In 2008, Congress passed a law to force contractors to pay payroll taxes for employees who are U.S. citizens working for their offshore subsidiaries. The IRS is collecting more taxes as a result, but much of that new tax revenue is leaving government in the form of higher contract costs for the Defense Department.

Defense contractors have billed the department for more than $140 million in reimbursements for payroll tax expenses they've paid since the law was passed, a new Government Accountability Office report says.

And that's just on five contracts — worth a combined $6 billion — that were reviewed by GAO.

Executives from some of the biggest Defense contractors — including Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and KBR — told GAO that, before the law was passed, they hired U.S. citizens at their offshore subsidiaries as a way to lower their costs and remain competitive. The companies say they only use the offshore subsidiaries to hire employees to perform work overseas.

Overall, GAO said the law is accomplishing its intended effect: forcing offshore companies to share the tax burden for social security, Medicare and federal income tax payments. GAO recommended Congress expand the legislation to force contractors offshore to contribute to state unemployment insurance programs so workers can collect when they lose their jobs.

In 2009, one state, Texas, denied unemployment claims of 140 individuals employed by several of the contractors because they were employed by offshore subsidiaries that did not contribute to the state's unemployment insurance programs. GAO chose Texas because several major contractors have corporate offices there.