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Senator Bill Nelson requests expedited probe of NASA contractors for unpaid taxes

Press Release From: Sen. Bill Nelson
Posted: Monday, June 21, 2004

ORLANDO - Spurred in part by a new recommendation to the president that NASA allow more private sector involvement in space operations, U.S. Sen. Bill Nelson today called for an expedited investigation into NASA contractors who get work despite owing unpaid taxes.

Nelson's request also comes in response to an earlier study by the General Accounting Office that revealed 27,000 contractors for the Defense Department owe the government over $3 billion in unpaid federal taxes. Forty-seven of those contractors received closer scrutiny; and, a top GAO official has confirmed for Nelson that several work for NASA.

Late last week, Nelson spoke with David Walker, the U.S. comptroller who heads the GAO, the investigative arm of Congress, to request a probe of tax abuses among any NASA contractors, which receive a huge share of the agency's $15.4 billion annual budget.

While Nelson thinks a broader investigation into all federal agency contractors is warranted - as has been requested by a handful of his Senate colleagues - he wants the GAO to immediately look into NASA. That, he said, is because the presidential commission just last week recommended that NASA allow more private sector involvement in space operations.

The commission said President Bush's plan to explore the moon, Mars and other destinations could be accomplished if NASA changes the way it does business and allows more private sector involvement. NASA officials are expected to detail changes in the coming weeks.

An indication of problems at NASA is in the GAO report on defense contractors. In it, federal investigators suggest abuses of the tax system go well beyond just the Pentagon. In fact, some defense contractors owing unpaid taxes also work for NASA and other agencies.

"If a company is going to be rewarded with a government contract, then it should have paid its taxes," Nelson, a key member of a Senate panel that oversees NASA, said today from his Orlando regional office. "It's intolerable that a company would receive payments from a federal contract with one hand, while refusing to pay their federal taxes with the other."

In addition to the warning in the GAO report on the Defense Department, a top GAO official also confirms the problem is likely widespread. Gregory Kutz, the head of GAO financial management, has said that some defense contractors investigated for owing back taxes also work for other government agencies, including NASA.

Nelson has worked closely with the GAO on investigations before. Earlier this year, he asked it to investigate potential mishandling of bids to build temporary office space at MacDill Air Force Base. The agency published a report in January showing that the military paid over three times the cost cited in the original bid for the project.

Attached is Nelson's letter to the GAO requesting an expedited investigation of NASA contracting, along with a summary of the GAO's recent report on defense contractors owing back taxes; and, the key commission recommendation on revamping NASA. Also attached is an article in which a top GAO official reveals tax problems with NASA contractors.

June 18, 2004

David M. Walker, Comptroller of the United States
United States General Accounting Office
441 G Street NW
Washington, DC 20548

Dear David:

It was good talking to you about the General Accounting Office report titled "Some DOD Contractors Abuse the Federal Tax System with Little Consequence" (GAO-04-95).

The investigation your office conducted focused exclusively on the Department of Defense and found that as many as 27,000 contractors owe the government as much as $3 billion.

According to your report, "The federal government has no coordinated process for identifying and determining the businesses and individuals that abuse the federal tax system and for conveying that information to contracting officers for use before awarding contracts."

Also, a GAO director, Gregory Kutz, has stated that several of the contractors GAO investigated work with other government agencies besides the Defense Department, including NASA and Health and Human Services; and, he said these problems are likely widespread.

Additionally, in our conversations you have confirmed that several NASA contractors owe unpaid taxes.

We all agree it's an egregious abuse of the public trust when taxpayers' money is used to contract with businesses with unpaid taxes, which is why some of my colleagues on the Senate Governmental Affairs Committee already have asked the GAO to widen its initial investigation of unpaid taxes to all government agencies and their contractors.

Broadening the scope of the investigation is warranted, but I ask that you pay particular attention to NASA contractors - because a presidential commission just recommended that the space agency allow more private sector involvement.

Thank you in advance for your attention to this matter.

Sincerely,

GAO Highlights February 2004
FINANCIAL MANAGEMENT
Some DOD Contractors Abuse the Federal Tax System with Little Consequence

What GAO Found DOD and IRS records showed that over 27,000 contractors owed about $3 billion in unpaid taxes as of September 30, 2002. DOD has not fully implemented provisions of the Debt Collection Improvement Act of 1996 that would assist IRS in levying up to 15 percent of each contract payment to offset a DOD contractor's federal tax debt. We estimate that DOD could have collected at least $100 million in fiscal year 2002 had it and IRS fully utilized the levy process authorized by the Taxpayer Relief Act of 1997. As of September 2003, DOD had collected only about $687,000 in part because DOD provides contractor payment information from only 1 of its 16 payment systems to TOP. DOD had no formal plans at the completion of our work to provide payment information from its other 15 payment systems to TOP. Furthermore, we found abusive or potentially criminal activity related to the federal tax system through our audit and investigation of 47 DOD contractors. The 47 contractors provided a variety of goods and services, including parts or support for weapons and other sensitive military programs. The businesses in these case studies owed primarily payroll taxes with some dating back to the early 1990s. These payroll taxes included amounts withheld from employee wages for Social Security, Medicare, and individual income taxes. However, rather than fulfill their role as "trustees" and forward these amounts to IRS, these DOD contractors diverted the money for personal gain or to fund the business. For example, owners of two businesses each borrowed nearly $1 million from their companies and, at about the same time, did not remit millions of dollars in payroll taxes. One owner bought a boat, several cars, and a home outside the United States. The other paid over $1 million for a furnished home. Both contractors received DOD payments during fiscal year 2002, but one went out of business in 2003. The business, however, transferred its employees to a relative's company (also with unpaid taxes) and recently received DOD payments on a previous contract. IRS's continuing challenges in collecting unpaid federal taxes also contributed to the problem. In several case studies, IRS was not pursuing DOD contractors due to resource and workload management constraints. For other cases, control breakdowns resulted in IRS freezing collection activity for reasons that were no longer applicable. Federal law does not prohibit contractors with unpaid federal taxes from receiving federal contracts. OMB is responsible for providing overall direction to governmentwide procurement policies, regulations, and procedures, and is in the best position to develop policy options for prohibiting federal government contract awards to businesses and individuals that abuse the tax system.

Why GAO Did This Study

GAO was asked to determine

(1) the magnitude of unpaid federal taxes owed by Department of Defense (DOD) contractors, (2) whether indications exist of abuse or criminal activity by DOD contractors related to the federal tax system, (3) whether DOD and the Internal Revenue Service (IRS) have effective processes and controls in place to use the Treasury Offset Program (TOP) in collecting unpaid federal taxes from DOD contractors, and (4) whether DOD contractors with unpaid federal taxes are prohibited by law from receiving contracts from the federal government.

What GAO Recommends

GAO makes recommendations to DOD for complying with statutory guidance and supporting IRS efforts in collecting unpaid taxes, to IRS for improving the effectiveness of collection activities, and to the Office of Management and Budget (OMB) to develop options for prohibiting federal contract awards to businesses and individuals that abuse the federal tax system. DOD and IRS partially agreed; OMB did not agree. DOD and OMB also did not agree with GAO's matters for congressional consideration that DOD report on its collections through TOP and OMB report on policy options developed and actions taken against contractors that abuse the federal tax system. GAO reiterated support for its recommendations as well as for its suggestions to Congress. www.gao.gov/cgi-bin/getrpt?GAO-04-95 To view the full product, including the scope and methodology, click on the link above. For more information, contact Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov, or Steven J. Sebastian at (202) 512-3406.

Excerpt from the Report of the President's Commission on Implementation of United States Space Exploration Policy Moon, Mars and Beyond ... A Journey to Inspire, Innovate, and Discover

June 2004

_ NASA's relationship to the private sector, its organizational structure, business culture, and management processes - all largely inherited from the Apollo era - must be decisively transformed to implement the new, multi-decadal space exploration vision. The Commission recommends:

_ NASA recognize and implement a far larger presence of private industry in space operations with the specific goal of allowing private industry to assume the primary role of providing services to NASA, and most immediately in accessing low-Earth orbit. In NASA decisions, the preferred choice for operational activities must be competitively awarded contracts with private and non-profit organizations and NASA's role must be limited to only those areas where there is irrefutable demonstration that only government can perform the proposed activity;

_ NASA be transformed to become more focused and effectively integrated to implement the national space exploration vision, with a structure that affixes clear authority and accountability;

_ NASA Centers be reconfigured as Federally Funded Research and Development Centers to enable innovation, to work effectively with the private sector, and to stimulate economic development. The Commission recognizes that certain specific functions should remain under federal management within a reconfigured Center;

_ the Administration and Congress work with NASA to create 3 new NASA organizations:

* a technical advisory board that would give the Administrator and NASA leadership independent and responsive advice on technology and risk mitigation plans;
* an independent cost estimating organization to ensure cost realism and accuracy; and
* a research and technology organization that sponsors high risk/high payoff technology advancement while tolerating periodic failures; and

_ NASA adopt proven personnel and management reforms to implement the national space exploration vision, to include:

* use of "system-of-systems" approach;
* policies of spiral, evolutionary development;
* reliance upon lead systems integrators; and
* independent technical and cost assess

ments.

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