Issa Releases Report Finding Questionable Contracting Practices at IRS

June 25, 2013

(WASHINGTON) Today, House Oversight and Government Reform Committee Chairman Darrell Issa (R-Calif.) released a report detailing a problematic and abusive contracting relationship between the Internal Revenue Service (IRS) and contractor Strong Castle. The report found that a personal relationship between an IRS contracting official and the owner of a company, Strong Castle/Signet Computers, facilitated contracts in a six month period that could be worth nearly $500 million. Prior to January 2012, the company had only $250,000 in annual revenue. The report, detailing a Committee investigation that began in February, also found that Strong Castle/Signet Computers gained an advantage over competitors by gaining a socioeconomic HUBzone business designation by making false representations to the Small Business Administration.

Despite knowing about these concerning issues with Strong Castle/Signet Computers, the IRS has failed to revoke tainted large contract awards or take disciplinary action against IRS employees who acted inappropriately. Throughout the report, numerous examples from texts, emails, and witness testimony show that the IRS contracting officer played an often hands-on role in tilting the table in Strong Castle’s favor in numerous contract competitions.

“Today, the IRS cannot look taxpayers in the eye and truthfully say they are protecting their contributions to government,” said Issa. “By inappropriately using a personal relationship and abusing a provision designed to help disadvantaged businesses, the IRS and Strong Castle have made a mockery of fair and open competition for government contracts.  Taxpayers deserve accountability and the Committee is troubled by this unacceptable behavior.”

Tomorrow, the Oversight Committee will hold a full committee hearing at 9 am in Rayburn 2154. The hearing will be streamed live at oversight.house.gov

Witnesses:

Ms. Beth Tucker

Deputy Commissioner for Operations Support

Internal Revenue Service

 

Mr. Michael Chodos

Associate Administrator

Office of Entrepreneurial Development

U.S. Small Business Administration

 

Mr. Brad Flohr

Senior Advisor for Compensation Service, Veterans Benefits Administration

U.S. Veterans Administration

 

Mr. Gregory Roseman

Deputy Director, Enterprise Networks and Tier Systems Support

Internal Revenue Service

 

Mr. William A. Sisk

Deputy Commissioner

Federal Acquisition Service

General Services Administration

 

Mr. Braulio Castillo

President and Chief Executive Officer

Strong Castle, Inc.

 

Key Report Findings:

  • Prior to January 2012, when Braulio Castillo purchased Signet/Strong Castle, the business had $250,000 in annual revenue.  In just six months, it won over $500 million of potential awards – overwhelmingly these awards came from the IRS.  (Section IX(C), p. 94).
  • Strong Castle’s business strategy revolved around preference contracting.  Strong Castle secured the designation of a Service-Disabled Veteran-Owned Small Business as a result of an injury its owner suffered at a military prep school.  He was able to get this designation despite the fact that he never actively served as a member of the armed services, he played college football after the injury, and twenty-seven years went by before he sought the designation as a disabled veteran.  Castillo sought the disabled veteran designation only months before he purchased the company and was so focused on its ability to help secure contracts that he didn’t even know it would entitle him a $450 monthly payment.
  • Strong Castle gained a competitive edge by winning a designation from the Small Business Administration as a HUBzone contractor Strong Castle did this by (1) hiring full time college students from Catholic University to fulfill the 35% requirement; (2) falsely dubbing more senior employees who lived in other areas as “consultants” so that they would not harm the 35% employee threshold minimum; and (3) although the company opened a new “headquarters” office in Leesburg, Virginia, it also opened a small office in Chinatown that it said was its “principal office.”  One student employee was fired after Strong Castle discovered she did not live in the HUBzone area.  Another student supposedly worked 9 hours at the office the same day he had 4 1Ž2 hours of final exams.  Strong Castle said this was simply a discrepancy in its records (pp. 25-58).
  • SBA revoked Strong Castle’s HUBzone designation after information about false claims were brought to its attention by the Oversight Committee.
  • Student employees interviewed by the Committee had only limited knowledge of what the company did or that it even had contracts with the IRS.
  • In an interview this month with Oversight Committee investigators, Castillo acknowledged that he has had a longstanding relationship with IRS Deputy Director, Enterprise Networks and Tier Systems Support Gregory Roseman since 2003 (p. 56).
  • The Committee reviewed over 350 text messages between Roseman and Castillo.  The messages show a relationship far closer than an arms-length relationship between a contractor and government contracting customer.  Text messages include grossly inappropriate homophobic slurs that underscore a problematically close relationship (p. 56).  Castillo said months of records for other text messages, at critical contract junctures, were accidentally deleted and unavailable.
  • The Director of the IRS’s Office of IT Acquisition told investigators that he would cancel a $266 million IBM blanket purchase agreement made with Strong Castle if it was shown that it had intentionally misrepresented facts about its HUBzone certification.  The contract had been described at the biggest contract put out by IRS in 15 years.  Despite SBA revoking Strong Castle’s HUBzone status, IRS now says that cancelling the contract would be too disruptive and doesn’t currently plan to do so (p. 148).
  • While IRS has asked TIGTA to investigate, no discipline has been planned or announced for the IRS contracting officials whose conduct was criticized by other IRS employees.  Meanwhile, taxpayers remain on the hook for the costs of these contracts given to a vendor with questionable reliability.

Read the report here.