The Internal Revenue Service (IRS) is legally prohibited from doing business with companies that owe a significant amount of back taxes or a felony conviction, but an audit found the agency paid $18.8 million to such companies over a two-year period.

The Treasury Inspector General for Tax Administration (TIGTA) found that the IRS entered into 57 contracts with companies that owe back taxes during the 2012 and 2013 fiscal years. The bulk of such contracts, $18 million, were modifications to contracts that were let before the rule went into effect.

“By including the 32 modifications within TIGTA’s calculation, we feel TIGTA improperly interpreted the 2012 and 2013 policies on this matter,” Kevin Q. McIver, acting chief of agency-wide services at the IRS, wrote in response to the report, according to Accounting Today. “The policies were clear in that they only applied to new solicitations. A proper analysis shows the identification of 25 new awards valued at less than $900,000.”

TIGTA disagreed with that interpretation. “The IRS informed us that their interpretation of the Department of the Treasury implementing guidance for the Act excluded modifications to existing contracts,” according to the report (pdf). “The IRS had improperly interpreted the Department of the Treasury implementing guidance to be only applicable to newly competed contracts awarded subsequent to the enactment of the Act.”

The audit also found that one company that had been convicted of a felony received three contracts worth more than a total of $67,000 over the period in question.

Part of the problem is that the IRS isn’t even asking prospective contractors if they’re eligible under the rules to bid on contracts. The IRS is supposed to ask if companies owe more than $3,000 in back taxes or have a felony conviction, but TIGTA found that in all the 143 sample cases it examined, including the contracts let to the company with a felony conviction, it didn’t.

After the report was released, the IRS attempted to minimize the problem. “It is important to note that nine contractors—more than half of the 17 contractors cited in the TIGTA report—are now compliant with their taxes, with one of those in an installment payment agreement,” an agency spokesman wrote to Accounting Today. “To put this into perspective, the IRS awarded more than 20,000 contracts worth billions of dollars in fiscal years 2012 and 2013. That means the 57 contracts identified in the report represent a small fraction of overall IRS contracting work—well under a half percent of the total awarded.”

Does that mean there’s a chance the IRS will let taxpayers get away with not paying a half percent of what they owe next April 15? Get back to us on that.

-Steve Straehley

To Learn More:

Existing Procurement Practices Allowed Corporations With Federal Tax Debt to Obtain Contract Awards (pdf) (Treasury Inspector General for Tax Administration)

IRS Awarded $18.8M in Contracts to Companies with Tax Debts (by Michael Cohn, Accounting Today)

IRS Contractors Owe $589 Million in Back Taxes (by Matt Bewig, AllGov)

IRS Awarded Contracts to 20 Companies that Owed Taxes (by Noel Brinkerhoff, AllGov)