Federal Contracting:

Opportunities to Improve Compliance with Regulations and Enhance Tax Collections

GAO-19-243: Published: Apr 15, 2019. Publicly Released: May 15, 2019.

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Rebecca Shea
(202) 512-6722
shear@gao.gov

 

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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.

Contractors report their debts through the System for Award Management

U:\Work in Process\Teams\FY19 FAIS Reports\101695_243\Graphics\Fast Facts\Fast_Facts_v03_101695_mcm.png

Photograph showing the System for Award Management (SAM) website.

 

Additional Materials:

Contact:

Rebecca Shea
(202) 512-6722
shear@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

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.

Number of Contract Awards to Contractors Reporting Qualifying Tax Debt under FAR § 52.209-11 and § 52.209-5 in Calendar Years 2015 and 2016, by Selected Agency

Agency

Contract awards

under § 52.209-11

Contract awards

under § 52.209-5

Department of Defense, Army

73

324

Department of Defense, Navy

54

266

Department of Energy

0

22

Department of Health and Human Services

7

78

Department of Veterans Affairs

9

1,016

Total

143

1,706

Source: GAO analysis of General Services Administration data. | GAO-19-243

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.

Why GAO Did This Study

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.

What GAO Recommends

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.

For more information, contact Rebecca Shea at (202) 512-6722 or shear@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Defense: Department of the Army

  2. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Senior Procurement Executive for the Department of Health and Human Services (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)

    Agency Affected: Department of Health and Human Services

  3. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Defense: Department of the Navy

  4. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Senior Procurement Executive for the Department of Veterans Affairs (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)

    Agency Affected: Department of Veterans Affairs

  5. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Defense: Department of the Army

  6. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Senior Procurement Executive for the Department of Energy 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)

    Agency Affected: Department of Energy

  7. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Health and Human Services

  8. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Defense: Department of the Navy

  9. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of Veterans Affairs

  10. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator of the General Services Administration should coordinate with the appropriate System for Award Management 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)

    Agency Affected: General Services Administration

  11. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: 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)

    Agency Affected: Department of the Treasury: Internal Revenue Service

  12. Status: Open

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of the IRS should evaluate options to obtain comprehensive contract payment data above the existing Federal Procurement Data System–Next Generation (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)

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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