In the wake of its decision not to renew contracts with two private debt collection agencies, the Internal Revenue Service now appears set to review other types of outside contracts.

A new report from the Treasury Department’s Inspector General for Tax Administration reviewed the IRS’s contracting practices and found that the agency’s current practices might be preventing it from using the most advantageous contracting methods to acquire goods and services. The review, requested by the IRS Office of Procurement, assessed whether the IRS is using the appropriate contract types to accomplish its tax administration mission.

Choosing the appropriate contract type is essential to successful performance and obtaining the best value for the federal government, TIGTA pointed out. Cost-reimbursement contracts, which reimburse contractors for all their costs, represent the highest monetary risk to the federal government.

TIGTA reviewed a sample of 40 contracts representing approximately $339 million negotiated by the IRS with private vendors between February 2007 and January 2008. It found that 83 percent, or 33 of the 40 contracts, were awarded on a cost-reimbursement basis.

“While the contract types we reviewed were not improper, these types of contracts present a greater risk of the IRS paying more for contracts than necessary,” said TIGTA Inspector General J. Russell George in a statement.

The report recommended that the IRS’s program offices work more closely with the Office of Procurement during acquisition planning to ensure selection of the most appropriate contract type. TIGTA also said that the IRS should document its justification for selecting a cost-reimbursement contract, and program officers should routinely review contracts prior to exercising their option years or recompeting contracts to consider less risky contract types.

The IRS agreed with the majority of TIGTA’s recommendations. In addition, IRS personnel said that they are now using more hybrid contracts, in which some elements of the contract are firm fixed-price, which can limit the financial risk to the federal government.

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