Internal Revenue Service contractors received more than $356 million in payments from the IRS in 2009 despite owing a combined $3.8 million in back taxes, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that the IRS did not take enforcement actions against the contractors because their accounts were still in dispute.

TIGTA reviewed the reasons why the accounts of IRS contractors who owed millions of dollars in delinquent taxes and were previously selected for the Federal Payment Levy Program were blocked from levy. The FPLP is an automated process that collects delinquent federal taxes by issuing levies on a variety of federal payments, including contract awards.

TIGTA identified five contractors with delinquent taxes totaling approximately $4.2 million that were blocked from inclusion in the FPLP because their delinquent tax accounts had a suspended status. All five contractors questioned the tax assessments and provided the IRS with information to substantiate why they believed they did not owe the tax.

TIGTA found that it took the IRS an average of eight months to review and determine if the information provided was sufficient to adjust the outstanding balance. While the IRS was reviewing the contractors’ accounts, collection efforts were suspended and the contractors received payments totaling approximately $356 million from the IRS and $3.6 billion from other federal agencies.

“All federal contractors, and particularly those that do business with the IRS, must meet their obligations to pay federal taxes,” said TIGTA Inspector General J. Russell George in a statement. “Although the IRS has the responsibility to investigate the merit of a taxpayer’s claim before initiating enforced collection activity, it should improve its practices to expedite the timely resolution of federal contractor accounts that are in dispute.”

TIGTA recommended that the IRS review its current processes to identify opportunities to expedite levying federal contractor cases. The IRS agreed with TIGTA’s recommendations, but did not agree with the $3.8 million figure.

“The IRS believes that all federal contractors should be held to high standards in matters concerning federal tax responsibility and agrees with TIGTA that improvement opportunities exist to further increase federal tax compliance within the federal contractor community,” wrote Christopher Wagner, the commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report.

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