TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

August 30, 2013 

Reference Number: 2013-10-082 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process 

and information determined to be restricted from public release has been redacted from this document. 

Phone Number / 202-622-6500 

E-mail Address / TIGTACommunications@tigta.treas.gov

Website / http://www.treasury.gov/tigta 
HIGHLIGHTS

CONTRACTOR EMPLOYEES HAVE access to IRS facilities, systems, and data. 

MILLIONS OF DOLLARS OF FEDERAL TIGTA identified five IRS contractor employees TAX DEBTS who either did not file required tax returns or 

Highlights

filed them late but were still granted staff-like 

access. TIGTA also identified 13 IRS contractor 

employees who were tax compliant at the time 

staff-like access was granted but who Final Report issued on August 30, 2013 subsequently failed to file a required Federal tax 

return while assigned to an active IRS contract. 

Highlights of Reference Number: 2013-10-082 

to the Internal Revenue Service Deputy TIGTA identified weaknesses in the IRS’s 

Commissioner for Operations Support. existing practices that allowed contractor 

employees with Federal tax debts and instances 

IMPACT ON TAXPAYERS of nonfiling to go undetected after staff-like 

access was initially granted because the IRS The IRS requires that its own employees file does not continuously monitor contractor their Federal tax returns on time and pay any employee tax compliance in the same way it Federal tax debt. However, TIGTA identified monitors IRS employee tax compliance. hundreds of employees working for IRS Instead, the IRS reviews contractor tax contractors (contractor employees) who were compliance only every five years or if the not held to that same standard. The IRS should contractor employee has longer than a two-year address tax noncompliance for these contractor break in service. employees to ensure that all individuals 

employed by the IRS, whether as Federal WHAT TIGTA RECOMMENDED 

employees or contractor employees, are tax 

compliant. TIGTA recommended that the IRS continuously 

monitor contractor employee tax compliance 

WHY TIGTA DID THE AUDIT similar to the way IRS employee Federal tax 

compliance is monitored. In addition, TIGTA The overall objective of this audit was to recommended that when revalidating contractor determine the effectiveness of the IRS’s employee staff-like access after a break in background investigation process to identify service longer than two years, the IRS should contractor employees who do not file required complete a tax compliance check. Finally, Federal tax returns or who owe Federal taxes TIGTA recommended that the IRS further but are not currently on a payment plan. evaluate the contractor employees TIGTA 

WHAT TIGTA FOUND identified as potentially noncompliant and 

promptly bring those individuals into compliance 

As of June 14, 2012, 691 (5 percent) of the or remove them from IRS contracts. 

13,591 IRS contractor employees reviewed by In their response, IRS management agreed with TIGTA had $5.4 million in Federal tax debt. our recommendations and plans to establish and These Federal tax debts were either agreed to implement policies to ensure that contractor by the taxpayers or affirmed by the court. Of the employee tax compliance is continuously 691 contractor employees, 352 were not monitored and background clearance currently on a payment plan to resolve their tax revalidations include a tax compliance debt. Most of the contractor employees component. In addition, the IRS plans to further appeared to have been compliant when their research and carefully evaluate the contractor initial staff-like access was granted. However, at employees identified in this report as potentially least 319 contractor employees had tax debt noncompliant and refer them for additional assessed after they were granted staff-like action as appropriate. Finally, the IRS plans to access, and these employees were not currently convene a team to fully explore all viable options on a payment plan. Under IRS policy, these to address any future tax noncompliance. 319 contractor employees were not eligible for 

staff-like access and should not have had 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION 

August 30, 2013 

MEMORANDUM FOR DEPUTY COMMISSIONER FOR OPERATIONS SUPPORT 

FROM: Michael E. McKenney 

Acting Deputy Inspector General for Audit 

SUBJECT: Final Audit Report – Contractor Employees Have Millions of Dollars 

of Federal Tax Debts (Audit # 201210029) 

 

This report presents the results of our review of the background clearance process for contractor 

employees. The overall objective of our audit was to determine the effectiveness of the Internal 

Revenue Service (IRS) background investigation process to identify contractor employees who 

do not file required Federal tax returns or who owe Federal taxes but are not on a payment plan. 

This review is included in the Treasury Inspector General for Tax Administration’s Fiscal Year 

2013 Annual Audit Plan and addresses the major management challenge of Security for 

Taxpayer Data and Employees. 

Management’s complete response to the draft report is included as Appendix IV. Copies of this 

report are also being sent to the IRS managers affected by the report recommendations. 

If you have any questions, please contact me or Gregory D. Kutz, Assistant Inspector General for 

Audit (Management Services and Exempt Organizations). 
Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Table of Contents 

Background .......................................................................................................... Page 1 

Results of Review ............................................................................................... Page 5 

Contractor Employees Owe Almost $5.4 Million in 

Federal Tax Debt........................................................................................... Page 5 

Recommendations 1 through 3: ......................................... Page 11 

Appendices 

Appendix I – Detailed Objective, Scope, and Methodology ........................ Page 12 

Appendix II – Major Contributors to This Report ........................................ Page 15 

Appendix III – Report Distribution List ....................................................... Page 16 

Appendix VI – Management’s Response to the Draft Report ...................... Page 17 
Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Background 

Federal agencies of the U.S. Government contract with independent contractor companies to 

accomplish Government business. Because Federal contractors and their employees are 

frequently paid in whole or in part from funds appropriated by Congress, it is imperative that 

these entities and their employees remain in full compliance with all Federal tax laws. The 

Internal Revenue Service (IRS) collected about $2.4 trillion in Federal taxes in Fiscal Year1 2011 

and employed approximately 93,000 Federal employees. In addition to Federal employees, the 

IRS also maintains a contractor employee workforce, many of whom work side by side with IRS 

employees. As of June 2012, there were approximately 14,500 IRS contractor employees 

assigned to active contracts who had “staff-like” access (unescorted access) to IRS facilities 

and/or access to sensitive but unclassified data in IRS information systems. 

Contractor employees who require escorted or unescorted (staff-like) access to IRS facilities, or 

work on contracts that involve the design, operation, repair, or maintenance of information 

systems and/or require access to sensitive but unclassified information or security items or 

products, must meet the following three eligibility criteria before a full background investigation 

will be initiated: 

 Must be compliant with Federal taxes. Must have filed all required Federal tax returns 

and paid all taxes due or be current on a payment plan for taxes due.2

 Must be a U.S. citizen or have lawful permanent residency, depending on the contractor 

employee’s risk level. 

 For all males born after 1959, must be registered with Selective Service or have an 

exception. 

Contractor employees are required to undergo background investigations if their duration of 

employment exceeds 180 days. If the duration of employment is less than 180 days or access is 

 

1

 A 12-consecutive-month period, ending on the last day of any month. The Federal Government’s fiscal year 

begins on October 1 and ends on September 30. 

2

 The IRS considers a contractor to be tax compliant if the individual has filed all required Federal tax returns for the 

last three years, and if any tax debt balances are due, the individual must be current on a payment plan or part of an 

active bankruptcy proceeding. For information on bankruptcy proceedings, see Internal Revenue Code 

Section 5.9.4.18, Installment Agreements and Bankruptcy, Protection of the Taxpayer’s Rights (Jan. 2011). The IRS 

protects taxpayer’s rights while the debtor is under the protection of the bankruptcy court. Therefore, an installment 

agreement should be regarded as suspended – not terminated – during the pendency of a bankruptcy proceeding. In 

a follow-up audit, we plan to review the adequacy of the IRS’s controls over the background clearance process, 

including those controls that would prevent granting staff-like access to individuals with significant financial 

problems. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

infrequent (i.e., two to three days per month), and the contractor requires unescorted access, the 

contractor employee must meet the previously mentioned eligibility requirements and must 

undergo Federal tax compliance and fingerprint check screenings (but does not have to undergo a 

complete background investigation). A contractor employee who has been approved for interim 

or final staff-like access requires no escort while in an IRS owned or controlled facility. 

Approved contractor employees may be granted access to information systems, data, or sensitive 

but unclassified information, no matter where the work will be located. 

Once staff-like access is granted to an IRS contractor, the background investigation, including 

the tax compliance component, is reinvestigated only every five years. In addition, if a 

contractor employee takes less than a two-year break in service while under the initial five-year 

investigation period, the contractor employee’s access can be “revalidated.” According to 

current IRS policy, a revalidation does not require another tax compliance review. However, if a 

contractor employee is assigned to a different contract prior to the expiration of the five-year 

period and the new duties are at a higher risk level, the contractor employee is required to 

undergo a new investigation at the higher risk level. A new tax check is conducted with the new 

investigation. 

The IRS reported that retired and active Federal employees owed more than $3.5 billion in 

unpaid Tax Year3

 2011 Federal income taxes. The delinquency rate for Federal workers and 

retirees was 3.2 percent in 2011, while the delinquency rate for the Department of the Treasury, 

which includes the IRS, was 1.1 percent. The U.S. population as a whole has a delinquency rate 

of 8.2 percent. Currently, only IRS employees can be terminated for nonpayment of Federal 

income taxes. All IRS employees are required to file and pay Federal taxes accurately and on 

time. In order to ensure that IRS employees meet their tax obligations, the IRS matches its 

employee database with information available from the Integrated Data Retrieval System4 three 

times a year to identify potential employee noncompliance. The IRS Restructuring and Reform 

Act of 19985 made mandatory the removal of IRS employees who are found to have intentionally 

committed certain acts of misconduct, including willful failure to timely file a Federal tax return 

and willful understatement of their Federal tax liability. For IRS employees, failure to timely 

pay one’s full Federal tax liability does not require mandatory removal; however, it is still 

considered misconduct and may result in discipline up to and including removal. 

Recent legislation has been introduced that would require the termination of current tax 

delinquent Federal employees and would also prohibit the hiring for Federal employment 

 

3

 A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year. 

4

 The Integrated Data Retrieval System is an IRS computer system capable of retrieving or updating stored 

information. It works in conjunction with a taxpayer’s account records. 

5

 Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app, 

16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.). 

Page 2
Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

individuals with documented serious delinquent tax debts.6 While the IRS does require 

contractor employees to be tax compliant at the time an interim staff-like access determination is 

made and when a reinvestigation is required on a five-year cycle, there are currently no 

requirements for contractor employees to be monitored for tax compliance during this five-year 

period. 

The IRS maintains a file of all “unpaid assessments.” These unpaid assessments are legally 

enforceable claims against taxpayers and consist of taxes, penalties, and interest that have not 

been paid or abated. For the purposes of this report, we refer to these unpaid assessments as 

Federal tax debts. These Federal tax debts are generally created when a taxpayer files a return 

without full payment, an IRS audit identifies additional amounts owed, and the IRS makes 

adjustments to correct inaccuracies on a return. In addition, a Federal tax debt can be identified 

as a part of IRS enforcement programs. These enforcement programs generally identify 

taxpayers who fail to file or timely file required Federal returns, accurately report their taxes, or 

voluntarily pay the amount of taxes due. The IRS classifies its total Federal tax debt inventory 

into the following four categories: 

 Taxes receivable: Assessments that are self-assessed by the taxpayer, an agreed 

examination, a court ruling in favor of the IRS, etc. 

 Compliance: Assessments not agreed to by the taxpayer. 

 Write-Offs: Assessments that the IRS still has the statutory authority to collect, but for 

which there is no collection potential. 

 Memo: Assessments that are not receivables according to Federal financial standards, 

including duplicate assessments, assessments due to a fraudulent return filed by a 

taxpayer, assessments involving many tax periods with related and/or intermingled 

issues, and instances in which an examination/appeal will not be resolved for more than 

one year. 

Under Federal accounting standards, Federal tax debts require taxpayer or court agreement to be 

considered Federal tax receivables. Because of this distinction, when we refer to Federal tax 

debts in this report, we are referring to those debts that require taxpayer or court agreement that 

are classified by the IRS as taxes receivable and write-offs. Compliance and memo assessments 

are not considered Federal taxes receivable because they have not been agreed to by the 

taxpayers or the courts. 

We held discussions with personnel and/or analyzed data obtained from the Agency-Wide 

Shared Services Office of Procurement in Oxon Hill, Maryland; the Agency-Wide Shared 

Services Physical Security and Emergency Preparedness Office in Washington, D.C., and 

 

6

 H.R. 249, Federal Employee Tax Accountability Act of 2013 (Jan. 15, 2013). The bill defines seriously delinquent 

tax debt as an outstanding tax debt for which a notice of lien has been filed in public records. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Florence, Kentucky; and the Human Capital Office in Washington, D.C., during the period 

June 2012 through March 2013. We assessed the effectiveness of the controls over the 

background investigation process for determining contractor tax compliance, specifically looking 

at certain types of Federal tax debt and failure to file required tax returns. We conducted this 

performance audit in accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit objective. We 

believe that the evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objective. Detailed information on our audit objective, scope, and 

methodology is presented in Appendix I. Major contributors to the report are listed in 

Appendix II. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Results of Review 

Contractor Employees Owe Almost $5.4 Million in Federal Tax Debt 

Although the IRS has controls to prevent contractor employees who have Federal tax debts or 

who have not filed required Federal tax returns from obtaining staff-like access, we found 

weaknesses in the IRS’s existing practices that allowed contractor employees with Federal tax 

debts and instances of nonfiling to go undetected after staff-like access was initially granted. We 

determined that 691 (5 percent) of the 13,591 contractor employees7 assigned to active IRS 

contracts had almost $5.4 million in Federal tax debts. However, the IRS considers a potential 

contractor employee to be tax compliant and, therefore, eligible to work on an IRS contract, if 

the individual’s tax debt is part of a current payment plan. We identified 352 contractor 

employees, with Federal tax debts totaling $2.7 million dollars as of June 14, 2012,8 who were 

not on a payment plan to resolve their tax debt. In addition, we identified 13 contractor 

employees who were tax compliant at the time staff-like access was granted but who 

subsequently failed to file a required Federal tax return. The IRS must immediately address 

noncompliance for these contractor employees to ensure that individuals employed by the IRS, 

whether as Federal employees or contractor employees, are tax compliant. 

These almost $5.4 million in Federal tax debts were almost exclusively associated with 

individual income tax returns.9 The majority of the contractor employees (65 percent) had 

Federal tax debts from only one calendar year; however, 30 contractor employees had Federal 

tax debts from five or more tax years. Figure 1 shows information related to the number of tax 

years of Federal tax debt by contractor employee. 

 

7

 We obtained a list of active contractor employees as of October 22, 2012, who received staff-like access on or 

before June 30, 2012. There were 910 additional contractor employees listed in this database for which we could 

not identify a complete Social Security Number, which was required to perform our data analysis. The IRS began 

requiring a complete Social Security Number in April 2011. Due to the incomplete data, we removed these 

individuals from our analysis. 

8

 Information on these Federal tax debts is as of June 14, 2012, because this is the most recent date that data were 

available at the time our analysis was performed. All figures in this report related to the number of contractor 

employees, the amount of tax balances due, and the status of contractor employee installment agreements are based 

on our analysis of IRS data as of June 14, 2012. 

9

 Approximately $500 of the $5.4 million in Federal tax debts was related to Individual Retirement Accounts or 

other savings plans. 

Page 5
Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Figure 1: Number of Tax Years That 

Contractor Employees Incurred Federal Tax Debts 

Number of 

Tax Years 

Number of 

Contractor Employees 

Total Federal 

Tax Debt 

1 tax year 452 $1,960,226 

2 tax years 123 $968,520 

3 tax years 60 $758,770 

4 tax years 26 $1,012,066 

5 or more tax years 30 $688,936 

Total 691 $5,388,518 

Source: Analysis of the IRS unpaid assessment file. Federal tax debt amounts shown in this 

table include only those that are agreed to by the taxpayer or affirmed by the court. All 

information is current as of June 14, 2012. 

Almost 80 percent of the 691 contractor employees with Federal tax debts owed $10,000 or less. 

However, 11 contractor employees owed more than $50,000 each. These 11 employees had 

Federal tax debts that ranged from around $64,000 to a high of around $184,000, for a total of 

$1.1 million in Federal tax debt. Figure 2 shows the distribution of total Federal tax debt by the 

size of the various debts. 

Figure 2: Size of Federal Tax Debt for Contractor Employees 

Source: Analysis of the IRS unpaid assessment file. Federal tax debt amounts 

shown in this table include only those that are agreed to by the taxpayer or 

affirmed by the court. All information is current as of June 14, 2012. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

We determined that of the 691contractor employees who had a Federal tax debt, 339 were on a 

payment plan. These 339 had Federal tax debts totaling $2.7 million. The IRS considers a 

potential contractor employee to be tax compliant and, therefore, eligible to work on an IRS 

contract, if the individual’s tax debt is part of a payment plan. However, 352 of the 

691 contractor employees, with Federal tax debt totaling an additional $2.7 million, were not on 

a payment plan to resolve their tax debt. Figure 3 shows the number of contractor employees 

and whether they were part of a payment plan. 

Figure 3: Contractor Employee Federal Tax Debt 

Type of Assessment 

Number of 

Contractor 

Employees 

Total Federal 

Tax Debt 

Federal tax debt, on a payment plan 339 $2.7 million 

Federal tax debt, not on a payment plan10 352 $2.7 million 

All Federal tax debts 691 $5.4 million 

Source: Analysis of the IRS unpaid assessment file. Federal tax debt amounts shown in this table include only those 

that are agreed to by the taxpayer or affirmed by the court. All information is current as of June 14, 2012. 

A contractor employee could have Federal tax debts that originated before he or she was granted 

staff-like access, after staff-like access was granted, or both. Of the 691 contractor employees 

we identified as having Federal tax debts, at least 556 contractor employees had at least one 

Federal tax debt that originated after the contractor employee obtained staff-like access.11 Of 

these 556 contractor employees with Federal tax debts that originated after staff-like access was 

granted, 319 were not on a payment plan to resolve their tax debt. 

 

10 We found that our data analysis could not systematically identify individuals who were engaged in bankruptcy 

proceedings. Individuals who are part of bankruptcy proceedings are considered tax compliant by the IRS; 

therefore, these figures could overstate the number of contractor employees with tax debt that are not tax compliant. 

In a future audit, the Treasury Inspector General for Tax Administration plans to look at the broader issue of IRS 

policies related to hiring contractor employees with known financial problems. 

11 The IRS maintains two separate systems to track the contractor background investigation process – the Personal 

Identity Verification Background Investigation Process database maintained by the Physical Security and 

Emergency Preparedness Office, and the Automated Background Investigation System maintained by the Human 

Capital Office. For approximately one-third of the contractor employees, the earliest access date on record in the 

Automated Background Investigation System was before the earliest access date on record for the Personal Identity 

Verification Background Investigation Process database. We used the Personal Identity Verification Background 

Investigation Process database to perform our analysis, which is a more conservative approach. Therefore, it is 

possible that more than 556 contractor employees with Federal tax debts had debts that originated after they 

obtained staff-like access. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

We selected for further review the 50 contractor employees with the largest Federal tax debts 

from the 691 contractor employees we identified as having Federal tax debts. As of 

June 14, 2012, these 50 contractor employees had Federal tax debts that ranged from 

approximately $24,000 to $184,000, for a total of $2.4 million in Federal tax debts. The Federal 

tax debts for these 50 contractor employees can be categorized as follows: 

 28 contractor employees (56 percent) had Federal tax debts that originated before 

staff-like access was granted. We confirmed that all 28 contractor employees were on a 

payment plan or engaged in bankruptcy proceedings and, therefore, were considered tax 

compliant at the time staff-like access was granted.12 However, as of June 14, 2012, IRS 

records show that 15 of the 28 contractor employees were no longer tax compliant 

because they were not on a payment plan while assigned to an active IRS contract. In 

addition, 17 of the 28 contractor employees incurred another instance of Federal tax debt 

that originated after access was granted. 

 22 contractor employees (44 percent) had Federal tax debts that originated after 

staff-like access was granted. IRS records show that, of these 22, seven IRS contractor 

employees were not on a payment plan as of June 14, 2012. 

In addition, we determined that of these 50 contractor employees: 

 16 contractor employees (32 percent) had an outstanding Federal tax debt for which a 

notice of lien had been filed in public records. 

 12 contractor employees (24 percent) had an outstanding State tax debt for which a notice 

of lien had been filed in public records. 

 10 contractor employees (20 percent) had both an outstanding Federal and State tax debt 

for which a notice of lien had been filed in public records. 

In addition to the 50 contractor employees previously discussed, we reviewed tax information for 

29 contractor employees who had agreed-to Federal tax debts that originated prior to their 

staff-like access and who were not on a payment plan as of June 14, 2012.13 Of these 29, we 

confirmed that all 29 contractor employees were on a payment plan or engaged in a bankruptcy 

proceeding and therefore were considered tax compliant at the time that staff-like access was 

granted. We found that six (21 percent) of the 29 were on a payment plan at the time their 

staff-like access was granted but subsequently defaulted on their payment plan. 

 

12 As mentioned previously, we plan to conduct a follow-up audit that will examine contractor employee bankruptcy 

and other financial and integrity issues. 

13 In total, we identified 50 contractor employees who had Federal tax debts that originated prior to their earliest 

access date recorded who were not on a payment plan as of June 14, 2012. Eleven of the 50 were also in the top 50 

contractor employees by total unpaid taxes and, therefore, were previously researched. Of the remaining 

39 contractor employees, we selected 29 to research further. We eliminated 10 contractor employees from further 

review because their total Federal tax debt was less than $500 as of June 14, 2012. 

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Contractor Employees Have 

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In total, 21 (27 percent) of the 79 contractor employees who we selected for further review were 

on a payment plan or engaged in a bankruptcy proceeding at the time staff-like access was 

granted but defaulted on a payment agreement after staff-like access was granted. On average, 

these contractor employees defaulted on their payment plans 192 calendar days (less than seven 

months) after obtaining staff-like access. Some of these contractor employees were responsible 

for physical and information technology security activities, such as monitoring security cameras, 

checking badges, physical patrol, and security analysis and strategic planning and tactical 

support to integrate IRS cybersecurity activities. 

Existing practices allowed the Federal tax debts of contractor employees to go 

undetected after interim access was granted 

There were at least 319 contractor employees assigned to active IRS contracts with agreed-to tax 

debts that originated after staff-like access was granted who were not on a payment plan as of 

June 14, 2012.14 These 319 individuals had almost $2 million in Federal tax debts. Unlike IRS 

employees, contractor employees are not monitored for tax compliance after the initial staff-like 

access is granted. According to IRS policies, the tax compliance of contractor employees is 

reinvestigated only every five years. In addition, if a contractor employee takes less than a 

two-year break in service (was not assigned to an active IRS contract during this period) while 

under the initial five-year investigation period, the employee’s staff-like access can be 

revalidated. According to current IRS policies, a revalidation does not require another tax check. 

Due to limitations in the databases that store information on IRS contractor employees, we could 

not confirm that all 319 employees were actively employed on any specific date as IRS 

contractor employees as of June 14, 2012. However, these contractor employees were assigned 

to active contracts and were, therefore, eligible to work on IRS contracts. The IRS told us that 

due to the nature of many of its contracts, contractor employees can frequently change their 

status from active to inactive; however, the IRS tracking system cannot tell which contractor 

employees are working on any given day. 

IRS data show that in the past 10 years more than 400 IRS employees were removed from 

employment, retired, or resigned after being investigated for having one or more tax compliance 

issues. We asked the IRS for information on how many contractor employees had either been 

denied staff-like access or removed from a contract due to tax compliance issues, and we were 

told that the systems that track contractor employee background investigations do not capture 

 

14 As previously mentioned, the IRS maintains two separate systems to track the contractor background investigation 

process: the Personal Identity Verification Background Investigation Process and the Automated Background 

Investigation Process System. For approximately one-third of the contractor employees, the earliest access date on 

record in the Automated Background Investigation Process System was before the earliest access date on record for 

the Personal Identity Verification Background Investigation Process. We used the Personal Identity Verification 

Background Investigation Process database to perform our analysis, which is a more conservative approach. 

Therefore, it is possible that more than 319 contractor employees with Federal tax debts were not in a payment plan 

as of June 14, 2012, and had debt that originated after they obtained a clearance. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

information in a way that would allow the IRS to systematically identify how many contractor 

employees were denied access or had access revoked due to tax issues. 

We determined that some of the 319 contractor employees with Federal tax debts that originated 

after staff-like access was granted and who were not on payment plans had access to sensitive 

IRS systems such as those: 

 Used to research tax cases, track money-laundering and other currency flow activities, 

and investigate leads. 

 Used for tracking the status of assets seized during criminal investigations. 

 Related to the IRS’s Computer Security Incident Response Center. 

Ensuring that all individuals employed by the IRS, whether as Federal employees or as 

contractor employees, are tax compliant is essential to the tax administration mission of the IRS. 

Existing practices allowed contractor employee nonfiling to go undetected 

We identified five contractor employees who had either missing or delinquent (late) Federal tax 

returns at the time they were granted staff-like access and 13 contractor employees who were tax 

compliant at the time staff-like access was granted but who subsequently failed to file a required 

Federal tax return. We also identified 79 contractor employees who appeared to have missing or 

late returns at the time they were granted staff-like access. We asked the IRS to research 40 of 

these 79 cases. Of these 40 contractor employees, 35 were tax compliant at the time interim 

access was granted. However, the IRS confirmed that the remaining five contractor employees 

either did not file required tax returns and thus were improperly granted staff-like access due to 

human error during the tax compliance screening process or submitted documentation to support 

that a return was filed but never actually filed that return. In addition, 13 contractor employees 

were tax compliant at the time staff-like access was granted but failed to file a required return 

subsequent to receiving their staff-like access. In four of the 13 cases, the contractor employees 

went through the revalidation process, but this process does not require a follow-up tax check. 

IRS officials explained that when a contractor moves from one contract to another within 

five years of the date on which they were granted staff-like access, and less than a two-year 

break in service has occurred, a revalidation is completed instead of a complete background 

investigation. During this revalidation process, a tax compliance check is not performed. It is 

not until five years have elapsed that the IRS specifically determines whether contractor 

employees remain tax compliant. 

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Contractor Employees Have 

Millions of Dollars of Federal Tax Debts 

Recommendations 

The IRS Chief Human Capital Officer should: 

Recommendation 1: Establish and implement policies and procedures to ensure that 

contractor employee tax compliance is continuously monitored, similar to the way IRS Federal 

employee tax compliance is monitored. The IRS Human Capital Officer should work with the 

Chief, Agency-Wide Shared Services, to implement any necessary contractual provisions to 

inform contractors of the established policies. 

Management’s Response: The IRS agreed with this recommendation and stated that 

it will establish and implement policies to ensure that contractor employee tax 

compliance is continuously monitored. The IRS indicated, however, that currently there 

is no systemic means of continuously monitoring contractor employees’ tax compliance. 

The IRS stated that it can conduct manual tax checks annually and establish a 

cross-functional team comprised of members from the Human Capital Office, 

Information Technology, and Agency-Wide Shared Services to create a systemic process 

that would allow for the matching and monitoring of systems related to the contractor 

background investigations process and the Integrated Data Retrieval System. Further, the 

IRS stated that once a systemic process is developed, it can conduct tax checks more 

frequently, similar to IRS employees.

Recommendation 2: Establish and implement policies and procedures to require that 

contractor employee background investigation revalidations, which occur when a contractor 

employee has had a longer than a two-year break in service, include a tax compliance 

component. 

Management’s Response: The IRS agreed with this recommendation and will 

incorporate tax compliance checks during the revalidation process.

Recommendation 3: Ensure that any contractor employees we identified in this report as 

potentially noncompliant are further evaluated and that any contractor employees who are not tax 

compliant are promptly brought into compliance or removed from IRS contracts (including 

removal of access to IRS facilities, information systems, and taxpayer data). 

Management’s Response: The IRS agreed with this recommendation. The IRS 

secured additional information on the contractor employees identified in this report as 

potentially noncompliant and has begun reviewing the 691 records to determine if they 

are still active contractor employees and whether they are still potentially noncompliant. 

The IRS plans to carefully evaluate each of these cases and refer them for additional 

action as appropriate. Additionally, the IRS will convene a team to fully explore all 

viable options to address any future noncompliance. 

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Contractor Employees Have 

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Appendix I 

Detailed Objective, Scope, and Methodology 

The overall objective of our audit was to determine the effectiveness of the IRS background 

investigation process to identify contractor employees who do not file required Federal tax 

returns or who owe Federal taxes but are not on a payment plan. To accomplish this objective, 

we:

I. Assessed the adequacy of the internal control environment and agency compliance with 

established Federal regulations and agency policies for the IRS contractor employee 

background investigation program as it relates to tax compliance. 

A. Obtained and reviewed current Department of the Treasury, IRS, and other policies 

and procedures for requesting, processing, monitoring, and adjudicating background 

investigations on contractor employees. 

B. Interviewed key IRS personnel from the Office of Procurement; the Contractor 

Security Management Branch, Incident and Contract Management Division, Physical 

Security and Emergency Preparedness Office; and the Personnel Security Office, 

Employment, Talent and Security, Human Capital Office, to identify and document 

their roles and responsibilities in the contractor employee background investigation 

program, and the procedures and practices utilized in executing those responsibilities. 

II. Determined whether background investigations of contractor employees are adequately 

performed to identify any tax compliance issues before contractor employees are granted 

interim access to work on IRS contracts. 

A. Obtained an extract of the Personal Identity Verification Background Investigation 

Process database showing contractor employees assigned to work on active IRS 

contracts who have background investigations that were successfully completed or 

were in progress as of June 30, 2012.1

 To determine the reliability of the data, we 

verified whether all records contained a complete Social Security Number, and we 

compared the Social Security Numbers and last names of the contractor employees to 

the Social Security Numbers and name controls on the National Account Profile2

 to 

identify Social Security Numbers that are incorrect in Personal Identity Verification 

Background Investigation Process data. There were 910 additional contractor 

 

1

 Upon receiving an interim staff-like access, contractor employees are eligible for unescorted access to IRS 

facilities and information systems. 

2

 The National Account Profile contains IRS and Social Security Administration information for name control, date 

of birth, and date of death for each Taxpayer Identification Number. 

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employees listed in this database for which we could not identify a complete Social 

Security Number, which was required to perform our data analysis. The IRS began 

requiring a complete Social Security Number in April 2011. Due to the incomplete 

data, we removed these individuals from our analysis. In addition, we identified 95 

incorrect contractor Social Security Numbers and corrected these numbers before 

using the data. Finally, we compared the earliest access date on record in the 

Personal Identity Verification Background Investigation Process database with the 

earliest staff-like access date on record in the Automated Background Investigation 

Process. For approximately one-third of the contractor employees, the earliest stafflike access date on record in the Automated Background Investigation Process 

System was before the earliest access date on record for the Personal Identity 

Verification Background Investigation Process database. We used the Personal 

Identity Verification Background Investigation Process database to perform our 

analysis, which was a more conservative approach. We determined that the data were 

sufficiently reliable for our purposes but made the adjustments previously mentioned 

for the limitations we identified. 

B. Evaluated the tax compliance of the contractor employees identified from Step II.A. 

1. Matched the contractor employees who had been granted at least interim 

staff-like access with the IRS unpaid assessments file to identify all contractor 

employees with Federal tax debts as of June 14, 2012.3

 

2. Determined whether any tax compliance issues identified were present at the time 

the contractor employee was granted interim access for the IRS contract. 

3. Determined the number of contractor employees and the dollar value of any 

uncollected tax assessments occurring before and after staff-like access approval. 

4. For the 50 contractor employees with the largest total dollar value of Federal tax 

debts, further research was conducted using the Integrated Data Retrieval System4

and the Consolidated Lead Evaluation and Reporting public records database. 

 

3

 The IRS classifies its total Federal tax debt inventory into the following four categories: 1) taxes receivable: 

assessments that are self-assessed by the taxpayer, an agreed examination, a court ruling in favor of the IRS, etc.; 

2) compliance: assessments not agreed to by the taxpayer; 3) write-offs: assessments that the IRS still has the 

statutory authority to collect, but for which there is no collection potential; and 4) memo: assessments that are not 

receivables according to Federal financial standards, including duplicate assessments, assessments due to a 

fraudulent return filed by a taxpayer, assessments for which many tax periods are involved with related and/or 

intermingled issues, and instances in which an examination/appeal will not be resolved for more than one year. We 

analyzed those Federal tax debts that were either agreed to by the taxpayers or affirmed by the court, represented by 

categories one and three. 

4

 The Integrated Data Retrieval System is an IRS computer system capable of retrieving or updating stored 

information. It works in conjunction with a taxpayer’s account records. 

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C. Evaluated the tax filing history of the contractor employees identified from Step II.A. 

1. Matched the contractor employees with the Individual Master File5 to identify 

contractor employees who had not filed Individual Tax Returns during the three 

prior tax years6

 (2009, 2010, and 2011).7

2. Determined whether any tax compliance issues identified were present at the time 

the contractor employee was granted interim access for the IRS contract. 

D. Determined how the IRS monitors contractor employee tax compliance after granting 

interim access and completion of the full background investigation in order to identify 

tax compliance issues.

Internal controls methodology 

Internal controls relate to management’s plans, methods, and procedures used to meet their 

mission, goals, and objectives. Internal controls include the processes and procedures for 

planning, organizing, directing, and controlling program operations. They include the systems 

for measuring, reporting, and monitoring program performance. We determined the following 

internal controls were relevant to our audit objective: IRS Human Capital Office and Physical 

Security and Emergency Preparedness Office procedures for background investigations for 

contractor employees. We evaluated these controls by interviewing management, reviewing 

documentation, and reviewing a judgmental sample of cases.

 

5

 The Individual Master File is the IRS database that stores various types of taxpayer account information. This 

database includes individual, business, and employee plans and exempt organizations data. 

6

 A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year. 

7

 These tax years are the only tax years available at Treasury Inspector General for Tax Administration’s data 

warehouse. Thus, we limited our analysis to these tax years. 

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Appendix II 

Major Contributors to This Report 

Gregory Kutz, Assistant Inspector General for Audit (Management Services and Exempt 

Organizations) 

Alicia Mrozowski, Director 

Heather Hill, Audit Manager 

Darryl Roth, Audit Manager 

Dana Karaffa, Acting Audit Manager 

Gary Pressley, Lead Auditor 

Melvin Lindsey, Senior Auditor 

Trisa Brewer, Auditor 

Evan Close, Auditor 

Allison Meyer, Auditor 

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Appendix III 

Report Distribution List 

Acting Commissioner 

Office of the Commissioner – Attn: Chief of Staff C 

Office of the Deputy Commissioner for Services and Enforcement SE 

Chief, Agency-Wide Shared Services OS:A 

IRS Human Capital Officer OS:HC 

Director, Employment, Talent and Security, IRS Human Capital Officer OS:HC:ETS 

Director, Physical Security and Emergency Preparedness, Agency-Wide Shared Services 

OS:A:P 

Director, Procurement, Agency-Wide Shared Services OS:A:P 

Chief Counsel CC 

National Taxpayer Advocate TA 

Director, Office of Legislative Affairs CL:LA 

Director, Office of Program Evaluation and Risk Analysis RAS:O 

Office of Internal Control OS:CFO:CPIC:IC 

Audit Liaisons: 

Chief, Agency-Wide Shared Services OS:A 

IRS Human Capital Officer OS:HC 

Director, Physical Security and Emergency Preparedness, Agency-Wide Shared Services 

OS:A:P 

Director, Procurement, Agency-Wide Shared Services OS:A:P 

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Appendix IV 

Management’s Response to the Draft Report 

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