TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Controls Over the Internal Revenue Service Contractor Tax Check Process Need to Be Improved June 11, 2021 Report Number: 2021-10-039 [email protected] | www.treasury.gov/tigta 1 HIGHLIGHTS: Controls Over the Internal Revenue Service Contractor Tax Check Process Need to Be Improved Final Audit Report issued on June 11, 2021 Report Number 2021-10-039 Why TIGTA Did This Audit What TIGTA Found The overall objective of this review TIGTA reviewed 71 randomly selected new awards and found was to determine whether the IRS that 47 (66 percent) had one or more deficiencies related to the contractor tax check process has contractor tax check process. Contractor tax checks were not always adequate controls to ensure that completed prior to contract award or, if completed, were not a) tax checks of contractors are performed within the required time frame. For example, a tax check completed timely, include all was not performed for 18 (25 percent) of the 71 contract awards required steps, and are selected. In addition, Tax Check Notice and Consent provisions were documented adequately, and not always provided to or signed by the offeror. However, TIGTA b) the Treasury Suspension and independently verified that the 71 contractors did not have any Debarment official is notified of delinquent Federal taxes at the time the contracts were awarded. contractor tax delinquencies, as Based on sample results, TIGTA estimated that 2,435 of the 3,679 new required. award contracts (awarded between October 1, 2018, and March 30, Impact on Taxpayers 2020) have one or more of these errors identified. Also, information provided to the Treasury Suspension and Between October 1, 2018, and Debarment official related to contractors with unresolved tax March 30, 2020, the IRS made delinquencies was untimely and incomplete. Specifically, during the 3,679 new awards to contractors period between October 1, 2018, and March 30, 2020, IRS for the purchase of goods and procurement tax checks identified 20 contractors with unresolved tax services ranging from computer delinquencies totaling more than $7 million. However, no hardware to expert witnesses. information was reported to the Treasury Suspension and Debarment If required tax checks are not official on any of these 20 contractors until June 2020, during the consistently performed, it puts the course of our review. In addition, based on the requirements IRS at risk of awarding contracts to provided by the office of the Treasury Suspension and Debarment offerors with existing tax liabilities. official, the information reported was incomplete. Additionally, not completing tax Currently, the IRS is the only Federal agency that can access taxpayer checks within the required time return information to support its determination of an offeror’s frame increases the risk that an eligibility to receive a Federal contract award. If the IRS awards offeror’s recently incurred tax contracts to businesses with outstanding tax debt, it erodes public liability will not be identified confidence in the tax system. during the tax check process. Lastly, untimely or incomplete What TIGTA Recommended notification to the Treasury TIGTA recommended that the Chief Procurement Officer complete Suspension and Debarment official implementation of the enhancement to the IRS contract writing increases the chances that system, which will allow Contracting Officers direct access to offeror contractors with a tax deficiency tax status, and require the use of the system’s existing contract will obtain a contract award with writing feature that automatically includes a Tax Check Notice and another Federal agency. Consent provision. TIGTA also recommended that the Chief Procurement Officer update its process to ensure that required information on contractors identified with unresolved tax delinquencies is timely referred to the Treasury Suspension and Debarment official. IRS management agreed with the report recommendations and stated that they have implemented partial enhancements to its contract writing system and is evaluating whether the system’s feature that automatically includes the mandatory provisions will meet the future needs of the IRS. The IRS will also update its guidance to require that tax check–related notifications are provided to the Treasury Suspension and Debarment official quarterly. U.S. DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220 TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION June 11, 2021 MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE FROM: Michael E. McKenney Deputy Inspector General for Audit SUBJECT: Final Audit Report – Controls Over the Internal Revenue Service Contractor Tax Check Process Need to Be Improved (Audit #202010019) This report presents the results of our review to determine whether the Internal Revenue Service contractor tax check process has adequate controls to ensure that (a) tax checks of contractors are completed timely, include all required steps, and are documented adequately and b) the Treasury Suspension and Debarment official is notified of contractor tax delinquencies, as required. This review is part of our Fiscal Year 2021 Annual Audit Plan and addresses the Fiscal Year 2020 major management challenge of Achieving Operational Efficiencies. Management’s complete response to the draft report is included as Appendix III. Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Heather M. Hill, Assistant Inspector General for Audit (Management Services and Exempt Organizations). Controls Over the Internal Revenue Service Contractor Tax Check Process Need to Be Improved Table of Contents Background .....................................................................................................................................Page 1 Results of Review .......................................................................................................................Page 2 Contractor Tax Checks Were Not Always Performed As Required ..................................................................................................................................Page 2 Recommendations 1 and 2: .....................................................Page 6 Information Provided to the Treasury Suspension and Debarment Official on Contractors With Unresolved Delinquent Tax Liabilities Was Untimely and Incomplete ....................................Page 6 Recommendation 3: ...................................................................Page 7 Appendices Appendix I – Detailed Objective, Scope, and Methodology ................................Page 8 Appendix II – Outcome Measure ...................................................................................Page 10 Appendix III – Management’s Response to the Draft Report .............................Page 12 Appendix IV – Glossary of Terms ...................................................................................Page 16 Appendix V – Abbreviations.............................................................................................Page. 17 Controls Over the Internal Revenue Service Contractor Tax Check Process Need to Be Improved Background Between October 1, 2018, and March 30, 2020, the Internal Revenue Service (IRS) made 3,679 new awards to contractors for the purchase of goods and services ranging from computer hardware to expert witnesses. Before these contracts are awarded, the assigned IRS Contracting Officer (CO) must examine the prospective contractor’s eligibility, including whether the contractor has any outstanding Federal tax indebtedness. In the Consolidated and Further Continuing Appropriations Act of 2015, Congress specified that the Government will not enter into a contract with any corporation that has any unpaid Federal tax liability that has been assessed, unless an Between October 1, 2018, and agency has considered suspension or debarment of the March 20, 2020, the IRS made corporation and made a determination that suspension 3,679 new awards to contractors or debarment is not necessary to protect the interests of for goods and services ranging 1 the Government. The Treasury Suspension and from computer hardware to 2 Debarment Official (SDO) is responsible for all expert witnesses. suspension and debarment actions within the Department of the Treasury. The IRS’s internal acquisition procedures further require that the COs always request a tax check on the apparently successful offeror prior to making an award of any dollar value. A tax check is an IRS process that accesses and uses taxpayer return information that is available only to the IRS to support the Government’s determination of an offeror’s eligibility to receive an award. At the time of our review, as shown in Figure 1, the IRS’s process to conduct a tax check on a successful offeror was a multistep process. 1. The CO e-mails a designated Procurement Office Point of Contact (POC). 2. The POC searches a database of contractors with delinquent Federal tax liability, provided by the Chief Financial Officer. This database is updated on a weekly basis. If a tax check is completed more than five business days prior to making an award, the CO should conduct a second tax check to ensure that the offeror’s tax compliance status is still accurate. 3. If the POC identifies a tax delinquency, the tax check result is validated by contacting the IRS Small Business/Self-Employed