[Senate Hearing 112-53]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-53
 
     STIMULUS CONTRACTORS WHO CHEAT ON THEIR TAXES: WHAT HAPPENED?

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2011

                               __________

        Available via the World Wide Web: http://www.fdsys.gov/

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


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  JERRY MORAN, Kansas

                  Michael L. Alexander, Staff Director
               Nicholas A. Rossi, Minority Staff Director
                  Trina Driessnack Tyrer, Chief Clerk
         Patricia R. Hogan, Publications Clerk and GPO Detailee


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware           TOM COBURN, Oklahoma
MARY L. LANDRIEU, Louisiana          SUSAN M. COLLINS, Maine
CLAIRE McCASKILL, Missouri           SCOTT P. BROWN, Massachusetts
JON TESTER, Montana                  JOHN McCAIN, Arizona
MARK BEGICH, Alaska                  RAND PAUL, Kentucky
            Elise J. Bean, Staff Director and Chief Counsel
                      Allison Abrams, GAO Detailee
            Christopher J. Barkley, Minority Staff Director
             Candice Wright, GAO Detailee for the Minority
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Begich...............................................     4
    Senator Coburn...............................................     4
Prepared statements:
    Senator Levin................................................    25
    Senator Coburn...............................................    28
    Senator Carper...............................................    30

                               WITNESSES
                         Tuesday, May 24, 2011

Gregory D. Kutz, Director, Forensic Audits and Special 
  Investigative Service, U.S. Government Accountability Office...     6
Hon. Daniel I. Gordon, Administrator, Office of Federal 
  Procurement Policy, U.S. Office of Management and Budget.......     7

                     Alphabetical List of Witnesses

Gordon, Hon. Daniel I.:
    Testimony....................................................     7
    Prepared statement...........................................    37
Kutz, Gregory D.:
    Testimony....................................................     6
    Prepared statement...........................................    31

                              EXHIBIT LIST

1. GGAO Report, Recovery Act--Thousands of Recovery Act Contract 
  and Grant Recipients Owe Hundreds of Millions in Federal Taxes, 
  GAO-11-485, April 2011.........................................    46
2. GResponses to supplemental questions for the Record submitted 
  to Gregory D. Kutz, Director, Forensic Audits and Investigative 
  Service, U.S. Government Accountability Office.................    75
3. GResponses to supplemental questions for the Record submitted 
  to Hon. Daniel I. Gordon, Administrator, Office of Federal 
  Procurement Policy, U.S. Office of Management and Budget.......    82


     STIMULUS CONTRACTORS WHO CHEAT ON THEIR TAXES: WHAT HAPPENED?

                              ----------                              


                         TUESDAY, MAY 24, 2011

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                       Committee on Homeland Security and  
                                      Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, Begich, and Coburn.
    Staff Present: Elise J. Bean, Staff Director and Chief 
Counsel; Christopher Barkley, Staff Director to the Minority; 
Mary D. Robertson, Chief Clerk; Allison Abrams, Detailee (GAO); 
Michael Martineau, Detailee (DOJ); Katie Martin-Browne, Law 
Clerk; Daniel Perez, Law Clerk; John Richards (Senator Begich); 
Sarah Deutschmann, Detailee (ICE); and Candice Wright, Detailee 
(GAO).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good afternoon, everybody. The Subcommittee 
today is examining Federal contractors who get paid with 
taxpayer dollars but then fail to pay the taxes they owe. I 
commend my colleague Senator Coburn for taking the initiative 
to press forward on this issue.
    Prior Subcommittee hearings on this and related topics have 
exposed as tax delinquents tens of thousands of Federal 
contractors and service providers who collectively owe billions 
in unpaid taxes. The spotlight today is on businesses that 
receive contract or grant funds under the American Recovery and 
Reinvestment Act (ARRA or Recovery Act). While the vast 
majority--well over 90 percent--of the Recovery Act recipients 
are in compliance with Federal requirements and are 
contributing to the economic recovery, a small portion--about 5 
percent--have put taxpayer dollars in their pockets while 
failing to meet their tax obligations.
    That 5 percent, by the way, is about half the percentage of 
the Department of Defense (DOD) contractors that an earlier 
report found had unpaid taxes, but this is obviously very 
troubling, whether it is 5 percent or 10 percent.
    According to the report the Subcommittee is releasing 
today, that 5 percent translates into about 3,700 contractors 
and grant recipients out of a total of about 63,000 that 
received over $24 billion in stimulus dollars while owing 
unpaid Federal taxes of more than $750 million. That is they 
owed taxes at the time they received the contracts.
    Federal programs now exist to stop this type of abuse. One 
key program is the Federal Payment Levy Program, which was 
established over 10 years ago to enable the Federal Government 
to identify Federal payments being made to tax delinquents and 
authorize the withholding of a portion of those payments to 
apply to the person's tax debt.
    When the Subcommittee began looking at the Federal 
contractor issue in 2004, the tax levy program was weighed down 
by bureaucratic requirements and red tape. In response to the 
Subcommittee's request, the key Federal agencies, including the 
Internal Revenue Service (IRS), the Financial Management 
Service at Treasury, and others, formed a governmentwide task 
force to streamline the tax levy program. That task force has 
addressed many of the problems that have been identified by the 
Subcommittee. As a result, the tax levy program has become 
energized. It has moved from covering only 10 percent to 
covering 100 percent of the payment systems at the Department 
of Defense. In addition, by September of this year, 100 percent 
of the $400 billion in Medicare payments made each year will be 
screened for tax delinquents.
    Tax levy collections from tax delinquent Federal 
contractors as a whole have increased almost six-fold over the 
last 6 years, from about $20 million in 2004 to $115 million in 
fiscal year 2010. Last year is the first time the tax levy 
program has collected over $100 million from tax delinquent 
Federal contractors in a single year. We applaud that progress. 
But at the same time, that $100 million per year has to be 
compared to the billions of dollars in unpaid tax debt still 
owed by Federal contractors, which means there is still an 
awful lot more work to be done.
    The Government Accountability Office (GAO) selected 15 of 
the Recovery Act recipients that raised particular red flags 
for a closer look. The GAO found that those 15 recipients alone 
were responsible for $40 million in unpaid taxes. The GAO also 
found that those 15 had engaged in abusive or potentially 
criminal activities, including failing to remit the payroll 
taxes that were taken out of employee paychecks but never sent 
to the IRS.
    Federal law requires employers to hold payroll tax money 
``in trust'' for the IRS, and the failure to remit those funds 
as required is a violation of civil and criminal law.
    In one case, GAO identified a security company that 
received $100,000 in Federal funds yet owed $9 million in 
unpaid taxes. Those unpaid taxes were primarily payroll taxes 
from 5 years earlier that the company never forwarded to the 
IRS. The company had also been cited by the Department of Labor 
for violating Federal labor laws.
    In another case GAO identified, a social services company 
owed over $2 million in taxes yet received more than $1 million 
in Federal funds. That company had defaulted on several 
installment agreements with the IRS, which finally imposed a 
penalty on an executive who was personally responsible for 
nonpayment of the taxes owed. GAO found that this executive had 
numerous transactions with casinos totaling hundreds of 
thousands of dollars a year, indicating that he had substantial 
funds to apply to the company's tax debt, yet failed to do so.
    The GAO also found that while some of the recipients were 
subjected to the tax levy program, about $315 million of the 
tax debt was not because the Recovery Act funds had not been 
paid directly by the Federal Government to the tax-delinquent 
businesses. Instead, in those cases the Federal Government had 
paid the funds to a State or a prime contractor or a grant 
recipient, which in turn made payments to the ultimate 
recipients. The businesses that got their money from a State, a 
prime contractor, or grant recipient were never screened by the 
Federal tax levy program and so escaped having any portion of 
their funds withheld for payment of their tax debt. That gap in 
the tax levy program needs to be addressed.
    In addition to hearing from GAO, we will hear today from 
the President's Office of Federal Procurement Policy (OFPP), 
which sets contract policy for the Administration and is part 
of the Office of Management and Budget (OMB). President Obama 
became concerned about the issue of Federal contractors with 
unpaid taxes while he was here in the Senate, and he has not 
forgotten the issue.
    In addition to setting a policy against awarding Federal 
contracts to tax-delinquent companies, his Administration has 
changed the Federal Acquisition Regulations (FAR), to require 
businesses bidding on Federal contracts to certify in writing 
if they have a tax debt of $3,000 or more so that Federal 
agencies would know about the problem when awarding contracts. 
The Administration also made nonpayment of tax grounds for 
debarring a business from bidding on any Federal contract.
    In January 2010, the President also issued a memorandum 
which, among other matters, caused the Office of Management and 
Budget to initiate an evaluation of whether Federal contracting 
officers and debarment officials were fully utilizing tax debt 
information. Today we are going to hear more about those 
efforts.
    Since the problem of Federal contractors who get paid with 
taxpayer dollars while dodging their own tax obligations is not 
going away, we need to do more to stop the abuse. One action we 
could surely take is a concerted effort to debar the really 
flagrant tax cheats from obtaining Federal contracts and 
grants. In each of the hearings that we have held on this 
topic, GAO has identified 15 or 20 or 25 tax-delinquent 
businesses that have essentially thumbed their noses at Uncle 
Sam. Some paid their taxes with bounced checks, repeatedly 
violated installment agreements, or reincorporated as a new 
company to escape past tax debt.
    Some business owners sported mansions, expensive cars, or 
other luxury assets, indicating that they had the money needed 
to repay the outstanding tax debt but did not do so.
    While these egregious cases have been referred to the IRS 
and prosecutors, in most cases the companies and their owners 
have not been debarred from obtaining new Federal contracts or 
grants. Starting with the cases flagged by GAO, the 
Administration ought to get on with an immediate effort to 
debar egregious tax cheats from competing against honest 
businesses that pay their fair share.
    We should also consider requiring States, prime 
contractors, and grant recipients that receive Federal funds to 
require their subcontractors or sub-recipients to disclose tax 
debt as described in the Federal Acquisition Regulations, and 
then we should consider prohibiting those States, prime 
contractors, and grant recipients from dispensing Federal 
taxpayer dollars to those who have outstanding tax debt.
    Tax deadbeats should not be getting taxpayer dollars, and 
they should not be allowed to compete against honest businesses 
that meet their tax obligations. I look forward to hearing from 
the witnesses today about these and other ideas to stop the 
abuse, and I now turn, again with thanks, to Dr. Coburn for his 
initiative in this area and for the great work of his staff.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Mr. Chairman, thank you very much. I would 
like for my complete statement to be made a part of the record.
    Senator Levin. It will be.
    Senator Coburn. And I would like to thank you for this 
hearing. I know you have worked on these issues for a long 
time, and I appreciate your work.
    My colleague in the Senate, Senator Obama, and I passed the 
Federal Financial Accountability and Transparency Act, and one 
of the goals of that was to have subcontractees and sub-
awardees on grants available on USAspending.gov. They are still 
not there, and one of the reasons we are not getting where we 
need to be is because of that.
    To comment on the 5 percent, it is true that 5 percent of 
the contractors have a problem, but it is $1 in $6 that came 
through the stimulus grants and contracts that were issued if 
we extrapolate, and that is an extrapolation so I am not sure 
that is factual. But if you were to extrapolate it, that is 
what it would be.
    I appreciate GAO's hard work. I think there are a lot of 
problems in terms of implementing the Federal Payment Levy 
Program. I think we can see that is obvious from the GAO 
report. And I would say that I think the Obama Administration 
has done a better job than the Bush Administration in many of 
these areas, but we are not where we need to be, obvious by 
this GAO report. So I look forward to the hearing, the 
comments, and the questioning in the hopes that we can truly 
achieve what is needed to get there.
    It is one thing for us to have a hearing. It is totally 
another to say this has got to stop. What do we need to do to 
empower OMB and the Administration to put this to a dead stop? 
It is always inappropriate, but it is more so today when we 
find ourselves in such difficult times.
    With that, I would yield back, and look forward to the 
testimony.
    Senator Levin. Thank you very much, Dr. Coburn. Senator 
Begich.

              OPENING STATEMENT OF SENATOR BEGICH

    Senator Begich. Thank you, Mr. Chairman, and I will be very 
brief. I just want to say thank you also for holding this 
hearing and for you two to be here and hear more about the 
report. I am going to be interested in, as you looked at the 
ARRA money, how widespread this is in the sense of the Federal 
Government in total. I will only give you my experience.
    When I was mayor of Anchorage, we came in, we had about $20 
million of owed fees, fines, and other taxes, and we could not 
get a lot of response. So we ended up creating a Web site. We 
posted everyone's name with what they owed on a Friday. The 
system crashed three times because it was not necessarily the 
person who owed the money who was looking. It was everyone else 
who wanted to see who was on the list. And within a short time, 
almost half of that money was paid up, and we were very 
aggressive about it.
    So like Senator Levin and Senator Coburn, I am going to be 
interested in what is the next step. It is somewhat appalling 
to see that people can continue to do business, owe money to 
us, take our checks, and then never pay us for the taxes that 
are due when good, strong business folks are out there trying 
to compete and they are paying their taxes.
    So I am going to be anxious to associate my comments and 
whatever actions the Subcommittee deems necessary, but I can 
tell you what we did as mayor, and it sure did change the deck, 
especially when we posted their names with what they owed and 
what for. Like I said, it got a lot of people talking and a lot 
of bills paid.
    So I will just leave it at that and say thank you again, 
Mr. Chairman, for this opportunity.
    Senator Levin. Thank you, Senator Begich. Let me now call 
on our witnesses for this afternoon's hearing.
    First, Gregory Kutz, Director of Forensic Audits and 
Investigative Service at the Government Accountability Office, 
who has testified many times before our Subcommittee.
    Second, Daniel Gordon, the Administrator of the Office of 
Federal Procurement Policy at the Office of Management and 
Budget.
    We welcome you both. We appreciate both of you being with 
us this afternoon and look forward to your testimony. And as 
you know, we have a rule here, Rule VI, which requires all 
witnesses who testify before the Committee to be sworn, and at 
this time I would ask both of you to please stand and raise 
your right hand.
    Do you solemnly swear that the testimony you are about to 
give will be the truth, the whole truth, and nothing but the 
truth, so help you, God?
    Mr. Kutz. I do.
    Mr. Gordon. I do.
    Senator Levin. We will use our timing system today. At 
about 1 minute before the red light comes on, you will see that 
the light is changing from green to yellow, which would give 
you an opportunity to conclude your remarks. Your written 
testimony will be printed in the record in its entirety. We 
would appreciate it if you could limit your oral testimony to 
no more than 7 minutes.
    Mr. Kutz, you go first.

TESTIMONY OF GREGORY D. KUTZ,\1\ DIRECTOR, FORENSIC AUDITS AND 
  INVESTIGATIVE SERVICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Kutz. Mr. Chairman, Ranking Member Coburn, and Members 
of the Subcommittee, thank you for the opportunity to discuss 
the tax gap. Today's testimony highlights the results of our 
investigation into whether the Recovery Act recipients have 
unpaid Federal taxes.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Kutz appears in the Appendix on 
page 31.
---------------------------------------------------------------------------
    My testimony has two parts: First, I will discuss the 
magnitude of unpaid taxes; and, second, I will discuss our case 
studies.
    First, we found that at least 3,700 contract and grant 
recipients with $750 million of unpaid Federal taxes received 
$24 billion of Recovery Act funds. This represents about 5 
percent of the 80,000 contract and grant recipients reported on 
Recovery.gov through July 2010. The numbers are understated for 
several reasons, including the fact that we could not derive 
taxpayer identification numbers for 17,000 of the 80,000 
recipients.
    As was mentioned, Federal law does not prohibit contract 
and grant recipients with unpaid taxes from receiving future 
contract and grant awards. However, Treasury can levy certain 
payments to satisfy tax debt.
    About 90 percent of the $750 million of unpaid taxes was 
not subject to the continuous levy program for two key reasons: 
First, only 13 percent of the dollars were reported by the IRS 
to Treasury for levy; and, second, half of the 3,700 recipients 
were not directly paid by the Federal Government.
    Moving on to my second point, as you mentioned, we took a 
further look at 15 of the 3,700 contract and grant recipients. 
We focused on those with unpaid payroll taxes. All 15 of these 
cases, which included 8 contract and 7 grant recipients, had 
unpaid payroll taxes. These entities provided construction, 
engineering, security, and health care services. These 15 cases 
were not randomly selected and, thus, may not be representative 
of all 3,700 recipients.
    IRS has taken collection or enforcement action for all 15 
of these cases. For example, IRS has filed Federal tax liens 
for 13 of the 15 cases. In addition, they have assessed trust 
fund recovery penalties for 12 cases. The effect of this civil 
penalty is a company's owners and officers are personally held 
responsible for a portion of the unpaid corporate or other 
entity payroll taxes.
    Examples of some interesting facts related to these 15 
cases include: Over half had reported State and local tax 
liens. Several had defaulted on installment agreements. Several 
did not file required tax returns. Several were cited for 
Federal labor law violations. Several executives received 
substantial salaries, as you mentioned, along with company 
loans. Several executives had hundreds of thousands of dollars 
each in gambling transactions. And several received millions of 
dollars of non-stimulus government contracts, Medicare and 
Medicaid dollars.
    These cases raise questions not only about the integrity of 
government programs but also about fairness. Organizations that 
fail to pay their payroll taxes have a lower cost base and an 
unfair advantage when competing for government contract and 
grant awards.
    As the Chairman mentioned, I first testified on this issue 
many years ago, in 1999, including several times before this 
Subcommittee. Our past reports have shown tens of thousands of 
individuals, corporations, and nonprofit organizations with 
unpaid taxes receiving billions of dollars of Medicare, 
Medicaid, contract, and grant payments.
    In conclusion, today's report shows once again billions of 
dollars going to individuals, corporations, and nonprofit 
organizations that failed to pay their fair share of taxes. 
This sends a negative message to the vast majority of American 
taxpayers that pay their fair share.
    As the Chairman mentioned, I am pleased to report to you 
that the continuous levy program has shown great improvement, 
and I applaud this Subcommittee for its role in making that 
happen.
    Mr. Chairman, Ranking Member Coburn, that ends my opening 
statement, and I look forward to your questions.
    Senator Levin. Thank you so much, Mr. Kutz. Mr. Gordon.

TESTIMONY OF HON. DANIEL I. GORDON,\1\ ADMINISTRATOR, OFFICE OF 
   FEDERAL PROCUREMENT POLICY, U.S. OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Gordon. Thank you, sir. Chairman Levin, Ranking Member 
Coburn, and Members of the Subcommittee, I very much appreciate 
the opportunity to appear before you today. This is my first 
time before this Subcommittee. I am happy to discuss the 
question of preventing tax cheats from getting government 
contracts. I want to talk about the progress we have made, but 
also the challenges ahead.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Gordon appears in the Appendix on 
page 37.
---------------------------------------------------------------------------
    I very much want to thank this Subcommittee for shining a 
spotlight on this issue for a good number of years, and with 
good results. And if I could be permitted to put in a good word 
for my former colleague, Mr. Kutz, and my former employer, GAO, 
where I had the honor to work in the Office of General Counsel 
for 17 years, let me say that we in the Administration 
appreciate GAO's report on tax debts held by recipients of 
Recovery Act funds, another in an ongoing series of GAO reports 
on tax-delinquent recipients of Federal funds.
    We are proud of the high level of transparency and the low 
level of fraud, waste, and abuse shown in Recovery Act 
spending, and I think that the work of the Recovery Board has 
certainly helped in that regard. That said, we take very 
seriously what GAO found in its latest report using its unique 
statutory access to tax records.
    I do have a few questions about data in the GAO report 
which I hope will be addressed, either at this hearing or we 
can do it as follow-up with GAO afterwards.
    With the encouragement of this Subcommittee and due in part 
to hearings, as has been mentioned, that this Subcommittee held 
several years ago on this very important topic, we have taken 
action, as the Chairman was pointing out, to better protect 
taxpayer interests when dealing with contractors who have tax 
delinquency. The fact is that the great majority of contractors 
pay their taxes, but we have an obligation to our citizens to 
crack down on those who abuse the system.
    A key step forward that the Chairman mentioned has been 
mandatory self-certification in which prospective contractors 
must state whether they have tax delinquencies, and there is a 
similar disclosure requirement for applicants for grants. And, 
again, as the Chairman pointed out, there has been considerable 
progress with the levy program through which we take part of 
government payments to contractors to pay off tax debts before 
money goes to the contractors.
    In January 2010, the President directed OMB and the 
Internal Revenue Service to evaluate the effectiveness of that 
contractor self-certification process. OMB worked with the 
agencies to check whether contracting officers had awarded new 
contracts to companies that had certified to having a tax 
delinquency. And the IRS evaluated the overall accuracy of 
contractor certifications based on their statistical sampling.
    OMB's review showed that only a tiny fraction of contract 
dollars went to contractors that had certified to a tax 
delinquency, and IRS's review revealed that the vast majority 
of the certifications were accurate. That shows promise, 
suggesting that certification acts as an effective deterrent.
    At the same time, we recognize that there is much more work 
that needs to be done. In particular, the statutory limits on 
IRS's ability to share taxpayer information represent a 
challenge for our contracting agencies, although we obviously 
fully appreciate and respect the importance of protecting 
taxpayer information. That is why we welcome the opportunity to 
work with Congress to craft statutory authority for limited 
sharing of information on tax delinquencies with appropriate 
safeguards so that the IRS can more effectively alert agencies 
if, for example, would-be contractors are misrepresenting their 
tax status, and agencies can stop those entities from getting 
government contracts.
    In addition to increasing attention on the tax status of 
prospective contractors, we are, as you have noted, getting 
much better at collecting tax debt from contractors. I think 
the contrast with the environment in 2004 is noteworthy. At 
that time GAO concluded that defense contractors were able to 
abuse the Federal tax system with little consequence. Today we 
are moving much more vigorously to collect tax debt. And as you 
have noted, probably the most important way that we are doing 
that is through Treasury's Federal Payment and Levy Program 
under which a contracting agency is advised on a payment-by-
payment basis how much to pay the IRS in satisfaction of a tax 
levy and how much, if any, to pay the contractor. And, again, 
as the Chairman noted, last year Treasury collected more than 
$110 million from tax delinquents through that program.
    The bottom line is this: We must take all appropriate 
actions, including debarment, to ensure that government 
contracts are rewarded to responsible, law-abiding contractors 
who take their tax obligations seriously. And we need to 
collect tax debts that contractors owe the government. We very 
much look forward to working with this Subcommittee, as we have 
in the past, and with other Members of Congress, as we move 
forward.
    This concludes my oral remarks, but obviously I am happy to 
answer all of your questions. Thank you.
    Senator Levin. Thank you so much, Mr. Gordon.
    Why don't we try an 8-minute first round, if that is OK.
    Mr. Kutz, let me first ask you about the 15 cases which GAO 
identified as apparently involving some real tax dodgers, hard-
core tax dodgers. You said these cases were not selected at 
random, but they had some things which made it appear that 
these would be some good targets for you to analyze what is 
happening and what is not happening. I think you said that 
eight of them were Federal contractors, seven of them grant 
recipients; one of them was a prime, the rest were 
subcontractors.
    Did you see any evidence that the Federal agencies intend 
to debar any of the eight that received contract dollars?
    Mr. Kutz. No, and one of them, according to IRS, was under 
criminal investigation by the IRS Criminal Investigative 
Division. So we did not see evidence that they were under 
debarment.
    Senator Levin. Now, is there a different issue relative to 
the seven that received grants? Is that a harder problem in 
terms of getting debarment in those cases?
    Mr. Kutz. Not necessarily, but the levy program does not 
cover most grant payments. So the Federal Payment Levy Program 
would not have allowed offset of a Federal payment at the back 
end. So I do not think necessarily debarment would be more or 
less difficult for them because if you look at the health care 
system, HHS debars Medicare providers, etc. So I do not think 
the process would vary necessarily.
    Senator Levin. OK. Now, we have all these businesses that 
are kind of obvious tax dodgers, and so obvious that you can 
pick them out. They stick out. And yet there is no debarment in 
evidence for any of those. What explains that lack of 
debarment? We have got the procedure that can be used, but 
apparently it is not often used, even in cases which are this 
egregious. Have you been able to figure out why?
    Mr. Kutz. Well, the agencies would not necessarily know 
that they had tax issues because they were not mostly primes. 
They were mostly at the subcontractor or sub-grant recipient 
type level. So under the self-certification under the FAR for 
the contractors, it would not have been necessarily apparent 
for the prime. But you mentioned the primes could get their 
subs to certify to them; that would have potentially gotten you 
a little bit more visibility if they were honest in that 
reporting.
    Senator Levin. But 8 of the 15 were Federal contractors.
    Mr. Kutz. Correct.
    Senator Levin. Only one of those was a prime. Is that 
right?
    Mr. Kutz. That is correct.
    Senator Levin. And are you saying for the ones that were 
subcontractors, in effect, that it would be hard to know--it 
would be hard to utilize the current debarment proceeding?
    Mr. Kutz. Oh, no, not necessarily that.
    Senator Levin. Well, then, why is there so little 
debarment?
    Mr. Kutz. Mr. Gordon maybe can answer that better. I do not 
know. Debarment is something that is one avenue for protecting 
the government from individuals and corporations that are bad 
actors.
    Senator Levin. Yes, but it is apparently not very often 
used.
    Do you have any statistics on debarment, Mr. Gordon?
    Mr. Gordon. I am not sure I have numbers at hand, but I can 
tell you a little bit about suspension or debarment in this 
particular area, sir.
    Mr. Chairman, when we checked with the agencies, we found 
that the Department of Defense, in fact, did refer a number of 
cases. (This is not with respect to GAO's report. This is the 
review we did last year.) The Department of Defense referred a 
number of companies because of tax delinquency certifications 
to their suspension or debarment offices, and, in fact, one of 
the companies was debarred.
    Senator Levin. One company. I mean, we have got tens of 
thousands of companies out there that are delinquent, and 
debarment is rare. One company out of I do not know how many 
were referred by the Department of Defense. I think your 
testimony says several instances.
    We just have to find out--it was great we collected over 
$100 million. We need it. But we have got billions out there, 
and we have got to figure out why debarment is not more often 
used. That is one of the things that I would like to figure 
out.
    Mr. Gordon. If I could, Mr. Chairman--first of all, I agree 
with you. We need to be much more vigorous in our suspension 
and debarment programs. I will say that there has been 
improvement over the last 2 years. As you know, USAID has 
exercised their authority, and that is a good thing. The Small 
Business Administration certainly got everybody's attention 
when they suspended companies because of concerns of abuse.
    Suspension and debarment is a key protection, and it needs 
to be exercised, when it is appropriate, but we should be 
seeing more vigorous investigations by our suspension and 
debarment officials, and you would expect there to be 
suspension or debarment.
    One of the challenges, I think, that we all face as we look 
at this GAO report is one you alluded to, Mr. Chairman, and 
that is, many of the problems here were actually not by 
entities that directly received Federal funds. As Mr. Kutz 
pointed out, their report, when it looked at 15, had 8 what 
they call contract recipients. But, in fact, only one of them 
was a prime contractor. The other seven, I am not even sure 
that they were subs because they might have just been vendors. 
We need to find out more.
    But it is noteworthy that the one entity that was a prime 
contractor in the GAO report was current in paying back its 
taxes.
    Senator Levin. What would you think of requiring the prime 
contractors to include a provision in all of their contracts 
that says to anyone who wants to be one of their subs or supply 
materials or services that they must disclose to the prime 
whether there are any back taxes owing to Uncle Sam? What would 
you think of making that a requirement in every contract that 
we issue?
    Mr. Gordon. Obviously, there may be sensitivities about 
taxpayer information, but I will tell you, I like the idea of 
shining a brighter light on this question. The challenge that 
the GAO report points to is that tier below the primes. We need 
to find a way to reach them.
    On the grant side, by the way, the vast majority of the 
grants--and I think Mr. Kutz alluded to this--were going to 
States and local governments. They are tax free. They are not 
the problem. It is the sub-recipients beyond the States.
    It is a challenge, and we would very much look forward to 
the opportunity to working with this Subcommittee and others in 
Congress to find a way to reach those tax delinquents.
    Senator Levin. Well, let me repeat one way, which is that 
there be a standard contract provision in all of our contracts 
with primes requiring them to have a clause in all of their 
subcontracts and in all of their purchase agreements that 
requires their subs or their vendors to disclose whether or not 
there is a back tax owed to Uncle Sam. Failure to disclose that 
would really create some jeopardy, or if there is a 
misstatement about it, because that could be a false statement 
that would be put in place in order to obtain Federal funds. So 
it could be very serious, a false statement or an omission 
where there is one that is required.
    I hope you would take a look at that, and give us some 
other ideas as to how we can get to that tier below, because we 
are not using the tools that we have against very many people. 
We have made a small dent in the problem, and we are grateful 
we have. A lot of oversight has gone into this. I think 
probably, Mr. Kutz, there have been 100 to 150 contractors that 
the GAO has identified in this and earlier hearings.
    Mr. Kutz. Yes.
    Senator Levin. I would hate to find out how many of those 
contractors never did pay their taxes, but we want to kind of 
not look that far backward. We want to just pick up right from 
here and really put some teeth into our laws and in the 
procedures which are supposed to be enforcing those laws, and 
we would look to both of you for specific recommendations on 
how we can use debarment more often and suspension more often 
and perhaps get that clause into all of our prime contracts. 
Thank you.
    Dr. Coburn.
    Senator Coburn. I want to repeat this one statement. If 
USAspending.gov was working the way it was supposed to, you 
would have a historical record of every sub-grantee and sub-
sub-grantee of every grant and every contract with the Federal 
Government. And the fact that that is not happening--and it is 
something that the President actually authored the bill on, 
along with myself--and now it is not being implemented is one 
of our problems.
    I want to go back to the question: Why should somebody get 
a Federal contract if they owe the Federal Government money? I 
mean, should we be in the business of giving them business so 
we can collect the taxes? Or should there be a consequence to 
being irresponsible?
    Mr. Gordon. Shall I respond, sir?
    Senator Coburn. Sure.
    Mr. Gordon. First of all, I should say on USAspending.gov, 
it is a serious issue. I had the pleasure when I was preparing 
for this hearing of watching a hearing that you held about a 
year ago with my colleague Vivek Kundra and others, talking 
about that. As I am sure you know, there has been some 
progress, Dr. Coburn, in terms of getting subcontractor data 
up, but we have a lot more work to do in that area.
    On the issue of ever giving a contract to a tax delinquent 
contractor, as a general rule, we can all agree that tax cheats 
should not be getting Federal contracts. That said, on 
reflection, I think we would also agree that, for example, if 
the tax debt is very small, that probably would not be a reason 
to exclude them, and----
    Senator Coburn. Why not? If I owe you money and I do not 
pay you the money, why would you give me more money? If I am 
not responsible--I do not care if it is a dime. Why would we 
say that you can be just a little bit irresponsible and still 
get a contract versus a little bit more irresponsible and you 
do not? I do not understand that thinking.
    Mr. Gordon. I understand the point, Senator, but I think 
that when you are talking about if you had a tax debt of $200 
and those debts are captured in the universe that GAO has in 
its report, it feels like the Federal Government could be 
cutting off its nose to spite its face if it says, ``We are not 
going to award a contract even though with the levy program we 
will get our $200 back immediately.''
    Senator Coburn. That is not true. We do not get our levy 
money back. As a matter of fact, we have big problems with the 
levy program. It is much better than what it used to be, but it 
is not anywhere close to where it needs to be.
    Mr. Gordon. It is certainly not as good as it should be, 
but, sir, we have collected overall through that levy program 
more than half a billion dollars, more than $600 million 
cumulatively through that levy program. Is it where it should 
be? Absolutely not. Have we made substantial progress? Yes. And 
if we were to say we are not going to award a contract to this 
company even though it offers us the best price or the best 
quality, or both, because of a $200 debt----
    Senator Coburn. Have them go fix it before--in other words, 
what you are saying is rationalizing that you are going to 
create an expectation less than what we should have in terms of 
integrity. If all contractors know, if it is a given that if 
you have an outstanding debt liability to the Federal 
Government, you are not going to be considered for a contract, 
I guarantee you they will go borrow it from Granny and pay the 
two hundred bucks. This rationalization that, oh, well, we 
might miss one, if you create the proper expectation, you are 
not going to have that problem. That is not even going to be 
there. They are going to worry. If they are depending on 
Federal Government contracts or grants for their revenue, they 
are going to make sure that is taken care of. And if they do 
not take care of it, it tells you they are a terrible manager 
to begin with and you do not want them contracting with the 
Federal Government. So I would challenge that position.
    Let me go back. In 2004, in the American Jobs Creation Act, 
we increased the levy amount to 100 percent of payments to 
Federal contractors and other vendors for goods or services 
sold or leased to the Federal Government. This increase would 
allow the Federal Government to be fully repaid, in some cases 
before payments are made to contractors with back taxes. 
However, IRS officials told us that they have not implemented 
this authority because, in their opinion, the statute did not 
explicitly name real property among the assets that could be 
levied up to 100 percent.
    So here we have a decision by the IRS that says we are not 
going to implement what the law is starting in 2004 because we 
are not sure it clarifies our ability to levy.
    So what percentage of the levy program is not being levied 
because we do not have clarification--that is one of the things 
we are going to have to take care of if we address it. There is 
no question that it was the intent of the Congress to levy real 
property, and for them to not do it--what percentage of the 
levies are not being accomplished because the IRS will not levy 
real property?
    Mr. Gordon. Sir, I do not know the percentage that is not 
being collected now, but I can tell you that we agree with 
your--we share your concern. The President's budget, as I am 
sure you know, includes a provision that would correct that 
problem.
    Senator Coburn. All right. Let me have one other question, 
if I might, to you. Let us say I am a Federal contractor and I 
certify that I have no tax liability when, in fact, I do. What 
are the checks on that? And how often does it happen that you 
actually check whether I have a tax liability or not?
    Mr. Gordon. It is very difficult to check because our 
contracting officers cannot get that information from the IRS. 
That is what we did last year. We had the IRS check 
certifications. They checked, if I remember correctly, a 
statistically valid sample of 400 of the certifications. It is 
just the situation you are referring to, Dr. Coburn. They 
looked at situations where companies said, ``We do not have a 
qualifying tax delinquency,'' and what they found was that in 
the great majority--do not hold me to the exact number, but 
something like 93 percent of the time those certifications were 
accurate. And in the few that were not accurate, the problems 
were--I think they called them ``transitory.'' They were either 
very minor, or they were resolved within a matter of weeks. And 
it is not because IRS was looking. They had already been 
resolved.
    Senator Coburn. They had been resolved, so in the mind of 
the vendor, they had resolved the issue.
    Mr. Gordon. Eventually, although at the time they 
certified, they were not accurate.
    Senator Coburn. So what are the consequences to that? If I 
falsely certify to the Federal Government on the basis to get a 
contract that I have no tax liability, when I know very well 
that I do, what are the consequences?
    Mr. Gordon. It is a very serious matter. As you know, it 
potentially is a criminal matter. It is a violation of 18 
U.S.C. 1001. But the problem is that our contracting officials 
do not have any way to find out because we are barred by 6103 
from getting taxpayer information.
    Senator Coburn. You do not have to get taxpayer results. 
All you have to do is send to the IRS, is this an accurate 
representation? They either say yes or no. They are not giving 
you any tax information other than to say this representation 
is false or it is accurate.
    Mr. Gordon. I would defer to my colleagues at IRS, but I 
fear that they would have concern that they were sharing 
taxpayer information.
    Senator Coburn. Well, we need to fix that. That is 
something we need to fix.
    Mr. Gordon. We would very much support improved ability to 
communicate between IRS and the agency.
    Senator Coburn. I would also say, in terms of the levy 
program, you have saved half a billion dollars. This one report 
found $757 million, which is three-quarters of a billion 
dollars, just in this one report. So the magnitude--it is great 
that you found $500 million. I am happy for you. I want to find 
$5 billion. And I think we have a lot of work to do to get 
there.
    You said a moment ago in your testimony or in answering one 
of Senator Levin's questions that you found a tiny fraction 
when you looked in terms of noncompliance at the OMB when you 
all looked at it. What is a tiny fraction to you?
    Mr. Gordon. My recollection, sir, is that there was less 
than $20 million of contracts awarded during the fiscal year 
where the contracting officer was awarding a contract making a 
responsibility determination, and as to those $20 million, the 
contractor actually had certified to a tax delinquency. So that 
is $20 million out of something on the order of $540 billion.
    Senator Coburn. OK. One last question real quick, Mr. 
Chairman, if you do not mind.
    Mr. Kutz, you testified that you had no taxpayer 
identification number on 17,000 of these.
    Mr. Kutz. Correct.
    Senator Coburn. Out of some 80,000.
    Mr. Kutz. Correct.
    Senator Coburn. Why?
    Mr. Kutz. Because of the way--they had to use DUNS numbers. 
We matched Recovery.gov to the Central Contract Registry so we 
could get taxpayer identification numbers because Recovery only 
has Dun & Bradstreet numbers. To match the IRS unpaid 
assessment file, you have to get a taxpayer identification 
number. So these were entities that were not registered in the 
Central Contract Registry because they were not direct Federal 
Government contractors.
    Senator Coburn. OK. So would you imagine that we need some 
help to clarify or at least clean up so that we have a 
consistent standard so that there is a way to track it?
    Mr. Kutz. Certainly, with respect to transparency of who 
these subs are, yes, that would be useful.
    Senator Coburn. All right. Thank you, Mr. Chairman, for 
being lenient.
    Senator Levin. Thank you, Dr. Coburn. Senator Begich.
    Senator Begich. Thank you, Mr. Chairman. I am feeling bad 
that I have a 3:30 meeting because I would rather be in here.
    Let me ask one thing. You talked about how to get that. I 
know everyone who buys a home in this country, when you settle, 
do a settlement--I know this as being someone in real estate 
for several years--you have to fill out the 4506 form, which is 
an IRS form. At any time that file is audited, they have the 
right to go look at your tax records. Now, everybody in America 
who buys a home has to do that. Why can't we have that as a 
simple clause on the contractor who certifies that also says--
it is a simple form. IRS produces it. It is a transcript form, 
and it is not complicated, and you just sign it. If you do not 
sign it, you do not get the contract. Why can't you just do 
that now? What prohibits you from that?
    Mr. Gordon. I think that the idea of requiring consent----
    Senator Begich. I know you like that.
    Mr. Gordon [continuing]. Is a good idea.
    Senator Begich. OK. What prohibits you from doing that 
right now?
    Mr. Gordon. My understanding is that there is concern about 
6103, but it is certainly something we are happy----
    Senator Begich. But a contract of service is a mutually 
agreed upon arrangement. So I, government, offer you a 
contract; here are the terms of the contract. You sign it or 
you do not. You do not sign it, you do not get the contract. 
And part of that is at any time we audit this file on this 
contract, we have the right to review, just like every 
homeowner--I mean, if any of us in our homes, if the title 
company, and we closed that, got audited, they have the right 
to determine, to make sure that what we said our income levels 
were and everything at the time of purchase was accurate and we 
actually were doing our business.
    So I challenge you with that because what I fear greatly is 
the way the legislative process works around this place, 
millions more will not be paid while we wait around. So I would 
encourage you to look at that.
    Second, I will tell you this: As a former mayor and 
assembly, no one could get a liquor license unless they paid 
their taxes. That was the rule. You come up, you get a liquor 
license, but you are not in business until you pay your taxes. 
If you do not pay your taxes, you do not get the license. It is 
not complicated.
    So I think administratively there are probably some things 
you can do, especially because it is under contract law. We 
always go back and say we have to write a new law to make this. 
It is contract law.
    The other thing that drives me a little crazy as I am 
sitting here is that people--for example, if I wanted to know 
the person who has been banned from--I think it was one prime, 
where do I go to find that? If I am a local government official 
and I am granting out these contracts, and I want to look at a 
list that the Federal Government has of bad actors, is there 
any place I can go?
    Mr. Gordon. Senator Begich, you raise several important 
points. I want to tell you, we in the Administration want to 
leave no stone unturned, whether it is through the suspension 
or debarment process, whether it is through more vigorous 
following up on these certifications, whether it is through 
thinking about how to get to sub-recipients. They were all 
challenging, but I think we can make progress, as you say, on 
the administrative side and not only through the legislative 
side.
    The certifications that entities have, if they are prime 
entities, prime contractors, the certifications go into a 
database that all of our contracting officials can see. It is 
called Online Representations and Certifications Application 
(ORCA). That is not publicly accessible at this point. We would 
eventually want to make that publicly accessible. The main 
reason that we are not doing it is, frankly, the cost of 
building out the system.
    We think, as long as there is not a taxpayer information 
problem, that there should be a way that the public can see 
which entities, in fact, have put into the system called ORCA, 
the fact that they have delinquencies.
    But if I could, two other points that are worth 
considering. One of them is, what does the contracting officer 
do if she or he is given the right of access to tax returns? It 
is giving them a lot of sensitive information, and I think that 
our contracting officers would be hard pressed to make calls 
about how serious a tax return is as part of the responsibility 
determination. If we ended up going down that path, I would 
want to be sure that contracting officers get training.
    Senator Begich. I am not necessarily saying that. What I am 
saying is one of the things I have heard over and over again is 
access. All I am saying is just like every homeowner has to 
sign a document that if that file is audited, they can get the 
information very easily.
    But the other piece I want to try to dive into, if the IRS 
has a tax lien on any business, is there a simple--I can go to 
the IRS Web site, and if I am a Federal Government purchasing 
officer or a State purchasing officer or a local government 
purchasing officer, because a lot of the contracts local 
governments do, they require you to name your subs. They do not 
just give you a contract. I know this from the work we used to 
do as mayor. You have to name your subs. So can they access a 
site publicly to show if there are tax liens? I know you can do 
it State by State. But is there a central location as well as 
criminal investigations, just a simple one, two, three site, 
that is it.
    Mr. Gordon. I do not believe there is a simple way to get 
that information today.
    I should say, Senator, one of the challenges--and this is 
one of the things, as I was studying the GAO report. Again, in 
the 15 examples where they drilled down, the great majority of 
them were not entities that got money directly from the Federal 
Government.
    Senator Begich. No, I understand. But what I am trying to 
do is follow the next link, and that is, if I am the 
municipality of Anchorage, when I was mayor, the purchasing 
officer would--they have Federal receipts. The requirement is 
you have to certify that no one owes taxes who you are granting 
this to. If I am a contractor with the city of Anchorage, the 
prime will give the list of the subbers. That is a requirement. 
At least in our city it was, that you cannot just go pick 
people later. You actually had to find your subcontractors. So 
then the purchasing officer just goes to one site, and they see 
who has tax liens all across this country. And if Joe Blow 
subcontractor has a tax lien, he tells the prime, ``I cannot 
give you this contract until that is cleared up.''
    So that is what I am saying. In other words, what we have a 
tendency to do--at least what I am learning after 2\1/2\ years 
here, we have a disjointed information source. So if you expect 
a sizable amount of this money which does go to State and local 
governments and health care agencies, there has to be a point 
where they can go to and what I call is a three-click rule. If 
it takes beyond that, it is never going to work.
    So I am asking you to kind of look at that, and if there is 
a cost issue to this, I am sure we could do the pay-for as much 
we collect from the past due. I think we can figure this out. 
If you think there is money to be collected, the pay-for alone 
could probably solve this problem and have tons left over. But 
I am struggling here, and I will tell you, I will probably go 
to a Web site. I will pretend I am a contractor and try to see 
if I can accomplish the goal of finding out how to find this 
information. My guess is I will not be able to find it. It will 
be difficult for me, because we cannot--the Federal Government 
can only do so much, especially with so much money granted to 
States and local governments who are also using layers of prime 
and subs. And we give them tools. They sure do not want to have 
a violation because they want those dollars, whether they be 
transportation dollars or whatever they might be. But the 
combination of the three entities could be powerful. And I 
agree with Senator Coburn and Senator Levin. The minute they 
get the message, they are going to be kicked off the list. And 
I would agree--I would say one comment. Probably the reason why 
they have best prices is because they are not paying their 
taxes. But once they are kicked off the list, I know what we 
did in local government. They got their act together, or as 
Senator Coburn said, they were bad actors anyway and they 
needed to be cleared out of the system.
    So, again, I just want to say thanks for having the 
hearing. Hopefully, again, the form that I suggested is an 
example, it is a contract relationship. I cannot see why every 
contractor cannot sign that and say, ``We will ensure that the 
information is available.'' If not, then we will audit them.
    Mr. Kutz. Senator, could I address those before you go? 
Because I want to just touch on a couple things. We have 
mentioned--we believe, I think, that consent is a valid option 
here. We have talked about it at past hearings, and it is 
something that could be done to allow the government to do more 
of a systematic look at the tax issue.
    There is a central location for all suspended and debarred 
contractors and other entities called the Excluded Parties List 
System. I do not know if it is available to State and local 
governments, though.
    Mr. Gordon. It is publicly available.
    Mr. Kutz. OK. So then it could be searched by State and 
local--and it also includes the HHS exclusion list for health 
care-related issues.
    On the tax liens, I do not believe----
    Senator Begich. What Web site would you find that on?
    Mr. Gordon. It is a GSA Web site, www.epls.gov, Excluded 
Parties List System. Publicly available.
    Mr. Kutz. The tax liens, I believe IRS does not have a 
central system, but we go to LexisNexis, and it is public 
information. So it is not one push. It might be a couple of 
buttons to get to. So it is available.
    And then the criminal investigations, they are only 
available if they are closed. If it is an open criminal 
investigation, law enforcement is not going to talk to you 
about it.
    Senator Levin. Before you leave, Senator Begich, we did act 
last year to have a more publicly available Web site, which 
shows a list of basically bad actors beyond those that are 
excluded formally. But let me go through this--there are a lot 
of acronyms here, and there is a lot of new stuff here, and I 
am not sure it has been implemented. But let me start.
    You have a governmentwide database, as I understand it, 
called ORCA. You made reference to ORCA, the Online 
Representations and Certifications Application. Then you have 
something which we passed last year, which is FAPIIS. I do not 
know how you pronounce it.
    Mr. Gordon. Usually ``fap-is,'' although every so often 
there are people who say ``fay-pis.'' It is the Federal Awardee 
Performance and Integrity Information System. It actually was 
up and running 1 year ago now, April of last year.
    Senator Levin. That is what I want to get into, because I 
think this may or may not address some of the issues which have 
been raised here. So the Federal Awardee Performance and 
Integrity Information System has been up for a year. But I 
believe that--and your excluded contractors are just one part 
of that. That is not the whole deal.
    Mr. Gordon. Yes.
    Senator Levin. Then we adopted in our last year's defense 
authorization bill--I think this was the one where it was 
Congresswoman Maloney, I think, in the House and Mr. Waxman in 
the House and Mr. Towns in the House; Senator McCaskill and I 
were involved, Senators McCain and Sanders were involved here. 
Are you familiar with that issue?
    Mr. Kutz. I am not.
    Senator Levin. Is that the FAPIIS issue?
    Mr. Gordon. I have not heard what the next point is, sir.
    Senator Levin. It is a public version of FAPIIS.
    Mr. Gordon. Yes, now I understand. Last year, Congress 
required that we open up most of FAPIIS to the public except 
for the past performance section, and that has now happened as 
of----
    Senator Levin. A month ago or so.
    Mr. Gordon. Yes, exactly, several weeks ago. FAPIIS is now 
publicly available. That provides an enormous amount of 
information, for example, about civil problems, about 
convictions, about terminations for default, and many other 
issues. Publicly available.
    Senator Levin. We are going to ask you, Mr. Kutz, if you 
would look at what is now publicly available and tell us what 
is available, since it is brand new, and what is not available. 
You have heard the kind of questions here today as to what we 
think ought to be available and what is there which is 
available publicly and what is not. That would be very helpful. 
I think while you are still here, it is right along the line, 
Senator Begich, that you were talking about.
    OK. So that would be very helpful. But I also want to get 
to this other provision that I talked about, that every 
contractor would have to include a provision in their contract 
or purchase agreement with a supplier that the supplier would 
have to represent that they are current on their taxes, or if 
not, what their back taxes are. If they misrepresented in 
response to that, if a subcontractor made a misstatement to a 
contractor in order to get a contract, or if a supplier 
misstated something, I presume that would be covered by current 
Federal law. Would that be true? It would be a 
misrepresentation in order to access Federal money.
    Mr. Gordon. Well, Chairman Levin, I no longer work in GAO's 
Office of General Counsel, so I had better be careful about 
law. But what I would say is it sounds like that statement 
would not be going to the Federal Government, but it would be 
used in order to get Federal funds, so there might be a false 
claim issue, I will say, not functioning as a lawyer.
    Senator Levin. OK. We have to find that out. I do not know 
who I am looking at to find that out.
    Mr. Kutz. We can try to report back to you on that.
    Senator Levin. OK. Would you find out if there is a 
misrepresentation if a subcontractor misstates whether or not 
it is current in its Federal taxes?
    Mr. Kutz. And you want to know whether that would be a 
false statement.
    Senator Levin. Is that a false statement under Federal law 
which would invoke some criminal liability?
    Mr. Kutz. Right, because it is not being made to the 
Federal Government, but we could do that.
    Senator Levin. That is right, but if you are getting 
Federal funds----
    Mr. Kutz. Right, that is getting Federal funds.
    Senator Levin [continuing]. Indirectly with the Federal 
Government. But the second question is whether or not if there 
is silence--if there is no statement made at all--if there is a 
requirement, tell us if you are behind in your Federal taxes, 
you must disclose to us, and there is no disclosure, would that 
be covered by Federal law? Is the failure to disclose--which is 
a harder case, I would think. But can you also let us know?
    Mr. Kutz. Sure.\1\
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    \1\ See Exhibit No. 2, which appears in the Appendix on page 75.
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    Senator Levin. Finally, would you let us know in both 
cases, is there anything we can do to tighten that law? Because 
that is really where a lot of this problem lies, is down below 
the prime level, for reasons you both have given. So we have to 
figure out, well, how do we get below the prime level? It may 
be a crime level too, but below the prime level. So if you 
could give us that information, we will look to you then, Mr. 
Kutz.
    Mr. Kutz. Yes, we will look into that, and I think that 
this is a good issue for today, too, because I think the 
Recovery Board provides some additional transparency at the 
sub-recipient level--which has not been there much in the past.
    Senator Levin. All right. And then while we are asking, any 
other legislation that you can recommend to us to tighten our 
laws, it would be appreciated. If you could give us that for 
the record, that would be helpful.
    Dr. Coburn.
    Senator Coburn. How do we know that contracting officers 
are checking ORCA?
    Mr. Gordon. The short answer is I cannot be 100 percent 
sure. They are required to, and we are providing them training 
that tells them how important it is. But can I be 100 percent 
sure that in every case every contracting officer is checking? 
I cannot.
    Senator Coburn. They do not have a checklist of things that 
have to happen before a contract is issued?
    Mr. Gordon. Oh, I suspect they do, but my point was----
    Senator Coburn. Yes, I understand that. What about on 
contract renewals? Are they required to go back and look at 
ORCA again?
    Mr. Gordon. If I could state it somewhat differently, but 
it is the very same question. Do they have to do a 
responsibility determination, for example, when they are 
exercising options? It is a very important question. I would 
want to check the Federal Acquisition Regulation and see if 
they are required to. I am not sure they are required to.\1\
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    \1\ See Exhibit No. 3, which appears in the Appendix on page 82.
---------------------------------------------------------------------------
    Senator Coburn. OK. Why did the IRS go after these guys 
only after your report? Why not before?
    Mr. Kutz. The 15 cases?
    Senator Coburn. Yes.
    Mr. Kutz. Well, they certainly did collection action 
against all of them. They did some enforcement action, as I 
mentioned. There were some levies and other types of things. 
But should there have been more aggressive action in some 
cases? That is a fair question. We did not really try to 
evaluate it.
    Senator Coburn. And it is not fair to go after the IRS here 
because overall they do a pretty good job, but maybe one of the 
things we should have done is talk with them maybe a little bit 
and have them on a second panel.
    Mr. Kutz. Well, let me just say, on the payroll tax issue 
it is a felony to withhold and not forward payroll taxes, and 
that is rarely investigated from a criminal perspective. It is 
almost always investigated from a civil case. That is why I 
mentioned in my opening statement, trust fund recovery 
penalties are exclusively used. We have hardly ever seen anyone 
convicted. And if you think about it, it is like taking money 
out of a 401(k) plan. These are for the Social Security and the 
Medicare trust funds, which the trustees report just came out. 
That is pretty egregious behavior, in our view.
    Senator Coburn. Yes.
    Mr. Gordon. Dr. Coburn, if I could?
    Senator Coburn. Yes.
    Mr. Gordon. A couple of things here. If I were going to ask 
GAO for a little bit more detail, actually your question goes 
to one of the areas where I think it would be useful to know 
more. For example, we learned in the GAO report that the only 
prime contractor in their 15, as I mentioned earlier, was fully 
current in repaying their taxes.
    The $40 million that were owed by the 15 entities that GAO 
identified, IRS was already collecting from them. And, in fact, 
before IRS ever saw the GAO report, before the IRS ever saw the 
list of 15, they were already taking action so that the $40 
million that is owed by the 15 is already down below $32 
million. IRS did not wait for the GAO report to go after those 
15.
    Senator Coburn. Good point. Which comes back to the point. 
What did their certification say?
    Mr. Gordon. It is an excellent question, sir. None of the 
entities were required to certify--none but one. I will get to 
that one in a moment.
    Senator Coburn. Because they were not prime contractors.
    Mr. Gordon. Because they were not prime contractors. The 
one that was required to certify accurately certified no 
delinquency because they were fully current in paying their 
taxes.
    Senator Coburn. OK. So what we have discovered here is 
there is a problem, a big problem with subcontractors.
    Mr. Gordon. Subcontractors, sub-recipients, and vendors, 
absolutely. It is a challenging one, and we want to work with 
you to find solutions, either administrative or legislative, 
that make sense.
    Senator Coburn. I think this is probably a repeat of what 
Senator Levin said, but you advocated for legislation that 
would permit the Treasury to share information with agency 
contracting officials. Have you done any research to say what 
needs to be done and what is the likely cost of that? I can sit 
and think, if I have a certification that says I do not have a 
tax liability, that is not hard to put into a computer and 
bounce it off IRS and it says, yes, that is an accurate 
statement, or no, it is not. So you know nothing about their 
tax situation other than that it is not an accurate statement 
or it is. That cannot be too hard, can it?
    Mr. Kutz. It depends on the link you have with IRS and to 
what----
    Senator Coburn. Well, I mean, we have all sorts of links 
with the IRS that are protected under statute that are 
monitored that can go back--and they do go back and forth.
    Mr. Kutz. Right. One approach is to do it case by case. The 
other is to do it systematically periodically and update the 
Central Contract Registry with who is and is not delinquent. 
Now, that would get into some disclosure issues with 6103 also, 
but right now there is an indicator in the Central Contract 
Registry about whether there is certain Federal tax debt--or 
Federal debt. Not tax debt--debt. There is a yes or no in 
there, and so there are certain types of situations where that 
could be a more systematic approach.
    Mr. Gordon. And to be fair, Dr. Coburn, to our colleagues 
in IRS, you could be talking about hundreds of thousands of 
inquiries each year that would be going to them.
    Senator Coburn. But hundreds of thousands of inquiries mean 
nothing on good modern computer systems, whereas if you are 
going--IRS knows who has a tax liability. It is on one server 
or one group of servers. There is nothing to write a program 
that if an intermediary said these are coming from contracting 
officers, all you have to say is yes or no, here is the 
taxpayer identification number, boom, yes, no, it is out. And 
nobody has to touch that except the contracting officer that 
says submit. And they can do them in batches or they can do it 
as they are working a contract. And they get an automatic 
answer, yes or no. So that is not a hard thing. It is not any 
harder than checking the box that said they filed the statement 
and certified that they did not have a tax liability. I mean, 
that is not a hard thing. We always try to make things hard. 
The only thing that is hard is getting the government up to 
speed on some of its computer software and allowing it to talk 
to each other.
    Is it a felony to falsely certify?
    Mr. Gordon. I would want to turn to counsel to answer that 
question. \1\
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    \1\ See Exhibit No. 3, which appears in the Appendix on page 82.
---------------------------------------------------------------------------
    Senator Coburn. OK. Please do.
    Mr. Gordon. But I think that a false certification to the 
Federal Government might be a violation of 18 U.S.C. 1001, 
which would be a criminal violation.
    Senator Coburn. One other question, and then we will finish 
up. I am going to have some questions for the record, and I 
hope you all will submit those. What I really want to do is 
create an environment where we can actually get from these 
gentlemen what we really need to do on our side to fix this and 
make it run smoother, make it more easily done.
    As you look back on the Recovery Act, besides it being 
controversial, do you think Congress did a good job of setting 
up--I know we did good with the Recovery Board. We had a great 
IG. Overall, whether I agree with where the money was spent, we 
did more to work on accuracy with that than anything. But in 
this one area it looks to me like Congress did not get it done. 
What is your assessment of that?
    Mr. Gordon. I think that would be a very harsh assessment, 
sir. I think that the Federal funds were going to recipients 
where I am not at all sure they had significant problems. The 
fact that there was a problem beyond that first tier--maybe it 
was the second tier, maybe even the third tier--that is very 
tough to do. Congress would have had to have some sort of a 
system to address the 6103 problem. It would have needed to be 
addressed. And the fact is we have had very few assertions of 
fraud, waste, or abuse in connection with the spending of 
Recovery Act funds.
    Senator Coburn. So looking forward, what do we need to do 
to make sure we do not--I have put out a few reports on the 
Recovery Act myself in terms of some of the awards that were 
associated with it. What are the systematic changes that we 
need to make going forward so that when we have another episode 
when we are going to do this or with the tremendous amount of 
dollars that flow out of this, what do we need to do?
    Mr. Gordon. And this is much broader than the Recovery Act. 
We need to be sure that the suspension and debarment progress 
is vigorous. I very much agree with what Chairman Levin said 
about that. The suspension and debarment process needs to be 
reinvigorated. We are working on that now. We need to be sure 
that our contracting officers have access to information. That 
is why ORCA and FAPIIS--forgive me for the acronyms, but that 
is why those databases are so important.
    We then need to train our contracting officers, and we are 
working on that right now to be sure that they know they have 
to check. They must not overlook these important issues. Those 
three steps alone I think will help us move forward.
    Senator Coburn. So do we have a system of randomly checking 
our contracting officers to see if they are checking?
    Mr. Gordon. I do not know that we have one governmentwide, 
but it is something I want to look into.\1\
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    \1\ See Exhibit No. 3, which appears in the Appendix on page 82.
---------------------------------------------------------------------------
    Senator Coburn. Do we have one in the Defense Department?
    Mr. Gordon. I think that some agencies are doing that, but 
I will tell you, one of the things I have done since I started 
this job a year and a half ago is talk to the senior 
procurement executives across the government. I want to raise 
that issue with them. I think it is a very important idea.
    Senator Coburn. We have a tremendous shortage of 
contracting officers, and what I want to do is make it to where 
their job is easy to be effective and efficient.
    Mr. Gordon. I could not agree more, sir.
    Senator Coburn. Yes. Thank you, Mr. Chairman.
    Senator Levin. Thank you, Dr. Coburn, again for your 
leadership here.
    When I was a young lawyer practicing law, we represented 
companies, some of whom did not send along their Social 
Security money to the Federal Government that they had deducted 
from their employees' salaries. We told them that was about one 
of the worst things in the world you could do because you could 
be in jail for that one. I mean, that is serious business, 
trust fund money. And I am surprised that there has been, as 
you talked about, Mr. Kutz, so little criminal enforcement of 
those provisions. That is theft of money that belongs in a 
trust fund.
    As you point out, there has been a reluctance to use the 
criminal law. But, I do not think there was a reluctance about 
that--I will not say how many decades ago, it is embarrassing--
when I was practicing law, but I do not think there was that 
much reluctance.
    Senator Coburn. Six or seven.
    Senator Levin. Thank you--that is years. That is not 
decades.
    Mr. Kutz. I used to be the auditor of IRS back in the 
1990s, and we looked at it back then, and it really has not 
changed that much in the 15 or so years.
    Senator Levin. I am talking about the 1970s.
    Mr. Kutz. Yes, so you are little longer than that, but----
    Mr. Gordon. But, sir, I very much agree. Those payroll 
taxes are held in trust by the employers. For the employers to 
take their employees' funds and not to pay them to the IRS is 
absolutely beyond----
    Senator Levin. It is criminal.
    Mr. Gordon. It is criminal and immoral.
    Senator Levin. It is not figuratively criminal. It is 
literally criminal. It is not what? You said it is criminal and 
what?
    Mr. Gordon. I said it is criminal and it is immoral.
    Senator Levin. Immoral.
    Mr. Gordon. It is taking those employees' funds.
    Senator Levin. Right. But it is also--isn't there 
individual liability for that?
    Mr. Kutz. Yes, that is the trust fund recovery penalty. So 
the officers and owners that are held responsible for that, 
they get assessed personally, and as I said, in 12 of these 15 
cases that was at least done. But no criminal.
    Senator Levin. No criminal. At any rate, one of the things 
that would be helpful is if you could give us, Mr. Gordon, a 
little bit of an assessment of why there are so few suspensions 
and debarments.\1\ What is missing in that area if we are going 
to really move strongly in that area to try to deter what is 
going on? There is still too much, although we have made some 
progress, and we also ought to acknowledge when we have made 
progress. We have. It just is frustrating that it has not been 
enough, and it is too slow. But if you could get us a report on 
the suspensions and debarments and why we do not debar more 
egregious tax deadbeats.
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    \1\ See Exhibit No. 3, which appears in the Appendix on page 82.
---------------------------------------------------------------------------
    And, finally, from my perspective, if you could get us the 
responses to that idea of a provision in all the contracts 
requiring the people who are going to get Federal funds on 
subcontracts or on purchases to represent whether or not they 
are current on their taxes. You are going to give us some 
information on that, but also give us a recommendation as to 
whether that would be a wise idea.
    Thank you again, and to you and your staff, Dr. Coburn, and 
my staff. Thank you all. And to our witnesses, thank you so 
much.
    [Whereupon, at 3:49 p.m., the Subcommittee was adjourned.]


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