Federal contractors with tax debts still scoring big contracts

Accounting

A system that Congress mandated allowing federal contractors to self-certify they don’t owe a significant amount of taxes is enabling many of them to score lucrative contracts while still owing plenty of delinquent taxes.

A report released last week by the Treasury Inspector General for Tax Administration pointed out that origins of the problem go back a number of years. The Government Accountability Office found that in 2015 and 2016, federal contracts were awarded to thousands of contractors with unpaid taxes that were most likely delinquent. Congress provided the IRS with $30 million to set up an application through which entities could ask the IRS for a certification that they did or did not owe seriously delinquent taxes. That system seems to have a mixed record at best.

Between October 2018 and December 2019, the federal government awarded 2.1 million federal contracts and grants to more than 83,000 awardees, according to the report. Of those, 3,040 contractors received nearly $10.2 billion in federal contracts while owing $621.8 million in delinquent federal taxes. In addition, 938 of the grantees received $22.7 billion in federal grants while owing $269.2 million in delinquent federal taxes. 

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IRS headquarters in Washington, D.C.

Al Drago/Bloomberg

The TIGTA report found that the majority of entities frequently did not self-certify their federal tax status accurately, as required, prior to receiving contracts or grants. “Specifically, 66 (93%) of 71 contractors selected in a judgmental sample certified in the System for Award Management that they either did not owe or had not yet been notified of delinquent federal taxes when IRS systems indicated that a federal tax debt was present,” said the report. 

The report acknowledged that the IRS made some progress establishing an application called the Federal Contractor Tax Check System that would allow prospective contractors and grantees to request a certificate from the IRS stating that they did or did not owe seriously delinquent taxes. The IRS also designed a technical solution to build the Federal Contractor Tax Check System and planned a foundational release in November 2022. 

TIGTA recommended that the IRS’s deputy commissioner for operations support should continue to prioritize the development of the Federal Contractor Tax Check System. The IRS agreed with TIGTA’s recommendation. 

However, it may take a long time to set up that system. “We appreciate your recognition of the positive steps taken by the IRS to prioritize development of the Federal Contractor Tax Check System,” wrote IRS chief privacy officer Robert Choi in response to the report. “This system will allow contractors to registering (and annually reregistering) in SAM [System for Award Management] to request an electronic certificate from the IRS stating whether they do or do not have a seriously delinquent tax debt. However, until the Office of Management and Budget agrees with this approach and the publication of the new requirements in the FAR [Federal Acquisition Regulations], IRS cannot complete the design and implementation of FCTCS, and neither vendors nor other agencies will be required to obtain, provide or consider the certificates.”

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