Prohibition on Contracting with Delinquent Taxpayers and Felons

Last December, the FAR Councils published an interim rule that prohibits the Federal Government from entering into a contract with any corporation having a delinquent Federal tax liability or a felony conviction under any Federal law, unless the agency has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the interests of the Government. This prohibition was required to implement sections of the Consolidated and Further Continuing Appropriations Act of 2015.

Yesterday, the FAR Councils made the interim rule permanent, without change, even though there were a few public comments that opposed, objected, or raised concerns with aspects of the interim and now, final, rule. For example, someone noted that the FAR already includes Federal tax delinquency and criminal malfeasance as causes for debarment so a new (similar) rule is unnecessary. Be that as it may, the Councils' response was a reference back to the underlying statute that made the regulation necessary.

Corporations are now required to self-certify in the SAM (System for Award Management) "Representations and Certifications" section that it has no delinquent taxes or has been convicted for a felony criminal violation with the preceding 24 months. The precise wording follows:

The new regulation contains no provisions for false certifications. Presumably that would result in a terminated contract and debarment or suspension thereafter.

This new rule should not have much of an impact as DoD and many other agencies have already implemented similar provisions in their FAR supplements.

Screening Contractors with Unpaid Federal Tax Liabilities

Back in 2010, the White House noted in a memorandum to Executive Agencies that Government contracts were being awarded to "thousands of companies" with serious tax delinquencies. The total amount of unpaid taxes owed by these companies was estimated to be more than $5 billion at the time.

Since then, through directives and various authorization/appropriations acts, Agencies have tried to crack down on awards of contracts to firms with unpaid tax liabilities. In most cases, contractors must self-certify that they have no unpaid delinquent tax liabilities. The Department of Defense, for example, implemented this requirement in its FAR Supplement, DFARS 252.209-7991.

Well, how's it been working? We can tell you how the prohibition has not been working at the IRS.

The Treasury Inspector General for Tax Administration (TIGTA) recently issued its findings from an audit to determine whether contracting officers are completing the required tax checks to ensure that contractors with serious delinquencies do nbot receive taxpayer funds through contracts with the IRS.

The TIGTA found that IRS contracting officers were not effective in identifying tax delinquent contractors. As a result, the IRS remains at risk of awarding contracts to entities that are not in compliance with the regulations.

TIGTA reviewed 73 contract awards from a population of 336 contracts greater than $250 thousand that were awarded during a two-year period ending in August 2014. The auditors found that 21 of the 73 contract awards (29 percent) did not have evidence that the contracting officer performed the required tax check on the winning bidders. Even worse, in all 73 awards, there was no evidence that the other qualified bidders for the work underwent a tax check, as required.

The audit found several systemic problems. For example, tax check results did not contain sufficient information to enable contracting officers to support their responsibility determinations. Additionally, policies did not give contracting officers the ability to communicate tax check results to the affected contractor using consent processes when tax check results indicated tax debt. Finally, tax checks were only performed for solicitations greater than $250 thousand, leaving thousands of contracts at risk for violating the regulations.

The IRS undoubtedly has it easier than other Executive Agencies in identifying tax deadbeats. Other agencies must rely on self-certifications of prospective contractors. But that could change.

You can read the entire audit report here.

Unpaid Delinquent Tax Liabilities and Felony Convictions

If you are planning to enter into contracts with the Department of Defense or even bidding on such, you need to be aware of DoD's policy that prohibits funds to be used to enter into contracts with firms that are either delinquent in paying their Federal tax liabilities or have been convicted of a felony criminal violation under any Federal law within the past 24 months.

Specifically, this prohibition applies to corporations that:

• Has any unpaid Federal tax liability that has been assessed, for which all judicial and administrative remedies have been exhausted or have lapsed, and that is not being paid in a timely manner pursuant to an agreement with the authority responsible for collecting the tax liability, where the awarding agency is aware of the unpaid tax liability, unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interests of the Government; or
• Was convicted of a felony criminal violation under any Federal law within the preceding 24 months, where the awarding agency is aware of the conviction unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interest of the Government.

DoD contracting officers are now including a provision in all solicitations that require prospective contractors to "represent" that it has not unpaid Federal tax liabilities of the type described above and that it has not been convicted of a felony criminal violation under a Federal law within the preceding 24 months.

You can read more about these prohibitions by clicking here.