The Internal Revenue Service does not verify that government contractors have paid federal taxes, despite a presidential directive last January that contractors with serious tax delinquencies not receive new work from federal agencies, and at least 20 contractors for the IRS owe a total of approximately $5.2 million in unpaid taxes, according to a new government report.

On Jan. 20, 2010, President Obama directed the IRS to review whether contractors bidding for federal contracts owed federal taxes. The Treasury Inspector General for Tax Administration reviewed whether businesses contracting to provide services to the IRS were compliant with federal tax laws, including filing and paying federal income taxes.

TIGTA determined that federal guidelines prevent the IRS from using tax-indebtedness information to preclude a contractor from obtaining a contract. Those guidelines permit the IRS to conduct tax checks only at the time of the initial award to determine whether tax-indebtedness exists and if it indicates serious issues that could jeopardize contract performance.

In addition, federal government guidelines do not require the IRS to complete tax checks when contracts are being considered for renewal. Therefore, annual tax checks are not performed. As a result, contractors that may have become delinquent or noncompliant since the initial award date can continue to receive Federal payments without being subject to additional tax checks.

TIGTA’s review of 135 current IRS contactors identified 20 (15 percent) with delinquent tax liabilities and penalties totaling approximately $5.2 million. Six of these contractors had delinquent tax liabilities totaling approximately $943,000 when they were awarded the contracts. In addition, tax checks were not completed for seven of the 20 contractors. The contracts were awarded between October 2006 and December 2008.

“In accordance with the presidential directive, the Internal Revenue Service must ensure that businesses contracting to provide services to the IRS are compliant with Federal tax laws,” said J. Russell George, the Treasury Inspector General for Tax Administration. “IRS contractors should be held accountable to the same tax compliance requirements as IRS employees.”

The IRS issued a statement taking exception to the TIGTA report. "It is important to recognize that IRS is the only agency of government that checks for tax delinquencies of contractors prior to awarding contracts," said spokesperson Michelle Eldridge. "IRS procurement officers routinely work with the IRS collection operation to follow up on these delinquencies, as needed. The IRS has fulfilled all of its obligations under the January 2010 Executive Order, and continues to work with the Office of Federal Procurement Policy on further improvements to the federal procurement process. TIGTA’s findings largely rest on 20 contractors who had $5.2 million in delinquent taxes.  In fact, 18 of these 20 contractors resolved their tax balances through routine and timely interactions with the IRS. Of the two remaining contractors, the current debt is $945,000 – an 82 percent reduction of the $5.2 million spotlighted by TIGTA. In these cases, the taxpayers have exercised their right to contest the amount due. Finally, the IRS strongly supports the idea that all contractors meet their tax responsibilities. And the IRS and Treasury have supported legislation that would expand the federal government’s ability to stop contractors with serious tax delinquencies from receiving contracts.  The IRS is strongly committed to improving its performance on tax checks and financial capability assessments. Our response to TIGTA reflects that."

TIGTA recommended in its report that the IRS communicate to its senior executives the administration’s request that contractors with tax liabilities not receive additional Federal contracts; ensure that tax checks and financial capability surveys are performed before contracts are awarded; and establish procedures to require an annual tax check of all IRS contractors.

IRS management agreed with the recommendation to evaluate the contract award process and to ensure tax checks and financial capability surveys are done before contracts are awarded. In addition, the IRS plans to include tax-check responsibilities in future employee training. The IRS disagreed with TIGTA’s recommendation to establish procedures to conduct annual tax checks on all contractors to identify subsequent tax delinquencies.

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