New Report Shows Some IRS Contractors Are Not Paying Their Taxes

Consider the double threat posed by a contractor that owes taxes: First, it deprives Uncle Sam of needed revenue. As of 2007, the Government Accountability Office estimated that contractors owed over $7 billion in federal taxes. Second, a mounting delinquent tax liability can hinder a contractor’s ability to perform the contract or even lead to default, again leaving the government holding the bag.

According to a newly published report by the Treasury Inspector General for Tax Administration (TIGTA), the Internal Revenue Service (IRS) awarded contracts to at least 20 companies with delinquent taxes totaling $5.2 million. TIGTA found that IRS contracting officials often fail to verify if contractors have paid federal corporate and payroll taxes. Out of 135 IRS contactors, TIGTA found that 20 of the firms owed federal taxes. Six had delinquent tax liabilities totaling $943,000 when they first won the contracts—as of March 2009, that amount had increased more than five-fold to $4.9 million. As reported yesterday in Federal Times, 18 of the 20 have since resolved their tax balances, although it is not known if the cases were settled for the full amount, and the other two are contesting delinquencies currently totaling $945,000.

This is not a matter of a few careless or inattentive IRS officials not properly vetting contractors. The problem is systemic. According to TIGTA’s report, even if a tax delinquency is discovered, federal guidelines do not allow the IRS to use this information to prevent a contractor from obtaining a contract. In addition, neither the Federal Acquisition Regulation (FAR) nor IRS guidelines require the IRS to conduct a tax check when contracts are being considered for renewal or conduct an annual check for multi-year contracts. (Contracting regulations require findings of financial responsibility and “a satisfactory record of integrity and business ethics,” as well as certifications related to tax delinquencies, prior to the initial awarding of a contract.) TIGTA found that the IRS renewed the contracts of 17 of the 20 companies with delinquencies.

All of this is particularly galling considering the IRS’s relatively draconian tax compliance standards for its own employees, who face disciplinary action up to and including loss of employment if they fail to accurately or timely file their taxes. Even those of us who do not work for the IRS are subject to a far more severe standard than the companies that receive billions of dollars in contracts from the IRS each year.

The problem of tax-delinquent contractors has received heightened scrutiny in recent years. In 2008, POGO blogged about and testified before Congress on the Contracting and Tax Accountability Act of 2007, which prohibited federal agencies from awarding contracts or grants to persons or companies with “seriously delinquent” federal tax debt. Unfortunately, the bill eventually died in the Senate. Last year, President Obama attempted to crack down on the problem with directives to the federal agencies and the creation of the “Do Not Pay List”.

It remains to be seen if President Obama’s initiatives will help the government shake loose the delinquent taxes owed by its contractors, or at least keep the more egregious deadbeats from getting contracts in the first place. In the meantime, the IRS should change its regulatory practices to ensure that the tax laws are being administered fairly for contractors and ordinary citizens alike.

See also:

• Obama to Federal Contractors: Tax Cheats Beware
• New Legislation Closes Tax Loophole for Federal Contractors
• A Taxing Time on the Hill for Contractors