House passes bill to prevent tax cheats from winning contracts

Today millions of procrastinating Americans will rush to their local post office to make sure they file their tax returns on time. For contractors interested in doing business with the federal government, missing this year's deadline may be particularly costly.

On Tuesday, the House approved H.R. 4881, which would withhold large federal contracts and grants from firms that are delinquent in paying taxes. The Contracting and Tax Accountability Act, sponsored by Rep. Brad Ellsworth, D-Ind., passed by a voice vote.

"Not only do these bad actors cheat our government of tax revenue, they also gain an unfair advantage over businesses that are doing the right thing," Ellsworth said. "This bill is a practical and cost-effective way to ensure all companies compete on an equal playing field and to restore some accountability in the government contracting system."

The bill would require firms to submit, along with their contract bid proposal, a form certifying that they do not have any "seriously delinquent tax debt." Contracting officers would then, for the first time, be required to verify the company's statement through an Internal Revenue Service database that tracks tax liens.

The bill defines seriously delinquent tax debt as an outstanding debt for which a notice of lien has been filed in public records. The bill would not affect companies paying tax debts through an installment agreement, or that have requested a collection due process hearing.

The act would not apply to contracts below the simplified acquisition threshold of $100,000.

Similar provisions were included in the omnibus appropriations bill late last year, but are effective only for fiscal 2008. Regulators also are preparing to separately change the tax delinquency rule in the Federal Acquisition Regulation.

Sen. Barack Obama, D-Ill., a candidate for the presidential Democratic nomination, introduced an identical measure in the Senate. It was referred to the Senate Homeland Security and Governmental Affairs Committee in December, but the committee has taken no action on the bill.

"Hard-working Americans don't get a free pass if they fail to pay their taxes, and neither should corporate interests," Obama said. "Our government should ensure that federal contractors also play by the rules and satisfy the basic responsibility of paying taxes."

A spokesperson for the committee did not return a call for comment.

Previous incarnations of Ellsworth's bill would have blocked contracts to companies that owed federal taxes, which raised concerns in the contracting community about how the law would be administered.

Federal law currently does not prohibit a contractor with unpaid federal taxes from earning government business. FAR requires agencies to do business with responsible contractors, including those with adequate financial resources and an acceptable record of integrity and business ethics.

Acquisition officials, however, are not required to consider a contractor's tax delinquency unless the company was specifically debarred or suspended for specific actions, such as a conviction for tax evasion. Meanwhile, federal law generally prohibits the disclosure of taxpayer data to contracting officers.

According to audits conducted by the Government Accountability Office, thousands of federal contractors owe billions in unpaid federal taxes.

In February 2004, GAO found that about 27,000 Defense Department contractors owed nearly $3 billion in federal taxes. The following year, an audit of 33,000 civilian agency federal contractors turned up $3.3 billion in delinquent federal taxes. And in March 2006, the watchdog found that 3,800 General Services Administration contractors owed about $1.4 billion in federal taxes.

Last April, GAO conducted investigations of 122 federal contractors -- including many small firms that provided sensitive work for the Defense, Justice and Homeland Security departments -- and found potentially criminal activity related to the federal tax system.

"Some company owners diverted payroll taxes for personal gain, or to fund their businesses," GAO concluded. "A number of owners or officers of the 122 federal contractors owned significant personal assets, including a sports team, multimillion-dollar houses, a high-performance airplane and luxury vehicles. Several owners gambled hundreds of thousands of dollars at the same time they were not paying the taxes that their businesses owed."

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