What Contractors Should Know About Tax Certification
By L. James D’Agostino and David P. Goodwin
President Obama recently ordered the commissioner of internal revenue to review the accuracy of contractor documents that show federal taxes have been paid in full and on time.
The president’s Jan. 20, 2010, directive calls for the commissioner to conduct a review of certifications made by contractors since the certification came into effect in 2008. Furthermore, the directive calls for the director of the Office of Management and Budget to work with the secretary of the Treasury to review and create new systems for contracting officers and debarring officials to review these tax status certifications.
Generally, no certification should ever be signed that is not fully understood. This seems obvious, but in practice it is not always easy to do. The president’s directive to tighten enforcement of the government contractor tax non-delinquency certification reinforces key ethical concerns as to certifications to the government.
In 2008, then Sen. Obama authored language in all appropriations bills requiring contractors to certify they were current on their federal taxes. The tax certification language requires government contract bids to certify that the offeror and its principals have or have not “within a three-year period preceding this offer, been notified of any delinquent federal taxes in an amount that exceeds $3,000 for which the liability remains unsatisfied.” (FAR §§ 52.209-5, 52.212-3)
The certification clause deems federal taxes to be delinquent when the tax liability is “finally determined” and the taxpayer is delinquent in making payment. “Finally determined” is further defined as when there are no further administrative or judicial appeals and all judicial appeal rights have been exhausted.
This tax status certification was added to other existing Federal Acquisition Regulation (FAR) certifications — such as presently debarred, suspended, or indicted. All of these certifications are made on behalf of the “offeror” (the government contractor company) and the principals of the government contractor company. The FAR clause defines “principal,” for purposes of these certifications, as “an officer, director, owner, partner, or person having primary management or supervisory responsibilities within a business entity (general manager, plant manager, head of a subsidiary, division, or business segment, and similar positions).” (FAR § 52.209-5(a)(2)).
Clearly this definition of principal is broad and must be analyzed on a company by company basis, taking into account the individual company’s corporate structure and operational hierarchy. Additionally, certain individuals may be considered a principal for a particular procurement bid based on the particular subsidiaries or other business entities involved in that bid, but not be considered a principal for another procurement.
During the FAR revision process that added the tax non-delinquency certification to the other existing FAR certifications, one commenter raised concerns that the applicability of the tax status certification to principals would result in compliance challenges because of the level of personal information sharing among principals. (73 FR 21792).
The FAR secretariat’s response emphasizes the best practice for handling this new tax certification. This response is that the addition of the tax certification did not alter the existing certification procedures: The offeror “already has to certify to whether it or its principals are debarred, suspended, proposed for debarment, convicted of or charged with or had a civil judgment for certain offenses.” (73 FR 21792).
The best practice for handling this new tax non-delinquency certification is to include a question as to federal tax delinquency status with your current internal review process for querying principals covering other responsibility certifications (suspension, debarment, indictment) as part of the bid preparation process. It is best for such internal review processes to obligate principals to inform the company if the individual principal’s response would change as to any of the certifications, including tax delinquency. By asking principals to provide notice of any changes on a continuing basis the company can prepare and act accordingly. By maintaining such a system of internal review as part of the bid preparation process, companies can ensure that they are providing a good faith certification.
President Obama’s directive signals that increased enforcement measures that will be closely examining the tax certification in particular. A robust internal review process is important to ensuring accurate certifications. An effective internal review process is also an important proactive step in defending against allegations of false certifications to the government.
L. James D’Agostino is a shareholder (email@example.com) and David P. Goodwin (firstname.lastname@example.org) is an associate with the international law firm of Greenberg Traurig LLP government contracts practice group. The views expressed are solely those of the authors.