Senate Amendment Requires DHS Contractors to Pay Taxes

The amendment – which was sponsored by Sens. Barack Obama, D-Ill.; Bob Casey, D-Pa.; Tom Coburn, R-Okla.; and Dick Durbin, D-Ill. – bars DHS from awarding contracts and grants of more than $5 million unless prospective contractors and grantees certify in writing that they have no unpaid federal tax assessments or that they have entered into payment arrangements with the Internal Revenue Service (IRS).

The amendment also requires prospective contractors to inform DHS of whether they have been convicted of tax violations, they have been notified of delinquent taxes (which still have not been paid) or they have received a notice of a tax lien (which has not been released) within the three years preceding the contract offer.

“In the real world, no company would survive if it didn't pay its bills. Yet the government routinely rewards companies that break the law and fail to meet basic performance standards,” Coburn said. “This solution will help fix one part of that problem. I'm proud to stand with my colleagues on both sides of the aisle in defense of common sense, transparency and openness.”

The amendment – No. 2519 – passed the Senate July 26 as part of the fiscal year 2008 DHS appropriations bill. The amendment originally was introduced on April 20, 2007, by Rep. Brad Ellsworth, D-Ind., as the Federal Contractor Accountability Act of 2007.

GAO: Thousands of Contractors Abuse the System

In a number of audits and investigations, the Government Accountability Office (GAO) concluded that thousands of federal contractors abuse the federal tax system. According to GAO, 27,000 Department of Defense contractors, 33,000 civilian agency contractors and 3,800 General Services Administration contractors owed about $3 billion, $3.3 billion and $1.4 billion in unpaid taxes, respectively.

During an April 2007 House committee hearing, GAO officials testified that the agency's in-depth investigations of 122 federal contractors with unpaid taxes found that “each of the 122 federal contractors was involved in abusive and potentially criminal activity related to the tax system.”

“At the same time that they were not paying their federal taxes, many individuals associated with our 122 cases bought or owned significant personal assets, including a sports team, a high-performance airplane, commercial properties, multimillion-dollar homes and luxury vehicles,” GAO officials testified. “ ... Several owners also gambled hundreds of thousands of dollars at the same time they were not paying the federal taxes that their businesses owed.”

Federal Law Does Not Address the Issue

While willful failure to remit payroll taxes is a felony, GAO officials noted that federal law does not prohibit a contractor with unpaid federal taxes from receiving contracts from the federal government.

The Federal Acquisition Regulations calls on federal agencies to choose responsible contractors, and it requires agencies to consider certain criteria – including financial resources and business ethics and integrity – when choosing contractors. However, GAO pointed out, the regulation does not require contracting officers to consider a contractor's tax debt when assessing whether the prospective contractor is responsible.

“Further,” GAO added, “federal law generally prohibits the disclosure of taxpayer data to contracting officers.”

Obama asserted that the federal government “should not reward companies that fail to pay their taxes with federal contracts.”

“Working Americans don't get a free pass if they are unable to pay their taxes when they are due, and corporations shouldn't either,” Obama said. “This amendment will ensure that corporations that receive taxpayer funding play by the rules, and it will increase transparency and accountability over how our money is spent.”