Thank you, Chairman Coleman, for calling 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. 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 (GAO), $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 $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. 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. In the meantime, they have purchased luxury cars, commercial real estate, and in one case, even a professional sports team.
The Financial Management Service (FMS) 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 most civilian contractors.
Since 1996, FMS has administered the Treasury Offset Program, or 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 the 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, or 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 the 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 with us today, and I encourage you 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.
Federal contractors must be held accountable for their actions.
This is why, for example, I introduced the Federal Contractor Extraterritorial 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.
I look forward to the testimony of all our witnesses on the tax issue, and Mr. Chairman, I look forward to continuing our work. Thank you.
