Vendors Doing Business with IRS Owe Nearly $600M in Back Taxes

“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,” said J. Russell George. “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,” said J. Russell George. Charles Dharapak/AP file photo

Some 1,168 businesses that sell products and services to the Internal Revenue Service owe a combined $589 million in delinquent taxes, auditors found.

Federal law -- as updated in the 2012 Consolidated Appropriations Act -- forbids agencies from signing contracts with companies with unpaid federal tax liabilities, but the IRS’ system of controls, while effective much of the time, is not fool-proof, according to the report released Wednesday by the Treasury Inspector General for Tax Administration.

“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,” said J. Russell George, Treasury Inspector General for Tax Administration.

The IRS in the past has resisted TIGTA’s recommendation that it conduct an annual check on contractor tax records. And though the agency’s use of its Master Vendor File is generally effective, auditors recently found that the IRS has not checked the General Services Administration’s Excluded Parties List System. The agency improperly awarded four new contracts or exercised additional option years on existing contracts, valued at $2.6 million, to three vendors that were suspended from doing business with the government, the auditors found.

“The IRS stated that it sometimes does not have a choice in the vendors it must do business with,” TIGTA noted, listing statistics on firms that had gone out of business, were part of larger contractors, or already had tax liens applied to them. “The IRS told us that it routinely issues summons to specific financial intuitions for a particular taxpayer to obtain records as part of its tax administration processes and must pay a fee for obtaining these records. The IRS stated that it must also pay filing fees to state and county governments in order to file tax liens. Thus, even if these entities have unpaid tax debt, the IRS must still use their services.”

IRS managers who reviewed the report agreed with TIGTA’s recommendations for using GSA’s database and improving other controls.

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