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The Internal Revenue Service has been doing business with nearly 1,200 vendors that owe back taxes, including one unnamed contractor that owed a whopping $525 million, a new inspector general's report says.
Altogether, 1,168 IRS vendors owed back taxes totaling $589 million as of July 2012, according to the report released Tuesday. Only 50 were in a payment plan to pay off their debt.
"When the IRS conducts business with vendors that do not comply with federal tax laws, it conveys a contradictory message in relation to its mission to ensure compliance with the tax laws," said J. Russell George, Treasury inspector general for tax administration.
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The IRS checks whether vendors owe back taxes when the agency awards contracts, the IRS said. But the IRS doesn't continuously monitor whether vendors are current in their tax bills after contracts are awarded, the report said.
George has recommended the IRS require an annual tax check for all contractors, but the agency says federal acquisition regulations don't authorize them.
The inspector general's office is prohibited by law from revealing the name of any delinquent vendors, including the one that owed $525 million. The report says most of the back taxes, including the biggest, were delinquent for less than a year.
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The inspector general's office said its report excluded back taxes that were being contested, counting only those that were either agreed to by the taxpayer or ordered by a court.
About 7% of IRS vendors owed back taxes, the report said. However, it suggested the IRS may have been an unwilling business partner with most of them.
For example, the IRS must routinely pay fees to banks and other financial institutions when it orders them to turn over records about taxpayers, the report said. The agency also has to pay filing fees to state and county governments to file tax liens.
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"Thus, even if these entities have unpaid tax debt, the IRS must still use their services," the report said.
The IRS said 863 of the delinquent vendors — or about three-fourths — provided these types of services to the agency.
Federal law authorizes the IRS to withhold government payments to individuals and businesses that owe back taxes, the report said. The federal government can also exclude individuals or companies from doing business with the federal government for a variety of reasons, including failure to perform the terms of a contract or being convicted of a crime, the report said.
The IRS awarded contracts to three vendors that had been excluded from doing business with the federal government, the report said. However, the report said, IRS efforts to prevent such contracts were generally effective.
"The vast majority of vendors that conduct business with the IRS meet their federal tax obligations," the IRS said in a statement. "We appreciate (the inspector general's) acknowledgment that IRS has effective controls in place to prevent suspended and debarred vendors from receiving IRS contracts. We agreed with (the IG's) recommendations and are in the process of implementing them."
—By The Associated Press