2. 1 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: 301 Date: April 6, 2009 Time: 1100-1230

3. 2 Overview Contractor Standards of Responsibility Responsibility and Tax Compliance Federal Tax Compliance Requirements Implications for Contracting Officers Contracting and Tax Accountability Act Conclusion

4. 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 3

5. 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 4

6. 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 5

7. 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 6

8. 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 7

9. Contractor Responsibility Standards (FAR 9.104) Our focus is on “satisfactory record of integrity and business ethics” (FAR 9.104- 1(d) 8

10. 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. 9

11. 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. 10

12. 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) 11

13. 12 DoD contractors owed about $3B in unpaid taxes (GAO-04-95)

14. 13 Civilian agency contractors owed over $3B in unpaid taxes (GAO-05-637)

15. 14 GSA contractors had tax debts over $1.4B (GAO-06-492T)

16. 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)

17. 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 16

18. 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 17

19. 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 18

20. 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) 19

21. 20 *Incarceration includes confinement to federal prison, halfway house, home detention, or some combination thereof. Data Source: Criminal Investigation Management Information System FY2003FY2004FY2005FY2006FY2007FY2008 Investigations Initiated10411310847167164 Prosecution Recommendations66971015347103 Indictments/Informations447182504251 Sentenced455152 4542 Incarceration Rate*75.60%86.30%90.40%78.80%82.20%81.00% Avg. Months to Serve201830192229 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

22. Federal Tax Compliance Requirements Corporate Income Taxes –Based on the corporation’s taxable income –GAO report: DoD contractor unpaid taxes (39%) 21

23. 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 22

24. 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 23

25. 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 24

26. 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 25

27. 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 26

28. 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 27

29. 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)) 28

30. 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) 29

31. 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 30

32. Contracting and Tax Accountability Act (2009) Introduced as HR 572 on January 15, 2009 by 111 th Congress Reporting by committee and voting by House and Senate are pending 31

33. 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”. 32

34. Contracting and Tax Accountability Act (2009) 33 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--41 U.S.C. 401(11) ‘(A) certifying that the person does not have a seriously delinquent tax debt; and

35. Contracting and Tax Accountability Act (2009) 34 ‘(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.

36. Contracting and Tax Accountability Act (2009) 35 ‘(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.’.

37. Contracting and Tax Accountability Act (2009) 36 ‘(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.’.

38. 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 37