April 15 has some new implications that may affect your status as a responsible government contractor, and may influence your ability to obtain and maintain a federal contract. A new rule, which took effect May 22, 2008, cites tax delinquencies as grounds for declaring contract bidders non-responsible, and for debarment and suspension from federal procurement. Prior to the implementation of this rule, contractors were not required to disclose tax debts. Furthermore, contracting officers did not consider tax debts in making contracting decisions. However, since the issuance of the new rule, contractors could be in jeopardy of losing the opportunity to receive contract awards based on tax delinquency.
The new rule, issued by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (“Councils”), now requires contractors to disclose federal tax information. Under an amendment to the Federal Acquisition Regulations (“FAR”), entitled “Certification Regarding Responsibility Matter,” a contractor must disclose certain tax delinquencies when certifying its responsibility. Although an affirmation of tax delinquency does not necessarily equate to a lack of contractor responsibility, tax liability now is one of many factors to be evaluated by the contracting officer when determining responsibility and awarding a contract. In addition, tax delinquency may be considered by a suspension and debarment official (SDO”) in multiple aspects of suspension and debarment proceedings.
The origins of the new rule stem from the response to the Senate Permanent Subcommittee on Investigations’ (“PSI”) request for information on noncompliance with tax law and reports by the Government Accountability Office (“GAO”) on federal contractor abuse of the federal tax system. The GAO’s reports showed that thousands of federal contractors had substantial amounts of unpaid federal taxes. In an effort to better estimate and curb contractors’ unpaid taxes, the FAR was amended to add language addressing the nonpayment of taxes.
The new language applies not only to the offeror, but also to principals of the contractors. The FAR defines the term “principal” to include officers, directors, owners, partners, and persons having primary management or supervisory responsibilities within a business entity.* The Councils have held that this definition should be interpreted broadly, including compliance officers or other persons in positions of responsibility. Thus, a plant manager or head of a business division would be considered a principal for purposes of this requirement, and their tax information would be subject to the certification requirement.
The FAR now requires a contractor to certify whether it has been convicted of or had a civil judgment rendered against it for tax evasion. In addition, the FAR requires a contractor to certify whether or not it or any of its principals have been notified of any delinquent federal taxes in an amount that exceeds $3,000 for which the liability remains unsatisfied.
Under the new rule, the contractor must also certify whether or not, within the three-year period preceding the offer, it or any of its principals have been notified of any delinquent federal taxes exceeding $3,000 and remaining unsatisfied. According to revised FAR 52.209-5, delinquency only occurs when two criteria are met. First, tax liability must be finally determined. Tax liability is considered “final” only when no pending administrative or judicial challenges exist, and when all judicial appeals have been exhausted. Second, the taxpayer must be delinquent in making payment. A contractor is delinquent in making payments when it fails to pay tax liability in full when it is due and required.
The new rule provides multiple examples describing when a contractor does not need to certify that it is a delinquent taxpayer. One example states that a contractor is not delinquent if it is in full compliance with an installment tax payment agreement with the Internal Revenue Service. Another example specifies that a taxpayer who receives statutory notice of a deficiency and seeks tax court review has not encountered final tax liability. Thus, the contractor needs to understand the status of its tax liability to properly determine whether it must affirm tax delinquency in compliance with the provisions of the new rule.
Although the presence of a tax delinquency does not expressly prevent contractors from obtaining federal contracts, a federal contractor may be adversely affected by its tax liability status. Contractors, who may have previously had competitive advantages in costs compared with tax compliant contractors, now need to find new ways to create a competitive advantage against competitors.