In one case, a communications equipment contractor got $100,000 in federal payments while owing nearly $900,000 in unpaid taxes. The owner had been convicted of money laundering.

In another, a security services company got $100,000 while owing more than $3 million, mostly in payroll taxes. The owner had several commercial properties and a yacht.

The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations looked Tuesday into these and other examples of General Services Administration contractors getting federal payments while avoiding federal taxes, asking how the government can prevent tax offenders from getting federal business.

Subcommittee Chairman Norm Coleman, R-Minn., said some of those contractors owed taxes but nevertheless bought luxury cars, boats and million-dollar properties.

"These are not your everyday tax delinquents, but rather contractors who receive millions of dollars from American taxpayers and yet refuse to pay their fair share of taxes," he said.

The Government Accountability Office found more than 3,800 of those GSA contractors had tax debts that totaled about $1.4 billion. That figure may underestimate the amount owed, investigators said, because they did not examine contractors that failed to file tax returns or underreported their income.

The examination of GSA contracts is the third in the panel's series of hearings on contractors that owe federal taxes. The panel's staff said the hearings have identified $7.7 billion in taxes owed by government contractors.

A federal payment levy program that recoups unpaid taxes from delinquent contractors collected about $42 million last year. One contractor has been convicted for tax violations.

"One of the main problems here is that contractors are being allowed into the system in the first place and are being awarded contracts even though they owe taxes," said Sen. Carl Levin, D-Mich.

The GSA contractors with tax debts amount to one in 10 companies contracting with the agency. The GAO report said neither federal law nor the agency's policies require officials to weigh a company's tax debt when awarding a government contract.

A company can be barred from winning government contracts in cases of tax evasion. The GAO concluded that even if a company willfully fails to pay taxes, the company probably would not be barred unless the contractor was indicted or convicted of tax evasion.

Coleman said the process for awarding contracts must ask businesses about tax debt and include a search for state and federal tax liens.

The GAO discovered evidence of abusive or potentially criminal activity among 25 contractors who appear to have diverted payroll taxes for personal or business use. Failure to transfer to the government payroll taxes withheld from employee paychecks is a criminal felony.

The investigators looked at contracts used from October 2003 through June 2005. In most cases, the companies owed corporate income or payroll taxes.

Contractors that do not pay taxes may have an unfair advantage because they do not bear the same costs as companies complying with the tax laws. In a few cases, the GAO found that scofflaws beat the competition with lower prices to win contracts.