Financial Management: Thousands of Civilian Agency Contractors
Abuse the Federal Tax System with Little Consequence (16-JUN-05,
GAO-05-637).
Tax abuses by contractors working for the Department of Defense,
on which GAO previously reported, have led to concerns about
similar abuses by those hired by civilian agencies. GAO was asked
to determine if similar problems exist at civilian agencies and,
if so, to (1) quantify the amount of unpaid federal taxes owed by
civilian agency contractors paid through the Financial Management
Service (FMS), (2) identify any statutory or policy impediments
and control weaknesses that impede tax collections under the
Federal Payment Levy Program (FPLP), and (3) determine whether
there are indications of abusive or potential criminal activity
by contractors with unpaid tax debts.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-637
ACCNO: A26757
TITLE: Financial Management: Thousands of Civilian Agency
Contractors Abuse the Federal Tax System with Little Consequence
DATE: 06/16/2005
SUBJECT: Civilian employees
Delinquent taxes
Department of Defense contractors
Federal taxes
Internal controls
Tax administration
Tax administration systems
Tax law
Tax nonpayment
Tax violations
Taxpayers
Federal Payment Levy Program
FMS Payments, Claims, and Enhanced
Reconciliation System
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GAO-05-637
United States Government Accountability Office
GAO Report to Congressional Requesters
June 2005
FINANCIAL MANAGEMENT
Thousands of Civilian Agency Contractors Abuse the Federal Tax System with
Little Consequence
a
GAO-05-637
[IMG]
June 2005
FINANCIAL MANAGEMENT
Thousands of Civilian Agency Contractors Abuse the Federal Tax System with
Little Consequence
What GAO Found
FMS and IRS records showed that about 33,000 civilian agency contractors
owed over $3 billion in unpaid federal taxes as of September 30, 2004. All
50 civilian agency contractors we investigated had abusive and potentially
criminal activity. For example, businesses with employees did not forward
payroll taxes withheld from their employees to IRS. Willful failure to
remit payroll taxes is a felony under U.S. law. Further, several
individuals own multiple businesses with unpaid federal taxes-one
individual owns about 20 businesses that did not fully pay taxes related
to over 300 returns. Some contractors purchased or owned millions of
dollars of property while they did not remit payroll taxes. These
activities were identified for contractors at the Departments of Justice,
Homeland Security, and Veterans Affairs; the National Aeronautics and
Space Administration; and others agencies.
Examples of Abusive and Potentially Criminal Activity
Unpaid tax Fiscal year
2004
Business amount FMS payments Contractor activity
Purchased
multimillion-dollar
properties
Health care $18 million $300,000 while not paying millions
in payroll taxes
Consulting $1 million $200,000
Doubled salary of one officer/owner to over $750,000 while not remitting
payroll taxes
Temporary
help $900,000 $1 million
A pattern of nearly 20 years of closing businesses with tax debts, opening
new ones, and incurring more tax debts
Diverted payroll taxes to a foreign bank Security $400,000 $200,000
account to build a house overseas
Source: GAO analysis of civilian agency, IRS, FMS, public, and other
records.
GAO's analysis indicates that if all tax debts owed by, and all payments
made to, the 33,000 contractors were included in the FPLP, FMS could have
collected hundreds of millions of dollars in fiscal year 2004. However,
because only a fraction of all unpaid taxes and a portion of FMS payments
are subjected to the levy program, FMS actually collected only $16 million
from civilian contractors. For example, about $171 billion of unpaid
federal taxes were not sent to the levy program to be offset against
payments because of specific statutory requirements or IRS policy
exclusions, such as debtors' claims of financial hardship or bankruptcy.
Tens of billions of dollars in federal payments were not compared against
tax debts for potential levy because FMS did not proactively manage and
oversee the levy program. Until we brought it to FMS's attention, FMS did
not know that it did not submit $40 billion of contractor payments from
some civilian agencies for potential levy. FMS also did not identify
payment files that did not contain contractor tax identification numbers,
names, or both, resulting in $21 billion in payments to contractors that
could not be levied. FMS also excluded billions of dollars from levy
because of what it considered programming limitations without taking
proactive steps to overcome those limitations. Further, civilian agency
purchase card payments to contractors totaling $10 billion could not be
levied. Improvements at FMS could result in tens of millions of dollars of
additional levies annually.
United States Government Accountability Office
Contents
Letter
Results in Brief
Background
Civilian Contractors Have Billions of Dollars in Unpaid
Federal Taxes Legal Requirements and IRS Policy Decisions Contributeto
theLevy Collection Gap Lack of FMS Oversight and Proactive Management
Further Contribute to the Levy Collection Gap Civilian Agency Contractors
Involved in Abusive and Potentially
Criminal Activity Related to the Federal Tax System Conclusions
Recommendations for Executive Action Agency Comments and Our Evaluation
1 4 9
14
22
30
44 54 54 57
Appendixes
Appendix I: Scope and Methodology 64
Appendix II: Contractors with Unpaid Federal Taxes 69
Appendix III: Comments from the Internal Revenue Service 78
Appendix IV: Comments from the Financial Management Service 81
Appendix V: Staff Acknowledgments 85
Table 1: Payments Not Matched against Tax
Tables Debts for
Potential Levy 31
Table 2: Types of Goods and Services Provided
by Civilian Agency
Contractors in Case Studies 45
Table 3: Civilian Agency Contractors with
Unpaid Federal
Taxes 48
Table 4: Civilian Agency Contractors with 69
Unpaid Federal Taxes
Figures Figure 1: Levy Process Figure 2: Type of Debt 12
Owed by Civilian Contractors as of
September 30, 2004 17
Figure 3: Civilian Contractors' Unpaid Federal
Taxes by Tax
Periods through 2003 by Calendar Year 18
Figure 4: Levy Status of Unpaid Federal Taxes 23
as of April 2005
Figure 5: IRS Statutory Exclusions as of April 24
2005
Contents
Figure 6: IRS's Policy Exclusions from the Levy Program as of April 2005
26
Figure 7: Purchase Card Expenditures by Civilian Agencies- Fiscal Years
1997-2004 42
Abbreviations
ACH Automated Clearing House
ACH-CTX Automated Clearing House-Corporate Trade Exchange
ACS Automated Collection System
DCIA Debt Collection Improvement Act of 1996
DOD Department of Defense
EFT electronic funds transfer
FICA Federal Insurance Contribution Act
FMS Financial Management Service
FPLP Federal Payment Levy Program
IRS Internal Revenue Service
NASA National Aeronautics and Space Administration
PACER Payments, Claims, and Enhanced Reconciliation
TFRP trust fund recovery penalty
TIN taxpayer identification number
TOP Treasury Offset Program
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A
United States Government Accountability Office Washington, D.C. 20548
June 16, 2005
Congressional Requesters
The success of our tax system hinges on the public's perception of its
fairness, including the extent to which taxpayers believe their friends,
neighbors, and business competitors are complying with the tax laws and
are actually paying their taxes. The Internal Revenue Service's (IRS) own
data in this regard are not encouraging. IRS reported that the federal
government does not receive hundreds of billions of dollars in taxes owed
annually. Recent IRS data, released in March 2005, showed that the
estimated net annual tax gap-the difference between what taxpayers should
pay on a timely basis and what IRS collected through voluntary compliance
and enforcement activities-ranged from $250 billion to nearly $300
billion.1
A portion of the tax gap is owed by contractors receiving payments from
the federal government. For example, in February 2004, we reported that
some Department of Defense (DOD) contractors abuse the federal tax system
with little consequence.2 In our report and during a related congressional
hearing,3 we pointed out that based on our analysis of a limited number of
DOD disbursement systems, more than 27,000 DOD contractors owed nearly $3
billion in unpaid federal taxes. We also reported that some of these
contractors were engaged in abusive4 and
1 These data were released to the public as part of a National Research
Program sample of 46,000 individual tax returns for calendar year 2001.
The tax gap amount also includes an estimate for corporate tax debt based
on IRS's 1988 compliance research.
2 GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12,
2004).
3 GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence, GAO-04-414T (Washington, D.C.: Feb. 12,
2004).
4 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.
potentially criminal5 activities. Due to the significance of the issues
raised at that hearing, you asked us to provide additional information
about whether contractors for other federal agencies were engaged in
similar tax abuses and to provide recommendations to increase the
effectiveness and efficiency of tax revenue collections from federal
contractors under the Federal Payment Levy Program (FPLP).
This is the first in a series of reports to respond to your request. The
specific objectives of this first audit and investigation were, to the
extent possible, to (1) quantify the magnitude of unpaid taxes of
contractors at federal civilian agencies that are paid through the
Department of the Treasury's (Treasury) Financial Management Service
(FMS); (2) identify some statutory or policy impediments and control
weaknesses that impede tax collections under the FPLP; and (3) determine,
using case studies, whether indications exist that federal contractors
with unpaid taxes are engaged in abusive or potentially criminal
activities. To identify the extent of such activities, we analyzed the tax
debt and activity of entities with either the same owners or officers,
common taxpayer identification numbers (TIN) or addresses, or other
relationships as a group to identify patterns of abusive or potentially
criminal activities. We will address issues surrounding the amount of tax
debt IRS sends to the FPLP in subsequent reports.
To meet our first two objectives, we (1) identified civilian agency
contractors receiving federal payments that owe taxes by comparing the
database of FMS contractor payments with the IRS database of unpaid taxes,
(2) estimated the potential dollar amount that could be collected if all
unpaid taxes owed by civilian contractors and all FMS payments to civilian
contractors were subject to the FPLP, (3) reviewed major federal laws and
regulations and FMS policies on the FPLP, and (4) interviewed FMS and IRS
officials on processes and procedures related to the FPLP. To avoid
overstating the tax debt and potential levy amount, we limited the
population of tax debts from which we performed our analysis to tax debts
that have been agreed to by the taxpayers or confirmed by the courts, tax
debts for periods prior to calendar year 2004, tax debts of more than
$100, and fiscal year 2004 civilian contractor payments paid through FMS
of
5 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).
more than $100. We used data mining techniques to meet our third
objective-identifying civilian agency contractors engaged in abusive or
potentially criminal activity.
Although we were able to validate that the payment data provided by FMS
reflected disbursements to contractors, we were unable to confirm that the
disbursement data we received reflect all payments made to contractors.
Specifically, FMS was unable to provide us with electronic disbursement
data related to payments made to contractors through Fedwire, a large
system used for payments requiring same-day settlement. Further, IRS's
databases do not identify all unpaid federal taxes caused by a
contractors' underreporting of income or failure to file taxes. Because of
these problems, the FMS and IRS data we used will likely understate the
magnitude of contractors with unpaid federal taxes and the potential levy
collection. Further details on our scope and methodology are included in
appendix I.
Our work was performed from May 2004 through May 2005 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. The results of 10 case studies we investigated are shown in
table 3. The results of another 40 case studies are included in appendix
II. We requested comments on a draft of comments on a draft of this report
from the Commissioner for Internal Revenue or his designee and from the
Commissioner, Financial Management Service or his designee. We received
written comments from the Internal Revenue Service and the Financial
Management Service, which are reprinted in appendixes III and IV of this
report.
Results in Brief As was the case at DOD, many contractors of civilian
agencies throughout the federal government abuse the federal tax system
with little consequence. Our analysis of FMS and IRS records showed that
about 33,000 contractors that received substantial federal payments from
civilian agencies during fiscal year 2004 owed a total of more than $3
billion in unpaid taxes. The unpaid taxes included corporate income,
excise, unemployment, individual income, and payroll taxes.6 We estimate
that if there were no legal or procedural impediments to levying
contractor payments to satisfy unpaid federal taxes, IRS and FMS could
collect hundreds of millions of dollars annually. Since FMS collected $16
million in levies7 from civilian contractors through the FPLP during
fiscal year 2004, there is a significant tax levy collection gap. We also
found evidence of abusive and potentially criminal activity on the part of
contractors with unpaid tax debts.
A substantial portion of the levy collection gap is attributable to legal
requirements and policy decisions at IRS. Of IRS's approximately $269
billion in unpaid federal taxes as of April 2005, about $171 billion is
excluded from the levy program. Of this amount, about $71 billion was
excluded because of statutory provisions while another $100 billion was
excluded due to IRS policy decisions. This leaves approximately $98
billion in tax debt potentially subject to collection through the levy
program. However, for 70 percent of the amount that IRS forwards to FMS
for potential levy, IRS had not yet completed all of the legal
notifications necessary for FMS to begin levying payments. As a result,
only a small fraction of all unpaid federal taxes are eligible to be
collected through the levy program. While the exclusion of unpaid federal
taxes from the levy program is justified depending on the circumstances,
it nevertheless results in the potential loss of hundreds of millions of
dollars in tax collections. We will examine in detail in a later report
the accuracy and reasonableness of the IRS exclusions.
6 Payroll taxes are amounts that businesses withheld from employees' wages
for federal income taxes, Social Security, and Medicare but failed to
remit to IRS, as well as the related employer matching contributions for
Social Security and Medicare taxes.
7 Levy generically refers to seizure of property to collect a debt. For
tax debt, it is the legal process by which IRS orders a third party (e.g.,
FMS) to turn over property in its possession (e.g., the federal payment)
that belongs to the tax debtor named in a notice of levy. Overall, the
reduction of federal payments to satisfy debt is referred to as an offset.
Weaknesses in internal controls and lack of proactive management at FMS
further restricted the levy potential and contributed to the levy
collection gap. We estimate that if the FMS deficiencies we identified
were corrected, FMS could have collected at least $50 million more than it
did in fiscal year 2004. Specifically, lack of oversight led to FMS's
failure to update its levy database to include all agency paying stations,
resulting in $40 billion in contractor payments-16 percent of all fiscal
year 2004 contractor payments recorded in FMS's payment database-being
inappropriately excluded from the levy program. Lack of oversight also
resulted in payments being sent to the levy program without the necessary
data required for levy. Payments with missing data included $17 billion in
payments made to contractors without TINS and with obviously erroneous
TINs,8 nearly $4 billion without valid contractor names, and $5 billion
without proper payment type coding. A cursory review could have identified
these deficiencies in agency-submitted payment files. With the exception
of payments without TINs, FMS was not aware of these omissions until we
brought them to its attention. Further, although FMS was aware that
payments were made to contractors without TINs, FMS had not taken action
to address this deficiency. FMS's failure to identify and enforce
information requirements for disbursements reduced the amount of unpaid
federal taxes that was collected through the FPLP.
FMS has not been proactive in making changes necessary to maximize levy
collections by adding tens of billions of dollars in payments that are
currently excluded from the FPLP. These exclusions include about $26
billion (11 percent of FMS's 2004 contractor disbursements) of certain
categories of payments that FMS recorded in its payment database during
fiscal year 2004, and an unknown but potentially material amount of
Fedwire payments-payments requiring same-day settlement. FMS has not taken
actions to include these payments in the levy program because of what it
considers programming limitations. Similarly, FMS does not levy any
contractor payments to collect taxes owed by individuals, including
self-employed individuals and those with sole proprietorships. IRS and FMS
decided not to levy contractors' payments to collect the unpaid federal
taxes of contractors that file individual tax returns to avoid the
possibility of mistakenly levying an individual's payment to satisfy an
8 A TIN is a unique nine-digit identifier assigned to each business and
individual that files a tax return. For businesses, the employer
identification number assigned by IRS serves as the TIN. For individuals,
the Social Security number assigned by the Social Security Administration
serves as the TIN.
unrelated business's tax debt. Such an error could occur because a
business and an individual could have identical TINs and similar names,
and FMS's disbursement files do not distinguish between payments to
businesses and payments to individuals. While FMS and IRS officials
recognized that the potential risk of an improper levy resulting from an
erroneous match of an individual's payment with a business's tax debt is
probably small, they have only recently begun to take steps to allow the
unpaid federal taxes of individuals to be collected under the levy
program.
Finally, FMS has not addressed other challenges in the levy program that
further limit its effectiveness at collecting unpaid taxes. These
challenges include (1) matching the contractor name on the payment record
to the name in IRS's tax records, (2) levying contractors paid with
government purchase cards, and (3) implementing the increased 100 percent
levy provision authorized in 2004. We found that nearly $2 billion of
payments to contractors with unpaid taxes could not be levied because of
the requirement to match both the name and TIN in the payment records to
the unpaid federal taxes in the Treasury Offset Program (TOP) database.
FMS does not subject to levy the nearly $10 billion of fiscal year 2004
federal payments to contractors made with purchase cards because the
government payment is made to the bank that issued the purchase card, not
the contractor doing business with the government. FMS officials stated
that although they had met with certain bank officials and another federal
agency regarding this issue, they had not yet determined how to collect
federal debts from contractors paid with the purchase cards. Finally, FMS
faces a significant challenge in implementing a provision of the American
Jobs Creation Act of 2004, which allows the federal government to levy up
to 100 percent-up from a maximum of 15 percent-of specified payments for
goods and services provided by contractors with unpaid federal taxes. FMS
faces difficulty because civilian payment systems presently do not
distinguish goods and services, which are subject to the increased 100
percent levy provision, from real estate payments, which IRS has
determined are not. Overall, until FMS improves its oversight and
management of the FPLP and addresses these challenges, it will not be able
to realize the full potential of the program.
Our audit and investigation of 50 case study contractors9 paid through FMS
identified numerous instances of abusive or potentially criminal activity.
The subjects of the 50 case studies are mostly small companies-many of
them closely held by the owners and officers-operating in wage-based
industries. These companies provided building maintenance, computer,
consulting, health care, personnel, security, and other services at
numerous federal agencies, including agencies tasked with national
security and law enforcement, such as the Departments of Homeland
Security, Justice, and State. The 50 case studies included businesses that
had unpaid payroll taxes (as well as corporate income, personal income,
and other types of unpaid taxes). One group of related businesses had
unpaid taxes in over 300 tax returns. Rather than fulfilling their role as
"trustees" and forwarding these amounts as required by law to IRS, these
contractors diverted the money for personal gain or to fund their
businesses. Willful failure to remit payroll taxes is a felony.
Some owners or officers of businesses with unpaid taxes also have
individual tax debts and are associated with other businesses that have
unpaid federal taxes. One case study contractor has a 20-year history of
opening a business, failing to remit taxes withheld from employees to IRS,
and then closing the business, only to start the cycle all over again and
incur more tax debts almost immediately. We also found that a number of
owners or officers in our case studies have significant personal assets,
including a sports team, commercial properties, houses worth over $1
million, and luxury vehicles. Despite owning significant assets, the
owners or officers did not ensure the payment of the delinquent taxes of
their businesses, and sometimes did not pay their own individual income
taxes.
Through our case studies, we also found that some owners or officers of
civilian agency contractors with unpaid federal taxes had been convicted
or indicted of criminal conduct, such as embezzlement and money
laundering. For example, an officer of one case study contractor was
convicted for stealing hundreds of thousands of dollars from the company,
and the company's owner was indicted for embezzlement. Some
9 In instances where our work indicates that the owners or officers of the
business are involved in other related entities that have unpaid federal
taxes, we performed detailed audit and investigation on the related
entities, the owners or officers, and not just the original business we
identified. In instances where related entities exist, we defined a case
study to include all the related entities, and reported on the combined
unpaid taxes and combined fiscal year 2004 payments for all the related
entities.
contractors included in our investigation stated that they diverted the
payroll taxes that they did not remit to IRS for personal gain or to fund
their businesses. One of the owners was using the payroll taxes not
remitted to IRS to build a house overseas.
Finally, to improve collections under the FPLP, we are making 18
recommendations to the Commissioner of the Financial Management Service,
including recommendations to include all payment categories in the levy
program; ensure payments from all agency paying stations are subjected to
potential levy; and verify that all payment files contain information
needed to levy contractor payments, such as payment type, name, and TIN
(where required). We are also recommending that FMS work with IRS to
determine how to collect unpaid taxes from sole proprietors and
contractors paid with government purchase cards and to determine the steps
needed to implement the 100 percent levy authorized by the American Jobs
Creation Act of 2004. In addition, we are making a recommendation to the
Commissioner of Internal Revenue to review the 50 case study companies and
determine whether additional collection action or criminal investigation
is warranted.
IRS agreed and FMS partially agreed with our recommendations. FMS did not
agree with our recommendations that it should withhold payments to
contractors without names or work with IRS to explore options to levy or
otherwise collect from purchase card payments. FMS also disagreed with our
characterization of its management of the levy program but did not dispute
the factual basis on which we based our findings and recommendations. We
disagree with FMS's assessment and reiterate support for our
recommendations. See the "Agency Comments and Our Evaluation" section of
this report for a more detailed discussion of the agency comments. We have
reprinted the IRS and FMS written comments in appendixes III and IV.
Background In its role as the nation's tax collector, IRS is responsible
for collecting taxes, processing tax returns, and enforcing the nation's
tax laws. Treasury's FMS is the central disbursing authority for civilian
agencies. With limited exceptions,10 FMS processes most disbursements for
civilian agencies in the executive branch. FMS is also the federal
government's central debt collection agency. Since fiscal year 2000, FMS
has operated the FPLP in conjunction with IRS to collect unpaid federal
taxes, including tax debt owed by federal contractors.
IRS's Collection of Unpaid Taxes
Since 1990, we have designated IRS's enforcement of tax laws as a
governmentwide high-risk area.11 In attempting to ensure that taxpayers
fulfill their obligations, IRS is challenged on virtually every front.
While IRS's enforcement workload-measured by the number of taxpayer
returns filed-has continually increased, until fiscal year 2005, the
resources IRS has been able to dedicate to enforcing the tax laws have
declined. Enforcement efforts are designed to increase compliance and
reduce the tax gap. However, IRS recently reported that the gross tax gap,
that is, the difference between what the taxpayers should pay on a timely
basis and what they actually pay, exceed $300 billion annually. IRS
estimated the gross tax gap to be between $312 billion and $353. IRS
further reported that its enforcement activities, coupled with late
payments, recover just $55 billion of that amount, leaving a net tax gap
of from $257 billion to $298 billion. Preliminary IRS estimates indicate
that noncompliance is from 15 percent to 16.6 percent of taxpayers' true
tax liability, which further fuels congressional and public concern that
declines in IRS compliance and collections programs are eroding taxpayer
confidence in the fairness of our federal tax system.
10 A few civilian agencies, such as the U.S. Postal Service, have their
own disbursing authority and do their own disbursements. Although DOD has
its own disbursement authority, some DOD payments are made through FMS.
11 Additionally, we designated IRS's financial management and systems
modernization as high-risk areas in 1995. See GAO, High-Risk Series: An
Overview, GAO/HR-95-1 (Washington, D.C.: February 1995). In 2005, two of
IRS's high-risk areas-collection of unpaid taxes and earned income credit
noncompliance-were consolidated to make a single high-risk area called
enforcement of tax laws. Also in 2005, IRS's high-risk areas of business
systems modernization and financial management were merged into a single
high-risk area called business systems modernization. See GAO, High-Risk
Series, An Update, GAO-05-207 (Washington, D.C.: January 2005).
FMS Disbursements In fiscal year 2004, FMS made over 940 million
disbursements totaling over $1.5 trillion. FMS's major disbursing
activities include paying Social Security benefits, veterans'
compensation, federal tax refunds, federal salaries and pensions, and
contractor and miscellaneous payments. For statutory and logistical
reasons, a limited number of other governmental agencies, such as DOD and
the U.S. Postal Service, have their own authority to disburse funds. Those
agencies that have the authority to disburse federal funds are referred to
as Non-Treasury Disbursing Offices.
Although FMS is the disbursing agent for most of the federal government,
that is, it physically writes the checks or sends the electronic payments,
it does so on the behalf of, and at the direction of, the various federal
agencies. Federal agencies may have multiple offices or locations that
perform accounting for and preparation of payment information, referred to
by FMS as agency locations or paying stations.12 To generate a payment, an
agency payment location sends FMS a payment file, along with an
accompanying payment certification requesting that FMS disburse funds.
Agencies typically send the certification and detailed payment information
in an automated form, and FMS loads the payment data into its payment
system. Once loaded, FMS verifies that all payment requests were properly
authorized and certified and that the amount on the payment file agrees
with the certification amount before processing the payments for
disbursement.
FMS disburses federal funds via three main mechanisms: electronic funds
transfer (EFT) via Automated Clearing House (ACH), Fedwire, and checks.
Fedwire is also an EFT that provides for immediate transfers of funds from
the government's account in the Federal Reserve to the contractors' bank
accounts. According to FMS records, of the approximately $1.5 trillion
disbursed by FMS in fiscal year 2004, about 66 percent was disbursed using
ACH, 17 percent via Fedwire, and the remaining 17 percent as checks.
Once payments are disbursed, payment information related to ACH and checks
are sent to FMS's Payments, Claims, and Enhanced Reconciliation (PACER)
system, which maintains payment data and provides federal
12 The Treasury agency location code (ALC) is used to identify
transactions, documents, and reports processed through Treasury by a
specific accounting point or station, within an agency or bureau of a
federal department or independent agency. The use of the ALC, also
referred to as the accounting station symbol, enables Treasury to
reconcile deposits and disbursements.
payment agencies online access to these data. Among other payments, PACER
contained about 12.9 million contractor payments valued at $247 billion
for fiscal year 2004. Unlike checks and ACH payments, detailed information
regarding Fedwire payments is not sent to the PACER payment database.
Treasury Offset and Federal Payment Levy Programs
In 1996, Congress passed the Debt Collection Improvement Act 1996 (DCIA)
to maximize the collection of delinquent nontax debts owed to federal
agencies. As part of implementing its responsibilities under DCIA,
Treasury established the TOP, to be administered by FMS, to centralize the
process by which certain federal payments are withheld or reduced (offset)
to collect delinquent nontax debts owed to federal agencies.13 Under the
regulations implementing DCIA, FMS and other disbursing agencies are
required to compare their payment records with debt recorded in the TOP
database. If a match occurs, the disbursing agency must offset the
payment, thereby reducing or eliminating the nontax debt.
To improve collection of unpaid taxes, the Taxpayer Relief Act of 1997
authorized IRS to continuously levy up to 15 percent of specified federal
payments made to businesses and individuals with unpaid federal taxes.14
The continuous levy program, now referred to as FPLP, was implemented in
July 2000. The FPLP provides for the levy of various federal payments,
including federal employee retirement payments, certain Social Security
payments, selected federal salaries, and contractor payments. 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.
In fiscal year 2004, IRS received $114 million through the FPLP for
delinquent taxes, $16 million of which was from payments to civilian
contractors.
13 In addition, for certain federal payments, TOP collects child support
debts and state income tax debts on behalf of the states.
14 Taxpayer Relief Act of 1997 S: 1024, 26 U.S.C. S: 6331(h) (2000).
IRS coordinated with FMS to utilize the TOP database as the means of
collecting taxes under the FPLP. Each week IRS sends FMS an extract of its
tax debt files containing updated account balances of tax debts that are
already in TOP, the new tax debts that need to be added to TOP, and all
taxes in TOP that need to be rescinded.15 These data are uploaded into
TOP. For a payment to be levied through the FPLP, a debt has to exist in
TOP and a payment has to be available. Figure 1 provides an overview of
this process.
Figure 1: Levy Process
Source: GAO.
15 Debts are rescinded for a variety of reasons. For example, IRS will
rescind a debt if the debtor is subject to a bankruptcy stay or if other
reasons justify the rescission (such as when debt is paid in full,
compromised, or otherwise satisfied).
FMS sends payment data to TOP to be matched against unpaid federal taxes.
TOP electronically compares the names and TINs on the payment files to the
control names (first four characters of the names) and TINs of the debtors
listed in TOP. If there is a match and IRS has updated TOP to reflect that
it has completed all legal notifications, the federal payment is reduced
(levied) to help satisfy the unpaid federal taxes.
Federal Contractor Tax Compliance Task Force
To address issues raised by our February 12, 2004, report and testimony, a
multi-agency task force was established to help improve the FPLP. The task
force includes representatives from the Department of Defense, Defense
Finance and Accounting Service, IRS, FMS, General Services Administration
(GSA), Office of Management and Budget, and Department of Justice.
The objectives of the task force were to (1) identify and implement
shortterm and long-term operational changes to improve federal tax
compliance of DOD contractors, including increasing the number of tax
debts and the number of DOD contractor payments available for matching
through TOP, and (2) identify potential changes that would enhance efforts
to address federal contractor tax delinquencies and prevent future
occurrences of tax abuse by federal contractors.
The task force issued its report in October 2004. In its report, the task
force identified actions and made recommendations to improve tax
compliance of federal contractors, including maximizing the number of
delinquent tax debts that IRS makes available for matching, maximizing DOD
payment information available for matching, increasing the effectiveness
of the matching and levy processes, and preventing federal contract awards
to those who abuse the tax system. A number of the improvements identified
by the task force have already been implemented.
Civilian Contractors Have Billions of Dollars in Unpaid Federal Taxes
Our analysis indicates that the failure to pay taxes among DOD contractors
also exists among civilian agency contractors and totaled billions of
dollars. Our analysis of FMS and IRS records indicates that during fiscal
year 2004, FMS made payments on behalf of civilian agencies to about
33,000 federal contractors with over $3.3 billion in unpaid federal taxes
as of September 30, 2004.16 We estimate that if there were no legal or
administrative impediments to the levy program-if all unpaid federal taxes
were considered and all payments to these 33,000 contractors with unpaid
federal taxes were subjected to the 15 percent levy-FMS could have
collected as much as $350 million in unpaid federal taxes from civilian
contractors during fiscal 2004.17 Because some unpaid federal taxes are
excluded due to statutory requirements, IRS and FMS would never be able to
collect the entire amount. Over half of the $3.3 billion in tax debt was
coded by IRS as being excluded from the levy program for statutory
reasons, including contractors being in bankruptcy, having installment
payment agreements, or awaiting the completion of the required legal
notifications regarding the tax debt. However, many improvements can be
made to lessen the tax levy collection gap. As will be discussed later in
the report, the American Jobs Creation Act of 200418 increased the maximum
levy to 100 percent of any specified payments to contractors for goods and
services provided the federal government. When implemented, the maximum
levy amount that could be collected is even greater.
16 Our initial matches of civilian contractor payments made during fiscal
year 2004 with IRS tax debt as of September 30, 2004, identified about
63,000 contractors that had tax debt totaling $5.4 billion. We excluded
from our preliminary estimates tax debts that have not been agreed to by
the tax debtor or affirmed by the court, tax debts from calendar year
2004, tax debts of $100 or less, and fiscal year 2004 FMS payments of $100
or less.
17 This figure represents the potential levy that could be collected if
there were no legal or administrative impediments, that is, if all
payments, for which we have information, could be levied against all IRS
tax debt. This potential amount is likely understated because of data
limitations in the payment files and other issues, some of which are
discussed in this report.
18 Pub. L. No. 108-357,S:. 887(a), 118 Stat. 1418, October 22, 2004, to be
codified at 26 U.S.C. S: 6331 (h)(3).
Characteristics of Contractors' Unpaid Federal Taxes
The amount of unpaid taxes for these contractors paid through Treasury FMS
ranged from a small amount owed by an individual for a single tax period19
to a group of related businesses owing about $13 million for over 300 tax
periods.20 Unpaid taxes owed by these contractors included payroll,
corporate income, excise, unemployment, individual income, and other types
of taxes.
In the case of unpaid payroll taxes, employers withheld federal taxes from
employees' wages, but did not send the withheld payroll taxes or the
employers' matching amounts to IRS as required by law, instead diverting
the money for personal gain or to fund their businesses. One IRS official
acknowledged that frequently small businesses are undercapitalized and use
the tax money as operating capital. However, 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 deposit in a
separate bank account these amounts held "in trust" for the federal
government until making a federal tax deposit in that amount.21 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 Social Security contributions. Individuals within the business
(e.g., corporate officers) may be held personally liable for the withheld
amounts not forwarded, and they can be assessed a civil monetary penalty
known as a trust fund recovery penalty (TFRP).22
19 A "tax period" varies by tax type. For example, the tax period for
payroll and excise taxes is generally 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. As
described later in this report, a case study consists in some cases of
multiple related entities, some or all of which owe tax debts. The number
of tax periods and the accumulated tax debts we are reporting reflect the
accumulated tax periods and tax debts of all related entities.
20 IRS and FMS cannot collect from payments made to one related company to
satisfy the unpaid federal taxes of another related company.
21 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).
22 26 U.S.C. S: 6672.
Willful failure to remit payroll taxes is a criminal felony offense23
punishable by imprisonment of not more than 5 years, while the failure to
properly segregate payroll taxes can be a criminal misdemeanor offense24
punishable by imprisonment of up to a year. The employee is not
responsible 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 previous reports.25
Over time, the amount of this subsidy is significant.
As shown in figure 2, over a third of the total tax amount owed by
civilian contractors was for unpaid payroll taxes and over 40 percent was
for corporate income taxes. The remainder consisted of individual income
taxes, and other taxes. As discussed later in our case studies, some of
these contractors also owe state tax debts.
23 26 U.S.C. S: 7202.
24 26 U.S.C. S: 7215 and 26 U.S.C. S: 7512 (b).
25 GAO, 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 Unpaid
Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments Are
Owed, GAO/AIMD/GGD-99-211 (Washington, D.C.: Aug. 2, 1999).
Figure 2: Type of Debt Owed by Civilian Contractors as of September 30,
2004
Other tax $0.4 billion
Individual income tax $0.2 billion
Corporate income tax $1.5 billion
Payroll taxes $1.2 billion
Source: GAO analysis of IRS and FMS data as of September 30, 2004.
A substantial amount of the unpaid federal taxes shown in IRS records as
owed by civilian contractors had been outstanding for several years. As
reflected in figure 3, over half of the unpaid taxes owed by civilian
contractors were for tax periods prior to calendar year 2000.26
26 Tax period may not always correspond to the age of the tax debt, as
when a tax form is filed years after the due date or when IRS assesses
additional taxes to earlier tax periods.
Figure 3: Civilian Contractors' Unpaid Federal Taxes by Tax Periods
through 2003 by Calendar Year
Prior to 1990 $0.2 billion
2003 $0.5 billion
2000-2002 $1.1 billion
1990-1999 $1.5 billion
Source: GAO analysis of IRS and FMS data as of September 30, 2004.
Prompt collection of unpaid taxes is vital because, as our previous work27
has shown, 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 federal
taxes, which, over time, can dwarf the original tax obligation. The amount
of unpaid federal taxes reported above does not include all tax debts owed
by the civilian agency contractors due to statutory provisions that give
IRS a finite period under which it can seek to collect on unpaid taxes.
Generally, there is a 10-year statutory collection period beyond which IRS
is prohibited from attempting to collect tax debt. 28 Consequently, if the
contractors owe federal taxes
27 GAO/AIMD/GGD-99-211.
28 The 10-year time may be suspended including for periods during which
the taxpayer is involved in a collection due process appeal, litigation,
or a pending offer in compromise or installment agreement. As a result,
Fig. 3 includes taxes that are for tax periods from more than 10 years
ago.
beyond the 10-year statutory collection period, the older tax debt may
have been removed from IRS's records. We were unable to determine the
amount of tax debt that had been removed.
While Substantial, the Amount of Unpaid Taxes of Civilian Contractors Is
Likely Understated
The amount of unpaid federal taxes we identified among civilian agency
contractors-$3.3 billion-is likely understated for three main reasons: (1)
we intentionally limited our scope to contractors with agreed-to29 federal
tax debt for tax periods prior to 2004 that had substantial amounts of
both unpaid taxes and payments from civilian agencies; (2) FMS
disbursement files did not always contain the information we needed to
determine whether the contractors owed federal taxes; and (3) the IRS
taxpayer account database contains errors, and the 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.
To avoid overestimating the amount owed by government contractors, we took
a number of steps to exclude unpaid federal taxes that federal contractors
recently incurred or that are not individually significant. For example,
some recently assessed tax debts that appear as unpaid taxes through a
matching of PACER and IRS records may involve matters that are routinely
resolved between the taxpayer and IRS, with the taxes paid, abated, or
both30 within a short period. We attempted to eliminate these types of
debt by focusing on unpaid federal taxes for tax periods prior to calendar
year 2004 and eliminating tax debt of $100 or less. We also eliminated all
tax debt identified by IRS as not being agreed to by the
29 We eliminated from our analysis all tax debt coded by IRS as not having
been agreed to by the taxpayer (by filing a balance due return) or a tax
court. For financial reporting, those cases are referred to as compliance
assessments.
30 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.
contractor. Additionally, we eliminated contractors with tax debt that
received payments of $100 or less during fiscal year 2004.31
Regarding the completeness of FMS disbursement information, we found that
some contractors paid through FMS could not be identified due to blank or
obviously erroneous TINs, such as TINs made up of all zeros or all nines.
The lack of TINs prevented us from determining whether contractors had
unpaid federal taxes and, if so, the amount of unpaid taxes owed by the
contractors. Additionally, as will be discussed in more detail in a later
section of this report, FMS does not maintain detailed electronic payment
information for a large disbursement system-Fedwire-that also makes
disbursements to contractors, and thus the value of unpaid taxes
associated with contractors paid through that system could not be
determined.
As we have previously reported,32 IRS records contain errors that affect
the accuracy of taxpayer account information. Consequently, some of the
$3.3 billion may not reflect true unpaid taxes, although we cannot
quantify this amount. Nonetheless, we believe the $3.3 billion represents
a conservative estimate of unpaid federal taxes owed by civilian
contractors paid through FMS.
Also limiting the completeness of our estimate of the unpaid federal taxes
of civilian contractors is the fact that the IRS tax database reflects
only the amount of unpaid taxes either reported by the contractor on a tax
return or assessed by IRS through its various enforcement programs. The
IRS database does not reflect amounts owed by businesses and individuals
that have not filed tax returns and for which IRS has not assessed tax
amounts due. During our review, we identified instances in which civilian
contractors failed to file tax returns for a particular tax period and,
therefore, were listed in IRS records as having no unpaid taxes for that
period. Further, our analysis did not attempt to account for businesses or
individuals that purposely underreported income and were not specifically
31 The $3.3 billion shown in our analysis includes only amounts of tax
debt owed by civilian contractors paid through FMS's PACER database.
Amounts owed by the owners, officers, or related business entities that
were not paid through FMS are not included in the $3.3 billion estimate of
tax debt. We include this additional tax debt in later discussions of our
case study contractors.
32 GAO, Financial Audit: IRS's Fiscal Years 2002 and 2001 Financial
Statements, GAO-03-243 (Washington, D.C.: Nov. 15, 2002).
identified by IRS. According to IRS, underreporting of income is the
largest component of the roughly $300 billion tax gap. Preliminary IRS
estimates show underreporting accounts for more than 80 percent of the
total tax gap. Consequently, the true extent of unpaid taxes for these
businesses and individuals is not known.
Actual Levy Collections Significantly Less Than Maximum Potential Levy
Amount
There is a large tax levy collection gap between the maximum potential
levy we calculated and the amount FMS actually collected under the FPLP.
We estimate that if there were no legal or administrative provisions that
remove some tax debt from the levy program and if all PACER contractor
payments were subjected to a 15 percent levy to satisfy all the unpaid
taxes of those civilian contractors, FMS could have collected as much as
$350 million in fiscal year 2004. However, during fiscal year 2004, FMS
collected about $16 million from civilian contractors-or about 5 percent
of the approximately $350 million maximum levy collection estimate we
calculated. As discussed earlier in this report, because some unpaid
federal taxes are excluded due to statutory requirements, IRS and FMS will
never be able to close the levy collection gap completely. For example,
over half of the $3.3 billion in tax debt was coded by IRS as being
excluded from the levy program for statutory reasons, including
contractors being in bankruptcy, having installment agreements, or
awaiting the completion of the required initial legal notifications.
However, many improvements can be made to narrow the tax levy collection
gap.
We found that a vast majority of the collection gap is attributable to
debts that are excluded from TOP because of current law and IRS policies.
While we will provide an overview of the exclusions later in this report,
we will examine in detail in a later report the accuracy and
reasonableness of the exclusions and IRS's applications of those
exclusions. The remaining gap- to be covered in detail in this
report-between what could be collected and what was actually collected is
attributable to the fact that not all FMS payments could be matched
against unpaid federal taxes for levy. We estimate that the federal
government could have collected at least $50 million more in unpaid
federal taxes in fiscal year 2004 using the FPLP if all PACER contractor
payments could be matched against tax debts in TOP.
Legal Requirements and IRS Policy Decisions Contribute to the Levy Collection
Gap
The actual collection of unpaid federal taxes from the levy program does
not approach our maximum estimate largely because IRS excludes-either for
statutory or policy reasons-almost two-thirds of unpaid federal taxes from
potential levy collection. Since we last reported on DOD contractors that
abused the federal tax system,33 IRS has added about $28 billion in unpaid
federal taxes to the levy program from categories it formerly excluded
(from its total population of all tax debts). Despite these efforts, the
amount that is excluded from the levy program is significant. Our analysis
of all tax debt recorded by IRS-$269 billion34 in unpaid taxes- including
amounts owed by civilian contractors, indicates that $171 billion was
excluded from potential levy collection as of April 2005. For the civilian
contractors in fiscal year 2004, these exclusions accounted for over 80
percent of the levy collection gap. As shown in figure 4, $71 billion (26
percent) of all unpaid federal taxes are excluded from the levy program as
a result of statutory requirements, while another $100 billion (37
percent) of unpaid federal taxes are excluded due to IRS policy decisions,
leaving approximately $98 billion (37 percent) potentially subject to
collection through the levy program. While the exclusion of unpaid federal
taxes from the levy program is justified depending on the circumstances,
it nevertheless results in the loss of potentially hundreds of millions of
dollars in tax collections from the levy program.
33 GAO-04-95.
34 IRS's 2004 financial statements reported $237 billion in total unpaid
assessments. IRS eliminates from financial reporting certain tax debt,
including, among others, TFRP assessed against officers or owners of
companies to collect the federal taxes withheld by the business from their
employees but not remitted to the federal government. IRS does not report
these debts to eliminate double counting both the business tax debt and
the officer's assessment of those taxes.
Figure 4: Levy Status of Unpaid Federal Taxes as of April 2005
Statutory exclusions $71 billion
Policy exclusions $100 billion
In levy program $98 billion
Source: GAO analysis of unaudited IRS data as of April 2005.
In addition to not sending the majority of unpaid federal taxes to the
levy program, FMS records indicate that as of September 30, 2004, about 70
percent of the unpaid taxes that IRS submitted to TOP had not yet
completed the collection due process requirements necessary to allow the
levying of payments to begin. As a result, only a small portion of unpaid
federal taxes is available for immediate levy. We will examine in detail
in a later report the accuracy and reasonableness of the IRS exclusions
and IRS's applications of those exclusions. What follows is a more
detailed description of the amounts and types of unpaid taxes excluded
from the FPLP for statutory and policy reasons, as well as a detailed
discussion of the limitations associated with much of the unpaid federal
taxes that are referred to the FPLP.
A Substantial Portion of Unpaid Federal Taxes Are Legally Excluded from the
Levy Program
According to IRS records, as of April 2005, IRS had coded about $71
billion of unpaid federal taxes as being legally excluded from the levy
program. As shown in figure 5, IRS records indicate that bankruptcy and
taxpayer agreements-including installment or offer in compromise (OIC)35
agreements-each account for about a quarter of all statutory exclusions.
Another $27 billion (38 percent) of the $71 billion in statutory
exclusions is due to IRS not having completed all initial taxpayer
notifications required by law before a tax debt could be referred to
TOP-these are cases that IRS refers to as being in notice status.
Figure 5: IRS Statutory Exclusions as of April 2005
Other $7 billion
Bankruptcy $17 billion
Installment or OIC $20 billion
Notice status $27 billion
Source: GAO analysis of unaudited IRS data as of April 2005.
35 Installment agreements allow for payments on the debt in smaller, more
manageable amounts. An offer in compromise approved by IRS allows a tax
debtor to settle unpaid tax debt for less than the full amount due.
For tax debt in notice status-the first phase of IRS's collection process-
IRS sends a series of up to four separate notices to tax debtors asking
them to pay their tax debt. Upon receipt of each of the notices, the
debtors have a minimum of 30 days to respond in various ways:
o disagree with IRS's assessment and collection of tax liability and
appeal the tax debt;
o negotiate with IRS to set up an alternative payment arrangement, such
as an installment agreement or an offer in compromise;
o apply to IRS for a hardship determination, whereby tax debtors
demonstrate to IRS that making any payments at all would result in a
significant financial hardship; or
o elect to pay off the debt in full.
Each time the debtor responds to a notice, the matter must be resolved
before IRS can proceed with further notices or other collection actions.
For example, IRS must determine whether to accept or reject an installment
agreement or determine that the tax debtor is in financial hardship before
proceeding with the collection process. During this entire notice phase,
IRS is required to exclude the tax debt from the levy program. IRS does
not begin further collection action, for example, the unpaid federal taxes
are excluded from levy, until the series of initial notifications are
complete. IRS also sends out an annual notification letter requesting
payment of the unpaid federal taxes.
IRS Policy Decisions In addition to legal restrictions, IRS makes policy
and operational decisions Exclude Many Tax Debts that exclude about $100
billion in unpaid tax debts from the levy program. from the Levy Program
Categories of unpaid tax debts IRS has coded as being excluded due to
policy decisions include those of tax debtors with financial hardship,36
tax debtors working with IRS to voluntarily comply, and tax debtors under
active criminal investigation. Figure 6 shows that slightly over half ($51
billion) of all policy exclusions are due to IRS's determination that the
36 According to IRS, financial hardship can be either a statutory
exclusion (under 26 U.S.C. 6343(e)) or policy exclusion, depending on when
and who makes the determination. For reporting on the FPLP, IRS
categorizes hardship cases as policy exclusions.
tax debtor is in financial hardship. Another 40 percent ($40 billion) of
the policy exclusions include tax debtors who are deceased and those tax
debtors that have filed appeals, claims, or amended returns. About 7
percent ($7 billion), referred to as tax administration exclusions, is
excluded from the levy program because an IRS official is working to
encourage the affected tax debtor to voluntarily pay the federal taxes
owed. About 2 percent ($2 billion) are excluded due to active criminal
investigations.
Figure 6: IRS's Policy Exclusions from the Levy Program as of April 2005
Other policy exclusions $40 billion
2% Criminal investigation $2 billion
Tax administration $7 billion
Hardship $51 billion
Source: GAO analysis of unaudited IRS data.
Since our 2004 report on DOD contractors who abuse the tax system,37 in
which we recommended that IRS change or eliminate policies that prevent
businesses and individuals with federal contracts from entering the levy
program, IRS has taken specific actions to include more tax debt in the
levy program. Specifically, IRS submitted an additional $28 billion to the
levy program by removing many of the systemic exclusions for cases
37 GAO-04-95.
being actively pursued by IRS officials for collection (i.e., those
excluded for tax administration purposes).38 As a result of these and
other improvements (including DOD submitting more of its payments in the
levy program), collections from contractor payments under the levy program
increased over 200 percent in fiscal 2004 over fiscal 2003. Collections
continued to increase in the first half of fiscal year 2005.
Our past audits have indicated that IRS records contain coding errors that
affect the accuracy of taxpayer account information-including exclusion
categories. While we did not evaluate the appropriateness of the exclusion
categories in this report, the categories used by IRS are only as good as
the codes IRS has input into its systems.39 In our previous work on DOD
contractors with tax debt, we found that inaccurate coding at times
prevented both IRS collection action and cases from entering the levy
program. Therefore, the effective management of these codes is critical
because if these exclusion codes (such as codes identifying a contractor
as being in bankruptcy or having an installment agreement) 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.
Most Tax Debt IRS Submits to the Levy Program Is Not Legally Ready for Levy
FMS records indicate that as of September 30, 2004, about 70 percent of
the tax debt IRS sent to the levy program is not available for immediate
levy because IRS has not completed all the necessary legal notifications
before the levying of payments can begin. In addition to the initial
series of notice letters that are sent out at the beginning of IRS's
collection efforts, IRS is required to send the debtor an additional
notice of intent to levy that includes information regarding the tax
debtor's right to a hearing prior to levy action-also referred to as a
collection due process notice. Although
38 This was done automatically within IRS's tax database based on various
transaction and status codes. IRS previously blocked all cases assigned to
its Automated Collection System (ACS) and its field collection function.
The ACS process consists primarily of telephone calls to the tax debtor to
arrange for payment. Cases assigned to field collections are those for
which a revenue officer attempts face-to-face contact and collection. Even
though unblocked as a group, IRS officials who work on ACS and field
collection inventories can manually block individual cases they are
working in order to remove them from the levy program.
39 The process of sending cases to the levy program is driven by the
various status codes IRS enters into its tax records-such as codes
identifying a case as being in bankruptcy or having an installment
agreement.
the tax debtor has up to 30 days to respond to this notice under the law,
IRS has chosen to wait 10 weeks before proceeding with collection actions,
such as levying. Until the due process notification and waiting period
have been completed, a tax debt may be submitted to TOP but is not subject
to immediate levy. For civilian contractors, IRS generally does not
initiate the collection due process notifications until FMS identifies
that the contractor is to receive a federal payment.
Once the debtor receives the notice of impending levy, IRS gives the
debtor up to 10 weeks to respond to the notice. As in the initial notice
process, the debtor can respond to IRS by disagreeing with IRS's
assessment (in this case, filing for a due process hearing), negotiating
with IRS to set up an alternative payment arrangement, applying for a
hardship determination, or making payment in full. If a tax debtor does
not respond to IRS and take advantage of those options within the
notification period, IRS will instruct FMS to start levying future
payments. The tax debt in the levy program is then coded for immediate
levy. For future payments, FMS will proceed with the continuous levy by
reducing each scheduled payment to the tax debtor by 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.
Not having tax debt ready for levy results in the loss of millions of
dollars of tax revenue for the federal government. For example, for our 50
case studies we identified payments totaling $1.6 million in which the TIN
of the contractor matched an IRS tax debt, but no levy was taken because
IRS had not yet completed the collection due process activities. This
situation contributes to these contractors facing little or no
consequences for their abuse of the federal tax system. IRS has an
automated process in place by which, once a match is made against a tax
debt in the levy program, a due process notice is automatically sent to
the contractor. However, the payments made between the time of the initial
match and when IRS completes its due process notification process-usually
10 weeks-cannot be levied and the potential collections are lost to the
federal government. Additionally, if the tax debtor files for a due
process hearing once it receives the notice, the tax debt will continue to
be excluded from levy until the process-which could take months-is
complete.
Prior to 1998, IRS was authorized to levy a payment immediately upon
matching a tax debt with a federal payment so long as the collection due
process notice had been sent. At that time, IRS did not have to wait
before proceeding with the levy. This allowed the levy program to capture
the payment before it was made to preserve the government's right to the
payment while providing the contractor a postlevy due process. However,
the IRS Restructuring and Reform Act of 1998 requires that debtors be
afforded an opportunity for a collection due process hearing before a levy
action can take place. To comply with this provision, IRS has chosen to
wait a minimum of 10 weeks for the tax debtor to respond to the collection
due process notice. However, IRS's 10-week waiting period causes the
federal government to miss levying some contractor payments.
IRS has acknowledged that the delay in initiating the due process notice
can result in lost collections and is investigating ways to begin the
process earlier. The joint task force established after our previous audit
has supported making the due process for the FPLP a postlevy process.40
This would allow IRS to levy payments when first identified and provide
contractors with procedural due process remedies afterwards. To expedite
the notification, IRS officials stated that they had begun matching new
DOD contracts valued at over $25,000 against tax debt and sending out
collection due process notifications at that time rather than waiting
until payments are made. To address this same issue, the task force is
also exploring avenues to combine the collection due process notice with
the last of its initial notification letters sent to tax debtors. This
would allow IRS to have all tax debt legally ready for levy prior to it
being sent to TOP to be matched against federal payments. We fully support
the task force's and IRS's efforts to increase the amount of tax debt that
is ready for immediate levy.
40 Federal Contractor Tax Compliance Task Force, Report to Senate
Committee on Governmental Affairs Permanent Subcommittee on Investigations
(Washington, D.C.: Oct. 26, 2004).
Lack of FMS Oversight and Proactive Management Further Contribute to the Levy
Collection Gap
FMS has contributed to the tax levy collection gap by not taking a
proactive stance in overseeing and managing the levy program. GAO's
Standards for Internal Controls in the Federal Government considers a
positive control environment-which includes the establishment of
mechanisms to monitor or oversee program operations-to be the foundation
for all other standards. For FMS, such management control and oversight is
critical in its role as the federal government's debt collector and chief
money disburser. However, because of a lack of oversight, FMS did not
detect and have agencies correct obviously inaccurate information for tens
of billions of dollars in payments to contractors, and therefore was not
able to match these payments against tax debts for potential levy.
Further, because of a lack of proactive management, FMS did not send tens
of billions of dollars more in payments to the levy program. We estimate
that these deficiencies resulted in at least $50 million in lost levy
collections from civilian agency contractors during fiscal year 2004.41
Table 1 provides a breakdown of the deficiencies that result in payments
not being subject to levy. Further discussion of these deficiencies will
be provided in detail later in this report.
41 This estimate is based on all contractor payments recorded in PACER
during fiscal year 2004 being sent to TOP to be matched against the tax
debt in TOP as of September 2004. Due to the unavailability of information
at FMS, our estimate does not include an estimate of the amount that could
be collected from sending Fedwire payments to TOP. Additionally, we were
unable to estimate collections against many payments because of blank or
invalid TIN information in FMS's payment records. The estimate of a
minimum of $50 million represents our total estimate of potential levy
collections from civilian contractors less FMS's actual collections during
fiscal year 2004.
Table 1: Payments Not Matched against Tax Debts for Potential Levy
Dollars in billions
Cause of payment not being levied Amount excluded
Payments submitted to TOP that could not be levied
Payments where the agency payment station has not been $40 loaded in TOP
Payments containing blank or obviously inaccurate TINs
Payments containing blank or invalid names
Payments containing invalid payment types
Payments FMS does not submit to TOP
Certain categories of payments (at least $26 billion in Unknown amount
certain types of payments and an unknown amount in
Fedwire paymentsa)
Payments to individuals
Source: GAO analysis of FMS data.
Notes: The exclusion categories above cannot be added together to derive
the total amount of excluded payments because many payments had multiple
deficiencies, each of which would have prevented the payment from being
levied. For example, some payments without TINs also have invalid names,
and some payments originating from agency payment locations that were not
entered into the TOP database were also payment categories FMS was not
sending to the levy program.
aDuring fiscal year 2004, Fedwire disbursed $191 billion, some of which
was to contractors. FMS does not maintain detailed historical records and
could not determine the value of contractor payments paid with Fedwire.
In addition to these deficiencies, FMS also faces design challenges in the
levy program that limit its effectiveness at collecting unpaid taxes.
These challenges include the difficulty in matching the name of the
contractor recorded in the payment files to the name recorded in IRS's tax
records and the difficulty in levying vendors paid with government
purchase cards. FMS also has not implemented a provision of the American
Jobs Creation Act of 2004, which allows the federal government to levy up
to 100 percent of payments to contractors with unpaid federal taxes.
FMS Did Not Include All Agency Payments in the Levy Program
FMS has not updated its TOP database to capture payments from about 150
agency paying stations,42 resulting in $40 billion of fiscal year 2004
civilian agency contractor payments being excluded from potential levy.
Although effective internal control would generally include oversight of
key agency functions, FMS did not perform the management oversight
necessary to identify that a significant portion of all its disbursements
were not included in the levy program. Of the $40 billion not sent to TOP,
we determined that approximately $9 billion in payments were made to
civilian contractors with tax debts, none of which could be levied.
Federal agencies may have multiple offices or locations that perform
accounting for and preparation of payment information, referred to as
agency payment locations or paying stations. For a payment to be matched
against tax debts for the purpose of levy, the paying station from which
the payment originates needs to be programmed into the TOP database. If a
paying station is not in the TOP database, TOP considers that location to
be excluded from the levy program, and thus payments from that location
will not be matched against unpaid federal taxes for potential levy. The
approximately 150 paying stations not included in TOP are paying stations
for portions of a majority of federal departments, including the
Departments of Homeland Security, the Interior, Justice, State, the
Treasury, and Health and Human Services.
An FMS official stated that at the time FMS implemented TOP in the 1990s,
it had a centralized monitoring system to verify that payments from all
payment locations were included in TOP. According to the official, after
the initial group of paying units was incorporated into TOP, FMS did not
take steps to ensure that the TOP database was up to date and that
payments from new payment locations were incorporated into TOP. FMS was
unaware that a large percentage of its disbursements were being excluded
from potential levy. Since we brought the problem to their attention, FMS
officials stated that efforts are under way to update TOP for the paying
42 These stations are generally referred by their Treasury Agency Location
Code (ALC). The ALC is used to identify transactions, documents, and
reports processed through Treasury by a specific accounting point or
station, within an agency or bureau of a federal department or independent
agency. Using the ALC enables Treasury to reconcile deposits and
disbursements.
stations we identified as being excluded from the levy program.43 The
officials also stated that they plan to reinstate the centralized
monitoring to ensure that paying stations are updated in TOP so that
payments from these stations would be available for potential levy.
FMS Disbursed Payments to Contractors without Proper TINs
During fiscal year 2004, FMS disbursed over $17 billion in payments to
civilian agency contractors without TINs or with obviously inaccurate
TINs. Valid TIN information is critical to the levy program44 because
payments lacking this information cannot be matched against tax debts. The
DCIA45 requires executive agencies to obtain TINs from contractors and to
include TINs on certified payment vouchers, which are submitted to
Treasury.46 Without a proper TIN, payments cannot be levied.
We found that payment records with blank or obviously inaccurate TINs in
the TIN fields are prevalent in the payment files submitted to FMS by some
agencies. For example, over half of payments at one agency and over
threequarters of payments at another agency were made to contractors that
had blank or obviously erroneous TINs, such as TINs made up of all zeros
or all 9s. While certain vendors are exempt from the requirements to have
a TIN, the exemptions are rare and are generally limited to foreign
companies providing goods and services to federal agencies in a foreign
country or companies performing classified work. However, FMS does not
gather information to determine whether the payments to contractors
without TINs or with obviously inaccurate TINs are exempt from the TIN
requirement or that all nonexempt payments include TINs. FMS officials
stated that the responsibility for gathering and submitting TIN
information was solely that of the paying agency. In subsequent audit
efforts, we will evaluate selected agencies' controls over obtaining and
submitting TIN information for all nonexempt payments.
43 An FMS official also noted that some of the agency paying stations we
identified only disbursed categories of payments that FMS does not
currently submit to the levy program, such as type A and ACH-CTX payments.
44 GAO, Tax Administration: More Can Be Done to Ensure Federal Agencies
File Accurate Information Returns. GAO-04-74 (Washington, D.C.: Dec. 5,
2003).
45 Pub. L. No. 104-134, 110 Stat. 1321-358, April 26, 1996.
46 31 U.S.C. S: 7701(c) and (d).
FMS officials stated that FMS tabulates payment records with obviously
inaccurate TINs by agency47 to compile a monthly TIN Compliance Report.
This report is used to monitor agencies that send in payment requests with
obviously inaccurate TINs.48 According to FMS officials, in cases of
significant noncompliance, FMS encourages agencies to send payment files
with valid TINs. However, FMS does not enforce the TIN requirement by
rejecting agency payments without TINs or requiring the agencies to
certify that the payments not containing TINs meet one of the TIN
exclusion criteria. As a result, agencies continue to submit payment
requests without TINs, which cannot be levied to collect unpaid federal
taxes.
We found that some civilian agency contractors without TINs or with
obviously inaccurate TINs in the agency payment files received payments
during fiscal year 2004 and had unpaid federal taxes. For example, FMS
paid about $700,000 to one contractor with an invalid TIN. Based on
investigative work, we were able to determine that this contractor had
failed to pay all its payroll taxes and owed more than $50,000 in unpaid
taxes. Had the payment file contained a TIN and if the tax debt were
subject to immediate levy, the government could have collected the full
amount of unpaid taxes from this contractor during fiscal year 2004.
47 Tabulation is performed for the standard payment types sent through the
levy program, that is, payments known as type B. Type A payments-which are
payments that the agency certifies the payment in the same file that
contains detailed payment information-and Fedwire payments are not
tabulated or monitored.
48 In 1997, Treasury proposed a rule that would require disbursing
officials to reject agency payment requests that do not contain TINs. Upon
review of the comments received in response to the proposed rule, FMS
rescinded the proposed rule, and instead required agencies to submit to
FMS implementation plans to achieve compliance with the TIN requirement.
FMS's responsibility includes monitoring payment vouchers to ensure that
agencies are meeting compliance goals and time frames as identified in the
implementation reports.
FMS Made Disbursements to Contractors without Proper Names
FMS made disbursements of nearly $3.8 billion in fiscal year 2004 to
contractors whose payment files did not contain the name of the contractor
receiving the payment. We found that instead of the contractor's name, the
disbursement file name field was either blank or contained only numeric
characters.49 The lack of a name on the payment file does not prevent the
payment from occurring because FMS made these disbursements electronically
via direct deposit into the contractors' bank accounts. However, valid
name information is critical because the levy program requires a match
between both the name and TIN for a levy to occur.50 The lack of a proper
name could have been detected if FMS had conducted a cursory review of the
payment files submitted by the agencies.
For example, our review readily identified that most of the payment files
submitted by the State Department did not contain valid contractor names.
In addition, about $3.2 billion of the nearly $3.8 billion we identified
as payments made to contractors without names in the payment files were
made on behalf of the State Department. Until we brought the matter to
their attention, senior officials at both the State Department and FMS
were not aware that the State Department's contractor payments did not
contain valid names. At our request, a State Department official
investigated and found that the department's payment systems did contain
valid names but that a programming error resulted in the wrong field being
sent to FMS as the name field. The official told us that the error in the
payment file is not new because the structure of the payment file sent to
FMS had remained the same since the 1980s. Once we brought this to the
attention of State Department officials, they were quickly able to
identify corrective actions, and according to the State Department, they
have since corrected the deficiency.
Our analysis of FMS payment data found that FMS made disbursements without
contractor names, totaling approximately $400 million, to about 2,000
companies that had about $370 million in unpaid federal taxes. FMS's
failure to detect and correct missing names had a direct impact on the
levy program. For example, one contractor with unpaid taxes received from
the
49 In addition, we identified numerous payee names that contained only a
single alphabetic character in the name field. We did not include these in
our analysis of payments with improper name fields.
50 GAO, Tax Administration: Millions of Dollars Could Be Collected If IRS
Levied More Federal Payments. GAO-01-711 (Washington, D.C.: July 20,
2001).
State Department payments totaling over $400,000, which could not be
levied because of the missing name. The same contractor also received
payments from other civilian agencies. However, because the contractor's
name was included in the payment files from the other agencies, the levy
program collected over $50,000 from those payments. If FMS or the State
Department had identified and corrected the name problem, an additional
$60,000 in unpaid federal taxes from this contractor could have been
collected through the levy program.
FMS Made Payments without Proper Payment Type Codes
FMS disbursed $5 billion in payments using checks based on agencysubmitted
payment files that did not contain data in the payment type field during
fiscal year 2004. FMS uses the payment type field in the agencysubmitted
payment files to determine if the payment is required to be included in
the levy program. If a payment file record has a blank payment type field,
it is not matched in the levy program to collect unpaid federal taxes. As
a result, none of the $5 billion in payments we identified as having a
blank payment type field could have been levied to collect the
contractors' unpaid federal taxes. FMS lacked the oversight to detect that
the payment files submitted by agencies were not adequately coded. After
we brought this to management's attention, an FMS official stated that FMS
planned to establish a new centralized program to monitor the completeness
of agency information.
FMS Has Not Taken Action to Include All Categories of Contractor
Payments in the Levy Program
FMS has not been proactive in including many categories of payments in the
levy program, and has therefore kept tens of billions of dollars in
contractor payments from being subject to potential levy collection. FMS
uses several payment mechanisms to make its disbursements. FMS payment
mechanisms (payment categories) include what it refers to as type A, type
B, which includes Automated Clearing House-Corporate Trade Exchange
(ACH-CTX), and Fedwire.51 However, FMS has only taken action to include a
portion of type B payments in the levy program. FMS has not taken action
to include the other categories of payments due to what it
51 For type B payments, agencies send FMS the certification for the
payment separately from the detailed payment information. Type A payments
are payments in which the agency certifies the payment in the same file
that contains detailed payment information. ACH-CTX payments (a specific
kind of type B payment) are ones whereby agencies can pay multiple
invoices to a single contractor using a single ACH-CTX payment. Fedwire is
a processing system designed for high-dollar, low-volume payments that
must be received by payees the same day as originated by the agency.
considers to be programming limitations. Therefore, none of those payments
can be levied to collect unpaid federal taxes.
Although it is responsible for the levy program, FMS also could not
quantify the magnitude of federal contractor payments that it was not
sending to the levy program, nor could FMS estimate the amount of levy
collections it was missing because it had not included all payment
categories in the program. FMS officials estimated that FMS paid about $11
billion in contractor payments via ACH-CTX in fiscal year 2004, and our
analysis identified at least $15 billion in type A contractor payments.52
The combined amount of those two categories-$26 billion, though likely
understated-represents almost 11 percent of all contractor disbursements
recorded in FMS's PACER database. In addition, FMS disbursed approximately
$191 billion53 in Fedwire payments, but FMS could not identify the value
of Fedwire contractor payments that were not sent to the levy program.
Type A Payments FMS officials stated FMS had not included type A payments
in the levy program because it is waiting for a new disbursement system to
be deployed. Type A payments are payments whereby the agency certifies the
payment in the same file that contains detailed payment information.54
Although FMS had performed some preliminary studies in 2001 regarding how
to send type A payments to TOP, officials were unable to provide
information regarding the cost of making system corrections.55 At that
time, FMS was developing a new payment system that it estimated would be
completed as early as 2003 and therefore decided not to make the system
52 FMS officials could not identify type A or ACH-CTX payments in its
disbursement databases and therefore could not determine the amount
disbursed during fiscal year 2004 through type A. Based on data provided
by FMS on the payment locations that make only type A payments, we
determined that type A payments totaled at least $15 billion during fiscal
year 2004. This number is understated because a number of other locations
made both type A and type B payments, but the amount of type A payments
made by these locations is not estimable.
53 This amount does not include $66 billion in certain benefit payments.
54 The typical payment mechanism involves the certification being sent to
FMS separately from detailed payment information. This type of payment,
known as type B, is sent to TOP for levy.
55 FMS estimated that it would take about 6 hours of programming and 1 to
3 days of testing to make changes necessary in one system to send type A
payments to TOP. FMS officials stated that it could take additional
programming time to prepare other systems to send type A payment
information to TOP. However, FMS officials stated they did not know what
additional programming might be required or the potential cost thereof.
changes. However, at the time of our audit, the new system was still not
fully deployed. Consequently, over the last 4 years the federal government
has lost the collections that could have been levied from those payments.
FMS officials stated that FMS is continuing to focus on completing the
deployment of a new disbursement system, which it now estimates will be
fully operational in 2006, rather than including type A payments in its
current system. FMS tentatively plans to incorporate type A payments into
TOP in calendar year 2006 when its new system is scheduled to be
operational.
ACH-CTX Payments FMS officials stated that FMS does not send ACH-CTX
payments to TOP for levy. According to FMS officials, ACH-CTX can be used
to pay multiple invoices to a single contractor. However, the structure of
the ACH-CTX payments requires that the total payment amount disbursed to
the contractor match exactly the total of the invoices that the payment is
to cover. If a levy were to take place, the total payment amount would
differ from the total amount of the invoices that support the payment.
Consequently, FMS officials stated that they cannot levy a portion of the
payment. Officials stated that although they could not separately identify
them in the PACER database, FMS made about $11 billion in ACH-CTX payments
to contractors during fiscal year 2004.
FMS officials stated they had not developed an implementation plan or
timeline to incorporate ACH-CTX contractor payments into the levy program.
Fedwire Payments As with type A payments, FMS officials stated that FMS is
currently focused on completing a new disbursement system prior to
incorporating Fedwire payments-payments requiring same-day settlement-into
TOP. FMS officials recognized that Fedwire payments, as a whole, are not
specifically exempt from levy, though individual Fedwire payments may be
exempt. FMS officials stated that the decision to exclude Fedwire payments
from the levy program was also based on the limited time window FMS has to
send Fedwire payments to the Federal Reserve and the operational and
system changes necessary to send those payments to TOP.56 FMS's TOP
implementation plan, dated January 2005, called for
56 FMS officials stated that they performed a statistical match on Fedwire
payments for 1 month in 2003. FMS officials stated that because few of
these Fedwire payments had valid TINs, a small amount would have been
offset. FMS did not maintain the detailed transactions for this
statistical match for our review.
incorporating Fedwire payments into TOP in calendar year 2007, over 10
years after DCIA first required the establishment of a centralized offset
program. However, FMS officials recently informed us that they are going
to study the costs of submitting Fedwire payments to TOP and may not
attempt to include them in the levy program. As a result, FMS officials
stated that they no longer have a timeline to incorporate Fedwire payments
into TOP. We recognize that submitting Fedwire to the levy program could
result in a delay in disbursement, but until FMS fully explores and
identifies options for submitting Fedwire payments through TOP,
potentially billions of dollars may be disbursed to contractors with
unpaid federal taxes without the possibility of being levied.
FMS Does Not Offset Contractor Payments to Collect Tax Debts of Individuals
Because payment systems do not identify whether the payment is being made
to a business or individual, FMS does not offset contractor payments to
collect the unpaid federal taxes owed by individuals. Our analysis
determined that civilian agency contractors with unpaid federal taxes who
are individuals received payments totaling nearly $2 billion while owing
over $290 million in unpaid federal taxes.
Agency payment records do not distinguish payments made to individuals,
such as those who are self-employed or sole proprietors, from payments
made to businesses. IRS decided that due to the lack of distinction
between these two types of payments in FMS's system and the possibility of
improperly levying payments, contractor payments should not be levied to
satisfy the unpaid federal taxes of individuals. According to IRS, an
improper levy could occur because a business's TIN could be the same as an
individual's Social Security number (the individual's TIN). According to
FMS officials, IRS instructed FMS not to match any contractor payments
against unpaid federal taxes owed by individuals for potential levy
following discussions between FMS and IRS.
However, both FMS and IRS officials have indicated that the potential risk
of an improper levy is small. For a levy to occur, a match must exist
between the TIN and name in the payment files and the TIN and name control
in the tax debt file. FMS indicated it has performed a study and found
that only a small number of cases potentially have a business TIN and name
that would match with an individual's TIN and name. After we met with IRS
and FMS officials regarding this issue, IRS directed FMS to begin levying
contractor payments against tax debts owed by individuals. FMS officials
stated that they will need to make system changes to implement this
action.
FMS Faces Challenges in Addressing Other Program Limitations
Limitations in TIN/Name Match Reduces Levy Collections
FMS faces management challenges in addressing certain limitations in the
levy program that result in reduced collections. Specifically, almost $2
billion of contractor payments could not be levied due to difficulties in
matching both the name and TIN in the payment records to the tax debt in
the TOP database. Additionally, nearly $10 billion in federal payments
made via purchase cards to contractors are not subject to levy because the
government payment is made to the bank, not the contractor doing business
with the government. Finally, FMS faces challenges in implementing a
provision contained in the American Jobs Creation Act of 2004, which
provides for increasing the amount of levy to a maximum of 100 percent of
payments to contractors with unpaid tax debts.
Potentially thousands of payments are not levied every week because the
TINs and names from the payment records do not match against the names and
TINs in TOP for potential levy. Data from FMS's PACER and TOP databases
indicate that about $1.7 billion of payments made to contractors with
unpaid federal taxes in TOP could not be levied because the control name
supplied by IRS did not match the payee name in PACER. As a result, none
of these payments could be levied to collect delinquent tax debt.
IRS provides TOP with both a TIN and a "control name" of both companies
and individuals with unpaid federal taxes. In general, the control name is
the first four characters of an individual's last name or the first four
characters of the business name. TOP analyzes the name in the payment
files to determine if it contains the IRS control name. If it identifies
the control name (first four characters of the IRS name) anywhere within
the name field of the payment file, TOP levies the payment to collect the
unpaid taxes. If the control name is not found in the payment record's
name field, TOP records the mismatch on a report that it sends to IRS to
identify the mismatches.
We reviewed an example of the report containing approximately 2,400
different payments that could not be levied to identify some of the causes
for the mismatches. We found that a number of payments were not levied
because the payments were made using an individual's name and the
business's TIN. The following hypothetical example based on an actual case
illustrates the difficulty in matching names under the levy program. In
one case, the payment was made to an individual doctor, J. Doctor, MD.
However, the TIN provided was to the doctor's practice, Jenny Doctor, MD
PA. For IRS, the control name of the business TIN was "JENN." As a result,
although the TIN of the payment matched the TIN of the tax debt, the
control name "JENN" did not appear within the payment name "J Doctor."
Because the names did not match, the payments to this contractor were not
levied.
After we brought this to FMS's and IRS's attention, IRS began working with
FMS to increase the number of control names it sends to TOP. According to
IRS officials, IRS is taking action to begin sending up to 10 additional
business control names to FMS to be matched against payment data.57 IRS
officials believed that this should increase the number of matches
available under the levy program. IRS is also evaluating additional
changes to increase the number of name controls that it sends to FMS for
matching with payments to individuals.
Billions of Dollars in Purchase Due to the structure of the credit card
program, whereby payments are
Card Payments Are Not Levied made to the government purchase card bank and
not directly to contractors with unpaid tax debts, none of the $10 billion
in purchase card payments made during fiscal year 2004 were able to be
offset or levied. FMS officials have acknowledged the need to address
those challenges and stated that FMS has met with certain bank officials
and another federal agency regarding how to approach the issues. However,
they have not yet determined how to collect federal debts from contractors
paid with the government purchase card.
The Governmentwide Commercial Purchase Card Program was established to
streamline federal agency acquisition processes by providing a low-cost,
efficient vehicle for obtaining goods and services directly from
contractors. Governmentwide efforts to promote increased use of purchase
cards for small and routine purchases have dramatically increased purchase
card spending. As shown in figure 7, purchase card expenditures by
civilian agencies increased from nearly $3 billion in fiscal year 1997 to
nearly $10 billion in fiscal year 2004. The use of purchase cards has
accrued significant benefits to the federal government; however,
contractors receiving payments through purchase cards are not currently
subject to the levy program.
57 Once a match is made against the TIN in a contractor payment, FMS would
match the name against all of the control names provided by IRS to
determine if there is a match for potential levy.
Figure 7: Purchase Card Expenditures by Civilian Agencies-Fiscal Years
1997-2004
Dollars in billions 10
8
6
4
2
1997 1998 1999 2000 2001 2002 2003 2004
Fiscal year Source: GAO analysis of GSA data.
All purchase card payments are made to one of the five banks that issue
government purchase cards-Bank One, Bank of America, CitiBank, Mellon
Bank, or US Bank. In accordance with standard credit card payment
procedures, those banks are responsible for interfacing with Visa or
MasterCard and the contractor's bank to pay for the goods or services
provided. This payment process shields the identity of the contractor that
is ultimately paid by the civilian agency receiving the goods or services
from the levy program. Consequently, the disbursement file contains only
the name of the purchase card issuing bank and its TIN and not the
contractor that was actually doing business with the government.
Without identifying the contractor doing business with the government, the
federal government is unable to collect federal debts from payments to
these contractors. To demonstrate the effect of payments to contractors
using the purchase card, we obtained the National Aeronautics and Space
Administration's (NASA) fiscal year 2004 purchase card transactions and
compared the contractors from which NASA purchased goods and services to
the IRS unpaid taxes database. During fiscal year 2004, NASA used purchase
cards to pay about 12,000 contractors nearly $80 million.
According to IRS's data on unpaid tax debts, over 750 of those contractors
had about $440 million in unpaid federal taxes. However, none of the
purchase card payments made to these contractors could be levied to
collect the unpaid federal taxes. In contrast, in analyzing the TOP
database, we found that non-purchase card payments made during fiscal year
2004 to 49 of these same contractors were levied.
FMS recognizes purchase card payments as a significant problem for the
government's debt collection and lists the government purchase card
program among the payment streams that need to be incorporated into TOP.
FMS officials have stated they face both operational and legal issues to
incorporate such payments into TOP and that the process of paying the
purchase card issuing bank may prevent FMS from using TOP to collect from
contractors paid with purchase cards. Until the challenge is thoroughly
examined by FMS and IRS and solutions are identified, the federal
government will continue to be unable to levy or otherwise collect from
tens, if not hundreds, of billions of dollars in payments to civilian
contractors.
Statutory Authorization for FMS has not fully implemented a new provision,
authorized by Congress in
Increased Levy Has Yet to 2004, that increased the maximum levy percentage
on contractor
Be Implemented payments. In October 2004, Congress passed the American
Jobs Creation
Act 2004 to increase the maximum continuous levy from 15 percent to up to
100 percent of payments to contractors with unpaid taxes. The act
specifically increased the continuous levy on payments to vendors for
"goods and services" sold or leased to the government. According to IRS,
the legal language, which specified that goods and services be subject to
the 100 percent levy provision, excludes real estate, such as rent
payments, from the new levy requirement. This exclusion presents
significant implementation challenges for FMS because the civilian
agencies' payment systems cannot separately identify real estate
transactions from other contractor payments. Without the ability to
distinguish between these payments, FMS could not implement the new law
for civilian payments in such a way as to exempt real estate transactions
from the 100 percent levy. FMS officials stated they had recently been
able to implement the 100 percent levy provision for certain DOD payments,
but were unable to do so for their own disbursements. According to FMS and
IRS officials, a specific legislative change is being sought to make real
estate payments subject to the new 100 percent levy requirement.
We estimate that increasing the levy percentage from 15 to 100 could cause
a dramatic increase in collections. We performed a separate analysis of
our maximum levy potential estimate as if there were no legal or
administrative impediments-estimated at $350 million for a 15 percent
levy-and found that if a 100 percent levy rate had been applied in fiscal
year 2004, FMS could have collected as much as $800 million from civilian
contractors if all payments had been matched against all tax debt.58
Civilian Agency Contractors Involved in Abusive and Potentially Criminal
Activity Related to the Federal Tax System
We found abusive and potentially criminal activity related to the federal
tax system for all 50 cases that we audited and investigated. The case
studies were selected from the population of about 33,000 contractors that
were receiving federal payments during fiscal year 2004 and owed over $3.3
billion in unpaid federal taxes as of September 30, 2004, using a
nonprobability selection approach. The basis for selecting each of the
case study contractors was that they all had unpaid taxes totaling more
than $100,000 and federal payments totaling more than $10,000. When our
audit and investigative work indicated that the 50 contractors we
originally selected were related to other entities-defined as entities
sharing the same owner or officer or common addresses-we performed
additional work to determine whether the related entities and the owners
owed tax debts as of September 30, 2004, and received other federal
payments during fiscal year 2004.59 While we were able to identify some
related entities, in some cases other related entities might exist that we
were not able to identify. In addition, we found that 3 of the 50 case
studies involve owners or officers who had been either convicted or
indicted for non-tax-related criminal activities, or were under IRS
investigation. We are referring the 50 cases detailed in this report to
IRS so that a determination can be made as to whether additional
collection action or criminal investigations are warranted. For more
information on our criteria for the selection of the 50 case studies, see
appendix I.
58 This estimate is based on all contractor payments recorded in PACER
during fiscal year 2004 being matched against all contractor tax debt as
of September 30, 2004. Due to the unavailability of information at FMS,
our estimate does not include an estimate of the amount that could be
collected from sending Fedwire payments to TOP. Additionally, we were
unable to estimate collections against many payments due to blank or
invalid TIN information in FMS's payment records.
59 IRS and FMS cannot collect from payments made to one related company to
satisfy the unpaid federal taxes of another related company.
Nature of Business for Case Study Contractors
The federal government is a large and complex organization, consisting of
15 cabinet-level agencies-one defense and 14 civilian agencies-and
numerous independent agencies, administrations, and other entities that
collectively spent more than $2.5 trillion in fiscal year 2004. Civilian
agencies operate throughout the country and in more than 250 foreign
countries, carrying out a multitude of missions and programs. Because
civilian agencies contract for a large variety of goods and services to
carry out functions as diverse as guarding the nation's borders, providing
medical benefits to veterans, administering justice, and exploring space,
it is not surprising that civilian agency contractors with unpaid taxes
operate in a large number of industries. The industries are typically
wage-based, while the 50 case studies are mostly small, many of them
closely held by the owners and officers. Table 2 shows a breakdown for the
50 contractor case studies by the type of goods and services provided.
Table 2: Types of Goods and Services Provided by Civilian Agency
Contractors in Case Studies
Type of business Number
Building maintenance
Communications
Consulting
Health care
Manufacturing
Personnel services
Professional services
Sanitation
Security services
Transportation
Other
Total 50
Source: GAO analysis of civilian agency and public records.
Examples of Abusive or Potentially Criminal Activity Related to the Federal
Tax System by Businesses
Our audits and investigations of the 50 case study business contractors
showed substantial abuse and potential criminal activity related to the
tax system. All 48 of the contractors in our case studies that file
business tax returns had tax periods in which the contractors withheld
taxes from their employees' paychecks but did not remit them to IRS.60
Rather, these companies diverted the money to fund business operations,
for personal gain, or for other purposes. As discussed earlier in this
report, businesses with employees are required by law to remit employment
taxes to IRS or face potential civil or potential criminal penalties.
Specifically, the act of willfully failing to collect or pay any tax is a
felony while the failure to comply with certain requirements for the
separate accounting and deposit of withheld income and employment taxes is
a misdemeanor.
Six of the case study businesses involved owners or officers who were
"multiple abusers," those involved with a group of related companies that
owed taxes. The owners or operators of some of these businesses not only
failed to have their businesses pay taxes, but several also failed to pay
their own individual income taxes, with three individuals having more than
$100,000 in unpaid individual income taxes. The related businesses
involving these multiple abusers repeatedly failed to pay taxes. For
example, several groups of related businesses owed taxes for more than 50
tax periods-one group of about 20 businesses owed taxes for over 300 tax
periods. One case study business owner (whose businesses received more
than $1 million in federal payments in fiscal year 2004) has a pattern of
opening a business, failing to remit at least some payroll taxes, closing
the business, and then opening a new business to repeat the same pattern.
The owner repeated this pattern for at least three businesses over nearly
20 years.
Table 3 highlights 10 case studies with unpaid payroll tax debts. Nine of
the 10 cases have unpaid payroll taxes of 10 tax periods or more. The
amount of unpaid taxes associated with these 10 cases ranged from nearly
$400,000 to $18 million-6 businesses owed more that $1 million in unpaid
federal taxes. Our investigations revealed that some owners have
substantial personal assets-including commercial real estate, a sports
team, or multiple luxury vehicles-yet their businesses fail to remit the
payroll taxes withheld from employees' salaries. Several owners owned
60 The remaining two case study contractors were either individuals or
sole proprietorships that filed personal income tax returns.
homes worth over $1 million-one owner had over $3 million and another had
over $30 million in real estate holdings. Others informed our agents that
they diverted payroll taxes they did not remit to IRS for personal gain or
to fund their business, while others were engaged in activities that
indicated potential diversion of payroll taxes for personal gain. For
example, one owner transferred the payroll taxes he withheld from
employees to a foreign bank account and was using the money to build a
home in that country, while another contractor doubled the salary of an
officer in a 5-year period to over $750,000 at the same time that the
business failed to remit payroll taxes and declared losses of more than $2
million. Another purchased a number of multimillion-dollar properties and
an unrelated business at the same time that his many businesses owed
taxes, while yet another owner purchased, within a 2-year period, four
vehicles totaling nearly $200,000 after the owner's business started
accumulating unpaid tax debts.
IRS has taken some collection actions against the contractors in our case
studies, but has not been successful at collecting the unpaid taxes. For
example, we found that in all 10 cases shown in table 3, IRS has assessed
trust fund penalties on the owners or officers for willful failure to
remit to the government amounts they withheld from their employees'
salaries.61 However, as we have previously reported, IRS seldom collects
on trust fund penalties. As of September 30, 2004, the balance on the
trust fund penalties owed by the owners or officers of the 10 case studies
was over $19 million. IRS has also taken some collection actions against
all 10 contractors, such as placing liens on the assets of the companies
or owners. Although some of the owner/officers had substantial assets,
including expensive homes and luxury automobiles, the information we
reviewed did not identify that IRS has performed seizures of these assets.
However, we identified that 3 of the 10 owners or officers had been
convicted or indicted for non-tax-related offenses or were under active
IRS investigation for tax-related offenses.
61 Overall, IRS assessed trust fund penalties in 27 of our 50 case
studies. See app. II for further details.
Table 3: Civilian Agency Contractors with Unpaid Federal Taxes
Goods,
services, or
nature of work
and agencies
to Fiscal year Unpaid
Case which they 2004 FMS federal tax
study were provided paymentsa amountb Comments
o Business is affiliated with many
Health care Over Over other health care-related
facilities, including
related services $300,000 $18 million nursing and convalescent homes.
to Departments o Taxes owed by related entities
cover over 80 tax periods.
o Since failing to fully remit all
of Veterans' the taxes withheld from employees'
paychecks
Affairs and starting in the late 1990s, the
owner purchased
Health and multimillion-dollar properties,
Human Services an unrelated business, and
a number of luxury vehicles.
o Other real estate holdings
include residential and commercial
properties
valued in the tens of millions of
dollars.
Waste collection Over Over o Company and several other entities
share the same address or executives.
services to the $700,000 $2 million o Taxes owed by related entities
cover over 40 tax periods and include
Department of individual income tax debt of one
owner.
o Since the late 1990s, about the
Justice same time that the company failed to
pay all
of its payroll taxes, the company
regularly withdrew cash from its bank
accounts. These withdrawals totaled
several million dollars.
o Since failing to fully remit all
the payroll taxes withheld from
employees'
paychecks, one owner sold his
residence for more than $1 million.
Health care Nearly Over o Business is affiliated with three
other related companies.
o Taxes owed by related entities
related services $250,000 $9 million cover over 60 tax periods and include
the
to the owner's individual income tax debt
totaling hundreds of thousands.
o One entity is under IRS
Department of investigation. In addition, owner is
suspected of
Veterans Affairs fraudulent banking activity.
o Since failing to pay taxes,
officer spent tens of thousand of
dollars on gambling; and
one of the three companies had
multiple withdrawals of cash from
bank
accounts-each totaling tens of
thousands of dollars.
o Company is one of almost 20
Waste collection Over $10,000 Nearly related entities, all of which
owed unpaid
services to the $13 million taxes-primarily payroll taxes.
o Taxes owed by related
Department of entities cover over 300 tax
periods.
Veterans Affairs o The owner also owns
a residential property located
near a golf course and
other commercial properties in
several states with assessed
value of over
$2 million.
(Continued From Previous Page)
Goods,
services, or
nature of work
and agencies
to Fiscal year Unpaid
Case which they 2004 FMS federal tax
study were provided paymentsa amountb Comments
Payroll and temporary employment services to the Department of Housing and
Urban Development Over Nearly o Business related to three other
entities.
$1 million $900,000 o Taxes owed by two related entities cover over 20
tax periods. o Some tax debts of remaining entities were not paid for so
long that IRS is now legally prohibited from seeking collection. o The
owner's history of delinquency stretches nearly 20 years and covered
multiple businesses. Specifically, the owner typically incurs payroll
taxes on one company, is assessed trust fund penalty on that company but
makes no or little payments, closes company, starts another company, and
repeats the same pattern.
o For example, the owner filed for bankruptcy protection in the late
1990s. In the early 2000s, after the court denied the owner's request for
bankruptcy protection, the owner closed the company and immediately
established a new business with a similar name at the same address that
provides the same services.
o The owner rents office space in an expensive area of a major
metropolitan city and purchased a luxury automobile at the same time the
company had filed for bankruptcy protection and was not remitting all of
the payroll taxes.
o The company's delinquent
Health care Nearly Over taxes-primarily payroll taxes-cover
20 tax
related services $300,000 $10 million periods from the late 1990s.
to Department of o IRS is investigating the company
for potential criminal activity.
o Since failing to pay payroll
Veterans Affairs taxes in late 1990s, an officer
assessed a trust
fund violation purchased several
vehicles totaling nearly $200,000.
o Since the late 1990s, the company
reported cumulative losses on its
tax
returns totaling about $5 million.
o Despite these continued losses
and accumulated tax debt, the
company is
involved in a multimillion-dollar
joint venture.
o The company had not filed all
Security guard Over Over required tax returns since the early
2000s, and
services to $200,000 $400,000 had been delinquent in payroll taxes
almost continuously since the late
Departments of 1990s.
Homeland o Delinquent tax debts cover over 25
tax periods and include the owner's
individual income taxes totaling tens
Security and of thousands of dollars. In addition,
the
Veterans Affairs owner repeatedly failed to file
personal income tax returns.
o The owner diverted unpaid payroll
taxes to a foreign bank account to
build a
house overseas.
(Continued From Previous Page)
Goods,
services, or
nature of work
and agencies
to Fiscal year Unpaid
Case which they 2004 FMS federal tax
study were provided paymentsa amountb Comments
Consulting Over Over
services to the $200,000 $1 million
Smithsonian
Institution
o The business's unpaid federal taxes are primarily payroll taxes
incurred in late 1990s and early 2000.
o Unpaid tax debt balance covers more than 20 tax periods and includes
hundreds of thousands of dollars in individual income tax debts owed by
two officers.
o During the same period that tax debt was incurred, the company declared
large losses but doubled the salary of one officer to over three-quarters
of a million dollars.
o Officers own several luxury vehicles and multimillion-dollar properties
in exclusive areas of a major metropolitan area.
o The company is making payments on current installment agreement.
o Tax debt balance includes over
Armed security About Nearly $200,000 in payroll taxes owed for
almost 10
guard services to $500,000 $400,000 tax periods.
several agencies o In the early 2000s, company did not
file income tax returns.
o In mid-2000s, an officer of the
including the company was convicted for stealing
hundreds
Department of of thousands of dollars from the
company.
Justice and the o The owner is under indictment for
embezzlement and money laundering.
Environmental
Protection
Agency
o This business did not make any
Building Over Nearly payroll tax deposits for several years
from
maintenance, $300,000 $400,000 the late 1990s through the early 2000s.
lawn and garden, o Tax debt balance covers more than 30
tax periods and includes nearly
and sanitary $100,000 in personal tax debt of the
officer.
services to o The company is a chronic nonpayer of
corporate tax debts and has not made
Department of any voluntary income tax payments since
the mid-1990s.
o The officer is also a chronic
Transportation nonfiler of his individual income
taxes. In one of
those years, the officer reported net
income of about $100,000 but paid no
taxes.
Source: GAO analysis of civilian agency, IRS, FMS, public, and other
records.
Notes: Dollar amounts are rounded for the tax debt, estimated maximum
levy, and government payments. The nature of unpaid taxes for businesses
was primarily due to unpaid payroll taxes.
aCivilian agency vendor payments provided by FMS from its PACER system.
bUnpaid tax amount as of September 30, 2004.
The following provides illustrative detailed information on several of
these cases.
o Case 1: This case includes many related companies that provide health
care services to the Department of Veterans Affairs, for which they
received over $300,000 in payments during fiscal year 2004. The related
companies have different names, operate in a number of different
locations, and use at least several other TINs. However, they share a
common owner and contact address. The businesses collectively owed more
than $18 million in tax debts-of which nearly $17 million is unpaid
federal payroll taxes dating back to the mid-1990s. IRS has assessed a
multimillion-dollar trust fund penalty for willful failure to remit
payroll taxes on each of two officers. During the early 2000s, at the time
when the owner's business and related companies were still incurring
payroll tax debts, the owner purchased a number of multimillion-dollar
properties, an unrelated business, and a number of luxury vehicles. Our
investigation also determined that real estate holdings registered to the
owner totaled more than $30 million.
o Case 2: This case comprises a number of related entities, all of which
provide waste collection and recycling services. These entities received
fiscal year 2004 payments from the Department of Justice totaling over
$700,000, about half of which is from purchase card payments, while owing
in aggregate over $2 million in tax debt. These taxes date to the late
1990s and consist primarily of payroll taxes. Despite the fact that the
company reportedly used legally available means to repeatedly block
federal efforts to file liens against the company, liens totaling more
than $1 million exist against the company. IRS has also assessed trust
fund penalties against the two officers. At the same time that the
entities were incurring the tax debt, cash withdrawals totaling millions
of dollars were made against the business's bank account. Further, since
the company started owing taxes, the owner had sold real estate valued at
over $1 million. The executives of these entities also drive late-model
luxury or antique automobiles. Recently, the company started to make
payments on its taxes.
o Case 3: This case includes several nursing care facilities, three of
which owed taxes-primarily payroll-totaling nearly $9 million. In
addition, an owner's individual income tax debt totaled more than
$400,000. One business provides nursing care services to the Department of
Veterans Affairs, for which it was paid over $200,000 during fiscal year
2004. An officer of the company has been assessed a multimillion-dollar
trust
fund penalty for willful failure to remit payroll taxes and was recently
arrested on fraud charges. Our investigative work indicates that an owner
of the company made multiple cash withdrawals, each valued at tens of
thousands of dollars, in the early 2000s while owing payroll taxes, and
that those cash withdrawals were used for gambling. We further determined
that cash transfers totaling over $7 million were made in a 7-month period
in the early 2000s.
o Case 7: This contractor provided guard and armed security services to
the Department of Homeland Security and the Department of Veterans
Affairs, for which it was paid over $200,000 during fiscal year 2004. This
business has a history of noncompliance with federal tax laws.
Specifically, the business was consistently delinquent in paying its taxes
since the late 1990s and has not filed all its income and payroll tax
returns for a number of years in the late 1990s. The owner of this
business also has not filed individual income tax returns for a number of
years since the late 1990s. In the last 1-year period that the business
made payroll tax deposits, the business reported that it owed nearly
$80,000 in payroll taxes but made payments totaling less than $4,000-
about one-twentieth of the taxes owed. At the same time that the owner
withheld but failed to remit payroll taxes, the owner diverted the money
into a foreign bank account to build a house overseas.
o Case 8: During fiscal year 2004, this company provided consulting
services to the Smithsonian Institution, for which it received over
$200,000. Starting in the late 1990s, the company did not remit to the
government all the money it withheld from its employees' salaries.
However, at about the time the company was failing to remit the taxes, it
nearly doubled one officer's salary to over $750,000. IRS assessed a trust
fund penalty on the officers of this company for willfully failing to
remit payroll taxes withheld from their employees' salaries. Those
officers own homes valued at millions of dollars in exclusive
neighborhoods in a large metropolitan area and several late-model luxury
vehicles.
Contractors Also Had Unpaid State or Local Tax Debt
In addition to problems with paying federal taxes, contractors in at least
9 of the 10 case studies had unpaid state and or local tax debt. We
determined that the amount and severity of the unpaid state and or local
taxes were significant enough for state and local tax authorities to file
liens against those contractors. As we will be reporting in a related
product, neither the states nor FMS has pursued potentially beneficial
agreements to authorize the levying of federal payments, including
contractor payments, to satisfy delinquent state tax debts.62
Levy Collection The 50 case studies we selected illustrate FMS's inability
to collect the maximum levy amount. Although we found that payments to a
number of contractors were not levied because IRS excluded their tax debts
from TOP for at least a part of fiscal year 2004 for statutory or policy
reasons, many others were not levied because of FMS's lack of effective
oversight or proactive management of the levy program. One case study
contractor in particular illustrated the problems associated with the levy
program that we discussed earlier in this report. This contractor received
$4 million during fiscal year 2004, but only about $600,000 of those
payments were levied. Of the remaining $3.4 million that was not levied,
about two-thirds was not levied because the tax debt was either not
referred to TOP or it was referred to TOP but it was still in the notice
process during the first 7 months of fiscal year 2004. The remaining
one-third was not levied because the name provided in the payment files
did not match the IRS control name in TOP or because payments were made
using one of its specialized mechanisms. We estimate that if all the tax
debt and all of the payments of the 50 case studies were subjected to a
levy of 15 percent, FMS could have collected about $3.8 million in unpaid
federal taxes in fiscal year 2004. In contrast, FMS actually collected
$240,000 from these case study contractors.
62 GAO, Debt Collection: State and Federal Governments Are Not Taking
Action to Collect Unpaid Tax Debt through Reciprocal Agreements,
GAO-05-697R (Washington, D.C.: to be issued).
Conclusions In the current environment of federal deficits and rising
obligations, the federal government cannot afford to leave hundreds of
millions of dollars in taxes uncollected each year. However, this is
precisely what has been occurring with respect to the FPLP, which our work
shows has largely failed to approach its potential. The levy program has
thus far been inhibited from achieving its potential primarily because
substantial tax debt is not subject to levy and because FMS, the nation's
debt collector, has exercised ineffective oversight and management of the
program.
Further, by failing to pay taxes on their income or diverting the payroll
taxes withheld from their employees' salaries to fund business operations
or their own personal lifestyles, contractors with unpaid tax debts
effectively decrease their operating costs. The lower operating costs
provide these individuals and their companies with an unfair competitive
advantage over the vast majority of companies that pay their fair share of
taxes. Federal contractors should be held to a higher degree of
responsibility to pay their fair share of taxes owed because they are
being paid by the government, and the failure to effectively enforce the
tax laws against them encourages noncompliance among other contractors as
well. The federal government will continue to lose hundreds of millions of
dollars in tax collections annually until actions are taken to send all
payments to the levy program, ensure that all payments have the
information necessary to allow them to be levied, and establish a
proactive approach toward managing the levy program.
Recommendations for To comply with DCIA, further implement the Taxpayer
Relief Act, and support the federal government's efforts to collect unpaid
federal taxes, we
Executive Action recommend that the Commissioner of the Financial
Management Service take the following 18 actions:
o To obtain reasonable assurance that payments from all paying locations
are subjected to potential levy in TOP,
o update the TOP database to include payments from all agency paying
locations in TOP for potential levy and
o develop and implement a monitoring process to ensure TOP's list of
agency paying locations is consistently updated.
o To obtain reasonable assurance that payment files contain a TIN for
each payment requiring a TIN,
o enforce requirements that federal agencies must include TINs on all
payment vouchers submitted to FMS for disbursement or expressly indicate
that the contractor meets one of the criteria that exempts the contractor
from providing a TIN and
o develop and implement procedures to review payments submitted by paying
agencies to verify that each payment has either a TIN or a certification
that the contractor is exempt from providing a TIN.
o To obtain reasonable assurance that all payment files submitted by
agencies contain a contractor's name, develop procedures to
o evaluate payment files to identify payments with blank or obviously
inaccurate name fields;
o notify agencies of deficiencies in payment files regarding blank or
obviously inaccurate name fields;
o collaborate with agencies submitting payment files with blank or
obviously inaccurate names in the name field, including the State
Department, to develop and implement procedures to capture the
contractors' names in the payment files; and
o reject agency requests for payments with blank or obviously inaccurate
names.
o To obtain reasonable assurance that payment files contain a payment
type and thus, if appropriate, are subject to a levy,
o instruct all agencies that they must indicate a payment type on all
payments and
o implement monitoring procedures to verify that all payments indicate
payment type.
o To obtain reasonable assurance that all categories of eligible payments
to contractors with unpaid federal taxes are subjected to the TOP levy
process,
o develop and implement procedures to submit type A payments to TOP for
potential levy,
o develop and implement procedures to submit ACH-CTX payments to TOP for
potential levy, and
o develop and implement procedures to submit Fedwire payments to TOP for
potential levy.
o To collect unpaid taxes of individuals, make changes to TOP to levy
contractor payments to collect the unpaid federal taxes owed by
individuals.
o To ensure that more payments are matched against tax debt in TOP, take
actions necessary to incorporate IRS's expanded list of control names into
TOP.
o To address challenges of collecting unpaid taxes of contractors paid
using purchase cards, in conjunction with IRS, monitor payments to
o assess the extent to which contractors paid with purchase cards owe
federal taxes and
o assess alternatives available to levy or otherwise collect unpaid taxes
from those contractors.
o To address challenges associated with implementing the authorized
increase of the levy to 100 percent, work with IRS to determine steps
necessary to implement the increased levy percentage.
Finally, we recommend that the Commissioner of Internal Revenue evaluate
the 50 referred cases detailed in this report and consider whether
additional collection action or criminal investigations are warranted.
Agency Comments and We received written comments on a draft of this
report from the Commissioner of Internal Revenue (see app. III) and the
Commissioner
Our Evaluation of the Financial Management Service (see app. IV).
Response from IRS and Our Evaluation
In responding to a draft of our report, IRS agreed that continued efforts
are needed to improve and enhance the use of the levy program as a tool to
deal with contractors that abuse the tax system. IRS noted that it had
taken or was taking a number of actions toward this goal. For example, IRS
stated that it had begun, with DOD's assistance, to issue collection due
process notices to DOD contractors at the time of contract award rather
than after a contract payment is made, thereby allowing IRS to levy more
DOD contractor payments without delay. IRS stated that it planned to
expand this process to contractors at other agencies later in 2005. IRS
also stated that it is working to change its notice process so that more
debts can be ready for levy at the time of inclusion in TOP. IRS
reiterated the progress it has made to remove systematic exclusions,
resulting in an additional $28 billion in tax debts being included in the
FPLP, which we noted in our report. These actions have resulted in the
federal government collecting, in the first 7 months of fiscal year 2005,
$12.2 million in unpaid tax debts from civilian contractors-a nearly
threefold increase from the same period in fiscal year 2004. IRS further
stated that it would continuously evaluate its policies so that it does
not unnecessarily exclude tax debts from the levy program.
IRS concurred with our finding that the matching of the TIN and name of
contractor payments against records of unpaid federal taxes could be
improved, and stated that it will begin sending a greater number of
control names-up to 10 variations of the contractor's name as recorded in
IRS's files-to FMS to match against FMS's payment data. IRS also stated
that it was working to develop a consent-based TIN verification system for
contractors doing business with the federal government and that it
anticipated implementation of this system later this year. We believe that
the completion of these actions can significantly improve collections of
outstanding federal tax debt through the levy program.
With respect to the report's recommendations, IRS agreed to work with FMS
and other agencies through the Federal Contractor Tax Compliance Task
Force (FCTC) to conduct further analysis of the significant challenge
presented by contractors paid with purchase cards. IRS also stated that as
of April 2005, the 100 percent levy provision had been implemented with
respect to DOD contractors paid through DOD's largest payment system, and
that IRS was working with Treasury on a technical correction to allow the
100 percent levy on all federal contractors. Finally, IRS agreed with our
recommendation to review the 50 contractors discussed in our report to
determine what additional actions are warranted.
Response from FMS and Our Evaluation
In its response to a draft of our report, FMS generally agreed with many
of our findings and recommendations. However, FMS stated that we
mischaracterized its role in the levy process, and that primary
responsibility rests with IRS. FMS also did not concur with our
conclusions that its oversight and management of the program were
ineffective. Additionally, FMS disagreed that it had not fully implemented
the legislatively authorized increase in the maximum amount of contractor
payments subject to levy. FMS also stated that it disagreed with our
recommendation that it withhold payments that do not include a valid name
and stated that it was not in a position to implement our recommendations
with respect to working with IRS regarding issues associated with
collecting outstanding federal tax debt from purchase card payments.
Finally, FMS stated that the numbers and potential levy collection amounts
presented in the report were confusing and could be misleading.
We do not believe we mischaracterized FMS's role in the levy process. On
its Web site, FMS states that it "serves as the government's central debt
collection agency, managing the government's delinquent debt portfolio."
In our opinion, the agency that is responsible for managing the
government's delinquent debt portfolio needs to do so in a proactive
manner, which we did not always find to be the case. While we agree that
IRS has a key role in the levy process, many of the issues in our report
touch at the heart of FMS's debt collection responsibilities and most of
the weaknesses and challenges discussed in this report can only be
addressed by FMS. For example, it was FMS that did not send billions of
dollars of payments to the levy program because it had no monitoring
mechanism in place to determine that over 100 agency paying locations
created since the late 1990s were not included in the levy program.
Further, it was FMS that did not identify and inform agencies to correct
payment information for tens of billion of dollars in payments that did
not have the basic information necessary for the payments to be matched
against outstanding federal tax debt for potential levy. These findings
form the basis of our conclusion that FMS has not exercised effective
oversight and management of the levy program.
Despite the issues raised in our report, which FMS did not dispute, it
disagreed that its management of the program was ineffective. FMS pointed
to increased collections from the levy program in fiscal years 2003, 2004,
and 2005, to date, as evidence of excellent leadership and program
management. However, the recent increase in collections in the levy
program is primarily the result of actions stemming from the formation of
the FCTC, which was created in response to issues we raised in our
February 2004 report on DOD contractors that abused the tax system.
Further, the actions that have led to the increased collections were taken
by DOD and IRS. Finally, while collections have increased in the last 3
years, the annual totals to date have not been significant given the
potential of the program and, in the context of the program's 8-year life,
the annual increases have come about only very recently.
In its response, FMS stated that it is not normally in a position to
mandate changes to agencies. We disagree. FMS is in a unique position to
identify and help correct many of the issues we identified in the program,
some of which are relatively simple and could be quickly addressed. For
example, it took the Department of State (State) about a month to correct
the problem we identified with respect to missing names in the payment
file it had been submitting to FMS for payment once we brought the matter
to the department's attention. A programming error appears to have
resulted in the names not being in the disbursement files sent to FMS.
According to a State official, the department has likely had names of its
payment files since the 1980s, and it did not know that the names were not
getting to FMS. Because of State's responsiveness to our finding, FMS is
now levying payments from State's contractors with unpaid taxes. Had FMS
provided effective oversight and management of the debt collection
program, it could have detected the problem years ago and worked with the
State Department to correct it long before our audit. While we agree that
agencies should be responsible for the completeness and accuracy of the
payment files they send to FMS, we believe FMS should take a more
proactive role in identifying issues that impede the program's ability to
maximize collections and work with agencies to resolve such issues.
In responding to our report, FMS disagreed with our conclusion that it had
not implemented the provision of the American Jobs Creation Act of 2004
authorizing an increase in the maximum amount of contractor payments
subject to levy of up to 100 percent. FMS noted that it had made the
changes necessary in the levy program to allow for levying at 100 percent,
but that it was unable to implement the provision because civilian
agencies' payment records do not separately identify real estate
transactions-which
are not subject to the 100 percent levy-from other contractor payments.
Our report clearly indicates that the 100 percent levy provision had not
yet been fully implemented because of a number of challenges, including
the determination by IRS that real estate transactions are not subject to
the 100 percent levy provision, and that agency pay systems are presently
unable to identify real estate transactions from other contractor
payments. We also acknowledged in our report that a legislative change is
being sought to subject real estate payments to the 100 percent levy
provision. Our report describes this issue not as a weakness in the
program but, rather, as another challenge that FMS faces in maximizing
collections under the levy program. Our report also acknowledges that
certain DOD payments are already being levied at the 100 percent maximum.
FMS also did not concur with our recommendation to withhold payments that
do not include a valid name in the payment record. However, FMS said it
would improve monitoring and ensure agencies' compliance with the
requirement to include names, TINs, and payment types on certified
vouchers. This is in line with our recommendation, and we commend FMS for
its willingness to increase efforts to enforce the requirements. As the
State Department's prompt response to our findings indicates, when
weaknesses are identified, such as records without payee names, agencies
can take corrective actions, thereby making it unnecessary to withhold
payments. However, FMS has had many years to require agencies to improve
the data in their payment records but has, until now, not done so. As we
point out in the report, in 1997 FMS proposed a rule that would require
disbursing officials to reject agency payment requests that do not contain
TINs (that is, withhold the payment), yet later rescinded the proposed
rule and instead required agencies to submit to FMS implementation plans
to achieve compliance with the TIN requirement. Although FMS requested the
implementation plans in 1997, it has not been successful in gaining agency
compliance. We believe that if FMS had been more proactive, the
intervening years since 1997 would have provided FMS and the agencies
ample opportunities to take corrective action. As such, we continue to
believe FMS needs to take stronger leadership in enforcing the
requirements with respect to the completeness and accuracy of information
in agency-submitted payment files.
In its response, FMS accurately summarizes some of the challenges that we
described in the draft report regarding levying government purchase card
payments. These challenges are precisely why we recommended that FMS work
with IRS and arrive at a solution to subjecting to potential levy or other
form of collection the roughly $10 billion in annual purchase card
payments made to civilian agency contractors. However, FMS suggested that
we instead redirect the recommendation to have GSA work with IRS. In
addition, FMS pointed out that the FCTC could also provide valuable
assistance in determining the most efficient and effective means of
addressing contractors that have unpaid taxes and are being paid via
government purchase cards. While we agree that GSA could assist FMS and
IRS with this challenge, at the same time, we believe that as the
government's central debt collector, FMS should assume a leadership role
in emerging issues such as the rise in purchase card payments, as it has
significant implications with respect to its debt collection
responsibilities. In our opinion, FMS is the only federal entity with the
ability to identify which contractors that are receiving federal payments
have leviable tax debt. This is a role FMS plays when it compares the TIN
and the name on FMS payments to the list of contractors with unpaid taxes
to determine whether the payment should be levied. If FMS worked with the
five banks that currently issue government purchase cards to routinely
obtain electronic files listing the contractors being paid with purchase
cards, FMS could determine which government contractors that are paid with
a government purchase card have unpaid taxes. Consequently, we continue to
believe that FMS, in conjunction with IRS, would be in the best position
to monitor purchase card payments and assess the extent to which
contractors paid with purchase cards have unpaid federal taxes, and then
to identify solutions to the challenges presented by purchase card
payments.
Finally, in its response, FMS stated that the numbers and potential levy
collection amounts presented in the report are confusing and potentially
misleading. Specifically, FMS stated that our reporting of the levy
collection gap of $350 million was misleading as it suggested that FMS
would be able to collect that amount through the levy program. In our
report, we have taken care to clearly note that the levy collection gap is
an indicator of the amount of tax debt civilian contractors owe that could
be levied from the payments they get from the federal government if all
payments for which we have information could be levied against all
outstanding federal tax debt. We further note throughout the report that
because some tax debts are excluded due to specific statutory
requirements, IRS and FMS are presently restricted by law from collecting
a significant portion of this estimated amount. We do, however, clearly
identify that a portion of the levy collection gap-at least $50
million-that is directly attributable to weaknesses in internal controls
and lack of proactive management at FMS. This amount is understated due to
the unavailability of Fedwire information at FMS and because we were
unable
to estimate collections against many payments that did not contain valid
TINs and payment types. FMS's response does not recognize that although
IRS has a key responsibility to refer tax debts, FMS has an equally key
responsibility-to make all payments available for levy.
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 the Treasury, the
Commissioner of the Financial Management Service, the Commissioner of
Internal Revenue, and interested congressional committees and members.
We will also 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] or
Steven J. Sebastian at (202) 512-3406 or [email protected] if you or your
staff have any questions concerning this report. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix V.
Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations
Steven J. Sebastian
Director
Financial Management and Assurance
List of Requesters
The Honorable Susan M. Collins
Chairman
The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Homeland Security
and Governmental Affairs
United States Senate
The Honorable Norm Coleman
Chairman
The Honorable Carl Levin
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Homeland Security
and Governmental Affairs
United States Senate
The Honorable Daniel K. Akaka
Ranking Minority Member
Subcommittee on Oversight of Government Management,
the Federal Workforce, and the District of Columbia
Committee on Homeland Security
and Governmental Affairs
United States Senate
Appendix I
Scope and Methodology
To identify the magnitude of unpaid taxes owed by contractors receiving
payments from federal agencies disbursed by the Financial Management
Service (FMS), we obtained information from both the Internal Revenue
Service (IRS) and FMS. To identify taxes owed, we obtained IRS's unpaid
assessment database as of September 30, 2004. To identify disbursements
FMS made to contractors, we obtained from FMS extracts of the Payments,
Claims, and Enhanced Reconciliation (PACER) database containing data on
payments FMS made to contractors via Automated Clearing House (ACH) and by
check during fiscal year 2004. PACER contains information such as payee
and payment amount for disbursements FMS makes on behalf of federal
agencies.1 To determine the amount of levies that have been collected and
the amount of tax debt that has been referred to the Treasury Offset
Program (TOP), we obtained from FMS the TOP database as of September 30,
2004. As discussed later in this appendix, we first performed work to
assess the reliability of the data provided.
To determine the value of unpaid taxes owed by contractors, we matched
PACER disbursements coded as "vendor" to the IRS unpaid assessment
database using the tax identification number (TIN) field in both
databases. This match resulted in the identification of about 63,000
contractors with more than $5.4 billion in unpaid federal taxes. To avoid
overestimating the amount owed by contractors with unpaid tax debts and to
capture only significant tax debts, we excluded from our analysis tax
debts and payments meeting specific criteria to establish a minimum
threshold in the amount of tax debt and in the amount of payments to be
considered when determining whether a tax debt is significant. The
criteria we used to exclude tax debts and payments are as follows:
o tax debts that IRS classified as compliance assessments or memo
accounts for financial reporting,
o tax debts from calendar year 2004 tax periods,
o contractors with total unpaid taxes of $100 or less, and
o contractors with cumulative fiscal year 2004 payments of $100 or less.
1 PACER data indicated FMS also disbursed about $6 billion on behalf of
Department of Defense, primarily to health insurance providers.
Appendix I Scope and Methodology
The criteria above were used to exclude tax debts that might be under
dispute or generally duplicative or invalid, tax debts that are recently
incurred, and tax debts and payments that are insignificant for the
Federal Payment Levy Program (FPLP). Specifically, compliance assessments
or memo accounts were excluded because these taxes have neither been
agreed to by the taxpayers nor affirmed by the court, or these taxes could
be invalid or duplicative of other taxes already reported. We excluded
calendar year 2004 tax debts to eliminate tax debt that may involve
matters that are routinely resolved between the taxpayer and IRS, with the
taxes paid or abated2 within a short period. We further excluded tax debts
and cumulative fiscal year 2004 payments of $100 or less because they are
insignificant for the purpose of calculating potential levy collection.
Using the above criteria, we identified about 33,000 contractors with over
$3.3 billion in unpaid taxes as of September 30, 2004.
To determine the potential fiscal year 2004 levy collections, we used 15
percent of the payment or total tax debt amount, whichever is less. Our
analysis was performed as if (1) all unpaid federal taxes were referred to
FMS for inclusion in the TOP database and (2) all fiscal year 2004
disbursements for which FMS maintained detailed information3 were included
in TOP for potential levy. Because some tax debts are excluded from the
FPLP due to statutory exclusions, a gap will continue to exist between
what could be collected and the maximum levy amount calculated. However,
as discussed in the body of the report, the potential levy collection
amount of $350 million may be understated because we excluded, by design,
specific tax debts and payment amounts from the calculation of levy, and
missing data in FMS's disbursement information prevented us from providing
the full magnitude of tax debts and potential levy collection. The
American Jobs Creation Act of 2004 provided for a 100 percent levy on
vendor payments for goods or services sold or leased to the federal
government, effective October 2004. If unpaid tax debts and payments to
contractors in future years remain consistent with fiscal year 2004
patterns, we determined a potential future levy amount based on a levy
ratio of 100 percent of payments or total tax debt amount, whichever is
less.
2 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).
3 As discussed earlier in the report, FMS does not maintain historical
data on Fedwire payments.
Appendix I Scope and Methodology
To determine the effect of IRS and FMS policies and procedures on the
amounts actually collected through the FPLP, we conducted work at both
agencies related to their respective roles in the implementation of the
FPLP. At IRS, we interviewed agency officials and obtained documentation
that detailed the statutory requirements and policy and administrative
decisions that exclude certain tax debts from the FPLP. We did not
evaluate the accuracy and reasonableness of these exclusions, which will
be examined in detail in a later report. At FMS, we reviewed documentation
and interviewed agency officials to obtain an understanding of FMS's FPLP
policies, implementing guidance, operating procedures, and internal
controls related to the TOP and disbursement operations. We also visited
the San Francisco Regional Finance Center where we observed work flow
processes. We obtained a copy of the TOP database as of September 30,
2004. The TOP database contains all debt, including tax debt, referred to
it by federal agencies, including IRS. FMS uses the TOP database for
levying contractor payments. As discussed later, we performed work to
assess the reliability of data in TOP.
To identify payments to contractors disbursed through the government
purchase card, we obtained from the Bank of America the database of
purchase card payments made by the National Aeronautics and Space
Administration (NASA). We reconciled control totals for this data with
Bank of America and the General Services Administration. We restricted
purchase card data to one agency to demonstrate the magnitude and effect
of issues surrounding levying purchase card payments.
To identify indications of abuse or potential criminal activity, we
selected 50 civilian contractors for a detailed audit and investigation.
The 50 contractors were chosen using a nonprobability selection approach
based on our judgment, data mining, and a number of other criteria.
Specifically, we narrowed the 33,000 contractors with unpaid taxes based
on the amount of unpaid taxes, number of unpaid tax periods, amount of FMS
payments, indications that owner(s) might be involved in multiple
companies with tax debts, and representation of these contractors across
government. We specifically included contractors from NASA4 and the
4 NASA cases include NASA credit card payments.
Appendix I Scope and Methodology
Departments of Homeland Security (Transportation Security Administration),
Justice, State,5 and Veterans Affairs. These agencies were selected based
on a number of criteria: national security concerns; amount of payments to
contractors, especially those with tax debts; amount of payments made
without TINs, names, or both; amount of levy collected; and amount of
payments made with blank pay types. The reliability of TINs and contractor
names, and whether the agencies' payment systems are sufficiently
integrated to maximize levy collection, will also be covered in later
work.
We obtained copies of automated tax transcripts and other tax records
(e.g., revenue officer's notes) from IRS as of December 2004 and reviewed
these records to exclude contractors that had recently paid off their
unpaid tax balances and considered other factors before reducing the
number of businesses to 50 case studies. We performed additional searches
of criminal, financial, and public records. In cases where record searches
and IRS tax transcripts indicate that the owners or officers of a business
are involved in other related entities6 that have unpaid federal taxes, we
performed detailed audit and investigation on the related entities and the
owner(s) or officer(s), and not just the original business we identified.
In instances where related entities exist, we defined a case study to
include all the related entities, and reported on the combined unpaid
taxes and combined fiscal year 2004 payments for the original business and
all the related entities. We identified civilian agency contract awards
using the Federal Procurement Data System. Our investigators contacted
some contractors and performed interviews.
In addition, while assessing the reliability of the data provided by FMS,
we identified nearly $17 billion in payments that contain either no TIN or
an obviously inaccurate TIN.7 To determine whether contractors with no
TINs
5 Our ability to identify Department of State (State) contractors was
significantly limited by the fact that the PACER database did not identify
the name of any State contractors. Consequently, we identified only one
State contractor for a case study selection. We were able to identify that
contractor because the contractor was paid by FMS on behalf of (i.e.,
conducted work for) another agency.
6 We define related entities as entities that share common owner(s) or
officer(s), a common TIN, or a common address.
7 We termed obviously inaccurate TINs as those that fail to meet at least
some of the TIN validation rules. For example, the TIN contained all the
same digits (e.g., 999999999) or an unusual series of digits (e.g.,
123456789).
Appendix I Scope and Methodology
or obviously inaccurate TINs had tax debts, we used investigative
techniques to identify some of those contractors' TINs and, through
comparison with the IRS records of unpaid taxes, we determined whether
those contractors owed tax debts.
On May 9, 2005, we requested comments on a draft of comments on a draft of
this report from the Commissioner for Internal Revenue or his designee and
from the Commissioner of the Financial Management Service or his designee.
We received written comments from Commissioner of Internal Revenue dated
May 27, 2005, and from the Commissioner of the Financial Management
Service dated May 25, 2005, and reprinted those comments in appendixes III
and IV of this report. We conducted our audit work from May 2004 through
May 2005 in accordance with generally accepted government auditing
standards, and we performed our investigative work in accordance with
standards prescribed by the President's Council on Integrity and
Efficiency.
Data Reliability Assessment For the IRS database we used, we relied on the
work we perform during our annual audits of IRS's financial statements.
While our financial statement audits have identified some data reliability
problems associated with the coding of some of the fields in IRS's tax
records, including errors and delays in recording taxpayer information and
payments, we determined that the data were sufficiently reliable to
address the report's objectives. Our financial audit procedures, including
the reconciliation of the value of unpaid taxes recorded in IRS's
masterfile to IRS's general ledger, identified no material differences.
For PACER and TOP, we interviewed FMS officials responsible for the
databases and reviewed documentation provided by FMS supporting quality
reviews performed by FMS on its databases. In addition, we performed
electronic testing of specific data elements in the databases that we used
to perform our work. Based on our review of FMS's documents and our own
testing, we concluded that the data elements used for this report are
sufficiently reliable for the purpose of this report. In instances where
we found problems with the data, such as data with missing TINs and names,
we include those in this report. We also compared the PACER data to the
President's budget and the TOP data to the IRS unpaid assessment file.
Appendix II
Contractors with Unpaid Federal Taxes
Table 3 provides data on 10 detailed case studies. Table 4 provides
details of the remaining 40 businesses we selected as case studies. As
with the 10 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 40 case studies. The case studies
primarily involve businesses with unpaid payroll taxes, some for as many
as 35 tax periods. IRS has imposed trust fund penalties for willful
failure to remit payroll taxes on the officers of 17 of the 40 case
studies. In addition to owing federal taxes, 28 of these 40 case study
contractors owed sufficient state tax debts to warrant state tax
authorities to file liens against them. As we have done in the body of the
report, in instances where the business we selected also had related
entities, we considered the business and all related entities as one case
study and reported the civilian agency payments and unpaid federal tax
amount for all related entities in the table.
Table 4: Civilian Agency Contractors with Unpaid Federal Taxes
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Professional Multiple Over $1.5 Over $1 o Filed multiple tax
million million returns late. For
and clerical departments, several years in the early
2000s, the
services including the company remitted no payroll
taxes to IRS.
Department of o Firm's primary client is
the federal
Homeland government.
Security (DHS) o Has existing contracts
in FY 2005 with the
federal government.
o Diverted payroll taxes
to fund business due
to cash flow problems.
Consulting Multiple agencies Over Over o Repeatedly under paid
$200,000 $300,000 its payroll taxes
service including the since the late 1990s and
owes payroll tax
Department of debt for more than 15
tax periods.
the Interior o Officer has mortgages
of over $1 million.
o Has existing
(Interior) and the contracts in FY 2005
with the
Small Business federal government.
Administration
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Temporary help DHS Nearly $50,000 Over $600,000 o Several other related
entities-one of which is bankrupt-also have tax debt.
o Not in the FPLP because of IRS exclusion policy.
o Invalid name in payment files, thus levy cannot be taken even if debt
is unblocked.
o The owner attempted to negotiate repayment of IRS taxes so owner could
start a new multimillion-dollar business.
o FY 2004 maximum levy collections estimated at $7,000.
Nursing care Department of
facilities Veterans Affairs (VA)
Nearly $200,000 Over $4 million o Not in the levy program because of IRS
exclusion policy.
o Joint target of a federal and state criminal investigation for
fraudulent financial activities.
o Defaulted on several federal government loans.
o Millions in trust fund penalties assessed on officer.
o One of the related entities closed by state due to health code
violations in 2004.
o FY 2004 maximum levy collections estimated at over $25,000.
Building Multiple Over $4 Over o Levy not collected on
million $700,000 other payments
maintenance departments because name different
from IRS control
services including name and payments made
using
Departments of specialized payment
mechanism not
Agriculture, submitted to TOP.
Homeland o Payroll tax returns
frequently filed late.
Security, the o FY 2004 maximum levy
collections
Interior, the estimated at $630,000,
compared to nearly
Treasury, and $100,000 actually
collected.
Veterans Affairs
Moving and DHS and the Over $200,000 Nearly o Not in levy program
$700,000 due to pending appeal
storage Department of against a tax assessment.
State o The owner has a
vacation home as well as
a primary residence.
o FY 2004 maximum levy
collections
estimated at over
$33,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Business Multiple Nearly Nearly $1.5 o Business generally
$130,000 million did not pay payroll
training and departments taxes.
including DHS o In the early 2000s,
support business failed to remit
services and the most of taxes owed to
IRS.
o Levy of $1,500
collected but payments
Departments of over
Justice and the $100,000 not levied
during FY 2004
Interior because the name in the
payment
database did not match
with IRS name.
o FY 2004 maximum levy
collections
estimated at nearly
$20,000.
Tour services DHS Over $20,000 Nearly $800,000 o Business frequently did
not pay payroll taxes.
o In the FPLP but no levies collected during FY 2004 because FMS does not
include the payment category used by the agency in the TOP system.
o FY 2004 maximum levy collections estimated at $3,000.
o Officers assessed
Telecom- DHS Over $400,000 Nearly $300,000 penalties for willful
failure
munications to remit payroll taxes.
o Over $1,000 collected
from levies in FY
2004, but many payments not
levied
because they had no name or
were made
via a payment category FMS
does not
include in TOP.
o FY 2004 maximum levy
collections
estimated at $60,000.
Nonprofit Department of Over Nearly o Delinquency dates to late
social $70,000 $900,000 1990s.
service Justice o Owes taxes for more than 20
(Justice) tax periods.
o Officers have been assessed
more than
$200,000 for willful failure
to remit payroll
taxes related to 10 tax
periods.
o Not in the levy program
because of IRS
exclusion policy and because
FMS had not
included the agency paying
location in TOP.
o FY 2004 maximum levy
collections
estimated at $11,000.
21 Ministry Justice Nearly Over $400,000 o Owes on more than 10 tax
periods.
$1.3 million o Typically made partial
or no payments on
payroll taxes. For example,
in 2001,
withheld about $180,000
from employees
but remitted nothing.
o Over $50,000 collected
from levies in FY
2004. However, some periods
not in TOP
due to a pending tax claim.
o FY 2004 maximum levy
collections
estimated at nearly
$195,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Freight Multiple departments including Interior, Justice, and Treasury
Over $300,000 Over $300,000 o Did not file several years of early 2000s
tax returns until April 2004.
o Did not remit any payroll taxes withheld from employees since early
2000s.
o Owes tax debt on more than 20 tax periods.
o The owner had drug-related criminal activity.
o Levy started in September 2004, but prior to that no levies collected
in FY 2004 because of IRS exclusion policy.
o FY 2004 maximum levy collections estimated at $46,000.
Court reporter Justice Over $25,000 Over $400,000 o Consistently owed
unpaid payroll taxes from late 1990s through 2002.
o Consistently reported losses or no income.
o Two owners assessed hundreds of thousands in penalties for willful
failure to remit payroll taxes.
o New installment agreement in 2004, for which $2,000 had been received.
o No levies collected in FY 2004.
o FY 2004 maximum levy collections estimated at nearly $4,000.
Aircraft and NASA Over $100,000 Nearly $200,000 o Owes more than 10 tax
periods.
o Did not pay any IRS
space parts payroll taxes withheld
from employees for five
periods.
o Companies did not file
income taxes for
several years in the early
2000s.
o Over $7,000 collected
from levies in FY
2004. Levy less than
estimated because
some tax debt excluded due
to IRS
exclusion policy.
o FY 2004 maximum levy
collections
estimated at nearly
$17,000.
Electro-optic DHS and Nearly Over $1 o Withheld more than $500,000
NASA $700,000 million from
equipment employees one year in early 2000s
but
remitted less than $50,000 to
IRS.
o Received nearly $900,000 in
grants.
o Payments not levied due to
pending
installment agreement.
o FY 2004 maximum levy
collections
estimated at nearly $105,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Acquisition and Multiple Over $3 Nearly o Not in the levy
million $400,000 program because of IRS
financial departments, exclusion policy.
o Has an existing
including Health contract in FY 2005
support with
and Human the federal
government.
Services (HHS), o FY 2004 maximum
levy collections
Transportation estimated at nearly
$380,000.
(Transportation),
as well as NASA
Computer Multiple Over $300,000 Over $50,000 o Payments were not
agencies levied because of an
software including HHS, IRS statutory
exclusion.
Justice, o FY 2004 maximum
Treasury, levy collections
and NASA estimated at $46,000.
Logistics and Agriculture and Over Over $2 o Payroll taxes owed
$650,000 million since early 2000s.
o Multiple cash
engineering NASA withdrawals totaling tens
of
services thousands of dollars
each.
o Penalties were
assessed on an officer of
the company for failure
to remit payroll
taxes.
o FY 2004 maximum levy
collections
estimated at $98,000.
Casino NASA, Interior, Over $35,000 Over $1.5 o Large penalty for
million intentional disregard for
and Agriculture requirement to file accurate
information
returns.
o Annual net income $6
million to over
$30 million over the past 10
years.
o One payment not levied
because tax debt
not turned on for immediate
levy in TOP.
o FY 2004 maximum levy
collections
estimated at $5,000.
Manufacturing NASA (including More than
credit cards) $600,000,
$30,000 of which
is credit card
payments
Nearly $200,000 o Subsidiary of international defense-related group.
o Taxes owed mostly interest and penalties.
o Company noted as having problems with filing tax returns.
o Levies totaling nearly $6,600 collected, but maximum levy was not
collected because majority of tax debts were not in TOP.
o FY 2004 maximum levy collections estimated at nearly $100,000 not
including amounts paid to contractor via government purchase card.
31 Medical doctor VA Over $180,000 Nearly $700,000 o Tax debt dates back
to early 1990s.
o Contractor payments not levied to pay tax debt of individuals.
o FY 2004 maximum levy collections estimated at $27,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Engineering Treasury Over $500,000 Nearly $2 million o Owner did not
file personal income tax return for 2 years in early 2000s.
o Payments were not levied because of an IRS statutory exclusion.
o FY 2004 maximum levy collections estimated at $75,000.
Plumbing, Multiple Over Over o Substantial payments
$130,000 $300,000 made to IRS in early
heating, and air departments FY 2005 to settle tax
debt.
conditioning including o No levies collected
Labor, in FY 2004 because of
Treasury, and IRS exclusion policy.
VA
o FY 2004 maximum levy
collections
estimated at nearly
$20,000.
o Almost all of
Janitorial Agriculture and Over $700,000 Over $300,000 the taxes owed are
unpaid
payroll taxes that
VA company withheld
from
employees but
failed to remit.
o No levies
collected in FY
2004 because of
an installment
agreement, which is
an IRS
statutory
exclusion.
o FY 2004 maximum
levy collections
estimated at
$107,000.
Building HHS and Over $1.5 Over $200,000 o Payroll taxes owed since
VA million the late 1990s.
construction o No levies collected in FY
2004 because of a
tax claim.
o FY 2004 maximum levy
collections would
have completely paid off the
tax debt.
Health care services
VA Over $40,000 Nearly $300,000 o Bankruptcy filed in late 1990s
dismissed prior to 2004.
o Offer-in-compromise not rejected for 2 years, which resulted in
payments being excluded from levy program for almost two years.
o Installment agreement requested immediately after offer-in-compromise
rejected. No levies collected in FY 2004 because of an installment
agreement.
o FY 2004 maximum levy collections estimated at $6,500.
37 Public relations HHS Nearly $280,000 Over $300,000 o Multiple federal
and state tax liens and judgments.
o Unpaid payroll taxes since early 2000s.
o Officer assessed penalty for willful failure to pay payroll taxes;
penalty paid in full the year it was assessed.
o No levies collected in FY 2004.
o FY 2004 maximum levy collections estimated at nearly $42,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Telecommu- Commerce, Over $1 Over $300,000 o Company owed payroll
million taxes back to the
nications Treasury, and late 1990s.
HHS o Over $10,000 collected
from levies in FY
2004.
o FY 2004 maximum levy
collections
estimated at $211,000.
Building maintenance
HHS and State Over $1.1 million Nearly $1 million o Company owed payroll
taxes back to the late 1990s.
o Defaulted on installment agreement in early 2000s.
o Company filed an offer-in-compromise with IRS, which IRS rejected.
o Officers were assessed trust fund penalties for willfully failing to
pay payroll taxes withheld from employees.
o About $50,000 collected from levies in FY 2004.
o FY 2004 maximum levy collections estimated at $176,000.
Medical, Executive Office Over Nearly $2 o In the early 2000s,
$900,000 million company collected more
dental, and of the President than $600,000 in payroll
taxes from
hospital and Agriculture employees that were not
remitted to IRS.
equipment o Company filed for
bankruptcy in the late
1990s.
o About $6,000 collected
from levies in FY
2004.
o FY 2004 maximum levy
collections
estimated at $139,000.
Health care VA Over $60,000 Over $500,000 o Payroll taxes owed for almost
every period
services since 2000.
o In the early 2000s, defaulted
on an
installment agreement after 10
months.
o An officer assessed trust
fund penalties for
willfully failing to remit
payroll taxes
withheld from employees.
o No payments levied during FY
2004.
o FY 2004 maximum levy
collections
estimated at $10,000.
42 Automotive Agriculture Over $60,000 Over $1 o Contractor in levy
million program during many
manufacturer months in 2004, but no
levy was taken
because the name did not
match with IRS
name for levy.
o FY 2004 maximum levy
collections
estimated at $10,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
o Business in
Support and Treasury Over $90,000 Nearly $400,000 bankruptcy since late
1990s
managerial that was discharged in
2004.
services o No payments levied in
FY 2004.
o FY 2004 maximum levy
collections
estimated at $14,000.
Health care VA Over $200,000 Nearly $2 million o Payroll taxes owed for
taxes in late 1990s
services and early 2000s.
o Payments were not levied
because the
business was in notice
status, which is an
IRS statutory exclusion.
o FY 2004 maximum levy
collections
estimated at $31,000.
Ambulance VA and Over $20,000 Over 600,000 o Since the late 1990s,
the company had
services Agriculture annual revenue exceeding
$10 million but
repeatedly reported tax
losses.
o Company under
bankruptcy protection
since early 2000s.
o No payments levied in
FY 2004 due to IRS
exclusion policy.
o FY 2004 maximum levy
collections
estimated at $3,000.
Taxi services VA Over $40,000 Over $600,000 o Company in litigation
status since the mid1990s, which prevented any payments from being levied.
o An officer assessed trust fund penalties for willfully failing to pay
payroll taxes withheld from employees.
o Officer placed on an installment agreement in 2004.
o FY 2004 maximum levy collections estimated at $6,000.
Home health VA Over $200,000 Nearly $3 o No payments levied in FY 2004
million due to an
care services installment agreement for which
contractor
is making payments.
o IRS had to construct payroll
tax returns for
five periods (over 1 year)
because the
company did not file quarterly
payroll tax
returns.
o FY 2004 maximum levy
collections
estimated at $31,000.
Appendix II Contractors with Unpaid Federal Taxes
(Continued From Previous Page)
Fiscal year
Goods, Agencies 2004 civilian
Case services, or making agency Unpaid federal tax
study nature of work payments payments amount at 9/30/04 Comments
Residential Justice Nearly $770,000 Nearly $9 o Multiple withdrawals of
million cash from late
care 1990s to 2001 totaling
several million
dollars.
o An officer assessed trust
fund penalties for
willfully failing to remit
payroll taxes.
o The agency location code
was not in TOP
so no levies would have been
possible.
o FY 2004 maximum levy
collections
estimated at $115,000.
o Company under
Building Social Security Over $330,000 Over bankruptcy protection
in
maintenance Administration $400,000 2004.
o Officers assessed
trust fund penalties
for
willfully failing to
remit payroll taxes.
o No payments levied
in FY 2004.
o FY 2004 collections
under effective levy
estimated at nearly
$50,000.
Special trade Justice and Over $400,000 Over $100,000 o Tax debt dated to
the late 1990s.
o Penalty assessed
contractor Treasury on officers being
paid.
o Business current
on installment
agreement.
o FY 2004 maximum
levy collections
estimated at $65,000
Source: GAO analysis of civilian agency, IRS, FMS, public, and other records.
Appendix III
Comments from the Internal Revenue Service
Appendix III Comments from the Internal Revenue Service
Appendix III Comments from the Internal Revenue Service
Appendix IV
Comments from the Financial Management Service
Appendix IV
Comments from the Financial Management
Service
Appendix IV
Comments from the Financial Management
Service
Appendix IV
Comments from the Financial Management
Service
Appendix V
Staff Acknowledgments
Acknowledgments The following individuals made major contributions to this
report: Beverly Burke, Ray Bush, Richard Cambosos, William Cordrey,
Francine Delvecchio, F. Abe Dymond, Paul Foderaro, Alison Heafitz, Kenneth
Hill, Aaron Holling, Jason Kelly, John Kelly, Rich Larsen, Tram Le, Mai
Nguyen, Kristen Plungas, Rick Riskie, John Ryan, David Shoemaker, Sid
Schwartz, Esther Tepper, Tuyet-Quan Thai, Wayne Turowski, Matt Valenta,
Scott Wrightson, and Mark Yoder.
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