House investigators say the largest contract issued by the Internal Revenue Service in the last 15 years has been award fraudulently, but the agency has no plans to revoke it.

House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., said the IRS handed a $266 million purchasing agreement to Strong Castle, an information technology company based in Leesburg, Va., based on the company owner’s “longstanding relationship,” with an IRS deputy director Gregory Roseman, who is in charge of the agency’s Enterprise Networks and Tier Systems Support.

The company was recently named “small business contractor of the year,” by the Treasury department. According to Issa, the company earned a Service-Disabled Veteran-Owned Small Business designation based on the owner’s injuries sustained during military prep school and not during active duty or in combat for the U.S. armed forces.

Issa issued a report on the fraud investigation Tuesday and plans to hold a hearing on the matter Wednesday that will feature, among other witnesses, both Roseman and Strong Castle Inc. president and CEO Braulio Castillo.

A message sent to Castillo’s company by the Washington Examiner has not been returned.

According to the Oversight panel’s report, investigators found evidence of the relationship between the two men despite public denials earlier this year by Castillo that had a close relationship with anyone at the IRS. More than 350 text messages between Roseman and Castillo tell a different story, the report found.

“The messages show a relationship far closer than an arms-length relationship between a contractor and government contracting customer,” the report states. “Text messages include grossly inappropriate homophobic slurs that underscore a problematically close relationship. Castillo said months of records for other text messages, at critical contract junctures, were accidentally deleted and unavailable.”

Among the text messages between the two men were “offensive jokes about the physical appearance of other IRS employees.”

Castillo also asked Roseman for help “structuring a deal” to set up a new company that would focus on selling technology to the IRS.

Roseman, who was in charge of millions of dollars in IRS contracts, sent Castillo a text message on Dec. 31, 2011, congratulating him on his new company and telling him, “U will be fortune 500 in no time.”

Within a year, the IRS had awarded contracts valued at more than $500 million to the new company.

The report also found that Roseman helped Castillo win contracts with the General Services Administration by “calling on old friends,” at the agency.

The report also notes that the Small Business Administration revoked the company’s “HUBzone” designation, which along with the Service-Disabled, Veteran-Owned label, gave Castillo a competitive edge.

The report accuses Castillo of using fraudulent hiring practices to obtain the HUBzone label, which, according to the Small Business Administration, helps companies “gain preferential access to federal procurement opportunities,” if they locate in “underutilized business zones.”

Castillo is located primarily in Leesburg but keeps an office in Chinatown.

According to investigators, the head of the IRS Office of Information Technology Acquisition said he would cancel the $266 million contract if it turned out Castillo had fraudulently obtained his HUBzone certification. But now, the IRS official said he has no plans to do so because “canceling the contract would be too disruptive,” according to the report.

Update: Castillo has issued a written statement responding to the report:

“Strong Castle, Inc. is a small business that delivers high-quality IT products and services to the federal government. The family-owned company is a well-qualified, minority-owned small business, and all of its contracts with the federal government were properly awarded through the competitive procurement process.

“The U.S. government has a variety of programs intended to create contracting opportunities for qualified small businesses. Among these programs are the HUBZone program (for Historically Underutilized Business Zones) and the SDVOSB program (for Service-Disabled Veteran-Owned Small Business Concerns). We have worked closely with the U.S. Small Business Administration and the Department of Veterans Affairs to meet the requirements to qualify as a HUBZone business and a Service-Disabled Veteran-Owned Small Business Concern.

“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. We are confident that the record will ultimately show that our company has committed no wrongdoing.”