The U.S. government finalized on Sept. 30, 2016, regulations amending the Federal Acquisition Regulation (FAR) that will affect an estimated 350,000 federal contractors. These new regulations were promulgated as a result of 2014 legislation and prohibit federal agencies from entering into contracts with corporations that have any unpaid federal tax liabilities or felony convictions, unless the agency has first considered suspension and debarment. All federal contractors need to be aware of this new regulation, as it could impact the ability to win federal contracts.

The final rule adopts without change an interim rule published on Dec. 4, 2015. Specifically, the FAR requires each contractor responding to federal solicitations to represent whether:

  1. it is a corporation that has any unpaid federal tax liability that has been assessed, for which all judicial and administrative remedies have been exhausted or lapsed, and that is not being paid in a timely manner pursuant to agreement with the taxing authority
  2. it is a corporation that has been convicted of a felony criminal violation within the last two years (a conviction includes a plea agreement)

If the contractor answers in the affirmative to either of these two representations, the federal contracting officer must notify the agency official responsible for initiating suspension or debarment. Under the new regulations, the contract cannot be awarded until a determination is made that suspension or debarment of the contractor is not necessary to protect the interests of the government.

Notes of Significance

No De Minimis Rule
Despite public urging, there is no de minimis rule included in the new regulations. This means any amount of outstanding federal tax liability could require the contractor to answer the representation in the affirmative. (Other areas of the FAR, such as FAR Clause 52.209-5, apply a $3,500 threshold to covered tax liabilities.)

No Simplified Acquisition Threshold Exception
There is no exception provided in the new regulations with respect to contracts for the acquisition of commercial items or contracts below the simplified acquisition threshold, which is generally $150,000.

Suspension and Debarment Consideration
The statute and implementing regulations prohibit an agency from entering a contract with an entity that has a conviction or covered unpaid tax liability, unless the agency has first considered suspension and debarment of the contractor. The process and criteria for determining whether suspension or debarment is appropriate is spelled out in FAR Subpart 9.4. It can be complex and time consuming. Contractors should provide notice to the suspension and debarment official (SDO) of any agency with which they do business or are seeking to do business before any conviction is finalized or any plea agreement is entered, as well as seek a determination from the SDO that it views the company as being "presently responsible." Absent an interagency agreement, each agency SDO has an obligation to make this determination. Contractors that do business with multiple agencies will have to coordinate their approach to each agency customer.

It is important to note that the considerations underlying suspension and debarment are substantially different than those employed in prosecutions. Counsel with specific experience in the suspension and debarment process should be retained. The new regulations are not entirely clear about the definition of "corporation" and how the rules might apply when a pass-through entity is involved, such as an S corporation, limited liability company or partnership. (Under the tax code, an S corporation can elect to be taxed as a pass-through entity.) The concern expressed by the public was whether pass-through entities were subject to the rule and whether the outstanding federal tax liability of an individual partner or member of a pass-through entity could negatively impact the award process. In the explanation of the new regulations, the government suggests that pass-through entities are subject to these new rules. With respect to the tax liability of individual partners or members, the explanation cautions that individuals can become liable for corporate obligations under the doctrine of "piercing the corporate veil." This suggests that pass-through entities should take care to maintain legal separation between the entities and the individual members or owners.

Impact on Large Contracts
Although it impacts far fewer federal contractors, the new regulations also require contractors pursuing large contracts (generally in excess of $5 million) with the U.S. Department of Defense, National Aeronautics and Space Administration (NASA) or General Services Administration (GSA) to make a certification related to the filing of all federal tax returns, convictions of criminal offenses under the tax code and notifications of federal tax assessments.