Government Contractors Owe $7.7 Billion In Back Taxes!

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A recent Government Accounting Office inquiry reveals that about 113,800 contractors working for a variety of federal agencies, including the Pentagon and the General Services Administration, have built up $7.7 billion in unpaid taxes. This matches untidily with a March GAO report saying that more than 21,000 doctors, health professionals or medical suppliers, collecting billions in federal Medicare dollars, simultaneously owed more than $1 billion in federal income taxes.

A federal watchdog agency insists that its investigations clearly show the US government is facing serious long-term funding shortfalls, while federal contractors, doctors and medical suppliers, regularly receiving federal Medicare money, owe billions in unpaid taxes.

Earlier this month, Comptroller General David M. Walker of the US General Accountability Office opened one of his critical summary presentations to a Defense Department acquisition conference with: "The federal government is on a 'burning platform,' and the status quo way of doing business is unacceptable...."

He cited "past fiscal trends and significant long-range challenges; selected trends ... having no boundaries;" outlandish government funding demands due to the wars in Iraq and Afghanistan, as well as natural disasters like Hurricane Katrina; outdated federal policies and practices; and finally, "rising public expectations" for results.

Within the past six years, said Walker, the government's long-term financial exposures in debt, health and Social Security have jumped 147 percent to $50.5 trillion. If this trend continues, said the GAO report, federal spending will need to be cut by 60 percent and taxes will have to double to balance the budget in the year 2040. To close off this sweeping gap, the economy would demand double-digit growth for every single year for 75 years, he said.

Meanwhile, a recent GAO inquiry reveals that about 113,800 contractors working for a variety of federal agencies, including the Pentagon and the General Services Administration, have built up $7.7 billion in unpaid taxes. This matches untidily with a March GAO report saying that more than 21,000 doctors, health professionals or medical suppliers, collecting billions in federal Medicare dollars, simultaneously owed more than $1 billion in federal income taxes. Federal agencies either have to rely on their hired contractors and medical providers to disclose what they owe the IRS, or dig out the data elsewhere in public record disclosures of the debts, said the GAO report. It goes on to explain that the IRS does not file public liens on the property of all tax debtors, nor does it have a central file where federal agencies can obtain those liens.

Since much of what the federal contractors owe the IRS arises from withholding taxes for employees, said the GAO, they actually gain a competitive advantage over other contractors from not paying. That results from the tax-delinquent contractors having more money readily available so they can post lower bids for federal work, the GAO inquiry revealed.

But the GAO said that neither the federal agencies hiring contractors nor federal officials paying out Medicare fees to its doctors, health professionals or medical suppliers have the legal tools to collect back taxes owed by them. The Internal Revenue Service is not permitted to communicate with other federal agencies about what taxes federal contractors or medical suppliers and doctors receiving Medicare fees owe. Federal law, the GAO concluded, needs enhancing to make sure the IRS and federal agencies have sufficient tools to ensure that federal contractors and Medicare doctors don't owe back taxes. "With the serious fiscal challenges facing our nation, the status quo is no longer an option."
On the other hand, the GAO said the IRS has for several years experienced trouble with its automated coding system to sort out tax delinquents. For example, said the GAO, in 2005 the IRS faultily excluded $2.4 billion in debt from its active tax-levy system.

"It certainly was shocking that the GAO continues to report the IRS's inability to collect back taxes from government contractors," said Peter Sepp, the National Taxpayers Union's vice president for communications. "Unlike the mythical $345 billion tax gap, these taxes are right under the government's nose. And, it should be no harder than sending a notice and docking the contractor. But, that's the federal government for you."

''The same goes for the federal entitlement system," he continued. "Continually, the Congress and the president would rather talk about the matter than act on it. And the problems they face with federal Medicare and Social Security are much closer than the projected bankruptcy dates, because they begin to run in the red a lot sooner. Once that happens, reforms become a lot more difficult."

The NTU, touting limited government and low taxes, quotes other alarming government reports: "The trustees of Social Security and Medicare predicted that Medicare Part A will exhaust its trust fund in 2019, and Social Security will be insolvent by 2041."

"Restoring balance to Medicare alone," said NTU President John Berthoud, an expert in federal finances, "will require either an immediate 122 percent tax increase or a 51 percent reduction in benefits, both of which are politically infeasible. Though the White House and Congress are controlled by different parties, Democrats and Republicans must start to grapple with the largest federal deficit threat this nation has seen."

However, the GAO's "sister agency," the Congressional Budget Office, does not project such a pessimistic future. Its ten-year summary says that if current laws and policies remain the same, "the budget would essentially be balanced in 2011, and then would show surpluses of about one percent of the Gross Domestic Product each year through 2017." The GDP is the market value of all final goods and services produced annually in the United States.
The White House's Office of Management and Budget projects the federal budget will be balanced within five years through a robust US economy, pro-economic growth policies and spending restraints, including preventing members of Congress from "earmarking" patronage spending on pet and wasteful projects in their home states.

"We're very much aware of the big budgetary challenges on the horizon, which are largely the result of exponentially growing costs in entitlement programs like Medicare, Medicaid and Social Security," said an OMB spokesman. "[That] is why in the president's 2008 budget, which was presented to Congress on February 5, 2007 the administration offered a down payment on entitlement reform that will save $96 billion in five years and have an even larger impact on Medicare over the next 75 years by reducing the growth in spending by $8 trillion."

In a budget speech early this year, President George W. Bush said: "This budget will restrain spending while setting priorities. It will address the most urgent needs of our nation - in particular, the need to protect ourselves from radicals and terrorists; the need to win the war on terror; the need to maintain a strong national defense; and the need to keep this economy growing by making tax relief permanent. By balancing the budget through pro-growth economic policies and spending restraint, we are better positioned to tackle longer-term fiscal challenges facing our country: namely, the entitlement programs. These programs need to be reformed for the sake of younger Americans. We need to reform Social Security and Medicare and Medicaid so future generations of Americans can benefit from these vital programs without bankrupting our country."

Later, in March, US Treasury Department Commissioner Kenneth R. Papaj testified at a Congressional hearing that his financial management service department is taking steps to ensure better federal contractor tax compliance. Such contractor tax collections increased from $7 million in fiscal year 2003 to $59.6 million in 2006, he said. IRS spokesman Rob Marvin declined comment on the GAO reports. In the past, the IRS has told the GAO it has made strong strides to improve its collection processes.

Despite its more optimistic budgetary projections, the Congressional Budget Office, like the GAO, is concerned about the potential for long-term budgetary threats. "The aging of the population and continuing increases in health care costs are expected to put considerable pressure on the budget in coming decades," says the office's long-range summary. "Economic growth alone is unlikely to be sufficient to alleviate that pressure as Medicare, Medicaid, and (to a lesser extent) Social Security require ever greater resources under current law. Either a substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of spending and revenue changes will be necessary to promote the nation's long-term fiscal stability."





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