Thousands of contractors doing business with Uncle Sam are stiffing the federal government (pdf) for billions of dollars in back-taxes.

Over the past few years, the Government Accountability Office (GAO) has discovered more than 60,000 contractors that owe more than $7.7 billion in back taxes. This includes 27,000 Department of Defense contractors, 33,000 civilian agency contractors and 3,800 General Service Agency contractors; contractors working for DOD, NASA, Department of Homeland Security and Veterans Affairs, providing a wide range of services ranging from law enforcement to disaster relief. While these contractors have one hand out to get government cash, they were using the other to stiff arm the tax man.

Federal purchasing rules require contractors to be “responsible,” which includes having “a satisfactory record of integrity and business ethics.” Contractors don’t have to ‘fess up to tax debts to comply, and even if they did, federal contracting officers don’t have to disqualify tax cheats from getting contracts. Only in the bizarre world of federal contracting can failure to pay taxes be interpreted as ethical behavior.

The GAO investigation also found that some of these contractors were fly-by-night operations. Company directors would set up a company, win contracts, pocket employee’s payroll taxes, and eventually fold the company, only to start a new one. Some of these contractors had tax debts going by 20 years! And these are not your struggling small businessmen. GAO found that some of the company officers owned million-dollar homes, yachts, and one even owned a sports team.

A few examples highlighted by GAO:

• A contractor providing custodial services for DOD received more than $1 million in federal payments but owed more than $10 million in taxes.
• A contractor providing armed security guard services to federal agencies received more than $100,000 while owing more than $400,000 in taxes.
• A contractor providing payroll and temporary employment services to Department of Housing and Urban Development received more than $1 million in federal payments while failing to pay more than $900,000 in federal taxes.

Adding insult to injury, not paying taxes can be a smart business strategy. After reviewing the GAO findings, the IRS Commissioner pointed out that “many of these contractors had been ale to underbid their competitors for these Federal contracts by factoring in the savings they would receive by not paying income tax or remitting payroll taxes.” So the failure of government to hold tax bandit contractors accountable ends up harming law-abiding citizen contractors.

Finally, the stories of contractor tax cheats seem to be sinking in. Congress is considering legislation to tighten up on contractor tax cheats and several agencies have proposed updating the acquisition rules to require prospective contractors disclose if they have been notified about owing back taxes. Taxpayers are hiring these contractors; they have a right to be sure that the companies are paying their fair share.

For more information, contact Steve Ellis at (202)-546-8500 ext. 126 or steve [at] taxpayer.net