Audit Report: $24 Billion in Stimulus Money to Tax Cheats

Lawmakers from both parties are calling for a fix to prevent tax cheating companies from getting federal contracts in light of a government investigation that found $24 billion in stimulus act funds went to companies owing $757 million in unpaid taxes.

“Average Americans are likely wondering why we gave such a huge amount of federal money to tax cheats when our national debt is more than $14 trillion,” Sen. Tom Coburn (R-Okla.) said in a statement. “That $24 billion went to such people looks like we are rewarding people for potentially criminal behavior.”

The report by the Government Accountability Office on money from the $800 billion American Recovery and Reinvestment Act going to tax delinquent firms did not name any specific companies, but it gave general examples of firms with delinquent taxes receiving tax dollars.

One example was a construction company that owed $700,000 in back taxes getting $1 million in stimulus contracts. In another example, a security firm with $9 million in unpaid taxes got $100,000 in stimulus funds. A technical services company got $100,000 in stimulus funds despite owing $4 million in taxes, was also found to own $4 million in real estate and earned hundreds of thousands of dollars in adjusted gross income in a recent tax return.

“At least 3,700 Recovery Act contract and grant recipients—including prime recipients, subrecipients, and vendors—are estimated to owe more than $750 million in known unpaid federal taxes as of September 30, 2009, and received over $24 billion in Recovery Act funds,” Gregory D. Kurtz, director of forensic audits and investigative service for the GAO, told the subcommittee on investigations for Senate Homeland Security and Governmental Affairs Committee Tuesday.

“This represented nearly 5 percent of the approximately 80,000 contractors and grant recipients in the data from Recovery.gov as of July 2010 that we reviewed,” Kurtz added.

The report goes on to point out, “Federal law does not prohibit a contractor with unpaid federal taxes from receiving contracts from the federal government. Currently, regulations calling for federal agencies to do business only with responsible contractors do not require contracting officers to consider a contractor’s tax delinquency unless the contractor was specifically debarred or suspended by a debarring official for specific actions, such as conviction for tax evasion.”

Sen. Carl Levin (D-Mich.) called on the Obama administration to enforce laws already enacted to collect revenue from federal contractors.

“We’ve strengthened the levy program to recover more funds from them, and the executive branch has made it clear nonpayment of tax can be grounds for denying a specific contract or debarring a contractor from bidding on any contract,” Levin said in a statement. “Now the executive branch should get on with it and actually debar the worst of the tax cheats from the contractor workforce.”

Congress passed the Taxpayer Relief Act of 1997 that authorized Internal Revenue Service to collect delinquent tax debt by continuously levying (offsetting) up to 15 percent of certain federal payments made to tax debtors.

The tax data was not accessible for oversight, said John P. Higgins, director of the the Recovery Accountability and Transparency Board – appointed by President Barack Obama to oversee stimulus fund expenditures.

“This lack of access to relevant taxpayer data also affects Inspector General offices that oversee Recovery Act programs,” Higgins said in a letter to the GAO.

“Access to the very same tax information utilized by GAO in its analysis could likewise greatly assist the Recovery Board in its mission preventing fraud, waste and abuse of Recovery funds,” Higgins continued. “The Recovery Board could compare recipient reports to the unpaid tax data and determine whether federal recipients of Recovery funds owed money to the federal government.”

In a breakdown of the type of unpaid taxes, 55 percent or $417 million came from corporate income taxes, 27 percent or $207 million came from payroll taxes and 18 percent or $133 million from other taxes, according to the GAO report. Further, the report says, “65 percent of the estimated $757 million in unpaid taxes were for tax periods from tax years 2003 through 2008 and about 35 percent of the estimated taxes were for tax periods prior to that.”

“Many companies pay their taxes, so there’s no reason for the government to deal with companies that don’t,” Sen. Charles Grassley (R-Iowa) said in a statement. “The businesses that should be excluded first from government business are those that have tax debts outstanding over several years and haven’t done anything to try to pay off the debt.

“A substantial amount of the estimated unpaid federal taxes owed by stimulus program contractors are in this category. A government contract is something to be earned, not something to be taken for granted. The Administration has at least two rules in place to address this problem, but it’s not clear whether the rules are being used,” Grassley added.

Tax compliance is considered when issuing contracts, said Daniel I. Gordon, the administrator for federal procurement policy for the White House Office of Management and Budget.

“Before a federal contract is awarded, contracting officers must determine that the contractor is responsible – that is, qualified to do business with the Federal Government, which includes having the integrity and business ethics to work for our taxpayers,” Gordon told the subcommittee.

“Tax compliance is appropriately considered in determining if the contractor has a satisfactory record of integrity and business ethics, a critical element of a responsibility determination,” he said.

But that information can be difficult to track and analyze, Gordon said.

“A number of agency officials, including senior procurement executives and suspension and debarment officials, have noted the challenge associated with taking action based on the certification as currently worded,” Gordon said.

“The limited information provided in the certification, i.e., an attestation of delinquency of $3,000, or more makes it difficult to gauge the seriousness of the delinquency and the extent to which the non-compliance calls into question the contractor’s integrity and business ethics, so that it is not clear whether the delinquency would justify a non-responsibility determination or indicates a systemic problem that might justify a suspension or debarment to protect the government’s interests,” he added.

Crossposted at CNSNews.com