Federal Contracting: Opportunities to Improve Compliance with Regulations and Enhance Tax Collections

The federal government obligated approximately $507 billion on contracts in fiscal year 2017. Businesses, including federal contractors, pay billions of dollars in taxes each year. Some businesses, however, do not pay owed taxes, contributing to what is known as the tax gap. Federal contractors owe some of the taxes that contribute to the tax gap, and, since 2015, federal law prohibits agencies, under certain circumstances, from using appropriated funds to contract with those who have qualifying tax debt. The IRS also has authority to levy certain payments of contractors with qualifying federal tax debt.

GAO was asked to review issues related to federal contractors and tax debt. Among other things, GAO examined whether, in calendar years 2015 and 2016, (1) selected federal agencies had control activities that ensured contractors' reported federal tax debts were considered before contract award and (2) the IRS levied selected federal contractors' payments. GAO analyzed contract and IRS data from 2015 and 2016 (the most-recent data available), reviewed five agencies that represent 51 percent of contract obligations, and reviewed seven awards to contractors reporting tax debt.

The five selected agencies GAO reviewed have control activities—such as policies and procedures—to help ensure they consider qualifying federal tax debts as defined by Federal Acquisition Regulation (FAR) § 52.209-11 and § 52.209-5 before awarding contracts. However, these controls were potentially ineffective in ensuring compliance with relevant laws and regulations. According to GAO's analysis, in 2015 and 2016 the Departments of Energy, Health and Human Services, and Veterans Affairs, and the Army and Navy, awarded 1,849 contracts to contractors that reported qualifying federal tax debts, such as delinquent debts over $3,500 (see table). When a contractor reports qualifying tax debts under these regulations, the contracting officer must take several actions, including notifying the agency suspension and debarment official (SDO). However, SDOs at all five agencies told GAO they did not receive any notifications of contractors reporting tax debt in this period. As a result, these contracts may have been awarded without potential required actions, indicating potential violations of federal regulations and, in some cases, appropriations law.

GAO's nongeneralizable review of seven contracts illustrate two cases where contractors were collectively awarded more than $510,000 in contract obligations while having more than $250,000 in tax debt, including tax penalties for willful noncompliance with tax laws. Officials from the selected agencies were unable to explain why their control activities were potentially ineffective without reviewing each contract to determine whether FAR requirements were applicable and whether control activities were applied. Understanding why existing control activities did not operate effectively will help these agencies enhance controls to avoid future misuses of appropriated funds. GAO plans to provide information on the instances of potential noncompliance GAO identified to the selected agencies.

Of the over 2,700 executive-branch contractors GAO found to have likely qualifying federal tax debt as of December 2016, the Internal Revenue Service (IRS) had identified over 2,000 for levy through its automated Federal Payment Levy Program (FPLP). However, the FPLP cannot levy all contractors because not all payments are processed by the system the FPLP uses. The data the IRS receives from agencies does not allow it to readily identify payments made using other systems—information the IRS needs for agency outreach about inclusion in the FPLP and to more quickly initiate a manual levy. With this information, the IRS may be able to improve its levy capacity and enhance tax collections.

GAO is making 12 recommendations, including that selected agencies enhance controls for considering contactors' qualifying federal tax debt before awarding contracts and that the IRS evaluate options to obtain comprehensive contract-payment information. All the agencies generally agreed with GAO's recommendations.

The federal government obligated approximately $507 billion on contracts  and awarded about 537,000 new contracts to over 100,000 contractors in  fiscal year 2017. Businesses, including those that receive federal  contracts, are responsible for paying their share of taxes including  employment and income tax, which results in billions of dollars in tax  revenue each year. Some taxes are not paid voluntarily and on time,  however, leading to what is known as a “tax gap.” A portion of the tax  gap is owed by individuals and businesses receiving payments from the  federal government. In its most-recent estimate, the Internal Revenue  Service (IRS) stated that the average annual gross tax gap was $458  billion for tax years 2008–2010. The IRS estimated that it would  eventually collect $52 billion of this amount, leaving a net tax gap of $406  billion in unpaid taxes for each of those 3 years. In an effort to help close  the tax gap, Congress gave the IRS the authority to collect assets or  payments, including federal contract payments, to collect unpaid taxes,  and these collections are referred to as a levy. IRS enforcement of tax laws is vital to promote compliance by giving taxpayers confidence that  others are paying their fair share. Because of the challenges that the IRS  faces in its enforcement of tax laws, we continue to include it as a high- risk area.

Our prior work, as well as that of the Treasury Inspector General for Tax  Administration, identified thousands of federal contractors that abused the  federal tax system, causing significant loss of tax revenue. For example,  in 2007 we found that thousands of federal contractors had substantial  amounts of unpaid federal taxes. Specifically, about 63,000 federal  contractors owed approximately $7 billion in unpaid taxes. At the time of  that report, there was no requirement that contracting officers consider  most instances of unpaid federal taxes prior to the award.

Since as early as 2008, under the Federal Acquisition Regulation (FAR),  certain prospective contractors have been required to report delinquent  federal tax. Furthermore, since fiscal year 2015, appropriations statutes  have included a government-wide provision prohibiting federal agencies,  under certain circumstances, from using appropriated funds to enter into  contracts with corporations that have certain federal tax debts.  Specifically, fiscal years 2015 and 2016 appropriations statutes contain a  government-wide provision stating that funds may not be used to enter  into a contract with any corporation that has any unpaid federal tax  liability (1) that has been assessed, (2) for which all judicial and  administrative remedies have been exhausted or have lapsed, and (3)  that is not being paid in a timely manner pursuant to an agreement with  the authority responsible for collecting the tax liability, when the awarding  agency is aware of the unpaid tax liability, unless a federal agency has  considered suspension or debarment of the corporation and has made a  determination that further action is not necessary to protect the interests  of the government. To implement the appropriations requirement and  avoid misuse of appropriated funds, in 2016 the FAR was revised to  require contracting officers to include a new tax debt–related provision in  all solicitations regardless of contract value. Further, the revised  regulation required that prospective contractors respond to this tax  provision in the System for Award Management (SAM) as part of their  annual representations and certifications.

You asked us to review issues related to federal contractors and tax debt.  This report first examines the extent to which, in calendar years 2015 and  2016, (1) selected federal agencies had control activities that ensured  contractors’ reported federal tax debts were considered before contract  award. The remainder of the report assesses the same period; however,  it focuses on all executive-branch agencies and examines the extent to  which (2) federal contracts were awarded to contractors with federal tax  debt, including the characteristics of those contracts and contractors, and  (3) the IRS identified selected federal contractors’ payments for levy.

To identify the extent to which selected federal agencies had control  activities that ensured contractors’ reported federal tax debts were  considered before contract award (including task orders), we analyzed  contract obligation information from the Federal Procurement Data  System–Next Generation (FPDS-NG) and selected for our review the five  agencies with the highest contract obligations associated with contract  awards for 2015 and 2016. We selected this 2-year period because it  included the most-recent contract award data available at the time of our  review and covered a period in which the newest FAR tax-debt provision  was implemented. Specifically, we selected the three civilian agencies  with the highest obligations—the Departments of Energy (DOE), Health  and Human Services (HHS), and Veterans Affairs (VA)—and, within the  Department of Defense, the two agencies with the highest obligations— the Departments of the Army and Navy. The results of our review of  these five selected agencies are not generalizable to all federal agencies.  However, these five selected agencies awarded about 51 percent of  contract obligations associated with contract awards for 2015 and 2016.

We reviewed the selected agencies’ policies and procedures related to  awarding contracts to prospective contractors that report they owe certain  tax debts and we met with agency officials to discuss how their agencies  consider contractors’ reported federal tax debt before awarding a federal  contract. Specifically, we met with agency officials who supervise  contracting officers, such as the Head of Contracting Activity, Director of  Contracts, or other contracting managers, policy and procurement  officials, and suspension and debarment officials (SDO) from the selected  agencies. Additionally, we reviewed and analyzed applicable laws,  regulations, and policy memorandums, as well as applicable policies and  procedures, from DOE, HHS, VA, the Navy, and the Army for considering  contractors’ reported federal tax debt when awarding federal contracts.  We interviewed officials from the Office of Management and Budget’s  Office of Federal Procurement Policy, the Interagency Suspension and  Debarment Committee, and the Civilian Agency Acquisition Council to  obtain an understanding of how the law is implemented through the FAR.  We also met with the General Services Administration (GSA) to obtain an  understanding of SAM, including the registration of prospective  contractors and their reporting of certain federal tax debt pursuant to the  representation requirement of FAR § 52.209-11 and the certification  requirement of § 52.209-5.

As part of this work, we analyzed FPDS-NG contract award and SAM  contractor registration data to identify instances where contractors  reported having certain federal tax debt and received a contract award.  Specifically, we electronically matched FPDS-NG contract award data  from 2015 and 2016 to the relevant contractors’ SAM registration. We  then analyzed the relevant contractors’ representations and certifications  most recently updated in SAM before the relevant contract award to  identify all instances where contractors reported that they had a federal  tax debt as defined in FAR § 52.209-11 or § 52.209-5 within our time  frame. From the resulting list, we identified the contracts that selected  agencies awarded to contractors that reported these federal tax debts. In  addition, we reviewed a nongeneralizable sample of 15 contract awards  from the five selected agencies to provide illustrative examples of the  extent to which these agencies’ control activities ensured required actions  were taken before contract award. These 15 contract awards were  selected based on numerous criteria, including the prospective  contractors’ (1) responses under FAR § 52.209-11 or § 52.209-5 in SAM  and (2) having tax debts as of December 15, 2016, that were not in a  repayment agreement with the IRS. Further, when selecting contract  awards that had a § 52.209-5 certification we considered only contractors  having at least $3,500 in tax debts as of December 15, 2016. We  reviewed seven contract awards made to contractors that reported that  they had certain tax debts and eight contract awards made to contractors  that reported that they did not have certain tax debts as part of their §  52.209-11 representations and § 52.209-5 certifications in SAM. For  these 15 contract awards, we reviewed pre–contract award  documentation and copies of historical tax transcripts and other records,  such as revenue officers’ notes obtained from the IRS.

To determine the extent to which executive-branch agency contracts were  awarded in 2015 and 2016 to federal contractors with federal tax debt and  characteristics of those contract awards and contractors, we electronically  matched data from FPDS-NG on contract awards with (1) data from SAM  on contractors’ representations and certifications of their tax debt and (2)  data from the IRS on tax debts owed by these contractors. Our analysis  included all of the executive-branch agencies. Further, our analysis  describes some characteristics of these debts, including the total amount  of debt outstanding and whether or not contractors had unpaid taxes that  were timely paid or appeared to be finally determined as of December 15,  2016, which was the time of our data extract. We also analyzed whether  contractors that were assessed unpaid taxes in the IRS data reported  having certain tax debts as part of their § 52.209-11 representations and  § 52.209-5 certifications in SAM. We reviewed the most-recent § 52.209- 11 representation and § 52.209-5 certification prior to the relevant  contract award.

To determine the extent to which the IRS identified selected federal  contractors’ payments for levy in 2015 and 2016, we identified the  population of contractors that owed taxes at the time they received a  contract award during our period by matching FPDS-NG, SAM, and IRS  Unpaid Assessment data, as described above. We then determined  whether the tax debt had ever been identified for levy by the Federal  Payment Levy Program (FPLP) as of December 15, 2016, according to  IRS data. We also interviewed IRS officials about levying federal  contractor payments and reviewed Internal Revenue Manual sections and  other relevant documents from the IRS.

We assessed the reliability of FPDS-NG, SAM, and IRS Unpaid  Assessment data by reviewing relevant documentation, interviewing  knowledgeable agency officials, and performing electronic testing to  determine the validity of specific data elements in the databases and  determined that these databases were sufficiently reliable for the  purposes of our reporting objectives. For additional details on our scope  and methods, see appendix I.

We conducted this performance audit from February 2017 to April 2019 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Pertinent Regulations Governing Federal Contractors and Tax Debt

The FAR, among other things, sets forth requirements that must be met  before agencies can award contracts to prospective contractors.  Beginning February 26, 2016, contracting officers are required to include  a provision in all contract solicitations that require contractors to report  information about unpaid federal taxes regardless of the contract value.  Specifically, FAR § 52.209-11 incorporates the language from the fiscal  years 2015 and 2016 appropriations acts that prohibits the government  from entering into contracts with corporations with unpaid federal taxes  that have been assessed,  for which all judicial and administrative remedies have been  exhausted or have lapsed, and  that are not being paid in a timely manner pursuant to an agreement  with the authority responsible for collecting the tax liability, where the awarding agency is aware of the unpaid tax liability, unless an agency has considered suspension or debarment of the  corporation and made a determination such action is not necessary to  protect the interests of the government.

If the prospective contractor reports having unpaid federal taxes under  this provision, the contracting officer must  request additional information from the prospective contractor;  in accordance with agency procedures, notify the officials responsible  for debarment and suspension actions, commonly referred to as the  suspension and debarment officials (SDO); and not award to the corporation unless an agency SDO has considered  suspension or debarment of the corporation and has made a  determination that suspension or debarment is not necessary to  protect the interests of the government.

Additionally, the FAR requires that contracting officers include in certain  contract solicitations another provision for prospective contractors to  report delinquent taxes. Specifically, contracting officers are also required  to include FAR § 52.209-5 in contract solicitations in which the contract  value is expected to exceed the simplified acquisition threshold, which  was generally $150,000 at the time of our review, under which  prospective contractors report delinquent federal taxes owed. This  requirement has been in place since 2008. Under this provision, the  prospective contractor must report whether it or any of its principals have,  within the preceding 3-year period, been notified of “delinquent federal  taxes” in an amount that exceeds $3,500. For purposes of this  provision, “delinquent federal taxes” are those for which  the tax liability is finally determined and assessed, with no pending  administrative or judicial challenge, and all judicial appeal rights are  exhausted; and  the taxpayer is delinquent in making payment, unless enforced  collection action is precluded (the taxpayer is not delinquent if the  taxpayer has entered into an installment agreement and is making  timely payments in compliance with the agreement terms).

If the prospective contractor reports having federal tax debt under this  provision, the contracting officer must (1) request additional information  from the prospective contractor and (2) in accordance with agency  procedures notify the officials responsible for debarment and suspension  actions. Further, the contracting officer is not required to receive a  suspension and debarment determination before contract award for tax  debt reported under this certification.

In addition, the FAR generally requires prospective contractors to register  in SAM before a contract can be awarded. As part of registering in SAM,  prospective contractors must make up to 54 representations and  certifications, which must be updated as necessary but at least  annually. Included among these is the federal tax debt FAR § 52.209-11  representation and § 52.209-5 certification. The representations and  certifications in SAM must be kept current, accurate, and complete.

Unpaid federal tax debts reported under FAR § 52.209-11 and delinquent  federal taxes reported under § 52.209-5 do not automatically disqualify  the prospective contractor from receiving a contract, but rather are used  as part of the contracting officer’s responsibility determination of the  prospective contractor. Contracting officers rely on the contractors’  representations and certifications in SAM to identify qualifying federal tax  debts. Federal tax law generally prohibits the IRS from disclosing  taxpayer data to other federal agencies for the purpose of determining  whether potential contractors owe qualifying federal tax debt. As a  result, contracting officers cannot verify a contractor’s tax-debt status by  obtaining taxpayer information directly from the IRS without the  contractor’s prior consent.

Pre–Contract Award Requirements Related to Tax Debt

In general, the federal pre–contract award process consists of the agency  identifying its needs for goods and services, creating an acquisition plan,  posting a solicitation that allows interested contractors to submit bids or  proposals, and assessing and selecting a prospective contractor to meet  its needs. Agency contracting personnel have a variety of pre–contract  award responsibilities. As one of these responsibilities, the contracting  officer is to identify the FAR provisions and clauses required to be  included in contract solicitations based on various criteria, such as the  contract type and contract value. For example, contracts expected to be  above the simplified acquisition threshold are required to include §  52.209-5 in the solicitation. After the solicitation is issued and prospective  contractors’ offers are obtained, the contracting officer, among other  tasks, generally must verify that the prospective contractor is registered in  SAM, and that the contractor is not suspended or excluded from doing  business with the federal government prior to contract award.

The contracting officer must also determine whether the prospective  contractor is “responsible.” FAR § 9.104-1 requires that to be determined  responsible, prospective contractors must have adequate financial  resources to perform the contract, or the ability to obtain them; have a  satisfactory record of integrity and business ethics; and be otherwise  qualified and eligible to receive an award under applicable laws and  regulations, among other things. As part of the responsibility  determination, the contracting officer must also access, review, and  document the prospective contractor’s applicable representations and  certifications, including qualifying federal tax debt reported under §  52.209-11 and § 52.209-5. See figure 1 for an overview of the pre– contract award requirements related to tax debt.

The IRS, which is located in the Department of the Treasury (Treasury)  and led by a commissioner, may collect assets or payments, including  federal contract payments to collect unpaid taxes, and these collections  are referred to as a “levy.” The IRS will usually levy only after notifying  the taxpayer in writing of the amount of the unpaid tax and the right of the  taxpayer to request a hearing within a 30-day period before the levy  occurs. However, if the taxpayer is a federal contractor, the taxpayer is  given the opportunity for the hearing within a reasonable period after the  levy. One way the IRS levies federal contractor payments is through the  FPLP, which is an automated program that can collect overdue taxes  through a continuous levy on certain federal payments processed by  Treasury’s Bureau of the Fiscal Service (Fiscal Service). In addition to the  FPLP, the IRS can also levy federal contractors manually. Specifically,  the IRS may levy federal contractor payments directly from federal  agencies to collect unpaid taxes.

Selected Agencies Have Controls to Identify Contractors’ Reported Tax Debt, but the Controls Were Potentially Ineffective at Ensuring Compliance with Regulations

Agencies Have Control Activities to Identify Contractors That Reported Qualifying Federal Tax Debt

The five selected agencies we examined have established control  activities to varying degrees to help contracting officers comply with  federal laws and regulations related to identifying prospective contractors’  reported qualifying federal tax debt. These control activities include the  following:

Class Deviations: The five agencies issued class deviations from the  FAR to implement the tax debt–related appropriations restriction prior  to February 26, 2016. These class deviations generally required  contracting officers to include an alternative provision in solicitations  and, if a contractor reported having qualifying tax debt, to not award  the contract without a written suspension and debarment  determination from an agency SDO. For example, the Department of  Defense, DOE, HHS, and VA issued class deviations as early as 2012  that required contracting officers to take two actions: (1) insert an  alternate provision when issuing solicitations using appropriated funds  and (2) obtain an SDO determination that suspension or debarment is  not necessary to protect the interests of the government before  awarding a contract to a contractor who reported qualifying tax  debts.

Policies and Procedures: VA, DOE, and HHS issued policies and  procedures to varying degrees that generally direct contracting  officers to the relevant sections of the FAR when assessing contractor  responsibility. For example, both VA and DOE issued policies or  guidance on determining contractor responsibility and including §  52.209-5 in solicitations where the value was expected to exceed the  simplified acquisition threshold. In addition, agency officials who  supervise contracting officers told us that contracting officers use  contractors’ representations and certifications in SAM to identify  qualifying federal tax debts and document their review of the  information when determining contractor responsibility before contract  award. For example, one of the Navy’s responsibility-determination  templates requires contracting officers to notate that they verified, in  SAM, that the prospective contractor did not report qualifying federal  tax debts under FAR § 52.209-5.

Further, the five agencies have also issued procedures outlining the  SDO suspension and debarment referral and review process, as  required by federal regulations. For example, HHS issued guidance  on suspension and debarment that includes (1) relevant contact  information, (2) required or optional documentation to include, and (3)  potential causes for suspension or debarment, such as the contractor  reported qualifying federal tax debt. Both the Army and Navy issued  policy alerts informing contracting officers of the February 26, 2016,  effective date of FAR § 52.209-11 and the requirement that an SDO  determine that suspension or debarment is not necessary to protect  the interests of the government before awarding a contract to a  contractor who reported having tax debts under this provision.

Contract-File Compliance Tools: The five agencies told us that  contracting officers have tools available that help ensure required  information, including information related to federal tax debt, is  reviewed and documented in contract files. For example, contracting  officer supervisors and policy officials at these agencies told us that  contracting officers use agency contract-writing systems to assist with  identifying and inserting required FAR provisions and clauses in the  contract solicitation. HHS and VA contracting officer supervisors  also told us contracting officers use contract-file checklists to ensure  required FAR provisions and clauses are included in the contract  solicitation. In addition, some of the five selected agencies’ contract- file checklists or memorandums we reviewed generally document that  the contracting officer verified the prospective contractor’s SAM  registration, and suspension and debarment status, and retrieved the  relevant SAM representations and certifications before contract  award. Further, some VA and DOE contract checklists we reviewed  also document that the contracting officer considered tax debts  reported under § 52.209-5 or federal tax debt in general (see fig. 2).

Periodic Compliance Reviews of Samples of Contracts: The five  agencies’ policy officials and contracting officer supervisors we  interviewed told us they generally conduct compliance reviews on a  sample of contract files before and after contract award to ensure that  the required FAR provisions and clauses are inserted in contract  solicitations, including peer-to-peer, management, and legal  compliance reviews. Agency officials also told us this includes  verifying that the contracting officer considered and documented the  prospective contractors’ SAM representations and certifications before  contract award. For example, the Army’s procurement management  review program is designed to ensure regulatory and policy  compliance, among other things, via oversight by a multilevel program  that reviews each contracting activity every 3 years.

Training: DOE and VA provide training that generally discusses  contractor responsibility determinations and references the  requirement that contracting officers inform the SDO when  prospective contractors report that they have qualifying federal tax  debt before contract award. The Department of Defense provides  training on the causes for suspension, and the Navy SDO also  provides training discussing the requirement to notify the SDO when  prospective contractors report qualifying federal tax debt. HHS  suspension and debarment staff we interviewed told us that they  provide general suspension and debarment training that includes  causes for suspension and debarment referrals, such as tax debt.  Further, one Navy contracting office also provides training on inserting  the tax-debt provision in all contract solicitations.

Selected Agencies’ Control Activities Potentially Did Not Ensure Compliance with Requirements Related to Contractors’ Reported Qualifying Tax Debt

We identified 1,849 contracts awarded by the five selected agencies in  2015 and 2016 to contractors that reported qualifying federal tax debt that  potentially should have resulted in these agencies taking required follow- up actions before contract award, such as notifying the agency SDO of  these tax debts. Specifically, according to our analysis of FPDS-NG and  SAM data for this period, the five selected agencies potentially should  have notified an SDO prior to awarding 1,849 contracts to contractors that  reported having qualifying federal tax debt under their § 52.209-11  representation or § 52.209-5 certification, which we discuss further  below. However, none of the five selected agencies’ SDOs we  interviewed were notified of any instances in which a contracting officer  identified a prospective contractor with these reported qualifying federal  tax debts, and they did not receive any tax debt-related referrals within  this period. Agency officials we interviewed were unable to explain why  the SDOs were not notified without reviewing each of the 1,849 contract  files. Because referrals were not made to an SDO before awarding the  contract, agencies’ control activities do not appear to have operated  effectively to identify contractors’ reported tax debt and to consider  suspension and debarment when required. As a result, these contracts  may have been awarded without required actions being taken—a  potential violation of federal regulations and, in some cases, the  Antideficiency Act.

In addition, we reviewed a nongeneralizable sample of seven contracts  where prospective contractors reported qualifying tax debts before  receiving contract awards and identified two illustrative examples where  agency control activities did not ensure regulatory compliance. The tax  debts for these contractors were collectively more than $250,000, and  historical IRS tax records include instances where the IRS had  assessed a Trust Fund Recovery Penalty (TFRP), indicating willful failure  to collect, account for, or pay taxes owed. Nonetheless, the contracting  officers awarded these two contracts without taking required follow-up  actions for these awards. These contractors were awarded more than  $510,000 in contract obligations in total, in 2015 and 2016.

Four Agencies Did Not Take Potentially Required Actions before Contract Award When Contractors Reported Qualifying Federal Tax Debt under FAR § 52.209-11

In our analysis of the five selected agencies, we identified 143 contracts  at four of the agencies that were awarded to contractors who reported  qualifying federal tax debt in SAM under § 52.209-11 from February 26,  2016, through December 31, 2016. Table 1 shows the number of  contract awards to contractors who reported qualifying federal tax debt  under § 52.209-11 from February 26, 2016, through December 31, 2016,  by selected agency. We did not identify contracts awarded by DOE during  this period to similar contractors, and thus did not assess the operational  effectiveness of the agency’s controls activities for compliance with its  relevant class deviation.

However, none of the four agencies that awarded these 143 contracts  took required follow-up actions that potentially should have resulted from  the contractor’s reporting qualifying tax debt before contract award. As  mentioned earlier, when prospective contractors report having qualifying  federal tax debt under § 52.209-11, the FAR requires that contracting  officers (1) request that the contractor provide such additional information  as the contractor deems necessary in order to demonstrate responsibility;  (2) notify, in accordance with agency procedures, the SDO of the  contractor’s reported qualifying federal tax debt, before award, for  suspension and debarment review; and (3) not award the contract unless  an SDO determines that further action is not required to protect the  interest of the government. The FAR also requires that contracting  officers possess or obtain information sufficient to determine whether the  prospective contractor is responsible. As mentioned above, qualifying  federal tax debts reported under this representation do not automatically  disqualify the prospective contractor from receiving a contract, but rather  are used as part of the contracting officer’s responsibility determination of  the prospective contractor. In our review of contract-file documentation for  seven contract awards to contractors that reported they had qualifying tax  debt under either provision, we could determine for one case under this  representation that the contracting officer did not take required follow-up  actions to ensure compliance with federal regulations. We highlight this  example in the sidebar to the left.

Agency contracting officer supervisors we interviewed from the four  selected agencies that awarded the 143 contracts discussed earlier told  us that they were not aware of any instances in which a contracting officer  identified a prospective contractor’s reported qualifying federal tax debt  under § 52.209-11 and notified the SDO during this period. As mentioned,  the SDOs we interviewed at these four agencies told us that they did not receive, nor were they aware of, any notifications to review prospective  contractors that reported having qualifying federal tax debt during this  period. All four of these SDOs told us that they track notifications to the  SDO manually or via a case-management tracking system. Further, none  of the agency officials we interviewed at the selected agencies were able  to identify specific reasons a contracting officer would not notify an SDO  of reported qualifying federal tax debt as required.

Five Agencies Did Not Take Potentially Required Actions before Contract Award When Contractors Reported Qualifying Federal Tax Debt under FAR § 52.209-5

Our analysis of the five selected agencies also identified 1,706 contracts  awarded in 2015 and 2016 to contractors that reported having qualifying  federal tax debt in SAM under § 52.209-5. Table 2 shows the number of  contract awards to contractors that reported having qualifying tax debt  under § 52.209-5 in 2015 and 2016, by selected agency.

However, none of the five agencies that awarded these 1,706 contracts  took required follow-up actions that potentially should have resulted from  the contractor’s reporting qualifying tax debt before contract award. As  mentioned above, as early as 2008, contractors were required to certify  whether they had qualifying federal tax debt if, within the preceding 3-year  period, they or any of their principals had been notified of “delinquent  federal taxes” in an amount that exceeds $3,500 for which the liability  remained unsatisfied. Also as previously mentioned, tax debts must only  be reported under this provision if the tax liability is finally determined with  no pending administrative or judicial challenge, all judicial appeal rights  have been exhausted, enforcement action is not precluded, and the taxpayer is not in compliance with an installment repayment agreement.  Qualifying federal tax debts reported under this certification do not  automatically disqualify the prospective contractor from receiving a  contract, but rather are used as part of the contracting officer’s  responsibility determination. Further, contracting officers are to insert this  FAR provision in solicitations where the value of the contract is expected  to be greater than the simplified acquisition threshold. If a prospective  contractor reports qualifying tax debt, contracting officers must request  such additional information as the contractor deems necessary in order to  demonstrate responsibility, and, prior to proceeding with the award, notify  the agency’s SDO in accordance with agency procedures.

While we cannot readily determine whether all 1,706 contract awards  were out of compliance with federal regulations due to limitations in the  data, as discussed earlier, our review of seven contract awards with  reported qualifying tax debt under either provision identified an instance  under this certification where we confirmed that the solicitation was above  the simplified acquisition threshold and the contracting officer did not take  follow-up actions to ensure compliance with federal regulations (see  sidebar to the left).

As mentioned, agency contracting officer supervisors we interviewed from  the five agencies told us that they were not aware of any instances in  which a contracting officer identified a prospective contractor’s reporting  qualifying federal tax debt under § 52.209-5 and notified the SDO during  this period. Further, SDOs we interviewed at these five agencies told us  that they did not receive, nor were they aware of, any notifications  identifying prospective contractors that reported qualifying federal tax  debt under this FAR provision during this period. As mentioned earlier,  four out of the five SDOs told us that they track SDO notifications, and  none of the agency officials we interviewed identified specific reasons a  contracting officer would not notify an SDO as required.

When discussing these 1,849 contracts with agency officials, they were  unable to explain whether or why their control activities did not operate effectively to ensure compliance with applicable federal laws and  regulations. To do so, some of these officials told us that they would need  to review the contract files for each of the 1,849 instances of potential  noncompliance we identified. Specifically, the agency must confirm that  (1) a solicitation was issued, and (2) the estimated value of the contract  award was above the simplified acquisition threshold, when applicable, to  determine whether the regulatory requirements applied. If the regulatory  requirement applied to the contract award, the agency must then  determine why their control activities did not operate effectively to ensure  compliance. We plan to refer these contract awards to the appropriate  agency’s Inspector General for review, and share them with the agencies  at that time as well. Understanding why existing control activities  potentially did not operate effectively will help these agencies ensure they  are taking necessary steps to protect the interests of the government and  avoid the misuse of appropriated funds in the future.

The five selected agencies told us, in response to our review, they plan to  take actions to improve control activities to identify contractors’ federal tax  debts reported under § 52.209-11 and § 52.209-5. These planned actions  include issuing new guidance, providing additional training, verifying that  contracting officers considered reported tax debts in postaward  compliance reviews, and updating preaward contract-file checklists to  ensure compliance with federal laws and regulations.

Some of the selected agencies also noted that the FAR requirements  apply to all executive agencies and that a broader solution to accessing,  identifying, and reviewing qualifying federal tax debt reported in SAM  representations and certifications could be useful. Agency officials  explained that contracting officers have to individually identify and review  each relevant representation and certification—up to 54 representations  and certifications—to become aware of the prospective contractor’s  response before contract award. Further, agency officials told us that  contractors’ responses are not easily identifiable in SAM and contracting  officers can miss the contractor’s reported qualifying federal tax debt  under § 52.209-11 and § 52.209-5. As mentioned earlier, accessing,  reviewing and documenting the SAM representations and certifications is  one part of the preaward contracting process and is one of the actions  contracting officers are required to take as part of the contract award  process. The SAM tax-related representations and certifications that must  be reviewed before contract award are determined by various factors,  including contract award value. See figure 3 for an overview of the  general process to access, review, and identify prospective contractors’  qualifying tax debts reported in SAM.

As mentioned earlier, GSA manages SAM, and while the GSA official we  interviewed acknowledged the challenges raised by the selected  agencies, this official noted that SAM representation and certification data  are accessible to contracting officers for the purpose of reviewing  qualifying federal tax debt reported by prospective contractors and taking  any required follow-up actions. Nevertheless, this official noted that GSA  is in the process of upgrading SAM, which may include changes to the  representations and certifications. Standards for Internal Control in the  Federal Government state that management should use high-quality  information to achieve its objectives and that management should  consider the accessibility of information and make revisions when  necessary so that the necessary information is accessible. As GSA  makes planned upgrades to SAM, it is in a position to consider  improvements to SAM users’ experience with representations and  certifications that may help executive-branch agency contracting officers  more easily identify contractors’ reported qualifying federal tax debt under  § 52.209-11 and § 52.209-5.

Federal Contracts Were Awarded to Thousands of Contractors with Potentially Qualifying Federal Tax Debt

Of the 120,000 federal contractors that were awarded contracts in 2015  and 2016, our analysis found that over 4,600 of them had unpaid taxes  at the time they received the award. These contractors collectively owed  $1.8 billion in unpaid taxes as of December 15, 2016, and received  contract award obligations totaling $17 billion. We could not confirm,  however, whether at the time of the contract awards these contractors’  unpaid taxes met the relevant legal definitions of qualifying federal tax  debt under § 52.209-11 and § 52.209-5 due to limitations in the data.  However, we were able to determine which debts likely met the definition  of qualifying tax debt, and to determine those that did not meet the  definition, as of December 15, 2016—a date after the contract award.  Specifically, over 2,700 of these contractors had unpaid taxes that were  all likely qualifying federal tax debt as of December 15, 2016. In  addition, about 1,900 had unpaid taxes that were not qualifying federal  tax debt. As previously noted, agencies are required by the FAR to  consider contractors’ reported qualifying federal tax debt before awarding  contracts. Generally, as mentioned earlier, agencies are not restricted  from awarding contracts to contractors that report having qualifying  federal tax debt if an agency SDO determines suspension and debarment  of the contractor is not necessary to protect the interests of the  government. We describe characteristics of the unpaid taxes and contract  awards for these 4,600 contractors with unpaid taxes below. (See fig. 4.)

Contractors Owed Unpaid Taxes at the Time They Received Contract Awards

We identified over 4,600 federal contractors that had unpaid taxes at the  time they received a contract award in 2015 and 2016. However, we  could not confirm whether these contractors’ unpaid taxes met the  relevant legal definitions under § 52.209-11 and § 52.209-5 at the time of  the contract award due to limitations in the data we obtained, as  previously described. These 4,600 contractors received about $17 billion  in contract awards and owed $1.8 billion in unpaid taxes as of December  15, 2016. The characteristics of these 4,600 federal contractors with  unpaid taxes in December 15, 2016, are discussed below:

Average and Total Debt Associated with Contractors with Unpaid  Taxes: About 1,000 contractors had unpaid taxes of at least $51,000  each. These contractors collectively owed about 98 percent of the  $1.8 billion in unpaid taxes we identified. About 1,900 contractors  each had unpaid taxes between $3,500 and $51,000. They  collectively owed about $30 million in taxes. About 1,700 contractors  each had unpaid taxes over $100 but less than $3,500. They  collectively owed about $2 million in taxes.

Chief Financial Officers (CFO) Act Agencies Associated with  Contractors with Unpaid Taxes: The 4,600 contractors with unpaid  taxes as of December 15, 2016, received contract awards in our 2- year period from one or more of all 24 CFO Act agencies. Almost  1,500 contractors received contract awards from more than one  agency. These contractors owed almost $600 million in unpaid taxes  as of December 15, 2016 (see sidebar to the left). Although, as  discussed above, we reviewed the control activities of five agencies,  all executive-branch agencies are required by the FAR to consider the  qualifying federal tax debt of prospective contractors before making  an award. If a contractor is receiving awards from multiple federal  agencies, the suspension and debarment determination of any  agency SDO is relevant to other agencies considering the same  contractor for an award. For example, as discussed earlier, we  identified 1,849 contract awards by five selected agencies to  contractors that reported qualifying tax debt before contract award,  and none of these agency SDOs were notified. There were some  instances where more than one agency made a contract award to the  same contractor that reported having qualifying tax debts. These  obligations might not have been made by multiple agencies if one of  these agencies’ SDOs had been notified of the reported tax debt as  required.

Contractors with Unpaid Taxes and Associated with TFRP: We  also identified about 600 contractors whose tax records indicate the  IRS assessed a TFRP to the owner or officers associated with the  contractor, as shown in the sidebar to the left. As mentioned  previously, a TFRP indicates willful failure to collect, account for, or  pay certain taxes owed. These 600 contractors had $200 million in  unpaid taxes in December 2016. Having a TFRP does not disqualify a  contractor from obtaining a contract, but it can be considered when  the agency determines a prospective contractor’s responsibility under  the FAR, according to agency contracting and suspension and  debarment officials (SDO) we spoke with.

Over 2,700 Federal Contractors Likely Had Qualifying Federal Tax Debt on December 15, 2016, but Few Reported Qualifying Tax Debt in SAM

We found that over 2,700 contractors owed about $350 million in unpaid  taxes that likely met the relevant legal criteria for qualifying federal tax  debt on December 15, 2016. However, few of those contractors reported  having qualifying tax debts in SAM. Because the contracts were awarded  before December 2016, we cannot determine whether these unpaid taxes  met the relevant legal criteria under § 52.209-11 and § 52.209-5 for  qualifying federal tax debt at the time of the contract award. However,  because these tax debts were unpaid as of December 15, 2016, we  determined they were likely qualifying tax debts because they were not  being timely paid consistent with a collection agreement and appeared to  be finally determined. These tax debts amounted to about 20 percent of  the $1.8 billion in unpaid taxes we identified. The 2,700 contractors  received almost $5 billion of the $17 billion in federal contract obligations  for awards made to contractors with unpaid taxes.

We examined the SAM § 52.209-11 representations and § 52.209-5  certifications for these over 2,700 contractors to determine whether they  reported this debt as qualifying federal tax debt. We identified about 2,000  contractors that had completed a representation or certification, and,  when applicable, met the tax-debt threshold for § 52.209-5. Of those  2,000, 93 percent (1,848) did not report their debt as qualifying federal tax  debt, compared to fewer than 150 who did report qualifying federal tax  debt under one or both tax-debt provisions (see sidebar to the left).  Specifically:

Over 1,300 contractors completed the § 52.209-11 representation in  SAM (which took effect on Feb. 26, 2016), and less than two dozen of these contractors reported having qualifying federal tax debt under §  52.209-11 before receiving contract awards.

Nearly 1,400 contractors completed the § 52.209-5 certification in  SAM and as of December 15, 2016, had unpaid taxes over the  certification threshold. Fewer than 140 of these contractors reported  under § 52.209-5 that they had been notified of qualifying federal tax  debt above $3,500 before receiving a contract award.

The accuracy of contractors’ reported tax-debt status in SAM is critical to  federal agencies’ ability to identify reported qualifying federal tax debt  owed by prospective contractors. As described earlier, contracting officers  generally rely on the contractors’ representations and certifications in  SAM to identify qualifying federal tax debts. Contracting officers generally  cannot verify a contractor’s tax-debt status by obtaining taxpayer  information directly from the IRS without the contractor’s prior consent,  because federal tax law generally prohibits the IRS from disclosing  taxpayer data for this purpose. While contracting officers cannot  independently verify whether federal contractors accurately report  qualifying federal tax debt, any qualifying federal tax debt may be  available for levy by the IRS, as discussed further below.

About 1,900 Federal Contractors Owed Unpaid Taxes That Were Not Qualifying Federal Tax Debt as of December 15, 2016

We found that about 1,900 contractors had about $1.4 billion in unpaid  taxes that did not meet the relevant criteria for qualifying federal tax debt  on December 15, 2016, a date after which their contracts were  awarded. Specifically, these unpaid taxes were not finally determined or  were being paid in a timely manner consistent with a collection agreement  as of December 15, 2016. If the status of these debts was the same at  the time of contract award, then the contractors did not need to report  them during the contracting process and agencies were not required to  consider the debts before awarding the contract. Although we were able  to determine that these unpaid taxes did not meet the legal definitions of  qualifying federal tax debt as of December 15, 2016, we could not  determine whether this was also the case at the time of the contract  award. Federal agencies obligated $12 billion to these 1,900 contractors  between 2015 and 2016, for awards made while the contractors owed  taxes.

Of these 1,900 contractors, about 1,400 owed $1.3 billion in unpaid taxes  that were not finally determined on December 15, 2016. About 700  contractors owed $90 million in unpaid taxes that were being timely paid  consistent with a collection agreement in December 15, 2016, due to  installment agreements or offers-in-compromise accepted by the IRS.

The IRS Identified Most Federal Contractors with Unpaid Taxes for Levy, but the FPLP Cannot Comprehensively Identify All Federal Contractors for Levy

Through its FPLP, the IRS identified for levy most contractors we found to  have likely qualifying federal tax debt, according to our analysis of IRS  data. Specifically, of the over 2,700 executive-branch agency  contractors with likely qualifying federal tax debt as of December 15,  2016, discussed above, the IRS identified over 2,000 for levy through the  FPLP, a program administered by Treasury’s Fiscal Service. These  2,000 contractors collectively owed about $300 million of the roughly  $350 million in likely qualifying federal tax debt.

According to IRS data, the FPLP did not identify almost 700 of the 2,700  contractors we found to have likely qualifying federal tax debt as of  December 15, 2016. These 700 contractors owed about $50 million in  likely qualifying federal taxes. IRS officials responsible for the FPLP told  us that they would need to review these instances to determine whether  the contractors were eligible for levy as of December 15, 2016, and if so  why they were not identified by the FPLP. We plan to share these cases  with the IRS to determine whether the contractors were eligible for levy at  that time and take any appropriate enforcement action.

It is possible that the IRS did not identify these 700 contractors for levy  through the FPLP because the IRS did not have access to their  payments. The FPLP was developed as an automatic and efficient means  for the IRS to collect delinquent taxes as payments were processed  through the Fiscal Service. Accordingly, the FPLP can only levy federal  agency payments processed by the Fiscal Service, but not all federal  agencies process their payments through the Fiscal Service. As a result,  payments disbursed by other means—such as payments that agencies  make directly to contractors—are not included in the FPLP, although they  can be levied by the IRS through other manual methods (see fig. 5).

The IRS cannot readily identify which payments are made outside of the  Fiscal Service, and such payments cannot be levied through the FPLP.  While the IRS receives some information about contractor payments from  agencies, it does not receive information that would allow it to  comprehensively determine which payments are processed by the Fiscal  Service and can be levied through the FPLP and which payments are not  and must be levied manually. Specifically, executive-branch agencies,  including those that do and do not process payments through the Fiscal  Service, are required to report information to the IRS about some federal  contracts through the IRS Form 8596 information return. Reporting  agencies identify themselves on the Form 8596, and the IRS uses data  from this form to identify federal contractors for potential levy. However,  the Form 8596 information return lacks information on whether payments  to federal contractors are processed by the Fiscal Service or through  some other means. Without visibility into the payments made outside the  Fiscal Service, the IRS is limited in its ability to identify nonparticipating  agencies for outreach about the efficiencies of leveraging the FPLP to  collect contractors’ unpaid taxes, as opposed to manual levies. Further,  without information on agencies’ payment methods, the IRS cannot  quickly identify payments that must be levied through manual methods.  Expanding Form 8596 to include payment-method information could help  the IRS identify which agencies to target for outreach and avoid delays in  identifying contractor payments requiring manual levy. IRS officials told us  the IRS has the legal authority to expand Form 8596 reporting  requirements and would have to determine whether a change to add  information on Fiscal Service processing of agency payments was  warranted.

In addition, we found the IRS is missing an opportunity to further enhance  the FPLP levy process for certain contractor payments. Within the FPLP,  the IRS has an expedited process to levy federal contractors and, as  noted above, the IRS uses data from Form 8596 to identify federal  contractors for potential levy. However, Form 8596 reporting  requirements do not apply to federal contracts for which the amount  obligated is $25,000 or less. When Form 8596 reporting requirements  were initially established, this threshold was consistent with Federal  Procurement Data System (FPDS) contract reporting requirements for  agencies at the time. However, subsequent FAR amendments revised the  reporting threshold from contracts over $25,000 to contracts over the  micropurchase amount, which is currently set at $10,000. Because the  Form 8596 reporting threshold is higher than FPDS reporting  requirements, information about contracts in the $10,000 to $25,000  range is available in FPDS, but is not required to be shared with the IRS.  Such information could help the IRS identify and use expedited levy  procedures on federal contractors with contract obligations in the  $10,000–$25,000 range. According to the IRS, an amendment to its  regulations would be needed to align the Form 8596 reporting threshold  with FPDS reporting requirements.

Standards for Internal Control in the Federal Government state that  management should use high-quality information to achieve the entity’s  objectives. To do this, management obtains relevant data from reliable  internal and external sources, processes the obtained data into high- quality information, and uses high-quality information to make informed  decisions and evaluate the entity’s performance in achieving key  objectives. Without additional information about and from the agencies  making these payments, the IRS may be missing opportunities to identify  federal contractors for levy to enhance tax collections.

Considering prospective contractors’ reported qualifying federal tax  debt—in accordance with federal regulations—helps ensure federal  agencies comply with federal appropriations law, supports the integrity of  the contracting process, and protects the interests of the government.

The five federal agencies we reviewed had control activities, such as  policies, procedures, and training, to help ensure contracting officers  consider prospective contractors’ reported qualifying federal tax debt  before making an award. However, these controls were not always  effective in ensuring that potentially required actions were taken.  Determining the reasons the contracts we identified were awarded  without appropriate consideration of contractors’ reported qualifying  federal tax debt and taking additional steps to ensure tax debts are  appropriately considered in future contract award decisions is necessary  to ensure contracting opportunities are appropriately awarded. Improving  accessibility of SAM representation and certification data to allow  contracting officers to more easily identify and consider reported  qualifying federal tax debt before contract award can help contracting  officers meet required steps, such as referring them to the SDO.

Federal tax law generally prohibits the IRS from disclosing taxpayer data  to other federal agencies for the purpose of determining whether potential  contractors owe qualifying federal tax debt. Consequently, federal  agencies generally rely on contractors’ reported qualifying federal tax  debt to detect any tax debt owed by their potential contractors. However,  agencies cannot independently verify the accuracy of contractors’  reported qualifying federal tax debts when awarding contracts. This  limitation heightens the importance of the IRS’s levy process for  recouping revenue from businesses that have failed to pay their taxes in a  timely way but are receiving federal contract dollars, and the recoupment  of revenue can help reduce the tax gap. Accordingly, the IRS has  opportunities to use available data to improve its detection and collection  of qualifying federal tax debts owed by federal contractors, which can  help enhance revenue collection and compliance.

We are making 12 recommendations—two each to the Army, HHS, the  Navy, and VA; one each to DOE and GSA; and two to the IRS.

The Senior Procurement Executive for the Department of the Army  should review the contracts we identified as being awarded to contractors  that reported qualifying federal tax debt under FAR § 52.209-11 and (1)  determine whether the contracting officer was required to consider the  contractor’s reported tax debt; if so, (2) determine the reasons controls to  identify and refer these contractors to the SDO before contract award did  not operate effectively; and (3) design or modify controls to help ensure  compliance with applicable regulations. (Recommendation 1)

The Senior Procurement Executive for HHS should review the contracts  we identified as being awarded to contractors that reported qualifying  federal tax debt under FAR § 52.209-11 and (1) determine whether the  contracting officer was required to consider the contractor’s reported tax  debt; if so, (2) determine the reasons controls to identify and refer these  contractors to the SDO before contract award did not operate effectively;  and (3) design or modify controls to help ensure compliance with  applicable regulations. (Recommendation 2)

The Senior Procurement Executive for the Department of the Navy should  review the contracts we identified as being awarded to contractors that  reported qualifying federal tax debt under FAR § 52.209-11 and (1)  determine whether the contracting officer was required to consider the  contractor’s reported tax debt; if so, (2) determine the reasons controls to  identify and refer these contractors to the SDO before contract award did  not operate effectively; and (3) design or modify controls to help ensure  compliance with applicable regulations. (Recommendation 3)

The Senior Procurement Executive for VA should review the contracts we  identified as being awarded to contractors that reported qualifying federal  tax debt under FAR § 52.209-11 and (1) determine whether the  contracting officer was required to consider the contractor’s reported tax  debt; if so, (2) determine the reasons controls to identify and refer these  contractors to the SDO before contract award did not operate effectively;  and (3) design or modify controls to help ensure compliance with  applicable regulations. (Recommendation 4)

The Senior Procurement Executive for the Department of the Army  should review the contracts we identified as being awarded to contractors  that reported qualifying federal tax debt under FAR § 52.209-5.  Specifically, the Senior Procurement Executive should determine whether  each contract value was expected to exceed the simplified acquisition  threshold when the solicitation was issued and, if so, (1) determine the  reasons controls to identify and notify the SDO of these contractors  before contract award did not operate effectively and (2) design or modify  controls to help ensure compliance with applicable regulations.  (Recommendation 5)

The Senior Procurement Executive for DOE should review the contracts  we identified as being awarded to contractors that reported qualifying  federal tax debt under FAR § 52.209-5. Specifically, the Senior  Procurement Executive should determine whether each contract value  was expected to exceed the simplified acquisition threshold when the  solicitation was issued and, if so, (1) determine the reasons controls to  identify and notify the SDO of these contractors before contract award did  not operate effectively and (2) design or modify controls to help ensure  compliance with applicable regulations. (Recommendation 6)

The Senior Procurement Executive for HHS should review the contracts  we identified as being awarded to contractors that reported qualifying  federal tax debt under FAR § 52.209-5. Specifically, the Senior  Procurement Executive should determine whether each contract value  was expected to exceed the simplified acquisition threshold when the  solicitation was issued and, if so, (1) determine the reasons controls to  identify and notify the SDO of these contractors before contract award did  not operate effectively and (2) design or modify controls to help ensure  compliance with applicable regulations. (Recommendation 7)

The Senior Procurement Executive for the Department of the Navy should  review the contracts we identified as being awarded to contractors that  reported qualifying federal tax debt under FAR § 52.209-5. Specifically,  the Senior Procurement Executive should determine whether each  contract value was expected to exceed the simplified acquisition  threshold when the solicitation was issued and, if so, (1) determine the  reasons controls to identify and notify the SDO of these contractors  before contract award did not operate effectively and (2) design or modify  controls to help ensure compliance with applicable regulations.  (Recommendation 8)

The Senior Procurement Executive for VA should review the contracts we  identified as being awarded to contractors that reported qualifying federal  tax debt under FAR § 52.209-5. Specifically, the Senior Procurement  Executive should determine whether each contract value was expected to  exceed the simplified acquisition threshold when the solicitation was  issued and, if so, (1) determine the reasons controls to identify and notify  the SDO of these contractors before contract award did not operate  effectively and (2) design or modify controls to help ensure compliance  with applicable regulations. (Recommendation 9)

The Administrator of GSA should coordinate with the appropriate SAM  users, such as agency procurement officials, to identify potential updates  to facilitate contracting officers’ identification of contractors that report  qualifying federal tax debt under the § 52.209-11 representation and §  52.209-5 certification. (Recommendation 10)

The Commissioner of the IRS should evaluate options to identify which  contract payments federal agencies expect to be processed by the Fiscal  Service, including amending the reporting requirements for Form 8596 to  require federal agencies to include information about whether contractor  payments are expected to be processed by the Fiscal Service. If the IRS  amends Form 8596 reporting requirements, the IRS should (1)  systematically note this information on taxpayer accounts to help the IRS  identify which payments may be available for levy through the FPLP and  which payments may be available for other (i.e., manual) levies and (2)  analyze these data to help identify agencies that do not participate in the  FPLP and inform its efforts to expand the number of agencies  participating in the FPLP. (Recommendation 11)

The Commissioner of the IRS should evaluate options to obtain  comprehensive contract payment data above the existing FPDS-NG  reporting threshold of $10,000, including assessing the costs and benefits  of changing the current threshold for contracts that agencies are required  to report to the IRS through Form 8596 information returns to be  consistent with the existing reporting threshold for FPDS-NG, determine  whether regulatory revisions are necessary, and change the reporting  threshold, if appropriate. (Recommendation 12)

We provided a draft of this report to the Department of Defense (for the  Army and Navy), HHS, VA, DOE, GSA, the IRS and the Office of  Management and Budget for review and comment. In written comments  (reproduced in appendixes II–VI), the Department of Defense, HHS, VA,  DOE, and GSA agreed with our recommendations. The IRS generally  agreed with our recommendations (see appendix VII). The Office of  Management and Budget had no comments. HHS and the Navy provided  technical comments, which we incorporated as appropriate.

The Department of Defense, HHS, VA, and DOE noted that they plan to  review the contract awards identified in our review. In addition, several  agencies described steps they will be taking to address our  recommendations. For example, the Department of Defense noted that it  plans to take corrective actions or add controls as necessary. HHS noted  that it will assess internal controls and take appropriate action. VA noted  that it will provide an action plan. DOE noted that it will design or modify  controls for regulatory compliance, if necessary. GSA noted that it will  work with the procurement community through established governance  channels to identify potential approaches for drawing contracting officers’  attention to qualifying federal tax-debt information reported in SAM. The  IRS noted its commitment to obtaining accurate information on potential  levy sources and, accordingly, indicated it will review the benefits of  expanding the information included on its Form 8596, along with other  alternatives, to determine their feasibility, effectiveness, and relative  burden. The IRS further noted that it will review the potential benefits and  costs that would result from changing the current reporting threshold for  contract payments, and submit its findings to the Office of IRS Chief  Counsel to consider this addition to the IRS Priority Guidance Plan.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Health and Human Services,  the Secretary of Veterans Affairs, the Secretary of Defense, the Secretary  of the Navy, the Secretary of the Army, the Secretary of Energy, the  Administrator of GSA, the Commissioner of Internal Revenue, the  Director of the Office of Management and Budget, and other interested  parties. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-6722 or shear@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix VIII.

Appendix I: Objectives, Scope, and Methodology

This report first examines the extent to which, in calendar years 2015 and  2016, (1) selected federal agencies had control activities that ensured  contractors’ reported federal tax debts were considered before contract  award. The remainder of the report assesses the same period; however,  it focuses on all executive-branch agencies and examines the extent to  which (2) federal contracts were awarded to contractors with federal tax  debt, including the characteristics of those contracts and contractors, and  (3) the Internal Revenue Service (IRS) identified selected federal  contractors’ payments for levy.

To identify the extent to which selected federal agencies had control  activities that ensured contractors’ reported federal tax debts were  considered before contract award (including task orders), we analyzed  contract obligation information from the Federal Procurement Data  System–Next Generation (FPDS-NG) and selected for our review the  five agencies with the highest contract obligations associated with  contract awards for 2015 and 2016, which is the period when contract  award data were available at the time of our review. In addition, the  revised FAR tax-debt provision went into effect during this period.  Specifically, we selected the three civilian agencies with the highest  obligations—the Departments of Energy (DOE), Health and Human  Services (HHS), and Veterans Affairs (VA)—and, within the Department  of Defense, the two agencies with the highest obligations—the  Departments of the Army and Navy. The results of our review of these  five selected agencies are not generalizable to all federal agencies.  However, these five selected agencies awarded about 51 percent of  contract obligations associated with contract awards for 2015 and 2016,  which were the most-recent contract award data available at the time of  our review, and during this period the newest Federal Acquisition  Regulation (FAR) tax-debt provision was implemented. We reviewed  selected agencies’ policies and procedures related to awarding contracts  to prospective contractors that report they owe certain tax debts and met  with agency officials to discuss how their agencies consider contractors’  reported federal tax debt before awarding a federal contract. Specifically,  we met with agency officials who supervise contracting officers, such as  the Head of Contracting Activity, Director of Contracts, or other  contracting managers, policy and procurement officials, and suspension  and debarment officials from the selected agencies. Additionally, we  reviewed and analyzed applicable laws and regulations, as well as  applicable policies and procedures from DOE, HHS, VA, the Navy, and  the Army for considering contractors’ reported federal tax debt when  awarding federal contracts. In addition, we interviewed staff from the  Office of Management and Budget’s Office of Federal Procurement Policy  and officials from the Interagency Suspension and Debarment  Committee, and the Civilian Agency Acquisition Council to obtain an  understanding of how the law is implemented through the FAR. We also  met with the General Services Administration (GSA) to obtain an  understanding of the System for Award Management (SAM), including  the registration of prospective contractors and their reporting of certain  federal tax debt to the representation requirement of FAR § 52.209-11  and the certification of § 52.209-5.

As part of this work, we analyzed FPDS-NG contract award and SAM  contractor registration data to identify instances where contractors  reported having certain qualifying federal tax debt and received a contract  award (including task orders). Specifically, we electronically matched  FPDS-NG contract award data from 2015 and 2016 to the relevant  contractors’ SAM registration. We then analyzed the relevant contractors’  representations and certifications most recently updated in SAM before  the relevant contract award to identify all instances where contractors  reported that they had a federal tax debt as defined in FAR § 52.209-11  or § 52.209-5 within our time frame. From the resulting list, we identified  the contracts that selected agencies awarded to contractors that reported  these qualifying federal tax debts. In addition, we reviewed a  nongeneralizable sample of 15 contract awards selected from the five  selected agencies to provide illustrative examples of the extent to which  these agencies’ control activities ensured required actions were taken  before contract award. These 15 contract awards were selected based on  numerous criteria, including the prospective contractors’ (1) responses  under FAR § 52.209-11 or § 52.209-5 in SAM before the new contract  award, and (2) having tax debts as of December 15, 2016, that were not  in a repayment agreement with the IRS. Further, when selecting  contract awards that had a § 52.209-5 certification, we considered only  contractors having at least $3,500 in tax debts as of December 15, 2016.

We identified the relevant contractor population and then considered the  following factors simultaneously to select the 15 case examples: unique contractor Taxpayer Identification Number across selected agency contracting office locations,  the amount of tax debt owed by the prospective contractor,  the amount of award obligations, and  IRS assessment of a Trust Fund Recovery Penalty (TFRP).

We selected case examples that represent a variety of these factors. We  reviewed seven contract awards made to contractors that reported that  they had certain tax debts and eight contract awards made to contractors  that reported that they did not have certain tax debts as part of their §  52.209-11 representations and § 52.209-5 certifications in SAM. For  these 15 contract awards, we reviewed pre–contract award  documentation, which included tax debt–related representations and  certifications retrieved by the selected agencies from SAM, and copies of  historical tax transcripts and other records, such as revenue officers’  notes obtained from the IRS. For the case examples presented in this  report, we rounded tax debt and contract obligation amounts, did not  identify the awarding agency, and did not meet with awarding agency  officials to discuss each contract award to protect sensitive taxpayer  information.

To determine the extent to which executive-branch agency contracts were  awarded in 2015 and 2016 to federal contractors with federal tax debt,  and characteristics of those contract awards and contractors, we  electronically matched data from FPDS-NG on contract awards (including  task orders) for all executive agencies with (1) data from SAM on  contractors’ representations and certifications of their tax debt, and (2)  data from the IRS on tax debts owed by these contractors. Specifically,  we used the Data Universal Numbering System number to match data  from FPDS-NG with contractor registration data from SAM to obtain  additional information on these contractors, such as the contractors’  Taxpayer Identification Numbers and their representations and  certifications of tax debt. Using the contractor Taxpayer Identification  Number from SAM, we then matched our list of contractors with IRS data  to identify our population of contractors that received a contract award  and had unpaid federal tax debts. Our analysis included all of the  executive-branch agencies. Further, our analysis describes some of  characteristics of these debts, including the total amount of unpaid taxes,  whether the contractors had a TFRP, and whether or not contractors had  unpaid taxes that were timely paid or appeared to be finally determined,  as of December 15, 2016, which was the time of our data extract. We  also analyzed whether contractors that were assessed unpaid taxes in  the IRS data reported having certain tax debts as part of their § 52.209- 11 representations and § 52.209-5 certifications in SAM. We reviewed the  most-recent § 52.209-11 representation and § 52.209-5 certification prior  to the relevant contract award. Our analysis may understate the  population of contractors with tax debt to the extent that contractors  repaid their tax debts before the timing of our data extract. Specifically,  our analysis does not include any contractors that may have owed federal  taxes at the time of a new contract award during this period, but that paid  or otherwise resolved their tax debts before December 15, 2016.  Additionally, our analysis focuses on contract awards made in 2015 and  2016, and not contract modifications made during this period. In 2015 and  2016, federal agencies obligated $400 billion in modifications to contracts  made in 2014 or earlier, almost half of all federal contract obligations in  this period. We identify contractors who potentially may have had federal  tax debt meeting the definitions of tax debt under FAR § 52.209-11 and §  52.209-5 before the contract award, but cannot verify whether that was  the case.

To determine the extent to which the IRS identified selected federal  contractors’ payments made for levy in 2015 and 2016, we identified the  population of contractors that owed taxes at the same time they received  a contract award during our period by matching FPDS-NG, SAM, and IRS  Unpaid Assessment data, as described above. We then determined  whether the tax debt had ever been levied or blocked by the Federal  Payment Levy Program (FPLP) as of December 15, 2016, according to  IRS data. We also interviewed IRS officials about levying federal  contractor payments and reviewed Internal Revenue Manual sections and  other relevant documents from the IRS.

We assessed the reliability of FPDS-NG, SAM, and IRS Unpaid  Assessment data by reviewing relevant documentation, interviewing  knowledgeable agency officials, and performing electronic testing to  determine the validity of specific data elements in the databases. We  determined that these databases were sufficiently reliable for the  purposes of our reporting objectives.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from the Department of Health and Human Services

Appendix IV: Comments from the Department of Veterans Affairs

Appendix V: Comments from the Department of Energy

Appendix VI: Comments from the General Services Administration

Appendix VII: Comments from the Internal Revenue Service

Appendix VIII: GAO Contact and Staff Acknowledgments

In additional to the individual named above, Jonathon Oldmixon  (Assistant Director), Gloria Proa (Analyst-in-Charge), Jennifer Felder, and  Albert Sim made significant contributions to this report. Also contributing  to this report were Scott Hiromoto, Barbara Lewis, Heather Miller, James  Murphy, and Elizabeth Wood.

Businesses are responsible for paying taxes and must report their tax debts if they want federal contracts. Agencies are supposed to consider these debts before awarding contracts.

However, we reviewed the Departments of Energy, Health and Human Services, and Veterans Affairs, as well as the Army and Navy, and found that they may have inappropriately awarded more than 1,800 contracts to businesses with tax debts in 2015 and 2016.

We recommended that these agencies enhance their processes for reviewing tax debt before awarding federal contracts.