<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:27750.wais]
S. Hrg. 109-418
GSA 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
SECOND SESSION
__________
MARCH 14, 2006
__________
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
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COMMITTEE ON HOMELAND SECURITY AND 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 Driessnack 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
Elise J. Bean, Minority Staff Director and Chief Counsel
Jay Jennings, Senior Investigator
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Coleman.............................................. 1
Senator Levin................................................ 2
Senator Carper............................................... 10
Prepared statement:
Senator Akaka................................................ 39
WITNESSES
Tuesday, March 14, 2006
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations Unit, U.S. Government Accountability Office,
accompanied by Steven J. Sebastian, Director, Financial
Management and Assurance Team, and John J. Ryan, Assistant
Director, Forensic Audits and Special Investigations Unit...... 13
Hon. Mark Everson, Commissioner, Internal Revenue Service, U.S.
Department of the Treasury..................................... 27
Kathleen M. Turco, Acting Deputy Administrator, General Services
Administration................................................. 29
Alphabetical List of Witnesses
Everson, Hon. Mark:
Testimony.................................................... 27
Prepared statement with attachments.......................... 70
Kutz, Gregory D.:
Testimony.................................................... 13
Prepared statement with attachments.......................... 40
Ryan, John J.:
Prepared statement with attachments.......................... 40
Sebastian, Steven J.:
Testimony.................................................... 13
Prepared statement with attachments.......................... 40
Turco, Kathleen M.:
Testimony.................................................... 29
Prepared statement........................................... 88
EXHIBITS
1. GCharacteristics of Egregious Tax Abuse, chart prepared by
the Majority Staff of the Permanent Subcommittee on
Investigations (based on analysis of 97 GAO case studies)...... 96
2. GNursing Home Owner Convicted of Failing To Pay Over $3
Million in Employees' Taxes to IRS, February 9, 2006, press
release of the United States Attorney's Office, Northern
District of California, U.S. Department of Justice............. 97
3. GResponses to supplemental questions for the record submitted
to Gregory D. Kutz, Managing Director, Forensic Audit and
Special Investigations, Government Accountability Office....... 990
4. GResponses to supplemental questions for the record submitted
to The Honorable Mark Everson, Commissioner, Internal Revenue
Service, Department of the Treasury............................ 106
5. GResponses to supplemental questions for the record submitted
to Kathleen M. Turco, Acting Deputy Administrator, General
Services Administration........................................ 114
GSA CONTRACTORS WHO CHEAT ON THEIR
TAXES AND WHAT SHOULD BE DONE ABOUT IT
----------
TUESDAY, MARCH 14, 2006
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 9:30 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Levin, and Carper.
Staff Present: Raymond V. Shepherd III, Staff Director and
Chief Counsel; Jay Jennings, Senior Investigator; Mary D.
Robertson, Chief Clerk; Leland B. Erickson, Counsel; Mark L.
Greenblatt, Counsel; Steven A. Groves, Counsel; Mark D. Nelson,
Counsel; Brian M. White, Professional Staff Member; Cindy
Barnes, Detailee (GAO); Joanna Ip Durie, Detailee (ICE); Elise
J. Bean, Chief Counsel and Staff Director to the Minority; Eric
J. Diamant, Detailee (GAO); Matt Schmitten, Intern; John
Kilvington, (Senator Carper); and Tom Spangler, (Senator
Akaka).
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is called to order.
Good morning and welcome. This is the third Subcommittee
hearing focusing on Federal contractors with unpaid tax debts.
These are not your everyday tax delinquents, but rather
contractors who receive millions of dollars from American
taxpayers, yet refuse to pay their fair share.
Just a note, I am going to walk through both what we are
going to talk about today, and give a little history. But I do
want to express my appreciation for the work of the Government
Accountability Office. They really have done some outstanding
work in this area, and as Chairman of this Subcommittee, I am
very appreciative.
And there are some things that have been done and others
that continue to need to be done, but I also want to
acknowledge the response of the IRS in dealing with these
matters. I think we have come a long way in a short period of
time. There is more work to be done. I am going to express some
concerns in that area, but I do want to start off by expressing
my appreciation.
Senator Levin, I know that you have an Armed Services
Committee hearing. I have a pretty full statement. Do you have
time, or I would actually defer to you if you wanted to make a
statement, and then do what you have to do? And then I will
proceed from there.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Mr. Chairman, thank you for your usual
courtesy in that regard, and I want to first just thank you for
your leadership in this area, for your sticking with a very
important subject.
We have a huge tax gap in this country, estimated at about
$350 billion a year. That is the gap between the taxes that
businesses and organizations and individuals owe the Federal
Government and what they have actually paid.
And 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 the 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 $350 billion annual tax gap, the
contractors who are awarded contracts by the General Services
Administration and get paid with taxpayers' dollars while, at
the same time, failing to pay their taxes.
And in testimony before this Subcommittee today, the
Government Accountability Office, the GAO, will describe almost
4,000 such civilian contractors who have dodged their tax
obligations and accumulated tax debts to Uncle Sam totaling at
least $1.4 billion and are still awarded government contracts.
In related reports released over the last 2 years, the GAO
found 27,000 DOD contractors with accumulated tax debts
totaling $3 billion and 33,000 civilian contractors with
accumulated tax debts totaling at least $3.3 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, and
it is just simply mind-boggling that this is allowed to
continue.
I want to join you, Mr. Chairman, in thanking our witnesses
who are here today. Thanking the IRS and the other agencies,
including the GSA, who are working hard to address this issue,
which you have identified and the Subcommittee has investigated
and continues to investigate and press for loophole closing and
gap closing in this area.
The kind of leadership that you have shown here is the kind
that we are going to need to close this tax gap that exists for
lots of reasons in many ways. In other parts of our
Subcommittee work, we are going to try to close other parts of
this tax gap, including the abuses that are exemplified when
tax havens are utilized by taxpayers to avoid taxes to Uncle
Sam.
But this morning's hearing is a very important one. It is a
continuation of a series of hearings in this area, which you
have chaired. I hope to be able to get back for some questions.
I would ask unanimous consent that the balance of my statement
be inserted in the record.
Senator Coleman. Without objection.
Senator Levin. Thank you again for yielding to me.
[The prepared statement of Senator Levin follows:]
PREPARED STATEMENT OF SENATOR LEVIN
The current tax gap in this country is about $345 billion per year.
That $345 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 make up 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 $345 billion tax gap--contractors who are awarded contracts by the
General Services Administration (GSA) and get paid with taxpayer
dollars while, at the same time, failing to pay their taxes. In
testimony before this Subcommittee today, the Government Accountability
Office (GAO) will describe 3,800 such civilian contractors who have
dodged their tax obligations and accumulated tax debts to Uncle Sam
totaling at least $1.4 billion--and are still awarded government
contracts. In related reports released over the last 2 years, GAO found
27,000 DOD contractors with accumulated tax debts totaling $3 billion
and 33,000 civilian contractors with accumulated tax debts totaling at
least $3.3 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 not only unfair to the
honest taxpayers left to make up the difference, but also to the honest
companies that have to compete against the tax dodgers that aren't
paying what they owe, while honest companies do.
One of the main problems here is that contractors are being allowed
into the system in the first place and are being awarded contracts even
though they owe taxes. There should be a red flag on any contract
application by a company that owes back taxes and a requirement for
them to explain the circumstances. 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 repay the back taxes they owe.
Tax chiseling by federal contractors is not a new story, but it is
particularly galling when engaged in by folks who make their living
directly from taxpayer dollars. 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. In 2004, we increased the percentage that can be
withheld from a contract payment to up to 100 percent.
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 today.
Until recently, the federal tax levy program was not an effective
tool to stop contractor tax deadbeats. But under this Subcommittee's
scrutiny, it is improving. The clearest proof is the increase in back
taxes collected from federal contractors. In 2003, the tax levy program
collected $7 million. In 2005, it collected $42 million, a six-fold
increase in two years. That's a little progress, anyway, though still
far from the $100 million per year projected by GAO as the minimum that
should be collected.
One reason for this progress is the Federal Contractor Tax
Compliance Task Force, which was formed after the Subcommittee's first
hearing on this topic in 2004, and which has worked hard to improve the
tax levy program. These improvements include the following:
<bullet> A few years ago, DOD, which issues more contract dollars
than any other federal agency, had only 1 out of 16 payment systems
integrated into the tax levy program. Now, 18 out of 20 systems are
routinely screened for tax levies.
<bullet> Prior to 2006, many federal contractors failed to submit
valid Taxpayer Identification Numbers (TINs) to the federal government.
Without a TIN, the federal government can't perform the computer
matches needed to identify tax deadbeats. Last year, in response to the
urging of this Subcommittee, the IRS developed a consent-based TIN
verification system, requiring taxpayers to allow verification of their
TINs as a condition of competing for Federal contracts. The program
started October 31, 2005 and by the end of the year, 16 percent of the
380,000 contractors registered in the Central Contractor Registry (CCR)
had validated their TINs. By October 31, 2006, 100 percent will have
gone through the TIN validation process. Hopefully, the days of missing
or false TINs will then be behind us, greatly strengthening the
effectiveness of the Federal Payment Levy Program matching process.
<bullet> Another milestone is a new effort to identify those
federal contractors who have failed to file any tax return. Until
recently, the tax levy program had focused only on contractors who have
filed tax returns. For the first time last year, a file containing all
awarded contracts from DOD and GSA for the past year was matched
against IRS data to identify contractors who are non-filers. An
analysis is now being conducted on the data to determine appropriate
next actions.
<bullet> Still another gap in the tax levy program has been
federal contractors who are paid by purchase cards, meaning either
credit cards or debit cards. To date, these contract payments, which
total about $10 billion annually, have been excluded from the tax levy
program. That doesn't make sense. In response to the Subcommittee's
request, the task force has completed a study of this problem and
recommended blocking payments over $2,500 via purchase cards to
contractors with an active tax debt. The Task Force is now developing a
process to create an indicator that a contractor is not eligible to be
paid by purchase card and must be paid by check or electronic transfer,
payment mechanisms which are already subject to the tax levy program.
Each of these steps is moving us toward a more effective tax levy
program, but a lot more needs to be done, including stopping
contractors that have tax debt from receiving a contract in the first
place. We should be stopping these contractors before they get in the
door.
Most federal contractors provide valuable goods or services, and do
so while paying their taxes. Other contractors stuff taxpayer dollars
in their pockets with one hand, while stiffing Uncle Sam with the
other. 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 dodgers from succeeding.
I commend Senator Coleman for his leadership and sustained effort
on this important issue. I look forward to the testimony today.
Senator Coleman. And Senator Levin, I want to thank you
again for your leadership in this area. You really pointed the
way, and it has been a privilege for me to continue moving with
you in this direction in a very bipartisan way.
And you are right. Average folks, taxpaying citizens of
this country, they pay their fair share. They live up to their
obligations, and they are the ones that are hurt by this. A
greater burden falls on them.
In some of these cases, the type of taxes that aren't paid,
payroll taxes, you are not only ripping off the government, you
are ripping off your employees, who had the money taken out of
their pay. Instead of then submitting it and it covers things
like Social Security and Medicare, things of that nature, what
we see--and we have seen in this investigation--is unscrupulous
folks, contractors using it for their own purposes.
So a lot of folks are hurt in this, but you have had the
vision for a long time, and I just wanted to applaud you for
that.
Senator Levin. Thank you so much.
Senator Coleman. What I am going to do is first get a sense
of the problem through review of a handful of disturbing cases.
We have one contractor that provides security services for the
Federal Government that was paid more than $1 million from
American taxpayers over the past 2 years, even though he owes
more than $12 million in payroll taxes.
The last few years, as his company failed to turn over
payroll taxes that were withheld from employees' paychecks, the
owner made large cash withdrawals from the company for his
personal use. I believe more than $100,000 of that money GAO
investigators indicated was spent on gambling.
And again, we are talking about, in this case, payroll
taxes. So the employees, part of their wages are being
withheld. But instead of being forwarded, as they should be, to
Uncle Sam, they are put in someone's pocket.
Another contractor provides public communications services
to the Federal Government and was paid $100,000 and owes more
than $2 million in payroll taxes. And while he kept his
employees' payroll taxes, the owner purchased residential
property valued at $1 million and made numerous cash
withdrawals totaling $500,000 at casinos.
A third contractor sells emergency supplies, was paid
$100,000 by the Federal Government while simultaneously owing
more than $700,000 in back taxes. The IRS assessed a penalty
against the owner for failing to remit payroll taxes and
imposed a Federal tax lien that was in effect when the
contractor received a Federal contract. While refusing to pay
his employees' payroll taxes, the owner made several real
estate purchases, including a home worth over a million
dollars.
And sadly, these are just the tip of the iceberg. The
Subcommittee's efforts, in concert with the work of the
Government Accountability Office, has revealed that 3,800
Federal contractors who contract with the General Services
Administration owe back taxes totaling $1.4 billion.
In an age of increasingly tight fiscal discipline, that
$1.4 billion could be put toward our homeland security, our
children's education, our job training programs. It adds insult
to injury that these tax deadbeats are actually paid enormous
amounts of money every year from American tax coffers, and I
think that is a good phrase, ``tax deadbeats'' being paid
enormous amount of money every year.
Our hearing today will address why these tax cheats were
able to do business with the government in the first place and
what we need to do to put a stop to it. This hearing continues
our long-standing investigation of Federal contractors who
cheat on taxes.
In February 2004, the Subcommittee held a hearing that
examined Federal contractors doing business with the Department
of Defense, and we looked at over $3 billion being owed there.
In 2005, the Subcommittee looked at unpaid taxes by civilian
contractors for various Federal civilian agencies. And the
total there was $3.3 billion, and that is with a ``B,'' that
had not been paid.
So this now is the third hearing. This focuses on GSA
contractors that provide a vast array of products and services
to the Federal Government, ranging from office supplies,
furniture, communications equipment, security services,
automobiles, office space, and landscaping. We will also
explore how to fix the problem so that these contractors cannot
continue to fleece American taxpayers.
There is an old adage that states if you want to have the
right answer, you have to ask the right question. When it comes
to Federal contractors, we have been asking the wrong
questions, perhaps not asking enough questions.
The Federal Government has been trying, since the year
2000, to identify tax cheats by asking Federal contractors
actually a very narrow question. Whether they have been
indicted or convicted of tax evasion in the last 3 years. It is
a very specific crime.
The Subcommittee's investigation has shown, however, that
this question is simply too narrow to weed out tax delinquent
contractors. The simple fact is that not all tax frauds result
in a conviction for tax evasion. Indeed, there is a broad
spectrum of tax-related violations that are utterly ignored by
our contracting review process. As a result, many Federal
contractors continue to receive contracts even though they owe
massive amounts in back taxes.
Take the case of Jack Easterday, who is the owner of nine
nursing homes and a computer software firm in California. Just
a few weeks ago, Mr. Easterday was convicted of 47 counts of
failing to turn over $3 million in payroll taxes that he had
withheld in trust for his employees. He used the money for
personal gain. Paid himself and his wife an average salary of
more than $338,000 between 1998 and 2004, and purchased a
10,000 square foot home for $750,000 in 1997.
He purchased a dining room table and chairs that seated 22
people, along with a 24-place setting of Limoges china. He
purchased a Rolex watch for $16,340. He owned a sailboat and
jet skis. He was living like Louis XIV, compliments of the
American taxpayer.
Mr. Easterday was convicted of willfully failing to account
for and turn over payroll taxes, but he was not convicted of
tax evasion, which is a different violation of the code.
Consequently, Mr. Easterday can honestly represent that he has
not been indicted for or convicted of tax evasion in the last 3
years and, therefore, potentially would remain eligible to
contract with the Federal Government in the future.
Mr. Easterday is just 1 of 97 known cases of egregious tax
abuse by Federal contractors that were identified by this
Subcommittee with the assistance of the GAO. These 97
contractors are the worst of the worst, yet none of the 97
contractors has been indicted or convicted of tax evasion.
Therefore, every single one of those worst of the worst would
be potentially able to slip their tax violations through our
contracting personnel.
On the other hand, if we asked those 97 contractors,
including Mr. Easterday, the right questions, we would know
that they were tax deadbeats before we gave them contracts.
Clearly, we are not asking the right questions, and we are not
asking broad enough questions.
That is only half the problem. The other half is that there
is no verification of the tax-related representations that
contractors make. Even though we ask contractors if they have
been indicted for or convicted of tax evasion, we do not
identify those who lie.
Neither the Internal Revenue Service nor the Department of
Justice currently provides GSA with lists of persons or
companies who have been indicted for or convicted of tax
evasion. Therefore, GSA has no method to verify whether
contractors' representations are true.
Clearly, we must not only ask the right questions, we also
need to verify the truth of the answers that we receive. Until
this problem is rectified, the Federal Government is likely to
be awash in Federal contractors who are cheating on their
taxes.
But there is good news to report as well. The principal
objective of this Subcommittee's investigation is to increase
the effectiveness of the Federal Payment Levy Program under
which a portion of Federal contractors' payments are levied to
pay off their outstanding tax debt.
When we started in 2003, levies on Federal contractors
amounted to $7 million. Substantial credit is due to the GAO
and the Commissioner of the IRS, the Administrator of GSA, the
Secretary of Defense, the Commissioner of the Financial
Management Service, whose support led to the establishment of
the Federal Contractor Tax Compliance Task Force. The task
force has addressed and resolved several problems that inhibit
levies, and it is continuing to work on a number of additional
problems.
And I started off this hearing by saying I appreciate their
hard work, and I applaud their success. To date, the notable
accomplishments of these efforts include the establishment of a
taxpayer identification number verification program in the
Central Contractor Registration, IRS's release of $28 billion
in additional tax debt for levy purposes, and the creation and
testing of a Federal contractor nonfiling program.
All of these improvements are designed to increase the
number of levies on Federal contractors' payments, and the
results demonstrate that we are succeeding. But the task
force's work is not finished. The Financial Management Service
must find a way to impose levies on all Federal contractor
payments, especially those that are made with purchase cards.
The task force needs to develop procedures to ensure that
all Federal contractors are registered in the Central
Contractor Registration. Further, the task force needs to
develop procedures to ensure that all Federal agencies use the
validated name and taxpayer identification number from the
Central Contractor Registration for all tax-related purposes.
I expect that today's hearing will add to the task force's
to-do list. Specifically, the tax-related questions and the
Representations and Certifications Application need to be
revised, and processes need to be developed to verify
contractors' tax-related statements.
On the first panel this morning, we will hear from the GAO
representatives on the results of our request to determine if
there are tax delinquent Federal contractors working for the
General Services Administration who are on the GSA's general
schedule.
To date, their hard work has resulted in the identification
of 57,000 Federal contractors who owe $6.3 billion. I want to
repeat that. To date, their hard work has resulted in the
identification of 57,000 Federal contractors who owe $6.3
billion in unpaid taxes, including 97 contractors who
flagrantly abused the tax system and who have been referred to
the IRS for further investigation.
On the second panel, we will hear from the Commissioner of
the IRS and the Acting Deputy Administrator of GSA concerning
the actions they have taken or plan to take to ensure that
Federal contractors who abuse the tax system are identified and
that those who owe tax have their contract payments levied.
I would like to make it clear I am pleased with the results
that the Federal Contractor Tax Compliance Task Force has
achieved to date. I applaud the Commissioner of the IRS, the
Administrator of GSA, and other participants for their active
support of the task force's work.
However, I am concerned that only 1 of the 97 cases of
potential fraud identified by the Subcommittee have been
prosecuted. This is well below the infamous baseball Mendoza
line.
In closing, it is simply unacceptable that tax cheats who
owe the government billions in back taxes get millions of
dollars from the government. This Subcommittee will continue to
aggressively pursue this matter until the Federal Government
tightens its procedures to ensure that these tax deadbeats are
prohibited from receiving lucrative government contracts.
[The prepared statement of Senator Coleman follows:]
Good morning and welcome to today's hearing. This is the third
Subcommittee hearing focusing on federal contractors with unpaid tax
debts. These are not your everyday tax delinquents, but rather
contractors who receive millions of dollars from American taxpayers and
yet refuse to pay their fair share of taxes.
Some of these tax-delinquent contractors fraudulently used withheld
payroll taxes for their business or personal use. Keep in mind that
payroll taxes include withholdings from employees' wages for Social
Security, Medicare, and individual income taxes. These contractors,
like all employers, hold these wages in trust for their employees and
are required to remit them to the IRS. Rather than fulfilling their
legal obligations, these contractors have diverted the money for their
own personal gain. An investigation by the Government Accountability
Office in conjunction with this Subcommittee uncovered numerous
contractors who bought luxury cars, boats, and multi-million dollar
properties, even though they owed hundreds of thousands of dollars in
unpaid taxes.
To get a sense of the problem, let's review of handful of
disturbing cases:
<bullet> One contractor that provides security services for the
federal government was paid more than $1 million from the American
taxpayers over the past two years, even though he owes more than $12
million in payroll taxes. Over the last few years, as his company
failed to turn over payroll taxes it withheld from its employees
paychecks, the owner made large cash withdrawals from the company for
his personal use. More than $100,000 of that money was spent gambling.
<bullet> Another contractor who provides public communications
services to the federal government was paid $100,000 and owes more than
$2 million in payroll taxes. While he kept his employees' payroll
taxes, the owner purchased a residential property valued at $1 million,
and made numerous cash withdrawals totaling $500,000 at casinos.
<bullet> A third contractor who sells emergency supplies was paid
$100,000 by the federal government, while simultaneously owing more
than $700,000 in back taxes. The IRS assessed a penalty against the
owner for failing to remit payroll taxes and imposed a federal tax lien
that was in effect when the contractor received a federal contract.
While refusing to pay his employees' payroll taxes, the owner made
several real estate purchases, including a million dollar home.
Sadly, these are just the tip of the iceberg. The Subcommittee's
efforts--in concert with the hard work of Government Accountability
Office--have revealed that 3,800 federal contractors who contract with
the General Services Administration owe back taxes amounting to a $1.4
billion. In an age of increasingly tight fiscal discipline, that $1.4
billion could be put towards our homeland security, our children's
education, or job training programs. It adds insult to injury that
these tax deadbeats are actually paid enormous amounts of money every
year from American tax coffers.
Our hearing today will address why these tax cheats were able to do
business with the government in the first place, and what we need to do
to put a stop to it. This hearing continues our long-standing
investigation of federal contractors who cheat on their taxes. In
February 2004, the Subcommittee held a hearing that examined federal
contractors doing business with the Department of Defense who owed $3
billion in unpaid taxes. In June 2005, the Subcommittee held a hearing
that identified $3.3 billion dollars in unpaid taxes by civilian
contractors at various federal civilian agencies. This third hearing
will focus on GSA contractors who provide a vast array of products and
services to the federal government, ranging from office supplies,
furniture, communications equipment, security services, automobiles,
office space and landscaping. We will also explore how to fix the
problem so that these contractors cannot continue fleecing the American
taxpayers.
There is an old adage that states: ``If you want the right answer,
you have to ask the right question.'' When it comes to federal
contractors, we have been asking the wrong questions. The federal
government has been trying since 2000 to identify tax cheats by asking
federal contractors one narrow question--whether they have been
indicted for or convicted of tax evasion in the last three years. The
Subcommittee's investigation has shown, however, that this question is
simply too narrow to weed out tax-delinquent contractors. The simple
fact is that not all tax frauds result in a conviction for tax evasion.
Indeed, there is a broad spectrum of tax-related violations that are
utterly ignored by our contracting review process. As a result, many
federal contractors continue to receive contracts even though they owe
a massive amount in back taxes.
Take the case of Jack Easterday, who is the owner of nine nursing
homes and a computer software firm in California. Just a few weeks ago,
Mr. Easterday was convicted on 47 counts of failing to turn over as
much as $3 million in payroll taxes that he had withheld in trust for
his employees. He used the money for personal gain. He paid himself and
his wife an average annual salary of more than $338,000 between 1998
and 2004. He purchased a 10,000 square foot home for $750,000 in 1997.
He purchased a dining room table and chairs that seated 22 people along
with a 24 place setting of Limoges china. He purchased a Rolex watch
for $16,340. He owned a sailboat and jet skis. He was living like Louis
XIV, compliments of the American taxpayer.
Mr. Easterday was convicted of willfully failing to account for and
turn over payroll taxes. More importantly, he was not convicted of tax
evasion, which is a different violation of the code. Consequently, Mr.
Easterday can honestly represent that he has not been indicted for or
convicted of tax evasion in the last three years, and therefore, he
would remain eligible to contract with the federal government in the
future.
Mr. Easterday is just one of the 97 known cases of egregious tax
abuse by federal contractors that were identified by the Subcommittee,
with the assistance of GAO. These 97 contractors are the worst of the
worst. Yet, none of those 97 contractors has been indicted for or
convicted of tax evasion. Therefore, every single one of those ``worst
of the worst'' would be able to slip their tax violations by our
contracting personnel. On the other hand, if we had asked those 97
contractors, including Mr. Easterday, the right questions, we would
have known that they were tax deadbeats before we gave them contracts.
Clearly, we are asking the wrong questions.
But that is only half of the problem. The other half is that there
is no verification of the tax-related representations that contractors
make. Even when we ask contractors if they have been indicted for or
convicted of tax evasion, we do not identify those who lie. Neither the
Internal Revenue Service nor the Department of Justice currently
provides GSA with lists of persons or companies who have been indicted
for or convicted of tax evasion. Therefore, GSA has no method to verify
whether contractors' representations are true. Clearly, we must not
only ask the right questions, but also verify the truth of the answers
we receive. Until this problem is rectified, the federal government is
likely to be awash in federal contractors who are cheating on their
taxes.
But there is good news to report as well. The principal objective
of this Subcommittee's investigation is to increase the effectiveness
of the Federal Payment Levy Program under which a portion of federal
contractor's payments are levied to pay off their outstanding tax debt.
When the Subcommittee started this investigation in 2003, levies on
federal contractors amounted to $7 million. In two short years,
collections have grown to $42 million. Substantial credit is due GAO
and the Commissioner of IRS, the Administrator of GSA, the Secretary of
Defense, and the Commissioner of the Financial Management Service whose
support led to the establishment of the Federal Contractor Tax
Compliance Task Force. The Task Force has addressed and resolved
several problems that inhibit levies and it is continuing its work on a
number of additional problems. I appreciate their hard work and I
applaud their success.
To date, the notable accomplishments of these efforts include the
establishment of a Taxpayer Identification Number Verification Program
in the Central Contractor Registration, IRS' release of $28 billion in
additional tax debt for levy purposes, and the creation and testing of
a federal contractor non-filing program. All of these improvements are
designed to increase the number of levies on federal contractors'
payments and the results demonstrate that we are succeeding.
But the Task Force's work is not finished. The Financial Management
Service must find ways to impose levies on all federal contractor
payments, especially those that are made with purchase cards. The Task
Force needs to develop procedures to ensure that all federal
contractors are registered in the Central Contractor Registration.
Further, the Task Force needs to develop procedures to ensure that all
federal agencies use the validated name and Taxpayer Identification
Number from the Central Contractor Registration for all tax-related
purposes. I expect that today's hearing will add to the Task Force's
to-do list. Specifically, the tax-related questions in the
Representations and Certifications Application need to be revised, and
processes need to be developed to verify contractors' tax-related
statements.
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 the General Services
Administration or who are on GSA's General Schedule. To date, their
hard work has resulted in the identification of 57,000 federal
contractors who owe $6.3 billion in unpaid taxes, including 97
contractors who had flagrantly abused the tax system and have been
referred to IRS for further investigation.
On the second panel, we will hear from the Commissioner of IRS and
the Acting Administrator of GSA concerning the actions they have taken
or plan to take to ensure that federal contractors who abuse the tax
system are identified and that those who owe tax have their contract
payments levied. 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. I applaud the Commissioner of IRS, the Administrator
of GSA and other participants for their active support of the Task
Force's work. However, I am concerned that only one of the 97 cases of
potential fraud identified by this Subcommittee has been prosecuted.
This is well below the infamous baseball Mendoza line.
In closing, it is simply unacceptable that tax cheats who owe the
government millions in back taxes get millions of dollars from the
government. This Subcommittee will continue to aggressively pursue this
matter until the federal government tightens its procedures to ensure
that these tax deadbeats are prohibited from receiving lucrative
government contracts.
Senator Coleman. Senator Carper.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thank you, Mr. Chairman.
To our witnesses, welcome. We thank you for being here. We
thank you for the work that you are doing on behalf of our
country and our taxpayers.
I have been over on the Senate floor just before I came
over here, Mr. Chairman. And this hearing is actually
especially well timed. I don't know if it is just a coincidence
or not. But we are debating this week whether to raise the debt
ceiling of our country by over three quarters of a trillion
dollars.
This is a country where 5 years ago, we actually had a
balanced budget. Actually, surpluses as far as the eye can see.
And now, we look at these huge deficits that, frankly, don't
get a whole lot smaller unless you assume we are not going to
be spending any money in Iraq in the future, or spending any
money in Afghanistan in the future, or you assume that we are
not going to do anything to fix the alternative minimum tax
problem.
If you make all of those assumptions, then maybe it looks
like the deficit is getting smaller. Those aren't very valid
assumptions. And as a result, we know the deficit is not going
to get a whole lot smaller at all.
It turns out that the deficit last year was over $300
billion. And as the Chairman here knows and I think our
witnesses know, the IRS has reported that last year there was a
tax gap--monies owed to the Federal Government, to the Treasury
from any number of sources, including contractors--but about a
$290 billion tax gap.
And one of the things that we ought to do and certainly
doing through this hearing today is putting a spotlight on some
of it, maybe about $6 billion. And while that may seem like it
is relatively small, that is a lot of money compared to zero,
which is what we have been collecting from these contractors.
The President has actually put in his budget proposal for
fiscal year 2007 some ideas that would enable IRS to go out and
collect some of these monies that are owed.
Senator Bayh--Evan Bayh--our colleague from Indiana has a
proposal that I think he is going to introduce soon that has
merit and would probably lead, if implemented, to collecting
maybe another $15 billion per year, further reducing the tax
gap.
Senator Coburn and I, who lead another Subcommittee of this
Committee focusing on financial management, are working on
improper payments. And as it turns out, there is about roughly
$50 billion worth of improper payments that are made each year.
Most of that is overpayments. A little bit of it is
underpayments. But it is about $50 billion all told.
That doesn't include all the agencies. It doesn't include,
for example, DOD. But it is real money. And if we could even
get half of it, it would make a difference in the amount of
money that we are borrowing.
The other thing is entitlement programs. I know
particularly for folks on my side of the aisle, the entitlement
programs are sacred. We don't want to savage them. I sure
don't. Having said that, there are some of the entitlement
programs, some aspects of some of the entitlement programs
probably could be means tested without doing harm to upper
middle income folks and, frankly, upper income people in our
country.
And also I would mention enhanced rescission powers, Mr.
President--well, maybe some day Mr. President. [Laughter.]
Today, though, it is just Mr. Chairman.
I mention enhanced rescission powers. The President has
asked for line-item veto powers. I think what he is asking for
is maybe a bridge too far, but we actually passed in the House
of Representatives legislation that I authored with a couple of
our colleagues that provided for a 2-year test drive for line-
item veto powers, where the President could propose rescinding
spending if it was not authorized.
If it was not authorized, he could propose to rescind it
all in a particular line-item. If it was authorized, he could
rescind up to 25 percent of it. Either house could override the
rescission with a 51 percent majority. Just a bare majority.
And I think if the President, the way we have crafted our
proposal, if the President abused what new power we have given
him, then after 2 years he would lose that power. And it is
just really a 2-year test drive. I think it is probably just a
better approach, if we are going to get into that, than simply
taking up what the President has proposed.
The other thing I would say, we are debating it right now
over on the Senate floor, Pay-go. The idea that if Senator
Carper or Senator Coleman want to increase spending for a
particular proposal, we have to come up with an offset. If we
want to cut taxes, if it has an adverse effect on the deficit,
we have got to come up with an offset either on the spending
side or on the revenue side.
And if you put all of these things together, they actually
would make a real difference. They would make a real difference
in the fiscal management of our country. And a good place to
start, frankly, is where we are today.
And I am just delighted that we are holding this hearing. A
chance to kind of gauge the success, the progress that is being
made, and figure out what more we can do to get us heading in
the right direction.
Mr. Chairman, again, I am happy to be here with you, to sit
at your side, and we welcome the testimony from our witnesses.
Thank you.
Senator Coleman. Thank you, Senator Carper.
I do know the chart lays out $7.7 billion that Federal
contractors owe the Federal Government. We are paying them
money, and they owe us $7.7 billion. And then even for the
Federal Government, $7.7 billion is a lot of money.
I would like to welcome our first panel to this important
hearing. Gregory Kutz, Managing Director of the Forensic Audits
and Special Investigations Unit at the Government
Accountability Office, accompanied by Steve Sebastian, a
Director with the Financial Management and Assurance Team at
the GAO, and also accompanied by Special Agent John Ryan, an
Assistant Director with the Forensic Audits and Special
Investigations Unit. Gentlemen, I welcome you back to the
Subcommittee.
GAO is here to testify on the latest information they have
developed pursuant to our request for an investigation of
Federal contractors who are 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.
Again, it is good to see you gentlemen. I appreciate your
hard work, which has resulted in the identification of more
than 50,000 Federal contractors who owe more than $6 billion in
unpaid taxes in just our last two hearings. And then I look
forward to hearing about the General Services Administration
contractors who are not paying their taxes.
I am particularly interested in knowing what we can do to
identify these deadbeats before they are awarded Federal
contracts. As you are aware, pursuant to Rule 6, all witnesses
who testify before the Subcommittee are required to be sworn. I
would ask you to please stand, raise your right hand.
Do you swear the testimony you are about to give before
this Subcommittee is the truth, the whole truth, and nothing
but the truth, so help you, God?
The Witnesses. I do.
Senator Coleman. You are acquainted with the timing system.
One minute before the red light comes on, you will see the
lights change from green to yellow. If you can sum up your
testimony at that time, we will enter your entire written
testimony into the record.
And Mr. Kutz, I understand that you will be presenting the
GAO statement this morning. Please proceed.
TESTIMONY OF GREGORY D. KUTZ,\1\ MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS UNIT, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE, ACCOMPANIED BY STEVEN J. SEBASTIAN,\1\
DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE TEAM, AND JOHN J.
RYAN,\1\ ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL
INVESTIGATIONS UNIT
Mr. Kutz. Mr. Chairman, as you mentioned, this is the third
time that we have been before this Subcommittee to discuss
government contractors that have significant tax problems, and
you have noted some of the progress that has been made and some
of the other issues that remain.
---------------------------------------------------------------------------
\1\ The combined prepared statement of Mr. Kutz, Mr. Sebastian, and
Mr. Ryan appears in the Appendix on page 40.
---------------------------------------------------------------------------
I commend you and the Subcommittee for holding this hearing
and for your consistent and aggressive oversight of this
important matter. Today, Mr. Sebastian is going to join me in
doing the statement, and he will open, and then I will close.
Mr. Sebastian. Thank you, Mr. Kutz.
Mr. Chairman, thank you for the opportunity to discuss
issues surrounding Federal contractors with tax problems. We
previously testified that thousands of DOD and civilian agency
contractors abused the tax system with little or no
consequence, and that serious impediments prevented the Federal
Government from collecting hundreds of millions of dollars in
outstanding taxes annually through the Federal Payment Levy
Program.
At those hearings, you expressed concern over how
contractors who routinely abuse the tax system could continue
to get government contracts, and you asked us to investigate
the process GSA uses to screen contractors for government-wide
business. Our bottom line today is that thousands of GSA-
approved contractors abuse the tax system.
Our testimony has two parts. First, I will discuss
increased collections through the levy program, issues that
prevent the Federal Government from effectively screening
prospective contractors for tax problems, and the extent to
which GSA contractors doing business with the Federal
Government owe substantial tax debt.
Second, Mr. Kutz will discuss egregious cases of tax abuse
related to these contractors and how this has led to an unfair
competitive advantage on the part of tax cheats.
First, important progress has been made to increase the
collection of taxes owed by contractors since you began
focusing attention on the issue, as the posterboard
illustrates. In fiscal year 2003, despite tens of thousands of
Federal contractors owing billions of dollars in taxes, the
levy program collected just $7 million.
Numerous issues contributed to this low collection rate,
including many of DOD's payment systems not being matched
against tax debt for levy, tens of billions of dollars in tax
debt not being referred to the program, and deficiencies in
FMS's processes for matching Federal payments for levy.
This Subcommittee's continued focus on these matters has
had a positive impact. For example, and as you mentioned, IRS
reassessed and referred an additional $28 billion in tax debt
to the levy program. DOD now includes many of its pay systems
in the program. And FMS is working to address control
deficiencies that excluded tens of billions of dollars in
Federal payments from potential levy.
Although we believe more can be collected, for fiscal year
2005, tax collections from contractors via the levy program
increased to over $42 million. While some progress is being
made on the back end, our testimony today sheds disturbing
light on why contractors with outstanding taxes are able to
routinely get Federal contracts.
In reviewing how GSA screens prospective contractors, we
found that neither Federal law nor GSA's own policies require
that tax debt be considered in making contract award decisions.
The FAR does not require contracting officers to consider tax
debt in determining whether a prospective contractor meets the
requirements of a responsible source. Consequently, no
consideration is given as to whether companies that do not pay
their taxes have the integrity or ethics to perform the
contract.
Also statutory restrictions preclude contracting officers
from having access to tax debt information unless furnished by
the businesses themselves or disclosed in public records.
Consequently, contracting officers do not have ready access to
the tax status of prospective contractors in making
qualification determinations.
Not surprisingly, these limitations have led to a
substantial number of businesses being cleared for government
contracts who owe significant tax debt. Our work shows that
over 3,800 GSA-approved contractors had over $1.4 billion in
outstanding tax debt as of June 2005.
Mr. Kutz will now discuss the results of our investigation
of 25 egregious cases of tax abuse related to these
contractors.
Mr. Kutz. Thank you.
All 25 of the GSA contractors that we investigated had
abusive and potentially criminal activity related to the
Federal tax system. As you mentioned, our prior testimony
highlighted 97 defense and civilian agency contractors that had
similar problems. All 25 of the GSA contractors had, as you
mentioned, Mr. Chairman, unpaid payroll taxes, which represent
amounts withheld from employees' wages for Federal income
taxes, Social Security, and Medicare.
However, rather than fulfill their roles as trustees of
this money and forward it to the IRS, these contractors
diverted the money for use in their business or for personal
gain. Regardless of the cause, willful failure to remit payroll
taxes to the IRS is a felony.
Mr. Chairman, as you requested, we have pictures related to
the 25-case study GSA contractors for today's hearing. Note
that in some cases, we have altered the picture to protect
individual identities.
As shown on the posterboards, our investigations related to
the lifestyles of the owners and officers of these contractors,
and they revealed the following: Many million in multi-million
dollar homes, numerous luxury vehicles; ownership of millions
of dollars of commercial property, rental property, and land;
hundreds of thousands of dollars spent gambling at casinos such
as the Trump Taj Mahal in Atlantic City and the Bellagio in Las
Vegas; and the purchase of a 20-karat diamond men's bracelet.
Diversion schemes by owners and officers included inflated
salaries, millions of dollars of cash withdrawals, and
substantial loans. Some owners were simply poor business
managers. However, many clearly accumulated substantial
personal wealth at the same time their companies failed to pay
their taxes.
Other issues related to these companies and their owners
included check kiting, money laundering, embezzlement, and
hundreds of thousands of dollars of unpaid personal income
taxes.
The companies we investigated were small to mid-sized and
closely held. Some of the industries included security,
building maintenance, and information technology. Ironically,
these potential felons are doing business with the Departments
of Defense, Justice, and Homeland Security.
Our testimony also highlights two cases where contractors
with unpaid taxes won awards based on price, beating out
contractors that paid their fair share of taxes. This situation
creates a disincentive for the vast majority of government
contractors that pay their fair share and could result in
further erosion in compliance with our Nation's tax system.
In conclusion, the real question today is why is the
Federal Government doing business with these contractors?
Further, at the Committee's recent Katrina fraud hearing, a
senior Justice Department official spoke of a zero tolerance
policy for individuals that are caught stealing disaster money.
In contrast, our investigations have shown a 100 percent
tolerance policy for government contractors stealing payroll
tax money.
Mr. Chairman, this concludes our statement. We look forward
to your questions.
Senator Coleman. Thank you very much, Mr. Kutz. We could
start a new reality TV show, ``Lifestyles of Rich and Famous
Tax Deadbeats.'' [Laughter.]
Can we talk first about competitive disadvantage or
competitive advantage? And correct me if I am mistaken here,
but essentially what you are saying is, in some of these cases
is you believe that some of these tax deadbeats apply for a
contract with an understanding that they are not going to be
paying all of their taxes, and they can factor that into their
bid?
Mr. Kutz. We don't know about that. But when we looked at
the two case studies, for example, they were wage-based type
services--moving services, etc. And clearly, you have at least
a 15 percent advantage where the payroll tax is not in the wage
base.
And also many of these companies were not paying their
corporate income taxes, and many of the owners weren't paying
their personal income taxes. So for small, closely held
companies, that would provide a significant cost advantage.
Senator Coleman. Is there any information to indicate that
folks have done this before or any kind of habitual conduct
here?
Mr. Kutz. We have certainly seen evidence of this from work
Mr. Sebastian and I have done of companies and owners. They
would open up one company, shut it down. Open up another one.
We have seen instances where individuals were involved with
dozens of companies that did not pay their taxes, including
payroll taxes.
Senator Coleman. You also talked about Federal Acquisition
Regulation requires government contracts with responsible
contractors. And the situation that we have today is the
questions that are taken into consideration, what is
responsible, do not include whether there are existing tax
liens, do not include whether there have been any kind of
indictments, convictions for things such as failing to remit
payroll taxes. Is that correct?
Mr. Kutz. That is correct. And I would agree with your
opening statement that we are asking the wrong question.
Senator Coleman. What question would you ask?
Mr. Kutz. Well, I think it needs to be a much broader
question about compliance with the Federal tax system in whole,
whether it be payroll taxes or other. And certainly, payroll
taxes, in our view, would be the most egregious type of
behavior that we have seen.
Senator Coleman. And I am curious. To me, it seems pretty
obvious. We are sitting here on March 14, 2006. We have been
looking at this issue for a number of years. I mean, it is not
rocket science. If you ask somebody a narrow question, you get
a narrow answer.
If you know that folks who are involved in this, and it is
interesting because you actually identified a broad range of
conduct. Not only did we see in some of these cases the failing
to remit payroll taxes, but if you dig a little deeper, you
have unpaid personal taxes. You have some instances of money
laundering, check kiting, kind of a list of conduct here.
Can you give me a sense as to why we haven't been asking
the broader questions?
Mr. Kutz. Well, Mr. Sebastian and I testified back in the
late 1990s on the issue. There was actually a bill, it was H.R.
4181, that would have amended the Debt Collection Improvement
Act and would have barred these companies with egregious
behavior from doing business with the government. And that was
passed out of the House Government Reform Committee, but did
not go any further.
And so, again, I don't know the full reason. There was a
lot of pushback from the contract community and the procurement
community at that time, including the Defense Department. But I
would think that given that the vast majority of contractors do
pay their fair share, that from a fairness perspective, they
would probably like to see something done because they are
having to compete with these people.
Senator Coleman. And part of the whole purpose of the lien
program is not to put people out of business. It is to put them
on a schedule of paying off taxes. And in fact, if we, the
government, are giving you additional contracts, but you have
tax liens--let us say you weren't even barred--we would be
making sure that we get that money coming back.
Mr. Kutz. Whatever is done on the front end, you need to
have an effective levy program on the back end. We certainly
agree with that, and I think that there has been a lot of
progress made in that area, as Mr. Sebastian showed and you
mentioned in your opening statement.
Senator Coleman. I will pursue this next line of inquiry
with both the Commissioner and the Deputy Administrator. But
talk to me about how we evaluate, find out whether, in fact,
the information, the answers we are getting are correct.
There seems to be a wall between the IRS and other
agencies. I understand it is statutory. We will talk about
that. Can you talk about the limitations that we have of
checking the accuracy of contractors' answers and then move me
to a potential fixing of that situation?
Mr. Kutz. Certainly. Under the 6103 sharing rules, there
are certainly limitations as to what can be shared. I mean, we
have been asked, even on the companies that we have
investigated, by the Defense Department and other agencies,
``Can you tell me who they are?'' And we can't tell anybody who
they are. We can certainly speak to the IRS about it, and IRS
faces the same issue. And so, there is a sharing issue here.
One of the possible solutions to that would be a contractor
consent. Right now, we understand that contractors have to get
into the Central Contract Registry, and have to allow a consent
for a check of the taxpayer identification number with the
Internal Revenue Service.
And so, it would seem that you could possibly expand that,
that if you want to do business with the government, you have
to go through the Central Contract Registry, not only allowing
a search for the taxpayer identification number, but also a
search for any unpaid tax problems. That is one of several
possible solutions.
Senator Coleman. So today, just so I understand, we have--
and we talked about this at our last hearing--to get the
contractor consent to check to see that you got the taxpayer ID
that you signed into the system. You are saying you have got to
expand that to have a consent to identify any tax liens?
Mr. Kutz. Yes. That would certainly be--not tax liens,
actual tax debt.
Senator Coleman. Tax debt.
Mr. Kutz. Tax liens certainly is another piece of
information you could get. We get that, in many cases, from
public sources. So that is something you could get,
potentially, now.
Senator Coleman. I am trying to figure out, though, the
practical way to do it. Tax liens are public information.
Mr. Kutz. Yes.
Senator Coleman. Tax convictions are public information.
Not just a conviction for tax evasion, but a conviction for
failing to remit payroll taxes, that is public information.
What is the bar in the system today? What prevents the GSA
when they are contracting with an individual who has tax liens,
substantial, X number of tax liens, who may, in fact, have tax
convictions--what prevents them today from knowing that
information when they make a determination that this is or is
not a responsible contractor?
Mr. Kutz. I don't think anything prevents them. Certainly
our evidence, when we have looked at the situation, is that
they are not doing it. And I think even if they were doing it,
there would have to be specific guidelines out there as to what
they were going to do with the information.
I mean, what would be the criteria for not giving a
contract or letting someone be on the GSA schedule? That would
be something we think would have to be developed if this
information was considered.
Senator Coleman. I presume that the IRS has a central
registry of all tax liens? Is that a presumption, fair
presumption?
Mr. Sebastian. That is correct.
Senator Coleman. Is that registry available to other
government agencies to cross reference, see whether potential
contractors are on that list?
Mr. Sebastian. No, I do not believe so.
Senator Coleman. And is that a statutory problem? Is that a
6103 problem, or is it a procedural problem?
And I will pursue this line of inquiry with the
Commissioner. But Mr. Sebastian, from your perspective, that
list is out there. It has a full inventory of everybody who has
a tax lien. I presume the IRS, if they do a contract, they
probably run through that list. But my understanding is GSA
doesn't have access to that?
Mr. Sebastian. I am not certain what the prohibition would
be because you are correct. This is information that is
available in the public domain. If GSA or any contracting
officer were to do a search of public records, they would be
able to identify tax liens associated with the prospective
contractor.
Senator Coleman. Mr. Kutz, you talked about, post-Katrina,
a zero tolerance for folks who are ripping off the system. But
then we looked at instances here where folks aren't remitting
payroll taxes, and you talked about 100 percent tolerance.
I want to step back a little. In the past, our last
hearing, we identified 97 cases of egregious tax abuse. The
sense I got from either you or Mr. Ryan that these were
potentially criminal cases. To date, has there been one
prosecution out of those 97?
Mr. Kutz. That is what IRS has represented to us.
Senator Coleman. Can you give me your assessment of the
aggressiveness in IRS dealing with the criminal aspect of these
violations?
Mr. Kutz. Yes, and let me just give you that I think when
you looked at the Katrina Hurricane, John Ryan and I have seen
that they are prosecuting $2,000 check fraud cases. And here we
see individuals with a million dollars of payroll tax money
with no action.
So I think what we are talking about here is on the
criminal side. When we first looked at the 120 cases, we saw no
criminal pursuit of any of the 120. Now that we have referred
them to the IRS, we do believe that there is action going on.
I would say, though, on the civil side, on the collection
side, there is a lot of activity. For example, with respect to
the 25 cases today, I believe at least 10 of them had trust
fund penalty assessments against the owners and/or officers.
And so, I think from a collection standpoint, we have seen
some fairly aggressive action. On the criminal side, we haven't
seen that, and we are certainly looking to hear possibly what
the commissioner would say about a strategy going forward as to
how IRS would intend to pursue payroll tax cases here.
Senator Coleman. And Mr. Ryan, have you been working with
the IRS? Do they typically work, by the way, with the GAO where
you have identified these cases, provide the information? Do
you have regular contact with the criminal side with the IRS?
Mr. Ryan. That is not the way it works, Senator. What has
happened in the past is, is that we have identified the cases.
We have referred them to the IRS. And quite honestly, right
prior to your hearings, we usually get a call to find out what
is going on.
I have been in contact with the IRS criminal investigative
group as of last week. They have provided a briefing as to the
criminal investigations. To be honest, I had no expectations
that the criminal investigative group would get back to us.
They obviously have their job that they need to do.
They need to work with the U.S. attorneys office. They need
to decide what the strategy is going forward. Are they going to
do parallel civil/criminal? That is up to the agency to decide
the direction.
But we give them the referral. My expectation is that they
won't get back to me, and they usually call right before the
hearing.
Senator Coleman. Do you have a sense--either you, Mr. Ryan,
or Mr. Kutz--about any kind of deterrent effect of criminal
prosecutions? Is that something that you think would make a
difference?
Mr. Kutz. And again, I will let Mr. Ryan add to that. I
think that is one of the strategies the Katrina fraud task
force had, and we talked about that at the full Committee
hearing. That is why they are going after the zero tolerance
policy now so that, for future disasters, people may think
twice about trying to steal disaster money.
Certainly the case you talked about is a several million
dollar payroll tax case. I would think that if a handful of
those are successfully prosecuted that that would send a
message that you are going to have more than collection actions
taken in some cases if you have payroll tax problems.
Mr. Ryan. I believe if the IRS works very closely with
Department of Justice, and Department of Justice could get a
message out to the U.S. attorneys offices about the importance
of paying the payroll taxes, and there is emphasis by the U.S.
attorneys in those particular districts to pursue those type of
cases, I think it awakens everyone's idea that there is a
problem and that they need to go after it, and they are going
to go after it. As you know, they can pursue it both civilly
and criminally.
Senator Coleman. Just a process question. The 25 cases that
you have looked at here, there are no names attached to those.
And that goes back to the appropriate privacy considerations
that we have when dealing with tax issues.
What access do you have to the names? How does it work when
you are trying to dig into this, how are you able to identify
these tax deadbeats? What kind of authority do you have to do
that?
Mr. Kutz. Well, we work with your staff, with the Joint
Committee on Taxation. We need to clear getting access to the
taxpayer information with the Joint Committee on Taxation.
Once we have that clearance, we have access to IRS what is
called the unpaid tax assessment file. That is what we use data
mining to match that against the disbursement activity and
other activity to identify our cases.
And hopefully, the 122 that we have pursued so far would
be, as you mentioned, some of the worst of the worst because we
used certain criteria in getting to those 122, such as the most
number of payroll tax periods outstanding, the most dollars
outstanding, and other things.
We can only get to the criminal type activity in our
investigations once we actually pick the contractors, and we
can do criminal background checks. And then we do our lifestyle
checks on them. And so, we don't really have a systematic way
of looking for the most interesting lifestyles. But as you can
tell, we have found some fairly interesting ones so far.
Senator Coleman. Hopefully, as a result of this, those
lifestyles will be somewhat more restrained as their tax
obligations are being met.
Gentlemen, I want to thank you for your attendance today,
and I will now call the second panel.
Senator Carper. Mr. Chairman, I have another hearing going
on at this same time. I am trying to do justice to both.
Again, we appreciate what you have shared with us today.
Let me just ask you a couple of questions, and I don't think I
am going to be going over ground that the Chairman has already
covered. But if I have, just bear with me, please.
When I heard you giving your testimony, I thought I heard
one of you saying there is no law--Federal law at least--that
requires that taxes owed be considered when contracts were
awarded. Is that what you said?
Mr. Sebastian. That is correct.
Senator Carper. Are you aware of states that might be doing
things a little smarter?
Mr. Sebastian. I personally have not looked at what the
State processes are with respect to contracting. So I am really
not sure.
Mr. Kutz. Senator, I would say that 24 of the 25 case
studies today had State and local tax liens also. So these are
not only Federal unpaid tax cases. They are also State cases.
Senator Carper. Let me just follow up on that. Our Chairman
was a mayor. I was a governor. And we still think a little bit
as I call them recovering governors, recovering mayors. What
are the implications, if any, for State revenues or for
municipal revenues? Is it reasonable to assume that not only is
the Federal Government, the Federal taxpayer being bilked, but
the same is true of the State and local levels?
Mr. Sebastian. The presence of State tax liens would
indicate that would be the case. Yes.
Senator Carper. OK. I am going to ask you, basically, what
do we need to do?
And when I say ``we,'' it is not just this Subcommittee. It
is not just the Senate. It is not just the Congress--the House
and the Senate. It is not just the Administration. It is not
just the agencies. But when I say ``we,'' I am looking at more
of a collective response. But let us start with us here in the
Senate. What do we need to do?
Mr. Sebastian. I think one of the ideas that was presented
a few minutes ago was a consent-type process, where a
prospective contractor would agree or consent to a tax check as
part of registering to do business with the Federal Government.
That would then allow the IRS to share the tax status of the
prospective contractor with the contracting officer because he
essentially would get the consent from the prospective
contractor.
Now coupled with that, there would need to be some
stringent guidelines that would be worked out as to what would
constitute a serious noncompliance with the tax laws such that
the contracting officer could make a determination that the
prospective contractor was not a responsible source.
Senator Carper. All right. Mr. Chairman, I was just sitting
here thinking somebody solved this problem. And it may be in
Minnesota. It may be a State. Maybe your State. It might be a
city or county in Minnesota. Maybe another State. I bet
somebody solved this problem.
And they probably figured out how to solve it in a way that
is not hopelessly complex, maybe in a way that harnesses
technology.
Mr. Kutz. Senator, one thing that some States do that we
are aware of is they actually publish the names of individuals
and companies that don't pay their taxes. And again, that may
or may not have had a lot of effect.
And I think that what they would do is send notices to
them, saying that if you don't pay your taxes within a certain
period of time, we are going to put your name on the Internet
and publish it. And I think some of the States have had some
experience of revenue coming in as a result of that.
Senator Carper. OK. Do we need to pass a law to provide for
the kind of consent that you just mentioned?
Mr. Sebastian. Ultimately, you might need to consider
legislation. It is one thing to publish guidelines and
regulations. It is another thing to enforce them. And so, I
think down the road, you may need to consider legislation to
that effect.
Senator Carper. Mr. Chairman, I don't know if you have
given that any consideration. Have you talked about that in
your Subcommittee?
Senator Coleman. No. But today, I mean the whole purpose,
there are two things that will come out of today. One is asking
the right questions. Two is being able to verify, and part of
verification is going to be process by which we get consent.
So, certainly, that is what is on the table here, and I
would like to hear the next panel to see whether there are some
problems with that or why it can or can't be done.
Senator Carper. Thank you.
Just sort of thinking outside of the box, how might we
better use technology in order to come up with a system whereby
we collect more of the revenues that are owed, but we don't end
up with a system that is just hopelessly complex to administer
and to operate?
Mr. Kutz. Well, one of the things, as we mentioned earlier
and you may have been out, what is called the Central Contract
Registry, which is where all contractors are supposed to
register that do business with the government. Right now, our
understanding is that is somewhat of a stovepipe system. It is
not integrated with all of the systems at all of the agencies.
Ultimately, it would seem the integration of that system
with agency contract payment systems, possibly with the offset
and levy program would facilitate more timely identification
and levy of information.
Certainly with respect to tax system modernization, any
systems changes that could more timely identify payroll tax
problems to get it in the hands of revenue officers before--in
some of these cases, we see 10 or 15 years of payroll tax
noncompliance. And it would seem that trying to get to those,
if someone misses a payroll tax deposit, that is a huge red
flag that they are either having cash flow problems or they are
stealing the money.
So it would seem something to get on the front end of that
process is an important technological thing that would be
useful.
Senator Carper. All right. Mr. Ryan, go ahead. I know you
are dying to say something.
Mr. Ryan. Actually, I believe Senator Coleman. Asking the
right question, we have policies in the banking industry,
``Know your customer.'' Maybe we should have, ``Know your
contractor.''
Maybe ask the right questions in regards to the TIN that
you are using to do business, the TIN that you are using to pay
your taxes, the TIN that you have ever done business with. The
more information that we have, the more intelligence that we
can gather, the better decisions that we can make.
If you allow these contractors to continue on not paying
their taxes, then the pressure is put on law enforcement at the
end to do something from a criminal standpoint. The more you
can do up front to cut this off, I think the better chance we
have of recovering the funds, instead of trying to look at it
from a criminal angle.
And I just am a big believer in having the controls up
front and utilizing law enforcement for a lot of things, but
not collecting taxes at this point in regards to working out
between collections and the criminal side.
Senator Carper. Mr. Chairman, I think there is a lot of
wisdom in what Mr. Ryan just said.
I have maybe one more question I would like to ask. And as
more and more agency purchases, at least some of the smaller
ones, are being made with purchase cards--and I think these
cards work a whole lot like credit cards that we are all
familiar with--I understand that it is difficult sometimes to
collect back taxes from payments made using purchase cards.
And I just want to know what are our options in this area,
and what has the task force been working on in this regard, if
at all?
Mr. Ryan. I don't know what the task force was working on,
but working with credit cards pretty much my whole career, you
are absolutely correct. One of the areas before you are
awarding the contract is getting back to asking those
questions. If you are going to disburse funds for someone, I
guess you should really know who they are. You should know
whether or not they have the tax problems before you get into
the contracting area.
The purchase card is not only a contract payment method, it
is also an acquisition. So in some of the small purchases, you
are going to have a problem with going to your commercial
vendors. But when the purchase card is used to pay on
contracts, I think the contracting officer should be involved
before the contract is awarded and knowing exactly what the tax
problem is with that payer.
Mr. Kutz. I think the actual mechanics of levying a
purchase card payment are very difficult. I think that the
better solution is to identify the contractors up front and not
let the officers use credit cards to make the payments. Because
if they can't levy the credit card payment, you could at least
levy a normal payment.
So it would be possibly making sure that the people who are
procuring the services don't let the contractors use the
purchase cards, require them to go through another payment
process that you can levy.
Senator Carper. Do you agree with that, Mr. Sebastian?
Mr. Sebastian. Yes.
Senator Carper. OK. I also noted during your testimony,
gentlemen, that you said that most of the companies that you
have looked at in the work of the task force were small to mid-
sized companies, closely held. Do I assume from that that none
of them are publicly traded companies?
Mr. Kutz. I don't believe any of the 120 were publicly
traded companies.
Mr. Sebastian. I don't believe so.
Senator Carper. All right. Good enough. We are grateful to
you for your presence and testimony today, for your response to
our questions, and for the good work that you are doing.
Senator Coleman. I am going to do just a little follow-up.
Mr. Sebastian, on a couple of occasions, you talked about
needing strict standards for evaluating the impact of these
liens. In fact, it was you, Mr. Kutz, who mentioned that on the
House side, there had been an effort to actually prohibit folks
who have liens from doing contracts.
And my sense of the rationale for not doing that was that
we don't want to prohibit everyone who has a tax lien from
being a Federal contractor. If they are making their payments,
if they had some problem that could be explained, that perhaps
they could still do this work.
On the other hand, you get these pattern defenders, you get
the serial offenders, you get folks that go way beyond just the
tax lien. We want to somehow draw that line. What is a
responsible contractor?
Is there a way that we could set up a system--and maybe it
goes to the consent, getting it early on--where they are not
precluded if they have a lien from having a contract. But if
there is a payment, right away, we know that if payroll taxes
that first period or second period aren't remitted that we
could somehow step in? There could be an early warning system
that would allow us to stop these folks from being in a
position where, in the end, they owe millions of dollars, which
is what we have today.
Can you kind of walk me through that? Would there be a way,
and that goes to Senator Carper's question, a simple way using
technology whereby folks who have a lien, have had a history
here. But if they are still allowed to contract, that if--it is
kind of like a parolee--you have got an X violation, you have
got a problem.
Can technology allow us to set up that early warning
system? Are you aware of any systems where this is done?
Mr. Sebastian. Well, I will approach it from a couple of
views. One would be the early warning that payroll tax deposits
are missed.
Back when Mr. Kutz and I did an initial study looking at
payroll taxes and the enforcement over this area, the IRS did
have what was called an FTD alert program, which conceptually
would have alerted the IRS to any missed tax deposits and would
have been an early warning, as Mr. Kutz had indicated, that
there may be indications the company is in trouble or that
someone is stealing.
What we found, though, was that there were some significant
deficiencies with regard to how that alert process was being
run so that information was not getting into the hands of the
field officers until quarters, even years after the initial tax
deposits had been skipped.
And not having looked at that program in a number of years,
I am not sure whether they have made improvements, etc. But
that would be one avenue of identifying whether you have got an
early warning of missed deposits.
For those contractors or individuals that want to do
business that already have outstanding tax debt, I think the
task force has already implemented a process with the
Department of Defense and was considering doing so with
civilian agencies, where the IRS would actually have
information available at the time of contract award.
That would essentially enable them to begin levying
payments immediately upon the point in time that the contractor
would receive the first payment. One of the issues that we
raised in the previous studies looking at the Federal Payment
Levy Program is the period of time it takes to actually provide
appropriate statutory notice to the contractor that you are
going to levy the payments.
There is an appeals process, which can take months. In the
mean time, payments are being missed. They are being made to
the individual and are not being levied.
So I think the actions that the task force has taken with
respect to DOD, and I believe, again, they are expanding that
to civilian agencies, to actually get information at the time
of contract award would allow IRS to send the collection due
process notices out to the contractor at that point in time,
and they can begin levying the payments immediately. That will
at least allow the government to collect some of those
revenues.
Also, I think to the extent that a taxpayer has entered
into and is complying with the terms of an installment
agreement that, in and of itself, would indicate that they are
working to get themselves back into compliance and would be a
factor that should be considered in determining whether you are
dealing with a responsible source.
Senator Coleman. But in fact, the new contract would also
be subject to the installment process because that is what we
are missing now?
Mr. Sebastian. Yes.
Senator Coleman. We have a tax lien. We don't know about
it. We haven't asked you the question. We haven't identified it
and whether you are or not paying it. If you are not paying it
back, that would go to the question of whether it is a
responsible party. If you are paying it back, certainly the new
contract would also be subject to the levy program.
Mr. Sebastian. And that is why you would really have to
consider going to a consent-type process, where the prospective
contractor recognizes up front that to do business with the
Federal Government, they will need to consent to a tax check.
And that may essentially bring them to the table and negotiate
for a payment process with the IRS.
Senator Coleman. Thank you. Senator Carper, anything
further at this point?
Senator Carper. Actually, I do have one thing. Sitting here
listening to this conversation, it reminds me, as I was saying
earlier, that some State, some county, some city probably
already figured out how to solve this problem.
As it turns out, I met with the management of a large
credit card company last week, and they shared with me one of
the things that they do to reduce the amount of bad debt, bad
credit card debt that is out there. And what they have
developed over time is software that enables them to intercede
with their credit card holders.
If they have a credit card holder, for example, who has
traditionally been making all their payments, paying off
everything, and then they stop doing that. And maybe they are
paying part of it, and then less and less, and eventually
getting to the point where they are not even making the minimum
payment. The credit card company intercedes before they get to
the point where the payment isn't being made.
Or the other things that trigger the intervention are if
maybe this credit card was the only one that the consumer had,
but then they got some other credit cards. And maybe they
started using the credit cards of a subprime operations,
subprime lenders.
The credit card company--the initial one we are talking
about here, the one I met with--they intercede early on, just
to see. It is really an early warning system, and it has worked
very well for them. And I am sure a variation of this could be
developed to work for us.
And if it works for them--I said somebody has already
invented this wheel, and I think maybe I met with some of the
inventors last week.
Senator Coleman. What I find fascinating is this
Subcommittee last week, we were looking at I think our 22nd
Katrina hearing. We had folks from the inspector general's
office talking about things being lost in the pipeline. That
was one of the problems. And my reaction was talk to FedEx.
They will tell you where it is in the pipeline.
Talk to any small business. If you order something, they
can tell you exactly where. At AutoZone, here is where the
carburetor is at this point in time. And they can tell you the
city that it is in, how long it is going to take.
The Federal Government has great resources. We should be
able to use that technology, and this is another area. Talk to
one of those credit card companies and see what we can do to
establish an early warning system that would then not have us
in a situation where we are looking at $2 million worth of
unpaid taxes and another million dollars in continuing to
contract with these folks.
Gentlemen, thank you. I appreciate your testimony.
We will now call the second and final panel of witnesses
for this morning's hearings.
We have with us the Hon. Mark Everson, Commissioner of the
Internal Revenue Service, and Kathleen M. Turco, the Acting
Deputy Administrator of the General Services Administration.
Mr. Everson, it is good to see you again. This is the third
time we have gotten together to discuss Federal contractors not
paying their taxes.
As I stated in my opening statement, for preliminary
comments in my opening statement, I believe we made a lot of
progress, Commissioner, since we first began discussing this
issue and having you before this Committee. I think it was in
February 2004.
I look forward to hearing what progress has been made since
your last appearance in June 2005, and I am encouraged by the
tremendous increase in tax collections from Federal contractors
over the past 2 years. I believe that in regard to the Defense
Department, if I recall the figures, I think we were collecting
about $680,000 when we had our first hearing, and it is
somewhere close to $20 million right now. I think that is about
a 3,000 percent increase in collections.
Mr. Everson. On a small base.
Senator Coleman. Yes. But it shows progress, and I
appreciate that.
Senator Carper. Mr. Chairman. I want to apologize to this
panel. I am going to have to leave during your testimony. I
very much appreciate your being here. And got a chance to work
with Commissioner Everson a little bit before and mindful of
the work that he is trying to do, and we look forward to
partnering with both of you. Thank you.
Senator Coleman. Thanks, Senator Carper.
Commissioner, I still continue to be concerned about the
criminal side, and we will talk about that a little bit.
Ms. Turco, I welcome you to this hearing. I am disappointed
that Mr. Bibb, the Acting Administrator, could not be here, but
I appreciate your filling in for him. I would like your
assurance that you are speaking on behalf of the Acting
Administrator and that you will bring these matters that we
discuss at this hearing directly to his attention.
I look forward to discussing whether the Federal Government
should be doing business with contractors who continue to abuse
the tax system. I also want to know what can be done to
identify tax delinquent Federal contractors on a regular basis
and how you propose to deal with them.
I understand that GSA has become a contributor member of
the Federal Contractor Tax Compliance Task Force. And I know
you recognize the importance of this work, and I appreciate
your continuing support for this effort.
Again, before we begin, pursuant to Rule 6, all witnesses
who testify before this Subcommittee are required to be sworn.
At this time, I would ask you to rise. Please 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?
The Witnesses. I do.
Senator Coleman. Thank you.
Commissioner Everson, we will have you go first, followed
by Ms. Turco. You know the timing system. Your entire written
statement will be entered into the record. You may proceed.
TESTIMONY OF THE HON. MARK EVERSON,\1\ COMMISSIONER, INTERNAL
REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY
Mr. Everson. Thank you, Mr. Chairman and Senator Carper.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Everson appears in the Appendix
on page 70.
---------------------------------------------------------------------------
I want to start out introducing my mother. I have testified
some 30 times before Congress since I have had this job. She
has not been here before. And I want to assure you that, to the
best of my knowledge, she is not a delinquent Federal
contractor. [Laughter.]
If she has been doing it, it has been really quite cleverly
disguised.
Senator Coleman. Does this mean, Commissioner, that I have
to really be nice to her son today because your mom is here?
Mr. Everson. You do. You use everything you can when you
are on this side of the table. Absolutely. [Laughter.]
Senator Carper. Mr. Commissioner, my parents used to say
the apple, in this case me, didn't fall too far from the tree.
And I am really watching your mom's lips very carefully to see
if they move when you speak. [Laughter.]
Welcome, Mr. Everson.
Mr. Everson. OK. Well, thank you.
Before turning to today's subject, let me first say that I
appreciate your strong support for strengthening the integrity
of the tax system through enhanced enforcement. This
Subcommittee has shown impressive leadership in combating
abusive tax shelters and those who play fast and loose with the
tax code, as has the counterpart Subcommittee where I was here
just last week, as Senator Carper knows, on looking at EITC and
erroneous payments.
This includes the Subcommittee's efforts on the KPMG
investigation. I just want to once again--as I did at the press
conference last August 29 with the attorney general--commend
you, Mr. Chairman, Senator Levin, and the staff of the
Subcommittee for just the outstanding work that was done
contributing to that investigation, which really was a landmark
event in terms of making sure that practitioners and others
adhere to professional standards and follow the law.
I also want to thank the Committee for the support it has
provided to the Administration's budget request for IRS
enforcement activities. That is very important. It is a
continuing subject and one that the more you weigh in, the
better off we are.
Turning to compliance by Federal contractors, Americans
certainly have every right to expect that anybody doing
business with the Federal Government pays their taxes.
Contractors receiving Federal tax dollars shouldn't cheat the
very same taxpayers by passing on their tax bills to them.
We take seriously the issue of Federal contractors being
delinquent on their Federal tax obligations. As you know, for
the past 2 years, we have worked closely with other Federal
agencies through the Federal Contractor Tax Compliance Task
Force, and we were making progress.
We have taken steps, as you indicated, to enhance the
automated Federal Payment Levy Program. We removed some of the
operational exclusions, as you mentioned, that have prevented
tax debts from being available for levy to match payments to
levies.
A valid TIN and name are now required, and we have
implemented the 100 percent continuous levy authority on
defense contractors. We did that last April. And beginning last
November, we began matching individual income tax debts and
payroll trust fund penalties against contractor payments.
As you have indicated, 122 delinquent contractor cases were
referred to us by the GAO. We put these cases ahead of others
in the queue to provide appropriate focus. Looking at the 122
cases as a whole, 74 are now closed.
Of this number, 12 paid their obligation in full for
slightly over $6 million; 48 are in bankruptcy, out of
business, or not collectible because of hardship or
liquidation; another 14 cases have installment agreements in
place; 9 cases have been referred for criminal investigation.
As you indicated, one recently resulted in actual conviction, a
47-count conviction. And two other cases are being referred to
DOJ.
That leaves almost 40 additional open cases. These cases
that represent over $25 million owed by taxpayers are in the
collection process. We are moving forward on a number of
initiatives to combat delinquent Federal contractors beyond
these cases, of course.
We will continue to review potential changes in the
exclusion policy criteria. Can we get that pool of potential
taxes larger, as we have already done? This will make
additional debts available for levy. And in July, we are going
to take some steps that I gather will speed up the notice
process, which will help us.
I know that some Members of the Subcommittee, as you
indicated, Mr. Chairman, would like for us to look at the front
end of the process for ways to prevent delinquent contractors
from ever receiving Federal contracts. Currently, a prospective
contractor, as you have indicated, only has to answer one
question. Some have suggested the list of questions be
broadened. They urge that IRS get involved in verifying the
answers, possibly on an annual basis.
While I can certainly understand the motivation to do this,
I am concerned that it could drive the IRS into the realm of
procurement policy.
Senator, it is similar to the conversation we had last
week. A lot of tax administration is done on the back end. That
is the way our system works. The degree to which you bring us
forward, you run the risk in this day of great concerns on
privacy of having the image of an ever-intrusive IRS.
So there are some of the same considerations we got to with
EITC or that we get to right now in the very important debate
about proper immigration policy, where some are suggesting that
our tax records be shared in order to have workplace
enforcement of the immigration laws.
We believe Congress can do several things to help us
collect delinquent taxes from Federal contractors. We have
proposed a change in the tax code to allow the IRS to implement
the 100 percent levy on all vendor payments, not just for goods
and services.
Second proposal--we have actually made five proposals in
the budget that strengthen information reporting and other
areas, that go parallel to the request for additional monies.
The second proposal would actually allow us to improse a levy
for employment tax liabilities prior to a collection due
process hearing.
This is important. It gets at the issue you were just
talking about. Right now, any time a payment is missed, it goes
down a corridor where there are all sorts of procedural steps
that need to be taken before we can do the levy. This proposal
would treat the levy as comparable to our right.
Right now, talking about States, if a State is going to
issue a refund or we are going to issue a refund, there is a
reciprocity as the ability to levy that refund by either one of
the governmental levels. Then you can go back and challenge it
with all appropriate due process, but we can get the money
first and then go through the process.
We would like to do the same thing on employment taxes
because these pyramid. If somebody gets in trouble, they can
use the government as a bank. They have no intention to
necessarily break the law. They want to pay it back, but this
15 percent can be an important point. We would like to get
after this with that change.
The other proposal we would make would increase information
reporting for certain government payments for property and
services. We think this would be helpful in this contractor
issue as well.
Let me just close by repeating the point you have heard me
make in the past. We want to vigorously attack noncompliance by
contractors, but I would emphasize that consideration for
taxpayer rights must be balanced with our desire that Federal
contractors pay their taxes. Thank you.
Senator Coleman. Thank you, Commissioner. Ms. Turco.
TESTIMONY OF KATHLEEN M. TURCO,\1\ ACTING DEPUTY ADMINISTRATOR,
GENERAL SERVICES ADMINISTRATION
Ms. Turco. Thank you.
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\1\ The prepared statement of Ms. Turco appears in the Appendix on
page 88.
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Mr. Chairman, let me begin by saying that the General
Services Administration takes very seriously the issue of
contractors not paying their Federal taxes. We want to be in
the vanguard of those agencies working to make certain that the
American people are paid in full by all those who enjoy the
privilege of doing business with the Federal Government.
I will address the highlights of what I reported in my
testimony. Let me begin with the pre-award phase of the
contract award process. Prior to the award of a contract, GSA
determines whether prospective contractors are responsible in
accordance with the Federal Acquisition Regulation.
The process GSA follows is specifically governed by the
FAR, which requires that in order to be deemed responsible, a
prospective contractor must have adequate financial resources,
be able to comply with the delivery or performance schedule,
have a satisfactory performance record, possess a satisfactory
record on integrity and business ethics, possess the necessary
organization, experience, and technical skills, have accounting
and operations oversight, and have the production,
construction, and technical equipment and facilities to perform
the work required.
A pre-award survey can be conducted if the contracting
officer has reason to believe that one or more of the
aforementioned factors are in doubt. An overall responsibility
determination is also dependent on the contractor
representations and certification statements. Contractors must
provide and enter these into the FAR by using the Online
Representations and Certification Application System.
Furthermore, all agencies have access to the ORCA
application system and can ascertain information on the
contractor's status. In turn, contracting officers must use the
ORCA to obtain information on competing vendors prior to
awarding a contract.
This information includes a certification addressing
whether or not the offeror or any principals within a 3-year
period preceding this offer have been convicted of or had a
civil judgment rendered against them for a number of offenses,
including tax evasion. As has been discussed earlier, this may
be too narrow a definition, Mr. Chairman, and we need to look
at that.
We have also integrated the ORCA system and the Central
Contractor Registration, known as the CCR. The CCR data
collected includes addresses, types of business line, socio-
economic data, taxpayer identification numbers, points of
contact, and electronic funds transfer information for
payments. With the inclusion of the CCR data, we have expanded
the government-wide use of the CCR and the TINs as part of our
due diligence.
In the fall of 2005, the CCR program began validating the
TIN data. In order to complete CCR registration and qualify to
bid for Federal Government contracts, the TIN and the taxpayer
name combination must match exactly to the TIN and taxpayer
name used in Federal tax reporting. Nonmatching vendors are
notified to contact the IRS. The vendor is deemed nonactive,
i.e., they don't match. They cannot bid on any contracts.
Another area that we have been addressing today is the use
of the purchase card payments as part of GSA's SmartPay Program
and whether the card payments are subjected to levies pursuant
to the Federal Payment Levy Program. We continue to examine a
number of approaches to provide charge card information that
may be of assistance in the levy issue.
One approach involves development of more robust data
sharing practices, possibly including a data warehouse within
the GSA's SmartPay Program. If developed, this approach could
provide more granular commercial merchant identification data
for use in the Federal levy process. We clearly have more work
to do in this area, and we look forward to working with the
task force in addressing how we can go about a data warehouse
or other means in terms of improving or using the purchase card
payments for offset.
I hope my testimony has provided an adequate snapshot of
what we are working on at GSA, and I am happy to answer any
questions you might have.
Senator Coleman. Thank you, Ms. Turco.
Just the last point first, the Federal purchase card
payments. At this point, it is my understanding that they are
not subject to the Federal Payment Levy Program?
Ms. Turco. That is correct.
Senator Coleman. And so, what we are talking about is
similar to Senator Carper's question, to make sure that those
payments are subject to the levy program, just coming up with
the right system?
Ms. Turco. Yes, sir.
Senator Coleman. We appreciate and do look forward to your
work in this area.
In your testimony, I think you used the phrase, you were
talking about things that can be looked at in determining
whether somebody is a responsible contractor. And you talked
about--I think you used the phrase--``convicted of a number of
offenses, including tax evasion.''
When you say ``number of offenses,'' beyond tax evasion,
are there other tax-related convictions or indictments that are
questioned or that are referred to when dealing with potential
contractors?
Ms. Turco. No. I think we only ask for tax evasion.
Senator Coleman. Do you have any reaction? To me, it is
kind of obvious that there are a whole range of other failures
to submit payroll taxes just being one of a number of offenses.
Has there been discussion before this hearing as to broadening
the scope of those questions?
Ms. Turco. Well, Mr. Chairman, I think that was what the
GAO folks were talking about in terms of expanding beyond tax
evasion. I would say that this is part of the Federal
Acquisition Regulation, and it could be that in terms of how we
go about the process of submitting changes to the FAR that we
may not have had full knowledge that, in fact, tax evasion is a
very narrow question.
And so, I think what we would like to do is to go back and
work with the Chief Acquisition Officer at GSA as well as with
the IRS as to whether or not we could expand the questions.
Senator Coleman. Commissioner Everson.
Mr. Everson. I just want to make a commercial for one thing
that we are interested in. You may not be aware of this,
Senator, but failure to file your income tax return is not a
felony.
So the basic issue of nonfiling, which represents about 10
percent of the tax gap, you wouldn't even get at it. I suspect
you wouldn't be asking people to necessarily report on
misdemeanors. I mean, how deep are you going to go with all of
this? But we have said we think that ought to be a felony, and
it is not.
Senator Coleman. Some of these to me, Commissioner, seem
like low-hanging fruit. I mean, it is pretty obvious that if
you are asking people to make a determination as to business
integrity and ethics, if you have a history, or in this case,
you could have convictions--convictions, regardless of what the
level of not submitting payroll tax--the Easterday case is a
good example.
You have got convicted, the charge was $3 million. I
thought that the investigation showed about $18 million,
somewhere between $15 million and $18 million, if not more, of
Federal taxes not being remitted. That is pretty substantial.
And not to be asking that question, to me, seems so narrow and
blind that I would hope we would go back and then take a look
at kind of the broad range of what things to ask about.
And again, that is without making the judgment that these
are automatically debars. I am not sure I want to look at that.
It may be the size of the offense. It may be the repetitiveness
of the offense. There are some folks who have a problem, and
they then make all efforts to correct it. They sign up. They do
payments, installment payments as part of the levy program.
They meet their obligations. That is not the problem for me.
If you are being directed to make a judgment about business
integrity and ethics, you have got to be able to ask the
questions that can help you make that evaluation. I would hope
we would go back then, and clearly, this is something that
absolutely needs to be done.
A question about taxpayer identification--TINS, taxpayer
identification numbers. When a contractor comes forward, they
have a taxpayer identification number. Do the contractors have
one taxpayer identification number, or do they change, do they
have different numbers for different transactions?
Mr. Everson. Well, it depends on how many different
business entities they have established and what legal forms
they have. But your taxpayer identification number doesn't
change for that entity.
Senator Coleman. But if you have somebody who wants to game
the system, and is it possible then to simply change the name
of the business and have a different number? Is that possible?
Mr. Everson. Well, you go through a proceeding. I think
that if it was done for fraudulent purposes, which I would
think would be pretty unusual, I suppose you could run into
problems there. But again, if you look at particularly you go
to larger businesses, it depends on what is in the tax return
or what is not or what are the related party deals. It can be
very different forms.
Senator Coleman. How do we know if people have different
taxpayer identification numbers? And here is what I am looking
at. I am looking at cases that if we go back through these
investigations, we clearly had some contractors who were gaming
the system.
Mr. Everson. Sure.
Senator Coleman. And part of the gaming of the system is
that they would create new companies. They would have
obligations, and they would just create a new company and get a
new contract. So I am dealing front end now, not back end.
Mr. Everson. Yes.
Senator Coleman. How do we know----
Mr. Everson. I don't think that that would be----
Senator Coleman. How do we know whether folks have
different taxpayer identification numbers?
Mr. Everson. With a new business, I think you would have to
ask questions. Again, this is a procurement question. It is not
a tax question.
The tax law here would follow the legal entity, who is the
taxpayer, if you will? But if you are asking previous things
that someone or officers or owners have done in their career,
that is a different question. It is not a tax question, from my
point of view.
Senator Coleman. The challenge is to figure out how to get
those who are gaming the system, how to hold them accountable
up front. It is less of a problem if you stop them on the front
end than you have got to deal with the back end, at the same
time without making the system so burdensome that people can't
work their way through it, and then we talk about government
bureaucracy.
But somewhere I still think we have to look at the front
end, ask the broader questions. At least have the information
so that then you can render a judgment.
And Commissioner, in regard to the way you operate, IRS,
and what I am thinking here is that you may have a situation
where some of the statutory prohibitions that others have, I am
not sure whether they impact you. But if you do a contract, do
you go back and check whether there are liens? Do you have the
ability to just kind of go back and check, see whether there
are tax liens?
Mr. Everson. We do. I have the same ability that anybody
else has. But 6103 information, as you say, is protected. So
what you have to do is be extremely careful, Senator, on the
use of that information.
You have talked about liens. If something is public, an
organization can go back and check the public record. They
wouldn't do it via us, if you will. That is the trick here or
where you run into trouble because the legal interpretations on
this have always been very conservative. So we do not, even if
something has become public, open up that public record of the
lien, if you will.
And the difficult thing here for a procurement
organization, which is even for us separate from the rest of
our operation, is you would have to go and you would have to
check at something like 4,200 different counties and see
whether the lien was placed somewhere.
Senator Coleman. Well, I am trying to get a practical way
to get access to public information.
The IRS, do you probe contractors, or do you have the
ability to look in greater depth at potential contractors than
any other government agency?
Mr. Everson. No, I wouldn't say that we would interpret our
authorities that way, and I don't think we do.
Senator Coleman. Do you have access in terms of
information? My concern with tax liens are public information?
Mr. Everson. Yes.
Senator Coleman. But the question is, where do you have to
look for that public information?
Mr. Everson. Right.
Senator Coleman. Is there a single source? Is there a
single file? Do you have a single file of all taxpayers who
have tax liens?
Mr. Everson. Well, we have our systems where we have in all
of our collection systems. And liens and levies, just to give
you an idea of the volumes here, levies fell after the reforms
of 1998. They went all the way down to something like 217,000.
Last year, they were back over 2,700,000, I believe. Yes,
that is the case. Same thing with liens. Liens declined to
170,000 in 1999. They are back up over 500,000.
We have those, but again, that is protected information
because those are centralized databases protected, as you say,
under statute. Nobody else has any one-stop shopping to go find
that. They have got to go and look elsewhere.
Senator Coleman. Do you have an automated lien system
database?
Mr. Everson. We have a database that covers all the
collections and which would enable you to go by taxpayer and
see whether there is a lien on them.
Senator Coleman. So when you have a potential contractor,
you check the potential contractor and their taxpayer
identification number?
Mr. Everson. No, I am not saying we do that. That is not
for tax enforcement purposes. That is a distinction. I would
not do something at the IRS, use information that we have for
personnel purposes, for hiring purposes, anything that would
violate the principles of 6103 until you give me permission as
the Congress to do that.
Senator Coleman. Again, I am just dealing with public
information, lien information.
Mr. Everson. I will check and verify this. But I don't
believe we go to the step of checking with each of those 4,200
municipalities or the States or where there is a lien.
Senator Coleman. This is more from a policy perspective
now, not a process perspective. If liens are public
information, would it be in the best interest of government to
have a single database with liens that the GSA could then check
to verify whether, in fact, there are liens?
There are other steps you would have to go to in terms of
the impact of those liens and what impact they would have on a
potential contract. But just in terms of not having to go to X
number of counties, courthouses----
Mr. Everson. Sure. That is a----
Senator Coleman. Is there anything from a policy
perspective? Put your policy hat on. Understanding great
reverence for privacy, for protecting identities. But we have
public information.
Mr. Everson. Yes.
Senator Coleman. Taxpayer liens. Why shouldn't there be a
single database that the GSA or others can go to to determine
whether a contractor does, in fact, have liens against them?
Mr. Everson. I don't have a problem with that from a tax
point of view. That is a procurement question. And if GSA or
the White House procurement officer would ask that a database
like that would be developed, fair enough. And it is no
different than the same question on convictions or other areas.
Senator Coleman. Ms. Turco, any response to that? Would
that be helpful if you had a single place that you could go to
to determine whether, in fact, there were outstanding liens
against a prospective contractor?
Ms. Turco. Yes, I think it would be. I think it would
enhance in terms of the review process that we undertake with
the contractors.
Senator Coleman. Commissioner Everson, when you went
through your list of those 97 cases, you indicated that some of
the businesses are out of business?
Mr. Everson. Yes.
Senator Coleman. How do you verify that?
Mr. Everson. I believe all of these cases, as you know from
my commitment to you 2 years ago, were investigated by our
criminal investigators. I am sure that they have checked that
pretty closely.
Senator Coleman. Would you go back and verify that? There
seems to be some question about--again, this is the trust you
have got to verify.
Mr. Everson. Absolutely. It sounds like you have
information that I don't. So I am happy to take a look at that.
And any case you have got, we will take a look at it.
Senator Coleman. I would just ask if you have your folks go
back and verify.
Mr. Everson. I think you know, Senator, from the KPMG and
other matters, when you give us something, we take a good look
at it.
Senator Coleman. And we appreciate that, Commissioner.
And while touching on the verification issue, if I can go
to you, Ms. Turco? One of the concerns we have in our
investigation, we don't see the verification of the tax-related
answers that potential Federal contractors provide on the
representation and certification application. Is there a
verification process?
Ms. Turco. Chairman, no. There is not a verification
process. It is a review process. The verification would be with
the IRS.
Senator Coleman. What I would like is for you to commit to
work with the IRS and other member of the contractor tax
compliance group to look at this verification issue.
I just think so much of what we do is on the back end.
Commissioner, so much of what you do is on the back end, and
that is resource intensive. And if on the front end, we can
kind of check some of this stuff out, get some of the
miscreants and the deadbeats out of the system up front, it is
less work for you, and it is less abuse to the system.
Mr. Everson. Again, though, Senator, there is a big
distinction between what is public information and what is not.
And we have had this discussion in the past. Where do you draw
the line between what is a legitimate tax challenge that a
taxpayer is making versus something that is, as you have said,
abusive or repetitive? And these are hard lines to draw and
subject to a lot of interpretation.
And the difficulty here and I am sure why GSA and others,
it hasn't evolved more on the procurement side, they are not
tax experts. So you draw, getting into this, getting into the
weeds here, it is a tough thing fraught with a lot of
sensitivity for Americans of all stripes.
Senator Coleman. But the pretty basic stuff, the most basic
kind of elements of this whole thing is you have folks out
there today who have liens, and they have liens because they
have obligations that have not been met. So a determination has
been made that this is your responsibility to meet that
obligation.
Mr. Everson. Yes.
Senator Coleman. And unfortunately, then we have contracts
going out to folks who really have no consideration and no
knowledge of whether these folks have had a prior history, have
had obligations. And as a result, we are paying contracts that
are not subject to the liens, even though these people have
some responsibility. Or in the worst case, to go beyond the
liens, folks who may have been convicted of serious, serious
tax violations. And again, we have no knowledge.
And so, in the end, I don't know how you can make a
judgment about business integrity and business ethics when we
don't have the questions. We don't have the information. Even
when we get the answers, we don't verify them.
Mr. Everson. Sure. I agree with you entirely on the
information that is public.
Senator Coleman. Let me ask you a question. We talked about
the government purchase cards.
Mr. Everson. Yes.
Senator Coleman. That was a concern of the Senator from
Delaware. He has a lot of these operations in his State. So I
appreciate that. [Laughter.]
Mr. Everson. I haven't heard from him yet on our proposal
that credit card issuers report gross receipts for businesses
to us. I may hear from him. He is big on the tax gap, but we
will see what happens when I get there. I hope I will have his
support.
Senator Coleman. The question I have is I understand that
the Financial Management Service identified about 8,000
contractors who owed about I think it was close to $750 million
in taxes. And we only levy a small percentage of that, as I
understand.
Are you familiar with that? Can you help me understand the
issue there of the difficulty in levying in those cases?
Mr. Everson. With the purchase cards, I guess you have an
intermediary there, and that is the problem. But my
understanding, and perhaps my colleague can help me on this, is
that the task force has looked at this, and they say that we
can address this problem.
I have it, and I covered it in the written testimony. I
will just read that to you. The task force is currently
pursuing an interim procedure to match debts in TOP with a CCR
database maintained by the DOD. If a match is found, the CCR--
that is the database itself--would be updated with a field that
the contractor is not eligible to be paid by a purchase card
program.
So they would have to go down the other corridor for
payment, and I guess they would be basically locked out of the
purchase card program. But the teams that have looked at this
seem to feel that that is a better approach as opposed to
working on the purchase card, trying to intrude into the card
workings itself.
Senator Coleman. I appreciate the continued work in that
area. It is certainly an area of concern.
And let me kind of pull all this together, if I can.
Clearly, this Chairman certainly believes--I can't speak for
all Members of the Subcommittee. But I would suspect that most
Members of this Subcommittee would want us to take a more
complete look at the contractor, this issue of contractor
responsibility under the Federal Acquisitions Regulations, the
FAR, to look in determining whether compliance with tax laws
has taken place.
That we go beyond limiting the questions to indictments or
convictions for tax evasion. That we are able to look at
noncompliance. That we look at the broader spectrum of tax
violations, including some that we have talked about today.
But in addition, and I think you mentioned, Commissioner
Everson, there are folks here who have State, unsatisfied State
tax liens that are involved in this that, clearly, we don't
look at. Unpaid outstanding tax debt, that is, that we don't
look at.
And so, I would hope that we would put in place a system,
and I would expect--more than hope, I would expect that we have
in place a system that asks the broader questions and that
provides ways to verify consistent with the deep concerns about
privacy. But that we do those things particularly with the
opportunities technology affords us to have in a central place
information about tax liens and other things that are a matter
of public record.
And that would make it easy for those who are issuing
contracts to be able to look at that and then to make some
judgments and determinations on a policy perspective of the
impact that those liens and those other obligations would have.
So there is work to be done. I am an optimist, so I am going to
end on the positive note.
I really do appreciate what has been done so far. I think
we have made great strides. And Commissioner, we have come a
long way on this and other issues. You mentioned the KPMG and
the sham tax transactions. I believe I remember not only do you
have that statement there, but I think it was about $3 billion?
With a ``B,'' $3 billion in additional revenues?
Mr. Everson. The ``Son of Boss?'' Yes, the Son of Boss
settlement is over $4 billion that we have at this stage. And
we have others. We have just finished the application period
for a global settlement initiative covering 21 transactions. A
lot of good news there, too.
So we are making some progress. I just thank you for your
support on the budget and on some of these legislative
proposals we have. I think those are very important, too, sir.
Senator Coleman. Even for the Federal Government, millions
and billions are real dollars.
Mr. Everson. We go after it all, yes, sir.
Senator Coleman. As I said earlier, this is the third in a
series of hearings on tax delinquent Federal contractors. This
Subcommittee will remain focused and vigilant on this issue.
We are going to, in the next couple of days, have to make
some tough votes about budgetary matters, and there are
programs that, as a former mayor, I look at--for community
development block grants and community service block grants.
And the ag side, Food Stamps and a whole range of things, which
we are talking in the billions that have a--low billions, a
billion dollars or $2 billion--that have a substantial impact
on the quality of life of a lot of our citizens.
And it greatly troubles me when I see billions being
unpaid, and I think we have got to keep doing what we are
doing.
So I do appreciate the work that you have been doing and
the work that you will continue to do, and we look forward to
making further progress with the IRS and GSA, FMS, and the
other relevant Federal agencies.
Thank you very much. This hearing is now adjourned.
[Whereupon, at 11:09 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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PREPARED STATEMENT OF SENATOR AKAKA
I wish to thank Chairman Coleman and Ranking Member Levin for
bringing the extent of the problem of unpaid taxes by federal
contractors into clear focus. I am proud to partner with you in finding
viable solutions to contractor tax abuse which costs American taxpayers
billions per year. The two preceding hearings held by this Subcommittee
have yielded positive results--an increase in levies against tax
cheaters; the creation of the Federal Contractor Tax Compliance Task
Force; and stepped up investigations of non-compliant contractors.
Despite such positive steps, there remains the nagging question of
why should any federal contractor receive government funds if he or she
fails to do what nearly 84 percent of Americans do every year--pay
taxes? Why isn't there a zero tolerance policy when it comes to federal
contractors who are either abusing or ignoring the tax system?
Just last month, our full Committee heard from the head of the
Department of Justice Hurricane Katrina Fraud Task Force who said a
zero tolerance policy greatly aided in the prosecution of Katrina-
related fraud cases. Given that many of the initial Katrina cases
involved low-level dollar figures, a zero tolerance policy might work
when we're dealing with billions in unpaid taxes by federal
contractors.
Because of the PSI hearings--and what I believe is a real
commitment from IRS Commissioner Everson--there has been a coordinated
and cooperative effort to close the tax gap for federal contractors. I
look forward to hearing from the Commissioner what he sees as the next
steps in dealing with this pervasive problem.
I do want to raise a couple of additional concerns that tie into
today's hearing. Knowing that the job of detecting--deterring--and
prosecuting tax fraud rests with the IRS, I continue to oppose
outsourcing the collection of unpaid taxes which I feel is as an
inherently governmental job. Because contracting officers cannot access
tax information, I want to know how the IRS is reviewing contractors
who are competing for and being selected to receive these contracts. I
am also curious whether individuals employed by contractors--those who
will actually perform the work--will be held to the identical
performance and ethical standards as IRS employees. We know that IRS
employees may be fired for breaking any of what's called the twelve
deadly sins. It's unfair for contract employees to be held any less of
a standard if they are doing such important work.
I know from our hearings here and the Joint Committee on Taxation
hearing I attended last May that Commissioner Everson is fully engaged
in closing the gap between what is owed to the federal government and
what gets paid to the federal government. But in doing so, we must make
sure that IRS contractors fulfill their tax obligations.
In closing, I also want to acknowledge the outstanding work being
done by Mr. Kutz and his team at GAO. Sixteen years ago, GAO began its
high risk list, and for 16 years the area of uncollected taxes has been
on the list. In fact, GAO expanded the list to include the backlog of
uncollected debts and the IRS's ability to detect noncompliance of tax
laws. I mention this, because tomorrow, my Subcommittee--Oversight of
Government Management--will hold its sixth hearing in 12 months on the
GAO high risk list. Senator Voinovich and I, just as Senator Coleman
and Senator Levin here, are working with GAO and selected agencies to
resolve long- term, systemic problems. That is why I am so pleased to
be a part of this continuing effort to ensure that federal contractors
are not cheating the American people of their hard-earned money.
Mr. Chairman and Senator Levin, I want to thank you for holding
today's hearing and for including in GAO's ongoing review of tax
delinquent contractors my special concern of whether a 1996 law that
allows the federal government to withhold federal contractor payments
for state debts is working. You understand that Minnesota and Michigan,
like Hawaii, could use these uncollected state taxes to pay for state
health and education programs. Thank you.
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<all>