<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:22195.wais]
S. Hrg. 109-189
CIVILIAN CONTRACTORS WHO CHEAT ON THEIR
TAXES AND WHAT SHOULD BE DONE ABOUT IT
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
JUNE 16, 2005
__________
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and Governmental Affairs
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
Trina D. Tyrer, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
C. Jay Jennings, Senior Investigator
Elise J. Bean, Minority Staff Director and Chief Counsel
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coleman.............................................. 1
Senator Levin................................................ 5
Senator Collins.............................................. 10
Senator Akaka................................................ 11
WITNESSES
Thursday, June 16, 2005
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, U.S. Government Accountability Office,
accompanied by Steven J. Sebastian, Director, Financial
Management and Assurance, U.S. Government Accountability
Office; and John J. Ryan, Assistant Director, Forensic Audits
and Special Investigations, U.S. Government Accountability
Office......................................................... 14
Hon. Mark W. Everson, Commissioner, Internal Revenue Service,
U.S. Department of the Treasury................................ 30
Richard L. Gregg, Commissioner, Financial Management Service,
U.S. Department of the Treasury................................ 32
Alphabetical List of Witnesses
Everson, Hon. Mark W.:
Testimony.................................................... 30
Prepared statement with attachments.......................... 76
Gregg, Richard L.:
Testimony.................................................... 32
Prepared statement........................................... 91
Kutz, Gregory D.:
Testimony.................................................... 14
Prepared statement........................................... 47
Ryan, John J.:
Testimony.................................................... 14
Prepared statement........................................... 47
Sebastian, Steven J.:
Testimony.................................................... 14
Prepared statement........................................... 47
EXHIBITS
1. GThe Federal Payment Levy Program Does Not Screen All
Contractor Payments, chart prepared by the Majority Staff of
the Permanent Subcommittee on Investigations................... 96
2. GU.S. Government Accountability Office (GAO) Report to
Congressional Requesters, FINANCIAL MANAGEMENT--Thousands of
Civilian Agency Contractors Abuse the Federal Tax System With
Little Consequence, June 2005, GAO-05-637...................... 97
3. GFederal Contractor Tax Compliance Task Force Report,
September 2004................................................. 186
4. GResponses to supplemental questions for the record submitted
to Gregory D. Kutz, Managing Director, Forensic Audit and
Special Investigations and Steven J. Sebastian, Director,
Financial Management and Assurance, Government Accountability
Office......................................................... 211
5. GResponses to supplemental questions for the record submitted
to The Honorable Mark Everson, Commissioner, Internal Revenue
Service, Department of the Treasury............................ 224
6. GResponses to supplemental questions for the record submitted
to Richard L. Gregg, Commissioner, Financial Management
Service, Department of the Treasury............................ 234
CIVILIAN CONTRACTORS WHO CHEAT ON THEIR TAXES AND WHAT SHOULD BE DONE
ABOUT IT
----------
THURSDAY, JUNE 16, 2005
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:34 a.m., in
room 563, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Collins, Levin, and Akaka.
Staff Present: Raymond V. Shepherd, III, Staff Director and
Chief Counsel; C. Jay Jennings, Senior Investigator; Mary D.
Robertson, Chief Clerk; Mark Greenblatt, Counsel; Steven
Groves, Counsel; Mark Nelson, Counsel; Brian White,
Professional Staff Member; Katherine Russell, Detailee (FBI);
Richard Fahy, Detailee (ICE); Caitlin Foley, Intern; Corey
Bakken, Intern; Elise J. Bean, Staff Director/Chief Counsel to
the Minority; Eric J. Diamant, Detailee, GAO; John Lavinsky,
Intern; Audrey Soffer, Intern; Alec Rogers (Senator Collins);
Richard Kessler and Robert Westerbrook (Senator Akaka).
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is called to order. Good morning. Good
morning to Chairman Collins. It is great to be with you and
Ranking Member Levin. Welcome to today's hearing.
This hearing is about tax cheats, not your everyday tax
delinquents but rather Federal contractors who do not pay their
fair share of taxes even though they receive billions of
dollars from American taxpayers each year. The Subcommittee's
efforts, in concert with the hard work of the Government
Accountability Office (GAO), have revealed that 33,000 Federal
contractors at civilian agencies owe back taxes amounting to a
whooping $3.3 billion. Some of these delinquent contractors
provide crucial services to some of our most critical agencies,
such as the Department of Justice and the Department of
Homeland Security.
To get a sense of the problem, let us review a handful of
egregious cases. A contractor for the Justice Department was
paid more than $700,000 this year, even though it owes more
than $2 million in back taxes. Over the last few years, as the
company refused to pay its proper share of taxes, it withdrew
literally millions of dollars from its bank accounts.
A contractor that provides security guard services to the
Department of Homeland Security owes more than $400,000 in
unpaid taxes. In addition to the company's tax debt, the owners
repeatedly failed to file individual income taxes and diverted
the employees' payroll taxes to a foreign bank account to build
a house overseas. Despite that, the Federal Government paid
this company more than $200,000 last year.
A health care company that provides services to the
Departments of Veterans' Affairs and Health and Human Services
was paid more than $300,000 from the Federal Government this
year alone. That company owes more than $18 million in back
taxes. While the company was cheating the American taxpayers,
the owner of the company brought multi-million dollar
properties and a fleet of luxury cars.
These are just a handful of the 33,000 government
contractors that failed to play by the rules. Our hearing today
will show just how widespread the problem is. We will also
examine the considerable obstacles that prevent the government
from collecting back taxes from Federal contractors.
But first, it would be helpful to review how we got here.
Last year, this Subcommittee with the GAO uncovered disturbing
evidence that the Defense Department had 27,000 contractors who
had $3 billion in unpaid taxes. To make matters worse, GAO
determined that the government's program to collect unpaid
taxes from Federal contractors, which is called the Federal
Payment Levy Program, simply wasn't working. The Federal
Payment Levy Program should have collected more than $100
million from these contractors. Unfortunately, instead of the
$100 million it should have collected, it obtained a paltry
$680,000.
In February of last year, I requested the IRS, Financial
Management Service, Department of Defense, and other affected
agencies to establish the Federal Contractor Tax Compliance Tax
Force, which would identify and resolve problems that
frustrated the Federal Payment Levy Program. I am pleased to
report that as a direct result of the tax force's efforts, tax
levy collections from defense contractors have increased
dramatically.
For instance, in all of 2003, back taxes recovered from
defense contractors amounted to a mere $680,000. In the first 7
months of this year, however, that number has risen to more
than $11.5 million. At that rate, the government will recover
$17.2 million in unpaid taxes by the end of 2005. That is an
increase of more than 2,500 percent in just 2 years.
One of the principal problems we identified was that many
Federal contractors provided false Taxpayer Identification
Numbers when they register with the government. To remedy this
problem, Senator Levin and I, and other interested Senators,
introduced the Central Contractor Registry Act to ensure that
Federal contractors' Taxpayer Identification Numbers would be
validated by the IRS.
In light of the problems found with defense contractors, we
asked GAO to determine if similar problems also existed in
other Federal departments and agencies. In response to our
request, GAO has conducted an extensive analysis and prepared
an alarming report, which we are releasing today. As I
mentioned earlier, GAO's report reveals that 33,000 civilian
contractors who receive billions of dollars from the U.S.
Government in contract payments each year currently owe $3.3
billion in unpaid taxes. Even worse, most of these contractors
withheld payroll taxes in trust for their employees and then
failed to pay those taxes to the Internal Revenue Service. As a
result, they cheated not only the American people, but their
own employees, as well.
Some of these contractors fraudulently used the withheld
taxes for business or personal use. GAO investigators found
contractors who bought luxury cars, multi-million-dollar
properties, and vacation homes even though they owed hundreds
of thousands of dollars in unpaid taxes.
One significant problem is Section 6103 of the Internal
Revenue Code, which is designed to promote tax compliance by
protecting honest taxpayers from having their names and other
personal information disclosed. That privacy provision has been
turned on its head and covers tax cheats who do not file their
returns or do not pay their taxes. These tax cheats act with
impunity because Section 6103 prevents the IRS from disclosing
their identities. As a result, Federal contract officers cannot
determine if a contractor owes taxes before signing a contract.
Even the President of the United States is not immune from
contracting with a tax cheat. In one case examined by the GAO,
the Executive Office of the President contracted with a
medical, dental, and hospital equipment company that owes
nearly $2 million in unpaid taxes. In 2004, the company was
paid over $900,000. While the Financial Management Service
collected $6,000 in unpaid tax from some of these payments, it
was not screening all such payments and, therefore, missed the
opportunity to collect an additional $133,000 from this
company.
This is but one of the 50 worst examples that GAO
identified in their investigation. Many of these documents
demonstrate a continuing pattern of fraud and abuse in which
some contractors use every available means to delay or avoid
paying their taxes. In fact, 27 of the 50 cases GAO
investigated demonstrated a pattern of avoidance.
For example, over a 20-year period, one contractor has
repeatedly not paid taxes and accumulated tax debt of more than
$900,000. He declared bankruptcy and reopened his business
under a new name. In 2004, the Federal Government paid this
delinquent contractor more than $1 million.
In another case, a building maintenance company that owes
nearly $1 million in unpaid tax, entered into an installment
agreement with the IRS and then defaulted on that agreement.
The company then made the IRS an offer in compromise to settle
the tax debt. IRS rejected the offer and this company has
avoided any tax levy for more than 5 years.
In another case, the IRS entered into an installment
agreement with a court reporting service with the Department of
Justice who owes over $400,000 in unpaid tax. Last year, the
company paid a mere $2,000 pursuant to the agreement. At that
rate, I think the tax debt will be paid off in about 200 years.
Other examples that GAO identified involve potential fraud
that included an armed guard service company that has contracts
with the Department of Justice and the Environmental Protection
Agency and owes nearly $400,000 in unpaid taxes. In 2004, the
company was paid about $500,000. The owner of this company is
under indictment for embezzlement and money laundering.
A doctor who works for the Veterans' Administration owes
nearly $700,000 in unpaid taxes and was paid over $180,000 in
2004. The doctor's payments should have been levied to collect
$27,000. However, none of the payments were levied.
A building maintenance services company that has numerous
contracts with Federal agencies, including the Department of
Treasury, owes over $700,000 in unpaid taxes. The company was
paid over $4 million in 2004. Nearly $100,000 was offset for
its unpaid taxes. However, they should have been levied for
$630,000.
Under these circumstances, we must bar certain companies
and individuals from receiving Federal contracts. When
individuals or companies demonstrate flagrant disregard for the
tax system through a pattern of continued and repeated tax
abuse, it is appropriate to publish their names and bar their
receipt of Federal contracts. GAO's report that is being
released today found serious problems in the contractor payment
system that permit these abuses to continue.
For instance, GAO found that the Financial Management
Service (FMS), which makes payments to contractors for the
Federal Government, does not check all contractor payments to
determine if taxes are owed. In addition, contractor payments
that should be checked have inaccurate or incomplete
information and cannot be matched to the Internal Revenue
Service's list of delinquent taxpayers. FMS failed to
adequately update agency location codes and ensure that
agencies submitted payment documentation that was complete and
valid. As a result, the FMS did not match these payments and
irrevocably lost the opportunity to collect an additional $50
million in back taxes.
FMS is the lead agency for the Federal Payment Levy
Program. FMS should not hide behind the mantra that FMS is
simply the paying agent for the Federal Government and must
rubber stamp Federal agencies' payments. This position
completely abdicates FMS's true leadership and managerial
responsibilities for the program. I am concerned that FMS has
placed the payment of contractors ahead of recognized
accounting principles that require complete and accurate
documentation.
Let me be clear. The system in place requires FMS to
identify tax cheats and levy their payments. The contracting
agency and GSA have no ability to identify the tax cheats or to
bar them from doing business with the government. When FMS
fails to do its job, the system fails, and the system and FMS
are failing today.
As the government's paying agency, FMS has clear
responsibility for ensuring adherence to basic requirements
that must be met before making disbursements. I fully expect
Commissioner Gregg and FMS to aggressively resolve the
shortcomings identified by GAO.
FMS must assure that contractors are screened up front and
pay their taxes. FMS must be sure that agency documentation is
complete before disbursements are made and must regularly
update agency location codes. FMS must take the lead on
requiring civilian agencies and departments to register their
contractors in the Central Contract Registry, as required by
the Federal Acquisition Regulations and directed by the Office
of Management and Budget. Without this proper exercise of
responsibility, billions of taxpayer dollars will continue to
be paid to delinquent contractors without being levied. This is
simply not acceptable.
On the first panel this morning, we will hear from GAO
representatives on the results of our request to determine if
there are tax delinquent Federal contractors working for
civilian departments and agencies. Last year, their hard work
resulted in the identification of 27,000 Department of Defense
(DOD) contractors who owe $3 billion in unpaid taxes, including
47 contractors that had flagrantly abused the tax system.
On the second panel, we will hear from the IRS and FMS
concerning actions they have taken or plan to take to ensure
that civilian contractors pay the taxes they owe. I would like
to make it clear that I am pleased with the results that the
Federal Contractor Tax Compliance Task Force has achieved to
date and that the Commissioners of IRS and FMS have agreed to
continue the work of the task force.
A lengthy statement, but a lot of information here, and I
appreciate the indulgence of my colleagues as I went through
that.
Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you, first of all, for
your leadership on this issue. It has been critically important
in the progress that we have made. You and your staff and our
staffs have worked very closely together on this and we are
making some progress, but as you pointed out, we have got a
long way to go, but without your leadership, we wouldn't have
gotten to where we are.
The current annual tax gap in this country is about $300
billion, and that $300 billion gap is the difference between
the taxes that businesses, organizations, and individuals owe
the Federal Government and what they have actually paid. When
so many Americans fail to pay the taxes that they owe, it
begins to undermine the fairness of our tax system, forcing
honest taxpayers to make up the shortfall needed to pay for
basic Federal protections, like Social Security, Medicare, and
weapons needed by our men and women on the front lines of our
military.
Today's hearing focuses on one particular group that
contributes to that $300 billion tax gap, government
contractors who get paid with taxpayer dollars while at the
same time failing to pay their taxes.
In a report released today, the GAO describes 33,000
civilian contractors who have dodged their tax obligations and
have accumulated tax debts to Uncle Sam totaling at least $3.3
billion. In a related report released last year, GAO found
27,000 DOD contractors with accumulated tax debts totalling $3
billion. Those are huge numbers--tens of thousands of companies
receiving contracts and payments on those contracts from the
Federal Government, while owing billions of dollars in unpaid
taxes. It is simply mind-boggling that this is allowed to
continue.
Tax dodging by any Federal contractor is unfair, not only
to the honest taxpayers left to make up the difference, but it
is also unfair to honest companies that have to compete against
the tax dodgers that aren't paying their fair share.
The main responsibility here has got to be with FMS, as our
Chairman has said. There should be a red flag on any contract
where a company owes back taxes, and there should be monies
withheld from any payments on that contract until those back
taxes are paid.
There are some tax dodgers who simply should not receive
contracts to begin with, since tax debts should be paid before
more contracts are awarded or, at a minimum, until arrangements
are made to pay the back taxes.
GAO tells us that about $1.2 billion, or 37 percent of the
unpaid taxes owed by the civilian contractors involve payroll
taxes. Now, what that means is that contractors fail to send to
the IRS sums withheld from employees' wages for Federal, Social
Security, and Medicare taxes. The failure to send those payroll
taxes to the IRS is more than a debt that is owed to the
Federal Government. It is a crime, since payroll funds withheld
from employees' wages are held in trust, and it is illegal for
companies not to send those funds to the government.
Another $1.5 billion, or 40 percent of the total, involve
unpaid corporate income taxes.
All of the $3.3 billion are unpaid taxes which a court has
determined or the taxpayer has admitted are owed to the
government. The taxes at issue here are not disputed amounts,
in other words.
The GAO also took a closer look at 50 of the contractors
with unpaid taxes and found egregious examples of companies
dodging taxes, sometimes for years, and in some cases spending
money meant for payroll taxes on luxuries for themselves, such
as expensive homes or cars. Despite those abuses, those
contractors kept getting contracts and payments on those
contracts using taxpayers' dollars.
The Chairman has identified a number of specific cases, and
I am not going to repeat those, but they are part of my entire
statement which will be made part of the record, Mr. Chairman,
with your order.
Senator Coleman. Without objection.
[The prepared statement of Senator Levin follows:]
PREPARED STATEMENT OF SENATOR LEVIN
The current annual tax gap in this country is about $300 billion.
That $300 billion gap is the difference between the taxes that
businesses, organizations, and individuals owe the federal government
and what they've actually paid. When so many Americans fail to pay the
taxes that they owe, it begins to undermine the fairness of our tax
system, forcing honest taxpayers to makeup the shortfall needed to pay
for basic federal protections--like social security, Medicare, and the
weapons needed by our men and women on the frontlines of our military.
Today's hearing focuses on one particular group that contributes to
that $300 billion tax gap--government contractors who get paid with
taxpayer dollars while, at the same time, failing to pay their taxes.
In a report released today, GAO describes 33,000 civilian contractors
who have dodged their tax obligations and accumulated tax debts to
Uncle Sam totaling at least $3.3 billion. In a related report released
last year, GAO found 27,000 DOD contractors with accumulated tax debts
totaling $3 billion. Those are huge numbers--tens of thousands of
companies receiving contracts and payments on those contracts from the
federal government, while owing billions of dollars in unpaid taxes.
It's simply mind boggling that this is allowed to continue.
Tax dodging by any federal contractor is unfair--not only to the
honest taxpayers left to make up the difference, but it's also unfair
to the honest companies that have to compete against the tax dodgers
that aren't paying their fair share.
The main responsibility here has got to be with FMS, as our
Chairman has said. There should be a red flag on any contract where a
company owes back taxes and there should be monies withheld from any
payments on these contracts until those back taxes are paid. Some tax
dodgers should not receive contracts to begin with--their tax debts
should be paid before more contracts are awarded, or, at a minimum,
until arrangements are made for them to pay the back taxes.
GAO tells us that about $1.2 billion, or 37% of the unpaid taxes
owed by civilian contractors, involve payroll taxes. What that means is
that contractors failed to send to the IRS sums withheld from
employees' wages for federal, Social Security, and Medicare taxes. The
failure to send those payroll taxes to the IRS is more than a debt owed
to the federal government--it is a crime, since payroll funds withheld
from employees' wages are held in trust, and it is illegal for
companies not to send those funds to the government. Another $1.5
billion, or 40% of the total, involve unpaid corporate income taxes.
All of the $3.3 billion are unpaid taxes which a court has determined
or the taxpayer has admitted are owed to the government. The taxes at
issue here are not disputed amounts, in other words.
GAO also took a closer look at 50 of the contractors with unpaid
taxes and found egregious examples of companies dodging taxes,
sometimes for years, and, in some cases, spending money meant for
payroll taxes on luxuries for themselves such as expensive homes or
cars. Despite those abuses, those contractors kept getting contracts
and payments on those contracts using taxpayer dollars. For example,
one contractor owing $1 million in unpaid taxes was paid $1.5 million
in FY2004 by the Department of Homeland Security and other federal
agencies. Another contractor owing $900,000 had a 20-year history of
opening a business, failing to remit payroll taxes to the IRS, closing
the business, and then repeating the cycle. On and on, while continuing
to get more government contracts.
Tax chiseling by federal contractors is not a new story. In 1997,
Congress enacted the Taxpayer Relief Act which, in part, authorized
federal agencies to withhold 15 percent of any federal payment going to
a person with an outstanding tax debt. The goal was to stop taxpayer
dollars from being paid to a tax deadbeat, unless a portion was
withheld off the top to reduce that person's tax debt. Last year, we
increased the percentage that can be withheld from a contract payment
to up to 100%.
The Taxpayer Relief Act sought to apply a common sense principle to
government operations: to offset the taxpayer dollars sent to people
who haven't paid their tax bills by directing a percentage of the total
be withheld to reduce their tax debt. That common sense principle isn't
always easy to apply in a government that has hundreds of thousands of
contractors on the books, but it must be applied and the computer
capability to apply that principle exists.
The Financial Management Service or FMS in the Treasury Department
took until July 2000 to establish an automated tax levy program under a
larger Treasury Offset Program that handles offsets from government
payments for a variety of reasons. It took another two years--until the
end of 2002--for DOD to follow suit.
GAO estimates that, last year, the tax levy program for civilian
contractors ought to have collected a minimum of $50 million, but FMS
actually collected only about $16 million, or just over 30% of the
projected total. The GAO report spells out a number of reasons why this
collection rate is so low.
First, out of the $250 billion in contractor payments last year,
the GAO determined that $100 billion was made in ways that made it
virtually impossible for a payment to result in a computer match and
tax levy. About $66 billion of those payments were made with payment
forms filled out by various federal agencies that left out key
information. The FMS shouldn't accept those payment forms, but they
have so far. Key information is left out by agencies; nonetheless,
checks are sent. That information which is left out includes the
contractor's name or taxpayer identification number, which you have to
have for a computer match. Another $10 billion was paid on government-
issued credit cards held by federal agencies, which means that the
payments were directed to the bank administering the credit cards and
the bank then paid the contractors, instead of direct payments to the
relevant contractors. Since the agency payments did not name the
contractors, they couldn't be matched against the IRS tax data. Still
another $25 billion of payments were made through wire transfers that
also were directed to banks instead of contractors, and so did not
trigger any computer matches with IRS data. Each of these problems can
and should be addressed to increase the chances for computer matches
identifying contractors with unpaid taxes. It should not be difficult
to simply red flag the contractor to say that no payment should be made
to that contractor, through a bank or otherwise, without the deduction
for back taxes being made.
Second, of the $150 billion in contractor payments that were
subjected to the tax levy computer matches, the GAO found that too many
failed to result in an actual levy because the IRS had failed to mail a
30-day notice to the relevant contractors warning them of an upcoming
levy. After last year's hearing, to address the tax levy notice
problem, the IRS initiated a new approach with DOD contractors. Instead
of waiting for the first contract payment to mail a tax levy notice,
the IRS instead evaluated the tax status of contractors as soon as they
were awarded a contract and immediately sent tax levy notices to those
contractors with unpaid taxes. This new approach apparently resulted in
the mailing of 6,000 accelerated notices. That's a bit of progress,
although we have to wait to see the extent to which this new approach
solves the notice problem and it needs to be applied to civilian
contractors as well.
Other approaches to the notice problem should also be considered.
One possibility that should be explored is combining tax levy notices
with the tax delinquency notices that are already mailed to contractors
with unpaid taxes. Another possibility would be to amend the Prompt
Payment Act to allow FMS and DOD to delay contract payments to tax
delinquent contractors until the 30-day tax levy notice period expires
and a levy can properly be placed on their payments. Another approach
is to include a contract provision in the original contract that simply
says if you owe back taxes, you waive your right to a levy notice.
Alternatively, we can modify the law to say that notices of levies are
not required on those contracts where back taxes are owed.
Federal contractors should not be allowed to get away with cheating
on their taxes. Dodging taxes is never acceptable, but it is
particularly galling when engaged in by folks who make their living
from taxpayer dollars.
It is clear that we can make major progress in the tax levy program
and ensure that deadbeat contractors start paying their tax debts. That
progress has already begun. After the Subcommittee's hearing last year
on DOD contractors, the IRS, DOD and FMS formed a joint task force to
improve the DOD tax levy program. In the span of about a year, using
improvements initiated by this task force, DOD has increased its
collections from $1 million in 2003, to a likely total in 2005 of $17
million. While $17 million is still far short of the $100 million that
GAO thinks DOD ought to be collecting each year, and even farther from
the $3 billion owed by DOD contractors, it is a start.
The improvements made in the DOD tax levy program include the
following:
<bullet> FMS and DOD have automated the tax levy computer matching
system for 18 out of DOD's 20 payment systems, up from just 1 system in
2004. The final 2 DOD payment systems are scheduled for automation
during 2005.
<bullet> FMS is now conducting tax levy computer matches twice per
week instead of once per week, resulting in more computer matches.
<bullet> The IRS has cleaned up the tax levy database by removing
$27 billion of uncollectable tax debt.
<bullet> The IRS has eliminated a policy that delayed tax levies
on federal contractors for one year or until an IRS revenue agent was
assigned to the relevant case.
<bullet> The IRS is now checking the tax status of DOD contractors
as soon as a contract is awarded, instead of waiting for the first
contract payment, so that tax levy notices can be mailed earlier.
<bullet> In October, DOD will begin requiring everyone who files
an application with the Central Contractor Register to become a
potential bidder on federal contracts to consent to having their
taxpayer identification numbers validated by the IRS. The end result
will be a more accurate and complete database of contractor TINs.
Each of these steps is moving us toward a more effective tax levy
program, but a lot more needs to be done, including ensuring timely tax
levy notices, barring payments to contractors using agency forms that
lack key information needed for tax levy computer matches, and barring
contractors with unpaid taxes from getting paid via government-issued
credit cards or wire transfers. Even better would be putting a hold on
contract awards to contractors owing an undisputed amount of unpaid
taxes.
Last year, Senator Coleman and I introduced legislation to improve
the tax levy program by strengthening taxpayer identification numbers.
We reintroduced this bill in this Congress as S. 679. In the meantime,
the IRS, DOD and FMS have voluntarily taken some of the steps called
for in that bill, which we appreciate. Senator Coleman and I are now
planning to introduce a more comprehensive bill to address the broader
spectrum of problems that impede the tax levy program.
Most federal contractors provide valuable goods or services, and do
so while paying their taxes. Other contractors, however, take payment
in taxpayer dollars, while dodging the taxes owed to Uncle Sam. This
tax dodging hurts honest taxpayers, honest businesses, and our country
as a whole. Effective use of the federal tax levy program is necessary
to help keep the tax dodger's hand out of the taxpayer's wallet.
I commend Senator Coleman for his leadership on this important
issue. I look forward to the testimony today.
Senator Levin. Tax chiseling by Federal contractors is not
a new story. As our Chairman pointed out, in 1997, Congress
enacted the Taxpayer Relief Act which in part authorized
Federal agencies to withhold 15 percent of any Federal payment
going to a person with an outstanding tax debt. The goal was to
stop taxpayers dollars from being paid to a tax deadbeat unless
a portion was withheld off the top to reduce that person's tax
debt. Last year, we increased the percentage that could be
withheld from a contract payment to up to 100 percent.
The Taxpayer Relief Act sought to apply a common sense
principle to government operation, to offset the taxpayers'
dollars sent to people who haven't paid their tax bill by
directing a percentage of the total be withheld to reduce their
tax debt. That common sense principle isn't always easy to
apply when the government has hundreds of thousands of
contractors on the books, but it must be applied, and the
computer capability to apply that principle is here. This may
have been difficult without computers, but this should not be
so difficult now that we have computers.
There are a number of reasons why the collection rate is
low, and I am just going to spend a minute or two on some of
these reasons. We have made progress, as the Chairman has
pointed out, but we still have a low collection rate from these
contractors.
First, out of the $250 billion in contractor payments last
year, the GAO determined that $100 billion was made in ways
that made it virtually impossible for a payment to result in a
computer match and a tax levy. About $66 billion of those
payments were made with payment forms filled out by various
Federal agencies that left out key information. Well, the FMS
shouldn't accept those payment forms, but they so far have. Key
information left out by agencies. Nonetheless, checks are sent.
That information which is left out includes the contractor's
name or a Taxpayer Identification Number, which you have to
have for a computer match.
Another $10 billion was paid on government-issued credit
cards held by Federal agencies, which means that the payments
were directed to the bank administering the credit cards and
the bank then paid the contractors, instead of the agencies'
making direct payments to relevant contractors. It should not
be difficult to simply red flag a contract and to say that no
payment should be made on that contract to a bank or otherwise,
or wire transferred, or in any other way, without the deduction
for back taxes being made.
Now, of the $150 billion in contractor payments that were
subjected to tax levy computer matches, the GAO found that too
many failed to result in an actual levy, because the IRS had
failed to mail a 30-day notice to the relevant contractors
warning them of an upcoming levy. That should be easily
correctable with a contract provision in the original contract
that simply says, if you owe back taxes, you waive your right
to contest a levy, or we will modify the law if necessary to
say that notices of levies are not required in those contracts
where back taxes are owing.
So progress has been made, but we have got a long way to
go, and Federal contractors should not be allowed to get away
with cheating on their taxes. Dodging taxes is never
acceptable, but it is particularly galling when engaged in by
folks who make their living from taxpayer dollars.
Mr. Chairman, again, I thank you for your leadership. You
have been doing critically important work, and I commend you
for it.
Senator Coleman. Thank you, Senator Levin, and my thanks to
you and your staff for the strong partnership. It has been a
very bipartisan effort and hopefully we are getting some
results.
Chairman Collins.
OPENING STATEMENT OF CHAIRMAN COLLINS
Chairman Collins. Thank you, Mr. Chairman. Let me join
Senator Levin in commending you for your leadership on this
issue, but let me also commend Senator Levin. I know the two of
you have worked very closely on this important investigation.
I am pleased to join you today for the second hearing on
government contractors who cheat on their taxes. Federal
contractors have an obligation to operate according to the
highest ethical standards. That is not just my opinion, that is
the law. The law requires bidders for Federal contractors to be
found to be responsible. I don't understand how a contractor
who is delinquent on Federal taxes could meet the standard of
being a responsible bidder.
The Subcommittee's investigation reveals a shocking lack of
such ethical standards. At our first hearing last year, we
learned that civilian contractors doing business with the
Department of Defense owed an estimated $3 billion in back
taxes at the end of fiscal year 2002. At that time, the GAO
advised us that this problem of tax delinquency and
noncompliance may not be confined to the Department of Defense,
and indeed, further investigation demonstrates clearly that it
is not.
The estimated tax delinquency of contractors doing business
with other government agencies, including key departments such
as the Department of Homeland Security and NASA, may well be in
excess of $3.3 billion. Among the 50 civilian agency
contractors investigated by the GAO for the report we will
discuss today, all were found to have engaged in abusive or
potentially criminal activity.
I think it is important for us to emphasize that these tax
delinquencies were not the result of legitimate hardship. They
were the result of these contractors willfully deciding that
the laws of our country do not apply to them. Rather than pay
their fair share of taxes on income derived from the taxes of
others, they chose instead to inflate their own salaries, to
purchase multi-million-dollar properties, and in some cases to
divert payroll taxes withheld from employees. In one egregious
case, they diverted that money to an offshore bank to finance a
luxury home overseas. And like Senator Levin, I find the cases
where payroll taxes were not remitted to be particularly
outrageous. That isn't even the contractors' money. That is
money that belongs to the employees and it is just totally
unacceptable that this is occurring.
The case studies described in the GAO report do not merely
tell a story of how a business from time to time can pull a
fast one. In far too many cases, contractors pull fast ones
repeatedly, chronically, and apparently without meaningful
penalty.
One example particularly stood out to me. That is the owner
of a business that provides temporary workers which currently
owes $900,000 in delinquent taxes. Through its investigation,
GAO discovered that this contractor has a nearly 20-year
history of closing businesses with tax debts, opening up new
ones, and then incurring new tax debts. In other cases, the GAO
found that some contractors with unpaid Federal taxes had been
convicted of crimes, such as embezzlement and money laundering,
and yet they still received government contracts.
Mr. Chairman, a system that permits participation by such
contractors is a system in failure. I think it is important
that we focus not just on the levy system, which is after the
fact to catch those who fall through the cracks. We have to
correct this up front so that there is a review that prevents
contractors from receiving Federal contracts in the first place
if they are cheating on their taxes.
I very much look forward to hearing our witnesses today. I
would especially like to note that Greg Kutz is here today in
his first appearance as head of the GAO's new Forensic Audit
and Special Investigations Unit. Earlier this year, Senator
Lieberman and I encouraged the Comptroller General to establish
this new unit so that we could focus more on agency and
financial management of high-risk areas. I believe that this
new unit is going to greatly improve our oversight capacity and
I am very pleased that Mr. Kutz has been chosen to lead it.
So thank you again, Mr. Chairman, for your attention and
commitment to this matter of such importance. We simply cannot
allow contractors that get paid with taxpayer dollars to refuse
to pay their fair of Federal taxes. Thank you.
Senator Coleman. Thank you, Senator Collins. Senator Akaka.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I thank
you, Chairman Coleman, for holding this hearing and for your
continued commitment to closing the gap between what Federal
contractors owe in taxes and what is collected by the Federal
Government.
As our budget deficit increases and the national debt
grows, it is essential that the Federal Government does
everything possible to collect what is due. And when we hear
guesses of the amount that is due, it is amazing. No business
could survive very long with billions of dollars in accounts
receivable and little success in collecting them.
Exactly how much is owed? According to the Government
Accountability Office, $3.3 billion in unpaid taxes is owed by
33,000 civilian contractors. What is staggering is that this
amount is in addition to another 27,000 DOD contractors who owe
an additional $3 billion. That is a total of $6.3 billion in
Federal tax debt owed by Federal contractors.
I am particularly disturbed that two-thirds of the
outstanding tax debt is for failure to remit payroll taxes.
This is not about businesses that run into financial hardship
and don't have money to pay taxes. No. This is about employers
who collect money from employees in trust, pocket the money,
and then continue to profit from Federal contracts. This has
been mentioned by the Chairman of our full Committee.
In investigative case studies, GAO found patterns of abuse
with some contractors. While honest Americans are paying their
taxes, these tax cheats open a business, profit from Federal
contracts, steal the payroll taxes, close the business, then
start all over again. In the meantime, they have purchased
luxury cars, commercial real estate, and in one case, even a
professional sports team.
The Financial Management Service of the Treasury Department
bills itself as the Federal Government's money manager. FMS is
responsible for disbursing payments for most Federal agencies.
FMS is also responsible for collecting money owed to Federal
agencies by offsetting various types of payments that pass
through FMS, including payments to civilian contractors.
Since 1996, FMS has administered the Treasury Offset
Program (TOP), to collect delinquent non-tax debts owed to
Federal agencies. FMS collects delinquent tax debt on behalf of
the Internal Revenue Service through the Federal Payment Levy
Program. Under the levy program, IRS sends tax debts to TOP for
collection. Today, we will learn if FMS is living up to its
responsibilities as the government's money manager.
Under TOP, the names and Taxpayer Identification Numbers
(TINs), of debtors in an FMS database are matched against the
names and TINs of recipients of Federal payments. If there is a
match, the Federal payment is reduced or offset to satisfy that
debt.
The questions we ask today are, why aren't there more
matches in TOP, and why was only $16 million collected last
year from contractor payments?
According to GAO, there are various reasons that prevent
matching: No name, no TIN, an invalid TIN, and lack of an
agency location code, to name a few. GAO estimates that FMS
could collect $50 million, or three times more than what is
collected now, If FMS simply exercised greater oversight to
ensure that these data fields are complete and accurate. It
should be as simple as no TIN, no money.
In March 2004, I asked GAO to expand its original review of
unpaid Federal taxes by contractors to determine how much FMS
is collecting from Federal contractor payments for unpaid State
taxes. I thank Chairman Coleman and Ranking Member Levin for
extending this courtesy to me. The Debt Collection Improvement
Act of 1996 allows FMS to collect State tax debts from Federal
payments to contractors. Before FMS can do so, a State must
enter into a reciprocal agreement with FMS that would require
the State to collect unpaid Federal tax debt from State
payments.
The Federal Government and the States have worked together
to collect unpaid tax debts from State and Federal tax refunds.
In 2004, for example, FMS collected $229,000 on behalf of my
home State of Hawaii. But there has not been similar leadership
efforts by FMS to collect State tax debts from Federal
contractor payments.
According to GAO, FMS said that no States expressed
interest. However, the States that were contacted by GAO said
they were unaware of this provision and are interested in
pursuing such agreements.
I am pleased that Mr. Gregg, the head of FMS, is here with
us today. I encourage you, Mr. Gregg, to do whatever is
necessary to make this happen. While this hearing is about how
a Federal program is being used to collect tax debt, the larger
goal is to ensure that those who receive the benefit of Federal
contracts act as good corporate citizens.
Let me state this. Federal contractors must be held
accountable for their actions. This is why, for example, I
introduced the Federal Contractor Extra-Territorial
Jurisdiction for Human Trafficking Offenses Act of 2005 just
this week. My bill, S. 1226, closes a loophole in Federal
criminal law and allows the prosecution in U.S. court of
Federal contractors who engage in human trafficking overseas.
And so we are looking at Federal contractors.
I look forward, Mr. Chairman, to the testimony of our
witnesses on the tax issue, and Mr. Chairman, I thank you so
much for what you are doing in this regard. Thank you.
Senator Coleman. Senator Akaka, thank you. I want to thank
you for your keen interest in this area and all the focus that
you have put on it. It has been extraordinarily helpful and it
is greatly appreciated.
And I want to thank Chairman Collins for her work in
establishing the Office of Forensic Audits and Special
Investigations. I would say, and we are going to get a chance
to hear from Mr. Kutz in a little bit, but to him and to Mr.
Ryan and Mr. Sebastian, we do appreciate the work that you have
done. We have fought to continue the relationship that this
Committee has and Subcommittee has with you to identify fraud,
waste, and abuse. So I want to thank the Chairman. We are
already reaping dividends from the focus that has been
provided.
I would like to welcome our first panel to this important
hearing. Gregory Kutz, Managing Director, Forensic Audits and
Special Investigations, Government Accountability Office; Steve
Sebastian, Director of Financial Management and Assurance Team
at GAO; and finally, John Ryan, Assistant Director of the
Office of Forensic Audits and Special Investigations at GAO.
GAO is here to testify on our request for investigation of
civilian agency contractors who are abusing the Federal tax
system by not paying their taxes. The purpose of this hearing
is to identify further corrective actions that can be taken to
improve the effectiveness of the Federal Payment Levy Program.
It is good to see you gentlemen here again. I appreciate
your hard work that has resulted in the identification of tens
of thousands of Federal contractors who owe billions of dollars
in unpaid taxes. I also appreciate your efforts and look
forward to hearing about Federal contractors at civilian
agencies who are not paying their taxes, including the problems
you have identified with regard to collecting unpaid taxes from
them.
Before we begin, pursuant to Rule 6, all witnesses before
the Subcommittee are required to be sworn. At this time, I
would ask you all to please stand and raise your right hand.
Do you swear the testimony you are about to give before the
Subcommittee is the truth, the whole truth, and nothing but the
truth, so help you, God?
Mr. Kutz. I do.
Mr. Sebastian. I do.
Mr. Ryan. I do.
Senator Coleman. As you are well aware, gentlemen, having
been here before, we will be using a timing system today. When
the green light turns to amber, give yourself about another
minute to finish up. Your full statements will be entered into
the record in their entirety.
We will begin with Mr. Kutz, then Mr. Sebastian will be
presenting the GAO statement this morning, as I understand.
Gentlemen, please proceed.
TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE; ACCOMPANIED BY STEVEN J. SEBASTIAN,\1\
DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE; AND JOHN J. RYAN,\1\ ASSISTANT DIRECTOR,
FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman, Members of the Subcommittee, and
Chairman Collins, thank you for the opportunity to discuss
contractors with tax problems.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Kutz, Mr. Sebastian, and Mr. Ryan
appears in the appendix on page 47.
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Last year, we testified that DOD contractors were abusing
the Federal tax system with little or no consequence. At that
hearing, you expressed concerns that this was a governmentwide
problem. Unfortunately, our bottom line today is that thousands
of civilian agency contractors are also abusing the tax system.
Our testimony has two parts. First, I will discuss
contractors that abuse the tax system, and second, my
colleague, Mr. Sebastian, will discuss why these contractors
face few consequences.
First, we found that 33,000 civilian agency contractors had
over $3 billion of unpaid Federal taxes.\2\ We investigated the
activity of 50 of these contractors, including the owners,
officers, and any related businesses. For all 50 case studies,
we found abusive and potentially criminal activity related to
the Federal tax system.
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\2\ See Exhibit No. 2, GAO Report entitled FINANCIAL MANAGEMENT--
Thousands of Civilian Agency Contractors Abuse the Federal Tax System
With Little Consequence, which appears in the Appendix on page 97.
---------------------------------------------------------------------------
Forty-eight of these case study contractors, as you have
all mentioned, had unpaid payroll taxes, which represent
amounts withheld from employee wages for individual income
taxes, Social Security, and Medicare. However, rather than
fulfill their role as trustees of this money and forward it to
the IRS, these contractors diverted the money for the use of
their business or for personal gain. Regardless of the cause,
willful failure to remit payroll taxes is a felony.
While these companies were stealing millions of dollars
from the government, as shown on the posterboard, our
investigations found the owners spending money on their own
professional sports team, gambling, million-dollar homes, a
shopping mall, luxury automobiles, and a recreational vehicle
worth hundreds of thousands of dollars. Diversion schemes
included the transfer of money to a foreign bank account,
inflated salaries for the owners and officers, and millions of
dollars of cash withdrawals.
Some of the owners were simply poor business managers.
However, others clearly accumulated substantial personal wealth
at the same time their companies failed to pay their taxes.
The companies that we investigated were small to mid-sized
and were closely held. Industries included health care,
building maintenance, manufacturing, security, and a casino.
Ironically, these potential felons are doing business with the
Departments of Homeland Security and Justice.
Senators, let me end by saying that there is something
fundamentally wrong with this picture. If we can't trust these
contractors to pay their taxes, then how can we trust them to
guard our Federal buildings, to manufacture parts for the Space
Shuttle, or to provide health care for our veterans? Instead of
these owners and officers doing time, the government is paying
them millions of dollars for their time.
Mr. Sebastian will now discuss why little has been done to
deal with abusive contractors.
Senator Coleman. Thank you, Mr. Kutz. Mr. Sebastian.
Mr. Sebastian. Thank you, Mr. Kutz.
Mr. Chairman, Members of the Subcommittee, and Chairman
Collins, Federal law presently does not prohibit contractors
with unpaid taxes from receiving government contracts. However,
tools exist to assist in collecting unpaid taxes from
contractors, most notably the Federal Payment Levy Program.
Unfortunately, despite some progress, substantial amounts
of potential tax collections under the program go uncollected
each year. We estimate that in fiscal year 2004, the Federal
Government could have collected as much as $350 million in
outstanding taxes from contractors had all tax debt owed by
civilian agency contractors been eligible for levy action, and
all contractor payments disbursed by Treasury's Financial
Management Service been subject to a 15 percent levy.
In contrast, as you noted, FMS collected just $16 million
in outstanding taxes from these contractors. This gap between
potential and actual collections, which we refer to as the levy
collection gap, results from both exclusions of substantial tax
debt from the program and a lack of proactive oversight and
management. I want to briefly discuss both components.
First, of $269 billion in outstanding Federal taxes, only
$35 billion, or 13 percent, is eligible for immediate levy
action. The posterboard provides a graphic illustration of
this. As it shows, $71 billion of tax debt, or about 26
percent, is excluded because of statutory restrictions, such as
bankruptcy. Another $100 billion, or about 37 percent, is
excluded by IRS policy restrictions, including what IRS refers
to as hardship cases.
Of the $98 billion that is forwarded to the levy program,
only 30 percent is actually eligible for immediate levy action.
The other 70 percent is not eligible until IRS's collection due
process is completed, which can take months and sometimes
years.
Second, with respect to FMS's oversight and management of
the levy program, FMS failed to subject to levy tens of
billions of dollars in payments it disbursed to contractors in
fiscal year 2004 due to control breakdowns. For example, FMS
erroneously excluded $40 billion in payments related to 150
agency pay stations from its debt collection database for
matching with outstanding taxes. Nine billion of this was paid
to contractors with outstanding tax debt.
And FMS paid $17 billion to contractors where Taxpayer
Identification Numbers, or TINs, were not contained on agency
payment files or were obviously invalid, and it paid another $4
billion where contractor names were not included on those pay
files. Without a valid TIN and name to match against the tax
debt, these payments could not be levied.
While inaccurate and incomplete information provided by
agencies contributed to some of these omissions, FMS, as the
Nation's debt collector, has a responsibility to actively
identify and resolve issues that adversely impact the
effectiveness of the levy program. FMS policy decisions have
also led to at least tens of billions of dollars in additional
disbursements to contractors being excluded from potential
levy.
Specifically, FMS uses several methods to disburse funds,
but only payments made through one method are included in the
levy program. FMS excluded the other payment methods because
their inclusion would require system and process changes.
However, FMS performed no study to determine whether the
benefits from additional tax collections would outweigh the
costs associated with such processing and system changes. This
is like flying blind. The lack of proactive oversight and
management of the program has resulted in the Federal
Government forfeiting its ability to collect at least $50
million more in annual tax collections through the levy
program.
FMS faces other challenges. Increasingly, the government is
using purchase cards to pay contractors, $10 billion in fiscal
year 2004. Because payments are made to the banks that issue
the cards and not the contractors, the government doesn't
presently have a means to levy such payments.
Additionally, FMS and IRS have yet to fully implement the
American Jobs Creation Act provision that authorizes the
government to levy up to 100 percent of contractor payments to
collect outstanding tax debt.
In conclusion, allowing contractors to do business with the
government while not paying their taxes creates an unfair
competitive advantage for them at the expense of the vast
majority of Federal contractors that fulfill their tax
obligations. The levy program has thus far failed to achieve
its potential, primarily because substantial tax debt is
excluded and because FMS, the Nation's debt collector, has not
exercised effective and proactive oversight and management of
the program. As a result, the government has missed
opportunities to collect substantial amounts of tax debt.
We believe prompt implementation of the recommendations
contained in our report released today will result in tens of
millions of dollars in annual tax collections.
Mr. Chairman, this concludes our statement. We would be
pleased to answer any questions you or other Members of the
Subcommittee may have.
Senator Coleman. Thank you, gentlemen, and again, we do
appreciate the work that you have done.
Mr. Sebastian, you indicated that Federal law doesn't stop
contractors from receiving contract payments even if they are
not paying their Federal taxes. Should there be, in your
opinion, or any of you, should there be a debarment option for
egregious and repeated conduct for individuals? I think both of
my colleagues talked about cases over, in one case, a 20-year
period. Should there be a debarment, do you believe? I am going
to ask the next panel the same question.
Mr. Sebastian. Mr. Kutz and I actually testified on this
issue a number of years ago. A bill was introduced that would
have, in fact, barred such tax delinquents from entering into
contracts, as well as receiving loans, grants, etc. The bill
was actually voted out of the House Government Reform Committee
and then languished, quite frankly.
Certainly it is a policy option that the Congress could
consider. I would caution you, as we have cautioned in the
past, that there are a host of issues associated with
implementing such a barring provision, including ensuring that
the information related to tax delinquents is accurate and that
the IRS would be able to respond to an inquiry within a matter
of hours as opposed to the days or weeks that it would
presently take. There are other issues with respect to the
contracting community, trying to expedite the negotiation of
contracts as quickly as possible. All of those would have to be
considered.
Mr. Kutz may be able to add more to that.
Senator Coleman. Mr. Kutz.
Mr. Kutz. Well, I think it is the difference between a
preventive and a detective control. The levy program is after
the money has been stolen, basically, when it comes to payroll
taxes, so you are trying to collect it after it is out the
door, versus you are talking about more preventive controls.
Once someone has stolen from us once, let us not do business
with them, so it is a valid policy option.
Senator Coleman. And I would be generous. Not once, five
times, whatever it is. Chairman Collins raised that in her
statement. It is one thing to act after the fact, but when you
have patterns of abuse, not to have the ability to say, hey,
this person is not a responsible contractor----
Mr. Kutz. Right, and the patterns are years and decades in
some cases.
Senator Coleman. Let me ask, Commissioner Gregg from FMS,
in his written statement, he says our effective management of
the levy program is demonstrated by the fact that through the
first 8 months of this fiscal year, FMS has collected more
taxes, $126 million on behalf of the IRS, than in any previous
year. I don't want to get agencies fighting with each other,
but I would like an honest assessment. Do you feel that, as we
sit here today, that FMS has had an effective levy management
program?
Mr. Sebastian. Let me take a shot at that, and then Mr.
Kutz can add to it. I think the information contained in our
report and included in our oral statement would indicate that
we believe that FMS has exercised less than effective oversight
and management of the program, as evidenced by such omissions
as $40 billion in payments related to 150 agency pay stations.
Senator Coleman. The chart on the board,\1\ one of the
comments, I believe it was Mr. Sebastian, in your testimony,
you talked about payments that are made that do not go through
the Treasury Offset Program. In other words, as I understand
it, what you have is FMS makes contractor payments. If they go
through the Treasury Offset Program, they can be screened for
levies, whether people have tax obligations. The money then can
be levied, 15 percent to the IRS, and the system is working.
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\1\ See Exhibit No. 1 which appears in the Appendix on page 96.
---------------------------------------------------------------------------
But apparently there are a series of payments--Fedwire,
purchase card, I believe you mentioned--that do not go through
the Treasury Offset Program, that they go directly to the
contractor, or in the purchase card, to the bank which then
goes to the contractor. Can you explain to me why there isn't a
Treasury Offset Program for these kinds of payments and what it
would take to have a levy in place?
Mr. Sebastian. With respect to the first three on the
chart, the Fedwire, the automated clearinghouse, CTX, and Type
A payments, the issue really comes down to a couple of things,
primarily, the structure of the payment files that are sent
forward. They currently are not compatible with the setup
within the TOP database to affect a matching. So that would
require some programming changes.
Senator Coleman. So I want to correct myself. There is not
a legal impediment. There is not a statutory impediment. This
is a program change that could correct the situation, is that
fair?
Mr. Sebastian. That is correct. The added complexity with
respect to the Fedwire payments, of which there were over $190
billion disbursed in 2004, is that these are same-day payments.
They are actually deposited into the payee's account within the
same day. They are high dollar value, low-volume payments. Of
that $190 billion, neither we nor FMS were ever able to get a
handle on how much of that represented payments to contractors.
Senator Coleman. Again, what would it take to get a better
sense of whether there are some levy obligations here? Are
these programming changes? Are these software changes?
Mr. Sebastian. Programming and processing changes within
FMS.
Senator Coleman. And I suspect there is a cost-benefit
analysis that one has to do here to say, what is the cost of
the change and what is the benefit? Have you been able to do a
cost-benefit analysis, even in a cursory fashion, to determine
whether, in fact, if we make some programmatic changes to
ensure that these payments go through the levy program it will
be worth the price or the cost of the software changes?
Mr. Sebastian. We were able to come up with estimates of
the amount of contractor payments that were being sent through
the CTX and the Type A. It was about $26 billion in contractor
payments. And when we matched those payments against the
outstanding tax debt within IRS, we were able to come up with
some significant dollar values that will be added to the levy.
That was actually a component of the $50 million that we
computed FMS could collect above and beyond the $16 million it
had collected.
Senator Coleman. So again, in your judgment, there would be
the cost-benefit analysis of what it would take to change the
system versus the monies that would be collected, it would be
the interest of the government to do the programmatic changes
so that we could collect the levies and make sure a tax
obligation is being taken care of, is that correct?
Mr. Sebastian. There is clearly some benefit with respect
to the additional revenue streams. What we don't have is
information on what it would actually cost to facilitate such
programming and processing changes.
Mr. Kutz. One more thing I would add on the purchase card
is that the payments to the banks actually would go through
TOP, like Bank of America and CitiBank. But the payments to the
contractors don't. The banks actually make the payments to the
contractors.
Senator Coleman. Mr. Kutz, let me ask you, we talked about
having 50 cases here which I know you have labeled abusive and
criminal, willful failure to remit payroll taxes, a felony. We
had 47 cases, and I am going to ask the Commissioner about this
when I have a chance to question him. Do we have a sense of
whether there has been any criminal action or any criminal
cases filed either in the 47 that you did with the Defense
Department or even in these 50, any sense of whether that is
being done?
Mr. Kutz. Yes. I will let Special Agent Ryan follow up, but
we don't see a lot of evidence that there has been any
prosecutions or indictments at this point. There is some
activity, but most of the activity seems to be recent. But it
is interesting to look at some of the information we got back
about some of the contractors that said that they were defunct
or bankrupt. I think that kind of misses the point here in that
the actual owners are the ones we are going after.
So to the extent that there is a shell company--if we had
stopped our investigation when we saw that there was a defunct
company, we would have missed a lot of what we were reporting
to you today. So there is something behind the defunct
companies, because someone steals the money, shuts down the
company, and moves on.
Senator Coleman. And they are able to restart another
company and do business with the government, aren't they?
Mr. Kutz. Absolutely.
Senator Coleman. I mean, that is one of the frustrations
that we have here. Agent Ryan.
Mr. Ryan. I would just like to add, Senator, that in the
cases that we looked at, of the 47 in the first report, shortly
after your hearing, the IRS did come over. They did review our
work papers and indicated that there were 10, 12, or 14 cases
that needed further investigation.
After that, we really didn't hear from them until about 2
months ago, when this hearing was announced, that we started to
get some inquiry from the field from the agents that had the
cases assigned to them. I don't believe that there was any
action taken because the agents were never contacted by U.S.
Attorneys' Offices, our work papers were never requested under
discovery, and there were no subpoenas issued for potential
witnesses.
So with that, we are here today, like Mr. Kutz just said. I
don't believe that at this stage of the game there has been a
lot of action on those cases.
Senator Coleman. I understand the sense that we should be
looking at administrative remedies before criminal remedies. I
was a prosecutor for many years, and if we can settle
something, you don't have to file criminal charges.
My concern is that in cases of clearly the most willful,
the most abusive cases, if you don't use that authority, I
think it sends the wrong signal. Again, if we could clearly
identify cases of repetitive conduct, of clear fraud, of money
going into personal pockets at the expense of both the employee
and the government. So that is the frustration I have with what
I am seeing and the lack of action that we are seeing in regard
to these cases.
Mr. Kutz. We concur. Certainly, we would believe that some
prosecutions, possibly high-profile ones, in some of these
cases would send a message out to people that this is not
proper behavior.
Senator Coleman. Thank you. Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
I want to go through the process a little bit with you. The
IRS sends to FMS the list of people or companies that owe
taxes, and that is done on a regular basis, I believe?
Mr. Sebastian. Weekly.
Senator Levin. Weekly. So FMS knows the names of companies
that owe the government taxes.
Mr. Sebastian. It has a control name sent over by the IRS
along with the Taxpayer Identification Numbers, four
characters, alpha characters.
Senator Levin. It just has the four? OK. That list, then,
when an agency enters into a contract, presumably could be
compared by the FMS with the contract if they had that four-
digit identifier, is that correct? FMS could make that match
before any payments are sent out to a contractor.
Mr. Sebastian. If they had a listing of prospective
contractors or contractors with that information.
Senator Levin. Either one. If they got a list from an
agency, we are about to enter into contracts with these 50
people. Are any of those on your list, FMS? Could FMS tell the
agency--are they allowed under current law--there is a notice
of tax delinquency that has been sent, or they owe back taxes?
Is that permitted under current law?
Mr. Sebastian. Presently, I do not believe so.
Senator Levin. Is there any reason why we shouldn't amend
the law so that the FMS can be informed by the IRS of the list
that was sent to them of contracts about to be entered into
that X number are on the IRS delinquency list? Is there any
reason that you can think of why we shouldn't allow FMS to be
given that information by IRS?
Mr. Sebastian. It is certainly a valid policy option for
you all to consider.
Senator Levin. We will ask IRS as to whether they would
have a problem with that.
So now you have a situation where payments are about to be
sent out by the FMS to presumably either a company or a bank
which is going to send money to that company. At that point,
they make a match. For reasons I don't understand, the current
law doesn't allow them to make the match before the contract is
entered into, but we will go there with the next panel.
Now you have payments going out. A significant number of
those payments go to people who owe money on their taxes
because the FMS doesn't have the TIN number, is that correct?
Mr. Sebastian. That is correct.
Senator Levin. And that is a decision which FMS has made,
right? I mean, they get a form from an agency. If it doesn't
have the number on it, they could tell the agency, you give us
that number. They could do that under current law, right?
Mr. Sebastian. Yes, they could. In fact, agencies are
required under law to provide TINs.
Senator Levin. But they don't do it at times, right?
Mr. Sebastian. That is correct.
Senator Levin. And the FMS up until now has not said, you
give us a completed form or we are not going to pursue it.
Mr. Sebastian. That is correct. They have not rejected
payment requests for that reason.
Senator Levin. That seems to me to be a fairly simple step.
Otherwise, there is not going to be a match made in a lot of
cases, because there is no number to match. The TIN number
isn't on the form for the payment.
Mr. Sebastian. Now, there are some exceptions with respect
to the TIN requirement. For example, payments to a foreign
company being made by a Federal agency would be exempt. But
what would be required is a certification of those exempted
entities from the TIN requirement.
Senator Levin. There could be a note made of that.
Mr. Sebastian. That is correct.
Senator Levin. Now you have also got a situation--and
sometimes these forms come in with no name of the contractor on
it, either, is that correct?
Mr. Sebastian. That is correct.
Senator Levin. And FMS has the power under current law to
reject the form from the agency. You give us a complete form,
TIN number, name, or else we are not going to accept it.
Mr. Sebastian. I am not aware of anything in law that would
preclude them from doing that.
Senator Levin. All right. Now, we also allow under current
law the payments to be made to a bank, in effect, instead of
directly to the contractor, is that correct?
Mr. Sebastian. That is correct.
Senator Levin. Is there any reason that you know of that we
couldn't say that payments--assuming we can get the list from
the IRS to the FMS of folks that are in arrears on taxes--that
you cannot have that indirect payment made? You must, if you
are on a delinquent list, have that payment go directly to you.
The computer will not accept a check going to a bank, or a wire
transfer, or use of another credit card, in effect, if that
delinquent company is on the delinquency list. Is there any
reason why we can't provide for that?
Mr. Kutz. I would say the purchase--if you are talking
about the purchase card----
Senator Levin. Both.
Mr. Kutz [continuing]. That is a little harder problem
because the banks are involved and it is merchant banks and so
it is a little more complex situation, which I think they have
just begun to look at. So they may have looked at it before,
but that is a harder one to do than the FMS process you have
just described.
Senator Levin. Well, explain to me why, if FMS has a list
of companies that are deliquent--the law changes, and the IRS
can give them the list of companies that are delinquent in
their taxes--we couldn't simply say to the computer, you cannot
send a payment owing by the government to that contractor that
is on that list unless it is made directly to the contractor,
which then means we can hold off the 15 percent or more for
back taxes.
Mr. Kutz. I believe you would have to share that
information with the banks that are making the payments to the
contractors in that case.
Senator Levin. You would have to share the----
Mr. Kutz. The information on tax problems with the actual
bank who is making the payment to the contractor, because the
contractor gets paid in a matter of days----
Senator Levin. No, but I am not even allowing the payment
to go to the bank. I am stopping the payment from going to the
bank if there is a contractor that owes money.
Mr. Kutz. It is just like your credit card, though. There
is maybe a thousand vendors on one credit card bill. So if you
stop the payment, you would be stopping the payments to
everyone, not just the one. What happens--it is just like your
credit card.
Senator Levin. Isn't it FMS that is making the payment to
the bank?
Mr. Kutz. Yes.
Mr. Sebastian. Correct.
Senator Levin. On a contract.
Mr. Kutz. Well, on a purchase card which is--again, it is
just like your credit card statement. You might get a bill with
200 charges on it that are going to go to contractors, so the
bank is making the payment to the contractors.
Senator Levin. I am missing something here, though, and I
want to try to understand it. If a contractor is saying, send
the payment owing me to a bank, that has to happen, right?
Instead of sending it to me, send it to a bank. Apply it to a
purchase card.
Mr. Kutz. Yes. The bank gets paid and the bank pays the
contractor, correct.
Senator Levin. But that is at the request of the
contractor, is it not?
Mr. Sebastian. I think what you may be referring to is
actually preventing a vendor with delinquent taxes from being
able to get payment through a purchase card----
Senator Levin. Exactly.
Mr. Sebastian [continuing]. Stopping it before they
actually get the purchase card.
Senator Levin. Right. You just say that the vendor is on
that list, which should exist, that FMS has of delinquent
vendors, that payment can not go in directly. It cannot go to a
bank. It must go directly to the vendor and then it is subject
to the 15 percent.
Mr. Kutz. It would seem possibly that the other agencies
might need to be involved so that they would deny those
contractors from using the purchase card, from being paid
through a purchase card.
Senator Levin. My time is up. There is a contractor out
there, right?
Mr. Kutz. Yes.
Senator Levin. The money is owed that contractor.
Mr. Kutz. Yes.
Senator Levin. And the contractor must say, don't send it
to me. Apply it to a purchase card. Isn't that what happens?
Isn't that the decision of the contractor?
Mr. Ryan. Senator, I think we are talking about apples and
oranges here. I understand what you are saying. That would be
more in line with using the card as a payment method in regard
to a contract that is set up, as Senator Collins and Senator
Coleman mentioned earlier, about identifying a contractor in
the early stages before the contract is awarded. When the
credit card is being used as a payment method, there can be a
hold put on those payments.
Senator Levin. That is what I am saying.
Mr. Ryan. And there is also another method----
Senator Levin. Albeit it at a slightly later stage. Their
question was, why even issue the contract, which is a perfectly
important question as far as I am concerned. But I am saying,
after a contract has been issued, if that person is on the list
that FMS has of delinquent contractors, why then can we not
tell the computer--you may not apply the payment owing the
contractor to the purchase card. You must send it directly to
the contractor. We are not going to accept that request to send
it to the bank.
Mr. Ryan. I think that is an issue that is probably going
to be addressed later on in regards to what you are talking
about. But there is also another system called Power Track that
is being used in the government in which there is a certain
financial institution that is hired to handle the payment
process. When receipt and acceptance comes in to pay on these
bills, they would absolutely have the ability under your
scenario to know who that contractor is before they would make
the payment to that contractor. So the intermediary would be
whoever the government would contract to handle that payment.
Senator Levin. I don't know why FMS can't simply notify its
computer that we have a list from IRS. These are the delinquent
companies. You do not send a check to anybody except that
company. It doesn't get wire transferred. It doesn't go through
a credit card. It has to go to that company, and then that is
subject to the withholding for back taxes. I don't know why the
FMS can't get that list from IRS and then cannot tell its
computer, only direct payments subject to withholding for back
taxes.
That is my question. I am not, perhaps too obviously, a
high-tech guy, but I will see if my staff can explain this to
me.
Senator Coleman. Chairman Collins.
Chairman Collins. I guess I shouldn't send you a Blackberry
message? [Laughter.]
Mr. Kutz, I want to go back to the issue that I raised in
my opening statement. We have talked about some important
reforms that would help with this unacceptable situation. One
is improving the levy system. The second one is to strengthen
the Federal Acquisition Regulations to allow firms engaged in
tax evasion to be debarred. That has been, I am told, a
recommendation of the joint task force.
But I am still fixated on what we could do on the front end
to prevent businesses or individuals with serious tax
delinquencies from receiving Federal contracts in the first
place. It is fine to have systems to take care of those who
slip through the cracks and get contracts despite evading
taxes, but we really ought to have a system that allows us to
screen out potential contractors who have serious tax
delinquencies. Do you have any recommendations in that regard?
Mr. Kutz. That was what Mr. Sebastian mentioned earlier
with the legislation from 2000 on the House side that would
have barred contractors from doing business, and the process
would have been the contracting officers would have checked
with the IRS to determine whether a company had severe tax
delinquencies, and if they did, that would have barred them
from getting that contract. And that was--the procurement
community at that point in time fought that legislation with
the streamlined acquisition problems. They didn't want to have
contracting officers spending their time looking to see what
kind of people we were doing business with, quite honestly.
Chairman Collins. I remember that bill being mentioned in
testimony last year when I brought up this same frustration
that I have. But are there technical reasons why that couldn't
be done? Would it slow the procurement process in a way that
would be unacceptable, or do you see that as a practical way
for the contracting official to do a check with IRS? Is this a
practical solution?
Mr. Kutz. With respect to IRS, and the Commissioner can
probably talk about that further. There are a couple of issues:
The timeliness of the response of IRS back to the contracting
officers, and, of course, the issue of accuracy. We don't want
to prevent taxpaying contractors from doing business with the
government. So we were concerned when we testified on that
legislation in 2000 of timeliness and accuracy of data, and so
with tax system modernization, I think that would be a question
for the Commissioner. But aside from those things, it is an
absolutely valid policy option. I think it is much easier to
explain to the American taxpayer something like that than just
relying on this levy program after they have already stolen the
money.
Chairman Collins. I certainly agree. You have done work now
looking at delinquent contractors in the area of defense
contracts and now civilian agency contracts. Have you come
across any evidence that contractors who are evading tax
obligations are receiving Federal grants?
Mr. Kutz. Yes. Several of our case studies were receiving
Federal grants, which is another outrageous situation, that
sometimes the grants were larger than the amount of taxes that
they owed and there was nothing done about that. Special Agent
Ryan can add further to the two cases, I believe.
Chairman Collins. Mr. Ryan.
Mr. Ryan. Senator, in the cases that we investigated, we
found out that after we conducted the interviews that the
corporations did, in fact, receive grants. Some of the grants
were from the Department of Energy, and as Mr. Kutz said, the
grants were larger than the taxes that were owed. And I am not
quite sure, but I don't think that the grants were ever levied.
Mr. Kutz. And I believe the other one was with the
Department of Homeland Security.
Chairman Collins. That was going to be my next question,
because you mentioned in your testimony that you had looked at
the Department of Homeland Security. The Chairman mentioned the
case of security guards being provided by a contractor with a
serious tax problem. Are you finding even examples of
contractors who have committed crimes of integrity, such as
embezzlement, who are doing business with sensitive agencies
like the Department of Homeland Security? I know you found that
with some defense contractors from your last study.
Mr. Kutz. Yes, and I think three of our 50 had been
convicted of those types of crimes and had those types of
issues in their background. Also, drug issues were involved
with some of these folks. So certainly, it is a bit disturbing
to see that the people who we are talking about today are
guarding our Federal buildings, and if we can't trust them
again to pay their taxes, it is very difficult to explain how
we can trust them to guard our buildings. How do we know if we
are dealing with who we think we are dealing with?
So that gets back to the front-end controls you are talking
about, trying to determine who we are doing business with
before we let a contract.
Chairman Collins. Mr. Chairman, I would suggest that this
is a whole new area that we should look into because it is
outrageous that a contractor is receiving contracts if there is
a serious tax delinquency. But if they are receiving grants, in
some ways, I think that is even worse and we need to do some
further work in this area.
I want to switch to another issue that troubles me greatly
and that is the competitiveness of a contractor who isn't
paying his taxes, who may even be withholding his employees'
payroll taxes. Doesn't that business have a competitive
advantage in competing for a contract? He may well be able to
offer a better price because he is cheating on his taxes.
Mr. Kutz. That is absolutely true, yes. When you think
about wage-based industries, which is most of what we looked at
here, it is a 15.3 percent advantage on the wage base. In
addition to that, we identified many of the contractors, as
some of you have mentioned, that owed corporate taxes. And so
if you are not paying your corporate taxes, you are not paying
your payroll taxes, and then we had a number of the officers
and owners who had hundreds of thousands of dollars of
individual income taxes that they owed. So this all presents a
very unfair situation for the vast majority, as Mr. Sebastian
said, of government contractors who do pay their taxes.
Chairman Collins. This is not only unfair to the taxpayers,
it is unfair to the legitimate businesses who are trying to
compete for Federal contracts.
Just one final quick question. In testimony submitted for
the record, Mr. Everson has indicated that the administration
is proposing to incentivize FMS to levy payments by allowing
them to keep part of the levied funds. It strikes me as an odd
situation to have to provide an incentive to FMS to do what it
is designed to do, but maybe I am missing something. Mr.
Sebastian, what is your view on that?
Mr. Sebastian. I guess my only reaction to that is with
respect to the levying of payments or offsetting of payments
for non-tax debt, it is my understanding that FMS does, in
fact, get a small user fee related to any collections coming
out of that process. So it is not unique in terms of the
services FMS has provided to other agencies for non-tax debt.
Chairman Collins. Mr. Kutz, do you have a comment on
expanding that?
Mr. Kutz. Well, they are the Nation's tax debt collector
and other debt collector, so it is part of their
responsibilities. I would say anything that can help make this
better, I would support certainly, and if it takes that--I am
not sure it should need that, but if, in fact, something like
that helps better incentivize the system so that you can
collect tens and hundreds of millions of dollars more, we are
looking for results either way.
Chairman Collins. I must say that it seems odd to me to
give an incentive to FMS when their job is to levy such
payments. But perhaps the system is so broken that we need to
consider that.
Thank you, Mr. Chairman.
Senator Coleman. Thank you, Senator Collins. Senator Akaka.
Senator Akaka. Thank you, Mr. Chairman.
Mr. Kutz, in your written testimony, you testified that FMS
has not taken proactive action to notify States that they can
enter into reciprocal agreements with the Federal Government to
collect each other's debts through offsetting contractor
payments. How does that fit into your overall findings related
to FMS's overall management and oversight of the Federal
Payment Levy Program and would pursuing reciprocal agreements
with the States be beneficial to both them and the Federal
Government?
Mr. Kutz. Yes, I believe it is consistent with our finding
of ineffective management oversight and control, and you see
the posterboard Senator Coleman had up there and you could just
add that as another example of FMS not being proactive in their
approach here, and certainly evidence to other programs that
have been--agreements with States have resulted in hundreds of
millions of dollars of collections. So it would seem that there
is a mutually beneficial situation here for the Federal
Government and States to pursue this alternative.
Senator Akaka. Thank you. Mr. Kutz, you have testified that
civilian contractors owe billions of dollars in unpaid taxes.
Some of this amount is not available for matching in the TOP
database for various reasons, including legal restrictions or
policy decisions. Other debt is not matched against Federal
contractor payments in the TOP database because of various
issues relating to the quality of the payment records. Some of
these limitations are outside of FMS's direct span of control.
My question to you is what specific improvements could FMS
make to the levy program without additional legal authority to
increase collections?
Mr. Kutz. I would just say, overall, most of this is a
management issue from the FMS side that would not require much
more legislation. It really is a management issue. I would let
Mr. Sebastian expand on that.
Mr. Sebastian. I think Mr. Kutz is absolutely correct. The
$50 million in additional tax collections that we identified,
and recognize that would not be complete because of our own
limitations with respect to data, is all within the power of
the FMS to change without any legal modifications.
With respect to the extensive tax debt that does not go
over to the TOP program, as we pointed out in our written
statement, a good percentage of that, about $71 billion,
currently is legally restricted from going forward to the TOP
program. Bankruptcy is one scenario. Another scenario would be
where the IRS has not completed the process of notifying the
taxpayer with respect to the amount due and giving that
taxpayer the opportunity to appeal the tax debt.
Senator Akaka. Mr. Sebastian, during the review, your team
discovered that most of the payment files from the State
Department did not have valid contractor names.
Mr. Sebastian. That is correct.
Senator Akaka. In fact, over $3.8 billion in contractor
payment files that you found which did not have valid
contractor names, of that $3.2 billion was from the State
Department alone.
Mr. Sebastian. Yes.
Senator Akaka. How difficult was it for your team to find
this error and how hard was it for the problem to be fixed?
Mr. Sebastian. Unfortunately, a cursory review of that file
disclosed the fact that there were no names included. So it did
not take sophisticated techniques to identify that problem.
We notified FMS as well as the State Department of the
issue. The State Department was able to ascertain that they had
incorrectly been providing the wrong field on their payment
file that was going forward to FMS, and they had actually been
doing this since the 1980's. They were able to effect a change
almost immediately. So those payments should now be coming
forward with contractor names and will be subject to levy.
Senator Akaka. Mr. Sebastian, as noted in the GAO
testimony, there are various reasons that prevent a match in
TOP between a tax debt and a payment. One such reason is an
invalid agency location code. Your team found that $40 billion
of last year's contractor payments were not even sent to TOP
for potential matching against debt because FMS does not have a
current agency location code list in TOP.
Is it true that FMS has a list of invalid agency location
codes in its disbursement system, and if so, what would it take
for FMS to update the TOP database? Do you know if FMS has, in
fact, updated the list after GAO told them about this problem?
Mr. Sebastian. I think part of the issue goes back to the
fact that when the Treasury Offset Program and then the Federal
Payment Levy Program were developed, in designing the TOP
database, at that point in time, FMS put together a complete
inventory of all agency location codes. Those codes were then
loaded within the TOP database to effect a match.
The problem was that there was no consistent oversight
where when new agencies, such as the Department of Homeland
Security, came into being that generated additional agency
locations or paying stations, the agency location codes
associated with those were entered into TOP. It would be a
fairly simple process to update that and then continuously
monitor it as new agency paying stations cropped up.
My understanding is that FMS is in the process of
developing some appropriate oversight for that to make sure
that the inventory is maintained. I don't know whether they
have updated TOP for all of the 150 paying location codes we
identified.
Senator Akaka. Thank you very much, Mr. Chairman.
Senator Coleman. Thanks, Senator Akaka.
Senator Levin, I know you have to leave, but I want to
defer to you if you have any follow-up questions you want to
ask.
Senator Levin. I just had one additional question. I have a
lot, but one I am going to ask the panel. Is there any reason
why we should not require people who are getting Federal
contracts to represent on their contract which they sign that
there are no outstanding tax delinquency notices against them,
or if there are, to list them, to make a representation to the
government which would then, if false, be the basis of action
against them under the criminal code? Is there any reason why
we shouldn't put that right in the contract?
Mr. Kutz. I am not aware of any.
Senator Levin. Is it in the contract, as far as you know,
right now?
Mr. Kutz. Not that we are aware of.
Senator Levin. I think that would be a fairly simple step
to take. That becomes a criminal misrepresentation. I am not
saying that they don't owe taxes. I mean, people can owe taxes
and they can be in dispute or they can owe taxes which are not
in dispute. It is not a crime to owe taxes. It is a crime to
owe trust fund taxes, payroll taxes.
Mr. Kutz. Right.
Senator Levin. That is a crime. But it is not a crime to
owe taxes to the Federal Government. But it is a crime to
misrepresent to get a contract whether you owe taxes. It seems
to me that would be a fairly effective mechanism to get some of
this money that is owing to us. Thank you.
Senator Coleman. Thank you, Senator Levin.
If there are no follow-up questions, I will excuse this
panel. Thank you, gentlemen, for your outstanding work.
We will now call the second panel. I would like to welcome
our final panel of witnesses for this morning's important
hearing. We have with us the Hon. Mark Everson, Commissioner of
the Internal Revenue Service, and Richard Gregg, the
Commissioner of the Treasury Department's Financial Management
Service.
Mr. Everson, it is good to see you again. We always
appreciate you coming before this Committee and appreciate the
cooperation we have been getting from the Internal Revenue
Service on the investigative matters we have pursued. As you
remember, in February 2004, you testified before the
Subcommittee regarding IRS's plans to make $28 billion in
additional tax debt available to the Federal Payment Levy
Program. I look forward to hearing the results of this action
as well as the status and results from implementing the Federal
Contractor Tax Compliance Task Force recommendations, which I
commented on in my opening statement and have been very
appreciative of the work that has been done there. I would also
be interested in knowing of any further action that IRS can
take to improve the effectiveness of the Federal Payment Levy
Program.
Mr. Gregg, I also want to welcome you back and look forward
to hearing how you will work with us to identify the problems
identified by the GAO in their latest report on tax delinquent
civilian contractors and Federal-State reciprocal tax
collection efforts.
I also want to thank you both for your participation in the
Federal Contractor Tax Compliance Task Force. The continuing
success of that effort would not have been possible without
your personal involvement and commitment. While I recognize
that a task force is a team effort, there are members who
provide vision and direction to the effort. In that respect, I
would also like to recognize Pam Watson, Fred Schindler, and
Julie Schwartz of the IRS, Dean Balamaci and Paul McVicker of
the FMS, Lisa Romney, Matt McGinnis, and Martha Stearns of the
Department of Defense for their exceptional dedication to
achieving the goals of that task force.
Again, I sincerely thank both of you for being with us at
this morning's hearing. As you are aware, all witnesses,
pursuant to Rule 6, are required to be sworn before the
Subcommittee. At this point, I ask you to raise your right hand
and ask, do you swear that the testimony you will give before
the Subcommittee is the truth, the whole truth, and nothing but
the truth, so help you, God?
Mr. Everson. I do.
Mr. Gregg. I do.
Senator Coleman. You again are familiar with the timing
system here. When the green light turns to amber, you have
about a minute to sum up and your entire written statement will
appear in the record in its entirety. I would ask that you
limit your testimony to no more than 10 minutes and we will do
10-minute rounds for the panel.
Commissioner Everson, you will go first, followed by
Commissioner Gregg. After you have given your testimony, we
will turn to questions. Commissioner Everson.
TESTIMONY OF HON. MARK W. EVERSON,\1\ COMMISSIONER, INTERNAL
REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY
Mr. Everson. Mr. Chairman, Senator Akaka, thank you for
inviting me here today. First, let me say that I appreciate
your strong support for strengthening the integrity of the
Nation's tax system through enhanced enforcement activities.
This Subcommittee has done important investigative and
oversight work in a number of areas, particularly abusive tax
shelters. And I thank you for the support you have offered for
the Administration's budget request for IRS enforcement
activities.
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\1\ The prepared statement of Mr. Everson with attachments appears
in the appendix on page 76.
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As to today's subject, I welcome your continued interest in
tax compliance by Federal contractors. Vigorous enforcement of
the tax law will help reduce the tax gap. Earlier this year, we
announced that the gross tax gap, the difference between what
taxpayers should pay and what they actually pay on a timely
basis, exceeds $300 billion per year. Even after IRS
enforcement recoveries and late payments, the tax gap is over a
quarter-trillion dollars per year. That is inexcusable.
Average Americans pay their taxes honestly and accurately.
They have every right to be confident that when they do so,
neighbors and competitors are doing the same. To bolster public
confidence in the tax system, the IRS has ramped up its audits
of individuals, particularly high-income taxpayers and
corporations. As you know, we are focusing more on abusive
shelters and conducting more criminal investigations. We have
collected over $3.7 billion in the settlement initiative for
Son of Boss, a particularly egregious shelter of which this
Subcommittee is well aware.
To frame the discussion of tax collections from Federal
contractors, let me share with you two charts.\2\ The first
shows our overall enforcement revenues. Enforcement revenues
are the direct revenues the IRS gets from collection, audit,
and document matching programs. We are doing better, as you can
see, up to $43 billion last year.
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\2\ The charts referred to are attached to IRS Commissioner
Everson's prepared statement which appears in the Appendix on page 87.
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The biggest piece of enforcement revenues comes from
collections. Levies are an important component of our
collection program. This second chart traces the number of
levies we have made over the same period.\3\ You can see how
they disastrously decreased after enactment of the IRS
Restructuring and Reform Act of 1998. They are now up
considerably, but still well below historic levels.
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\3\ The chart referred to appears in the Appendix on page 88.
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As part of our broader collection efforts, we are
particularly cognizant of the need to ensure tax compliance by
Federal contractors. Simply stated, if someone wants to do
business with the government, the people can and should demand
that vendors are current with their Federal tax obligations.
Since your hearing 16 months ago, we have taken a number of
steps to assure monies owed are paid. Results are promising.
Frankly, I think that the Subcommittee can take much of the
credit for this progress, and I want you to know that we expect
continued improvements in the future.
When I appeared before this Subcommittee in February last
year, I spoke about the establishment of a joint task force
that you have mentioned. In March 2004, the IRS, FMS, and DOD
established the Federal Contractor Tax Compliance Task Force.
The new task force also includes representatives from GSA, OMB,
and Justice. The task force has implemented several actions to
ensure that Federal contractors pay their taxes and that we
take appropriate enforcement actions, including levies, to
collect unpaid taxes.
We have both increased the pool of debt subject to levy and
improved our collection procedures. Compared to January 2004,
an additional $28 billion of tax is now subject to levy. We
have improved and accelerated the collection process by
increasing the frequency of matching activities. We have taken
steps to streamline our notice process to ensure that all
notice requirements, including due process notices, are met
earlier in the collection process.
The IRS and the Defense Department are working to implement
a system to verify the name and Taxpayer Identification Number
of each new potential contractor prior to contract award.
Accurate records will ensure that delinquent contractors are
identified and a portion of any vendor payment is levied and
applied to the tax debt.
As a result of these improvements, total collections
through the Federal Payment Levy Program surpassed $126 million
through May of this fiscal year. This is the whole program,
which includes not just contractors. But you can see, this is
the last 2 years. I guess that program sort of fell off the
tracks. [Laughter.]
This last piece here, this is just through 8 months only.
So already we have surpassed--this is the contractor piece.
This is the whole program, including Federal contractors and
everybody. The difference between this and what we are talking
about here is a lot of levies that come off of Social Security
checks basically. So that is up already compared to a year ago.
That is the overall program that is speeding collections.
Now let us go to the contractors themselves. This is just
what we are talking about today, the Federal contractors, DOD
and civilian contractors are both in these numbers. Same thing,
this shows that collections are dramatically up, and already in
8 months we surpassed what we did in the whole fiscal year.
You have suggested that the task force expand its mission
to include civilian contractors as well as those used by DOD.
We will do this. I have also charged the task force with
reviewing all remaining operational exclusions from the levy
program in hopes of further increasing the number of debts
available for levy. The task force will take up the challenges
identified in the GAO report.
While we continue to vigorously attack non-compliance by
contractors, I want to emphasize as I did last year that
protecting taxpayer rights is a cornerstone of our collection
process, even when it means collection action is delayed.
Consideration for taxpayer rights must be balanced with our
desire that Federal contractors pay their taxes. Thank you.
Senator Coleman. Thank you, Commissioner Everson.
Commissioner Gregg.
TESTIMONY OF RICHARD L. GREGG,\1\ COMMISSIONER, FINANCIAL
MANAGEMENT SERVICE, U.S. DEPARTMENT OF TREASURY
Mr. Gregg. Chairman Coleman, Members of the Subcommittee, I
welcome the opportunity to discuss the role of the Financial
Management Service in the collection of delinquent Federal tax
debt owed by Federal contractors conducting business with
civilian agencies.
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\1\ The prepared statement of Mr. Gregg appears in the appendix on
page 91.
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Mr. Chairman, I believe that FMS has a track record that
clearly demonstrates excellent leadership and program
management with respect to the governmentwide collection of
debts, both non-tax and tax. Since the inception of the Debt
Collection Improvement Act of 1996, FMS has collected $24
billion in delinquent debts that would otherwise have not been
recovered. More importantly, for the past several years
virtually every trend line shows increases in collections with
more than $400 million collected in the tax levy program alone.
Our effective management of the levy program is
demonstrated by the fact that through the first 8 months of the
fiscal year FMS has collected more tax debts, $126 million, on
behalf of IRS than in any previous fiscal year. Of key interest
to this Subcommittee, the collection of tax debts by levying
vendor payments has increased to $26 million in the first 8
months in fiscal year 2005 compared to $20.8 million in all of
fiscal year 2004.
We will continue to make improvements in fulfilling our
responsibilities, recognizing that managing any program
involves making choices and setting priorities. FMS has made
such choices in managing our limited, but nonetheless
important, tax levy program. We have allocated resources to the
highest management priorities to maximize collection and ensure
that proper management controls are in place. The growth of the
debt collection program in general and the tax levy program in
particular is a result of setting plans and priorities and then
maintaining the focus and discipline to execute them.
In my statement this morning I will use my time to discuss
the actions FMS is taking in response to four key
recommendations by the Government Accountability Office
regarding the tax levy program and its use in the collection of
tax debt owed by civilian contractors.
The first one is the taxpayer identification number and
names. GAO has recommended that FMS reject payment requests
that do not contain the information necessary to carry out the
levy program. Such action on the part of FMS has great
potential to interfere with the timely disbursement of Federal
funds to contractors who do not owe delinquent taxes. Even more
importantly, it would blur important legal authorities and
responsibilities.
As the Federal Government's chief disbursing office, FMS
ensures that certified payments submitted to FMS are disbursed
in a timely and an accurate manner. The certifying officials at
Federal program agencies are responsible for ensuring the
accuracy and validity of the payment information, such as name,
TIN, and payment type, and for ensuring that the payment is
legally authorized. Federal law provides that the certifying
official is responsible for the information contained on a
certified voucher. Putting FMS in a position of picking and
choosing which payments to disburse would, I believe, blur the
critical distinction between the agency's certification
authority and FMS disbursement authority.
I believe a better approach is to step up our efforts to
monitor and ensure agency compliance. A major step forward
relates to the recommendation by the Federal Contractor Tax
Compliance Task Force.\1\ In October, a program was implemented
whereby as part of the contractor registration process a
registering contractor's TIN number will be validated. If the
TIN cannot be validated, with very few exceptions, the
contractor will not be eligible to conduct business with DOD or
any Federal agency.
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\1\ See Exhibit No. 3, Federal Contractor Tax Compliance Task Force
Report, which appears in the Appendix on page 186.
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As part of the stepped-up efforts, FMS has also been
sending out reports on a monthly basis to all CFOs providing
updates on their agency TIN, name, and payment type compliance.
We will work closely with those agencies whose payment requests
continue to contain incomplete information. This will also help
compliance.
In addition, FMS is working with the Federal Credit
Council, a group of top executives of creditor agencies and the
council's debt collection subcommittee regarding TIN, name and
payment type compliance. We will evaluate this multifaceted
approach after one year and determine at the time whether
withholding payments should be reconsidered.
GAO has recommended that FMS develop and implement
procedures to include Type A, automated clearinghouse corporate
tax exchange--that is ACH-CTX--and Fedwire payments in the levy
process. FMS fully agrees with the goal of including all
eligible contractor payments and I would like to update you on
the actions taken to levy Type A payments and our plans to
address ACH-CTX and Fedwire payments.
Type A payments are often unanticipated and typically made
by agencies that do not have the payment volume to support
sending large-scale bulk payment files. Disaster relief
payments are an example of Type A payments. FMS is currently
implementing system changes that will allow us to begin levying
these payments later this year and we expect to be fully
operational next year.
The Fedwire payment system is used for low volume, high
dollar transactions that are deposited into a recipient's bank
account on the same business day. This same-day payment
requirement for Fedwire is in contrast to our normal electronic
and check payments where FMS has more time to match the payment
file against our debtor database. Because of Fedwire's same-day
payment requirement, operational and program changes to include
these payments in the levy process will be extremely difficult
and would increase the risk of erroneous payments.
While the dollar value of the payments that run through
Fedwire is large, Federal agencies have advised us that only a
small percentage of these payments are disbursed to Federal
contractors. In the last several weeks, FMS has begun to work
with agencies to identify more precisely the payments in the
Fedwire portfolio. In the near future, FMS will make payment
changes which will require agencies to identify in all
instances the type of payments being made through Fedwire.
In addition, we are developing new guidelines for all
Federal agencies to submit contractor payment requests to
payment systems that can be levied. We will notify agencies
about these new guidelines in the next monthly letter to agency
CFOs.
Our approach should help to minimize the number of
contractor payments going through Fedwire, but it does not
resolve the larger issue of whether FMS's overall debt
collection program can offset or levy the remaining Fedwire
payments. Within the next year we will conduct an analysis of
the payments going through Fedwire, the potential delinquent
debt that could be collected if we are able to offset or levy
those payments, and the determination of whether the additional
amount of debts that could be collected warrant the program
changes that would be needed to the Fedwire application.
The ACH-CTX payments are used for multiple payments to the
same payee or one payment with multiple invoices, and allow for
transmitting with the payment complete remittance information.
While this system is an appropriate and cost-effective way for
agencies to make vendor payments, given the relatively small
volume of payments going through ACH-CTX, the complexity of the
payment file, and FMS's need to set priorities, we have not yet
decided how to levy these payments. We will conduct an analysis
of the ACH-CTX payments to determine the feasibility and the
potential benefits of modifying the system.
The purchase card program. I would like to address the
matter of the collection of unpaid taxes of contractors that
are paid using purchase cards. Simply stated, the purchase
cards model does not fit the Federal payment levy process. When
FMS is in receipt of a levy from IRS our legal obligation is to
surrender any property in our possession that is subject to
levy. When a purchase is made using a purchase card, however,
FMS never has in its possession property belonging to the
vendor. Credit card payments to vendors are not processed
through FMS or any other authorized disbursing official.
Mr. Chairman, FMS agrees with GAO recommendations that a
thorough review of the purchase card program geared toward
exploring options for incorporating the collection of both tax
and non-tax debt is warranted. However, since the purchase card
program is not an FMS program and we do not disburse purchase
card payments to vendors or have information regarding what
vendors receive credit card payments, FMS is not the proper
government agency to lead this review. Government credit card
programs are under the authority of the General Services
Administration and we believe that working with GSA and IRS we
can further explore the options.
The American Jobs Creation Act of 2004 enacted last October
authorized IRS to levy up to 100 percent of certain vendor
payments. FMS modified its systems in November 2004, one month
after the law was enacted, to implement this authority where
100 percent levy is available. For example, IRS recently levied
100 percent of some DFAS vendor payments and collected $432,000
compared to $100,000 that would have been collected prior to
the law's enactment. However, full use of this new authority
has been delayed because the provision only permits 100 percent
continuous levy for payments for ``goods and services'' and
does not appear to apply to payments made for other kinds of
property. FMS stands ready to work with IRS as it attempts to
resolve this issue.
Mr. Chairman, I would just like to echo the good work that
has been done by the Federal Contractor Tax Compliance Task
Force. I think we have made a lot of progress and I would
support going forward with that. That concludes my remarks. I
would be happy to answer any questions.
Senator Coleman. Thank you, Commissioner Gregg. I do
appreciate the work that is being done by the task force. I
also want to say that I appreciate FMS agreeing with the goal
of doing those things we can to make sure we limit the bypasses
for the Treasury Offset Program. I understand some of the
challenges faced with Fedwire and some of the volume issues
with ACH-CTX. I just think it is important that we review these
programs and in fact limit as best we can those dollars that
are passing around the levy program. So let us continue the
review on one of those areas.
I have a question though about your concern with picking
and choosing which type of payments to dispense. At least as I
listened to your testimony--I think your approach is, let us
work with the agencies to make sure that they do a better job.
First, I take it you would agree with the presumption that any
agency it makes sense to get the correct taxpayer
identification number for anybody contracting with an agency.
Mr. Gregg. Yes.
Senator Coleman. So if we require that, and I think we have
done it now--I think there is a voluntary system now, give us
that. That would go a long way to getting that. As I understand
it, in the past year four-fifths of the State Department's
payment documents had no names, three-quarters of the
Department of Education, and half of the Department of
Transportation's payment documents had erroneous or no taxpayer
identification numbers. Would those statements be correct from
your perspective?
Mr. Gregg. I am not sure where those numbers came from, Mr.
Chairman. What I would say is that I reviewed a March 2005
report, and while we still have a ways to go, many agencies are
doing an outstanding job in getting tax ID numbers for contract
payments. Many of them are at 95 to 99 percent. There are a
handful of agencies, at least in the report that I saw, where
the numbers are very small. Whether or not some of those may
have legitimate reasons, security or other reasons, I am not
sure. But I think in the last 2 years, the increase in tax ID
numbers and the compliance has grown tremendously.
Senator Coleman. I believe that those numbers came from the
GAO report. My concern is this, that we still have evidence,
for whatever reason--I am not pointing fingers at agencies, but
that we are not getting the kind of compliance that we should
have with the Debt Collection Improvement Act. FMS is the
central player, in a position not to pick and choose who are
winners or losers in this process, not to interfere with the
disbursal of funds, but to say up front that unless we get
names, unless we get taxpayer identification numbers, we are
not processing these payments.
How is that somehow interfering with the timely disbursal
of funds or picking and choosing which payments are disbursed
if we simply tell the agencies and the contractors that we are
going to require this? This is the process that we are going to
follow.
Mr. Gregg. If we do that we certainly run the risk of not
paying contractors who in fact do not owe taxes. That is an
issue that I think is one that I would much prefer to go back
to solving at the front end and not putting us in a position of
saying--since this field is not complete, for some reason we
are going to reject it. We make nearly one billion payments a
year, Mr. Chairman, and 78 percent of those are electronic. I
would note the speed with which those flow through and go out,
and the fact that we actually match the great majority of those
against our debtor database before they go out the door.
The other thing is the legal responsibility of that
certifying officer who says this is a legal payment that has to
be made by the government. I would really find it very
difficult for FMS to be in the questionable role of saying,
this field did not have quite enough information and we are
going to reject it.
Senator Coleman. I am not going to debate this with you,
Commissioner Gregg, but it appears to me that you are in a very
central place here. I want to make sure that payments are made
timely. I want to make sure that we are not harassing or
abusing folks who are fulfilling all their obligations. But it
appears to me when you do a contract with the Federal
Government there are certain things you can be required to do.
Senator Levin raised one by saying, maybe an affirmative
statement about whether you owe any taxes. It is not a right to
do business with the government. It is a contractual obligation
of which we then have certain requirements, and one of the
requirements should be to simply provide certain information
that should allow us to get those folks who are abusing the
system. Not hurting or slowing up anybody else.
My problem is that we are relying now upon agencies, and I
am reading GAO reports that say we are still getting three-
quarters of one, Department of Education, half of another
department, not providing taxpayer identification numbers. At a
certain point in time we have to get back to them also.
But you are in a unique position here and my sense is that
we are not being clear enough, and we are not being aggressive
enough, and we are not being complete enough in getting this
basic information that would allow the system to work. This
system should not slow up payments. It simply puts in place
saying, if there is a problem--based on a taxpayer ID number
and a name. Two bits of information. Not hard to do. So again
we are going to push this because we are not--the problem is
the system today is not working. It is not working the way it
should.
Mr. Gregg. If I might, Mr. Chairman. I think it is working
in the great majority of cases. I am not sure whether those are
particular agency location codes so they may not be for the
whole department. They may be subcomponents. But when I said in
my statement that we are going to take a look at this within a
year, one of the concerns is narrowing this down to making sure
that we are dealing with contractor payments. Sometimes, as you
heard from the GAO report, the field that identifies the type
of payment may or may not be accurate. We are normally not in a
position to know that.
So if we can take a look at this to see what is going to
happen with the voluntary provision that we are working on
through the task force to get the information, and go back and
see what agencies that we are sending out letters to every
month say, here are problem areas. See where we are and then to
see whether or not we can really hone in on contractor
payments. If we were to go this route, give the agencies and
contractors sufficient notice that this is what we are going to
do, I would like the time, if I may, to study the issue and see
what progress we can make.
Senator Coleman. One final question to follow-up and,
Commissioner, I may have to come back to you in a second round.
But I believe that in 1997, as I recall in September 1997, the
Department of Treasury published proposed regulations requiring
a taxpayer identification number to be provided. The proposal
required Federal agencies provide taxpayer identification
numbers. That was 1997. That was then rejected. The final rule
did not have that requirement. We went to a TIN implementation
report. Now the GAO comes back and says we have $17 billion in
payments to contractors that did not pass through the Treasury
Offset Program because they had blank or invalid taxpayer
identification numbers.
So in 1997 we had something on the table that could have
corrected this; and stepped back. Obviously we have the problem
today. Do you intend them to go back and look at this 1997
regulation and see if in fact we can be in a position where we
actually require taxpayer identification numbers?
Mr. Gregg. In fact I am the one who pulled that back when I
first arrived at FMS. I thought it was too broad a brush. I
would much rather focus--we are collecting $3 billion a year
from our overall debt collection programs, so we are matching a
lot of taxpayer names and numbers. If we were to do something,
I would much prefer going in for a more finely-honed approach
in dealing with contractors, I agree it is terrible that in
fact they are doing business with the government and getting
paid and owe debt. So I would not go with a broad brush
approach. If we did something, I would focus it more on
contractors.
Senator Coleman. Commissioner, I will just ask one
question, but I do want to come back to have some follow-up
questions after Senator Akaka.
This question about contractor debarment that has been
raised, and it goes to Senator Collins' issue of, could we
define a type of conduct, maybe a pattern of conduct--I
understand the consequences of debarment and that there may be
business folks who have some poor business practices and they
need to be better educated and I am willing to work with them.
But I worry in the egregious cases. Clearly what we saw with
the Defense Department there were case of egregious abuse; what
we have seen with the GAO and these civilian contractors of in
some cases long term patterns of abuse.
Do you think that it would make sense to have a contract
debarment provision available to Federal agencies?
Mr. Everson. I think that as the Chairman indicated, you
want to get at this at the front end, so that is important. The
other thing you want to do, frankly, is you want the IRS to do
a better job of the collections process on an ongoing basis. I
talked about the tax gap; it is terribly important that we get
after the piece of it that is the non-payment. That is about 10
percent of the total tax gap. Then you have this back end piece
that we are talking about here today. I think we can make
progress, frankly, on all of those areas.
You are raising what I think is, frankly, a broader
procurement question for OMB and Clay Johnson who runs the
management side as to what procurement policy ought to be
governmentwide. From my point of view, obviously anything you
do to tighten up in this area sends a strong message. My
overall concern is though that when you start to carve out
contractors with different procedures, it can be problematic
because people and businesses shift in and out of that role, if
you will, and you want to make sure that you are doing, once
again, the proper balancing of the taxpayer rights.
Senator Coleman. Just one quick question. Are there any
debarment mechanisms for drug offenses, for national security?
Mr. Everson. There are debarment procedures--my
recollection--I cannot totally take the Fifth on this since I
did have that management job at OMB. There are very real
debarment proceedings. If you look at what happened with some
of the big corporate convictions, Enron, for instance, was
debarred after it had its problems, and it is my recollection
in other big outfits that does happen. So that is there and
there is the possibility right now to go forward on that.
But I think maybe I was responding more broadly. I think
that the Senator was raising questions about looking at tax
debts. But again, this is complicated, because as Senator Levin
says, we had this conversation last year. You can have a very
legitimate dispute with the government over a balance that is
owed.
I want to also say, not all the employment taxes that are
owed are criminal. They have been characterized as criminal in
this hearing today. I am a little disturbed by that. What
happens is we are looking at, oftentimes, these smaller
businesses and a lot of these businesses get in trouble. If you
wandered around with our revenue officers who are trying to
collect these monies, what happens is somebody really thinks
they are going to make it and they say, I am just going to
borrow this money to get through this next quarter, and then
another quarter goes by, and then if we are not on them soon
enough it keeps going and it pyramids. Now that is different
from some of the matters that you have raised and the GAO has
identified where there are willful patterns of abuse. But I do
not want to paint all these 27,000 contractors or the ones last
year as criminals. I think that is wrong.
Senator Coleman. I think it would be correct to say that
there are criminal penalties for this type of conduct. You
still have to prove the case. You have to show intent. But
there are certainly criminal penalties and I think that is what
Senator Levin was referring to.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman.
Mr. Gregg, in a March 2004 letter to the Chairman of this
Subcommittee you indicated that your agency was closely
monitoring actions it could take to aid in the collection of
State tax debt, specifically with regard to the formation of
reciprocal agreements under DCIA. However, GAO's June 2005
draft report indicates that none of the States they contacted,
and they contacted 17 of them in all, none of them had been
contacted by FMS. Also none of the States were aware of the
program, all of them expressed interest in participating.
Can you reconcile this for us, the statement you made in
March 2004 and also the GAO findings?
Mr. Gregg. You mentioned that we are helping the State of
Hawaii collect State tax debt, and when we got that authority
we went out to every State and aggressively pushed that, and we
still have four or five States that are not doing it. We were
not actually looking for reciprocal agreements there. We were
saying, we will, for a very modest fee, help you collect your
State tax debts.
So I would slightly differ--I do not disagree with what GAO
said the answers were, but when you go out to States and start
saying, here is what you have to do to be able to work with--
even to collect State tax debt, and then if we actually did
reciprocal agreeing where we were looking to them to help us
collect some of our Federal debt, I am pretty sure that the
answer is not going to be, ``no problem, we will do it right
away.'' They are going to want to take a hard look at what is
the bottom line.
On the State tax debt that we have collected, we have
collected $200 million a year, clearly an obvious winner with
minimal amount of effort from the States. But you get into
States like California where finally, after pushing for about 4
years, we finally got them to start the offset process for
State tax debts. They are still not taking advantage of the
whole thing. They are a very decentralized State.
For example, the State of Michigan has disclosure issues,
the State of Connecticut is building a new system. Those are
the sort of things that you run into when you really start
talking about, the fact that we have a database that is huge
and if you are going to help us collect some of our Federal
debts, here are the kinds of things you would have to do.
Let me take one other point. We collect each year about
$1.5 billion in child support payments. We do that through the
offset program. Most of that, virtually all of that comes from
offsetting tax refunds. They do have authority and we use it to
collect from other payments that we have. We collected $2.6
million in fiscal 2004. So you see, when you get out of the tax
refund area, which is where the bulk of that money came from,
and you get to these other payment systems such as Federal
salary and vendor payments, the amounts are quite modest. And
that has been in place for a while. It is $2.6 million versus
$1.5 billion that we collected.
So I guess my point is that we would certainly be willing
to work with States if we thought that the cost benefit for
both of us made sense. It is just one of those things that
while we have recently broached it with some of the State
organizations, we will have to wait and see whether or not
there is a real interest, because there is going to be some
expense and there is not as much gold in those hills as it
might appear.
Senator Akaka. Mr. Gregg, what would you say about working
with States on these reciprocal agreements? Are you going to
press it? Because the report we have had is that States are not
aware of this. If you are going to press it, do you have a
program on a timely basis?
Mr. Gregg. We will begin to raise the issue with them, but
they are going to have to look at what it is going to cost them
to do this, and we are going to have to help them look and see
what the possible return might be, because for some of these
the return may be quite modest. As you know, all the States are
strapped for money too, so if they are going to invest $50,000,
$100,000 or $200,000 to change to do reprogramming or build a
database to take any of our debts, it may well not be worth it
for them. But we will continue to discuss it with them and see
if there are areas that have potential.
There is legislation, by the way, that was proposed last
year that would do more, far more in this area than anything
else that at least I think is in the GAO report, and that was
legislation that we supported a couple of years ago which would
allow for the collection of State tax debts even if someone had
moved to a new State. Right now we are limited--the debt has to
be owed in the State in which they currently live. If we have
the authority to match for people who move to another State, we
could collect considerably more money. That legislation was
proposed I think in IRS legislation that did not get passed
last year. So that would actually help a lot.
Senator Akaka. These will have to be enforced and records
need to be shared on that.
Mr. Gregg, I am disappointed with FMS's leadership in the
area of debt collection. While FMS should be proactive in this
area, it seems that any improvements have been made in reaction
to the good oversight work of Chairman Coleman, this
Subcommittee, and GAO. Can you describe what FMS has done since
2004 in the area of improving Federal debt collection that has
not been in reaction to congressional oversight?
Mr. Gregg. If you take everything off the table that the
task force has been working on, maybe the list is not that
long. I will say that it takes the IRS and FMS and others to
make those a reality, so I think that, for example, working
with IRS to increase the amount of tax debt that is made
available for matching. That is something that we have been
advocating for some time. The fact that it was also part of the
task force I do not think diminishes our role in thinking that
was a good idea a long time ago.
We were also advocating some time ago improving the due
process. I would like to see that built into the contracts when
contractors first sign the contract, that they waive the due
process notice that they might have through levy. That is
something that we have been for, or something like that, for
some time.
We have brought in a lot of new debts into our system. We
have to make sure that is controlled properly. If you visualize
the billions and billions of dollars of debts that we have
there, trying to manage that process, make sure the proper
security, proper controls, and the right authentication happens
to match, where we do not go out and improperly take funds from
people, it is not something you do once and forget about. It is
an ongoing process. At the same time we have many things going
on. In another part of our program we are building new systems.
So I think to me the characterization that we are not
managing this properly is wrong because it focuses on the
things that we have not been doing as well as we should
perhaps, but there is a ton of things that we have been doing.
If you look at the fact that we are collecting $3 billion a
year, and with relatively small staff, those are important
achievements. And the number of complaints that we get about
the contractors that we hire, the private collection agencies,
is minimal. Why? Because we actively manage that and monitor
what they are doing. So I disagree with that assessment.
Is there more that can be done? Yes. But there is just a
ton of things that we have going on in a relatively small
organization.
Senator Akaka. Mr. Gregg, GAO reports that about $66
billion in payments to civilian agency contractors were unable
to result in computer matches to identify contractors with
unpaid taxes because the agency payment forms left out key
information such as the contractor's name or taxpayer
identification number. It seems reasonable to me that the
agency should have this information available for each
contractor that is receiving Federal dollars.
Why can't you withhold these payments until all of this
information is updated and complete? And if information is not
there, why does FMS have to make the payment?
Mr. Gregg. It does go back to the earlier question. I think
the other thing that I would want to say is that agencies have
been making really good progress. I am not saying that it is
perfect, because it is not. What we have been doing is going
out and pushing agencies to make sure that all the payment
information is right that should be there, and I expect that
will have additional results, especially after they see the
transcript from the Subcommittee.
But what I would like to do is to work on that, with the
IRS and others to make sure that the information is obtained
when the contract is signed through that voluntary basis, and
then let us take a look at it, and see where we are. If, in
fact, we continue to have a problem with contractor payments
not having enough information then I would reconsider whether
or not to withhold those payments. But I know if we do that we
will stop payments for people who do not know taxes and there
will be an uproar on that. But that is something that if you
would allow us time to take a look at it we will do.
Senator Akaka. Thank you, Mr. Chairman. My time has
expired.
I have further questions and also some questions on behalf
of Senator Levin.
Senator Coleman. Thank you, Senator Akaka. I am going to
have a follow-up round and I will also keep the record open for
2 weeks to ensure that if there are any questions that other
Members of the Subcommittee have, that they will be responded
to. So I am just going to follow up for a few minutes with
Commissioner Everson and if you want to continue, you can. If
not, we will, as I said, hold the record open and make sure
that there are responses to both your questions, Senator
Levin's, and any other Members of the Subcommittee.
Commissioner, let me follow up on this concern about how do
we get on top of things up front rather than just responding.
Clearly, the Federal Government does not need to do business
with tax cheats. There is no requirement to do business with
tax cheats, and in fact as my colleagues have indicated, tax
cheats have a competitive edge. They have an unethical
competitive edge over those individuals who are paying their
taxes as a cost of doing business. The tax cheat can factor the
non-payment as a none cost lower than the amount that they need
in order to make a profit and submit a lower bid, and there is
something egregious about that.
I am getting into the Section 6103 issue. It is
interesting, we are listening to these outrageous stories of
tax cheats who invest in sports team. We do not even know the
name of the sports team. GAO can get this information and issue
a report but we get no information as to who these people are.
Can the IRS notify Federal contracting officials about
Federal contractors who are abusing the tax system so they can
avoid signing contracts with them? What kind of ability do you
have to do that up front? If not, how do you overcome these
limitations?
Mr. Everson. Let me respond first to your overall
observation about the effect of non-compliance. Non-compliance
is corrosive, and what we are focusing on here is old debts
that are due. That does not even begin to get at the tax gap.
The bulk of the tax gap relates to individuals and it relates
to the under-reporting of income. If somebody is running their
business and they are under-reporting their income then they
can price their goods and services at a lower level, so they
have an absolute competitive advantage. That exists in this
discussion that we are having today, but it exists more
broadly.
Again, it would be easy to ramp up our enforcement efforts
with a lot more information sharing. The code is quite clear on
the privacy of tax returns. The real exception to this is in
the charitable sector where not-for-profit returns are public.
I have testified that Section 6103 should be looked at in terms
of more information sharing with other State regulators in
areas like the charities. The Subcommittee has expressed
interest in some of these abuses.
Right now we are precluded from sharing this information.
The kind of steps we have done jointly with FMS, I think, have
improved things. I think that what Commissioner Gregg is
talking about in terms of going into the future, starting in
October where there will be this consent to provide the
information, the TIN, by the contractor if you want to be on
that DOD registry. That is going to help. That is going to make
a difference.
But it does not get at this core issue of the absolute wall
that exists. I testified, I remember being here in late 2003, I
cannot even share information with the PCAOB about
investigations that we are doing on accounting firms, or with
the SEC about investigations that we have on companies where we
think that there is a heightened risk of compliance issues.
So this is a broad object. It clearly is one that gets at
that very real conflict between two public policy purposes
here. One, making sure people who do business with the
government have a clean bill of health. But two, this
protection of taxpayer privacy.
Senator Coleman. There is though an avenue by which this
information is available that you presently have, as I
understand it. If you bring criminal charges or you place a
lien on a taxpayer, is that not public information with the
court of jurisdiction?
Mr. Everson. Yes, sir, that is right. Once it gets out in
the public domain--go back to Son of Boss as an example, the
settlement issue that you are familiar with. We had two-thirds
of the players came in. Now some of them did not come in. Some
of them are under criminal investigation. Some of them are in
other litigation already. Once they go public, once they get
into tax court or into district court they become known
litigants, if you will. So if you go down an actual judicial
proceeding, that changes things. That gets out there, that is
right. And if there is an active criminal investigation, of
course that gets shared with the people who need to know.
Senator Coleman. But let me see if we can tie this to
Federal contractors. You have a Federal agency that is going to
contract with a security firm that has had a lien placed
against them. They have gone through the system. It would go
through the offset program. You have the lien and you would be
able to then take X number of dollars. So the agency, as I
understand it, would not know that the contractor with whom
they are dealing has a tax lien or has a criminal conviction;
is that correct?
Mr. Everson. That is a procurement question. I do not know
what the procurement procedures are for the individual agency,
be it--you talk about Homeland Security or Veterans Affairs. I
am not sure what their procedures are and what they check
beforehand. But I think we all agree that tax compliance is not
something that is a centerpiece of their procurement process.
Senator Coleman. It goes back to the question Senator Levin
said, asking folks to volunteer--two ways to approach it. One,
you ask them, voluntarily, do you owe taxes, just so that we
know that. That way you would make sure payments would go
through the offset program in spite of whether they are Fedwire
or anything else. So you would have a system, somebody owes
taxes----
But here is my question. If it is public information, if it
information that goes through a court, why couldn't the IRS
provide that information to Federal contract officials? Why
couldn't there be----
Mr. Everson. Something like a lien? You are saying we would
have a special program if a lien exits--to make sure that other
agencies know that?
Senator Coleman. Public information. At the point you
publish the lien, taxpayer's name, address, taxpayer
identification number, amount and type of tax owed is public
information, but only in the court of jurisdiction. So it is
there. It is public, but if you are a Federal contract official
you are not going to go to every court in the country to find
that.
Mr. Everson. I think we can obviously look at that. The
task force could look at what it would take to do that. That is
a thin strip of this though, I would indicate.
Senator Coleman. I would appreciate taking a look at
information that is already public, to simply make it more
available and see if that would help the Federal agencies in
being more effective in dealing with those that have
obligations.
Let me get back to this question I talked about earlier
about prosecutions. We had the 47 cases regarding the
Department of Defense. You have done, I think, an extraordinary
job working with the task force in correcting some of the
problems we have seen.
But the question that I asked the first panel, it did not
appear that in any of those 47 cases that any criminal action
had been taken. I recall one of those cases was an individual
who I believe bought some property on an island offshore,
contractor owed in $10 million in unpaid taxes. I think the
business was turned over to relatives who were also tax
delinquents. It would appear to me that we had in those
instances some outrageous cases.
The first thrust should be administrative. We should use
administrative remedies. Criminal prosecutions are a measure of
last resort. But if you have an outrageous case like the guy
that owed $10 million and had relatives that owed money, I am
not aware of whether any criminal actions have been taken. Can
you tell me whether any have been in regard to those 47 cases?
Mr. Everson. Last year when we talked I committed that what
we would do is take these 47 cases out of the queue. Normally,
our business units take a look at these matters and they may or
may not make a referral. We short-cut that process and asked
the criminal investigators just to take a look at the files and
see whether they would want to sweep any in. My understanding
is that we have active criminal investigation underway in three
of these matters.
Now again, there is a difference, as you appreciate,
between what is a colorful, dramatic write-up without names and
then when you get to establishing what is going to be
prosecutable in a courtroom, and then also how that matches out
against--criminal investigations, we are forced into doing
things like supporting, for the first time, a technical tax
shelter investigations, or the charitable abuses.
So what I asked our people to do is to make sure our CI
people took a look at each of these, and apparently they
reached a judgment that three of these merit, in their view,
this full follow-up. They are going to do the same thing, I
think they have done on the 50 that have already been
identified by GAO and I understand there are three or four that
they think are promising as well. Now that does not mean that
there will be an indictment in any of these cases. There can be
a variety of reasons, as you, better than most, appreciate. But
we have gone through that and looked at it on that basis.
Senator Coleman. I would just urge you to--I would hope
that one of the deciding factors would not be whether it is an
ongoing business. I am just concerned here--I appreciate the
judgments that have to be made. I was in that position myself
for many years. But I just want to make sure in making those
judgments that we are not factoring in things that should not
be factored. In this case one of them would be whether it is an
ongoing business. You have individuals--particularly in cases
where we see people doing things, getting rid of the business,
and then doing it again. Just sometimes there is a tendency to
say, they are not in knotted operation anymore so we are not--
we have other more important stuff. I want you to take a look
at that and at least recognize the concern of this chair, and I
think other Members of the Subcommittee.
Mr. Everson. I agree with you. As I said to you when I
think we chatted a few weeks ago in your office, I think that
having the hearing again will give me a good opportunity to go
back, ask those questions again, and put a finer point on it. I
am very proud of the rebuilt enforcement efforts that the IRS
has been undertaking. I know you are enthusiastic about it. So
there are individual choices that our folks make, but I can
certainly go back and ask about this particular program again
and I will.
Senator Coleman. We have seen the results with the Son of
Boss, billions of dollars that are now coming back into the
system because of increased enforcement efforts. I think this
is one where from a cost-benefit analysis we are seeing clearly
the benefit that far exceeds the cost. I wish we were able to
provide more resources for enforcement. A number of us will
certainly continue to fight for that in areas where it needs to
be done. We are not talking about getting the poor individual
who just cannot make ends meet and finds they have a problem
with the IRS. There is some massive fraud and abuse going on
that costs the government billions of dollars and I think we
can direct resources where across-the-board folks will say this
is fair, this is equitable, this is just and needs to be done.
Mr. Everson. I wish both you and Senator Levin were
appropriators, but I am not sure you would not change your
stripes once you got over to the other committee.
Senator Coleman. If that happens, we will chat.
Gentlemen, I want to thank you for your testimony. The
record will be kept open for 14 days.
With that, this hearing is adjourned.
[Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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