Bill would bar tax delinquents from federal contracting

A bill introduced in the House this week would bar companies that are delinquent on their taxes from receiving federal contracts.

The Contractor Tax Enforcement Act (H.R. 1870) goes a step beyond a recently proposed federal contracting rule that would require companies bidding on federal work to certify their tax compliance.

Under the bill, sponsored by Rep. Edolphus Towns, D-N.Y., agencies would be given the authority to check with the Internal Revenue Service to find out if potential federal contractors have outstanding tax delinquencies. Officials could deny contracts to companies that have not worked with the IRS to address their obligations.

Currently, agencies cannot access IRS records without a taxpayer's consent.

"It is especially wasteful for government agencies to write checks to companies that owe money to the IRS," Towns said at a Thursday hearing on the measure. "The bill would provide a level playing field for contractors that comply with our laws, who have to compete with companies that have lower costs because they are dodging their taxes."

Towns described the measure as affecting only "seriously delinquent companies" because agencies would not be able to deny a contract unless 180 days had passed after a final tax assessment without the company making payment arrangements. The bill also includes exceptions for disaster relief and national security contracts.

Government Accountability Office studies over the past several years have found that tens of thousands of government contractors owe a total of at least $8 billion in unpaid federal taxes. Much of that amount is in payroll taxes that had been deducted from employee paychecks but not forwarded to the IRS.

Testifying before the Government Oversight and Reform Subcommittee on Government Management, Organization and Procurement, which Towns chairs, a GAO official said Thursday that an in-depth look at 122 of those contractors found that in every case there was abusive and potentially criminal tax activity.

The official described egregious cases of executives failing to pay payroll and other taxes while lavishing money on a sports team, luxury cars, an airplane, gambling and multimillion-dollar homes. Failure to pay payroll taxes is a criminal felony.

Paul Denett, the Office of Management and Budget's chief of procurement policy, told lawmakers that a new task force dedicated to federal contractor tax compliance has improved agencies' abilities to collect unpaid taxes.

But Denett said he did not support the proposed bill, which he said would result in "de facto debarments" of contractors being imposed outside of the due process established in acquisition regulations.

Federal rules delineate a process to protect the rights of agencies and contractors in suspension and debarment proceedings, and the rules explicitly state that the process should be used to protect the government's interest, rather than as a punishment. In practice, companies are rarely debarred due to the stringent legal requirements of the process. Instead, agencies often terminate contracts for "convenience" rather than "default" with no responsibility assigned.

Denett said the Office of Federal Procurement Policy "is committed to ensuring that government contracts are awarded to responsible, law-abiding contractors who take their tax obligations seriously." But citing steps taken by the task force and the recently proposed rule change, he said, "I feel the progress we have made as a community and the proposed change to the [Federal Acquisition Regulation] preclude the need for additional legislation."

Speaking on background, a Democratic subcommittee staff member said lawmakers on both side of the aisle seem to be convinced of the need for stronger measures than the self-certification contained in the pending rule change.

He said discussions would continue to address the concerns expressed by Denett and others regarding due process, and that one solution might be to tighten the bill's definition of delinquency to encompass only the most egregious offenders for immediate contracting bans, possibly pushing others toward the existing suspension and debarment process.

Questioned on whether the bill requires agencies to check companies' tax status or simply authorizes it, the aide said that as currently written, the bill language may be ambiguous. He said it may be changed to reflect the authors' intention that agencies be required to exclude non-compliant companies.

The aide said the measure would likely move slowly and gain bipartisan support at the subcommittee level, and also will require consideration by the Ways and Means Committee. A similar measure proposed during the 106th Congress was blocked by that committee, he said, but its current members have expressed a willingness to consider the bill.