Part 2 of "Tax Penalties and FAPIIS" discusses some examples of tax penalties and their possible relation to the FAPIIS database.
Penalty Example One
It is hard to imagine what could connect a contractor’s tax penalties with the award to the contractor of a Federal contract, or with the contractor’s performance under that contract. Putting our imagination in overdrive, what if the Federal contract is performed partly by subcontractors that the prime contractor should have treated as employees, and after an IRS audit the prime contractor pays employment-related taxes and penalties? Should these penalties be reported in FAPIIS? In the FAR quoted above, it appears that the elements of requirement (c)(1)(iii) could be satisfied. For example, in an IRS audit and offer-in-compromise context, or in an appeal to the IRS Office of Appeals, liability that results in a penalty of $5,000 or more is certainly possible. In addition, the payment of a reimbursement, restitution, or damages in excess of $100,000 is not unheard of in such an administrative proceeding context. The taxpayer is not being sued in court here, but the pressure that the IRS can apply to resolve the dispute is considerable. Thus, in this example there does appear to be a connection between our hypothetical contractor’s tax penalties and his performance under a Federal contract.
We could stop here and conclude that we have shown a "sometimes" positive answer to the question of whether IRS penalties must be listed in FAPIIS, but we should also consider requirement (c)(1)(iv). Note in (c)(1)(iv) the words "a disposition of the matter by consent or compromise with an acknowledgment of fault by the Contractor". Wherever else they may be found, we see tax concepts here that we can find in the Internal Revenue Code sections quoted above—note the word "compromise" for example. An arguably broader, context-neutral word like "agreement" could have been selected. Settlement agreements are sometimes achieved by capitulation rather than compromise. Thus, logic suggests that the selection of "compromise" held one or more specific intentions, and the Internal Revenue Code’s tax concept of a "compromise" fits like a glove. Also, liability for some portion of taxes due is acknowledged in an offer-in-compromise, at least when it is accepted if not before. Finally, as we have seen, "the proceeding could have led to" the outcome specified in paragraph (c)(1)(iii). Looking at all of (c)(1)(iv), it appears that example number one could satisfy all of its elements.
Given two ways this example number one could satisfy the criteria of FAR 52.209-7, one through satisfying (c)(1)(iii) and the other through satisfying (c)(1)(iv), it appears that FAR 52.209-7 contemplates tax penalties within FAPIIS and hence tax penalties must be reported in FAPIIS under certain circumstances.
Penalty Example Two
Another example might arise where a contractor simply did not pay employment-related taxes for employees working on a Federal contract project, and after an IRS audit the contractor paid employment-related taxes, interest and penalties. In 2009 a failure to pay employment-related taxes generated the greatest volume of penalties in the employment taxes category. (See this IRS spreadsheet.) It appears that the elements of requirement (c)(1)(iii) of FAR 52.209-7 could be satisfied by this example, which again seems to suggest that some tax penalties must be reported in FAPIIS. It appears that (c)(1)(iv) also could be satisfied, and again that possibility seems to suggest the intention that some tax penalties must be reported in FAPIIS.
Penalty Example Three
Perhaps an award-related example might be helpful now that we have seen two contract performance examples. Imagine the contractor using a consultant, or perhaps a supplier or a subcontractor to help prepare an unsolicited proposal in a new product area. Then imagine that the contractor took excessive expense deductions for this proposal-preparation assistance that were caught in an IRS audit, after which the contractor paid additional taxes and penalties. Yet again it appears that the elements of requirements (c)(1)(iii) and (c)(1)(iv) of FAR 52.209-7 could be satisfied, which again seems to suggest that some tax penalties must be reported in FAPIIS.
Penalty Example Four
Are there any future-oriented examples? It has been reported that starting in a few years businesses will have to file with the IRS additional documents, known as 1099 forms, which state the total value of goods they buy from a single vendor if that total exceeds $600 annually--goods, for example, such as office supplies. (See the report for example in the July 17, 2010 article in The Wall Street Journal’s online Opinion Journal entitled "Lost in Taxation, The IRS's vast new ObamaCare powers".)
Before this rule was enacted businesses only had to tell the IRS the value of services they purchased. Imagine for the sake of discussion that this new rule is not repealed, and that our hypothetical contractor does not file 1099s for parts purchased that were built into products sold to the govenrment. Then imagine this failure to file 1099s was caught in an IRS audit, after which the contractor paid penalties. This situation is one more example in which it appears that the elements of requirements (c)(1)(iii) and (c)(1)(iv) of FAR 52.209-7 could be satisfied, which in turn further suggests that some tax penalties must be reported in FAPIIS.
Penalty Example Five
What about state tax penalties? To name just one state, California considers and accepts some offers in compromise from companies. Let us use penalty example number two again, but apply it at the state level. Imagine our hypothetical contractor did not pay state employment taxes for employees working on a Federal contract project, and that after a state audit the contractor paid the state a failure-to-pay tax penalty. Once again it appears that the elements of requirements (c)(1)(iii) and (c)(1)(iv) of FAR 52.209-7 could be satisfied, which suggests fairly clearly that some state tax penalties must be reported in FAPIIS.
Other Examples
You may think of better, or at least additional, examples. Comments are welcome.
Conclusion
How will government procurement personnel react to a contractor’s self-reported tax penalties found in the FAPIIS database? Will any of them ever overreact notwithstanding any contractor comments in FAPIIS? I believe that we will see instances of a large or mid-sized contractor found lacking for a major contract award by government contracting personnel who review the contractor’s self-reported negative data in the FAPIIS database and decide subjectively and excessively that there are sufficient responsibility concerns to warrant bid rejection.
In addition, what will competitors without tax penalties in their FAPIIS record do with the information that the contractor in question has paid tax penalties? Perhaps as much or more than in government procurements, in the world of commercial procurements such negative information about a contractor is potentially helpful to competitors.
Is tax penalty data a good indicator of a contractor’s contract-performance history? Or has the information net been cast too wide by FAPIIS? Could it be that tax penalties must be reported in FAPIIS under certain circumstances due to concerns about contractors living up to their tax payment "responsibility of citizenship"? Note a January 20, 2010 Presidential Memorandum that might be interpreted as supporting this view.
AF
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