Summary
Tax abuses by contractors working for the Department of Defense, on which GAO previously reported, have led to concerns about similar abuses by those hired by civilian agencies. GAO was asked to determine if similar problems exist at civilian agencies and, if so, to (1) quantify the amount of unpaid federal taxes owed by civilian agency contractors paid through the Financial Management Service (FMS), (2) identify any statutory or policy impediments and control weaknesses that impede tax collections under the Federal Payment Levy Program (FPLP), and (3) determine whether there are indications of abusive or potential criminal activity by contractors with unpaid tax debts.
FMS and IRS records showed that about 33,000 civilian agency contractors owed over $3 billion in unpaid federal taxes as of September 30, 2004. All 50 civilian agency contractors we investigated had abusive and potentially criminal activity. For example, businesses with employees did not forward payroll taxes withheld from their employees to IRS. Willful failure to remit payroll taxes is a felony under U.S. law. Further, several individuals own multiple businesses with unpaid federal taxes--one individual owns about 20 businesses that did not fully pay taxes related to over 300 returns. Some contractors purchased or owned millions of dollars of property while they did not remit payroll taxes. These activities were identified for contractors at the Departments of Justice, Homeland Security, and Veterans Affairs; the National Aeronautics and Space Administration; and others agencies. GAO's analysis indicates that if all tax debts owed by, and all payments made to, the 33,000 contractors were included in the FPLP, FMS could have collected hundreds of millions of dollars in fiscal year 2004. However, because only a fraction of all unpaid taxes and a portion of FMS payments are subjected to the levy program, FMS actually collected only $16 million from civilian contractors. For example, about $171 billion of unpaid federal taxes were not sent to the levy program to be offset against payments because of specific statutory requirements or IRS policy exclusions, such as debtors' claims of financial hardship or bankruptcy. Tens of billions of dollars in federal payments were not compared against tax debts for potential levy because FMS did not proactively manage and oversee the levy program. Until we brought it to FMS's attention, FMS did not know that it did not submit $40 billion of contractor payments from some civilian agencies for potential levy. FMS also did not identify payment files that did not contain contractor tax identification numbers, names, or both, resulting in $21 billion in payments to contractors that could not be levied. FMS also excluded billions of dollars from levy because of what it considered programming limitations without taking proactive steps to overcome those limitations. Further, civilian agency purchase card payments to contractors totaling $10 billion could not be levied. Improvements at FMS could result in tens of millions of dollars of additional levies annually.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change
from "In process" to "Implemented" or "Not implemented" based on our follow up work.
Director:
Team:
Phone:
Gregory D. Kutz
Government Accountability Office: Financial Management and Assurance
(202) 512-9505
Recommendations for Executive Action
Recommendation: To comply with the Debt Collection Improvement Act of 1996 (DCIA), further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payments from all paying locations are subjected to potential levy in the Treasury Offset Program (TOP) by updating the TOP database to include payments from all agency paying locations in TOP for potential levy.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payments from all paying locations are subjected to potential levy in TOP by developing and implementing a monitoring process to ensure TOP's list of agency paying locations is consistently updated.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a taxpayer identification number (TIN) for each payment requiring a TIN by enforcing requirements that federal agencies must include TINs on all payment vouchers submitted to FMS for disbursement or expressly indicate that the contractor meets one of the criteria that exempts the contractor from providing a TIN.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a taxpayer identification number (TIN) for each payment requiring a TIN by developing and implement procedures to review payments submitted by paying agencies to verify that each payment has either a TIN or a certification that the contractor is exempt from providing a TIN.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to evaluate payment files to identify payments with blank or obviously inaccurate name fields.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to notify agencies of deficiencies in payment files regarding blank or obviously inaccurate name fields.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to collaborate with agencies submitting payment files with blank or obviously inaccurate names in the name field, including the State Department, to develop and implement procedures to capture the contractors' names in the payment files.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all payment files submitted by agencies contain a contractor's name, by developing procedures to reject agency requests for payments with blank or obviously inaccurate names.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a payment type and thus, if appropriate, are subject to a levy, by instructing all agencies that they must indicate a payment type on all payments.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that payment files contain a payment type and thus, if appropriate, are subject to a levy, by implementing monitoring procedures to verify that all payments indicate payment type.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit type A payments to TOP for potential levy.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit Automated Clearing House-Corporate Trade Exchange payments to TOP for potential levy.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should obtain reasonable assurance that all categories of eligible payments to contractors with unpaid federal taxes are subjected to the TOP levy process by developing and implementing procedures to submit Fedwire payments to TOP for potential levy.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should collect unpaid taxes of individuals, make changes to TOP to levy contractor payments to collect the unpaid federal taxes owed by individuals.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should ensure that more payments are matched against tax debt in TOP, take actions necessary to incorporate IRS's expanded list of control names into TOP.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges of collecting unpaid taxes of contractors paid using purchase cards, in conjunction with IRS, by monitoring payments to assess the extent to which contractors paid with purchase cards owe federal taxes.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges of collecting unpaid taxes of contractors paid using purchase cards, in conjunction with IRS, by monitoring payments to assess alternatives available to levy or otherwise collect unpaid taxes from those contractors.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To comply with DCIA, further implement the Taxpayer Relief Act, and support the federal government's efforts to collect unpaid federal taxes, the Commissioner of the Financial Management Service should address challenges associated with implementing the authorized increase of the levy to 100 percent, by working with IRS to determine steps necessary to implement the increased levy percentage.
Agency Affected: Department of the Treasury: Financial Management Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: The Commissioner of Internal Revenue should evaluate the 50 referred cases detailed in this report and consider whether additional collection action or criminal investigations are warranted.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: In process
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
