Keeping the Tax Dodger's Hand Out of the Taxpayer's Wallet

Keeping the Tax Dodger's Hand Out of the Taxpayer's Wallet

Every year in America, more than $300 billion in taxes owed by businesses, organizations, and individuals goes unpaid. This "tax gap" between what is owed and what is paid must be made up by honest taxpayers and by borrowing money from foreign countries. Simply collecting what is owed, without raising a single tax, would wipe out nearly three-quarters of the federal budget deficit, projected at $427 billion this year. As a matter of basic fairness to honest Americans, we need to close this gap.

For more than a year, the Senate's Permanent Subcommittee on Investigations, on which I am the senior Democrat, has been focusing on efforts to collect unpaid taxes from businesses that receive federal contracts. In essence, these government contractors take taxpayer dollars and then fail to pay their own tax obligations. Dodging taxes is never acceptable, but doing it while at the same time taking advantage of government contracts paid for by hardworking taxpayers is particularly galling.

The Government Accountability Office (GAO), Congress' watchdog, has been investigating this issue. GAO found tens of thousands of contractors owing billions of dollars in unpaid taxes, including 27,000 contractors at the Defense Department alone that owe a total of $3 billion. To better understand the problem, GAO took a closer look at 97 DOD and civilian contractors and found egregious examples of companies dodging taxes for years. The abuses included executives withholding money from employee wages for Social Security and Medicare taxes and then spending the money on luxuries for themselves such as expensive homes, cars, or vacations.

Despite those abuses, the contractors kept getting contracts and the taxpayer dollars that went along with those contracts. For example, last year, one contractor owing $1 million in unpaid taxes was paid $1.5 million by the Department of Homeland Security and other federal agencies. Another contractor owing $900,000 had a 20-year history of opening a business, failing to remit payroll taxes to the IRS, closing the business, and then repeating the cycle.

This tax dodging is not only unfair to the honest taxpayers left to make up the difference, but also to the honest companies that have to compete against the tax dodgers that aren't paying their fair share. It's simply mind boggling that it is allowed to continue.

One solution is to stop allowing all those taxpayer dollars to be paid to deadbeat contractors. Instead, a portion of each contract payment should be withheld and used to pay down the contractor's tax debt. Congress set up a system to do just that in 1997, when the Taxpayer Relief Act created a federal tax levy program authorizing federal agencies to withhold 15 percent of any federal payment going to a person with unpaid taxes. Last year, that percentage was hiked to 100. For a variety of reasons, however, the tax levy program has collected peanuts -- $21 million from all federal contractors last year -- when it should be collecting billions.

We can do better. Earlier this year, I worked with Republican Senator Norm Coleman to introduce legislation to fix one of the critical problems in the tax levy program. Our bill would require every contractor to provide its taxpayer identification number when bidding on a government contract so that the government can identify those businesses that owe taxes and withhold a portion of their contract payments. We are also working to require contractors who get paid by credit card to be included in the tax levy program; right now $10 billion in credit card payments never get screened for tax cheats. Senator Coleman and I will soon offer a more comprehensive bill to fix a host of other problems that allow tax cheating by federal contractors to persist, including a provision to bar tax cheats from getting government contracts to begin with.

Most federal contractors provide our country with valuable goods or services, and do so while paying their taxes. The contractors who take payment in taxpayer dollars, while dodging payment of their fair share, hurt honest taxpayers, honest businesses, and our country as a whole.

http://levin.senate.gov/newsroom/release.cfm?id=239567