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IRS scandal exposes small-biz pass-throughs

Jul. 7, 2013 - 06:00AM   |  
By JIM McELHATTON   |   Comments
Braulio Castillo is the owner of Strong Castle, which is under congressional investigation into irregularities concerning the company's set-aside status and its IRS contracts.
Braulio Castillo is the owner of Strong Castle, which is under congressional investigation into irregularities concerning the company's set-aside status and its IRS contracts. (Thomas Brown / Staff)

Seven months ago, the Treasury Department boasted that it exceeded its small-business contracting goals for the second straight year, singling out for “exceptional performance” the contractor formerly known as Signet Computers.

But with the company now under investigation, an IRS official has disclosed that all but a small fraction of the quarter-billion-dollar blanket purchase award to the company was destined for computer giant IBM.

The IRS is cutting ties to Signet — later renamed Strong Castle — in the wake of a congressional investigation into a host of irregularities concerning the company’s set-aside status and its IRS contracts.

Investigators with the House Oversight and Government Reform Committee uncovered potential contract steering, false statements and questions about how a decades-old old military prep school foot injury by the company’s owner, Braulio Castillo, enabled Strong Castle to win special status as a service-disabled, veteran-owned contractor.

While the House found up to $500 million in potential contracts to the company after Castillo purchased it in January 2012, IRS deputy commissioner Beth Tucker told lawmakers at a June 26 hearing that Strong Castle “has not received anywhere near that amount of money.”

Referring to one blanket purchase agreement worth up to $267 million to provide software maintenance and services, she said 98 percent of the value of the contract, if awarded, would “flow to IBM.” Still, she said Strong Castle provided a critical program management and logistics role.

Castillo agreed. He said his company competed for blanket purchase order deals, but it ultimately received about $50 million in IRS orders, of which $49 million went to “large business providers.”

“This is just the tip of the iceberg,” said Lloyd Chapman, founder of the American Small Business League, a nonprofit group that estimates large companies received more than $16 billion from the federal government’s top 100 small-business contracts in fiscal 2001.

Committee investigators said such “pass-throughs” aren’t limited to Strong Castle.

“To illustrate this point, it is not unusual for 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,” committee staff wrote in the report. “This practice completely undermines the goals of these programs.”

An IRS spokesman declined to comment other than to provide the written testimony of Tucker, who noted that IRS is committed to its small-business program to help create jobs and drive the economy forward.

Role of friendship questioned

The monthslong House probe raised no questions about IBM’s role or performance. Rather, it centered on how Castillo’s company gained entry into the government set-aside market. Investigators also exposed Castillo’s friendship with Greg Roseman, former IRS deputy director for enterprise networks and tier support systems.

Roseman and Castillo were friends who, investigators learned, had exchanged hundreds of text messages, including several on the vulgar side. But the IRS official also served on the acquisition strategy team for one contract awarded to Strong Castle and pushed for the company to get IRS work, the investigation found.

Roseman isn’t talking. He invoked his Fifth Amendment right against self-incrimination in declining to testify. He’s been removed from his supervisory job and reassigned pending the outcome of a Treasury Inspector General for Tax Administration investigation, according to Tucker.

Castillo said neither he nor his company did anything wrong.

“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,” Castillo said in an email statement.

But even as the IRS moves to distance itself from Strong Castle, assuring lawmakers it received far less than $500 million, less clear is how the agency went about calculating how much money it spends on small businesses based on its contracts with Strong Castle.

Last year, the Treasury Department, which includes the IRS, reported that it spent 38.5 percent, or $2.3 billion in contracts, on small businesses — besting its goal of 32 percent.

In a blog post announcing the achievement, Assistant Treasury Secretary Nani Coloretti wrote in January that one example of the department’s excellent performance in meeting small-business goals was none other than Castillo’s company. “Signet worked closely with the Treasury procurement community to understand their needs and delivered innovative and cost effective infrastructure solutions,” she wrote.

'Fraudulent' scoring

Rep. Darrell Issa, chairman of the oversight panel, said Strong Castle’s case suggests flaws in how agencies report and track small-business contracting goals.

“One of the frauds on the American people ... is we get these report cards talking about hundreds of millions and billions of dollars going to our disabled veterans, hundreds of millions and billions of dollars going into these blighted zones that we’re trying to encourage,” Issa said at the June hearing.

“And we’re scoring impact to blighted communities when in fact that score is at best fraudulent. We’re scoring apparently $1 million but writing it in as 10 times or 100 times that.”

Under Small Business Administration rules, contractors get an edge in competing for federal work if they’re based in economically distressed areas known as HUBZones, or Historically Underutilized Business Zones. SBA revoked Strong Castle’s HUBZone status in May, and the House report said the company provided “inaccurate, unreliable and misleading information” to SBA to get that status. In a statement to Federal Times before the report was released, the company said it disagreed with the SBA ruling.

Federal Times emailed a copy of Issa’s statement to SBA, which did not say how funds paid out to Strong Castle, and later passed along to large companies, were tallied in report cards released July 2 grading agency efforts to contract with small businesses. Treasury received an A-plus.

While Strong Castle received millions of dollars in orders from IRS in fiscal 2012 during August and September, the company’s big $267 million blanket purchase order came during fiscal 2013.

“The contract vehicle used in the Strong Castle case is fairly unique,” SBA spokeswoman Tiffani Shea Clements wrote in a email to Federal Times, referring to the company’s “contract teaming agreement” with IBM. Under such agreements, two or more contractors on the General Services Administration schedule can join and compete for orders they might not qualify for individually, according to GSA’s website. It’s different from a typical contractor-subcontractor relationship in that both parties are considered equal.

“SBA is working with GSA to ensure proper small business goaling credit is given,” Clements wrote.

Firm blasted for veteran status

Meanwhile, much of the public scrutiny on Strong Castle remains not on SBA, but on how the Veterans Affairs Department came to award the company status as a service-disabled, veteran-owned business.

Castillo filed a claim with VA seeking compensation for a service-related disability 27 years after his prep school injury, but around the same time he purchased a government contracting company, committee investigators found.

The report said Castillo first told committee investigators he injured his foot playing football in fall 1984 during his single year as a student at the U.S. Military Academy Preparatory School, but later he said it was an injury he got during a military school exercise, which he called orienteering.

In an exchange that’s circulated widely online, Rep. Tammy Duckworth, D-Ill, who lost her legs and the use of her right arm as a helicopter pilot in Iraq in 2004, pressed Castillo on his 1984 injury.

“So I’m sorry that twisting your ankle in high school has now come back to hurt you in such a painful way, if also opportune for you to gain this status for your business as you were trying to compete for contracts,” she told Castillo.

Had Castillo completed his year at the preparatory school without injury, he wouldn’t have been considered a veteran, but a VA official told House investigators that cadets who are injured at school become veterans due to the service-connected disability.

A VA spokeswoman had no comment when asked whether the agency would review Strong Castle’s service-disabled, veteran-owned status, pointing to a statement saying VA seeks ways to improve small-business verification.

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