Obama Administration Directs Tax-Enforcement Action Against Contractors
Citing an estimated $5 billion in unpaid taxes by federal contractors, President Obama signed a memorandum to his cabinet on January 20 which directed executive departments and agencies to review their records and policies with respect to contractors with potentially delinquent taxes, and consider possible actions against such contractors.
The Obama memorandum directed the following specific actions:
- The IRS Commissioner will conduct a review of the certifications of tax non-delinquency submitted by contractors pursuant to FAR 9.104-6 and FAR 52.209-5 (Certification Regarding Responsibility Matters), which were added to the FAR in May 2008. The IRS Commissioner will submit a report to the President on the overall accuracy of these certifications by April 20, 2010.
- The Director of the Office of Management and Budget (“OMB”) will work with the Treasury Department and other cabinet agencies to evaluate practices of contracting officers and debarring officials in response to contractors’ certifications of tax delinquencies under FAR 52.209-5.
- Not later than April 20, 2010, the OMB Director will report to the President on process improvements, including a plan to ensure contractors are not awarded new contracts when the government considers them delinquent on their taxes, and inclusion of this information in a government-wide database.
In addition to these steps, President Obama indicated he would ask Congress for legislation that would further sanction contractors for failing to pay taxes. “Beyond these steps, I'm also calling on Congress to build on the kind of legislation that Senator McCaskill, Congressman Ellsworth, and Chairman Towns have introduced -- and that I introduced when I was senator -- legislation that will crack down on tax cheats by allowing the IRS to share information about tax delinquency with contracting officials,” President Obama said in a speech accompanying the signing of the memorandum.
Additionally, the administration said it plans to reintroduce language from last year’s budget submission which would enable the government to offset payments to contractors by the amount of any back taxes owed.
This policy announcement from the Obama administration comes on the heels of other policy and enforcement actions affecting the contractor community. For example, on November 20, 2009, President Obama issued an executive order “to reduce improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the Federal Government.” See MLA Advisory, “More Focus on Improper Payments to Contractors Likely Means More Compliance and Reporting Requirements and Potential Cash Flow Impacts, Dec. 15, 2009. On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009, which substantially broadened the False Claims Act (“FCA”) in an effort to get tough on contractors. See MLA Advisory, Obama Signs Into Law Key Amendments to the False Claims Act, May 22, 2009.
In 2010, it is likely that the Obama administration will continue its stance towards the contractor community, including but not limited to its efforts to “in-source” functions now performed by contractors, toughen the statutory and regulatory regime governing contracting by the Government, and increase the level of enforcement activity directed at contractors. While the vast majority of government contractors do not have delinquent tax issues, the potential regulatory enforcement of this policy may well result in the requirement for additional scrutiny of the qualifications of subcontractors and vendors. In addition, legitimate disputes with the IRS will need to be well documented and well presented in order to ensure that this policy does not provide leverage to the government to force otherwise unobtainable settlements. MLA will continue to report on the development of the regulatory enforcement of this policy, and contractors may wish to involve themselves in the response to the inevitable overreach of the proposed regulatory scheme.
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