NCPA - National Center for Policy Analysis


July 11, 2005

An estimated 33,000 federal contractors owe the Internal Revenue Service (IRS) more than $3.3 billion in back taxes, says Sen. Norm Coleman (Minn.), chairman of the Senate Permanent Subcommittee on Investigations. The number has increased from last year's estimate; his committee and the Government Accountability Office (GAO) found that 27,000 Defense Department contractors owed more than $3 billion in unpaid taxes.

In response to this delinquency, the Defense Department and other affected agencies established the Federal Contractor Tax Compliance Task Force which is on track to collect more than $17 million in back taxes. It is a 2,400 percent increase from two years ago, but still not enough, says Coleman.

This problem results from many factors:

  • The GAO found that many companies withhold payroll taxes from their employees' checks but never turn the money over to the IRS.
  • As a result of a statute designed to protect honest taxpayers from having their personal information publicly disclosed, the IRS has a confidential database of tax cheats.
  • Unfortunately, the agency has extended protection to all taxpayers and companies, including repeated tax cheats.
  • Moreover, the major part of the problem is that the Financial Management Service often fails to ensure that the companies' tax information is accurate.

To solve the problem the IRS should 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, concludes Coleman. This would help cancel existing contracts and deny work to companies who have failed to pay their taxes.

Source: Norm Coleman, "Tax Cheats at the Government Trough," New York Times, June 25, 2005.

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