In 2016, the federal government awarded $17 billion to contractors that owed a collective $1.8 billion in taxes.
Since 2008, the Federal Acquisition Regulation (FAR) has required contractors to report delinquent federal taxes of over $3,500 on their bids if the contract value is above $150,000. In 2015, Congress strengthened the requirement by prohibiting federal agencies from awarding contracts to tax delinquents unless they “made a determination [that] such action is not necessary to protect the interests of the government.”
Despite these federal laws, the Government Accountability Office (GAO) recently released a report that found that thousands of tax delinquent contractors are still winning lucrative federal contracts and the systems that federal agencies have in place to prevent that are clearly inadequate.
GAO looked at the processes of five federal entities – the Departments of Energy, Health and Human Services, and Veterans Affairs, along with the Army and Navy. Because the federal regulations do not automatically disqualify tax delinquents from winning federal contracts, the screening process is highly dependent on the federal contracting officer who reviews the files to ensure the contractor meets all federal requirements – including being up-to-date on their taxes. If there is an issue, the federal contracting officer is supposed to flag it for the suspension and debarment official (SDO) – the federal official in charge of suspending or barring companies from federal contract eligibility.
At the five federal agencies examined, GAO found 1,849 contracts that were awarded to contractors that owed at least $3,500 in unpaid taxes. Yet, there was not a single instance where the contracting officer flagged the issue for the SDO.
GAO also looked at the issue government-wide and found that over 4,600 federal contractors were awarded federal funds despite owing taxes. They won $17 billion in funds despite owing a whopping $1.8 billion in taxes.
About 1,000 of those contractors owed more than $51,000 each.
Two contractors alone won $510,000 in federal funds despite owing more than $250,000 in taxes and IRS tagging them with a designation indicating a “willful failure to collect, account for, or pay taxes owed.”
Another contractor won $450,000 in federal funds despite owing hundreds of thousands in tax debt.
GAO found that all 24 major federal agencies awarded at least one contract to a tax delinquent – and 1,500 of the tax delinquents won contracts from multiple agencies.
Tax dollars for tax cheats is a truly systemic problem.
One tool that the federal government has is the IRS’s ability to levy federal payments from those that owe taxes. The IRS was able to levy federal payments from about 2,000 of the contractors which owed a collective $300 million in debt. While it’s certainly an improvement – it probably gives taxpayers little solace that their tax dollars are being redirected to pay off the tax debts of deadbeat contractors. It would be much better if those contractors did not receive federal payments at all.
Unfortunately, tax law prohibits the IRS from sharing tax delinquency data with other federal agencies to help them avoid awarding contracts to tax cheats. There are certainly a lot more improvements that the agencies can make to avoid paying delinquents. Acknowledging the serious problems with the current system, the agencies evaluated by GAO said that they planned on “issuing new guidance, providing additional training, verifying that contracting officers considered reported tax debts in post-award compliance reviews, and updating pre-award contract-file checklists to ensure compliance with federal laws and regulations”
Taxpayers don’t ask for a lot (okay…maybe some do). But the least we can ask for is that federal agencies comply with a law that keeps our tax dollars out of the pocketbooks of contractors that don’t pay taxes at all.
