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US to Crack Down on Contractor Taxes

Monday, January 25, 2010

Facing a $5 billion unpaid tax debt by contractors, the Obama administration will review the tax status of all of its contractors and ban future contracts to any delinquent company.

“The federal government pays more than half a trillion dollars a year to contractors and has an important obligation to protect American taxpayer money and the integrity of the federal acquisition process,” the administration said in a statement Wednesday (Jan. 20).

“Yet, reports by the Government Accountability Office (GAO) state that federal contracts are awarded to tens of thousands of companies with serious tax delinquencies. The total amount in unpaid taxes owed by these contracting companies is estimated to be more than $5 billion.”

Under a 2008 amendment to the Federal Acquisition Regulation, companies bidding for federal contracts are required to submit a certification of non-delinquency in taxes.

However, the statement added, “too often, federal contracting officials do not have the most basic information they need to make informed judgments about whether a company trying to win a federal contract is delinquent in paying its taxes.”

Contracting officials will be given “the tools they need to protect taxpayer dollars,” Obama warned.

To that end, the Commissioner of Internal Revenue will conduct a review of certifications of non-delinquency in taxes and report within 90 days on the overall accuracy of contractors' certifications.

Also within that time, the Director of the Office of Management and Budget and other agency heads will evaluate practices of contracting officers, debar those who are not enforcing the law, and develop a plan to improve the contracting process “to ensure these contractors are not awarded new contracts, including a plan to make contractor certifications available in a government-wide database, as is already being done with other information on contractors.”

Meanwhile, in a long-running effort to close the national “tax gap” (the difference between taxes owed and actually paid), the Internal Revenue Service has launched the first of 6,000 audits involving employment tax compliance. The audits, which will take place over the next three years, will focus on five employment tax areas:

• Officer compensation

• Non-filers

• Worker classification

• Reimbursed expenses

• Fringe benefits.

The audits are part of the IRS’s National Research Program to test employment tax compliance. The program began after an IRS analysis showed that more than 80 percent of the tax gap—estimated at $300 billion for Tax Year 2001—was due to underreporting of income and self-employment taxes by individual taxpayers.

Companies to be audited will be chosen at random and come from different sectors of the economy. For more information, visit www.irs.gov.