Federal Contracting: Opportunities to Improve Compliance with Regulations and Enhance Tax Collections
GAO-19-243
Published: Apr 15, 2019. Publicly Released: May 15, 2019.
Fast Facts
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
Photograph showing the System for Award Management (SAM) website.
Highlights
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.
Recommendations
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.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Army | 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) |
In September 2019, the Army completed its review of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-11. Based on the Army's review, DOD noted that there was a systemic lack of compliance with including the FAR § 52.209-11 clauses in the contracts, suggesting that contracting officers did not always comply with FAR requirements to access, review, and document the prospective contractors' applicable representations and certifications, including qualifying federal tax debt reported under FAR § 52.209-11. In response to these findings and our recommendation, in December 2020, the Army updated its Army Federal Acquisition Regulation Supplement (AFARS) part 5109 to reference Army SDO notification procedures when an offeror represents that it has a delinquent Federal tax liability. Further, in December 2020, Army issued a policy alert to further clarify the link between receiving an affirmative response to FAR § 52.209-11 and coordinating with the SDO as well as to remind COs that failure to take the required steps prior to award may result in a violation of the Antideficiency Act. By updating the AFARs and issuing a policy alert to the contracting staff, the Army has taken important step to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| Department of Health and Human Services | 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) |
In July 2022, HHS told us that it reviewed the contract actions we identified in our report and confirmed that HHS Contracting Officers were required to consider tax debt and notify the Suspension and Debarment Official (SDO) in accordance with FAR § 52.209-11, but did not do so. In determining the reason for these instances of noncompliance, HHS told us that the relevant operating divisions were not aware of the requirement to notify the SDO. To mitigate the risk of reoccurring noncompliance, HHS issued an acquisition alert to reiterate to HHS Contracting Officers the requirement to notify the HHS SDO in accordance with relevant regulations. HHS also updated its Suspension & Debarment Guide in March 2022 to include instructions and procedures for submitting applicable contract actions to the SDO. HHS also told us that relevant operating divisions took action to bring awareness of this issue to their acquisition workforce by adding instructions to their contract file and review checklists, providing additional guidance to their staff, and other actions. By taking these steps, HHS will be better positioned to ensure it is awarding contracts in accordance with federal laws and regulations.
|
| Department of the Navy | 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) |
In August 2019, the Navy completed the review of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-11. The information Navy provided us in response to its review indicates that contractors' representations & certifications were not always included in the files Navy reviewed, suggesting that COs did not always comply with FAR requirements to access, review, and document the prospective contractors' applicable representations and certifications, including qualifying federal tax debt reported under FAR § 52.209-11. Further, Navy identified several cases where the contractor reported tax debt and no action was taken by Navy, indicating the contracting officer did not comply with the requirements of FAR § 52.209-11. In response to these findings and our recommendation, Navy took several actions to help ensure compliance with applicable regulations. Specifically, in May 2019 the Deputy Assistant Secretary of the Navy (Procurement) (DASN(P)) provided a briefing to the Strategic Systems Programs contracting leadership related to awareness of contractors with reported tax debt. Further, in June 2020, DASN(P) issued a reminder of the FAR § 52.209-11 requirements in a Policy Push. Finally, DASN(P) updated its procurement performance management assessment program check list to include verification of FAR § 52.209-11, which teams use to perform contract file review in support of assessing regulatory compliance. By briefing key staff, issuing a reminder of the FAR requirements, and updating its checklist, Navy has taken important steps to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| Department of Veterans Affairs | 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) |
In November 2019, VA noted that it had completed the review of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-11. The information VA provided in response to its review indicates that the controls to identify contractors with tax debt and notify the SDO prior to award did not operate effectively. Specifically, contracting officers (CO) were not adequately reviewing and documenting their review of contractor representations and certifications, and COs were not aware of the Federal Acquisition Regulation § 9.104-05 regarding actions COs need to take when tax debt is identified. In response to these findings and our recommendation, VA took several actions to help ensure compliance with applicable regulations. Specifically, in the beginning of fiscal year 2020, VA began utilizing FedDataCheck service, which includes a reporting function and an email alert when a contract is awarded to a contractor with tax debt under FAR § 52.209-11 to manage vendor tax delinquency. Further, in February 2020 the Deputy Senior Procurement Executive (SPE) issued an Acquisition Insider update regarding contracting officers' responsibilities related to contractors with reported tax debt FAR § 52.209-11. Lastly, in February 2020, a notification on behalf of the SPE was sent to VA Heads of Contracting Activities (HCA) to raise awareness of the Acquisition Insider update and a new tool available to COs, and to direct HCAs to ensure compliance with FAR requirements. By issuing a reminder of the FAR requirements and making use of a new tool for COs, VA has taken important steps to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| Department of the Army | 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) |
In September 2019, the Army completed its review of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-5. Based on the Army's review, DOD noted that there was a systemic lack of compliance with including the FAR § 52.209-5 clauses in the contracts, suggesting that contracting officers did not always comply with FAR requirements to access, review, and document the prospective contractors' applicable representations and certifications, including qualifying federal tax debt reported under FAR § 52.209-5. In response to these findings and our recommendation, in January 2020, the Army required contracting officials to use the Robotic Process Automation Contractors Responsibility Determination "Bot" to satisfy that the prospective contractor meets the applicable standards in FAR § 9.104. The bot automates the process to collect and format publicly available data from various sources regarding prospective contractor responsibility matters to Army contracting officers, including the representations made under FAR § 52.209-5. Additionally, in January 2020, the Army revised its guidance (the Army Federal Acquisition Regulation Supplement or AFARS) and issued a policy alert on the use of the Bot. Further, in December 2020, the Army updated its AFARS part 5109 to reference Army SDO notification procedures when an offeror represents that it has a delinquent Federal tax liability. In addition, in December 2020, Army issued a policy alert to further clarify the link between receiving an affirmative response to FAR § 52.209-5 and coordinating with the SDO and reminding COs that failure to take the required steps prior to award may result in a violation of the Antideficiency Act. Further, in January 2021, the Army provided a copy of its updated Procurement Management Review (PMR) toolkit (i.e., checklist) that included a requirement for the contracting officer to document his or her responsibility determination in the contract file for actions above the simplified acquisition threshold and include information obtained from the bot to support the prospective contractor's responsibility determination, which includes the certification to qualifying federal tax debt under FAR § 52.209-5. By implementing the use of the Bot, updating the AFARS, issuing a policy alert to the contracting staff, and updating its checklist on the use of the bot, the Army has taken important step to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| Department of Energy | 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) |
On December 31, 2019, the Senior Procurement Executives for the Department of Energy (DOE) and the National Nuclear Security Administration reviewed the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-5 to determine whether each contract value was expected to exceed the simplified acquisition threshold when the solicitation was issued and, if so, (1) determine the reason(s) controls to identify and notify the SDO of the theses contractors before contract award did not operate effectively; and (2) design or modify controls to help ensure compliance with applicable regulations. Based on DOE's review, the estimated value of each contract solicitation was below the simplified acquisition threshold; therefore, no controls needed to be modified or designed to help ensure compliance with applicable regulations at the time of DOE's review.
|
| Department of Health and Human Services | 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) |
In July 2022, HHS told us that it reviewed the contract actions we identified in our report and confirmed one contract action that was anticipated to be above the simplified acquisition threshold at the time of solicitation - meaning that the HHS Contracting Officer was required to notify the Suspension and Debarment Official (SDO) in accordance with FAR § 52.209-5, but did not do so. HHS officials told us that the relevant operating division issued notices to their acquisition workforce to ensure that reviews of contractor representations and certifications are consistently conducted to identify contractor tax debt, and to provide proper SDO notification instruction to prevent reoccurrence. To mitigate the risk of reoccurring noncompliance, HHS also issued an acquisition alert to reiterate to HHS Contracting Officers the requirement to notify the HHS SDO in accordance with relevant regulations. HHS also updated its Suspension & Debarment Guide in March 2022 to include instructions and procedures for submitting applicable contract actions to the SDO. By taking these steps, HHS will be better positioned to ensure it is awarding contracts in accordance with federal laws and regulations.
|
| Department of the Navy | 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) |
In August 2019, the Navy completed the review of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-5. For the contractors Navy found to exceed the simplified acquisition threshold when the solicitation was issued, they noted several instances where contractors' representations & certifications were not always included in the files Navy reviewed, suggesting that contracting officers did not always comply with FAR requirements to access, review, and document the prospective contractors' applicable representations and certifications, including qualifying federal tax debt reported under FAR § 52.209-5. Further, Navy identified several cases where the contractor reported tax debt and no action was taken by Navy, indicating the contracting officer did not comply with the requirements of FAR § 52.209-5. In response to these findings and our recommendation, Navy took several actions to help ensure compliance with applicable regulations. Specifically, in May 2019 the Deputy Assistant Secretary of the Navy (Procurement) (DASN(P)) provided a briefing to the Strategic Systems Programs contracting leadership related to awareness of contractors with reported tax debt. Further, in June 2020, DASN(P) issued a reminder of the FAR § 52.209-5 requirements in a Policy Push. Finally, DASN(P) updated its procurement performance management assessment program check list to include verification of FAR § 52.209-5, which teams use to perform contract file review in support of assessing regulatory compliance. By briefing key staff, issuing a reminder of the FAR requirements, and updating its checklist, Navy has taken important steps to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| Department of Veterans Affairs | 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) |
In November 2019, VA noted that it had completed the review of a sample of the contracts we identified as being awarded to contractors that reported qualifying federal tax debt under FAR § 52.209-5. The information VA provided in response to its review indicates that the controls to identify contractors with tax debt and notify the SDO prior to award did not operate effectively. Specifically, contracting officers (CO) were not adequately reviewing and documenting their review of contractor representations and certifications, and COs were not aware of the Federal Acquisition Regulation § 9.104-5 regarding actions COs need to take when tax debt is identified. In response to these findings and our recommendation, VA took several actions to help ensure compliance with applicable regulations. Specifically, in the beginning of fiscal year 2020, VA began utilizing FedDataCheck service, which includes a reporting function and an email alert when a contract is awarded to a contractor with tax debt under FAR § 52.209-5, to manage vendor tax delinquency. Further, in February 2020 the Deputy Senior Procurement Executive (SPE) issued an Acquisition Insider update regarding contracting officers' responsibilities related to contractors with reported tax debt FAR § 52.209-5. Lastly, in February 2020, a notification on behalf of the SPE was sent to VA Heads of Contracting Activities (HCA) to raise awareness of the Acquisition Insider update and a new tool available to COs, and to direct HCAs to ensure compliance with FAR requirements. By issuing a reminder of the FAR requirements and making use of a new tool for COs, VA has taken important steps to ensure compliance with laws and regulations on federal contractors with tax debts.
|
| General Services Administration | 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) |
In response to this recommendation, GSA worked with agency officials to gather input on system changes that would best help agency procurement officials easily identify entity records that contain relevant information. GSA then developed, tested, and implemented a set of updated designs for SAM search results, headers, and displays that make it easier for contracting officers to identify contractors that report qualifying federal tax debt under § 52.209-11 and § 52.209-5. These new designs were incorporated in SAM in April and May 2021. Specifically, the updated SAM design includes an entity registration header with a link to the § 52.209-11 representation and § 52.209-5 certification responses. The § 52.209-11 and § 52.209-5 responses are in bold, and affirmative responses appear in blue text, which makes them easier to identify. By coordinating with SAM users and making these updates, as we recommended, GSA has helped make it easier for contracting officers to identify contractors' federal tax debts, which is critical for ensuring compliance with FAR § 52.209-11 and § 52.209-5.
|
| Internal Revenue Service | 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) |
In October 2019, GAO met with representatives from IRS and the Bureau of the Fiscal Service to facilitate an exchange of information on non-treasury disbursing offices, which include federal offices that do not process payments through the Fiscal Service. Further, while IRS told GAO it did not think amending the reporting requirements for Form 8596 would have an impact on the collection process, IRS also told GAO that it had worked with Fiscal Service to improve the process used to match federal tax debts against eligible payments via "enhanced matching logic." Specifically, IRS stated that in October 2019, Fiscal Service began using the enhanced matching algorithm to match all payments against the list of delinquent business master file taxpayers, prior to the release of any disbursements to payees. IRS anticipates that this will have a significant impact on the number of payments to federal contractors that are sent to the FPLP for potential levy. By using available data to improve its detection and collection of qualifying federal tax debts owed by federal contractors, IRS is better positioned to enhance revenue collection and compliance with relevant federal tax laws.
|
| Internal Revenue Service | 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) |
In March 2022, IRS provided us evidence that it had explored options for obtaining more comprehensive contract information from FPDS-NG, as we recommended. Specifically, IRS officials obtained a sample of FPGS-NG data on contractors whose contracts fell between the $10k and $25k thresholds. IRS found that less than 1% of these contractors' tax accounts were in collection status, and most had data flags or other IRS filings indicating they were available for collection as appropriate. Consequently, IRS concluded that expanding the current reporting thresholds or revising relevant regulations would not identify a significant number of additional tax delinquencies for expedited collection. Thus, IRS determined it would not pursue these changes to the reporting thresholds or relevant regulatory changes. By taking these steps, IRS has better assurance that is not missing opportunities to collect unpaid taxes owed by entities with contracts between the $10k and $25k reporting thresholds.
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