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Contracting and Tax Accountability:Ensuring a Level Playing Field

Name: Juanita M. Rendon, CPA Dr. Rene G. Rendon, CPCM U.S. Naval Postgraduate School

Session: 301Date: April 6, 2009Time: 1100-1230

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Overview

• Contractor Standards of Responsibility

• Responsibility and Tax Compliance

• Federal Tax Compliance Requirements

• Implications for Contracting Officers

• Contracting and Tax Accountability Act

• Conclusion

Contractor Standards of Responsibility (FAR 9.104)

• Contracts shall be awarded to responsible perspective contractors only

• No contract shall be awarded unless the contracting officer makes an affirmative determination of responsibility

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Contractor Responsibility Standards (FAR 9.104)

• A prospective contractor must affirmatively demonstrate its responsibility

• In the absence of information clearly indicating that the prospective contractor is responsible, the contracting officer shall make a determination of nonresponsibility

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Contractor Responsibility Standards (FAR 9.104)

• To be determined responsible, a prospective contractor must– Have adequate financial resources ….– Be able to comply with the required

delivery or performance requirements ….– Have a satisfactory performance record

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Contractor Responsibility Standards (FAR 9.104)

• To be determined responsible, a prospective contractor must– Have a satisfactory record of integrity and

business ethics– Have the necessary organization,

experience, accounting, and operational controls, and technical skills or the ability to obtain them

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Contractor Responsibility Standards (FAR 9.104)

• To be determined responsible, a prospective contractor must– Have the necessary production,

construction, and technical equipment, and facilities, or the ability to obtain them

– Be otherwise qualified and eligible

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Contractor Responsibility Standards (FAR 9.104)

• Our focus is on “satisfactory record of integrity and business ethics” (FAR 9.104-1(d)

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Certification Regarding Responsibility Matters (FAR 9.104-5) (Dec 2008)

• Offerors who do not furnish the certification or such information as may be requested by the contracting officer shall be given an opportunity to remedy the deficiency.

• Failure to furnish the certification or such information may render the offeror nonresponsible.

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Certification Regarding Responsibility Matters (FAR 9.104-5) (Dec 2008)

• (a)(1) The Offeror certifies, to the best of its knowledge and belief, that—

(i) The Offeror and/or any of its Principals—

(D) Have , have not , within a three-year ❏ ❏period preceding this offer, been notified of any delinquent Federal taxes in an amount that exceeds $3,000 for which the liability remains unsatisfied.

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Responsibility and Tax Compliance

• GAO reports indicate that contractors are abusing the tax system and avoiding fulfilling tax obligations– DoD contractors owed about $3B in unpaid taxes

(GAO-04-95)– Civilian agency contractors owed over $3B in

unpaid taxes (GAO-05-637)– GSA contractors had tax debts over $1.4B (GAO-

06-492T)

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• DoD contractors owed about $3B in unpaid taxes (GAO-04-95)

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• Civilian agency contractors owed over $3B in unpaid taxes (GAO-05-637)

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• GSA contractors had tax debts over $1.4B (GAO-06-492T)

Individual Income Taxes

Unemployment Taxes

Other Taxes

Excise Taxes

Corporate Income Taxes

Payroll Taxes

1% 5%6%

7%

39%

42%

DoD Contractor Unpaid Taxes by Tax Type

Source: GAO Analysis of DoD and IRS Records (GAO, 2004)

Federal Tax Compliance Requirements

• Payroll Taxes:– GAO report: DoD Contractor Unpaid Taxes (42%)– W-4 (Employee’s Withholding Allowance Certificate)– Pub. 15 (Circular E: Employer’s Tax Guide; Tables)– W-2: Wage and Tax Statement– Employer’s FICA (Federal Insurance Contributions

Act) (Social Security)– Trust Fund Taxes:

• Federal Tax Withholding• FICA (Social Security—Employee portion)• Medicare

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Federal Tax Compliance Requirements

• Payroll Taxes (cont.):– Employee trust fund taxes, along with Employer’s

matching FICA taxes, must be paid to the US Treasury Dept. via the Federal Tax Deposit System

– Trust Fund Recovery Penalty (TFRP) (civil penalty) can be imposed on those determined to be willful and responsible for the nonpayment of trust fund taxes

– Willful failure to turn over payroll taxes is a criminal felony

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Federal Tax Compliance Requirements

• Payroll Taxes (cont.):– GAO report found many GSA contractors using the

withheld payroll taxes for personal use and for operating their businesses

– Unless a potential federal contractor has been debarred or suspended due to tax evasion, federal law does not require contracting officers to consider tax noncompliance

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Federal Tax Compliance Requirements• Payroll Taxes (cont.):

– When the employees file their individual federal income tax returns, IRS gives them credit for the withheld payroll taxes even though the employer failed to turn over those trust fund taxes to the IRS

– Independent Contractor vs Employee • 1099-Misc vs W-2• Publication 1779:

– Behavior Control

– Financial control

– Relationship of the Parties

– The noncompliant federal contractors have an unfair cost advantage over those contractors who are compliant (not a level playing field)

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*Incarceration includes confinement to federal prison, halfway house, home detention, or some combination thereof. Data Source: Criminal Investigation Management Information System

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008

Investigations Initiated 104 113 108 47 167 164Prosecution Recommendations 66 97 101 53 47 103

Indictments/Informations 44 71 82 50 42 51

Sentenced 45 51 52 52 45 42

Incarceration Rate* 75.60% 86.30% 90.40% 78.80% 82.20% 81.00%

Avg. Months to Serve 20 18 30 19 22 29

How to Interpret Criminal Investigation Data:Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

Employment Tax Evasion Statistical Data

Federal Tax Compliance Requirements

• Corporate Income Taxes– Based on the corporation’s taxable income– GAO report: DoD contractor unpaid taxes (39%)

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Federal Tax Compliance Requirements

• Corporate Fraud Investigations

(Criminal Investigation Division of the IRS)– Ghost employees– Fictitious or padded time cards– Corporate funds diverted to personal bank

accounts– Corporate officers using corporate assets

for personal use

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Federal Tax Compliance Requirements

• Disclosure of Taxpayer Information:– 26 U.S.C Section 6103: Prohibits disclosure of

taxpayer information

– Taxpayer data for potential contractors is not usually available to contracting officers unless:

• Taxpayers provide their tax returns • Taxpayers have federal tax liens, which are

public record

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Federal Tax Compliance Requirements

• Federal Tax Liens:– Under Internal Revenue Code Section 6321, IRS

is authorized to file federal tax liens on all real or personal property and rights to that property of any taxpayer who owes federal income tax.

– Usually filed in the county courthouse where the taxpayer resides

– Caution: Not all federal tax release forms are filed at the courthouse in public records

– When a tax lien is released, a copy of the release can be obtained by the taxpayer from the IRS

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Federal Tax Compliance Requirements• Federal Payment Levy Program:

– Grew out of a provision in the Taxpayer Relief Act of 1997

– IRS and Financial Management Service (FMS) can share confidential tax information

– In general, IRS can levy up to 15% of certain federal payments made to businesses/individuals who owe federal income taxes (assessments, not merely accrual of delinquent taxes) (July 2000)

• Federal employee retirement annuities• Certain Social Security benefits• Some federal salaries• Federal employee travel advances reimbursements

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Federal Tax Compliance Requirements• Federal Payment Levy Program:

– Payments to federal contractors can be reduced by 100%, or the amount of the overdue tax, whichever is lower

– IRS usually considers the following prior to issuing a levy:

• Installment agreements• Offer-in-compromise (doubt as to liability; doubt

as to collectability)• Innocent Spouse Provision• Bankruptcy• Litigation• Financial hardship

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Federal Tax Compliance Requirements• Federal Payment Levy Program:

– In 2004, IRS and DoD formed the Federal Contractor Tax Compliance Task Force (FCTC)

• To improve the sharing of information between the IRS and other federal agencies, especially DoD

• IRS now uses the data from the Federal Procurement Data System to identify contractors with outstanding tax debts

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Implications for Contracting Officers

• Contractors who avoid fulfilling tax obligations should not be considered as maintaining a satisfactory record of integrity and business ethics

• Adequate evidence of a contractors committing tax evasion is a cause for debarment and suspension (FAR 9.406-2(b)(3); FAR 9.407-2(a)(3))

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Implications for Contracting Officers

• Contractors who avoid fulfilling tax obligations may have an unfair advantage in winning government contracts

• GAO reports have determined that these contractors have been awarded contracts based on price differentials over tax compliant competing offerors (GAO-06-492T)

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Implications for Contracting Officers

• Offerors must now certify regarding responsibility matters, such as delinquent Federal taxes

• Disclosure of taxpayer data from the IRS is generally prohibited by law

• COs have no access to taxpayer data from IRS

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Contracting and Tax Accountability Act (2009)

• Introduced as HR 572 on January 15, 2009 by 111th Congress

• Reporting by committee and voting by House and Senate are pending

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Contracting and Tax Accountability Act (2009)

• “To prohibit the awarding of a contract or grant in excess of the simplified acquisition threshold unless the prospective contractor or grantee certifies in writing to the agency awarding the contract or grant that the contractor or grantee has no seriously delinquent tax debts, and for other purposes”.

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Contracting and Tax Accountability Act (2009)

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• The head of any Federal agency that issues an invitation for bids or a request for proposals for a contract in an amount greater than the simplified acquisition threshold (as defined in section 4(11) of the Office of Federal Procurement Policy Act (41 U.S.C. 401(11)) shall require each person that submits a bid or proposal to submit with the bid or proposal a form--

• ‘(A) certifying that the person does not have a seriously delinquent tax debt; and

Contracting and Tax Accountability Act (2009)

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• ‘(B) authorizing the Secretary of the Treasury to disclose to the head of the agency information limited to describing whether the person has a seriously delinquent tax debt.

Contracting and Tax Accountability Act (2009)

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• ‘(C)(i) The term ‘seriously delinquent tax debt’ means an outstanding debt under the Internal Revenue Code of 1986 for which a notice of lien has been filed in public records pursuant to section 6323 of such Code.

• ‘(ii) Such term does not include--• ‘(I) a debt that is being paid in a timely manner

pursuant to an agreement under section 6159 or section 7122 of such Code; and

• ‘(II) a debt with respect to which a collection due process hearing under section 6330 of such Code, or relief under subsection (a), (b), or (f) of section 6015 of such Code, is requested or pending.’.

Contracting and Tax Accountability Act (2009)

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• ‘(C)(i) The term ‘seriously delinquent tax debt’ means an outstanding debt under the Internal Revenue Code of 1986 for which a notice of lien has been filed in public records pursuant to section 6323 of such Code.

• ‘(ii) Such term does not include--• ‘(I) a debt that is being paid in a timely manner

pursuant to an agreement under section 6159 or section 7122 of such Code; and

• ‘(II) a debt with respect to which a collection due process hearing under section 6330 of such Code, or relief under subsection (a), (b), or (f) of section 6015 of such Code, is requested or pending.’.

Conclusion

• Contracting and Tax Accountability will provide– Integrated and collaborative effort between

IRS and contracting agencies to address contractors abusing the federal tax system

– Greater integration and collaboration will help maintain integrity of federal tax system as well as federal contracting system

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