Financial Management: Some DOD Contractors Abuse the Federal Tax 
System with Little Consequence (12-FEB-04, GAO-04-95).		 
                                                                 
GAO was asked to determine (1) the magnitude of unpaid federal	 
taxes owed by Department of Defense (DOD) contractors, (2)	 
whether indications exist of abuse or criminal activity by DOD	 
contractors related to the federal tax system, (3) whether DOD	 
and the Internal Revenue Service (IRS) have effective processes  
and controls in place to use the Treasury Offset Program (TOP) in
collecting unpaid federal taxes from DOD contractors, and (4)	 
whether DOD contractors with unpaid federal taxes are prohibited 
by law from receiving contracts from the federal government.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-95						        
    ACCNO:   A09229						        
  TITLE:     Financial Management: Some DOD Contractors Abuse the     
Federal Tax System with Little Consequence			 
     DATE:   02/12/2004 
  SUBJECT:   Delinquent taxes					 
	     Financial management				 
	     Fraud						 
	     Internal controls					 
	     Program abuses					 
	     Risk management					 
	     Strategic planning 				 
	     Taxes						 
	     Accountability					 
	     Budgeting						 
	     Department of Defense contractors			 
	     IRS Federal Payment Levy Program			 
	     Treasury Offset Program				 

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GAO-04-95

United States General Accounting Office

GAO

                       Report to Congressional Requesters

February 2004

FINANCIAL MANAGEMENT

Some DOD Contractors Abuse the Federal Tax System with Little Consequence

                                       a

GAO-04-95

Highlights of GAO-04-95, a report to congressional requesters

GAO was asked to determine (1) the magnitude of unpaid federal taxes owed
by Department of Defense (DOD) contractors, (2) whether indications exist
of abuse or criminal activity by DOD contractors related to the federal
tax system, (3) whether DOD and the Internal Revenue Service (IRS) have
effective processes and controls in place to use the Treasury Offset
Program (TOP) in collecting unpaid federal taxes from DOD contractors, and
(4) whether DOD contractors with unpaid federal taxes are prohibited by
law from receiving contracts from the federal government.

GAO makes recommendations to DOD for complying with statutory guidance and
supporting IRS efforts in collecting unpaid taxes, to IRS for improving
the effectiveness of collection activities, and to the Office of
Management and Budget (OMB) to develop options for prohibiting federal
contract awards to businesses and individuals that abuse the federal tax
system. DOD and IRS partially agreed; OMB did not agree. DOD and OMB also
did not agree with GAO's matters for congressional consideration that DOD
report on its collections through TOP and OMB report on policy options
developed and actions taken against contractors that abuse the federal tax
system. GAO reiterated support for its recommendations as well as for its
suggestions to Congress.

www.gao.gov/cgi-bin/getrpt?GAO-04-95

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Gregory D. Kutz at (202)
512-9095 or [email protected], or Steven J. Sebastian at (202) 512-3406.

February 2004

FINANCIAL MANAGEMENT

Some DOD Contractors Abuse the Federal Tax System with Little Consequence

DOD and IRS records showed that over 27,000 contractors owed about $3
billion in unpaid taxes as of September 30, 2002. DOD has not fully
implemented provisions of the Debt Collection Improvement Act of 1996 that
would assist IRS in levying up to 15 percent of each contract payment to
offset a DOD contractor's federal tax debt. We estimate that DOD could
have collected at least $100 million in fiscal year 2002 had it and IRS
fully utilized the levy process authorized by the Taxpayer Relief Act of
1997. As of September 2003, DOD had collected only about $687,000 in part
because DOD provides contractor payment information from only 1 of its 16
payment systems to TOP. DOD had no formal plans at the completion of our
work to provide payment information from its other 15 payment systems to
TOP.

Furthermore, we found abusive or potentially criminal activity related to
the federal tax system through our audit and investigation of 47 DOD
contractors. The 47 contractors provided a variety of goods and services,
including parts or support for weapons and other sensitive military
programs. The businesses in these case studies owed primarily payroll
taxes with some dating back to the early 1990s. These payroll taxes
included amounts withheld from employee wages for Social Security,
Medicare, and individual income taxes. However, rather than fulfill their
role as "trustees" and forward these amounts to IRS, these DOD contractors
diverted the money for personal gain or to fund the business.

For example, owners of two businesses each borrowed nearly $1 million from
their companies and, at about the same time, did not remit millions of
dollars in payroll taxes. One owner bought a boat, several cars, and a
home outside the United States. The other paid over $1 million for a
furnished home. Both contractors received DOD payments during fiscal year
2002, but one went out of business in 2003. The business, however,
transferred its employees to a relative's company (also with unpaid taxes)
and recently received DOD payments on a previous contract.

IRS's continuing challenges in collecting unpaid federal taxes also
contributed to the problem. In several case studies, IRS was not pursuing
DOD contractors due to resource and workload management constraints. For
other cases, control breakdowns resulted in IRS freezing collection
activity for reasons that were no longer applicable. Federal law does not
prohibit contractors with unpaid federal taxes from receiving federal
contracts. OMB is responsible for providing overall direction to
governmentwide procurement policies, regulations, and procedures, and is
in the best position to develop policy options for prohibiting federal
government contract awards to businesses and individuals that abuse the
tax system.

Contents

        Appendix I: Appendix II: Appendix III: Appendix IV: Appendix V:
Letter                                    1 
                  Results in Brief           3 
                                                   DOD Contractors Owe        
                     Background              6  Billions in Unpaid Federal 13
                                                          Taxes            
             DOD and IRS Are Not Collecting    
           Millions in Unpaid Federal Taxes    
                  from Contractors          19 
             DOD Contractors Involved in       
           Abusive or Potentially Criminal     
           Activity Related to the Federal  32 
                     Tax System                
          Contractors with Unpaid Taxes Are    
                 Not Prohibited by Law from    
            Receiving Contracts from the    41 
                 Federal Government            
                     Conclusions            44 
              Matters for Congressional     45 
                    Consideration              
            Recommendations for Executive   45 
                       Action                  
               Agency Comments and Our      47 
                     Evaluation                

Appendixes

Scope and Methodology 53

DOD Contractors with Unpaid Federal Taxes 56

Comments from the Department of Defense 61

Comments from the Internal Revenue Service 66

GAO Contacts and Staff Acknowledgments 68 GAO Contacts 68 Acknowledgments
68

Tables	Table 1: Table 2: Table 3: Table 4: Table 5:

Types of Goods and Services Provided by DOD
Contractors in Case Studies 33
DOD Contractors with Unpaid Federal
Taxes-Business 35
DOD Contractors with Unpaid Federal
Taxes-Individual 39
DOD Contractors with Unpaid Federal
Taxes-Business 56
DOD Contractors with Unpaid Federal
Taxes-Individual 59

Figures Figure 1: Fiscal Year 2002 Federal Contract Award Amounts by
Agency 7 Figure 2: DOD Contractor Unpaid Taxes by Tax Type 14

Contents

            Figure 3: DOD Contractor Unpaid Taxes by Fiscal Year 16

Abbreviations

ACS Automated Collection System
CAPS Computerized Accounts Payable System
CCR Central Contractor Registration
DCIA Debt Collection Improvement Act of 1996
DCMA Defense Contract Management Agency
DFAS Defense Finance and Accounting Service
DLIS Defense Logistics Information Service
DOD Department of Defense
DOE Department of Energy
EIN employer identification number
FAR Federal Acquisition Regulation
FICA Federal Insurance Contribution Act
FMS Financial Management Service
FPLP Federal Payment Levy Program
GSA General Services Administration
IAPS Integrated Accounts Payable System
IRS Internal Revenue Service
MOCAS Mechanization of Contract Administration Services
NASA National Aeronautics and Space Administration
OMB Office of Management and Budget
OSI Office of Special Investigations
SSA Social Security Administration
SSN Social Security number
TFRP trust fund recovery penalty
TIN tax identification number
TOP Treasury Offset Program

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A

United States General Accounting Office Washington, D.C. 20548

February 12, 2004

The Honorable Norm Coleman
Chairman
The Honorable Carl Levin
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate

The Honorable Janice D. Schakowsky
House of Representatives

In fiscal year 2002, the Department of Defense (DOD) awarded contracts
totaling nearly $165 billion. This is nearly two-thirds of the federal
government's contracting activity. Since 1990, we have periodically
reported on federal programs and operations that are high risk due to
their
greater vulnerabilities to fraud, waste, and abuse. Lasting solutions to
high
risk problems offer the potential to save billions of dollars,
dramatically
improve service to the American public, strengthen public confidence and
trust in the performance and accountability of our national government,
and ensure the ability of the government to deliver on its promises.

DOD and the Internal Revenue Service (IRS) face a variety of high-risk
challenges. Of the 26 areas on our governmentwide "high risk" list, 6 are
DOD program areas, and the department shares responsibility for 3 other
high-risk areas that are governmentwide in scope. Financial management,
1 of the 6 DOD high-risk program areas, has weaknesses, including the lack
of effective and efficient asset management and accountability, unreliable
estimates of environmental and disposal liabilities, lack of accurate
budget
and cost information, nonintegrated and proliferating financial
management systems, and fundamental flaws in the overall control
environment. As we have documented in numerous reports, DOD's
financial management problems leave it highly vulnerable to fraud, waste,
and abuse. IRS high-risk areas include financial management weaknesses
and difficulties in collecting unpaid taxes. Both areas continue to expose
the federal government to significant losses of tax revenue and
disproportionately increase the burden on compliant taxpayers to fund
government activities. This report addresses issues related to three high
risk areas: DOD and IRS financial management and IRS collection of
unpaid taxes.

For the last several years, Congress and others have expressed concern
that declines in IRS compliance and collections programs are eroding
taxpayer confidence in the fairness of our federal tax system. As of
September 30, 2002, IRS had confirmed unpaid taxes, including interest and
penalties, totaling $249 billion nationwide,1 of which nearly $49 billion
represented unpaid payroll taxes.

As you requested, this report addresses (1) the magnitude of unpaid
federal taxes owed by DOD contractors, (2) whether DOD and IRS have
effective processes and controls in place to use the Treasury Offset
Program (TOP)2 and Federal Payment Levy Program (FPLP)3 in collecting
unpaid federal taxes from DOD contractors, (3) whether indications exist
of abuse or criminal activity by DOD contractors related to the federal
tax system, and (4) whether DOD contractors with unpaid federal taxes are
prohibited by law from receiving federal contracts.

Our work was performed from March 2003 through September 2003 in
accordance with generally accepted government auditing standards. The
investigative portion of our work was completed in accordance with
investigative standards established by the President's Council on
Integrity and Efficiency. Details on our scope and methodology are
included in appendix I. The results of 17 of the 47 case studies we
audited and investigated are shown in tables 2 and 3. The results of the
other 30 case studies are included in appendix II.

1 U.S. General Accounting Office, Major Management Challenges and Program
Risks: Department of the Treasury, GAO-03-109 (Washington, D.C.: January
2003).

2 Treasury established TOP as part of implementing its responsibilities
under the Debt Collection Improvement Act of 1996. Treasury created TOP to
centralize the process by which certain federal payments are withheld or
reduced to collect delinquent nontax debts owed to federal agencies.

3 A provision in the Taxpayer Relief Act of 1997 authorized IRS to
continuously levy up to 15 percent of certain federal payments made to
delinquent taxpayers. IRS established its continuous levy program, now
referred to as FPLP, to collect federal tax debt. In this report, we refer
to FPLP as the levy program. Levy is the legal process by which IRS orders
a third party to turn over property in its possession that belongs to the
delinquent taxpayer named in a notice of levy.

Results in Brief	Some DOD contractors abuse the federal tax system with
little consequence.4 DOD and IRS records showed that about 27,100
contractors registered in DOD's Central Contractor Registration (CCR)
system had nearly $3 billion in unpaid federal taxes as of September 30,
2002, of which 78 percent was over a year old. Of these contractors, over
25,600 were businesses5 that primarily owed unpaid payroll taxes. These
taxes include amounts that a business withholds from an employee's wages
for federal income taxes, Social Security, Medicare, and the related
matching contributions of the employer for Social Security and Medicare.
The other approximately 1,500 contractors were primarily individuals who
owed but had not paid income taxes on their business profits or individual
income.

We estimate that DOD, which functions as its own disbursing agent, could
have offset payments and collected at least $100 million in unpaid taxes
in fiscal year 2002 if it had fully assisted IRS in effectively levying
contractor payments. In the 6 years since passage of the Taxpayer Relief
Act of 1997, DOD has collected only about $687,000. DOD collections to
date relate to its recently implemented TOP payment reporting process for
its contract payment system, which, according to DOD records, disbursed
over $86 billion to contractors in fiscal year 2002. DOD did not, however,
have formal plans or a schedule at the completion of our work for
reporting payment information to TOP for its 15 vendor payment systems,
which disbursed another $97 billion to contractors in fiscal year 2002.
DOD officials contend it would be difficult to implement a TOP reporting
process for vendor payments because the systems are decentralized in 22
different payment locations. In addition, DOD did not have an
organizational structure in place to implement a TOP reporting process.
Unless DOD establishes processes to assist IRS in identifying payments

4 In this report, a DOD contractor abused the federal tax system when
payroll taxes withheld from employee wages were not remitted to IRS for 1
year or more. We considered activity to be abusive when a contractor's
actions or inactions, though not illegal, took advantage of the existing
tax enforcement and administration system to avoid fulfilling federal tax
obligations and were deficient or improper when compared with behavior
that a prudent person would consider reasonable.

5 A tax identification number (TIN) is a unique nine-digit identifier
assigned to each business and individual that files a tax return. For
businesses, the employer identification number (EIN) assigned by IRS
serves as the TIN. For individuals, the Social Security number (SSN)
assigned by the Social Security Administration (SSA) serves as the TIN.
Contractors register their TINs in the CCR database in either the TIN/EIN
field or the SSN field. In our report, a contractor completing the TIN/EIN
field is referred to as a business, while a contractor completing the SSN
field is referred to as an individual.

from DOD systems that IRS could levy for unpaid federal taxes, the federal
government will miss opportunities to collect hundreds of millions of
dollars in unpaid taxes owed by DOD contractors.

IRS faces a number of high-risk challenges. Due to resource and workload
management constraints, IRS established policies that either exclude or
delay putting a significant number of cases into the levy program. In
addition to policy constraints, inaccurate or outdated information in IRS
systems prevent cases from entering the levy program. Our review of IRS
collection efforts against DOD contractors selected for audit and
investigation indicated that IRS attempts to work with the businesses and
individuals to achieve voluntary compliance, pursuing enforcement actions
such as levies of federal contract payments later rather than earlier in
the collection process. For many of our case study contractors, this
resulted in businesses and individuals continuing to receive federal
contract payments without making any payments on their unpaid federal
taxes.

We also found numerous instances of abusive or potentially criminal6
activity related to the federal tax system during our audit and
investigation of 47 DOD contractor case studies. The 34 case studies
involving businesses with employees had primarily unpaid payroll taxes,
some dating to the early 1990s and some for as many as 62 tax periods.7
However, rather than fulfill their role as "trustees" and forward these
amounts to IRS, these DOD contractors diverted the money for personal gain
or to fund their businesses. The other 13 case studies involved
individuals who had unpaid income taxes dating as far back as the 1980s.
These 47 DOD contractors provided a wide variety of goods and services,
including building maintenance, construction, consulting, catering,
dentistry, and funeral services. Several of these contractors provided
parts or services supporting weapons and other sensitive military
programs.

6 We characterized as "potentially criminal" any activity related to
federal tax liability that may be a crime under a specific provision of
the Internal Revenue Code. Depending on the potential penalty provided by
statute, the activity could be a felony (punishable by imprisonment of
more than 1 year) or a misdemeanor (punishable by imprisonment of 1 year
or less). Some potential crimes under the Internal Revenue Code constitute
fraud because of the presence of intent to defraud, intentional
misrepresentation or deception, or other required legal elements.

7 A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is one quarter of a year. The taxpayer is
required to file quarterly returns with IRS for these types of taxes,
although payment of the taxes occurs throughout the quarter. In contrast,
for income, corporate, and unemployment taxes, a tax period is 1 year.

Federal law does not prohibit a contractor with unpaid federal taxes from
receiving contracts from the federal government. At this juncture, the
criteria calling for federal agencies to do business only with responsible
contractors do not require contracting officers to consider a contractor's
tax noncompliance, unless the contractor has been suspended or debarred
for tax evasion. Further, the federal government has no coordinated
process for identifying and determining the businesses and individuals
that abuse the federal tax system and for conveying that information to
contracting officers for use before awarding contracts. The Office of
Federal Procurement Policy in the Office of Management and Budget (OMB) is
responsible for providing overall direction to governmentwide procurement
policies, regulations, and procedures and may be in the best position to
facilitate discussions between DOD, IRS, and other affected agencies.
Options could include designating such tax abuse as a cause for
governmentwide debarment and suspension or, if allowed by statute,
authorizing IRS to declare such businesses and individuals ineligible for
government contracts.

We are making recommendations to DOD to immediately provide its contractor
payment information to TOP and to IRS to use the levy program as one of
the first steps in the collection process. We are making a recommendation
to OMB to develop and pursue policy options for prohibiting contract
awards to contractors that abuse the federal tax system, including any
necessary legislation. We also suggest that Congress consider requiring
DOD to periodically report to Congress on its progress in implementing the
Debt Collection Improvement Act of 1996 (DCIA) and providing its payment
information for each of its contract and vendor payment systems to TOP,
including details of actual collections by system and in total for all
contract and vendor payment systems during the reporting period. In
addition, Congress may wish to require that OMB report to Congress on
progress in developing and pursuing options for prohibiting federal
contract awards to businesses and individuals that abuse the federal tax
system, including periodic reporting of actions taken against contractors.

DOD and IRS partially agreed with our recommendations while OMB did not
agree. In addition, DOD and OMB disagreed with our matters for
congressional consideration. DOD did not agree that a requirement is
necessary for DOD to report to Congress on its progress in implementing
the DCIA. We believe that such reporting to Congress is necessary to
facilitate oversight since DOD, until recently, had taken little action to
implement the offset provisions of DCIA since its passage more than 7

years ago. We continue to believe that Congress may wish to consider such
oversight as the federal government is missing opportunities to collect
hundreds of millions of dollars in unpaid taxes owed by DOD contractors.
In oral comments, OMB questioned the need for developing or pursuing
additional mechanisms to prohibit federal contract awards to "tax
abusers." OMB's comments provide us no basis to change our recommendation.
We believe that OMB should assume a leadership role in ensuring that
contractors that abuse the tax system are prohibited from receiving
federal contracts. See the "Agency Comments and Our Evaluation" section of
this report for a more detailed discussion of agency comments. We have
reprinted the DOD and IRS written comments in appendixes III and IV.

Background	As the largest purchaser of goods and services in the federal
government, DOD awarded contracts valued at nearly $165 billion in fiscal
year 2002. Within the federal government, DOD represented about two-thirds
of the federal contract spending reported in fiscal year 2002, as shown in
figure 1. Spending at the next three largest federal agencies, the
Department of Energy (DOE), the General Services Administration (GSA), and
the National Aeronautics and Space Administration (NASA), represented only
about half of the remaining 34 percent of federal contract awards during
the same period.

Figure 1: Fiscal Year 2002 Federal Contract Award Amounts by Agency

In 1998, DOD established the CCR database as the primary repository for
contractor information shared with other agencies. With minor exceptions,
contractors are required to register in the CCR database prior to award of
a DOD contract. In addition to a one-time registration process,
contractors are required to keep all registered information current, and
must confirm the registered information is accurate and complete annually.
The CCR database contains a wide variety of contractor information
including contractor name, address, points of contact, electronic payment
information, and tax identification number (TIN). As of June 2003, the CCR
database contained almost 224,000 active contractor registrations. DOD;
NASA; the Departments of the Treasury, Transportation, and the Interior;
as well as the Office of Personnel Management currently use CCR to
register contractors. According to CCR officials, while some contractors
engage in business with more than one agency (e.g., DOD and NASA),
prospective and current DOD contractors represented the majority of CCR
registrations. On October 1, 2003, a final rule change to the Federal
Acquisition Regulation (FAR) was announced8 that generally requires all
federal contractors to register in the CCR database.

8 Federal Acquisition Regulation; Central Contractor Registration, 68 Fed.
Reg. 56,669 (2003) (to be codified at 48 C.F.R. pts. 1, 2, 4, 13, 32, and
52).

Unlike most federal agencies that rely on the Department of the Treasury's
Financial Management Service (FMS) for issuing payments, DOD has its own
disbursing authority. The Defense Finance and Accounting Service (DFAS)
has overall payment responsibility for goods and services purchased by
DOD. As part of a reorganization in April 2001, DFAS separated its
commercial payment services into two areas-contract pay and vendor pay.
Contract pay handles invoices for formal, long-term contracts that are
typically administered by the Defense Contract Management Agency (DCMA).
These contracts tend to cover complex, multiyear purchases with
high-dollar values, such as major weapon systems. The single DOD automated
system9 used in contract pay disbursed over $86 billion to contractors in
fiscal year 2002. While somewhat of a misnomer, vendor pay10 is handled by
15 DOD payment and disbursing systems operating in 22 DFAS offices, and
cumulatively disbursed another $97 billion to contractors during fiscal
year 2002.

Overhauling DOD's financial management represents a major challenge that
goes far beyond financial accounting to the very fiber of the department's
range of business operations and management culture. Of the 26 areas on
our governmentwide "high-risk" list, 6 are DOD program areas, and the
department shares responsibility for 3 other high-risk areas that are
governmentwide in scope. Financial management, one of the 6 DOD program
areas, has weaknesses, including the lack of effective and efficient asset
management and accountability, unreliable estimates of environmental and
disposal liabilities, lack of accurate budget and cost information,
nonintegrated and proliferating financial management systems, and
fundamental flaws in the overall control environment. As we have
documented in numerous reports, DOD's financial management problems leave
it highly vulnerable to fraud, waste, and abuse.

In our high-risk list, IRS also shares responsibility for three areas that
are governmentwide in scope, as well as two IRS program areas pertinent to
this report: IRS financial management and collection of unpaid taxes. In
both of these areas, weaknesses continue to expose the federal government
to significant losses of tax revenue, and compliant taxpayers bear the
increased burden of financing the government's activities. IRS

9 Mechanization of Contract Administration Services.

10 The vendor pay systems include payments for contracts not administered
by DCMA, plus miscellaneous noncontractual payments such as utilities.

attempts to identify businesses and individuals that do not pay the taxes
they owe through its various enforcement programs. However, inadequate
financial and operational information has rendered IRS unable to develop
reliable cost-based performance information for its tax collection and
enforcement programs, and to judge whether the agency is appropriately
allocating available resources among competing management priorities. As
of September 2002, IRS had an inventory of known unpaid taxes,11 including
interest and penalties, totaling $249 billion, of which $112 billion has
some collection potential and thus is at risk.12

Our recent testimonies and reports have highlighted large and pervasive
declines in IRS compliance and collection programs. These programs
generally experienced larger workloads, smaller staffing, and fewer
numbers of cases closed per employee from 1996 through 2001. By the end of
fiscal year 2001, IRS was deferring collection action for about one of
three tax delinquencies assigned to the collection programs. In a
September 2002 report to the IRS Oversight Board, former IRS Commissioner
Rossotti said that IRS has been facing a growing compliance workload at
the same time that resources were declining. He said the result is a "huge
gap" between the number of taxpayers that are not filing, not reporting,
or not paying what they owe and IRS's capacity to deal with them.

In addition, we reported in 1999 that nearly 2 million businesses owed
about $49 billion in payroll taxes, which was about 22 percent of the
total outstanding balance of IRS unpaid tax assessments.13 As of September
30, 2002, the amount of unpaid payroll taxes remained about the same
(nearly $49 billion). In our 1999 report, we noted that according to IRS
records, IRS had assessed $15 billion in penalties against approximately
185,000 individuals found to be willful and responsible for the nonpayment
of payroll taxes withheld from employees. We reported that much of this

11 As of September 2003, IRS had an inventory of known unpaid taxes
totaling $246 billion of which $120 billion has some collection potential
but only $20 billion of which is considered currently collectible. This
inventory includes unpaid taxes that IRS is attempting to collect and
unpaid taxes that IRS knows are due but for which it has decided not to
pursue collection. Total unpaid taxes also include an unknown amount of
unpaid taxes that IRS has not identified and are therefore not in the IRS
inventory.

12 GAO-03-109.

13 U.S. General Accounting Office, Unpaid Payroll Taxes: Billions in
Delinquent Taxes and Penalty Assessments Are Owed, GAO/AIMD/GGD-99-211
(Washington, D.C.: Aug. 2, 1999).

amount was not being collected, and that businesses and individuals owing
payroll taxes received significant federal benefits and other federal
payments.

The Taxpayer Relief Act of 199714 enhanced IRS's ability to collect unpaid
federal taxes by authorizing IRS to continuously levy up to 15 percent of
certain federal payments made to businesses and individuals. The
continuous levy program, now referred to as FPLP, was implemented in July
2000. This program provides an automated process for serving tax levies
and collecting unpaid taxes through Treasury's FMS and its TOP process.

14 Taxpayer Relief Act of 1997 S: 1024, 26 U.S.C. S: 6331(h) (2000).

Treasury established the TOP as part of implementing the DCIA.15 Congress
passed DCIA to maximize the collection of delinquent nontax debts owed to
federal agencies. TOP centralizes the process by which certain federal
payments are withheld or reduced to collect delinquent debts, and as part
of that program, FMS has a centralized database of debts that DCIA
requires federal agencies to refer to FMS.16 Under the regulations
implementing DCIA, disbursing agencies, including DOD and others that
independently disburse rather than having it done on their behalf by FMS,
are required to compare their payment records with the TOP database.17 If
a match occurs, the disbursing agency must offset the payment, thereby
reducing or eliminating the nontax debt.

FMS assists IRS in implementing FPLP through a feature of the TOP process,
thus enabling IRS to electronically serve a tax levy. For payments
disbursed by FMS on behalf of most federal agencies, the amount to be
levied and credited to IRS is deducted before FMS disburses the payment.
For payments disbursed directly by other federal agencies, such as DOD,
FMS identifies the amount to be levied from the disbursing agency's
payment information and notifies the disbursing agency to deduct the levy
amount before payment is made.18

As a practical matter, FMS cannot honor a tax levy through TOP unless the
disbursing agency has fulfilled its DCIA responsibilities to compare
payment records with the TOP database.19 When a disbursing agency provides
FMS with payment information for comparison with the TOP database, FMS has
an opportunity to notify the disbursing agency of an IRS levy. To the
extent disbursing agencies are not providing payment information to TOP,
the implementation of FPLP is hindered.

15 Pub. L. No. 104-134, 110 Stat. 1321 (1996).

16 31 U.S.C. S: 3716(c)(6) (2000).

17 31 C.F.R. S: 285.5 (c)(2) (2003).

18 U.S. General Accounting Office, Tax Administration: Millions of Dollars
Could Be Collected If IRS Levied More Federal Payments, GAO-01-711
(Washington, D.C.: July 20, 2001).

19 31 U.S.C. S: 3716(c)(1)(A) (2000) and 31 C.F.R. S: 285.5(c)(2) (2003).

DCIA also requires agencies to refer certain debt to Treasury for
centralized collection.20 FMS reported that the debt referrals to TOP
totaled more than $186 billion as of September 2002. Of this amount, $81
billion were federal tax debt, $71 billion were child support debt, $3
billion were state tax debt, and $31 billion were federal nontax debt
(e.g., student loans).

Under the levy process, IRS supplies FMS with an electronic file
containing unpaid tax information for inclusion in the TOP database. FMS
compares the TIN and name on federal payment records with the TIN and name
on unpaid tax records provided by IRS. When FMS identifies a business or
individual with unpaid taxes that is scheduled to receive a federal
payment, it informs IRS, which issues a notice of intent to levy to the
delinquent taxpayer (unless the notice was previously sent).21 Once a
notice of impending levy is received, the delinquent taxpayer has several
options for action and a minimum of 30 days to respond.22 The options are
as follows:

o 	The taxpayer may disagree with IRS's assessment and collection of tax
liability, and appeal the action by requesting a hearing with the IRS
Office of Appeals. Generally, IRS must suspend any levy actions while the
hearing and related appeals are pending.

o  The taxpayer may elect to pay the debt in full.

o 	The taxpayer may negotiate with IRS to establish an alternative payment
arrangement, such as an installment agreement or an offer in compromise.23
IRS is precluded from continuing with a levy action while it considers a
taxpayer's proposed installment agreement or offer in compromise.

20 31 U.S.C. S: 3711(g)(1) (2000).

21 IRS must give the taxpayer written notice 30 days before initiating a
levy or seizure action. 26 U.S.C. S: 6330(a) (2000).

22 Before receiving a notice of intent to levy, a taxpayer typically
receives several balance due notices as part of the IRS standard
notification process.

23 Installment agreements allow the full payment of the debt in smaller,
more manageable amounts. An offer in compromise approved by IRS allows a
delinquent taxpayer to settle unpaid debt for less than the full amount
due.

o 	The taxpayer may apply to IRS for a hardship determination, for which a
business or individual demonstrates to IRS that making any payment would
result in a significant financial hardship. In such cases, IRS may agree
to delay collection action until the taxpayer's financial condition
improves.

If the delinquent taxpayer does not respond to the levy notice, IRS will
instruct FMS to proceed with the continuous levy and reduce all scheduled
payments by up to 15 percent, or the exact amount of tax owed if it is
less than 15 percent of the payment, until the tax debt is satisfied.
Since the inception of the levy program in July 2000, IRS has used it to
collect $76 million in tax debt, including over $60 million in tax debt
during fiscal year 2002, by directly levying federal payments. In earlier
reviews,24 we estimated that IRS could use the levy program to potentially
recover hundreds of millions of dollars in tax debt.

DOD Contractors Owe The federal government pays billions of dollars to DOD
contractors that

abuse the federal tax system. Further, as of September 2002,
businessesBillions in Unpaid and individuals registered in DOD's CCR
database owed nearly $3 billion inFederal Taxes unpaid federal taxes. Data
reliability issues with respect to DOD and IRS

records prevented us from identifying an exact amount. Consequently, the
total amount of unpaid federal taxes owed by DOD contractors is not known.

Magnitude of Unpaid Federal Taxes Owed by DOD Contractors

DOD and IRS records showed that the nearly $3 billion in unpaid federal
taxes is owed by about 27,100 contractors registered in CCR. This
represents almost 14 percent of the contractors registered as of February
2003. Of this number, over 25,600 were businesses that primarily had
unpaid payroll taxes.25 Many also had unpaid federal unemployment taxes.
The other approximately 1,500 contractors were primarily individuals who
did not pay income taxes on their business profits or individual income.

24 U.S. General Accounting Office, Tax Administration: Federal Payment
Levy Program Measure, Performance, and Equity Can Be Improved, GAO-03-356
(Washington, D.C.: Mar. 6, 2003); Tax Administration: IRS' Levy of Federal
Payments Could Generate Millions of Dollars, GAO/GGD-00-65 (Washington,
D.C.: Apr. 7, 2000); and GAO-01-711.

25 Payroll taxes consist of income and employment taxes (i.e., Federal
Insurance Contribution Act (FICA) contributions-Social Security and
Medicare) withheld from an employee's wages, as well as the employer's
matching FICA contributions.

The amount of unpaid taxes for DOD contractors registered in CCR ranged
from a small amount owed by an individual for a single tax period to
millions of dollars owed by a business over more than 60 tax periods. The
type of unpaid taxes owed by these contractors varied and consisted of
payroll, corporate income, excise, unemployment, individual income, and
other types of taxes. In the case of unpaid payroll taxes, an employer
withheld federal taxes from an employee's wages, but did not send the
withheld payroll taxes or the employer's required matching amount to IRS.
As shown in figure 2, about 42 percent of the total tax amount owed by DOD
contractors was for unpaid payroll taxes.

               Figure 2: DOD Contractor Unpaid Taxes by Tax Type

Employers are subject to civil and criminal penalties if they do not remit
payroll taxes to the federal government. When an employer withholds taxes
from an employee's wages, the employer is deemed to have a responsibility
to hold these amounts "in trust" for the federal government until the
employer makes a federal tax deposit in that amount.26 To the extent these
withheld amounts are not forwarded to the federal government, the employer
is liable for these amounts, as well as the employer's matching Federal
Insurance Contribution Act (FICA) contributions. Individuals within the
business (e.g., corporate officers) may be held personally liable for the
withheld amounts not forwarded and assessed a civil monetary penalty known
as a trust fund recovery penalty (TFRP).27 Failure to remit payroll taxes
can also be a criminal felony offense28 punishable by imprisonment of more
than a year, while the failure to properly segregate payroll taxes can be
a criminal misdemeanor offense29 punishable by imprisonment of up to a
year. The law imposes no penalties upon an employee for the employer's
failure to remit payroll taxes since the employer is responsible for
submitting the amounts withheld. The Social Security and Medicare trust
funds are subsidized or made whole for unpaid payroll taxes by the general
fund, as we discussed in a previous report.30 Over time, the amount of
this subsidy is significant. As of September 1998, the last date on which
information was readily available, the estimated cumulative amount of
unpaid taxes and associated interest for which the Social Security and
Medicare trust funds were subsidized by the general fund was approximately
$38 billion.31

Based on our case study analysis, we found that contractors with unpaid
federal taxes provide a wide range of goods and services to DOD, including

26 The law further provides that withheld income and employment taxes are
to be held in a separate bank account considered to be a special fund in
trust for the federal government. 26 U.S.C. S: 7512(b) (2000).

27 26 U.S.C. S: 6672 (2000).

28 26 U.S.C. S: 7202 (2000).

29 26 U.S.C. S: 7215 (2000).

30 GAO/AIMD/GGD-99-211.

31 The estimate includes both FICA and Self-Employment Contribution Act
taxes, but does not include federal income tax withholdings. Accrued
interest is included in this amount because assessments distributed to the
trust funds earn interest at Treasury-based interest rates, similar to the
rates used to develop IRS's interest accruals.

building maintenance, catering, construction, consulting, custodial,
dentistry, music, and funeral services. Several of these contractors
provided parts or services related to aircraft components for several DOD
and civilian programs.

A substantial amount of the unpaid federal taxes shown in IRS records as
owed by DOD contractors had been outstanding for several years. As
reflected in figure 3, 78 percent of the nearly $3 billion in unpaid taxes
was over a year old as of September 30, 2002, and 52 percent of the unpaid
taxes was for tax periods prior to September 30, 1999.

Figure 3: DOD Contractor Unpaid Taxes by Fiscal Year

Our previous work32 has shown that as unpaid taxes age, the likelihood of
collecting all or a portion of the amount owed decreases. This is due, in
part, to the continued accrual of interest and penalties on the
outstanding tax debt, which, over time, can dwarf the original tax
obligation.

32 U.S. General Accounting Office, Internal Revenue Service:
Recommendations to Improve Financial and Operational Management, GAO-01-42
(Washington, D.C.: Nov. 17, 2000); Internal Revenue Service: Composition
and Collectibility of Unpaid Assessments, GAO/AIMD-99-12 (Washington,
D.C.: Oct. 29, 1998); and GAO/AIMD/GGD-99-211.

DOD Contractor Unpaid Taxes Are Likely Understated

Although the nearly $3 billion in unpaid federal taxes owed by DOD
contractors as of September 30, 2002, is a significant amount, it may not
reflect the true amount of unpaid taxes owed by these businesses and
individuals. Data integrity issues with DOD's contractor database and the
nature of IRS's taxpayer account database prevented us from identifying
the true extent of DOD contractor unpaid taxes.

For example, we found that some contractors providing goods and services
to DOD could not be identified. We analyzed the TINs reported by
contractors in the CCR database. A TIN field33 is completed during a CCR
registration, and contractors are responsible for the TIN's accuracy.
During our review, we found that the CCR database included nearly 4,900
employer identification numbers (EIN) that did not match the IRS Master
Files.34 Our examination also identified some invalid TINs35 that were
either all the same digit (e.g., 999999999) or an unusual series of digits
(e.g., 123456789). Invalid TINs in the CCR database prevented us from
determining if the contractor had unpaid taxes.36 We recently recommended
to IRS and OMB that options to routinely validate all TINs in the CCR be
considered, and use of contractor and TIN information from CCR be required
for tax reporting by all federal agencies.37

As previously mentioned, some contractors that received DOD payments were
not registered in CCR. Our analysis of fiscal year 2002 disbursements
totaling almost $20 billion through one DFAS vendor payment system38

33 Contractors register their TINs in the CCR database into either the
TIN/EIN field (business) or the SSN field (individual).

34 IRS Master Files are data files that contain tax return filing
histories for businesses and individuals.

35 In this report, an invalid TIN refers to a missing TIN, a TIN with more
or less than nine numeric characters, a TIN that includes an alpha
character, or a TIN that does not match or cannot be found in IRS or SSA
records.

36 We referred this matter to our Office of Special Investigations because
we were concerned that some contractors may be registering in CCR with
invalid TINs to avoid federal taxes or debt collection.

37 U.S. General Accounting Office, Tax Administration: More Can Be Done to
Ensure Federal Agencies File Accurate Information Returns, GAO-04-74
(Washington, D.C.: Dec. 5, 2003).

38 One Bill Pay, formerly known as Standard Accounting and Reporting
System.

identified payments totaling about $1 billion with a TIN that did not
match a contractor TIN in the CCR database. We also identified contractor
payments totaling over $4 billion that lacked TINs in the same DFAS
system. Missing TINs in the DOD payment record prevented us from
determining if the payees were contractors with unpaid taxes. DOD
financial management regulations require that after reasonable efforts to
obtain the TIN have been unsuccessful, federal income tax at 31 percent
should be withheld and the balance of the payment forwarded to the payee.

Another factor that contributes to understating the amount of unpaid
federal taxes owed by DOD contractors is that the IRS taxpayer account
database reflects only the amount of unpaid taxes either reported by the
taxpayer on a tax return or assessed by IRS through its various
enforcement programs. The IRS database does not reflect amounts owed by
businesses and individuals that have not filed tax returns and for which
IRS has not assessed tax amounts due. During our review, we identified
instances in which a DOD contractor failed to file tax returns for a
particular tax period and, therefore, was listed in IRS records as having
no unpaid taxes. Consequently, the true extent of unpaid taxes for these
businesses and individuals is not known.

It is important to note that timing issues could result in some DOD
contractors that we identified with unpaid taxes having already paid the
amounts due. For example, some very recent amounts that appear as unpaid
taxes through a matching of DOD and IRS records may involve matters that
are routinely resolved between the taxpayer and IRS, with the taxes paid,
abated, or both39 within a short period. Also, it should be noted that
some assessments developed by IRS through third party information may be
overstated due to a lack of taxpayer information (e.g., deductions).
Similarly, as we have previously reported,40 IRS records contain errors
that affect the accuracy of taxpayer account information, and lead to both
lost opportunities to collect outstanding taxes and a burden on taxpayers
because IRS continues to pursue amounts from taxpayers that are no longer
owed. Consequently, some of the nearly $3 billion may not reflect true
unpaid taxes, although we cannot quantify this amount. Nonetheless,

39 Abatements are reductions in the amount of taxes owed and can occur for
a variety of reasons, such as to correct errors made by IRS or taxpayers
or to provide relief from interest and penalties. 26 U.S.C. S: 6404
(2000).

40 U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years
2002 and 2001 Financial Statements, GAO-03-243 (Washington, D.C.: Nov. 15,
2002).

we believe the nearly $3 billion represents a reasonable yet conservative
estimate of unpaid federal taxes owed by DOD contractors.

DOD and IRS Are Not Collecting Millions in Unpaid Federal Taxes from
Contractors

We estimate that DOD, which functions as its own disbursing agent, could
have levied payments and collected at least $100 million in unpaid taxes
in fiscal year 2002 if it and IRS had worked together to effectively levy
contractor payments. However, in the 6 years since the passage of the
Taxpayer Relief Act of 1997, DOD has collected only about $687,000. DOD
collections to date relate to DFAS payment reporting associated with
implementation of the TOP process in December 2002 for its Mechanization
of Contract Administration Services (MOCAS) contract payment system, which
disbursed over $86 billion to DOD contractors in fiscal year 2002. DFAS
had no plans or schedule at the completion of our review to report payment
information to TOP for any of its 15 vendor payment systems, which
disbursed another $97 billion to DOD contractors in fiscal year 2002.

IRS's continuing challenges in pursuing and collecting unpaid taxes also
hinder the government's ability to take full advantage of the levy
program. For example, due to resource constraints, IRS has established
policies that either exclude or delay referral of a significant number of
cases to the program. The IRS review process for taxpayer requests, such
as installment agreements or certain offers in compromise, which IRS is
legally required to consider, often takes many months, during which time
IRS excludes these cases from the levy program. In addition, inaccurate or
outdated information in IRS systems prevents cases from entering the levy
program. Our audit and investigation of 47 DOD contractor case studies,
discussed in detail later in this report, also show IRS continuing to work
with businesses and individuals to achieve voluntary compliance and taking
enforcement actions, such as levies of federal contractor payments, later
in the collection process.

From a governmentwide perspective, making payments to federal contractors
without requiring the businesses or individuals to meet their tax
obligations through methods such as levying payments to collect unpaid
taxes is not a sound business practice. Until DOD begins to fulfill its
responsibilities under DCIA by fully assisting IRS in its attempts to levy
contractor payments and IRS fully utilizes its authority under the
Taxpayer Relief Act of 1997, the federal government will continue to miss
opportunities to collect on hundreds of millions of dollars in unpaid
federal taxes owed by DOD contractors.

DOD Is Not Fully Assisting in the Collection of Unpaid Taxes Owed by Its
Contractors

Although it has been more than 7 years since the passage of DCIA, DOD has
not fully assisted IRS in using its continuous levy authority for the
collection of unpaid taxes by providing FMS with all DFAS payment
information. IRS's continuous levy authority authorizes the agency to
collect federal tax debts of businesses and individuals that receive
federal payments by levying up to 15 percent of each payment until the
debt is paid. Under TOP, FMS matches a database of debtors (including
those with federal tax debt) to certain federal payments (including
payments to DOD contractors). When a match occurs, the payment is
intercepted, the levied amount is sent to IRS, and the balance of the
payment is sent to the debtor. The TOP database includes federal tax and
nontax debt, state tax debt, and child support debt. All disbursing
agencies are to compare their payment records with the TOP database.41
Since DOD has its own disbursing authority, once DFAS is notified by FMS
of the amount to be levied, it should deduct this amount from the
contractor payment before it is made to the payee and forward the levied
amount to the Department of the Treasury. By fully participating in the
TOP process, DOD will also aid in the collection of other debts, such as
child support and federal nontax debt (e.g., student loans).

At the completion of our work, DOD had no formal plans or schedule to
begin providing payment information from any of its 15 vendor payment
systems to FMS for comparison with the TOP database. These 15 payment
systems disbursed almost $97 billion to DOD contractors in fiscal year
2002. DFAS officials contend that it would be difficult to provide this
payment information to TOP because the systems are decentralized and
nonintegrated in 22 different payment locations. As we have previously
reported, DOD's business systems environment is stovepiped and not well
integrated. DOD recently reported that its current business operations
were supported by approximately 2,300 systems in operation or under
development, and requested approximately $18 billion in fiscal year 2003
for the operation, maintenance, and modernization of its business
systems.42 In addition, DFAS did not have an organizational structure in
place to implement the TOP payment reporting process. DOD recently

41 31 C.F.R. S: 285.5(c)(2) (2003).

42 U.S. General Accounting Office, DOD Business Systems Modernization:
Continued Investment in Key Accounting Systems Needs to Be Justified,
GAO-03-465 (Washington, D.C.: Mar. 28, 2003) and DOD Business Systems
Modernization: Important Progress Made to Develop Business Enterprise
Architecture, but Much Work Remains, GAO-03-1018 (Washington, D.C.: Sept.
19, 2003).

communicated a timetable for implementing TOP reporting for its vendor
payment systems with completion targeted for March 2005. Until DOD
establishes processes to provide information from all payment systems to
TOP, the federal government will continue missing opportunities to collect
hundreds of millions of dollars in unpaid taxes owed by DOD contractors.

Although DFAS recently began providing payment information to TOP from its
largest payment system, total collections to date have been minimal. In
December 2002, DFAS began providing FMS with payment information for its
MOCAS contract payment system, which disbursed over $86 billion to
contractors in fiscal year 2002. According to IRS, from December 2002
through September 2003, DOD collected about $687,000 in unpaid taxes from
contractor payments.43 However, our analysis of IRS records for DOD
contractors receiving fiscal year 2002 payments from MOCAS showed that
these contractors owed about $750 million in unpaid federal taxes as of
September 30, 2002.

As mentioned previously, IRS records showed that over 27,100 contractors
in DOD's CCR database owed nearly $3 billion in unpaid federal taxes as of
September 30, 2002. We reviewed payment transactions in five of the
largest DOD disbursement systems covering about 72 percent of the fiscal
year 2002 disbursements, or almost $131 billion, from DFAS contract and
vendor payment systems. Contractors paid through these five DOD automated
systems represented at least $1.7 billion of the nearly $3 billion in
unpaid federal taxes shown on IRS records. We estimate that DOD could have
offset contractor payments to collect at least $100 million of this

43 Although over $1 million was levied during this period, FMS refunded
$353,500 to the contractors due to a processing error. FMS levied the DOD
payments prior to IRS issuing a levy to FMS and prior to the statutory
pre-levy notification letter to the taxpayer. Consequently, FMS was
required to refund some collections. DFAS implemented the levy process
near the beginning of our review; therefore, we did not test controls over
the process.

amount in fiscal year 2002 if DOD had been fulfilling its responsibilities
under DCIA to compare its payment records with the TOP database.44

IRS Policies Exclude Cases from the Levy Program

Although the levy program could provide a highly effective and efficient
method of collecting unpaid taxes from contractors that receive federal
payments, IRS policies restrict the number of cases that enter the program
and the point in the collection process they enter the program. For each
of the collection phases listed below, IRS policy either excludes or
severely delays putting cases into the levy program.45

o 	Phase 1: Notify taxpayer of unpaid taxes, including a demand for
payment letter.

o 	Phase 2: Place the case into the Automated Collection System (ACS)
process. The ACS process consists primarily of telephone calls to the
taxpayer to arrange for payment.

o 	Phase 3: Move the case into a queue of cases awaiting assignment to a
field collection revenue officer.

o 	Phase 4: Assign the case to field collections where a revenue officer
attempts face-to-face contact and collection.

44 We estimated this potential collection amount using the assumptions
that all unpaid federal taxes were referred to Treasury FMS for inclusion
in the TOP database, and all fiscal year 2002 DFAS payment information was
provided to FMS for matching against the TOP database. The collection
amount was calculated on 15 percent of the payment amount up to the amount
of unpaid taxes. Our analysis did not account for any exclusion allowed by
the levy program, such as cases where the contractor had entered
bankruptcy, made alternative arrangements to pay, or demonstrated to IRS
that making payments on the outstanding tax debt would result in a
financial hardship. However, although federal agencies are required to
obtain contractor TINs by 31 U.S.C. S: 7701(c)(1), many DOD contractor
payment transactions do not include TINs; therefore, the total amount of
unpaid federal taxes owed by contractors and potential collections through
FPLP is not known.

45 Although cases may move through the phases sequentially, it is not
necessary that they do so. Cases begin in the notice phase, but they move
back and forth between various phases and may, for example, enter the
queue or Automated Collection System phases repeatedly. There are also
other status phases into which a case might enter that are not presented
here.

As of September 30, 2002, IRS listed $81 billion of cases in these four
phases: 17 percent were in notice status, 17 percent were in ACS, 26
percent were in field collection, and 40 percent were in the queue
awaiting assignment to the field. At the same time these four phases take
place, sometimes over the course of years, DOD contractors with unpaid
taxes continue to receive billions of dollars in contract payments. IRS
excludes cases in the notification phase from the levy program to ensure
proper notification rules are followed. However, as we previously
reported, once proper notification has been completed, IRS continues to
delay or exclude from the levy program those accounts placed in the other
three phases.46 IRS policy is to exclude accounts in the ACS phase
primarily because officials believed they lack the resources to issue levy
notices and respond to the potential increase in telephone calls from
taxpayers responding to the notices. Additionally, IRS excludes the
majority of cases in the queue phase (awaiting assignment to field
collection) from the levy program for 1 year. Only after cases await
assignment for over a year does IRS allow them to enter the levy
program.47 Finally, IRS excludes most accounts from the levy program once
they are assigned to field collection because revenue officers said that
the levy action could interfere with their successfully contacting
taxpayers and resolving the unpaid taxes.

These policy decisions, which may be justified in some cases, result in
IRS excluding millions of cases from potential levy. IRS officials who
work on ACS and field collection inventories can manually unblock
individual cases they are working in order to put them in the levy
program. However, by excluding cases in the ACS and field collection
phases, IRS records indicate it excluded as much as $34 billion of cases
from the levy program as of September 30, 2002. In January 2003, IRS
unblocked and made available for levy those accounts identified as
receiving federal salary or annuity payments. However, other accounts
remain blocked from the levy program. IRS stated that it intended to
unblock a portion of the remaining accounts sometime in 2005.
Additionally, $32 billion of cases are in the queue, and thus under
existing policy, would be excluded from the levy

46 GAO-03-356.

47 IRS sends tax debt notifications at least once each year. When IRS
initiated the levy program, it blocked all cases entering the queue for 1
year to ensure that at least one notice would be sent before the case
entered the levy program. IRS officials stated that they intend to change
this policy in early 2004.

program for the first year each case is in that phase. IRS policies along
with its inability to more actively pursue collections, both of which IRS
has in the past attributed to resource constraints, combine to prevent
many cases from entering the levy program. Since IRS has a statutory
limitation on the length of time it can pursue unpaid taxes, generally 10
years from the date of the assessment, these long delays greatly decrease
the potential for IRS to collect the unpaid taxes.48

We identified specific examples of IRS not actively pursuing collection in
our audit and investigation of 47 selected cases involving DOD
contractors. For example, IRS used a special code within its automated
systems to block collection action for almost 10 months for one DOD
contractor that owed nearly $260,000 in unpaid taxes. Specifically, IRS
closed collection actions against this case (using an administrative
transaction code it refers to as 530-39) citing resource and workload
management considerations. IRS is not currently seeking collection of
about $14.9 billion of unpaid taxes because of this administrative
code-about 5 percent of its overall inventory of unpaid assessments as of
September 30, 2002. Once IRS reversed the special code, it placed the
contractor into its queue of cases awaiting assignment for collection
action. The contractor remained in the queue, awaiting assignment, from
October 2001 through the time of our review in May 2003-19 months. DOD
paid this contractor over $110,000 in fiscal year 2002, missing
opportunities to collect as much as $17,000 through the 15 percent levy.

For another DOD contractor, IRS coded the individual within its automated
systems in 1999 as having financial hardship and therefore unable to pay.
This code put collection activities on hold until the individual's
adjusted gross income (per subsequent tax return filings) exceeded a
certain threshold. At the same time, IRS entered a code to prevent further
collection actions because of its own resource constraints. IRS automated
systems are designed to automatically reverse the financial hardship code
when the adjusted gross income exceeds a certain threshold. That reversal
would put the contractor back into the IRS collection system. However,
before that occurred, the contractor stopped filing tax returns in 1997
and the IRS resource constraint code had the unintended effect of IRS not

48 The 10-year period can be extended or suspended under a variety of
circumstances, such as agreements by the taxpayer to extend the collection
period, bankruptcy litigation, and court appeals. Consequently, some tax
assessments can and do remain on IRS's records for decades.

attempting to obtain the unfiled tax returns. This combination of codes
effectively stopped collection action from taking place for this
contractor and created a catch-22 situation since one code prevents IRS
from pursuing the individual until a filed tax return reports higher
income and the other code prevents IRS from pursuing the individual to
obtain nonfiled tax forms. DOD paid this individual nearly $220,000 in
2002 and almost $700,000 since 1999. If an effective 15 percent levy had
been in place, the government could have collected over $30,000 of the
unpaid taxes in 2002. Because of the individual's failure to file, the
true amount of unpaid taxes is not known, but could be significantly
greater than the over $160,000 currently reflected in IRS records.

Some cases repeatedly enter the queue awaiting assignment to a field
collection revenue officer and remain there for long periods. For example,
one DOD contractor had gone between ACS and the queue awaiting assignment
since 1998. This individual's case entered the queue three times but was
never assigned. As of May 2003, this case spent almost 3 and a half years
in the queue. Moving a case in and out of the queue affects its
eligibility for the levy program. For another contractor involving over
$100,000 in unpaid taxes, IRS put the case into ACS in July 2000. As noted
previously, IRS routinely blocks ACS cases from entering the levy program.
Nine months later, in April 2001, IRS moved this case from ACS into the
queue to await assignment to a revenue officer. Again, in accordance with
IRS policy, IRS excludes cases in the queue from entering the levy program
for 1 year. After 1 year, the case was referred to the levy program, so
this case took about 21 months from the time it initially went to ACS
until it was moved into the levy program. The contractor received over
$350,000 in federal payments from 1999 to 2002, and current payments would
not be subject to the 15 percent levy because DOD is not reporting
information from the vendor payment system to TOP.

IRS Delays in Processing and Inaccurate Records Exclude Cases from the
Levy Program

In addition to excluding cases for various operational and policy reasons
as described above, IRS excludes cases from the levy program for
particular taxpayer events, such as bankruptcy, litigation, or financial
hardship, as well as when taxpayers apply for an installment agreement or
an offer in compromise. When one of these events takes place, IRS enters a
code in its automated system that excludes the case from entering the levy
program. Although these actions are appropriate, IRS may lose
opportunities to collect through the levy program if the processing of
agreements is not timely or prompt action is not taken to cancel the
exclusion when the event, such as a dismissed bankruptcy petition, is
concluded.

Delays in processing taxpayer documents and errors in taxpayer records are
long-standing problems at IRS and can harm both government interests and
the taxpayer. In 2002, the IRS Taxpayer Advocate Service49 reported that
over 65 percent of all offers in compromise take longer than 6 months to
process. Similarly, in our audits of IRS financial statements, we reported
on delays in processing offers in compromise. In those audits, we
identified delays in processing that were outside IRS's control (such as
taxpayer failure to provide appropriate documentation to support the
offer), as well as delays caused by IRS inactivity.50 These findings are
consistent with an earlier IRS internal audit report that found, in a
majority of cases sampled, that IRS had periods of inactivity that lasted
60 days or more.51 Similarly, past audits have identified instances in
which inaccurate records allowed tax refunds to be released to citizens
who owe taxes and other cases in which IRS erroneously assessed millions
of dollars due to inaccurate records.52 Our audit of cases involving DOD
contractors with unpaid federal taxes indicates that problems persist in
the timeliness of processing taxpayer applications and in the accuracy of
IRS records.

In our review of DOD contractors with unpaid federal taxes, we identified
a number of cases in which the processing of DOD contractor applications
for an offer in compromise or an installment agreement was delayed for
long periods, thus blocking the cases from the levy program and
potentially reducing government collections. For example, in one case, a
DOD contractor with nearly $400,000 in unpaid federal taxes applied for an
offer in compromise in mid-1999, but IRS did not reject the offer until
July 2000-over a year later. In this same case, the individual filed for
an installment agreement in March 1999, but it took IRS over 2 years-until
mid-2001-to reject the proposed agreement. During this period, the
individual's account was blocked from potential levying. From 1999 to
2001, DOD paid this individual over $200,000 in contract payments. Had

49 The Taxpayer Advocate Service is an IRS program that provides an
independent system to ensure that tax problems that have not been resolved
through normal channels are promptly and fairly handled.

50 U.S. General Accounting Office, Internal Revenue Service:
Recommendations to Improve Financial and Operational Management, GAO-01-42
(Washington, D.C.: Nov. 17, 2000).

51 Review of the Offers in Compromise Program (Reference No. 091603, Dec.
7, 1998), performed by what is now the Office of the Treasury Inspector
General for Tax Administration.

52 GAO-01-42.

DOD been reporting its payments to TOP during this period and had IRS not
blocked the account for a potential levy, a 15 percent levy of these
payments could have generated over $30,000 in collections for the
government.

In another example, there was both a long delay by IRS in deciding whether
to accept a DOD contractor's proposed installment agreement as well as a
failure to properly reverse the codes once a decision was made. The case
had a levy block due to a proposed installment agreement submitted by the
business in mid-2000. As mentioned above, under IRS regulations, once a
code is entered into the system indicating that a taxpayer has applied for
or is currently under an offer in compromise or installment agreement, the
case is automatically blocked from the levy program. IRS rejected the
installment agreement offer after a year. However, IRS had not properly
reversed the code in its systems that indicated an installment agreement
application was pending, as of our review in May 2003. Consequently, this
account with over $60,000 in unpaid taxes was inappropriately excluded
from the levy program for 2 years. Meanwhile, this business received
nearly $30,000 in payments from DOD while the statutory period in which
IRS had to collect the unpaid taxes continued to run.

We found that inaccurate coding at times prevented both IRS collection
action and cases from entering the levy program. Because the coding within
a taxpayer's account determines whether the account will enter the levy
program, effective management of these codes is critical. If these
blocking codes remain in the system for long periods, either because IRS
delays processing taxpayer agreements or because IRS fails to input or
reverse codes after processing is complete, cases may be needlessly
excluded from the levy program.

For example, as of May 2003, one DOD contractor had been assigned to field
collection since the spring of 1996. However, the case entered bankruptcy,
thus blocking it from the levy program and preventing all collection
action on the case. Although the bankruptcy was settled in 1998, the case
was never released for collection action. IRS had incorrectly entered a
reversal code, causing the case to remain in bankruptcy status and
therefore blocking it from the levy program. On the basis of our review,
IRS was attempting to reverse the bankruptcy code and begin collection
action against the case. Similarly, in another case, a DOD contractor
entered into an installment agreement with IRS in the spring of 1999, at
which time IRS posted the appropriate code to block other collection
activities. The individual defaulted on the agreement, after

making three payments, in 1999. However, IRS did not post the code
required to cancel the installment agreement, leaving the individual's
account blocked from collection activities, such as the levy program. If
the correct code had been posted, IRS systems would have automatically put
the individual in the levy program in late 2000 when IRS implemented the
program.

IRS Subordinates Use of the Levy Program to Other Collection Efforts

Although the nation's tax system is built upon voluntary compliance, when
businesses and individuals fail to pay voluntarily, the government has a
number of enforcement tools to compel compliance or elicit payment. Our
review of DOD contractors with unpaid federal taxes indicates that
although the levy program could be an effective, reliable collection tool,
IRS is not using the program as a primary tool for collecting unpaid taxes
from federal contractors. For the cases we audited, IRS subordinated the
use of the levy program in favor of negotiating voluntary tax compliance
with the business or individual.

We recently recommended that IRS study the feasibility of submitting all
eligible unpaid federal tax accounts to FMS on an ongoing basis for
matching against federal payment records under the levy program, and use
information from any matches to assist IRS in determining the most
efficient method of collecting unpaid taxes, including whether to use the
levy program. Although IRS raised concerns that increasing the use of the
levy program would increase workload for its staff and would entail
excessively high computer programming costs, it agreed to study the
feasibility of such an arrangement.53 The study was not completed at the
time of our review.

For the DOD contractors we audited and investigated, IRS attempts to gain
voluntary compliance often resulted in minimal or no actual collections.
For example, one case involved a sole proprietorship that had gross
revenue of over $40 million in 2001, about 10 percent of which came from
DOD contract payments. Although this business worked primarily for federal
agencies, it failed to remit payroll and unemployment taxes and had
accumulated unpaid federal taxes of nearly $10 million. Even with the
mounting tax debt, revenue officers continued working to get the business
to make payments, including executing an installment agreement, on which

53 GAO-03-356.

the business defaulted. After defaulting, IRS did not put the case into
the levy program. In November 2002, the revenue officer put a 1-year
collection hold on the business to see if it could restructure, cut costs,
and become profitable so that it could enter into another installment
agreement to voluntarily pay the tax debt. Throughout this period, the
business rarely paid its taxes on time or in full (essentially additional
payroll taxes), yet the business continued to operate and increase the
amount of unpaid federal taxes owed. In this case, IRS did not levy the
business's assets because it thought a levy would cause the business to
fail. However, the state in which the business operated seized funds from
the business's bank account in early 2003 to partially settle the
business's state tax debt. This caused the business to cease operations in
early 2003, leaving IRS with a potentially uncollectible debt of nearly
$10 million.

As another example, shortly after one business in our selection of DOD
contractors defaulted on an installment agreement, it requested and
received another installment agreement. The business promised to make
current tax payments. However, after only a few months the business was
not paying its current tax liabilities (essentially additional payroll
taxes) and had fallen behind on the installment agreement. Even without
the business accumulating more debt, the installment agreement required
the business to make monthly payments for 13 years. Given the business's
history of default, failure to pay its current tax debt, and default on
the current agreement, indications were the business would not fulfill
this obligation. However, instead of canceling this long-term payment plan
and preventing the business from accumulating additional debt due to its
failure to remit current quarterly payroll taxes, IRS reinstated the
installment agreement and declined to put a lien on the business's
properties. The business again defaulted on the installment agreement less
than 2 months after initiation, and at the time of our review, IRS was
negotiating with the business for yet another installment agreement.

Challenges for IRS Collections

The nation's tax system is rooted in the doctrine of its citizens
voluntarily complying with the tax laws. IRS has a difficult task in
maintaining a balance between this key doctrine and effectively fulfilling
its role as the nation's tax collector. The philosophical thrust of this
doctrine can, however, negatively affect IRS's ability to collect what is
legitimately owed to the government. If IRS fails or is limited in its
ability to act quickly and aggressively against businesses and individuals
that repeatedly fail to pay the taxes they owe, it runs the risk of not
fulfilling its mission. IRS also risks further weakening voluntary
compliance as declines in enforcement

programs may erode taxpayer confidence in the fairness of our federal tax
system and may create the perception that there is little risk in
noncompliance. The potential revenue losses and the threat to voluntary
compliance make the collection of unpaid taxes a high-risk area. Congress
and others have been concerned that declines in IRS enforcement programs
are eroding taxpayer confidence in the fairness of our tax system.

Prompt collection is important because, as discussed earlier, IRS
generally has a finite period under which to seek collection for unpaid
taxes. Generally, there is a 10-year statutory collection period beyond
which IRS is prohibited from attempting to collect. Unless the collection
period is extended, IRS removes unpaid taxes that exceed this statutory
period from its records. Even if a case is not actively worked for
extended periods, the collection period continues to move toward
expiration, reducing IRS's opportunity to collect the amount due.

The levy program could help IRS take prompt enforcement action and operate
more efficiently. In addition, from a governmentwide perspective, paying
billions of dollars to DOD contractors that at the same time have
substantial unpaid taxes is not a sound business practice. Withholding up
to 15 percent of these payments is an effective collection method and is
authorized by law. Additionally, the levy program can assist other
collection activities. For example, in one case the levy helped IRS
collect against a DOD contractor it was unable to locate. The IRS revenue
officers tried without success for 5 years to contact this business owner.
However, after placing a lien on the owner's assets and putting the case
into FPLP, which began to levy payments from the business's contract with
another federal agency, the contractor was ready to cooperate with IRS.

As the above case indicates, the levy program can have a far greater
impact on the tax program than just the dollars levied. We reported in the
past that businesses and individuals are more likely to pay voluntarily
when faced with a notice of intent to levy.54 Our audit of DOD contractors
also found this to be true. For example, IRS issued a levy notice to one
DOD contractor in the spring of 2003. After complaining that the levy
would force it into bankruptcy, the contractor agreed to begin making
voluntary installment payments. IRS accepted this offer and therefore did
not levy. At the time of our review in May 2003, IRS had received two
payments from

54 GAO-03-356.

the contractor to begin paying the liability from its earliest tax period.
In addition, the business paid two tax deposits for current (2003) periods
of over $160,000. This sequence of events indicates that, as we reported
previously, the threat of IRS levy action often brings about tax payments
and greater taxpayer compliance and fairness to those that do pay their
taxes.

In a previous report, we estimated that after receiving a notice of intent
to levy, about 29 percent of taxpayers take action that enables IRS to
remove them from the active inventory of unpaid taxes or move them to an
inactive status. Specifically, we estimated that subsequent to receiving a
levy notice, about 19 percent of the taxpayers resolved their liability
and were removed from the active inventory, while about 10 percent
obtained determinations of financial hardship.55 By reclassifying some
active accounts to an inactive status and removing others, the levy
program helps IRS prioritize its inventory of unpaid taxes more
efficiently and enables IRS to focus more of its resources on unpaid
accounts that have more collection potential.

As described above, the advantages of the levy program to IRS in assisting
its collection efforts are clear given its claims of resource constraints.
However, IRS's current implementation strategy appears to make the levy
program one of the last collection tools IRS uses. Changing the program to
(1) remove the policies that work to unnecessarily exclude cases from
entering the levy program and (2) promote the use of the levy program to
make it one of the first collection tools could allow IRS-and the
government-to reap the advantages of the program earlier in the collection
process.

55 GAO-03-356.

DOD Contractors Involved in Abusive or Potentially Criminal Activity
Related to the Federal Tax System

To determine whether there are instances of abusive or potentially
criminal activity by DOD contractors related to the federal tax system, we
selected 47 case study businesses and individuals that had unpaid taxes
and were receiving DOD contractor payments in fiscal year 2002. We
excluded cases that IRS categorized as "compliance assessment,"56 business
cases with total unpaid taxes under $10,000, and individual cases with
total unpaid taxes under $5,000. Our selection was based upon a business
or individual having a large number of unpaid tax periods, owing large tax
debt, and receiving DOD contractor payments. For more information on our
criteria for the selection of the 47 case studies, see appendix I.

For all 47 cases that we audited and investigated, we found abusive or
potentially criminal activity related to the federal tax system.
Thirty-four of these case studies involved businesses with employees who
had unpaid payroll taxes dating as far back as the early 1990s, some for
as many as 62 tax periods. However, rather than fulfill their role as
"trustees" of this money and forward it to IRS, these DOD contractors
diverted the money for other purposes. To reiterate, the diversion of
payroll taxes for personal or business use is potentially criminal
activity. The other 13 case studies involved individuals that had unpaid
income taxes dating as far back as the 1980s. We are referring the 47
cases detailed in this report to IRS for evaluation and additional
collection action or criminal investigation.

Nature of Business for Case DOD is a large and complex organization with a
budget of about $400

Study Contractors	billion and operations across the world. Because DOD
contracts for a large variety of goods and services, it is not surprising
that we found DOD contractors that have unpaid taxes from a large number
of industries. Table 1 shows a breakdown for our 47 contractor case
studies by the type of goods and services provided to DOD.

56 For financial reporting, IRS classifies its unpaid tax debts as either
(1) federal taxes receivable (taxes due from taxpayers for which IRS can
support the existence of a receivable through taxpayer agreement or a
favorable court ruling), (2) compliance assessments (where neither the
taxpayer nor the court has affirmed that the amounts are owed), or (3)
write-offs (which are unpaid assessments that IRS does not expect to
collect because of factors such as taxpayer death, bankruptcy, or
insolvency).

Table 1: Types of Goods and Services Provided by DOD Contractors in Case Studies

                            Type of business Number

                       Maintenance/construction services

Custodial services

Aircraft-related goods supplier

Research services

Consulting services

Music services

Dentist

Training services

Information technology personnel services

Othera

Total

Source: GAO analysis of DOD and public records.

aIncludes goods and services such as uniform manufacturing, courier
services, medical personnel services, funeral services, weapon parts, and
computer equipment.

Examples of Abusive or Potentially Criminal Activity Related to the
Federal Tax System by Businesses

As discussed previously, businesses with employees are required by law to
collect, account for, and transfer income and employment taxes to IRS,
which the employer withholds from an employee's wages. IRS refers to these
withheld payroll taxes as trust fund taxes because the employer holds the
employee's money "in trust" until the employer makes a federal tax deposit
in that amount. Businesses that fail to remit payroll taxes to the federal
government are liable for the amounts withheld from employees, and IRS can
assess a TFRP57 equal to the total amount of taxes not collected or not
accounted for and paid over against individuals who are determined by IRS
to be "willful and responsible" for the nonpayment of withheld payroll
taxes. Typically, these individuals are the officers of a corporation,
such as a president or treasurer. As we have found in previous reviews,
collections of TFRP assessments from officers are generally minimal.

57 26 U.S.C. S: 6672 (2000).

In addition to civil penalties, criminal penalties exist for an employer's
failure to turn over withheld employee payroll taxes to IRS. The act of
willfully failing to collect or pay over any tax is a felony.58
Additionally, the failure to comply with certain requirements for the
separate accounting and deposit of withheld income and employment taxes is
a misdemeanor.59

Our audit and investigation of the 34 case study business contractors
showed substantial abuse or potential criminal activity as all had unpaid
payroll taxes and all diverted funds for personal or business use. In
table 2, and on the following pages, we highlight 13 of these businesses
and estimate the amounts that could have been collected through the levy
program based on fiscal year 2002 DOD payments. For these 13 cases, the
businesses owed unpaid taxes for a range of 6 to 30 quarters (tax
periods). Eleven of these cases involved businesses that had unpaid taxes
in excess of 10 tax periods, and 5 of these were in excess of 20 tax
periods. The amount of unpaid taxes associated with these 13 cases ranged
from about $150,000 to nearly $10 million; 7 businesses owed in excess of
$1 million. In these 13 cases, we saw some cases where IRS filed tax liens
on property and bank accounts of the businesses, and a few cases where IRS
collected minor amounts through the levying of non-DOD federal payments.
We also saw 1 case in which the business applied for an offer in
compromise, which IRS rejected on the grounds that the business had the
financial resources to pay the outstanding taxes in their entirety, and 2
cases in which the business is entered into, and subsequently defaulted
on, installment agreements to pay the outstanding taxes. In 5 of the 13
cases, IRS assessed the owners or business officers with TFRPs, yet no
collections were received from these penalty assessments.

           58 26 U.S.C. S: 7202 (2000). 59 26 U.S.C. S: 7215 (2000).

Table 2: DOD Contractors with Unpaid Federal Taxes-Business

                                               Estimated             
                                Unpaid fiscal year 2002  Fiscal year 
Case  Goods or service  federal tax collections under    2002 DOD 
         and                                                         
         nature of DOD         amounta effective tax                 Comments 
study work                          levyb               paymentsc 

Base support and   Nearly    $527,000 $3.5 million  State tax authorities  
                                                        levied the business   
      custodial     $10 million                       bank account. The owner 
      services:                                               borrowed nearly 
provides dining,                                     $1 million from the   
        trash                                           business. The owner   
       removal,                                       bought a boat, several  
      security,                                          cars, and a home     
      cleaning, and                                     outside the United    
          recycling                                    States. The business   
     programs on                                      was dissolved in 2003   
       military                                       and transferred its     
                                                               employees to a 
        bases                                            relative's business, 
                                                                     where it 
                                                      submitted invoices and  
                                                      received payments       
                                                      from DOD on a previous  
                                                      contract through        
                                                           August 2003.       

Engineering research    Over    $58,000 $390,000 The owner paid $1 million 
                                                          to purchase a       
    services: conducts  $1 million                   house and furnishings in 
                                                            the mid-1990s. At 
     studies for DOD                                around the same time, the 
                                                               owner borrowed 
                                                       nearly $1 million from 
                                                        the business, and the 
                                                     business stopped paying  
                                                       its taxes in full.     
                                                    DOD awarded the business  
                                                            contracts         
                                                     totaling over $600,000.  

Aircraft-related goods: Nearly $50,000 $336,000 The business received over
30 DOD manufactures structural $2 million contracts from 1997 through 2002
totaling parts for DOD aircraft nearly $2 million.

Research services:    Over   $13,000 $86,000 DOD awarded the business a    
                                                contract in                   
    provides research  $700,000                     2002 for nearly $800,000. 
           for                                                 Owner has over 
           DOD                                   $1 million in loans related  
                                                        to cars, real         
                                                  estate, and recreational    
                                                       activities, and        
                                                      owner also has a        
                                                      high-performance        
                                                          airplane.           

Janitorial services:     Over    $108,000 $719,000    The business did not 
                                                            make tax payments 
    provides custodial   $3 million                   after early 2001, and   
                                                      it made only partial    
       services at a DOD                              payments prior to that  
                facility                              dating back to the      
                                                      mid-1990s. The business 
                                                            also did not file 
                                                       corporate tax returns  
                                                           for 8 years.       

     Private security   Nearly   $3,000 $21,000 One of the business's         
            services:                           officers, who owns a          
    provides security $6 million                       large boat, paid off a 
               guards                                 recreation-related loan 
at military bases                            in 1999. The business paid    
                                                taxes while in                
                                                      bankruptcy, but largely 
                                                         stopped paying after 
                                                  emerging from bankruptcy.   

7   Furniture sales and     Over   $6,000 $38,000   The owners used the    
                                                         business to pay      
     construction services:  $150,000                personal expenses, such  
                                                             as house         
       sells and installs                                 mortgage and credit 
             office                                     cards. One owner is a 
      furniture at military                              retired military     
                                                             officer.         
          installations                              

(Continued From Previous Page)

                                          Estimated             
                                       fiscal year              
                               Unpaid     2002      Fiscal year 
Case  Goods or service federal tax collections      2002 DOD 
               and                    under                     
study  nature of DOD       amounta effective tax   paymentsc   Comments    
               work                   levyb                     
            Custodial                                  $1.5     The business  
            services:            Over                 million     received    
                                           $219,000             numerous DOD  
                                                                contracts     
             provides        $800,000                           from 1998     
          janitorial and                                        through 2001  
                                                                totaling      
                                                                   nearly $12 
         housekeeping                                            million. The 
         services at                                              business is 
                                                                    linked to 
             military                                             potential   
          installations                                         check fraud.  

      Construction        Over    $357,000 $2.4 million The business owes DOD 
        services:                                           tens of thousands 
                                                            of dollars for an 
    provides housing   $1 million                        overpayment in early 
                                                                        2000. 
management services                                  
        including                                       
      maintenance,                                      
          repairs, and                                  
          renovations,                                  
    on military bases                                   

           Base support                                  The business was     
              services:   Nearly    $33,000     $217,000 awarded contracts    
                                                         from                 
                                                         1999 through 2000    
provides landscaping $1 million                       worth over $1        
                                                         million.             
    and snow removal at                                     The business owes 
                      a                                  taxes dating back to 
                                                                          the 
      military base                                          early 1990s.     
       Construction        Over             $2.8 million 
        services:                  $422,000              
provides repairs to   $700,000                        
aircraft hangars at                                   
            a                                            
      military base                                      

    Medical personnel    Nearly   $698,000 $4.7 million   Several federal and 
                                                         state tax liens have 
services: provides  $6 million                        been placed against  
                                                             the owner.       
nursing, pharmacy,                                   
    physical therapy,                                   
           and                                          
      other skilled                                     
         medical                                        
    personnel in DOD                                    
       facilities                                       

Aircraft-related goods:   Over   $29,000 $194,000 The business was awarded 
                                                                 numerous DOD 
    manufactures aircraft  $400,000                  contracts in a recent    
                                                     4-year period totaling   
    components for several                                over $300,000.      
      DOD and civilian                               
          programs                                   

Source: GAO analysis of DOD, IRS, FMS, public, and other records.

Notes: Dollar amounts are rounded. The nature of unpaid taxes for
businesses was primarily due to unpaid payroll taxes. A contractor
registers in the CCR database with either an EIN or an SSN. In our report,
any contractor registering with an EIN is referred to as a business, and
any contractor registering with an SSN is referred to as an individual. An
individual in CCR could be a business owner (i.e., sole proprietorship).

aUnpaid tax amount as of September 30, 2002.

bThe estimated collections under an effective tax levy use the assumptions
that all unpaid federal taxes are referred to TOP at Treasury FMS and all
fiscal year 2002 DOD payment information is provided to TOP. The
collection amount is calculated on 15 percent of the payment amount up to
the amount of unpaid taxes.

cDOD payments from MOCAS, One Bill Pay, Integrated Accounts Payable System
(IAPS), Computerized Accounts Payable System (CAPS) Clipper, and CAPS
Windows automated systems identified by GAO.

The following provides illustrative detailed information on several of
these cases.

o 	Case # 1 -This base support contractor provided services such as trash
removal, building cleaning, and security at U.S. military bases. The
business had revenues of over $40 million in 1 year, with over 25 percent
of this coming from federal agencies. This business's outstanding tax
obligations consisted of unpaid payroll taxes. In addition, the contractor
defaulted on an IRS installment agreement. IRS assessed a TFRP against the
owner. The business reported that it paid the owner a six figure income
and that the owner had borrowed nearly $1 million from the business. The
business also made a down payment for the owner's boat and bought several
cars and a home outside the country. The owner allegedly has now relocated
his cars and boat outside the United States. This contractor went out of
business in 2003 after state tax authorities seized its bank account. The
business transferred its employees to a relative's business, which also
had unpaid federal taxes, and submitted invoices and received payments
from DOD on a previous contract through August 2003.

o 	Case # 2 -This engineering research contractor received nearly $400,000
from DOD during 2002. At the time of our review, the contractor had not
remitted its payroll tax withholdings to the federal government since the
late 1990s. In 1996, the owner bought a home and furnishings worth
approximately $1 million and borrowed nearly $1 million from the business.
The owner told our investigators that the payroll tax funds were used for
other business purposes.

o 	Case # 3 -This aircraft parts manufacturer did not pay payroll
withholding and unemployment taxes for 19 of 20 periods through the mid-
to late 1990s. IRS assessed a TFRP against several corporate officers, and
placed the business in FPLP in 2000. This business claims that its payroll
taxes were not paid because the business had not received DOD contract
payments; however, DOD records show that the business received over
$300,000 from DOD during 2002.

o 	Case # 5 -This janitorial services contractor reported revenues of over
$3 million and had received over $700,000 from DOD in a recent year. The
tax problems of this business date back to the mid-1990s. At the time of
our review, the business had both unpaid payroll and unemployment taxes of
nearly $3 million. In addition, the business did not file its corporate
tax returns for 8 years. IRS assessed a TFRP

against the principal officer of the business in early 2002. This
contractor employed two officers who had been previously assessed TFRPs
related to another business.

o 	Case # 7 -This furniture business reported gross revenues of over
$200,000 and was paid nearly $40,000 by DOD in a recent year. The business
had accumulated unpaid federal taxes of over $100,000 at the time of our
review, primarily from unpaid employee payroll taxes. The business also
did not file tax returns for several years even after repeated notices
from IRS. The owners made an offer to pay IRS a portion of the unpaid
taxes through an offer in compromise, but IRS rejected the offer because
it concluded that the business and its owners had the resources to pay the
entire amount. At the time of our audit, IRS was considering assessing a
TFRP against the owners to make them personally liable for the taxes the
business owed. The owners used the business to pay their personal
expenses, such as their home mortgage, utilities, and credit cards. The
owners said they considered these payments a loan from the business. Under
this arrangement, the owners were not reporting this company benefit as
income so they were not paying income taxes, and the business was
reporting inflated expenses.

o 	Case # 9 -This family-owned and operated building contractor provided a
variety of products and services to DOD, and DOD provided a substantial
portion of the contractor's revenues. At the time of our review, the
business had unpaid payroll taxes dating back several years. In addition
to failing to remit the payroll taxes it withheld from employees, the
business had a history of filing tax returns late, sometimes only after
repeated IRS contact. Additionally, DOD made an overpayment to the
contractor for tens of thousands of dollars. Subsequently, DOD paid the
contractor over $2 million without offsetting the earlier overpayment.

o 	Case # 10 -This base support services contractor has close to $1
million in unpaid payroll and unemployment taxes dating back to the early
1990s, and the business has paid less than 50 percent of the taxes it
owed. IRS assessed a TFRP against one of the corporate officers. This
contractor received over $200,000 from DOD during 2002.

Examples of Abuse of the Federal Tax System by Individuals

Individuals are responsible for the payment of income taxes, and our audit
and investigation of 13 individuals showed significant abuse of the
federal tax system similar to what we found with our DOD business case
studies. In table 3, and on the following pages, we highlight four of the
individual case studies. In all four cases, the individuals had unpaid
income taxes. In one of the four cases, the individual operated a business
as a sole proprietorship with employees and had unpaid payroll taxes.
Taxes owed by the individuals ranged from four to nine tax periods, which
equated to years. Each individual owed in excess of $100,000 in unpaid
income taxes, with one owing in excess of $200,000. In two of the four
cases, the individuals had entered into, and subsequently defaulted on, at
least one installment agreement to pay off the tax debt.

Table 3: DOD Contractors with Unpaid Federal Taxes-Individual

                                       Estimated             
                                    fiscal year              
                            Unpaid     2002      Fiscal year 
Case  Goods or      federal tax collections      2002 DOD 
         service and               under                     
study nature of DOD     amounta effective tax   paymentsc     Comments     
             work                  levyb                     
         Vehicle                                             The business was 
         repair               Over                           investigated for 
         services:                       $22,000    $147,000      paying      
           provides                                           employee wages  
          repair and      $100,000                           in cash. Despite 
                                                                    a         
         painting for                                        substantial tax  
           military                                           liability, the  
                                                              owner recently  
                                                             purchased a home 
           vehicles                                          valued at over   
                                                             $1 million       
                                                               as well as a   
                                                              luxury sports   
                                                              car. The owner  
                                                                  also owes a 
                                                               federal agency 
                                                                    for child 
                                                                     support. 

Dentist: provides    Over   $12,000 $78,000   DOD recently increased the   
                                                        individual's          
dental services at $100,000                 contract by over $80,000. The  
           a                                             dentist's            
military facility                           credit history included        
                                               several credit card            
                                                accounts that were identified 
                                                               for collection 
                                                          action.             

Dentist: provides    Over   $11,000 $76,000  DOD awarded the individual a  
                                                         multiyear            
dental services at $200,000                    contract for over $400,000. 
           a                                                  This individual 
military facility                               paid income tax for only 1 
                                                             year since 1993. 
                                               The individual previously had  
                                                         a business           
                                               that owes over $100,000 in     
                                               unpaid payroll                 
                                                 and unemployment taxes going 
                                                                  back to the 
                                                        early 1990s.          

17	Training services: Over $2,000 $12,000 This individual has not paid
income taxes for conducts management $100,000 5 years. and leadership
courses

Source: GAO analysis of DOD, IRS, FMS, public, and other records.

Notes: Dollar amounts are rounded. Nature of unpaid taxes for individuals
was primarily due to unpaid income taxes. A contractor registers in the
CCR database with either an EIN or an SSN. In our report, any contractor
registering with an EIN is referred to as a business, and any contractor
registering with

an SSN is referred to as an individual. An individual in CCR could be a
business owner (i.e., sole proprietorship). For cases selected as
individuals, we reviewed both the owner and related business information,
if it could be identified.

aUnpaid tax amount as of September 30, 2002.

bThe estimated collections under an effective tax levy use the assumptions
that all unpaid federal taxes are referred to TOP at Treasury FMS and all
fiscal year 2002 DOD payment information is provided to TOP. The
collection amount is calculated on 15 percent of the payment amount up to
the amount of unpaid taxes.

cDOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems
identified by GAO.

The following provides illustrative detailed information on these four
cases.

o 	Case # 14 -This individual's business repaired and painted military
vehicles. The owner failed to pay personal income taxes and did not send
employee payroll tax withholdings to IRS. The owner owed over $500,000 in
unpaid federal business and individual taxes. Additionally, the TOP
database showed the owner had unpaid child support. IRS levied the owner's
bank accounts and placed liens against the owner's real property and
business assets. The business received over $100,000 in payments from DOD
in a recent year, and the contractor's current DOD contracts are valued at
over $60 million. In addition, the business was investigated for paying
employee wages in cash. Despite the large tax liability, the owner
purchased a home valued at over $1 million and a luxury sports car.

o 	Case # 15 -This individual, who is an independent contractor and works
as a dentist at a military installation, had a long history of not paying
income taxes. The individual did not file several tax returns and did not
pay taxes in other periods when a return was filed. The individual entered
into an installment agreement with IRS but defaulted on the agreement.
This individual received $78,000 from DOD during a recent year, and DOD
recently increased the individual's contract by over $80,000.

o 	Case # 16 -This individual is another independent contractor who also
works as a dentist on a military installation. DOD paid this individual
over $200,000 in recent years, and recently signed a multiyear contract
worth over $400,000. At the time of our review, this individual had paid
income taxes for only 1 year since the early 1990s and had accumulated
unpaid taxes of several hundred thousand dollars. In addition, the
individual's prior business practice owes over $100,000 in payroll and
unemployment taxes for multiple periods going back to the early 1990s.

o 	Case # 17 -DOD paid this individual nearly $90,000 for presenting
motivational speeches on management and leadership. This individual has
failed to file tax returns since the late 1990s and had unpaid income
taxes for a 5-year period from the early to mid-1990s. The total amount of
unpaid taxes owed by this individual is not known because of the
individual's failure to file income tax returns for a number of years. IRS
placed this individual in the levy program in late 2000; however, DOD
payments to this individual were not levied because DFAS payment
information was not reported to TOP as required.

See appendix II for details on the other 30 DOD contractor case studies.

Contractors with Unpaid Taxes Are Not Prohibited by Law from Receiving
Contracts from the Federal Government

Federal law does not prohibit a contractor with unpaid federal taxes from
receiving contracts from the federal government. Existing mechanisms for
doing business only with responsible contractors do not prevent businesses
and individuals that abuse the federal tax system from receiving
contracts. Further, the government has no coordinated process for
identifying and determining the businesses and individuals that should be
prevented from receiving contracts and for conveying that information to
contracting officers for use before awarding contracts.

In previous work, we supported the concept of barring delinquent taxpayers
from receiving federal contracts, loans and loan guarantees, and
insurance. In March 1992, we testified on the difficulties involved in
using tax compliance as a prerequisite for awarding federal contracts.60
In May 2000, we testified in support of H.R. 4181 (106th Congress), which
would have amended DCIA to prohibit delinquent federal debtors, including
delinquent taxpayers, from being eligible to contract with federal
agencies.61 Safeguards in the bill would have enabled the federal
government to procure goods or services it needed from delinquent
taxpayers for designated disaster relief or national security. Our
testimony also pointed out implementation issues, such as the need to
first ensure that IRS systems provide timely and accurate data on the
status of taxpayer

60 U.S. General Accounting Office, Tax Administration: Federal Contractor
Tax Delinquencies and Status of the 1992 Tax Return Filing Season,
GAO/T-GGD-92-23 (Washington, D.C.: Mar. 17, 1992).

61 U.S. General Accounting Office, Debt Collection: Barring Delinquent
Taxpayers From Receiving Federal Contracts and Loan Assistance,
GAO/T-GGD/AIMD-00-167 (Washington, D.C.: May 9, 2000).

accounts. However, this legislative proposal was not adopted and there is
no existing statutory bar on delinquent taxpayers receiving federal
contracts.

Federal agencies are required by law to award contracts to responsible
sources.62 This statutory requirement is implemented in the FAR, which
requires that government purchases be made from, and government contracts
awarded to, responsible contractors only.63 To effectuate this policy, the
government has established a debarment and suspension process and
established certain criteria for contracting officers to consider in
determining a prospective contractor's responsibility. Contractors
debarred, suspended, or proposed for debarment are excluded from receiving
contracts and agencies are prohibited from soliciting offers from,
awarding contracts to, or consenting to subcontracts with these
contractors, unless compelling reasons exist. Prior to award, contracting
officers are required to check a governmentwide list of parties that have
been debarred, suspended, or declared ineligible for government
contracts,64 as well as to review a prospective contractor's
certification65 on debarment, suspension, and other responsibility
matters. Among the causes for debarment and suspension is tax evasion.66
In determining

62 10 U.S.C. S: 2305 (b) and 41 U.S.C. S: 253b (2000).

63 48 C.F.R. S: 9.103 (a).

64 Contractors included on the list as having been declared ineligible on
the basis of statutory or regulatory procedures are excluded from
receiving contracts under the conditions and for the period set forth in
the statute or regulation. Agencies are prohibited from soliciting offers
from, awarding contracts to, or consenting to subcontracts with these
contractors under these conditions and for that period.

65 Such certification is required only for contracts exceeding the
simplified acquisition threshold.

66 The government may suspend a contractor suspected of tax evasion, upon
adequate evidence, and debar a contractor for a conviction or civil
judgment for commission of tax evasion. Further, prospective contractors
are required to certify in their bids or proposals whether they or their
principals, within the preceding 3 years, were convicted or had civil
judgments rendered against them for commission of tax evasion, and whether
they or their principals are presently indicted or otherwise criminally or
civilly charged with commission of tax evasion.

whether a prospective contractor is responsible, contracting officers are
also required to determine that the contractor meets several specified
standards, including "a satisfactory record of integrity and business
ethics." Except for a brief period during 2000 through 2001, contracting
officers have not been required to consider compliance with federal tax
laws in making responsibility determinations.67

Neither the current debarment and suspension process nor the requirements
for considering contractor responsibility effectively prevent the award of
government contracts to businesses and individuals that abuse the tax
system. Since most businesses and individuals with unpaid taxes are not
charged with tax evasion, and fewer still convicted, these contractors
would not necessarily be subject to the debarment and suspension process.
None of the contractors described in this report were charged with tax
evasion for the abuses of the tax system we identified.

A prospective contractor's tax noncompliance, other than tax evasion, is
not considered by the contracting officer before deciding whether to award
a contract. Further, no coordinated and independent mechanism exists for
contracting officers to obtain accurate information on contractors that
abuse the tax system. Such information is not obtainable from IRS because
of a statutory restriction on disclosure of taxpayer information.68 As we
found in November 2002,69 unless reported by prospective contractors
themselves, contracting officers face significant difficulties obtaining
or verifying tax compliance information on prospective contractors.

67 In December 2000, a controversial revision to the FAR was issued that
required contracting officers to consider a prospective contractor's
compliance with several areas of law, including tax, in determining a
satisfactory record of integrity and business ethics. This revision was
revoked in December 2001 after having been effectively suspended for many
federal agencies earlier in 2001.

68 26 U.S.C. S: 6103 (2000).

69 U.S. General Accounting Office, Government Contracting: Adjudicated
Violations of Certain Laws by Federal Contractors, GAO-03-163 (Washington,
D.C.: Nov. 15, 2002).

Moreover, even if a contracting officer could obtain tax compliance
information on prospective contractors, a determination of a prospective
contractor's responsibility under the FAR when a contractor abused the tax
system is still subject to a contracting officer's individual judgment.
Thus, a business or individual with unpaid taxes could be determined to be
responsible depending on the facts and circumstances of the case. Since
the responsibility determination is largely committed to the contracting
officer's discretion and depends on the contracting situation involved,
there is the risk that different determinations could be reached on the
basis of the same tax compliance information. On the other hand, if a
prospective contractor's tax noncompliance results in mechanical
determinations of nonresponsibility, de facto debarment could result.
Further, a determination that a prospective contractor is not responsible
under the FAR could be challenged.70

Because individual responsibility determinations can be affected by a
number of variables, any implementation of a policy designed to consider
tax compliance in the contract award process may be more suitably
addressed on a governmentwide basis. The formulation and implementation of
such a policy may most appropriately be the role of OMB's Office of
Federal Procurement Policy. The Administrator of Federal Procurement
Policy provides overall direction for governmentwide procurement policies,
regulations, and procedures. In this regard, OMB's Office of Federal
Procurement Policy is in the best position to develop and pursue policy
options for prohibiting federal contract awards to businesses and
individuals that abuse the tax system.

Conclusions	Thousands of DOD contractors that failed in their
responsibility to pay taxes continue to get federal contracts. Allowing
these contractors to do business with the federal government while not
paying their federal taxes creates an unfair competitive advantage for
these businesses and individuals at the expense of the vast majority of
DOD contractors that do pay their taxes. DOD's failure to fully comply
with DCIA and IRS's continuing challenges in collecting unpaid taxes have
contributed to this

70 For example, if the prospective contractor is a small business, the
nonresponsibility determination would be reviewed by the Small Business
Administration, which could issue a Certificate of Competency stating that
the prospective contractor is responsible for the purpose of receiving and
performing a specific government contract. A determination of
nonresponsibility could also be protested through the bid protest process.

unacceptable situation, and have resulted in the federal government
missing the opportunity to collect hundreds of millions of dollars in
unpaid taxes from DOD contractors. Working closely with IRS and Treasury,
DOD needs to take immediate action to comply with DCIA and thus assist in
effectively implementing IRS's legislative authority to levy contract
payments for unpaid federal taxes. Also, IRS needs to better leverage its
ability to levy DOD contractor payments, moving quickly to use this
important collection tool. Beyond DOD, the federal government needs a
coordinated process for dealing with contractors that abuse the federal
tax system, including taking actions to prevent these businesses and
individuals from receiving federal contracts.

Matters for Congressional Consideration

In view of congressional interest in both tax collection and government
contracting, Congress may wish to consider the following two actions.

Until such time as DOD is able to demonstrate that it is meeting its
responsibilities under DCIA, including providing payment information to
TOP for offsetting unpaid federal taxes, and to facilitate action by the
department, Congress may wish to consider requiring that DOD report
periodically to Congress on its progress in implementing DCIA for each of
its contract and vendor payment systems. This report should include
details of actual collections by system and in total for all contract and
vendor payment systems during the reporting period.

In addition, Congress may wish to consider requiring that OMB report to
Congress on progress in developing and pursuing options for prohibiting
federal government contract awards to businesses and individuals that
abuse the federal tax system, including periodic reporting of actions
taken.

Recommendations for Executive Action

To improve collection of DOD contractor tax debt, we recommend that DOD
take four corrective actions, IRS take four corrective actions, and OMB
take one corrective action.

To comply with the DCIA and support IRS efforts under the Taxpayer Relief
Act of 1997 to collect unpaid federal taxes, we recommend that the
Secretary of Defense direct the Under Secretary of Defense (Comptroller)
to take four long- and short-term actions. For the long term, we recommend
that the Under Secretary develop a formal plan to implement DCIA by
providing payment information to TOP for all DFAS payment

systems. At a minimum, the plan should designate officials responsible for
implementing DCIA responsibilities for each payment system, including firm
implementation dates for each payment system.

For the short term, we recommend that the Under Secretary

o 	collaborate with Treasury's FMS to develop interim procedures for
identifying active DOD contactors in TOP and

o 	develop manual procedures so that the levy of contractor payments can
be started immediately for all DOD payment systems.

For both the long and short term, we recommend that the Under Secretary
devote sufficient resources to implementing all aspects of TOP and the DOD
plan.

To help improve the effectiveness of IRS collection activities, we
recommend that the Commissioner of Internal Revenue capitalize on the
potential of the FPLP by taking the following three actions:

o 	using the levy program as one of the first steps in the IRS collection
process,

o 	changing or eliminating policies that prevent businesses and
individuals with federal contracts from entering the levy program, and

o 	evaluating the cost versus benefits of keeping businesses and
individuals in the levy program once placed in the program until the taxes
are fully paid.

We further recommend that the Commissioner of Internal Revenue evaluate
the 47 referred cases detailed in this report and consider whether
additional collection action or criminal investigation is warranted.

To help ensure that the federal government does not award contracts to
businesses and individuals that have flagrantly disregarded their federal
tax obligations (e.g., failed to remit payroll taxes for several tax
periods or broken installment agreements), we recommend that the Director
of OMB develop and pursue policy options for prohibiting federal contract
awards to contractors in cases in which abuse to the federal tax system
has occurred and the tax owed is not contested. Options could include
designating such tax abuse as a cause for governmentwide debarment and

suspension or, if allowed by statute, authorizing IRS to declare such
businesses and individuals ineligible for government contracts. We further
recommend that any option OMB develops should

o  consider whether additional legislation is needed;

o 	minimize administrative burdens on contracting officials, for example,
by distributing the names of abusive contractors debarred, suspended, or
declared ineligible on the governmentwide list of excluded parties that
contracting officers are already required to check before awarding
contracts;

o 	fully comply with the statutory restriction on disclosure of taxpayer
information; and

o 	address any necessary exceptions, such as when the goods or services
cannot be obtained from other sources or for national security.

Agency Comments and Our Evaluation

We received written comments on a draft of this report from the Under
Secretary of Defense (Comptroller) (see app. III) and the Commissioner of
Internal Revenue (see app. IV).

DOD concurred with three of the four recommendations and partially
concurred with the remaining recommendation. However, DOD disagreed with
our matter for congressional consideration related to progress reporting.
For the three recommendations with which it concurred, DOD stated that
actions are under way to address our recommendations and provided a
schedule of estimated implementation dates for all DFAS vendor payment
systems. The schedule estimates completion of 17 vendor payment systems by
March 2005. However, our report discusses 15 vendor pay systems because,
during our review, DOD represented that there were only 15 vendor payment
systems. We encourage DOD to continue to identify additional payment
systems to be included in its implementation schedule. DOD added that it
will devote the necessary resources to support the offset/levy program and
will reevaluate the level of resources as the program progresses.

Although DOD concurred with our second recommendation regarding
collaboration with Treasury for identifying active DOD contractors in TOP,
the comments point out that for the one payment system that DOD has
included in the levy program, the initial matches of contractors with the

TOP database have been low. We did not review the methodology or process
used by DFAS or by Treasury to make the matches. However, as stated in
this report, we believe that an effective levy program at DOD would yield
hundreds of million of dollars in tax collections. DOD further noted that
it has been and will continue to be proactive in working with Treasury to
generate as many collections as possible. With the exception of actions
taken with the MOCAS system, this statement is not accurate. DOD's
comments in response to this report represent its initial schedule for
reporting payment information to TOP for the 15 reported vendor payment
systems through which it disbursed almost $97 billion to contractors in
fiscal year 2002.

Regarding the partial concurrence to our third recommendation dealing with
development of manual procedures as a short-term corrective action, DOD
stated that its implementation plan has been accelerated to 6 months for
most payments systems, and that DOD's focus should remain on implementing
a system-based process rather than temporary manual procedures. As
previously mentioned, until the drafting of DOD's comments to this report,
there were no formal plans for reporting payment information to TOP for
any of DOD's vendor payment systems. Therefore, there was no plan for DOD
to accelerate. In addition, we believe that given the magnitude of
potential collections, it is unreasonable to wait for a systems solution,
which may not be available for a long time. Manual procedures should be
employed so that the offset of DOD payments can be started immediately.

Regarding the disagreement with the matters for congressional
consideration, DOD stated that a requirement is not necessary for DOD to
report to Congress on its progress in implementing the DCIA. We continue
to believe that Congress may wish to consider such oversight since DOD has
failed to fully implement the offset requirements of DCIA since its
passage more than 7 years ago, and the federal government continues to
miss opportunities to collect hundreds of millions of dollars in unpaid
taxes owed by DOD contractors.

IRS agreed with the issues raised in the report with respect to DOD
contractors that abuse the federal tax system, and agreed that FPLP can
become a more effective tool for collecting delinquent federal taxes owed
by businesses and individuals that receive federal payments, including DOD
contractors. Although IRS did not explicitly agree or disagree with the
recommendations in our report, it noted a number of actions that it had
taken or was taking to address the issues raised in this report, including

steps to accelerate the collection of delinquent taxes. Specifically, IRS
noted that it had made enhancements to its Inventory Delivery System to
identify certain businesses with payroll taxes as high-priority work and
that such cases would bypass the ACS phase of the collection process. IRS
pointed out that it had made improvements to the cycle time of a number of
its collection processes and cited recent improvements in expediting
processing of offers in compromise. IRS stated that it had reviewed the
systemic blocks on its FPLP procedures and information systems and, based
on this review, will be making changes to its information systems to
modify a number of blocks on cases in the queue and certain ACS
businessrelated cases. IRS will also work with DOD to ensure that
contractor TINs in the CCR database are accurate and will work with both
DOD and OMB in support of any changes they make with respect to how the
federal government deals with contactors with unpaid taxes. Finally, IRS
indicated that it would review the 47 case studies included in our report
and take additional action as appropriate.

While IRS agreed with the issues raised in the report, it pointed out that
the statutory requirements under which IRS must operate, coupled with
concerns for taxpayer rights, sometimes require IRS to remove a taxpayer
from FPLP or prevent it from taking any enforcement action. IRS added that
such requirements and considerations require IRS to take a more balanced
approach to FPLP versus a cost-benefit approach. We recognize the
statutory environment in which IRS operates in its efforts to collect
outstanding taxes and that statutory requirements affect how the FPLP is
used. We continue to believe, however, that FPLP provides an effective,
reliable means of ensuring at least some collections on unpaid taxes and
that IRS needs to consider a more aggressive and likely administratively
efficient approach, subject to legal requirements, for government
contractors that fail to pay their tax debt.

On January 15, 2004, we received oral comments from representatives of
OMB's Office of Federal Procurement Policy, Office of Federal Financial
Management, and Office of the General Counsel. OMB questioned the need for
developing or pursuing additional mechanisms to prohibit federal contract
awards to "tax abusers." OMB said that defining "tax abuse" would not be a
function of OMB and would be more appropriate for the Treasury Office of
Tax Policy or Congress. In addition, officials said that current FAR
guidance on responsibility (48 C.F.R. Subpart 9.1) as well as causes for
suspension and debarment (48 C.F.R. Subpart 9.4) and the Nonprocurement
Common Rule on Suspension and Debarment,71 recently updated November 26,
2003 (68 Fed. Reg. 66533), provide contracting officers and grant officers
with ample discretion to consider tax-related problems as a criterion for
making awards. Specifically, they noted that FAR 9.104-1(d) requires
prospective contractors to have, among other things, satisfactory records
of integrity and business ethics. Accordingly, they said, failure to pay
taxes or abuse of the tax system would be a factor in making this
determination.

OMB's comments provide us no basis to change our recommendation that OMB
develop and pursue policy options for prohibiting federal contract awards
to contractors that abuse the tax system. While we agree with OMB that the
definition of "tax abuse" should be developed in consultation with those
government officials responsible for administering the nation's tax laws,
as the agency responsible for governmentwide procurement policy, we
believe that OMB should assume a leadership role in ensuring that
contractors that abuse the tax system are prohibited from receiving
federal contracts.

As we discussed in this report, contracting officers have the discretion
to consider tax-related concerns in making determinations as to a
contractor's responsibility, specifically as to its record of integrity
and business ethics. However, contracting officers are not required to
consider a prospective contractor's tax noncompliance, other than tax
evasion, in deciding whether to award a contract and, as all 47 case
studies in our report clearly

71 The Nonprocurement Common Rule is the procedure used by federal
executive agencies to suspend, debar, or exclude individuals or entities
from participation in nonprocurement transactions such as grants,
cooperative agreements, scholarships, fellowships, contracts of
assistance, loans, loan guarantees, subsidies, insurance, payments for
specified use, and donation agreements.

illustrate, contracting officers are not doing so. There is no guidance
for contracting officers on considering tax information, even if the
information is legally available to them, nor is there any coordinated
mechanism to help contracting officers obtain accurate information on
contractors that abuse the tax system.

As OMB pointed out, the existing suspension and debarment process includes
an "other" category that provides for consideration of matters of "so
serious or compelling a nature" that they affect a contractor's present
responsibility. However, OMB did not explain how this effectively prevents
awards to contractors that abuse the federal tax system or provide
examples of such debarred or suspended contractors. Because the debarment
and suspension process does not appear to be preventing federal awards to
contractors that abuse the tax system, we continue to suggest that tax
abuse be specifically designated or authorized as a cause for debarment,
suspension, or ineligibility.

As agreed with your offices, unless you announce the contents of this
report earlier, we will not distribute it until 30 days after its date. At
that time, we will send copies to the Secretary of Defense; the Secretary
of the Treasury; the Director, Office of Management and Budget; the
Commissioner of the Financial Management Service; the Commissioner of
Internal Revenue; the Under Secretary of Defense for Acquisition,
Technology, and Logistics; the Under Secretary of Defense (Comptroller);
the Director, Defense Finance and Accounting Service; the Director,
Defense Logistics Agency; and interested congressional committees and
members. We will make copies available to others upon request. In
addition, this report will be available at no charge on the GAO web site
at http://www.gao.gov.

Please contact Gregory D. Kutz at (202) 512-9095 or [email protected], John J.
Ryan at (202) 512-9587 or [email protected], or Steven J. Sebastian at (202)
512-3406 or [email protected] if you or your staff have any questions
concerning this report.

Gregory D. Kutz
Director
Financial Management and Assurance

Robert J. Cramer
Managing Director
Office of Special Investigations

Steven J. Sebastian
Director
Financial Management and Assurance

Appendix I

Scope and Methodology

To identify DOD contractors, we obtained a copy of Department of Defense's
(DOD) Central Contractor Registration (CCR) database as of February 2003
from the Defense Logistics Information Service (DLIS) in Battle Creek,
Michigan. Because DOD does not have all contractor information in a single
automated system, the CCR database provided the best available source of
DOD contractor information.

To identify DOD contractors with unpaid federal taxes, we matched
contractor records from the CCR database to Internal Revenue Service (IRS)
tax records using the tax identification number (TIN) fields, which
resulted in about 27,100 matching records with nearly $3 billion in unpaid
taxes. We used data mining software to select, match, summarize, and
report on DOD and IRS records. We also identified over 5,000 contractors
with potentially invalid TINs by matching the contractor employer
identification number (EIN) and Social Security number (SSN) fields from
CCR to IRS tax records, and by providing an electronic file of contractor
SSNs from CCR to the Social Security Administration for matching against
its records.

To evaluate DOD and IRS processes and controls over the collection of
unpaid federal taxes, we discussed this issue and reviewed current
policies and procedures with the Defense Finance and Accounting Service
(DFAS), IRS, and Financial Management Service (FMS) officials. We did not
audit the effectiveness of the DFAS process for providing Mechanization of
Contract Administration Services (MOCAS) payment information to Treasury
Offset Program (TOP). In December 2003, we obtained information from IRS
on FPLP collections from MOCAS payments through September 2003. We visited
the IRS Processing Center in Kansas City, Missouri, to help determine the
effectiveness of the continuous levy program. In addition, we reviewed
related laws and regulations governing the levy program and TOP process.

To determine the DOD business activity of the about 27,100 contractors, we
obtained copies of fiscal year 2002 payment files for five of the largest
DOD payment systems: MOCAS for Defense Contract Management Agency (DCMA)
payments, One Bill Pay for Navy payments, Integrated Accounts Payable
System (IAPS) for Air Force payments, and Computerized Accounts Payable
System (CAPS) Clipper and CAPS Windows for Army and Marine Corps payments.
These payment files represented about 72 percent of the $183 billion
disbursed to DOD contractors in fiscal year 2002. The five payment files
are used to detect payment fraud and overpayments by the DFAS Internal
Review group with the DOD Operation

Appendix I
Scope and Methodology

Mongoose program at the Defense Manpower Data Center in Seaside,
California. Using TINs, we matched the about 27,100 contractors to the
five fiscal year 2002 DOD payment files.1 We also estimated the potential
fiscal year 2002 collections under an effective tax levy program of at
least $100 million using the assumptions that all unpaid federal taxes
were referred by IRS to FMS for inclusion in the TOP database, and fiscal
year 2002 payment information from the five DOD payment files was provided
to FMS for matching against the TOP database. The estimated collection
amount under an effective tax levy program was calculated on 15 percent of
the DOD contractor payments up to the amount of unpaid taxes.

To identify indications of abuse or potential criminal activity, we
selected a group of DOD contractors as case studies for a detailed audit
and investigation. To select the case studies, we used the about 27,100
contractors described above and, using TINs, we matched the contractors to
the five fiscal year 2002 DOD payment files. This matching yielded about
8,500 active DOD contractors, which we further reduced based on the amount
of unpaid taxes, number of unpaid tax periods, and DOD contractor
payments. We reviewed the IRS tax records and excluded contractors that
had recently paid off their unpaid tax balances or were categorized by IRS
as compliance assessments, and considered other factors before reducing
the number of cases for study to 47. We selected 34 businesses and 13
individuals for further audit and investigation, and obtained copies of
their automated tax transcripts from IRS as of May 2003. We reviewed the
transcripts for any steps taken to resolve the unpaid taxes. We also
obtained detailed tax records (e.g., tax returns, revenue officer notes,
and collection and assessment files) and reviewed them at the IRS
processing center in Kansas City, Missouri. We obtained additional
information from IRS to determine what enforcement actions had been taken
against these contractors. For the 47 case studies, we identified DOD
contract awards using the DOD Electronic Document Access system, and had
criminal, financial, and public record searches performed by our Office of
Special Investigations (OSI). We provided the case study list to FMS to
identify the tax and nontax debt in the TOP database. For some case
studies, we contacted the responsible DOD contracting officers to inquire
about the contractors' goods or services, performance, and current DOD

1 Because TINs were missing in some DOD payment records, we populated the
five payment files with TINs by matching payment records to contractor
records in the CCR database using the DOD Commercial and Government Entity
code. This procedure identified additional payments made to DOD
contractors with unpaid federal taxes.

Appendix I
Scope and Methodology

contracts. OSI investigators contacted some contractors and performed
interviews in California, the District of Columbia, Maryland, Michigan,
Pennsylvania, Texas, and Virginia.

To determine whether DOD contractors with unpaid federal taxes are
prohibited by law from receiving contracts from the federal government, we
reviewed prior GAO work and relevant laws.

We performed our work at DOD headquarters in Arlington, Virginia; the DFAS
office in Columbus, Ohio; the DLIS in Battle Creek, Michigan; the Defense
Manpower Data Center in Seaside, California; IRS and FMS headquarters in
Washington, D.C.; and the IRS processing center in Kansas City, Missouri.

Appendix II

                   DOD Contractors with Unpaid Federal Taxes

Tables 2 and 3 provide data on 17 detailed case studies. Tables 4 and 5
show the 30 remaining business and individual case studies that we audited
and investigated. As with the 17 cases discussed in the body of this
report, we also found substantial abuse or potentially criminal activity
related to the federal tax system during our review of these 30 case
studies. The case studies involving businesses with employees primarily
involved unpaid payroll taxes, some for as many as 62 tax periods. The
case studies involving individuals primarily involved unpaid income taxes.

Table 4: DOD Contractors with Unpaid Federal Taxes-Business

                                         Estimated           
                                      fiscal year  Fiscal    
                              Unpaid     2002      year      
Case  Goods or service  federal   collections    2002 DOD 
               and           tax     under                   
study  nature of DOD      amounta effective tax paymentsc     Comments     
               work                  levyb                   
                                                              o  Contract for 
            Television          Over                         over $180,000 in 
              repair                        $5,000   $32,000       late 1990s 
            services:                                        o  Long history  
             provides       $160,000                         of not remitting 
                                                                   tax        
            repairs at                                         withholdings   
             military                                        
                                                                   o  Several 
             hospital                                             federal tax 
                                                                  liens filed 
                                                                  against the 
                                                                  owner       
                                                              o  Numerous DOD 
             Clothing           Over                          contract awards 
          manufacturer:                   $137,000  $914,000         totaling 
             provides     $1 million                         over $10 million 
             military                                        
         uniforms for DOD                                      o  Offer in    
         agency                                                compromise,    
                                                               subsequently   
                                                                withdrawn     

Courier service Over $5,000 $34,000  o  DOD contract of over $30,000
$300,000  o  Bankruptcy filed

o  Several tax liens filed against the business

      Construction     Nearly   Nearly $1.1 million    o  Business cooperated 
        services:                                         with IRS only after 
    provides fencing   $60,000 $60,000              being placed in Federal   
                                                    Payment Levy              
         installation,                               Program and being levied 
           maintenance                                            on payments 
and renovations on                                    from a participating 
                                                          federal agency; IRS 
     military bases                                 received almost $25,000   
                                                    from levied               
                                                            payments          
                                                       o  Has unpaid child    
                                                          support debt        
                                                     o  Two tax liens filed   
                                                        against business      

22      Weapon parts        Over   $54,000 $363,000 o  Nearly $1.9 million 
                                                             in DOD contracts 
      manufacturer: supplies $400,000                  o  IRS tax liens filed 
                                                       against business       
      weapons parts and                                
      tools                                            
       to various military                             
          organizations                                

23  Cleaning services:     Over   $6,000 $40,000 o  Awarded over $200,000  
                                                    in DOD contracts          
                                                         o  Several tax liens 
      provides cleaning and $250,000                   filed against business 
                                                                          and 
       inspections of fire                                  its owner         
       suppression systems                          

Appendix II
DOD Contractors with Unpaid Federal Taxes

                         (Continued From Previous Page)

                                               Estimated             
                                Unpaid fiscal year 2002  Fiscal year 
Case  Goods or service  federal tax collections under    2002 DOD 
         and                                                         
         nature of DOD         amounta effective tax                 Comments 
study work                          levyb               paymentsc 

    Computer equipment    Over   $7,000 $45,000  o  Over $1.3 million in DOD  
                                                          contracts           
    supplier: supplies  $500,000                o  Owes tens of thousands of  
                                                        dollars to a          
     computer-related                              federal agency for a civil 
                                                          penalty for failing 
hardware to military                         to meet its fiduciary duties  
                                                          under the           
         services                                 employee retirement plan    
                                                   o  Several federal, state, 
                                                         and county tax liens 
                                                   filed against business     

        Information        Nearly   $140,000 $932,000     o  Federal payments 
        technology                                        received from three 
    personnel services:  $1 million                   other federal agencies  
provides support for                               o  Multiple DOD         
                                                      contracts valued up to  
     various military                                    approximately $13    
                                                              million         
       organizations                                  o  Potential money      
                                                      laundering activities   
                                                      o  Defaulted on         
                                                      installment agreements  

Aircraft-related goods:     Over     $33,000 $221,000 o  Nearly $2 million 
                                                           in DOD contracts   
                                                          o  Several federal  
      supplies aircraft    $1.5 million                  and state tax liens  
                                                                filed         
     maintenance equipment                                   against this     
                                                               business       
                                                         o  Several judgments 
                                                            were made against 
                                                                         this 
                                                              contractor      

        Aircraft-related                                 o  Numerous DOD      
             goods:          Nearly     $7,000   $48,000 contracts totaling   
                                                         over                 
      supplies instruments  $300,000                           $350,000       
               to                                        
       military services                                 
       Research services:     Over                       o  DOD contract for  
                                        $4,000   $30,000    over $100,000     
       provides research                                 o  Federal tax liens 
              for           $400,000                     filed against        
                                                         business             
      military service                                   
      programs                                           
                                                         o  Several IRS tax   
                              Over                       liens and state tax  
       Catering services                $4,000   $29,000 liens                
                            $60,000                       filed against this  
                                                               business       
          Ammunition:         Over        $100            o  Over $8 million  
                                                  $1,000   in DOD contracts   
                                                             o  Currently     
          manufactures     $2 million                       involved in a     
                                                               criminal       
           ammunition                                      investigation on   
                                                           product quality    
                                                    $2.7    o  Nearly $30     
                                                 million    million in DOD    
      Consulting services:   Nearly   $410,000                contracts       
       provides technical  $2 million                    o  Bankruptcy filed  
      support services for                               o  Federal and state 
                                                           tax liens filed    
            military                                     
         installations                                   
                              Over        Over           o  Over $200,000 in  
        Moving services:                        $399,000    DOD contracts     
       provides furniture                                o  Several federal   
              and           $50,000    $50,000           and state tax liens  
                                                         filed                
      office equipment for                               
            military                                     
         installations                                   
33                         Over     $86,000  $571,000  o  Over $3 million  
        Power equipment:                                   in DOD contracts   
                                                          o  Tax lien filed   
       manufactures power   $200,000                         against this     
                                                               business       
          supplies and                                   o  Several judgments 
           regulators                                     filed against the   
                                                             business and its 
      for various military                                       owner in the 
                                                                    mid-1990s 
         organizations                                   

                                  Appendix II
                   DOD Contractors with Unpaid Federal Taxes

                         (Continued From Previous Page)

                                         Estimated           
                                      fiscal year  Fiscal    
                              Unpaid     2002      year      
Case  Goods or service  federal   collections    2002 DOD 
               and           tax     under                   
study  nature of DOD      amounta effective tax paymentsc     Comments     
               work                  levyb                   
            Custodial                                   $1.3   o  About $4    
            services:           Over                 million  million in DOD  
                                          $188,000              contracts     
             provides                                          o  Multiple    
          janitorial and  $5 million                           bankruptcies   
                                                                  filed       
                                                                o  Several    
         housekeeping                                          federal and    
         services at                                         state tax liens  
                                                                  filed       
             military                                        against business 
          installations                                      
           Construction                                       o  Bankruptcy   
            services:                                         filed in late   
                              Nearly       $23,000  $152,000      1990s       
             provides                                        o  IRS received  
           construction     $150,000                           over $70,000   
                                                               from levied    
           services at                                          payments from 
             military                                          agencies other 
                                                                     than DOD 
          installations                                      
                                                             o  Continued to  
          Funeral home:         Over                         incur delinquent 
                                            $2,000   $14,000 taxes after      
         provides funeral   $360,000                          emerging from   
         services                                               bankruptcy    
                                                                o  Several    
           Procurement          Over                           federal and    
            services:                                        state tax liens  
                                           $12,000   $81,000      filed       
          obtains parts                                        against this   
               and          $100,000                         business and its 
                                                                  owner       
          equipment for                                      
             various                                         
             military                                        
          organizations                                      

       Information                                       o  Corporate officer 
        technology         Over    $289,000 $1.9 million     assessed a trust 
                                                                         fund 
personnel services:  $1 million                         recovery penalty   
provides information                                  
    technology support                                   
            to                                           
         military                                        
      organizations                                      

Source: GAO analysis of DOD, IRS, FMS, public, and other records.

Notes: Dollar amounts are rounded. Nature of unpaid taxes for businesses
was primarily due to unpaid payroll taxes. A contractor registers in the
CCR database with either an EIN or an SSN. In our report, any contractor
registering with an EIN is referred to as a business, and any contractor
registering with an SSN is referred to as an individual. An individual in
CCR could be a business owner (i.e., sole proprietorship).

aUnpaid tax amount as of September 30, 2002.

bThe estimated collections under an effective tax levy use the assumptions
that all unpaid federal taxes are referred to TOP at Treasury FMS and all
fiscal year 2002 DOD payment information is provided to TOP. The
collection amount is calculated on 15 percent of the payment amount up to
the amount of unpaid taxes.

cDOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems
identified by GAO.

                                  Appendix II
                   DOD Contractors with Unpaid Federal Taxes

Table 5: DOD Contractors with Unpaid Federal Taxes-Individual

                                       Estimated           
                                     fiscal year Fiscal    
                            Unpaid          2002 year      
Case     Goods or     federal   collections    2002 DOD 
           service and   tax       under                   
study  nature of DOD    amounta effective tax paymentsc      Comments      
              work                 levyb                   
         Music services:      Over                         o  Over $50,000 in 
                                          $2,000   $16,000   DOD contracts    
            provides       $30,000                         o  Debt for unpaid 
          musicians and                                      child support    
                                                            o  Individual has 
         music services                                    personal debt that 
                                                                     has been 
                                                            turned over for   
                                                           collection action  
           Maintenance        Over                          o  Over $100,000  
            services:                     $4,000   $28,000  in DOD contracts  
             repairs                                        o  Bankruptcies   
         shielded doors    $50,000                         filed in mid-1990s 
               for                                         
                                                           o  Several court   
          secure areas                                     judgments filed    
                                                           against the        
                                                           contractor in the  
                                                           mid- to late 1990s 
                                                           o  Individual has  
         Music services:      Over                            not filed an    
                                         $33,000  $217,000     income tax     
            provides     $160,000                          return since 1997  
          musicians for                                    
            religious                                         o  Defaulted on 
            services                                              installment 
                                                             agreement in the 
                                                               late 1990s     
          Construction                                      o  Over $100,000  
            services:       Nearly       $19,000  $130,000  in DOD contracts  
         provides                                              o  Federal tax 
         general           $70,000                         lien filed against 
         carpentry,                                           this individual 
           electrical,                                     
          painting, and                                    
            building                                       
             repairs                                       
                                                           o  Individual has  
           Consulting         Over                         personal credit    
            services:                     $8,000   $56,000 accounts in        
            provides       $50,000                             collection     
            software                                       
                                                               o  Federal tax 
           development                                     lien filed against 
            services                                          this individual 

     Training services:    Over   $13,000 $89,000   o  Over $90,000 in DOD    
                                                           contracts          
provides diversity and $60,000                    o  Student loan debt     
        sexual harassment                         o  Individual owes over     
                 training                         $10,000 in past due         
                                                             debt             
                                                   o  Several civil judgments 
                                                          and state tax liens 
                                                   filed against contractor   

Equipment maintenance:   Nearly  $17,000 $113,000  o  Individual owes over 
                                                          $10,000 in past due 
      provides maintenance $260,000                            debt           
                       and                           
     repair of boilers,                                  o  Defaulted on      
                                                      installment agreement   
       generators, and                               o  One judgment against  
                                                            individual        
         compressors                                 
             Environmental   Over      Over          o  Owner is federal      
              engineering:                  $286,000 employee and reserve     
prepares environmental  $10,000  $10,000              military officer     
           reports                                   

47 Consulting services:   Nearly  $13,000 $89,000  o  Nearly $300,000 in   
                                                          DOD contracts       
      provides advice to a  $140,000                     o  Student loan debt 
      military                                          with a federal agency 
         medical command                                o  Individual has     
                                                      several accounts with   
                                                        collection agency     
                                                     o  Federal tax lien      
                                                     filed against individual 

Source: GAO analysis of DOD, IRS, FMS, public, and other records.

Notes: Dollar amounts are rounded. Nature of unpaid taxes for individuals
was primarily due to unpaid income taxes. A contractor registers in the
CCR database with either an EIN or an SSN. In our report, any contractor
registering with an EIN is referred to as a business, and any contractor
registering with an SSN is referred to as an individual. An individual in
CCR could be a business owner (i.e., sole

Appendix II
DOD Contractors with Unpaid Federal Taxes

proprietorship). For cases selected as individuals, we reviewed both the
owner and related business information, if it could be identified.

aUnpaid tax amount as of September 30, 2002.

bThe estimated collections under an effective tax levy use the assumptions
that all unpaid federal taxes are referred to TOP at Treasury FMS and all
fiscal year 2002 DOD payment information is provided to TOP. The
collection amount is calculated on 15 percent of the payment amount up to
the amount of unpaid taxes.

cDOD payments from MOCAS, One Bill Pay, IAPS, and CAPS automated systems
identified by GAO.

                                  Appendix III

                    Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

                                  Appendix IV

                   Comments from the Internal Revenue Service

Appendix IV
Comments from the Internal Revenue Service

Appendix V

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Arthur W. Brouk, (214) 777-5633 Lawrence Malenich, (202)
512-9399 John J. Ryan, (202) 512-9587

Acknowledgments	In addition to the individuals named above, Tida Barakat,
Gary Bianchi, Ray Bush, William Cordrey, Francine DelVecchio, K. Eric
Essig, Kenneth Hill, Jeff Jacobson, Shirley Jones, Jason Kelly, Rich
Larsen, Tram Le, Malissa Livingston, Christie Mackie, Julie Matta, Dave
Shoemaker, Wayne Turowski, Jim Ungvarsky, and Adam Vodraska made key
contributions to this report.

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