Rule would require contractors to report tax debts

Would-be federal contractors would have to certify they are paying their taxes if a proposed rule is approved.

The regulation, published Friday in the Federal Register, would require contractors to indicate whether, over the most recent three years, they have been convicted of violating any tax law or failing to pay any tax, as well as whether they have been notified of any delinquent taxes or have an unresolved tax lien.

The proposal responds to findings, unearthed through a Senate investigation and work by the Government Accountability Office, that agencies regularly pay federal contractors for new work even when the firms have significant tax debts. Under the proposed rule, a firm could be suspended or debarred for tax delinquency or tax-related convictions.

The Senate Homeland Security and Governmental Affairs Subcommittee on Investigations has, over the past three years, investigated nonpayment of taxes by federal contractors with various agencies. Subcommittee studies of civilian and defense contractors found about $6.3 billion in unpaid taxes, and a GAO study last year found that about 3,800 General Services Administration contractors owed about $1.4 billion in taxes.

Under current rules, contractors must indicate if they have been charged or convicted of tax evasion, but the proposed rule covers a wider range of charges and also includes notifications of unpaid taxes for which charges have not been filed under criminal or civil laws.

Sen. Norm Coleman, R-Minn., who is ranking member of the subcommittee and led the investigation as chairman during the last session of Congress, said the proposed rule would help identify companies with whom agencies should not do business, before contracts are written.

"It is time to stop subsidizing federal contractors who cheat on their taxes," Coleman said. "Simply put, if federal contractors don't pay their taxes, they won't be doing business with Uncle Sam anymore."

Scott Amey, general counsel for the Washington, D.C.-based Project on Government Oversight, welcomed the rule change. "Federal contractors need to be held accountable, and one way to ensure accountability is to identify and expose tax dodgers," he said. "The proposed rule could become a valuable tool that would prevent those contractors from receiving additional federal dollars."

Alan Chvotkin, senior vice president of the Professional Services Council, an Arlington, Va.-based industry association, said his group generally supports the proposed rule as well, and noted that it mirrors requirements already in effect for defense contractors.

But he raised concerns about potential ambiguity over what would constitute delinquent taxes that would require certification. "There are some [tax] dispute processes, so the term 'delinquent' on the IRS or GAO side might be different than what some companies view as delinquent," he said.

Chvotkin differentiated the proposed rule from a provision, enacted through the 2006 Tax Reconciliation Act, requiring agencies to withhold 3 percent of most government payments for tax purposes. He said that provision does not uniquely target contractors, but his group opposes it in part because contract payments are not directly linked to taxes, so the withholding is unrelated to an individual company's tax liability. The Professional Services Council is part of a coalition seeking to repeal that withholding provision before it goes into effect at the end of 2010.

Comments on the proposed rule will be accepted until May 29, and can be submitted through the Federal eRulemaking Portal under FAR Case 2006-011.