Debt Collection: Barring Delinquent Taxpayers From Receiving Federal
Contracts and Loan Assistance (Testimony, 05/09/2000,
GAO/T-GGD/AIMD-00-167).

Pursuant to a congressional request, GAO discussed issues related to
H.R. 4181, which would bar delinquent taxpayers from receiving federal
contracts and loan assistance.

GAO noted that: (1) as of September 30, 1998, nearly 2 million
businesses owed $49 billion in cumulative delinquent unpaid payroll
taxes and 185,000 individuals responsible for the nonpayment of
delinquent payroll taxes owed $15 billion in trust fund recovery
penalties (TFRP); (2) the majority of these unpaid payroll taxes and
associated TFRPs are not likely to be collected for various reasons; (3)
a significant number of both businesses with delinquent unpaid payroll
taxes and individuals with outstanding TFRPs also receive substantial
payments from the federal government, either for federal benefits or
loans or for other payment purposes, such as under federal contracts for
goods and services; (4) the Internal Revenue Service (IRS) does not have
the systems that would enable it to consistently provide federal
agencies with timely, accurate, and complete information on an
individual's or business' tax delinquency status; (5) IRS is undergoing
a major systems modernization program, and if these modernization
efforts are successful, IRS may be able to provide agencies with timely,
accurate, and complete tax delinquency status information that could be
used as a basis for denying federal loan assistance and contracts to
delinquent taxpayers; (6) the Office of Management and Budget (OMB)
directs administrators of federal loan, loan insurance, and loan
guarantee programs to determine whether an applicant has any type of
delinquent federal debt, including a tax debt, for the purpose of
determining creditworthiness; (7) however, in regard to tax debts,
agencies may not always be complying with this directive; (8) OMB does
not direct federal agencies to check on a prospective contractor's tax
debts; (9) to help reduce the burden on the acquisition process,
imposition of H.R. 4181's barring requirements on the acquisition
process could be deferred until IRS has an effective and efficient tax
delinquency check program; (10) with the exception of taxpayers that
have made arrangements with IRS to make payments on their tax debts,
H.R. 4181 would deny loan assistance or contracts to all taxpayers with
tax debts that have been outstanding for more than 90 days after the
date the tax was assessed; (11) this provision may be too restrictive
because it may not allow enough time for delinquent taxpayers to fully
exercise their due process rights for settling their tax debts; and (12)
after 90 days from the date of the tax assessment, some taxpayers could
still be in the process of negotiating payment agreements to resolve
their delinquencies.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD/AIMD-00-167
     TITLE:  Debt Collection: Barring Delinquent Taxpayers From
	     Receiving Federal Contracts and Loan Assistance
      DATE:  05/09/2000
   SUBJECT:  Debt collection
	     Tax administration systems
	     Government guaranteed loans
	     Delinquent taxes
	     Taxpayers
	     Tax nonpayment
	     Federal taxes
	     Reporting requirements
	     Federal procurement
	     Proposed legislation
IDENTIFIER:  IRS Customer Account Data Engine Program
	     FBI National Instant Criminal Background Check System
	     OMB Circular A-129 Program

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************

United States General Accounting Office
GAO

Testimony

Before the Subcommittee on Government
Management, Infomation, and Technology
Committee on Government Reform
House of Representatives

For Release on Delivery
Expected at
10:00 a.m.
Tuesday,
May 9, 2000
GAO/T-GGD/AIMD-00-167

DEBT COLLECTION
Barring Delinquent Taxpayers From Receiving

Federal Contracts and Loan Assistance

Statement of Cornelia M. Ashby

Associate Director, Tax Policy and

Administration Issues

General Government Division

and

Gregory D. Kutz

Associate Director, Governmentwide Accounting

     and Financial Management Issues

Accounting and Information Management Division

Viewing GAO Reports on the Internet
For information on how to access GAO reports on
the INTERNET, send e-mail message with "info" in
the body to:
[email protected]
or visit GAO's World Wide Web Home Page at:
http://www.gao.gov

Reporting Fraud, Waste, and Abuse in Federal
Programs
To contact GAO's Fraud Hotline use:
Web site:
http://www.gao.gov/fraudnet/fraudnet.htm
E-Mail: [email protected]
Telephone: 1-800-424-5454 (automated answering
system)

 (268920)

Statement
Debt Collection: Barring Delinquent Taxpayers From
Receiving Federal Contracts and Loan Assistance
Page 11                     GAO/T-GGD/AIMD-00-167

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to assist the
Subcommittee in its consideration of H.R. 4181, a
bill to amend Title 31, United States Code, to
prohibit delinquent federal debtors, including
delinquent taxpayers, from being eligible to
contract with federal agencies.  The bill would
also generally preclude delinquent taxpayers from
obtaining federal loans (other than disaster
loans) or loan insurance or guarantees.

Our remarks today are based on the work we did at
the request of the Subcommittee on unpaid payroll
taxes and associated tax penalties and our past
and ongoing audits of the Internal Revenue Service
(IRS) and federal acquisition and loan assistance
processes.

We support the concept of barring delinquent
taxpayers from receiving federal contracts, loans,
and loan guarantees and insurance. In fact, in
1992,we said Congress should consider whether tax
compliance should be a prerequisite for receiving
a federal contract.1 However, with H.R. 4181, we
believe there are significant implementation
issues, particularly with respect to the federal
acquisition process, and we offer recommendations
for a phased-in implementation of the provisions
and additional standards for when delinquent
taxpayers should be barred. Our statement makes
the following points:

ï¿½    Taxpayers owe the federal government billions
of dollars in delinquent taxes. For example, as we
reported to this Subcommittee last August, as of
September 30, 1998, nearly 2 million businesses
owed $49 billion in cumulative delinquent unpaid
payroll taxes and 185,000 individuals responsible
for the nonpayment of delinquent payroll taxes
owed $15 billion in trust fund recovery penalties
(TFRP).2 The majority of these unpaid payroll
taxes and associated TFRPs are not likely to be
collected for various reasons, including the
delinquent taxpayers' inability or unwillingness
to pay. A significant number of both businesses
with delinquent unpaid payroll taxes and
individuals with outstanding TFRPs also receive
substantial payments from the federal government,
either for federal benefits or loans or for other
payment purposes, such as under federal contracts
for goods and services.

ï¿½    IRS currently does not have the systems that
would enable it to consistently provide federal
agencies with timely, accurate, and complete
information on an individual's or business' tax
delinquency status. IRS is undergoing a major
systems modernization program, which will likely
take several more years to complete.  If these
modernization efforts are successful, IRS may be
able to provide agencies with timely, accurate,
and complete tax delinquency status information
that could be used as a basis for denying federal
loan assistance and contracts to delinquent
taxpayers.
ï¿½    The Office of Management and Budget (OMB)
currently directs administrators of federal loan,
loan insurance, and loan guarantee programs to
determine whether an applicant has any type of
delinquent federal debt, including a tax debt, for
the purpose of determining creditworthiness.
However, in regard to tax debts, agencies may not
always be complying with this directive.
Moreover, because of IRS' systems limitations,
prior to full implementation of H.R. 4181, a pilot
test involving one or more federal loan assistance
programs could help determine whether IRS' current
systems can effectively and efficiently handle the
volume of tax delinquency status requests that it
would receive.  The pilot could also help IRS
develop and build into its modernization efforts
the requirements for a real-time tax delinquency
check program.
ï¿½    In recent years, both Congress and the
administration have attempted to streamline the
government procurement system in an effort to
reduce the cost of the system for both the
government and its contractors.  In large part,
these efforts have involved eliminating
administrative requirements not central to the
fundamental purpose of the procurement system:
purchasing best-value goods and services in an
efficient, cost-effective manner. Unlike federal
loan assistance programs, OMB does not direct
federal agencies to check on a prospective
contractor's tax debts. Thus, H.R. 4181 could add
considerable burden to the acquisition process
both in terms of costs and time. However, this
burden could eventually be decreased if IRS'
modernization efforts result in a system that
gives contracting agencies an almost immediate
response to their requests for information on the
delinquency status of prospective contractors.  To
help reduce the burden on the acquisition process,
imposition of H.R. 4181's barring requirements on
the acquisition process could be deferred until
IRS has an effective and efficient tax delinquency
check program.
ï¿½    Generally, with the exception of taxpayers
that have made arrangements with IRS to make
payments on their tax debts, H.R. 4181 would deny
loan assistance or contracts to all taxpayers with
tax debts that have been outstanding for more than
90 days after the date the tax was assessed. As a
starting point, the 90 days after assessment
standard is not unreasonable. However, this
provision may be too restrictive because it may
not allow enough time for delinquent taxpayers to
fully exercise their due process rights for
settling their tax debts.  Additionally, after 90
days from the date of the tax assessment, some
taxpayers could still be in the process of
negotiating payment agreements to resolve their
delinquencies. To help ensure that taxpayers are
not barred from receiving federal contracts or
loan assistance while they are negotiating payment
agreements, the Secretary of the Treasury could
prescribe additional standards for IRS to use in
determining when a person has a tax debt in
delinquent status for purposes of barring under
H.R. 4181.
H.R. 4181 Would Bar Delinquent Taxpayers From
Obtaining Federal Loan Assistance or Contracts
H.R. 4181 would amend the Debt Collection
Improvement Act to extend to delinquent tax
debtors the bar that currently prohibits the award
of federal loans, loan guarantees, and loan
insurance to nontax debtors whose debts are in
delinquent status. The bill would also prevent an
agency from entering into a contract with any
"person" who owes a debt (nontax or tax) to a
federal agency that is in delinquent status. The
bill defines "person" to include a partnership
with a partner who has been assessed a penalty for
unpaid payroll taxes under section 66723 of the
Internal Revenue Code of 1986. In addition, the
definition of "person" includes a corporation with
an officer or a shareholder who holds at least 25
percent of the outstanding shares of corporate
stock who has been assessed a penalty under
section 6672.

The bill specifically excludes from the barring
provision any contract that is entered into for
the performance of disaster relief as designated
in standards prescribed by the Secretary of the
Treasury and any contract designated by the
President as necessary to the national security.
Regarding tax debt, the bill establishes that,
generally, unless the tax debt is being paid
timely, the delinquent status commences 90 days
after an assessment.  The bill also requires that
any agency administering a loan or loan guarantee
program or requesting proposals for contracts
require each loan applicant or prospective
contractor to submit a form authorizing the
Secretary of the Treasury to disclose to the
agency whether the loan applicant or prospective
contractor has a tax debt that has been
outstanding for more than 90 days.

Delinquent Taxpayers Have Benefited From Federal
Contracts and Loans
Our work at IRS over the past several years has
shown that some taxpayers have benefited from
federal loan and guarantee programs and have
received federal contracts while they still had
delinquent tax liabilities. In a disturbing number
of instances, individuals have repeatedly failed
to fulfill their tax obligations, starting up
numerous businesses and then failing to pay their
tax liabilities. In some cases, such individuals
were actually assisted in this practice by
obtaining federal loans or contracts.  The barring
provisions of the proposed bill would preclude
individuals or businesses with all forms of
delinquent tax debt from obtaining federal loans
or contracts. H.R. 4181 would also attempt to
preclude individuals responsible for the
nonpayment of taxes owed by one business or
partnership from obtaining federal loans or
contracts for a second business or partnership.

As discussed in our report on unpaid payroll
taxes,4 according to IRS records, over 1.8 million
businesses owed cumulative delinquent unpaid
payroll taxes of about $49 billion as of September
30,1998.  Nearly 50 percent of these businesses
were delinquent for more than one tax period.5
These businesses are typically in wage-based
industries and are usually small, closely held
businesses using a corporate structure, although
this may vary.  TFRPs totaling about $15 billion
were assessed against 185,000 individuals
associated with these businesses.  Our work showed
that nearly 25,000, or about 13 percent of these
individuals with penalty assessments, had been
assessed such penalties for more than one
business. About one quarter of these individuals
were responsible for the nonpayment of payroll
taxes at three or more businesses.  The majority
of these unpaid payroll taxes and associated TFRPs
are not likely to be collected for various
reasons, including the delinquent taxpayers'
inability or unwillingness to pay.

We also found that, over a 3-month period, an
estimated 16,700 civilian contractors who owed the
federal government $507 million in delinquent
payroll taxes received about $7 billion in federal
payments.  6   Additionally, as of September 30,
1998, about 12,700 taxpayers (businesses and
individuals), with delinquent payroll taxes
totaling about $295 million, had received Small
Business Administration (SBA) loan disbursements
totaling about $3.5 billion.7 Further analysis
indicated that over 1,700 of these taxpayers
received their SBA loans estimated at nearly $449
million after they had accumulated unpaid payroll
tax delinquencies of almost $32 million.8

The general barring provisions are intended to end
the contract award and lending practices that lead
to delinquent taxpayers benefiting from federal
business and programs.  Other provisions of the
bill seek to end the practice by some multiple tax
offenders, who as corporate officers, employees,
or partners, were assessed TFRPs, from using
federal loans and contracts to start new
businesses while the payroll taxes of other
companies they were or are associated with remain
unpaid. To the extent that any of the nearly
25,000 multiple tax offenders discussed earlier
engage in this practice, the barring provisions of
H.R. 4181 would attempt to preclude these
individuals or their businesses, or any successor
business or partnership that these individuals may
be associated with, from obtaining additional
federal contracts or loans.

Perhaps most importantly, the provisions of the
proposed bill could serve as an incentive to
individuals and businesses wishing to do business
with the federal government to comply with their
tax obligations, thus reducing the level of tax
delinquencies and promoting compliance. This, in
turn, would serve to provide fairness to compliant
taxpayers who consistently fulfill their tax
obligations, only to see a portion of their tax
payments being used to finance federal loans and
contracts to those who do not pay their fair
share.

H.R. 4181 Poses Several Implementation Issues
In considering this legislation, Congress should
be aware of IRS' current inability to consistently
provide federal agencies with timely, accurate,
and complete information on loan assistance
applicants' and prospective contractors'
delinquency status.  Congress may want to defer
full implementation of H.R. 4181's barring
requirements until there is assurance that IRS
could make effective and efficient delinquency
status checks.

IRS Does Not Have the Capability to Provide
Accurate and Timely Delinquency Checks
H.R. 4181 would require a system that provides
accurate and complete information on loan
assistance applicants' and prospective
contractors' delinquency status on an almost
instantaneous basis. IRS could potentially be
required to annually verify the tax delinquency
status of over one million loan assistance
applicants and prospective contractors. However,
as we reported in 1999 and again earlier this
year,9 IRS' systems are not currently capable of
accessing and providing a complete and accurate
status of a given taxpayer's account on a real-
time basis.  The lack of an automatic link or
interface between IRS' business and individual
master files prevents IRS from having a complete
record of related taxpayer accounts to ensure that
all activity, such as collections, are properly
recorded in all related accounts. Without this
information, IRS has no assurance that its records
for an individual taxpayer or business are
complete and accurate, and IRS would have to
thoroughly analyze its records for a given
taxpayer before ensuring that the account status
is accurate. In our prior work, we found that IRS'
system deficiencies have resulted in instances in
which IRS has pursued and collected amounts that
were no longer owed.

While IRS has made some progress in attempting to
compensate for the lack of an automated interface
between the two taxpayer databases, these efforts
to date have not been fully effective in ensuring
the accuracy of taxpayers' accounts. Until
adequate automated systems are in place, it is not
possible for IRS to ensure that only delinquent
taxpayers that do not meet H.R. 4181 exemption
provisions are barred from receiving a federal
contract or loan assistance.

IRS recognizes that the age and complexity of its
tape-based master file system, which holds
critical taxpayer information, causes delays and
inaccuracies in providing service to taxpayers. As
a result, IRS is undergoing a major systems
modernization effort to correct systems
deficiencies. As part of this effort, it has a
Customer Account Data Engine project to
incrementally replace its old systems with new
technology, new applications, and new databases.

According to IRS, the new system will allow
employees to post transactions and update taxpayer
account and return data from their desks. The
updates are to be immediately available and
provide a complete, timely, and accurate account
of the taxpayer's information. The database and
applications developed by the data engine project
are to enable the development of mission-critical
modernization systems.  IRS expects that these new
systems will provide it with the capability to
service taxpayers in a manner similar to that
provided by commercial-sector financial service
organizations. IRS expects to fully deploy the
Customer Account Data Engine for individual
taxpayers in 2005. Such a system for business
taxpayers will not be available until after 2005.

The Customer Account Data Engine could allow IRS
to have an effective and efficient tax delinquency
status check system that should be able to provide
federal agencies with immediate responses from IRS
on a loan assistance applicant's or prospective
contractor's tax delinquency status.  In
developing a tax delinquency status check system,
IRS could use as a model the National Instant
Criminal Background Check System used to make
presale background checks for purchases from
federal firearms licensees-about 72 percent of the
criminal background checks result in approved
responses within 30 seconds, while responses to
most of the remaining 28 percent are provided
within 2 hours or less.

Loan Assistance Agencies Are Currently Directed to
Check Applicants For Delinquent Taxes
Agencies that administer loan, loan insurance, and
loan guarantee programs are currently directed to
determine whether an applicant has any type of
delinquent federal debt, including a tax debt.
Since 1993, OMB has directed agencies
administering federal loan assistance programs to
include on loan application forms a question
asking applicants if they have a delinquent
federal debt, including a tax debt, for the
purpose of determining creditworthiness. Under OMB
Circular A-129,10 the agencies are to seek third-
party assistance in determining whether applicants
have federal debts and suspend processing
applications when applicants have outstanding
federal delinquencies.  Processing may continue
only after the debtor satisfactorily resolves the
delinquency (e.g., pays in full or negotiates a
repayment agreement). Similar to the Debt
Collection Improvement Act of 1996, which codified
OMB's bar on persons with nontax federal debts
from receiving federal loan assistance, H.R. 4181
would codify the OMB guidance to bar persons with
tax debts from receiving federal loan assistance.

Currently, under Internal Revenue Code section
6103(l)(3) an agency can contact IRS for
information on an applicant's tax status to
determine creditworthiness.  We do not know how
many federal loan assistance agencies contact IRS
for this information, and when they do, whether
they receive timely data that are accurate and
complete. However, based on our prior unpaid
payroll tax work, there are indications that
agencies do not go to IRS for delinquency
information. For example, as we discussed earlier,
over 1,700 taxpayers received SBA loans when they
had payroll tax delinquencies.

Since agencies administering federal loan
assistance programs already are directed to seek
third-party assistance in determining whether an
applicant has a federal debt, they should have
time built into their application processes to
make these determinations. Even so, before fully
implementing the requirements of H.R. 4181, it
would be prudent to conduct a pilot test of one or
more loan assistance programs to determine whether
IRS' current systems could effectively and
efficiently handle the volume of delinquent
requests that could be expected and what changes
to its current processes and systems IRS would
have to make.  A pilot test would also be useful
to IRS as it develops its new data systems to
determine what capabilities would have to be
incorporated in the new systems to handle the H.R.
4181 requirements.

H.R. 4181 Could Increase Federal Acquisition Cost
Unlike its guidance for federal loan assistance
programs, OMB does not direct federal agencies to
check on the tax delinquency status of prospective
contractors.  Thus, H.R. 4181 could affect the
federal acquisition process and impose an
administrative burden on agencies and on those
wishing to do business with the government. We
believe that efforts to address delinquent federal
debt must be cost-effective.  In this regard, the
provision in the bill that would bar the award of
federal contracts to those with delinquent federal
debts might not meet this test. In recent years,
both Congress and the administration have
attempted to streamline the government procurement
system in an effort to reduce the cost of the
system for both the government and its
contractors.  In large part, these efforts have
involved eliminating administrative requirements
not central to the fundamental purpose of the
procurement system: purchasing best-value goods
and services in an efficient, cost-effective
manner.

We do not know the extent of all of the costs, in
terms of time and resources, that H.R. 4181
requirements may impose on the acquisition process
and prospective customers.  However, with regard
to costs associated with the time it takes to
award contracts, these could be reduced if IRS'
modernization efforts result in a system that
would give contracting agencies an almost
immediate response to their requests for
information on the delinquency status of
prospective contractors.  Since federal agencies
are not currently required to deny awards based on
prospective contractors' tax debts, the
appropriate time to impose H.R. 4181 requirements
on the acquisition process may be after IRS has
the capability to effectively and efficiently
check tax delinquencies.

In the meantime, beginning in July 2000, federal
civilian contractors who have tax debts are to be
subject to a program under which IRS can levy a
portion of their contract payments.  Provisions in
the Taxpayer Relief Act of 1997 gave IRS authority
to levy up to 15 percent of certain federal
payments made to delinquent taxpayers. The
payments include federal civilian agency vendor
payments, Social Security benefits, and federal
salary and retirement payments.  When this
continuous levy program is operational, IRS will
be able to electronically serve tax levies on
vendor payments made through the Department of the
Treasury's Financial Management Service (FMS).
Federal loan assistance payments are not subject
to this levy program.

While the levy program will not prevent delinquent
contractors from receiving federal contracts, it
may allow IRS to collect delinquent taxes from
some of the contractors who owe them.  Our review
of the continuous levy program showed that of
761,000 taxpayers that received federal vendor
payments in the first quarter of 1999, about one
percent, or 7,600 vendors, had delinquent taxes
that would have been subject to the continuous
levy program if it were operational.11 The 7,600
vendors had $362 million in delinquent taxes and
received federal vendor payments totaling about $2
billion. We estimated that about $104 million of
the vendor payments could be levied annually.

The 90-Day Barring Requirement May Be Too
Restrictive
Generally, with the exception of taxpayers that
have entered into agreements with IRS to pay off
their tax debts, H.R. 4181 would deny loans or
contracts to all taxpayers that have a tax debt
more than 90 days after the date the tax was
assessed.  The 90-day barring requirement may
prevent taxpayers that are still attempting to
reach agreement with IRS regarding their tax debts
from receiving federal loans or contracts.

IRS has for years had a graduated collection
process that generally consisted of, first,
sending delinquent taxpayers a series of notices
over a period of 11 to 21 weeks before attempting
personal contact through telephone calls or in-
person visits.12 If after these personal contacts
IRS cannot settle the delinquent account, it can
initiate enforced collection actions to collect
the delinquent tax, such as by levying taxpayers'
bank accounts or seizing their assets.

The IRS Restructuring and Reform Act of 1998
provided taxpayers with additional rights and
protections before IRS could take enforced
collection action, which further lengthened the
collection process. The Restructuring Act required
IRS to provide taxpayers with additional
notifications of its intent to take enforced
collection actions and expanded taxpayer rights to
appeal such decisions.  For example, the
Restructuring Act required that IRS give the
taxpayer written notice within 5 business days
after filing a lien and an additional 30 days
before initiating a levy or seizure action.

The 90-day timeframe for deeming a tax debt
delinquent could coincide with certain collection
tools IRS currently uses to seek compliance.  For
example, many delinquent taxpayers apply for
offers-in-compromise13 to settle their tax debt.
These applications are usually made later than 90
days from the date the tax was assessed.  Even if
an application were made within the 90-day period,
H.R. 4181 would bar the individual from receiving
a loan or contract because of the time it takes
IRS to process offer applications.  IRS' own
performance measure for processing offers is the
percent of offers closed within 6 months of the
date the offer application is accepted for
investigation.  For fiscal year 1999, IRS met this
goal for only 51 percent of its cases.

One way to help ensure that taxpayers are not
barred from receiving federal contracts or loans
while they are negotiating a payment agreement
would be to require the Secretary of the Treasury
to prescribe additional standards for IRS to use
in determining whether a person has an outstanding
tax debt that would be subject to H.R. 4181's
barring requirements.  A similar approach was
taken in the Debt Collection Improvement Act of
1996 in regards to nontax federal debts. This act
required the Secretary of the Treasury to
prescribe standards under which agencies would
determine whether a person had an outstanding
delinquent debt that would trigger the Debt
Collection Improvement Act's bar on federal loan
assistance.

Conclusions and Recommendations
We support the concept of barring delinquent
taxpayers from receiving federal contracts, loans,
and loan guarantees and insurance. Our work has
shown that some delinquent taxpayers receive
billions of dollars in federal contract payments,
loans, and other federal benefits.  H.R. 4181
would prevent most of these delinquent taxpayers
from receiving additional loans, loan guarantees,
loan insurance, or contracts until they pay off
their delinquent tax debts or enter into
agreements with IRS to pay off their tax debts.
This bill would provide a measure of fairness to
the vast majority of taxpayers who consistently
fulfill their tax obligations, only to see a
portion of their tax payments being used to
finance federal loans and contracts to those who
do not pay their fair share.

However, as we have explained, this bill presents
several significant implementation issues. As we
have reported for years, IRS' systems are unable
to provide timely and accurate data on taxpayer
accounts. For this reason and because the impact
on IRS' systems of the potentially large volume of
requests for delinquency status information is
unknown, we recommend that Congress provide that
the H.R. 4181 requirements be implemented
initially on a pilot basis for loans, loan
guarantees, and loan insurance. With respect to
federal contracts, we recommend that Congress
defer the application of the barring provisions of
H.R. 4181 until the results of the pilot program
for loan assistance and the success of IRS'
systems modernization are known. We believe that
application of the H.R. 4181 barring requirement
to the federal acquisition process at this time
could unduly delay the procurement of needed goods
and services to the federal government and
increase the cost of the federal acquisition
process.  We could support the application of H.R.
4181 to the federal acquisition process only after
IRS is able to determine in a matter of hours
whether prospective federal contractors have
delinquent tax debt.

The 90-day provision in H.R. 4181 for determining
when a tax debt meets the barring requirement may
be too restrictive because it may not allow enough
time for delinquent taxpayers to fully exercise
their due process rights for collection actions or
to negotiate payment agreements with IRS to settle
their tax debts.  To help ensure that taxpayers
are not prematurely barred from receiving federal
contracts or loan assistance, we recommend that
Congress require the Secretary of the Treasury to
prescribe additional standards for IRS to use in
determining when a taxpayer has an outstanding tax
debt in delinquent status for purposes of barring
under H.R. 4181.

Mr. Chairman, this concludes my statement. We
welcome any questions that you may have.

Contact and Acknowledgements
     For further contacts regarding this
testimony, please contact Cornelia M. Ashby at
(202) 512-9110 or Gregory D. Kutz at (202) 512-
3406.  Individuals making key contributions to
this testimony included Thomas Armstrong, Ralph
Block, Shirley Jones, Franklin Jackson, Andrea
Levine, and Steven Sebastian.

_______________________________
1Tax Administration: Federal Contractor Tax
Delinquencies and Status of the 1992 Tax Return
Filing Season (GAO/T-GGD-92-23, Mar. 17, 1992).
2IRS assesses a TFRP against an individual, such
as a corporate officer, who it determines was
willful and responsible for not forwarding to the
government the federal payroll taxes withheld from
employees' salaries.  The $49 billion in
cumulative unpaid payroll taxes includes about $19
billion in unpaid tax assessments and another $30
billion in penalties and interest. The $15 billion
in TFRPs includes initial assessments of about $9
billion and accumulated interest of about $6
billion.
3Section 6672 deals with TFRPs.
4Unpaid Payroll Taxes: Billions in Delinquent
Taxes and Penalty Assessments Are Owed
(GAO/AIMD/GGD-99-211, Aug. 2, 1999).
5For payroll taxes, the tax period is a quarter.
6There were several limitations related to this
analysis. Owing to the sporadic nature of contract
payments, we did not attempt to estimate an annual
amount. These estimates are subject to estimation
error and are based on unaudited data.  In
addition, serious deficiencies in IRS' financial
management systems, such as the failure to timely
post assessments, could cause an underestimation.
Further, we did not include military contractors
in our population of delinquent taxpayers.
7For purposes of this study, we only looked at
delinquent taxpayers receiving SBA loans.  We did
not broaden our work to search for delinquent
taxpayers who received loans or guarantees through
other federal lending programs.
8The attachment to our statement contains two
examples from our detailed review of unpaid
payroll tax case files of individuals and
businesses that received some form of federal
payment when they had multiple tax periods of
unpaid payroll taxes.
9GAO/AIMD/GGD-99-211, Aug. 2, 1999, and Financial
Audit: IRS ` Fiscal Year 1999 Financial Statement
(GAO/AIMD-00-76, Feb. 29, 2000).
10 OMB Circular No.  A-129, "Policies for Federal
Credit Programs and Non-Tax Receivables."
11Tax Administration: IRS' Levy of Federal Payments
Could Generate Millions of Dollars (GAO/GGD-00-65,
Apr. 7, 2000). Delinquent vendors not subject to
the continuous levy program include those who were
paying off their tax debts or who IRS has
determined do not currently have the financial
resources to pay down their tax debts.
12After a tax assessment is posted to IRS records
and the tax has not been paid, IRS sends taxpayers
a series of balance-due notices. The first notice
is to be sent within a week or so after the tax
assessment is posted.  For individual taxpayers,
IRS can send up to three additional notices at 5-
week intervals. About 6 weeks after the fourth
notice is sent, IRS attempts to make personal
contact with taxpayers. The notice process is
shorter for businesses. Five weeks after the
initial notice, IRS is to send a second notice and
wait 6 weeks after this notice before attempting
personal contact.
13 An offer-in-compromise is a taxpayer proposal to
settle a tax debt for less than the amount owed.

Attachment
Examples of Unpaid Payroll Tax Delinquency Cases
Page 14                     GAO/T-GGD/AIMD-00-167
The issues pertaining to individuals and
businesses with multiple tax periods of unpaid
payroll taxes receiving federal loans and
contracts can be illustrated by two specific
examples from our detailed review of unpaid
payroll tax case files. It is important to note
that these are just two of numerous examples of
such occurrences we have observed in our work at
IRS over the past several years. In each of these
cases, the IRS files provided evidence of the
businesses or individuals responsible for
delinquent federal taxes having diverted monies
for senior management's benefit or received
federal payments (e.g., loans, contracts) or a
combination of the two. In the first case, HR 4181
would attempt to preclude individuals who form new
companies and were responsible for the nonpayment
of payroll taxes from getting federal loans or
guarantees, or from getting federal contracts. In
the second case, if the company had applied for
its SBA loan subsequent to becoming delinquent on
its first quarter of payroll taxes, the provisions
of HR 4181 would have prevented this business from
obtaining the SBA loan.

Case 1
The first case involved a company that operated as
a freight handler and had agreements with the U.S.
Navy and other federal agencies. In fact, in 1993,
federal government agreements accounted for 85
percent of the company's revenues, and in 1994,
accounted for 65 percent of company revenues. In
early 1995, an accounting firm retained by the
company's officers reported an estimated $2
million unpaid payroll tax liability and related
tax returns (form 941s) that had not been filed
with the IRS for the last two quarters. Officers
of the company initially interviewed by IRS
claimed to have no idea why funds associated with
the payroll tax liabilities had not been remitted
to IRS and accused the former controller of being
responsible. However, IRS determined that the
former controller did not have the ability to
exercise control over financial matters, did not
have check-signing authority, and was not a
corporate officer.

Further investigation by IRS revealed that
corporate funds were routinely funneled to another
company owned by one of the officers and, in turn,
used to acquire trucks, equipment, and an
expansion of terminal locations on the East Coast.
The company's corporate tax return for 1994 showed
that, during the period in which the company's
payroll taxes went unpaid, over $2 million was
advanced to the affiliated company. At the same
time, the company's bank account balances showed
that there were adequate funds to meet the payroll
tax obligations. IRS determined that the primary
corporate officer who owned the affiliated company
had full signature authority, directed the payment
of all bills, and retained authority over all
financial matters.

Ultimately, IRS determined that funds for unpaid
payroll taxes were also being used for corporate
officers' personal expenses, including:

ï¿½    Paying the estimated taxes of corporate
officers,
ï¿½    Installing and maintaining a swimming pool
for the primary officer,
ï¿½    Paying off a personal car loan for the
primary officer's wife,
ï¿½    Purchasing a tractor for home use, and
ï¿½    Storing and maintaining at least eight
antique cars owned by the primary officer.

The company eventually filed for bankruptcy.
Additionally, IRS has determined that the payroll
taxes of the primary officer's other company have
also not been paid, and at the time we completed
our work, there was a substantial tax delinquency
for this company.

Case 2
The second case involved a garment manufacturing
company, with outstanding federal loans and
delinquent payroll taxes at the time of our
review, which has since gone out of business. The
company began experiencing cash flow problems
almost from its inception in 1980, and it had
delinquent payroll taxes for six quarters between
1981 and its last year of operation, 1988. At the
time it went bankrupt, the business had an
outstanding SBA loan. No trust fund recovery
penalties had been assessed against the company's
officers, despite evidence that the company
president (who also served as vice president and
treasurer) used funds to pay other creditors in an
attempt to keep the business from folding. The
president, while not assessed a penalty for the
delinquent payroll taxes associated with this
business, had been assessed penalties for
delinquent payroll taxes for two other businesses
in which he was involved.

*** End of Document ***