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New Rule Increases Scrutiny of Deadbeat and Felon Contractors

On Monday, the Project On Government Oversight submitted a public comment supporting a measure that will better protect federal funds from companies that committed a felony or owe taxes.

As directed by last year’s Consolidated and Further Continuing Appropriations Act, the White House issued an interim rule that will impose additional scrutiny on tax-delinquent or felon companies that bid on government contracts. The rule prohibits federal agencies from awarding a contract to any corporation that owes federal taxes or was convicted of a federal felony in the past two years, unless the agency “has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the interests of the government.” The rule will become effective on February 26.

POGO supports the rule because it will facilitate more rigorous scrutiny of very risky companies. POGO has long warned of the dangers of awarding contracts to companies that owe taxes. In addition to starving the government of revenue, such contractors are more likely to perform poorly. They may also have an unfair competitive advantage over companies that pay their taxes. The rule will help level the playing field and increase competition, which saves money, improves contractor performance, and promotes accountability. It will also lead to the recovery of unpaid corporate taxes and reform the behavior of companies that broke the law.

While we are pleased with the rule, we are concerned about an apparent conflict with the current regulation. As it stands now, heightened scrutiny of bidders is conducted only if the federal tax debt exceeds $3,500. The rule, which adds a new section to the regulation, does not have a dollar threshold. This inconsistency could create confusion and undermine the efficacy of the rule. For the sake of consistency, and in the interest of a zero tolerance policy toward tax-delinquent contractors, the $3,500 threshold should be eliminated.

A larger concern is that the rule doesn’t cover companies that have unpaid state or local taxes. A company owing any taxes is a contracting risk. Limiting the new requirement to federal tax delinquencies still leaves the government vulnerable to non-responsible companies and hampers competition.

Nevertheless, the rule is a step forward for contractor accountability. By weeding out risky contractors, it will lessen the occurrence of fraud and waste, and improve the quality of goods and services. At the same time, the rule will help the government recover delinquent corporate taxes and strengthen corporate ethics and compliance programs.