A new look at an old problem: Contractors who don’t pay their taxes

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The IRS has been making progress towards eliminating a long-standing problem, namely companies who are delinquent in their federal taxes, but that nevertheless received federal contracts. For the most recent figures,  the Federal Drive with Tom Temin spoke to the director in the office of audits at the Treasury Inspector General for Tax Administration, Latoya George.

Interview transcript: 

Tom Temin: Tell us the scope of the problem. You looked at awards between I guess, October 2018 and December 2019, the latest period you could measure. How many contractors? How much did they get in contracts, and what do they owe in taxes?

Latoya George: So we identified 3,978 entities and just included contractors and grantees. They received over that time period $32.9 billion in federal awards while owing $891 million in delinquent federal taxes.

Tom Temin: Yeah, so that’s a pretty substantial number, almost a billion dollars. And when the report says delinquent taxes, does that mean they’re way behind or a year behind? Or is there a specific meaning of delinquency here?

Latoya George: So IRS has standards in their processes, and we didn’t go into that matter of detail in our scope, but they are notifying these contractors and grantees of their tax delinquency. And so once it is reported in the system, then these grantees and contractors have been notified. I will say that we did identify that the average of tax delinquency for the contractors was about 607 days. And for the grantees, we found that average of 474 days.

Tom Temin: Yeah, so it’s at least a year and almost two years.

Latoya George: Correct.

Tom Temin: And its been an ongoing problem for many years, is it your sense that each report it gets a little worse? Or is it just a steady state problem that bedevils the government?

Latoya George: Well, I will say that not my exact area of expertise to say, by month-by-month or even year-by-year, that was included in our scope, but this is something that Congress and IRS are aware of.

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Tom Temin: And how do you go about coming up with the figures? It seems like you’ve got a lot of different databases to compare here.

Latoya George: We did we actually use information in the System for Award Management that contains the contract data. And also the contract data that’s listed on the federal procurement data system. There’s also grant information that’s listed on a publicly available website, USASpending.gov. So we took the information from those databases. And then we compare that to IRS records that detail the type of tax, the age and the delinquency status of individual and business taxpayer accounts.

Tom Temin: And is there any way that you’re aware of for contracting officers to be aware of this down to the individual or grant maker I should say, since we’re including grants and federal contracts. The people that award the grants, are awarded the contract, how do they know this tax status of an entity?

Latoya George: So federal contracting and grant officers do not have direct access to taxpayer information. So they rely on self-certifications that are made by the contractors and grantees within the system. I mentioned earlier, the System for Award Management that any prospective contractor or grantee is required to go into the system and certify that they either did not owe or had not been notified of any delinquent federal taxes. And so once those verifications are made, then the federal contracting and grant officers can go in there and take a look. However, part of our review identified that although some of those contractors and grantees that certify that they did not have tax information, IRS systems identify that they did at the time of the award. And so that shows that without any independent verification of the tax status for the prospective contractors and grantees, then they have to rely on the current self-certification process.

Tom Temin: We’re speaking with Latoya George, she’s a director in the office of audits at the Treasury Inspector General for Tax Administration. So you’re recommending then, you know, the self-certification is not working. And in the report, it mentions that the IRS is making progress on a program called the federal contractor tax check system. What is that and how will that work? And where do they stand on that and what benefits will it have?

Latoya George: That’s a good question. Congress provided the IRS with $30 million to establish this tax check system that you’re referring to. And we did reevaluate the IRS’s plans and their current progress and so they have actually moved forward and have made a lot of progress towards creating the systems they have actually designed the technical system and have prepared to roll out different implementations at different stages of it. However, there are still some concerns by stakeholders over policy and legislative information. This includes just the requirements around tax information disclosure, we have to make sure that we’re keeping taxpayer information protected, and also the ability to share information through IT systems. And so until these processes are identified, then and figured out and IRS cannot complete the implementation of the federal contract tax check system.

Tom Temin: Right, the data sharing among systems that may or may not be protective of privacy that’s a little bit outside of the IRS’ direct control, then, isn’t it?

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Latoya George: Yes, correct.

Tom Temin: And when it’s completed, let’s assume that someday they can figure this out. And it’ll all be working, that would enable a grant maker or a contracting officer to be able to basically check online. Yes, they’re good to go. They’re correct, in that they don’t have a tax delinquency.

Latoya George: So this would allow the actual prospective contractor or grantee to go into the system and request from IRS a certificate saying that the NT did or did not owe seriously delinquent taxes. And from there, that contractor or grantee would provide the information to the receiving federal granting contract and grant officer.

Tom Temin: Right. To the contractor or potential grantee who then would get this certificate via the SAM system from the IRS?

Latoya George: They would request the certificate from the IRS and then be able to upload that information to the SAM system.

Tom Temin: Got it. So it would come directly from the IRS to the entity, and then the entity would put it into SAM, and then there’d be some check that that number was valid.

Latoya George: It would be from there the contracting or grant officer could use that as the certification of whether tax delinquency instead of relying on just the self-certification from the contractor and grantee.

Tom Temin: And just to return to the IRS progress on that system. They have the design and the way it would work figured out. But there’s the data sharing and privacy and taxpayer protective information challenges that they still have to solve.

Latoya George: Yes, correct.

Tom Temin: Any sense of when they could get this all finished up?

Latoya George: Well, the IRS is working with the Office of Management and Budget and other outside entities. There’s also requirements that will need to be updated in the Federal Acquisition Regulation. And so IRS is working towards the IRS and Treasury. However, we can’t say at this time what the exact timeline will be.

Tom Temin: But in the meantime, your office will continue to track this problem of delinquencies and awards.

Latoya George: Yes, we will continue to track IRS’ progress on creating the system.

Eric White: Latoya George is director in the office of audits at the Treasury Inspector General for Tax Administration.

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