Federal Contractors Owe $3 Billion in Unpaid Taxes, Report Finds

About 33,000 federal government contractors owe more than $3 billion in unpaid taxes, a government report found, prompting senators to call Thursday for those contractors to be barred from future government business.

Some contractors withheld payroll taxes to pay for luxury homes and fled tax debts by closing businesses, according to the report by the Government Accountability Office, the investigative agency of Congress.

In many cases companies that owed back taxes continued to collect payments from federal contracts, according to the report, released Thursday in Washington at a hearing of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations.

“We must bar certain companies and individuals from receiving federal contracts,” said committee Chairman Norm Coleman (R-Minn.).

“When individuals or companies demonstrate flagrant disregard for the tax system through repeated and continuing abuse, it is appropriate to publish their names and bar their receipt of federal contracts,” Coleman said.

The Internal Revenue Service estimated in March that as much as $353 billion in taxes owed to the government are not paid on time, with 80% of the shortfall blamed on underreported income.

Sen. Carl Levin (D-Mich.) said it was “simply mind-boggling that this is allowed to continue.”

“There should be a red flag on any contractor that owes back taxes and then money should be withheld on those contracts until back taxes are paid,” Levin said.

None of the contractors that owe taxes is identified in the report. Many of the tax cheats are not discovered because government agencies do a poor job of sharing information on recipients of federal contracts and companies that have failed to pay taxes, Coleman said.

IRS Commissioner Mark W. Everson said his agency was prohibited from sharing company tax information.

“The codes are quite clear on the privacy of tax returns,” Everson said.

“If we can’t trust these people to pay their taxes, how can we trust them to guard our buildings?” said Steve Sebastian, one of the report’s authors.