Implications of the GTSI Suspension: FARS Management

Jonathan S. Aronie over at GovernmentContractsLawBlog.com pointed out some interesting implications of the recent GTSI suspension.

He astutely points out some possible consequences:

"Prime contractors reassessing their current relationships with small businesses. (And small businesses doing the same.)

Greater contracting officer focus on the SBA’s rules, and greater scrutiny of proposals in set-aside procurements.

SBA OIG audits of large and small teammates on set-aside contracts, like SEWP or FirstSource."

A greater focus on the rules. Audits. Sound familiar? Anyone who has been following contracting news knows that the Obama Administration has placed a greater focus on oversight and regulations. But what is a contractor to do about it?

Small businesses that find themselves under greater scrutiny by prime contractors should take a look at how they manage the FARS. Proving competence with the FARS is a good way for contractors to keep each other comfortable with the arrangement. Would you do business with someone who doesn't keep track of the terms of the contracts you make with them? Someone who ignores applicable regulations--which may in turn get you suspended, or get you negative ratings in the FAPIIS system, or may cause the DoD to withhold payments? Someone who would make you look less trustworthy to the greater contracting community?

Yet the FARS and their supplements are a monstrosity. How can a small business compete? It's increasingly apparent that in order to stay competitive, a FARS management system is crucial. It's not enough to print out regulations, stuff them into a folder and never look at them again. It's not enough to keep them in overflowing email inboxes. Competitive contractors of all sizes face the need to prove regulatory competence, the same way ISO-certified companies must.

Mr. Aronie also points out in his post:

"When push comes to shove, you may not get the expected mileage from a defense based upon the oral advice of a contracting officer."

Contractors shouldn't take the word of others; they need to be responsible for this information themselves. Competitive contractors must show that they have the regulations at their fingertips, and that applicable regulations are revisited frequently to ensure compliance. ISO certified companies often attest to the increased business brought by their certifications; we believe the same will be true of contractors who can show good FARS management.

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Tax Penalties and FAPIIS--Part 2

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

Tax Penalties and FAPIIS--Part 1

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.