Report: Oversight of contractors’ tax liability requires better oversight

The Internal Revenue Service (IRS) doesn’t verify each year that government contractors have paid federal taxes, despite a presidential directive that contractors with serious tax delinquencies not receive new work from federal agencies, the report stated. 

As a result, contractors that may have become delinquent or noncompliant since the initial award date can continue to receive federal payments without being subject to additional tax checks.

On Jan. 20, 2010, President Obama directed the IRS to review whether contractors bidding for federal contracts owed taxes. 

“In accordance with the presidential directive, the Internal Revenue Service must ensure that businesses contracting to provide services to the IRS are compliant with Federal tax laws,” said J. Russell George, the Treasury Inspector General for Tax Administration. “IRS contractors should be held accountable to the same tax compliance requirements as IRS employees.”

The report shows that federal guidelines allow the IRS to check the tax status of a contractor only at the time of the initial award to determine whether tax-indebtedness exists and if it indicates serious issues that could jeopardize contract performance.

Also, there are no federal guidelines that require the IRS to complete tax checks when contracts are up for renewal.

The report makes several recommendations for the IRS that include to: 

• Communicate to its senior executives the Administration’s request that contractors with tax liabilities not receive additional Federal contracts.

• Ensure that tax checks and financial capability surveys are performed before contracts are awarded.

• Establish procedures to require an annual tax check of all IRS contractors.

IRS management agreed with the recommendation to evaluate the contract award process and to ensure tax checks and financial capability surveys are done before contracts are awarded, the report said. Also, the IRS plans to include tax-check responsibilities in future employee training. 

The IRS disagreed with TIGTA’s recommendation to establish procedures to conduct annual tax checks on all contractors to identify subsequent tax delinquencies.