In yet another self-inflicted addition to the national "tax gap," the IRS is failing to collect millions of dollars in unpaid federal taxes owed by nearly 700 of its own contract employees, says the Treasury's inspector general for tax administration.
In a report made public on October 23, Treasury inspector general J. Russell George found that 691 (5%) of the 13,591 contract workers employed by the IRS owed a combined $5.4 million in back taxes as of June 14, 2012.
While the majority (65%) of the contract employees had federal income tax debts from only one calendar year, 30 contract employees owed back taxes from five or more years.
Contractors and their employees who work for the federal government are often paid completely or in part from taxpayers' money appropriated by Congress. As a result, noted the inspector general, "it is imperative that these entities and their employees remain in full compliance with all Federal tax laws."
Unique among other federal agencies, the IRS requires all of its employees, including contract workers to fully comply with federal tax laws. Like other taxpayers, they are required to either pay all the taxes they owe every year or enroll in an IRS installment payment plan.
However, 351 of the tax-delinquent contract employees were not enrolled in installment payment plans and, under agency rules, should have been ineligible to work for the IRS, noted the report. Those 351 contract employees owed a total of $2.7 million in unpaid taxes.
"Because many contractor employees have access to sensitive IRS systems and facilities, the IRS should address tax noncompliance for these employees in a similar manner as it would for its own employees," stated Inspector General George.
The overall tax delinquency rate among contract IRS workers was 2.6% in 2011, compared to 3.2% for all non-contract federal workers and retirees, and 8.2% for the U.S. population as a whole, the report showed. Among all federal agencies, the Treasury Department, which includes the IRS, had the lowest tax delinquency rate at 1.1%
Active and retired federal employees owed more than $3.5 billion in unpaid federal income tax in 2011, according to IRS statistics.
While finding the IRS carefully screens contract workers for tax compliance when they are first hired, the report criticized the agency for not continuing to monitor the employees for tax compliance over the years.
What the Inspector General Recommended
Inspector General George recommended that the IRS continuously monitor contractor employee tax compliance as aggressively as it monitors the tax compliance of its non-contract employees.
The IRS agreed and stated that it planned to establish and implement policies to ensure that contractor tax compliance is continuously monitored and applied to employee background and security clearances.
Oh, by the way, the IRS also requires all of its male employees born since 1959 to be registered for the draft or have an exception.