IRS Contractor Cheated His Way to $500 Million in Questionable Bids | AccountingWEB

IRS Contractor Cheated His Way to $500 Million in Questionable Bids

By Teresa Ambord
Scandals, scandals everywhere, and not an excuse to make. This seems to be the atmosphere at the IRS, as one problem after another has been revealed in recent weeks. On June 25, the results of a congressional investigation focused on yet another issue: a technology contractor who won "questionable bids" with the IRS worth up to $500 million. 
There's nothing wrong with doing all you can to gain advantages, as long as it's honest and aboveboard. But the investigation revealed there was a lot going on with this contractor, Braulio Castillo, that definitely didn't pass the smell tests.
Soon after Castillo founded his tech company  Strong Castle  in 2012, he began winning IRS contracts worth hundreds of millions of dollars. That kind of rapid rise raised some eyebrows on Capitol Hill. After taking a closer look, Darrell Issa, chairman of the House Oversight and Government Reform Committee, said, "We've found the kind of wrongdoing that should have caused this contract to be cancelled." 
Here's what happened
Technically, Castillo didn't break the law. But he does appear to have bent a few . . . severely. If the charges prove true, he seems to have taken advantage of programs designed to give preferential treatment to certain small businesses, even though he didn't actually qualify.
Here are some of the interesting points the investigation found:
1. The federal government sets aside some contracts for disabled veterans. Just before opening Strong Castle, Castillo filed for a "disability rating" with the Veteran's Administration. That allowed him to register Strong Castle as a "service-disabled, veteran-owned small business," which pushed him forward for preferential treatment in the bidding process. The problem, said Issa, is the injury and the timing of the injury. Castillo hurt his foot playing sports at US Military Academy Preparatory School way back in 1984. After that, he didn't complete further military service. 
Issa added, "Understand  never served a day on active duty, went to a school at taxpayers' expense, and had a minor injury that didn't keep him from going on to play college ball.
2. Castillo located Strong Castle "in the heart of Chinatown," according to his website. This is a government designated HUBZone, which is short for Historically Underutilized Business Zones program.* The idea is to bring jobs to an economically distressed area. The investigation says Castillo seems to have opened his office there and called it the business' principal location, giving Strong Castle further preferential treatment. The problem? Nobody appears to work on the premises. Several visits to the site by investigators found no one present. Castillo himself works from his home in a wealthy Virginia suburb. CBS News reported that investigators concluded Castillo's wife may have "manipulated employee time sheets" to give the appearance employees spent more time there. 
3. Instead of hiring residents and bringing jobs to the area, he hired students from Catholic University, a relatively high-tuition school. Hiring students gave him even more preference. 
If you think these advantages would be more than enough to propel Castillo's firm to the top of the list, wait . . . there's more. He has a friend on the inside, none other than then-IRS Deputy Director Greg Roseman. According to a Bloomberg Businessweek report, Roseman's help "was crucial to Strong Castle's success winning contacts." 

IRS Contracts May Be the Goal, but Miss the Point

Bloomberg Businessweek reported federal law requires agencies to award 23 percent of its prime contracts to small businesses, and some portion to businesses owned by women and veterans. Though they generally fall short of those goals, in the last two years, the IRS did meet the targets. Here's how the IRS did this, according to the report from Congress:
"It is not unusual for the IRS to award a large sum contract to a small disadvantaged business such as Strong Castle, only to have the bulk of the funds go to a large computer manufacturer such as IBM or Hewlett-Packard. This practice completely undermines the goals of these programs. It is, in fact, a 'pass through' because in the end, a large corporation receives the funds, and in many cases, performs the work."
On June 26, Roseman was summoned to the House Oversight and Government Reform Committee to answer questions about his association with Castillo. Only, he didn't. He took the Fifth: "On the advice of the counsel, I respectfully decline to answer any questions and invoke my Fifth Amendment privilege to remain silent." This was in answer to Issa's question asking him who he reported to at the IRS as well as to other questions he was asked. He offered no statement in his own defense.
Roseman has been removed from his position pending the outcome of the inspector general investigation.
As for Castillo, he told CBS News in a statement, "Throughout our work with the IRS, we have never received any improper preferential treatment and have competed fairly for every contract that we have received." 
CBS News reported that although the House committee reported these findings to the IRS months ago, officials there said cancelling a contract worth $260 million would be "too disruptive." Meanwhile, Strong Castle was stripped of its HUBZone designation earlier this year.
So what happens now? With pressure on the IRS  from the public and from Congress  to clean up its act, there may be more news coming. Watch for updates.
* A report from the Government Accountability Office published in 2010 states the HUBZone program itself is vulnerable to fraud and abuse. 
Watch a video of Tammy Duckworth (D-IL), an Iraq war veteran, during the hearing of the House Committee on Oversight and Government Reform as she takes on Castillo.
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