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Inspector General Finds 5% Compliance Rate With Regulations on Certain IRS Contracts

9:41 AM, May 23, 2013 • By JERYL BIER
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The Internal Revenue Service has come under heavy criticism from both Republicans and Democrats in recent days after an inspector general's report detailed "inappropriate criteria" used to identify certain applications of mainly conservative organizations for special review resulting in long delays in processing and invasive inquiries. The acting commissioner of the IRS himself admitted to "horrible customer service" and "foolish mistakes." But another report issued by the Treasury Department inspector general just two weeks earlier found that the vetting process for tax-exempt organizations was not the only flawed aspect of the agency's practices.

The report was issued on April 30, 2013, and was titled "Cost-Reimbursement Contracts  Did Not Fully Comply With Federal Acquisition Regulation [FAR] Revisions."  The findings make the title seem like an understatement:

The IRS did not comply with the majority of the new FAR requirements for 46 of the 49 cost-reimbursement contracts entered into between March 17, 2011, and June 30, 2012, totaling nearly $47 million. 

None of the three contracts that complied with some of the Acquisition Planning Requirements were in full compliance. With a list of 10 criteria and 49 contracts, there are a possible 490 pass/fail marks. As the chart below shows, there were only 13 passing marks out of 490 for a compliance rate under 3 percent.

When the two other areas audited are also included (Contracting Officer Responsibilities and Adequacy of Contractor Accounting System Requirements, see Figure 2 and Figure 3 in report), there were 46 passing marks out of a possible 882 for a compliance rate of about 5 percent.

The background section of the report explains what cost-reimbursements contracts are and why they require special handling [emphasis added]:

Certain contract types, such as cost-reimbursement contracts, pose risks of inefficiency and waste to the Federal Government because they provide no direct incentive for contractors to control costs.  Under cost-reimbursement contracts, contractors are paid based on the incurrence of allowable costs, as opposed to the delivery of a completed product or service.  

The IG report found that although Congress had passed legislation in 2008 to address high-risk contract awards, the IRS did not follow the act or the related Federal Acquisition Regulations (FAR.)  In fact, the IRS simply ignored the new regulations:

The IRS did not issue internal procurement policy guidance to implement the FAR revisions that were required by the Act.  Although the revised FAR became effective on March 17, 2011, the IRS has not issued any procurement policies and procedures to implement recent FAR changes for cost-reimbursement contracts.  Instead, the IRS has used the prior FAR and its existing internal procurement policies and procedures[.] [B]ecause no guidance had been provided, the COs who we interviewed were not aware of revisions to the FAR required by the Act as they related to documentation requirements in the contract file.  One CO stated there was no communication from the Office of Procurement regarding any FAR revisions on the subject of cost-reimbursement contract documentation requirements.  

The IRS concurred with the findings in the report and has begun to develop and circulate procedures to address the shortcomings.  But along with testimony from IRS administrators this week blaming at least some of the problems at the IRS on overwork and understaffing, this report adds legitimacy to the concern about adding the requirements of enforcing the Affordable Care Act (ACA) beginning in 2014.  The agency will likely still be getting its house in order for its current responsibilities while taking on the additional ACA workload.  The inspector general seems likely to have his work cut out for him for years to come.

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