New Federal Contracting Requirements for Reporting Tax Liabilities and Felony ConvictionsFederal acquisition officials recently finalized an interim rule intended to remove contractors with federal tax liabilities and felony convictions from the federal contracting arena. The interim rule, which took effect February 26, 2016, was published in December of 2015. No changes were made as a result of the comments submitted before its finalization and effective date of September 30, 2016. The rule amends the FAR by implementing sections of the Consolidated and Further Continuing Appropriations Act of 2015. The purpose of the amendments is to prohibit the federal government from contracting with corporations that have federal tax liability or a federal felony conviction.

Under the rule, offerors responding to federal solicitations are required to represent whether they (1) have a delinquent federal tax liability or (2) were convicted of a federal felony conviction within the preceding 24 months. When an offeror makes an affirmative response in connection with one of these representations, the rule requires the contracting officer to (1) request additional information from the offeror; (2) notify the agency official responsible for initiating debarment or suspension action; and (3) refrain from making an award to the offeror until the agency suspending or debarring official (SDO) has considered suspension or debarment of the offeror and determined that further action is not necessary to protect the interests of the government. If a federal agency has already determined that the disclosed incidents do not require suspension or debarment, the contracting officer may proceed with the award to the offeror without further delay.

The rule imposes additional, more stringent requirements where the offeror proposes a total contract price that will exceed $5 million. The rule states that “[i]f the certification regarding tax matters is applicable, then the contracting officer shall not award any contract in an amount greater than $5,000,000, unless the offeror affirmatively certified in its offer…” that (1) it has filed all required federal tax returns during the three years preceding the certification; (2) it has not been convicted of a criminal offense under the Internal Revenue Code of 1986 (this in addition to the felonies question, and it relates to any offense, including misdemeanors); and (3) it has not, more than 90 days prior to the certification, been notified of any unpaid federal tax assessment for which the liability remains unsatisfied, unless the assessment is the subject of an installment agreement or offer in compromise that has been approved by the IRS and is not in default, or the assessment is the subject of a non-frivolous administrative judicial proceeding.

The rule does not include a time requirement for a reasonable response time for an SDO to make a determination of whether suspension or debarment is required to protect the government’s interests. Despite at least one commenter’s concerns that the absence of a reasonable response time requirement will likely delay the procurement process, no such requirement was added.

It is also noteworthy that the rule contains no de minimis exception. Instead, offerors must disclose all federal tax liabilities. The rule does allow offerors to hold off on reporting tax debts until all appeals are exhausted. However, offerors must report any federal felony conviction, regardless of whether the conviction is on appeal.

The rule applies not only to C corporations, but also to entities such as S corps, professional corporations, LLCs, and may also apply to partnerships and joint ventures. In the response to a comment asking for clarification of the meaning of “corporation,” the agencies wrote: “A corporation is a legal entity that is separate and distinct from the entities that own, manage, or control it. It is organized and incorporated under the jurisdictional authority of a governmental body, such as a state or the District of Columbia.”

While no substantive changes were made to the interim rule, the finalization of the rule nonetheless is noteworthy because it will likely result in an increased government focus on and scrutiny of contractor certifications regarding delinquent tax liability and federal felony convictions. Accordingly, contractors should be particularly vigilant about ensuring the accuracy of federal certifications, as the penalties for making a false certification to the government can be many and severe.

For a related article written by Aron C. Beezley analyzing the interim rule, see Inside New FAR Provisions on Reporting Felony, Tax Info.

View the Federal Register announcement finalizing the interim rule published at 81 Fed. Reg. 67728-67731 (September 30, 2016) here.

View the interim rule published at 80 Fed. Reg. 75903-75907 (December 4, 2015) here.

View the Consolidated and Further Continuing Appropriations Act here. (The new rule implements sections 744 and 745 of Division E and section 523 of Division B).

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