RECOVERY
ACT
Previously Reported Acquisition Concerns That Are Relevant to the American Recovery and Reinvestment Act of 2009 Procurements
September 15, 2010
Reference Number: 2010-11-102
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
Email Address | inquiries@tigta.treas.gov
Web Site | http://www.tigta.gov
HIGHLIGHTS
PREVIOUSLY REPORTED ACQUISITION
CONCERNS THAT ARE RELEVANT TO THE AMERICAN RECOVERY AND REINVESTMENT ACT OF
2009 PROCUREMENTS
Highlights
Final
Report issued on September 15, 2010
Highlights of Reference Number: 2010-11-102 to the
Internal Revenue Service Deputy Commissioner for Operations Support.
IMPACT ON TAXPAYERS
The Internal Revenue Service (IRS)
received an appropriation of $203 million in American Recovery and Reinvestment
Act of 2009 (Recovery Act) funds. TIGTA analysis of acquisitions
audits conducted from Fiscal Year 1999 to June 2009 showed that while the IRS
has taken steps to address the concerns identified in those audits, recurring
problems exist which may put procurements funded by the Recovery Act at
risk. Until the IRS implements effective
internal controls, it will be unable to provide assurance that the Federal Government is receiving the best value for
its Recovery Act procurements and/or that contractors are meeting the
procurements’ terms and conditions to deliver goods or services.
WHY TIGTA DID THE AUDIT
The
Office of Management and Budget supplemental guidance for the Recovery Act
requires Federal agencies to determine whether final action has been taken
regarding weaknesses or deficiencies disclosed by prior audits and
investigations in program areas under which Recovery Act funds are authorized. The guidance also requires that Recovery Act
contracts be fixed-price to the maximum extent possible, acquisitions result in
meaningful and measurable outcomes, and contracts receive the appropriate
oversight to ensure that contract goals are met. The overall objective of this review was to provide observations
regarding the applicable procurement findings identified during a prior TIGTA
audit which evaluated trends identified from TIGTA audits of IRS procurements
from Fiscal Year 1999 to June 2009 that present a risk for procurements funded
under the Recovery Act.
WHAT TIGTA FOUND
TIGTA found several repeat findings or concerns that
are relevant to procurements funded by the Recovery Act. The most prevalent trends identified were the
recommendations that the IRS use performance-based contracts and fixed-price contracts
whenever possible.
TIGTA also identified trends where the IRS did not
have sufficient monitoring controls or processes to ensure contractors were
meeting the procurement’s terms and conditions, the IRS did not ensure funding was properly controlled and project costs were
not always charged to the appropriate accounting code, and modernization
contracts failed to achieve their objectives or intended benefits.
The IRS took corrective actions at the time the original
reports were issued to address many of the issues identified in the reports reviewed.
The IRS appears to have mitigated risks
associated with performance-based contracts.
However, if contract oversight is not operating effectively, IRS
Recovery Act procurements are at risk that goods and services will not meet the
Government needs at the price and other contract requirements agreed upon. In addition, when fixed-price contract types
are not used, generally there is an increased risk to the Federal Government
that the contract costs are not adequately controlled.
In their response to the prior trending report, IRS
officials agreed that addressing the two prevalent trends has been challenging
but they have made significant progress and have identified new initiatives to
address other trends. IRS officials
stated that had TIGTA performed an analysis of corrective actions implemented, the
prior report would more accurately reflect the progress the IRS has made.
WHAT TIGTA RECOMMENDED
TIGTA did not make any
recommendations in this report. However,
key IRS management officials reviewed it prior to issuance and agreed with the
facts and conclusions presented.
September 15, 2010
MEMORANDUM FOR DEPUTY COMMISSIONER FOR OPERATIONS SUPPORT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Previously Reported Acquisition Concerns That Are Relevant to the American Recovery and Reinvestment Act of 2009 Procurements (Audit # 201010116)
This report presents the results of our review of previously reported acquisition concerns that are relevant to the American Recovery and Reinvestment Act of 2009 (Recovery Act).[1] The overall objective of this review was to provide observations regarding the applicable procurement trends identified during our prior audit[2] that evaluated trends identified from Treasury Inspector General for Tax Administration audits of Internal Revenue Service (IRS) procurements from Fiscal Year 1999 to June 2009 that would also present a risk for procurements funded under the Recovery Act. This report is consistent with the Office of Management and Budget guidance[3] to identify high-risk programs and create quicker turnaround reporting. This review is included in our Fiscal Year 2010 Annual Audit Plan and addresses the major management challenge of Erroneous and Improper Credits and Payments.
The Recovery Act provides
separate funding to the Treasury Inspector General for Tax Administration through
September 30, 2013, to be used in oversight activities of IRS programs. This audit was conducted using Recovery Act
funds.
We did not make any recommendations in this report. However, key IRS management officials reviewed it prior to issuance and agreed with the facts and conclusions presented.
Copies of
this report are also being sent to the IRS managers affected by the report
finding. Please contact me at (202)
622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector
General for Audit (Management Services and Exempt Organizations), at (202)
622-8500.
Recurring Audit
Findings Could Pose Risks for Recovery Act Procurements
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Abbreviations
|
IRS |
Internal Revenue Service |
|
OMB |
Office of Management and Budget |
|
TIGTA |
Treasury Inspector General for Tax
Administration |
Enacted on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (Recovery Act)[4] contained both spending and tax provisions of $787 billion over 10 years designed to stimulate the national economy by creating and retaining jobs. The Internal Revenue Service (IRS) is charged with administrating tax law changes[5] contained in the Recovery Act. In April 2009, the IRS received its appropriation of $203 million in Recovery Act funds,[6] which was to be used to implement the necessary tax changes as a result of the Recovery Act provisions. As of April 29, 2010, the IRS has initiated or is in the process of initiating 26 of the initial 40 planned procurement actions on Recovery Act program initiatives with a total contract value of $81.9 million, of which approximately $78.5 million has been obligated. The IRS is using these Recovery Act funds for procurements to support the reprogramming of its computer systems, the updating of corresponding tax forms and publications, and its customer services to assist taxpayers.
The Recovery Act has created specific guidelines and requirements for all contracts funded under the Act.[7] The Office of Management and Budget (OMB)[8] has also issued several supplemental guidance[9] documents that outline steps for implementing the Recovery Act and also clarify the new requirements for processing procurements. The OMB’s guidance includes the requirement for agencies to determine whether final action has been taken regarding weaknesses or deficiencies disclosed by prior audits and investigations in program areas under which Recovery Act funds are authorized. If final action has not been completed, agencies should: 1) expedite such action to preclude the continuance of such weaknesses or deficiencies in the administration of programs funded by the Recovery Act or 2) provide an explanation of why such corrective actions cannot or should not be taken in the administration of programs funded by the Recovery Act.
In addition, the OMB supplemental guidance requires that Federal agencies must:
In September 2010, the Treasury Inspector General for Tax Administration (TIGTA) issued a report[10] (referred to as trending report) that examined 74 TIGTA reports addressing IRS procurements during the period Fiscal Year 1999 through June 2009. The audit was conducted to identify and categorize IRS acquisition issues that were identified in these TIGTA reports. The report found several repeat recommendations relating to different aspects of IRS procurements that continued to occur throughout the audit period. For example, in two different audit reports issued in Fiscal Year 2002, the TIGTA recommended that the IRS use performance-based contracts[11] and firm fixed-price contracts whenever possible. Subsequent to these reports, the TIGTA issued several additional reports containing similar recommendations.
We noted that these finding trends may also relate to Recovery Act procurements. In accordance with the OMB guidance to identify high-risk programs and create quicker turnaround reporting, in this report we are only highlighting the observations that are directly tied to the new requirements for Recovery Act procurements.
This review was performed at the IRS Office of Procurement
in
Recurring Audit Findings Could Pose Risks for Recovery Act Procurements
Based on the prior trending report, the TIGTA found that there were repeat findings or concerns that are relevant to Recovery Act-funded procurements, including:
· The limited use of fixed-price contracts.
· The limited use of performance-based contracts.
· Inadequate monitoring of the procurements by IRS Office of Procurement Contracting Officers and the program offices’ Contracting Officer’s Technical Representatives.
The IRS took corrective actions to address many of these
findings when the TIGTA reports were originally issued. However,
the repeat findings and recommendations are an indication that the
corrective actions were not effective.[12] The
IRS Office of Procurement advised us it has started new initiatives that
address some of the issues and trends presented in the trending report. We
did not perform followup audits on all of the 74 audits discussed in our
trending report, nor did we conduct any additional fieldwork to determine if
the IRS effectively implemented the agreed-upon corrective actions to fully
address the identified problems or how the findings might impact Recovery Act
requirements. In their response to the prior
report, IRS officials agreed that increasing both performance-based and firm
fixed-price contracting has been challenging over the past 10 years but added
that they have made significant progress in both of these areas and have
identified several new initiatives to address other trends. IRS officials stated that had the TIGTA
performed an analysis of corrective actions implemented in response to past
audit reports, the prior report would more accurately reflect the progress the
IRS has made.
The IRS has an increased risk of not complying with the general Federal acquisition requirements for procurements funded by the Recovery Act if the steps taken did not correct the reported weaknesses. Until effective internal controls, processes, and practices are implemented, the IRS will be unable to provide assurance that the Federal Government is receiving the best value for its Recovery Act procurements or that contractors are meeting the procurements’ terms and conditions to deliver goods or services in the most cost-effective manner.
Fixed-price contracts
The Recovery Act requires that, to the maximum extent possible, contracts funded under the Act shall be awarded as fixed-price contracts. The OMB guidance further emphasizes that fixed-price contracts provide maximum incentive for the contractor to control costs and perform effectively and impose a minimum burden upon the contracting parties.
The TIGTA reported in Fiscal Year 2002 that the IRS’ use of fixed-price contracts had decreased and recommended that the IRS use fixed-price contracts whenever possible. The IRS agreed with this recommendation and implemented corrective actions to address our findings. However, in Fiscal Year 2005, the TIGTA issued another report addressing the need for the IRS to increase the use of fixed-price type contracts. While the IRS again agreed to the overall recommendation, the TIGTA stated that the IRS’ corrective actions would not correct the identified issue. In Fiscal Years 2007 and 2009, the TIGTA issued two additional reports with similar findings and recommendations.
Through April 2010, the IRS indicated that 11 (42 percent) of 26 procurements awarded using Recovery Act funding were awarded as part of fixed-price contracts. Of the 26 Recovery Act procurements, 24 were contract modifications that added work or funds to existing awards. We did not review whether these 26 procurements were awarded with the appropriate contract type but, generally, when fixed-price contracts are not used, there is an increased risk to the Federal Government that the contract costs are not adequately controlled.
Structuring acquisitions to include quantifiable measures of performance
The OMB supplemental
guidance requires that agencies structure acquisitions to result in meaningful
and measurable outcomes consistent with agency plans as well as promoting the
goals of the Recovery Act. The guidance
also requires agencies to identify quantifiable measures of performance with clear
and measurable outcomes that include ranges of acceptable performance. While the OMB supplemental guidance does not
specifically require the use of performance-based contracting, these quantifiable
measurement requirements are key elements of performance-based contracting, and
increased use of performance-based contracting would help meet the intent of
the OMB guidance.
In a Fiscal Year 2002 report, the TIGTA recommended that the IRS use performance-based contracting whenever possible. While the IRS agreed with the recommendation, it did not agree with the TIGTA’s method for implementing the recommendation. As a result, the IRS did not implement any corrective actions for this recommendation. In Fiscal Year 2005, the TIGTA issued a second report containing a similar finding and recommendation. In this instance, while the IRS did not reject the TIGTA’s recommendation, the TIGTA did not believe that the IRS’ corrective action was adequate to address the issues noted in the report. Three additional reports containing similar findings and recommendations were issued since the Fiscal Year 2005 report. The IRS implemented corrective actions in response to these reports when they were originally issued and has subsequently instituted additional initiatives.
Through April 2010, the IRS indicated that 9 (82 percent) of 11 eligible Recovery Act contracts were performance-based. Performance-based contracting increases performance, innovation, and competition among interested vendors, resulting in a better value for the IRS. The IRS appears to have mitigated risks associated with non-performance-based contracts for procurements funded by the Recovery Act. However, we did not evaluate whether these performance-based contracts meet Recovery Act requirements for quantifiable measures of performance.
Contract monitoring
The OMB supplemental Recovery Act guidance states that agencies must provide for appropriate oversight of contracts to ensure outcomes that are consistent with and measurable against agency plans and goals under the Act. Agencies provide this oversight by assuring that they are able to appoint sufficient qualified Contracting Officers and Contracting Officer’s Technical Representatives with certification levels appropriate to the complexity of Recovery Act projects. In addition, agencies should actively monitor contracts to ensure that performance, cost, and schedule goals are being met.
We identified several broader trends involving similar findings throughout the procurement process. Many of the recurring findings relate to inadequate monitoring of the procurements by Office of Procurement Contracting Officers and the program offices’ Contracting Officer’s Technical Representatives. Examples of the trends included:
In addition to these contract monitoring issues, the TIGTA addressed concerns related to the Recovery Act and contract administration by Contracting Officer’s Technical Representatives in a separate report.[13] While that report stated that the IRS had begun to implement some of the recommendations concerning contract administration, the IRS still needed to implement the remaining recommendations. If the IRS’ contract oversight is not operating effectively, IRS Recovery Act procurements are at risk that goods and services will not meet the Government needs at the price and other contract requirements agreed upon.
Appendix I
Detailed
Objective, Scope, and Methodology
The overall objective of this review was to provide observations regarding the applicable procurement trends identified during our prior audit[14] that evaluated trends identified from TIGTA audits of IRS procurements from Fiscal Year 1999 to June 2009 that would also present a risk for procurements funded under the American Recovery and Reinvestment Act of 2009 (Recovery Act).[15] To accomplish the objective, we:
I.
Reviewed
the Recovery Act and appropriate implementing guidance to identify all
applicable requirements for Recovery Act-funded procurements.
II.
Reviewed
observations identified during the prior audit to determine which recurring
findings would also present risks for procurements
funded under the Recovery Act and the recommendations that would mitigate those
risks.
III.
From the
IRS Office of Procurement, obtained Recovery Act procurement data to identify
the number of fixed-price contracts and performance-based contracts. Due to the limited scope of this review, we
did not conduct any audit testing to ensure the validity of these data.
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 did not assess internal controls because
doing so was not applicable within the context of our objective.
Appendix II
Major Contributors to This Report
Nancy A. Nakamura, Assistant Inspector General for Audit (Management
Services and Exempt Organizations)
Alicia P. Mrozowski, Director
Michelle Philpott, Audit Manager
Darryl J. Roth, Audit Manager
David P. Robben, Lead Auditor
Jessy T. Joseph, Senior Auditor
Brett C. Thornock, Auditor
Appendix III
Commissioner C
Office of the Commissioner
– Attn: Chief of Staff C
Chief, Agency-Wide Shared
Services OS:A
Director, Procurement 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:F
Director,
Procurement OS:A:P
[1] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[2] Procurement Audit Results Indicate Problems Continue to Exist After Corrective Actions Were Implemented (Reference Number 2010-10-088, dated September 14, 2010).
[3] Updated Implementing Guidance for the American Recovery and Reinvestment Act of 2009 (dated April 3, 2009).
[4] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[5] The Recovery Act included more than 50 tax law provisions that the IRS is charged with administering. These tax changes included refundable credits, such as the Making Work Pay and First-Time Homebuyer Credits.
[6] This appropriation amount included $80 million for the Health Coverage Tax Credit program and $123 million for supporting tax provision changes cited in the Recovery Act.
[7] The Recovery Act mandates that agencies must follow the same laws, principles, procedures, and practices in awarding contracts with Recovery Act funds as they do with other funds.
[8] The OMB has the primary responsibility for developing Government-wide rules and procedures to ensure funds are awarded and distributed in a prompt and fair manner; uses of funds are transparent to the public; and steps are taken to mitigate fraud, waste, and abuse.
[9] The OMB supplemental guidance includes OMB Memorandum M-09-10, Initial Implementing Guidance for the American Recovery and Reinvestment Act of 2009, dated February 18, 2009, and Memorandum M-09-15, Updated Implementing Guidance for the American Recovery and Reinvestment Act of 2009, dated April 3, 2009.
[10] Procurement Audit Results Indicate Problems Continue to Exist After Corrective Actions Were Implemented (Reference Number 2010-10-088, dated September 14, 2010).
[11] Performance-based contracting is a method of contracting for which the Government defines the results it is seeking, rather than the process by which those results are attained. The first benefit of performance-based contracting is better prices and performance. Second, the Government is released from having to develop detailed specifications and define the process. Third, the contractor has more flexibility on how it achieves the desired results. Finally, less day-to-day surveillance is required, and contractors are motivated to be innovative and to save money.
[12] Our review did not assess the effectiveness of the corrective actions that did not fall into the three categories discussed here, so we are not commenting on whether they adequately addressed the reported findings.
[13] Concerns About Contracting Officer’s Technical Representatives That Are Relevant to the American Recovery and Reinvestment Act of 2009 Procurements (Reference Number 2010-11-087, dated July 23, 2010).
[14] Procurement Audit Results Indicate Problems Continue to Exist After Corrective Actions Were Implemented (Reference Number 2010-10-088, dated September 14, 2010).
[15] Pub. L. No. 111-5, 123 Stat. 115 (2009).