The report said only 50 of the vendors were on a payment plan to pay off their debt.
Inspector General J. Russell George says the IRS sends a bad message to the public when it does business with contractors that owe back taxes. George has recommended the IRS require an annual tax check for all contractors, but the agency has resisted.
In a written response to the report, the IRS said it is "committed to improving the controls" over its list of approved vendors.
The vendors who owe back taxes received approximately $741 million in payments from the IRS between October 2010 and June 2012.