Federal contractors would have to provide proof that they have paid all taxes and have not been convicted of violating tax code in the last three years if a proposed federal rule is approved.
The Defense Department, NASA and the General Services Administration proposed the rule in the March 30 version of the Federal Register. Congressional and Government Accountability Office investigations that found federal contractors owed billions of dollars in back taxes triggered the rule.
Nonpayment of these taxes prompted Sen. Charles Grassley, R-Iowa, to slip a provision in the 2005 law extending President Bush’s tax cuts requiring the federal government, along with state and local governments that spend more than $100 million annually, to withhold three percent of payments to contractors. Contractors would then have to go to the IRS to collect the withheld payment.
If the provision remains in effect, it would require all counties in the national capital region to withhold payment to contractors.
“The costs for county governments to comply will be enormous,” National Association of County Governments Executive Director Larry Naake said in a statement. “It will require many of the nation’s larger counties to reprogram or purchase new accounts payable systems, hire additional staff and essentially turn county accounting offices into IRS district offices. Rather than enforcing existing law against these contractors, this law imposes a new and untested requirement on state and local governments. This will be the first time ever that federal tax withholding and reporting are imposed on the purchase of goods as well as services.”
Nonpayment by contractors has significantly increased the “tax gap,” or the amount of money expected by the IRS compared with the amount it collects. A 2004 GAO report found Pentagon contractors owed $3 billion in delinquent taxes, while a 2006 report found 10 percentof all GSA contractors owed back taxes totaling $1.4 billion. The GAO report on Pentagon contractors’ late payments did not name individual companies. But violators included a company that provided janitorial services on military bases and owed the federal government $10 million. Other firms that were late on taxes provided support to sensitive military programs like weapon’s systems and engineering services.
The withholding measure does not take effect until 2011. Proponents of the measure argue it would dramatically decrease the tax gap, while the opposition has called the provision a stop gap measure that avoids directly confronting contractors who do not pay their taxes. Bills to repeal the provision have been introduced, but have gained little traction on Capitol Hill. If it remains law, every county in the region would be required to withhold payment from contractors.
