It seems safe to say that most Americans and American companies regard tax audits with some dread. After all, an IRS Revenue Agent’s determination that taxes are due may well lead to the payment of interest on top of the taxes due, and, possibly, lead to the payment of penalties.
A few examples of grounds for tax penalties and of their respective possible fines and sentences are quoted below from the United States Code.
Example 1
"26 U.S.C. § 7201: Attempt to evade or defeat tax
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution."
Example 2
"26 U.S.C. Section 7206: Fraud and false statements
Any person who -
(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter;
* * * * *
shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 3 years, or both, together with the costs of prosecution."Example 3
"26 U.S.C. Section 7207: Fraudulent returns, statements, or other documents
Any person who willfully delivers or discloses to the Secretary any list, return, account, statement, or other document, known by him to be fraudulent or to be false as to any material matter, shall be fined not more than $10,000 ($50,000 in the case of a corporation), or imprisoned not more than 1 year, or both. . . ."
Reading these statute sections can be unsettling, and perhaps equally unsettling is the Internal Revenue Manual for IRS personnel, especially in Part 20, Penalty and Interest, and sub-part 20.1, the "Penalty Handbook".
Of course, even if you are audited and find the prospect of penalties looming in your future, there is a possibility, however slim, that you may be able to reduce your taxes due and potential penalties. For example, with those goals in mind you could offer a compromise settlement. Note the following section 7122 from the Internal Revenue Code.
"26 U.S.C. Section 7122: Compromises
(a) Authorization
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
(b) Record
Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of -
(1) The amount of tax assessed,
(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed
* * * * *
(c) Standards for evaluation of offers
(1) In general
The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.
* * * * *
(3) Special rules relating to treatment of offers
The guidelines under paragraph (1) shall provide that -
(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer; and
(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer -
(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and
(ii) the taxpayer shall not be required to provide a financial statement.
(d) Administrative review
The Secretary shall establish procedures -
(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and
(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals."
We see here in section 7122 of the Internal Revenue Code some references to the tax assessed, to interest, and to an assessable penalty, but this section 7122 at least gives one some small hope of a possible compromise. Also potentially helpful is the administrative review option for rejections of this offer in compromise. The administrative process begun with filing an offer in compromise would then extend to the appeal at the IRS Office of Appeals.
FAPIIS Connection?
Is there a connection between these tax considerations or proceedings on the one hand, and FAPIIS on the other hand? To the best of my knowledge no one has authoritatively answered this question to date. Consequently at this point in time reasonable people might disagree over the answer. Obviously that situation would not help a contractor who did not list tax penalties in FAPIIS and subsequently suffered negative consequences as a result.
So, must IRS penalties be listed in FAPIIS? I believe the correct answer may be "sometimes", or "it depends". I explain my suggested answer below. Unfortunately, the question of whether state tax penalties must be listed in the FAPIIS database also arises, and once again I believe the correct answer may be "sometimes". I also explain this answer below.
Consider the following.
We know that FAR 52.209-7 imposes the following contractual requirements upon the offeror:
"(b) The offeror [ ] has [ ] does not have current active Federal contracts and grants with total value greater than $10,000,000.
(c) If the offeror checked "has" in paragraph (b) of this provision, the offeror represents, by submission of this offer, that the information it has entered in the Federal Awardee Performance and Integrity Information System (FAPIIS) is current, accurate, and complete as of the date of submission of this offer with regard to the following information:
(1) Whether the offeror, and/or any of its principals, has or has not, within the last five years, in connection with the award to or performance by the offeror of a Federal contract or grant, been the subject of a proceeding, at the Federal or State level that resulted in any of the following dispositions:
(i) In a criminal proceeding, a conviction.
(ii) In a civil proceeding, a finding of fault and liability that results in the payment of a monetary fine, penalty, reimbursement, restitution, or damages of $5,000 or more.
(iii) In an administrative proceeding, a finding of fault and liability that results in—
(A) The payment of a monetary fine or penalty of $5,000 or more; or
(B) The payment of a reimbursement, restitution, or damages in excess of $100,000.
(iv) In a criminal, civil, or administrative proceeding, a disposition of the matter by consent or compromise with an acknowledgment of fault by the Contractor if the proceeding could have led to any of the outcomes specified in paragraphs (c)(1)(i), (c)(1)(ii), or (c)(1)(iii) of this provision.
(2) If the offeror has been involved in the last five years in any of the occurrences listed in (c)(1) of this provision, whether the offeror has provided the requested information with regard to each occurrence."
To a fair degree this FAR echoes section 872 of The Duncan Hunter National Defense Authorization Act of 2009 (the "ACT").
Let us assume for the sake of discussion that we are considering a contractor with current active Federal contracts and grants totaling more than $10,000,000. Note in requirement (c)(1) above the words "in connection with the award to or performance by the offeror of a Federal contract or grant". How broad or narrow is the (c)(1) concept of "in connection with"? Must the connection be direct or can it be indirect? What connects a Federal contractor’s tax penalties with "the award to or performance by the offeror of a Federal contract or grant"?
We will discuss examples of tax penalties in Part 2, to be posted on September 3rd.
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