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The dual costs of tax debts owed by government contractors

Folks are pretty ticked off by a Government Accountability Office investigation that found thousands of contractors who got federal stimulus money back 2009 owed Uncle Sam big tax bucks.

We all should be angry at tax scofflaws getting more of our tax money. But one proposed solution -- preventing such contracts from ever being awarded -- also could have major costs to the U.S. Treasury.

First, let's look at the latest examination of the price of federal payments to companies that already owe the IRS.

At least 3,700 Recovery Act contract and grant recipients -- including prime recipients, sub-recipients and vendors -- who were awarded more than $24 billion in stimulus funds owed more than $750 million in unpaid federal taxes as of Sept. 30, 2009, says the GAO report released today.

The tax-delinquent contractors represented nearly 5 percent of the approximately 80,000 contractors and grant recipients, says the GAO.

The unpaid tax breakdown, according to the GAO, is:

  • $417 million (about 55 percent) in unpaid corporate income taxes;
  • $207 million (about 27 percent) in payroll taxes;  and
  • $133 million in unpaid excise, unemployment and other taxes.

Don't ask, don't tell contracting: So how did folks who didn't pay their taxes get government jobs?

Federal law does not prohibit the awarding of contracts or grants to entities because they owe federal taxes and does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal agencies unless the taxpayer consents.

Those privacy constraints, says the GAO, likely  mean that its estimated amount of known unpaid federal taxes is understated.

Even if Uncle Sam had asked questions, many of tax-delinquent companies would have been able to avoid answering because the federal government didn't directly pay them. The GAO notes that much of the stimulus money went to state governments or primary contractors, who then redistributed it.

In advance of the report's release, the White House on Monday said that more than $100 million in unpaid taxes was been collected from tax-delinquent contractors last year. It is also now requires companies to certify whether they have a significant tax delinquency before they bid for federal business.

The GAO also tabbed 15 recipients of stimulus money for further investigation. In these cases, the government watchdog said there was evidence of abusive or potentially criminal activity.

The GAO has referred all 15 cases to IRS for possible additional action. Six of the firms have agreed to pay back their due taxes.

Stopping contracts before they're awarded: Some members of Congress want to be proactive. Legislation has been introduced that would force contractors to come clean about thier tax debts before getting a government job.

H.R. 829, the Contracting and Tax Accountability Act of 2011, would prohibit federal agencies from awarding contracts or grants to persons or companies that have "seriously delinquent" tax debt. That would be, per the bill, "outstanding tax debt to the federal government for which a public lien has been filed."

Recipients of federal money would have to certify that they do not have such tax debt.The IRS would be authorized to confirm or refute the potential contractor's claims.

From a fairness standpoint, it sounds like a good deal, right? We taxpayers who meet our IRS obligations don't want our money going into the pockets of people who aren't paying their taxes.

Revenue results not that good: But from a financial point of view, it might not work out as planned.

The Congressional Budget Office was asked to work up a cost estimate for H.R. 829. The CBO cited Joint Committee on Taxation estimates that show enactment of H.R. 829 would cut federal revenue by $121 million between 2011 and 2021.

The graphic below (click here or the image for a larger view) shows the year-by-year budgetary impact, assuming that the bill is enacted near the start of the 2012 fiscal year:

Deficit increase from barring tax delinquent contractors

That's right. Forcing contractors to be up-to-date on their taxes could put Uncle Sam in a deeper fiscal hole.


There are some administrative costs, but those are nominal. Surely, those expenditures would be offset by some folks who would pay up to get a federal job, thereby adding to to the U.S. Treasury balance.

But other potential contractors, says the CBO, might choose not to compete for federal jobs if they are required to settle their existing federal tax bills first.

That then would put an end to an IRS source of recovering unpaid taxes because the companies and individuals would no longer receive government payments that could be levied.

And that would produce the net $121 million loss of revenue.

Can you say damned if you do, damned if you don't?

Which route would you prefer, preventing contractors who owe federal taxes from getting jobs? Or awarding them the contracts so that the IRS has a way to levy that money and possibly collect the rest of their unpaid taxes?

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