Tax Cheats Getting Government Business

Billions of dollars in economic stimulus program funds went to contractors and grantees who owed the government hundreds of millions of dollars in tax debts, according to a new report out this week.

Of the 63,000 contractors and grantees examined, 3,700 were found to owe $757 million in back taxes, but also received $24 billion in stimulus awards. The study identified 15 cases of individual contractors or grantees involving “abusive or potentially criminal activity” and has referred those cases to the IRS for further investigation. Many more cases could have been referred. One construction firm owed nearly $400,000 in back taxes but received a contract worth more than $1 million.  One non-profit organization owed more than $2 million from years of unpaid payroll taxes, while at the same time its CEO made numerous trips to a casino. This organization received more than $1 million in stimulus funds.  These are among the findings of the Government Accountability Office, Congress’ auditing arm.

I was among the requesters of the audit because tax cheating among government contractors is a longstanding problem, and I was skeptical of the stimulus program from the outset. The stimulus was enacted in February 2009 to jumpstart the economy.  The President and congressional supporters allocated $275 billion to be distributed for federal contracts, grants, and loans.  As of March 25, 2011, $191 billion of this $275 billion had been paid out.

My investigations, along with government audits, have found instances of shoddy work to weatherize homes, which stimulus supporters from the White House down portrayed as a job-creating centerpiece.  The government efforts to get the contractors to repair the subpar work or refund the money have been weak.  Similarly, the government gave millions of stimulus dollars to public housing authorities that auditors determined to be “high risk.”  The pressure to spend stimulus dollars was so intense that in at least some cases, responsible stewardship of the money was abandoned.  Once the government writes the check, it has to follow through to make sure the money is spent as intended.  The follow-through often doesn’t happen. 

That’s why it’s better to perform due diligence on the front end, like making sure government contractors are legal in their tax obligations. Many companies pay their taxes, so there’s no reason for the government to deal with companies that don’t.  The businesses that should be excluded first from government business are those that have tax debts outstanding over several years and haven’t done anything to try to pay off the debt.  The Administration has at least two rules in place to address this problem, but it’s not clear whether the rules are being used.  This problem has come up before.  Congress needs to figure out how to fix it.  The Senate Finance Committee has considered this.  This week, the committee with jurisdiction over government contracts took notice.  A permanent fix is necessary and overdue.