A Taxing Time on the Hill for Contractors

Attention federal contractors: Be prepared to open your wallets a little wider when the IRS comes calling in the future. Two bills pending in Congress aim to tighten the screws on the finances of those doing business with Uncle Sam.

One bill, H.R. 4881, the Contracting and Tax Accountability Act of 2008, would prohibit federal agencies from awarding contracts or grants to persons or companies that have "seriously delinquent" federal tax debts. According to the Government Accountability Office, federal contractors currently owe between $5-7 billion in unpaid federal taxes. In addition, the IRS audit rate for large corporations is at a 20-year low. In a February hearing before the House Subcommittee on Government Management, Organization, and Procurement, POGO came out in favor of this bill, albeit with some suggestions that would broaden its reach.

Another bill, H.R. 5602, the Fair Share Act of 2008, would close a loophole some contractors use to avoid paying payroll taxes on employees working outside the U.S. The bill would amend the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under federal contracts as American employers responsible for paying Social Security and Medicare payroll taxes. This bill is specifically targeted at contractors like KBR, notorious for setting up subsidiaries in foreign jurisdictions like the Cayman Islands and Bermuda to take advantage of loopholes in the current laws.

At a time when the average Joe Taxpayer is struggling to make ends meet, it's encouraging to see Congress cracking down on contractors, who take so much (about $443 billion in contracting dollars last year alone) yet are, in many instances, exploiting the system to avoid paying their fair share in taxes in return.

UPDATE: On Thursday, May 22, the Senate passed the Fair Share Act of 2008 as part of the Heroes Earnings Assistance and Relief Tax Act of 2008 (The "HEART Act"). The Act passed the House a day earlier and now goes to the President for his signature.