Report: Contractors Owe Billions in Back Taxes More than 27,000 defense contractors owe about $3 billion in back taxes, including many who are longtime repeat violators, the General Accounting Office reported. GAO found that about one out of seven companies registered in the Central Contractor Registration had delinquent federal taxes in 2002. Many of them had contracts with other agencies as well as DOD. Most were small businesses or independent contractors, the report said. They most commonly did not pay Social Security and Medicare payroll taxes that had been withheld from employees. Names were not disclosed because of privacy laws. The auditors pointed out that Social Security and Medicare taxes amount to 15.3% of payroll. “Allowing contractors to do business with the government while not paying their taxes creates an unfair competitive advantage for them at the expense of the vast majority of Defense contractors that fulfill their tax obligations,” said GAO’s Steve Sebastian. The auditors said the Defense Department and the Internal Revenue Service have done little to collect what is owed. They estimated IRS could have recovered $100 million in 2002 by using a federal law that allows the government to seize up to 15% of contract payments to offset overdue taxes. “The Pentagon needs to start targeting more firepower on the management side on fraud and abuse in the system and go after the thousands of defense contractors that routinely renege on paying their taxes,” said Sen. Norm Coleman (R-MN), chairman of the Senate Permanent Subcommittee on Investigations. Testifying before the subcommittee Feb. 12, GAO investigators detailed a number of horror stories. A base support contractor owed nearly $10 million in back taxes in 2002. The owner borrowed $1 million from the company and bought a boat, several cars and a home outside the country. The company was dissolved in 2003 and its employees were transferred to a related company, which is still a Defense contractor. •The owner of an engineering company paid $1 million for a house at the same time that he borrowed $1 million from the business and the company stopped paying taxes. • One contractor owned at least 40 companies and would run one “into the ground,” while continuing to do business with the government under a different name. •Another contractor had magnetic signs for his trucks and would switch the signs whenever he needed to operate under a different name. The Debt Collection Improvement Act of 1996 allows the government to levy 15% of payments to tax violators. But the auditors said DOD’s stovepiped information systems cannot provide contractors’ names to the IRS for comparison with lists of tax cheats. By law and policy, IRS uses the levy power as a last resort, preferring to negotiate a settlement with delinquents. GAO recommended that the Office of Management and Budget develop policies “for prohibiting federal contract awards to businesses and individuals that abuse the federal tax system.” OMB did not agree with the recommendation. A contractor may be suspended or disbarred only on conviction of tax evasion, which is rare, but the auditors said DOD contracting officers have no way to check whether a company had been convicted.