, for example, working 
with IRS to increase the amount of tax debt that is made 
available for matching. That is something that we have been 
advocating for some time. The fact that it was also part of the 
task force I do not think diminishes our role in thinking that 
was a good idea a long time ago.
    We were also advocating some time ago improving the due 
process. I would like to see that built into the contracts when 
contractors first sign the contract, that they waive the due 
process notice that they might have through levy. That is 
something that we have been for, or something like that, for 
some time.
    We have brought in a lot of new debts into our system. We 
have to make sure that is controlled properly. If you visualize 
the billions and billions of dollars of debts that we have 
there, trying to manage that process, make sure the proper 
security, proper controls, and the right authentication happens 
to match, where we do not go out and improperly take funds from 
people, it is not something you do once and forget about. It is 
an ongoing process. At the same time we have many things going 
on. In another part of our program we are building new systems.
    So I think to me the characterization that we are not 
managing this properly is wrong because it focuses on the 
things that we have not been doing as well as we should 
perhaps, but there is a ton of things that we have been doing. 
If you look at the fact that we are collecting $3 billion a 
year, and with relatively small staff, those are important 
achievements. And the number of complaints that we get about 
the contractors that we hire, the private collection agencies, 
is minimal. Why? Because we actively manage that and monitor 
what they are doing. So I disagree with that assessment.
    Is there more that can be done? Yes. But there is just a 
ton of things that we have going on in a relatively small 
organization.
    Senator Akaka. Mr. Gregg, GAO reports that about $66 
billion in payments to civilian agency contractors were unable 
to result in computer matches to identify contractors with 
unpaid taxes because the agency payment forms left out key 
information such as the contractor's name or taxpayer 
identification number. It seems reasonable to me that the 
agency should have this information available for each 
contractor that is receiving Federal dollars.
    Why can't you withhold these payments until all of this 
information is updated and complete? And if information is not 
there, why does FMS have to make the payment?
    Mr. Gregg. It does go back to the earlier question. I think 
the other thing that I would want to say is that agencies have 
been making really good progress. I am not saying that it is 
perfect, because it is not. What we have been doing is going 
out and pushing agencies to make sure that all the payment 
information is right that should be there, and I expect that 
will have additional results, especially after they see the 
transcript from the Subcommittee.
    But what I would like to do is to work on that, with the 
IRS and others to make sure that the information is obtained 
when the contract is signed through that voluntary basis, and 
then let us take a look at it, and see where we are. If, in 
fact, we continue to have a problem with contractor payments 
not having enough information then I would reconsider whether 
or not to withhold those payments. But I know if we do that we 
will stop payments for people who do not know taxes and there 
will be an uproar on that. But that is something that if you 
would allow us time to take a look at it we will do.
    Senator Akaka. Thank you, Mr. Chairman. My time has 
expired.
    I have further questions and also some questions on behalf 
of Senator Levin.
    Senator Coleman. Thank you, Senator Akaka. I am going to 
have a follow-up round and I will also keep the record open for 
2 weeks to ensure that if there are any questions that other 
Members of the Subcommittee have, that they will be responded 
to. So I am just going to follow up for a few minutes with 
Commissioner Everson and if you want to continue, you can. If 
not, we will, as I said, hold the record open and make sure 
that there are responses to both your questions, Senator 
Levin's, and any other Members of the Subcommittee.
    Commissioner, let me follow up on this concern about how do 
we get on top of things up front rather than just responding. 
Clearly, the Federal Government does not need to do business 
with tax cheats. There is no requirement to do business with 
tax cheats, and in fact as my colleagues have indicated, tax 
cheats have a competitive edge. They have an unethical 
competitive edge over those individuals who are paying their 
taxes as a cost of doing business. The tax cheat can factor the 
non-payment as a none cost lower than the amount that they need 
in order to make a profit and submit a lower bid, and there is 
something egregious about that.
    I am getting into the Section 6103 issue. It is 
interesting, we are listening to these outrageous stories of 
tax cheats who invest in sports team. We do not even know the 
name of the sports team. GAO can get this information and issue 
a report but we get no information as to who these people are.
    Can the IRS notify Federal contracting officials about 
Federal contractors who are abusing the tax system so they can 
avoid signing contracts with them? What kind of ability do you 
have to do that up front? If not, how do you overcome these 
limitations?
    Mr. Everson. Let me respond first to your overall 
observation about the effect of non-compliance. Non-compliance 
is corrosive, and what we are focusing on here is old debts 
that are due. That does not even begin to get at the tax gap. 
The bulk of the tax gap relates to individuals and it relates 
to the under-reporting of income. If somebody is running their 
business and they are under-reporting their income then they 
can price their goods and services at a lower level, so they 
have an absolute competitive advantage. That exists in this 
discussion that we are having today, but it exists more 
broadly.
    Again, it would be easy to ramp up our enforcement efforts 
with a lot more information sharing. The code is quite clear on 
the privacy of tax returns. The real exception to this is in 
the charitable sector where not-for-profit returns are public. 
I have testified that Section 6103 should be looked at in terms 
of more information sharing with other State regulators in 
areas like the charities. The Subcommittee has expressed 
interest in some of these abuses.
    Right now we are precluded from sharing this information. 
The kind of steps we have done jointly with FMS, I think, have 
improved things. I think that what Commissioner Gregg is 
talking about in terms of going into the future, starting in 
October where there will be this consent to provide the 
information, the TIN, by the contractor if you want to be on 
that DOD registry. That is going to help. That is going to make 
a difference.
    But it does not get at this core issue of the absolute wall 
that exists. I testified, I remember being here in late 2003, I 
cannot even share information with the PCAOB about 
investigations that we are doing on accounting firms, or with 
the SEC about investigations that we have on companies where we 
think that there is a heightened risk of compliance issues.
    So this is a broad object. It clearly is one that gets at 
that very real conflict between two public policy purposes 
here. One, making sure people who do business with the 
government have a clean bill of health. But two, this 
protection of taxpayer privacy.
    Senator Coleman. There is though an avenue by which this 
information is available that you presently have, as I 
understand it. If you bring criminal charges or you place a 
lien on a taxpayer, is that not public information with the 
court of jurisdiction?
    Mr. Everson. Yes, sir, that is right. Once it gets out in 
the public domain--go back to Son of Boss as an example, the 
settlement issue that you are familiar with. We had two-thirds 
of the players came in. Now some of them did not come in. Some 
of them are under criminal investigation. Some of them are in 
other litigation already. Once they go public, once they get 
into tax court or into district court they become known 
litigants, if you will. So if you go down an actual judicial 
proceeding, that changes things. That gets out there, that is 
right. And if there is an active criminal investigation, of 
course that gets shared with the people who need to know.
    Senator Coleman. But let me see if we can tie this to 
Federal contractors. You have a Federal agency that is going to 
contract with a security firm that has had a lien placed 
against them. They have gone through the system. It would go 
through the offset program. You have the lien and you would be 
able to then take X number of dollars. So the agency, as I 
understand it, would not know that the contractor with whom 
they are dealing has a tax lien or has a criminal conviction; 
is that correct?
    Mr. Everson. That is a procurement question. I do not know 
what the procurement procedures are for the individual agency, 
be it--you talk about Homeland Security or Veterans Affairs. I 
am not sure what their procedures are and what they check 
beforehand. But I think we all agree that tax compliance is not 
something that is a centerpiece of their procurement process.
    Senator Coleman. It goes back to the question Senator Levin 
said, asking folks to volunteer--two ways to approach it. One, 
you ask them, voluntarily, do you owe taxes, just so that we 
know that. That way you would make sure payments would go 
through the offset program in spite of whether they are Fedwire 
or anything else. So you would have a system, somebody owes 
taxes----
    But here is my question. If it is public information, if it 
information that goes through a court, why couldn't the IRS 
provide that information to Federal contract officials? Why 
couldn't there be----
    Mr. Everson. Something like a lien? You are saying we would 
have a special program if a lien exits--to make sure that other 
agencies know that?
    Senator Coleman. Public information. At the point you 
publish the lien, taxpayer's name, address, taxpayer 
identification number, amount and type of tax owed is public 
information, but only in the court of jurisdiction. So it is 
there. It is public, but if you are a Federal contract official 
you are not going to go to every court in the country to find 
that.
    Mr. Everson. I think we can obviously look at that. The 
task force could look at what it would take to do that. That is 
a thin strip of this though, I would indicate.
    Senator Coleman. I would appreciate taking a look at 
information that is already public, to simply make it more 
available and see if that would help the Federal agencies in 
being more effective in dealing with those that have 
obligations.
    Let me get back to this question I talked about earlier 
about prosecutions. We had the 47 cases regarding the 
Department of Defense. You have done, I think, an extraordinary 
job working with the task force in correcting some of the 
problems we have seen.
    But the question that I asked the first panel, it did not 
appear that in any of those 47 cases that any criminal action 
had been taken. I recall one of those cases was an individual 
who I believe bought some property on an island offshore, 
contractor owed in $10 million in unpaid taxes. I think the 
business was turned over to relatives who were also tax 
delinquents. It would appear to me that we had in those 
instances some outrageous cases.
    The first thrust should be administrative. We should use 
administrative remedies. Criminal prosecutions are a measure of 
last resort. But if you have an outrageous case like the guy 
that owed $10 million and had relatives that owed money, I am 
not aware of whether any criminal actions have been taken. Can 
you tell me whether any have been in regard to those 47 cases?
    Mr. Everson. Last year when we talked I committed that what 
we would do is take these 47 cases out of the queue. Normally, 
our business units take a look at these matters and they may or 
may not make a referral. We short-cut that process and asked 
the criminal investigators just to take a look at the files and 
see whether they would want to sweep any in. My understanding 
is that we have active criminal investigation underway in three 
of these matters.
    Now again, there is a difference, as you appreciate, 
between what is a colorful, dramatic write-up without names and 
then when you get to establishing what is going to be 
prosecutable in a courtroom, and then also how that matches out 
against--criminal investigations, we are forced into doing 
things like supporting, for the first time, a technical tax 
shelter investigations, or the charitable abuses.
    So what I asked our people to do is to make sure our CI 
people took a look at each of these, and apparently they 
reached a judgment that three of these merit, in their view, 
this full follow-up. They are going to do the same thing, I 
think they have done on the 50 that have already been 
identified by GAO and I understand there are three or four that 
they think are promising as well. Now that does not mean that 
there will be an indictment in any of these cases. There can be 
a variety of reasons, as you, better than most, appreciate. But 
we have gone through that and looked at it on that basis.
    Senator Coleman. I would just urge you to--I would hope 
that one of the deciding factors would not be whether it is an 
ongoing business. I am just concerned here--I appreciate the 
judgments that have to be made. I was in that position myself 
for many years. But I just want to make sure in making those 
judgments that we are not factoring in things that should not 
be factored. In this case one of them would be whether it is an 
ongoing business. You have individuals--particularly in cases 
where we see people doing things, getting rid of the business, 
and then doing it again. Just sometimes there is a tendency to 
say, they are not in knotted operation anymore so we are not--
we have other more important stuff. I want you to take a look 
at that and at least recognize the concern of this chair, and I 
think other Members of the Subcommittee.
    Mr. Everson. I agree with you. As I said to you when I 
think we chatted a few weeks ago in your office, I think that 
having the hearing again will give me a good opportunity to go 
back, ask those questions again, and put a finer point on it. I 
am very proud of the rebuilt enforcement efforts that the IRS 
has been undertaking. I know you are enthusiastic about it. So 
there are individual choices that our folks make, but I can 
certainly go back and ask about this particular program again 
and I will.
    Senator Coleman. We have seen the results with the Son of 
Boss, billions of dollars that are now coming back into the 
system because of increased enforcement efforts. I think this 
is one where from a cost-benefit analysis we are seeing clearly 
the benefit that far exceeds the cost. I wish we were able to 
provide more resources for enforcement. A number of us will 
certainly continue to fight for that in areas where it needs to 
be done. We are not talking about getting the poor individual 
who just cannot make ends meet and finds they have a problem 
with the IRS. There is some massive fraud and abuse going on 
that costs the government billions of dollars and I think we 
can direct resources where across-the-board folks will say this 
is fair, this is equitable, this is just and needs to be done.
    Mr. Everson. I wish both you and Senator Levin were 
appropriators, but I am not sure you would not change your 
stripes once you got over to the other committee.
    Senator Coleman. If that happens, we will chat.
    Gentlemen, I want to thank you for your testimony. The 
record will be kept open for 14 days.
    With that, this hearing is adjourned.
    [Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]


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