Report: Tax Cheats Got $1.4 Billion in Government Work

March 13, 2006 — -- If you're dreading tax day, consider this: Thousands of tax cheats who owe the government millions in back taxes are getting paid with your tax dollars -- in federal contracts.

One of the worst offenders, Jack Easterday, has quickly become the poster boy of the scandal. Easterday was convicted last month of charges related to keeping millions of dollars in government witholding taxes he collected from employees at his Oakland, Calif., nursing homes.

He allegedly kept the money to pay himself and his wife large salaries, buy a $750,000 home, a $16,000 Rolex watch and a dining room table to seat 22 -- all while the government was paying him for contract work.

"Here's a guy who pled poverty -- that's why he couldn't pay the taxes -- just [took] withholding payroll taxes," said Sen. Norm Coleman, R-Minn.

Tomorrow, Coleman unveils the latest investigation of contractor tax cheats. It involves the General Services Administration, the government's purchasing department.

Investigators found that 3,800 contractors -- one out of 10 -- have not paid all their taxes. The government is due $1.4 billion.

Where did the money go? Some contractors spent it on fancy cars, jewelry, expensive homes and gambling sprees.

The latest revelations come as many Americans are paying their taxes. "I think it's outrageous that the government continues to do business with people that are not playing by the rules," said Gene Colon, a taxpayer. "I just paid my taxes."

Part of the problem is that neither federal rules nor the GSA's own regulations requires those who hand out the contracts to check to see if the contractors they award taxpayer money to owe back taxes themselves. Contractors are asked only if they've been convicted of tax evasion. Coleman wants to change that.

As for Easterday, he faces years in prison when he's sentenced in two months. And all of that missing tax money? The government has recovered just 55 cents of every $100.

ABC News' David Kerley reported this story for "World News Tonight."