Giving Government Money to Tax Cheats

It's not often that I post editorials by Republican senators, but this one is well worth the read. A New York Times op-ed today by Senator Norm Coleman (R-MI)....

Tax Cheats at the Government Trough By NORM COLEMAN

A private company that provides health care services for the federal government received more than $300,000 from the Treasury last year. That is unremarkable. What is remarkable, however, is that the company owes more than $18 million in back taxes. And at the same time the company was cheating taxpayers, its owner bought several multimillion-dollar properties and a fleet of luxury cars.

Another contractor, which last year provided security guards for the Department of Homeland Security at a cost of $200,000, owes more than $400,000 in unpaid taxes. Its owner has repeatedly failed to file individual income taxes and has diverted his employees' payroll taxes to a foreign bank account to pay for building a home abroad.

Outrageous as these examples are, they are just the tip of a very large iceberg. Some 33,000 federal contractors together owe the Internal Revenue Service more than $3.3 billion in back taxes.

The scale of this boondoggle came to light last year when the Senate Permanent Subcommittee on Investigations, with the dogged help of the Government Accountability Office, found that 27,000 Defense Department contractors owed more than $3 billion in unpaid taxes. In its investigation, the G.A.O. determined that the government's program to subtract unpaid taxes from payments made to the companies, the Federal Payment Levy Program, simply was not working. In 2003, the levy program should have collected $100 million; it collected only $680,000.

This had to stop. So at the committee's request, the Defense Department and other affected agencies established the Federal Contractor Tax Compliance Task Force, which acts as a watchdog for the levy program. Not surprisingly, collections from delinquent contractors have increased dramatically. The Pentagon is on track to collect more than $17 million in back taxes this fiscal year - still far too little, but an increase of 2,400 percent over two years ago.

Given the problems we found with defense contractors, the subcommittee wondered whether other departments were doing as poorly. At our request, the G.A.O. conducted a broader search and came up with that jaw-dropping tally of 33,000 contractors. (Even the Executive Office of the President unwittingly contracted with a medical equipment company that owed nearly $2 million in unpaid taxes.) The G.A.O. also found that many companies withheld payroll taxes from their employees' checks but never turned the money over to the I.R.S.

A major part of the problem, the accountability office discovered, was that the agency that pays federal contractors, the Financial Management Service, often fails to ensure that the companies' tax information is accurate. In many cases, the management service failed to follow up even when federal agencies left out the names of the companies to be paid.

And, as usual, bureaucracy adds to the problem. The I.R.S. is the only government body that has a database of tax cheats, which it keeps confidential, the result of a statute designed to protect honest taxpayers from having their personal information publicly disclosed. Unfortunately, the agency has extended that reasonable protection to all taxpayers and companies, including repeat tax cheats.

To solve the problem, the I.R.S. must aggressively prosecute tax cheats and provide an annual list of federal contractors that have been convicted of tax-related crimes or have had tax liens placed against them to contracting officers. With this information, they could cancel existing contracts and deny work to companies that are more interested in running a shell game than they are in serving the nation.