Federal contracts to be tied to taxes

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Federal contractors will have to disclose tax violations under a new rule prompted by congressional probes that discovered thousands of companies doing business with the U.S. government owed billions of dollars in back taxes.

Under the rule, which takes effect next month, the contractors can face suspension if they fail to tell government contracting officials that they owe more than $3,000 in delinquent taxes or were convicted of any federal criminal tax laws.

The rule comes four years after the Senate Permanent Subcommittee on Investigations held the first of several hearings on government contractors who cheated or failed to pay their taxes.

Sen. Norm Coleman, Minnesota Republican, who chaired a 2006 hearing found that 3,800 General Services Administration (GSA) contractors owed $1.4 billion in taxes, yesterday called the new rule a "stop-gap to weed out delinquent contractors."

Mr. Coleman said congressional investigators found contractors buying high-end boats, cars and multi-million-dollar homes while owing hundreds of thousands of dollars in back taxes. In 2005, the Government Accountability Office (GAO) found 27,000 contractors who owed $3.3 billion in taxes.

"It is only common sense to ask whether the applicant owes the government money," said Mr. Coleman, adding that loopholes have allowed some contractors to live "the high life on the taxpayers' dime."

Carl Levin, Michigan Democrat who also led the Senate investigation, said the loopholes allowed tax delinquents to get contracts because past federal rules only required disclosure of convictions on tax evasion charges.

"The new rule broadens the disclosure requirement to cover both civil and criminal tax delinquencies, including unpaid tax liens," Mr. Levin said. "The new rule should help cull out the tax dodgers who are trying to get paid with federal dollars at the same time they are thumbing their noses at U.S. taxpayers."

Peter Sepp, vice president of communications for the National Taxpayers Union, yesterday called the new rule a "perfectly reasonable and common sense step." He also said it raised questions about why the federal government hasn't done more to collect tax debts owed by contractors and employees.

"It seems hard for the federal government to track down outstanding tax bills that are literally right under its nose," he said.

Initially, the government proposed requiring contractors to also list local and state tax violations, but the final rule, which was published this week, requires disclosure of only federal tax delinquencies.

Contracting officials with the GSA and the Defense Department ultimately threw out state and local tax violations as a consideration, saying the requirement would "unduly burden" companies and regulators, according to the rule.