Stimulus contractors owe millions in back taxes

Some 3,700 Recovery Act contractors owe $750 million in back taxes, according to a Government Accountability Office report.

WASHINGTON (CNNMoney) -- Thousands of contractors who got stimulus money to do such things as build roads and provide social services owe more than $750 million in back taxes, a federal investigation has found.

More than $24 billion in stimulus money went to some 3,700 contractors who still owe the federal government taxes, according to the report released Tuesday by the General Accountability Office, Congress' watchdog agency. Tax cheats accounted for 5% of 80,000 contractors who got stimulus dollars, the report said.

The investigative report is the focus of a Senate hearing Tuesday afternoon.

"It is a matter of basic fairness that those who take government money should be required to pay their taxes like everyone else," said Carl Levin, the Michigan Democrat who runs the Senate Permanent Subcommittee on Investigations, which called for the review. "That such a huge amount of the stimulus money went to known tax cheats should be a wake up call for Congress."

Of the $750 million owed, about 55% of the taxes owed were corporate income tax, 27% was payroll taxes and 18% was other.

The investigators highlighted 15 cases of stimulus recipients who owed payroll taxes. Four were construction companies, recipients of more than $1 million in stimulus awards each, who owed between $400,000 to more than a million in mostly payroll taxes.

In one "extreme case," an engineering firm that received more than $100,000 in stimulus owed more than $6 million in back taxes. That company purchased three new cars totaling about $90,000 and paid its top three chiefs $700,000 while it still owed employment taxes, according to GAO investigators.

Another case cited by the GAO was a social service company that got more than $1 million in stimulus dollars and owed more than $2 million in payroll taxes. The executive of that company filed "numerous" questionable business expenses with the IRS and spent hundreds of thousands of dollars at casinos each year, the report found.

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Investigators referred all 15 cases to the IRS, which has moved to crack down on those firms, filing tax liens, according to the report.

GAO investigators found that often the tax cheats didn't receive the federal dollars directly. Those who were delinquent were subcontractors or they received stimulus dollars through a state grant process.

The report is sure to give more fodder to Republicans who spent much of the last political season criticizing the $787 billion American Recovery and Reinvestment Act, President Obama's major stimulus push in his first year in office.

Sen. Charles Grassley, an Iowa Republican, took aim at a weakness cited by investigators: No federal law bans a firm that owes taxes from receiving taxpayer help.

"Many companies pay their taxes, so there's no reason for the government to deal with companies that don't," Grassley said in a statement. "A government contract is something to be earned, not something to be taken for granted."