Although federal law prohibits agencies from contracting with businesses that have unpaid federal tax liabilities, more than 1,100 vendors doing business with the IRS owe a combined $589 million in federal tax debt, according to a report by the Treasury Inspector General for Tax Administration.

TIGTA found that the vast majority of vendors that conduct business with the IRS meet their federal tax obligations. However, 1,168, or 7 percent, owed federal tax debt as of July 2012, the most recent data for which information was available at the time of the review.

“When the IRS conducts business with vendors that do not comply with federal tax laws, it conveys a contradictory message in relation to its mission to ensure compliance with the tax laws,” said J. Russell George, Treasury Inspector General for Tax Administration.

TIGTA previously recommended that the IRS establish procedures requiring an annual tax check for all contractors. The IRS disagreed with this recommendation at the time.  TIGTA continues to believe that the IRS should establish procedures requiring annual tax compliance checks for all contractors.

The TIGTA report found that the IRS’s efforts to prevent suspnded and debarred vendors from receiving IRS contracts generally appeared effective. However, the IRS improperly awarded four new contracts or exercised additional option years on existing contracts, valued at $2.6 million, to three vendors that were excluded from doing business with the federal government.

Further, TIGTA said that the IRS could improve its overall control of the IRS vendor master file. TIGTA found insufficient oversight and a lack of monitoring over operation and maintenance of the file. TIGTA recommended that the IRS determine why it did not identify the suspended vendors within the General Services Administration’s Excluded Parties List System. In addition, TIGTA made several recommendations to improve the controls over VMF maintenance and operation. IRS management agreed with TIGTA’s recommendations and plans to take corrective actions.