Landscape and other contractors who follow the rules are competing against a growing number of contractors who cheat-and the honest contractors are fighting back.

In states across the country, investigators are visiting job sites to check licenses and paperwork, a process that can end in arrest for operators who try to run below government radar. Legitimate contractors and consumers are tipping the authorities off about dubious construction and contracting operations.

Here's how the illegal game is played. Unscrupulous contractors skip license fees and pay employees in cash, foregoing wage tax and workers' comp payments. By working ?EUR??,,????'?????<

The problem may be worst in California, where the state misses an estimated $6.5 billion a year in lost tax revenue due to the so-called underground economy. Nationwide, the IRS says that close to $400 billion is lost to tax evaders each year-an amount that would almost cancel the 2005 federal budget deficit.

To fight back, many contractors are picking up the phone. California's Contractors State License Board is receiving between 150 and 170 tips about unlicensed activity each month, a number that's up from a few years ago.

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To take action, the board is helping set up an average of four law enforcement operations a month. One in April targeted operators who may have had licenses, but were neglecting to pay employees' workers' compensation insurance for hours worked. The investigators swept through 50 job sites and netted 11 contractors in violation of the law. The group paid a total of $7,250 in fees and fines. Other efforts are sting operations, where investigators pose as homeowners.

Like other small business owners, contractors complain about the high cost of workers' compensation insurance. In 2004, California passed legislation that has since brought premiums down. Still, according to an Oregon study published in Dec., 2004, California's workers' comp rates are close to two percentage points above the next highest-rate state, Alaska. Rounding out the top five for high rates are Florida, Hawaii and Ohio. The states with the lowest rates are Arizona, Indiana and North Dakota.

This employee of an unlicensed contractor in was taken into custody in Modesto, Calif. when investigators discovered a drug-related warrant. Deputies found a contractor carrying a concealed .45 caliber handgun at the same site. Photo: Patrick Halvorson, CSLB.

California isn't the only state with an active enforcement program. Florida investigators are spot-checking job sites for licenses and workers' comp documents. Contractors lacking licenses in one recent sweep were slapped with $500 fines. In Colorado, legislation may soon require independent contractors to carry workers' comp insurance or face daily $500 fines. In California, a San Jose storeowner was recently convicted of multiple years of workers' comp fraud and sentenced to 14 months in jail and forced to pay $2 million in restitution.

The bottom line seems to be that business owners can pay now-or they can pay more later, said Tom Delaney of the Washington, D.C.-based Professional Landcare Network, or PLANET.

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Contractors can report unlicensed competition to local law enforcement or to their state licensing agency.