Tax delinquency no impediment to contracts with IRS

File this one with the government's irony department.

The Internal Revenue Service and other federal agencies paid nearly a dozen federal contractors almost $3.7 billion in procurement awards, despite the fact the companies owe millions in back taxes, according to a new report by the Treasury Inspector General for Tax Administration.

In every case, the IRS failed to take enforcement actions because the contractor was disputing the tax liability. It took the IRS an average of eight months -- and in some instances as long as 22 months -- to determine whether the information provided by the company was enough to adjust the outstanding balance, TIGTA said in a report dated Feb. 4 but released on Monday.

While the IRS was reviewing the contractors' accounts, collection efforts were suspended and the firms received contract payments of $356 million from the IRS and $3.6 billion from other government agencies, the report found. If the accounts had not been blocked, the treasury would have received more than $3.7 million in taxes from the firms.

"All federal contractors, and particularly those that do business with the IRS, must meet their obligations to pay federal taxes," said J. Russell George, the Treasury Inspector General for Tax Administration. "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."

According to IRS procurement data, of the 535 companies with contracts at the agency, 61-- or more than 11 percent -- had delinquent federal tax accounts totaling some $10.6 million. Most of these companies are receiving reminder notices, are in litigation, or are working with the IRS to resolve the delinquency through a payment solution, TIGTA said.

The report identified eight contractors, however, with delinquent taxes totaling $4.2 million that were challenging the IRS assessments and were therefore blocked from inclusion in the Federal Payment Levy Program. The automated program collects delinquent federal taxes by issuing levies of up to 15 percent on a variety of federal payments, including contract awards.

From fiscal 2000 through 2009, nearly $2.4 billion was levied on behalf of the IRS and about $430 million was imposed on delinquent federal contractors.

Although a delinquent tax case can indicate the existence of serious issues that can jeopardize contract performance, it alone rarely precludes a company from winning a contract, George said.

The IG recommended the IRS expedite its review of federal contractor cases in a blocked status. "TIGTA believes the IRS could improve the timeliness of these cases by taking a more active enforcement approach to suspend payments to contractors if they are not making attempts to resolve their tax liability within a reasonable time period," the report said.

The IRS agreed with TIGTA's recommendations, but noted it has a responsibility to investigate companies' claims before beginning collection actions.

"If the IRS determines that the underlying tax assessment is accurate, the taxpayer's account is adjusted to the correct amount," wrote Christopher Wagner, commissioner of the small business/self-employed division at the IRS. "If the IRS denies the taxpayer's claim, the account is returned to the collection stream for appropriate action."

In January 2010, President Obama issued a governmentwide memorandum directing the IRS commissioner to review the certifications that firms bidding on federal contracts submit to demonstrate they are up-to-date on their taxes. The memo also required the Office of Management and Budget director to issue recommendations on ensuring tax delinquent contractors are not awarded new contracts, and to develop plans to make contractor tax certifications available in a governmentwide procurement database.

Earlier this month, Rep. Jason Chaffetz, R-Utah, introduced a pair of bills that would prevent contractors and federal employees with "seriously delinquent" tax debt from working for the government.