The Internal Revenue Service (IRS) supported the 8(a) business community by awarding over $36 million to 8(a) contractors during Fiscal Year 1998. An 8(a) firm is a Small Business Administration (SBA) approved small business that is owned and controlled by socially and economically disadvantaged American citizens. These 8(a) contractors have assisted the IRS in obtaining goods and services necessary to achieve organizational goals. However, the controls over the award and administration of 8(a) contracts could be improved.

The overall objective of the review was to evaluate whether the IRS is effectively using the 8(a) program to achieve organizational goals and whether sufficient controls exist to prevent fraud, waste, and abuse within the program. Due to ongoing contract investigations by the Treasury Inspector General for Tax Administration’s Office of Investigations, the Office of Audit did not conduct its planned tests of management controls regarding potential fraud, waste, or abuse within the program. At the conclusion of these investigations, any control weakness detected by the Office of Investigations will be addressed in a separate report.

While the 8(a) contractors provide valuable services to the IRS, additional emphasis is needed in planning and awarding 8(a) contracts. We also determined that improvements are needed in documenting 8(a) contractor compliance with federal subcontracting limitations.

During our review of 25 contracts, we identified 5 instances in which we believe the process for acquiring the goods and/or services could be improved. The Federal Acquisition Regulation (FAR), provides that 8(a) contracts are awarded on a competitive or non-competitive basis. These regulations further provide that contracts must be competed if the anticipated value over the life of the contract is greater than $3 million for acquisitions other than manufacturing.

We determined there were multiple purchase orders issued to one contractor prior to awarding the contractor two $3 million contracts. The total value of both contracts and associated purchase orders was in excess of $6.4 million, which exceeded the $3 million competition threshold. The purchase orders and contracts were for similar services and were awarded within a four-month period. Procurement management decided to continue with separate procurements because the time involved in combining and reorganizing the procurement was too lengthy and would not result in any cost or programmatic savings.

We further determined that the terms and conditions of contracts were not timely established for three letter contracts. A letter contract is a written preliminary contractual instrument that authorizes the contractor to commence work immediately. A letter contract must be superseded by a definitive contract. These letter contracts took an average of 11 months to establish the terms and conditions, even though regulations provide that the terms and conditions should be completed within 180 days after the date of the letter contract or before completion of 40 percent of the work to be performed. In 1 instance, the contract terms and conditions were negotiated 16 months after the letter contract was awarded. Although the Contracting Officer (CO) was successful in negotiating a $1.2 million credit for prior purchases, the IRS was unable to fully use the negotiated rates. It is anticipated that the IRS will ****7****.

The COs did not obtain documentation on how the 8(a) contractors planned to achieve compliance with federal limitations on subcontracting. A prior audit report identified a similar concern that IRS management relied on the SBA to evaluate the contractor’s compliance with federal limitations and additional controls were needed to ensure 8(a) contractor compliance with federal limitations. Only 1 of the 25 contracts we reviewed had documentation to support the contractor’s plan to comply with federal limitations. In reviewing the subcontracting documentation for this contract, it was questionable as to whether the 8(a) prime contractor would perform 50 percent of the work.. Regulations provide that at least 50 percent of the labor dollars must go to the 8(a) prime contractor for service type contracts. Failure to comply with subcontracting limitations could result in termination of the contractor from the 8(a) program.

The Assistant Commissioner (Procurement) should ensure all costs of an acquisition are considered when determining whether to compete the contract and continue to discourage the use of letter contracts. In addition, the Assistant Commissioner (Procurement) should ensure that documentation is obtained to certify that the 8(a) contractors are in compliance with subcontracting limitations.

Management’s Response: IRS management believes the recommendation that the Assistant Commissioner (Procurement) should ensure all costs of an acquisition are considered when determining whether to compete the contract is unnecessary. Management took this position because we identified only one instance of possible noncompliance with the competition requirements. In addition, IRS management believes they complied with competition requirements in the cited exception case.

IRS management also disagreed with discouraging the use of letter contracts, but will encourage the definitization of contracts within the recommended time frames. As a result, Procurement agreed to revise current Procurement Policies and Procedures to include a review to identify all letter contracts that have exceeded, or appear likely to exceed, the limits for definitization recommended in the FAR.

Additionally, Procurement management agreed to revise current policy and procedures to require COs to address subcontracting limitations in the price negotiation memorandum for each 8(a) contract. A complete copy of management’s response to the draft report is included as Appendix IV.

Office of Audit Comment: While we identified only one instance of apparent noncompliance, we believe it indicates a potential management control weakness. In this regard, the intent of our recommendation is to address situations where the value of the purchase orders issued are not considered in the total estimated value of the contract when deciding whether to compete the contract. It is our opinion that the value of all procurement actions to a contractor for the same, or similar, goods and services should be considered when determining whether the acquisition meets the competitive requirement.

7 = Predecisional staff recommendations or suggestions to agency decision makers