Although 1,168 Internal Revenue Service (IRS) contractors owe a combined $589 million in back taxes, the agency paid them about $741 million between October 2010 and June 2012, and continues to resist a key reform proposed two years ago, according to a report by the Treasury Inspector General for Tax Administration (TIGTA). Only 50 of the scofflaw vendors were on a current payment plan, leaving 1,118 of them (96%) delinquent to the tune of $587 million as of July 2, 2012. The data comes just weeks after a related TIGTA report found that 5% (691) of the 13,591 contractor employees assigned to the IRS had almost $5.4 million in federal tax debts. 

Prior to 2012 this would not have been an issue because federal law allowed companies to get government contracts even if they had a tax delinquency, but the Consolidated Appropriations Act of 2012 barred firms with unpaid tax bills from getting government contracts. IRS now conducts checks for tax debt prior to awarding a contract, but the agency does not monitor its contractors’ tax compliance after award, according to TIGTA.

That is the one recommendation, first made to IRS in 2011, which the agency refuses to implement, even as it accepts other suggestions of a more technical nature. For example, IRS agreed to take steps to improve its compliance monitoring in light of a finding that the agency awarded four new contracts or contract options worth $2.6 million to three vendors that were barred from government work.

IRS management pleaded for flexibility because “it sometimes does not have a choice in the vendors it” uses. According to the IRS, it must often pay fees of various kinds to financial institutions or to state and local governments for records relating to a particular taxpayer, so that “even if these entities have unpaid tax debt, the IRS must still use their services,” in order to do its job. According to the IRS, 863 (77%) of the 1,118 delinquent vendors were these kind of unavoidable contractors, owing about $39 million, while “the remaining 255 vendors had $548 million in delinquent tax debt.”

But TIGTA J. Russell George called the agency position self-contradictory: “When the IRS conducts business with vendors that do not comply with federal tax laws, it conveys a contradictory message in relation to its mission to ensure compliance with the tax laws,” he wrote in the report. 

-Matt Bewig

To Learn More:

IRS Vendors Owe $589Mn in Back Taxes (by Roger Russell, Accounting Today)

Vendors Had Millions of Dollars of Federal Tax Debt (TIGTA) (pdf)

IRS and Contractor Employees Owe Millions in Back Taxes, as do Thousands with Security Clearances (by Noel Brinkerhoff, AllGov)