[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
H.R. 4181, THE DEBT PAY INCENTIVE ACT OF 2000
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
H.R. 4181
TO AMEND TITLE 31, UNITED STATES CODE, TO PROHIBIT DELINQUENT FEDERAL
DEBTORS FROM BEING ELIGIBLE TO ENTER INTO FEDERAL CONTRACTS, AND FOR
OTHER PURPOSES
__________
MAY 9, 2000
__________
Serial No. 106-201
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
70-748 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250
Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Lisa Smith Arafune, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Randy Kaplan, Counsel
Bryan Sisk, Clerk
Michell Ash, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on May 9, 2000...................................... 1
Text of H.R. 4181................................................ 2
Statement of:
Ashby, Cornelia M., Associate Director, Tax Policy and
Administration Issues, General Accounting Office,
accompanied by Gregory D. Kutz, Associate Director,
Governmentwide Accounting and Financial Management Issues,
and Tom Armstrong, Assistant General Counsel; Deidre Lee,
Acting Deputy Director for Management, Office of Management
and Budget; Joe Mikrut, Tax Legislative Council, Department
of the Treasury; Carol Covey, Deputy Director of Defense
Procurement, Department of Defense; and Sally Thompson,
Chief Financial Officer, Department of Agriculture......... 18
Letters, statements, etc., submitted for the record by:
Ashby, Cornelia M., Associate Director, Tax Policy and
Administration Issues, General Accounting Office, prepared
statement of............................................... 20
Covey, Carol, Deputy Director of Defense Procurement,
Department of Defense, prepared statement of............... 58
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 7
Lee, Deidre, Acting Deputy Director for Management, Office of
Management and Budget:
Information concerning non-tax receivables............... 75
Prepared statement of.................................... 43
Mikrut, Joe, Tax Legislative Council, Department of the
Treasury, prepared statement of............................ 51
Thompson, Sally, Chief Financial Officer, Department of
Agriculture, prepared statement of......................... 66
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 11
H.R. 481, THE DEBT PAY INCENTIVE ACT OF 2000
----------
TUESDAY, MAY 9, 2000
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Biggert, Davis, Ose, Turner,
and Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Randy Kaplan, counsel; Bonnie Heald, director of
communications; Bryan Sisk, clerk; Michael Soon and Elizabeth
Seong, interns; Michelle Ash and Trey Henderson, minority
counsels; and Jean Gosa, minority assistant clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology will come to
order.
Today we will examine a bill introduced by the ranking
member of this subcommittee, Representative Jim Turner of
Texas.
[The text of H.R. 4181 follows:]
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Mr. Horn. Mr. Turner's bill is a superb one as far as I am
concerned, and I am glad to be a cosponsor of it. H.R. 4181,
the Debt Payment Incentive Act of 2000 would prohibit
delinquent tax debtors from receiving Federal loans or
contracts until their delinquencies are resolved.
The bill expands the Debt Collection Improvement Act of
1996, which bars delinquent nontax debtors from receiving
Federal loans or loan guarantees. That law only applied to non-
tax related delinquent debts. Frankly, the reason it applied
only to that is that if we wanted the bill to get through in
1996 we had to ride the train leaving the station, and that
meant don't get bogged down in the Committee on Ways and Means.
These overdue debtors that are referred to in the nontax-
related delinquent debts, who are overdue in paying off their
student loans and home mortgages, farm or business loans,
currently owe the Federal Government a total of $46 billion.
However, the 1996 law does not apply to the tax-related debt,
as we noted, which is estimated to be $231 billion in overdue
taxes, penalties, and interest.
At a hearing last summer, the General Accounting Office
testified that unpaid payroll taxes is one of the largest
categories of that outstanding tax debt. GAO investigators
found that nearly 2 million business owners owed the Federal
Government nearly $50 billion in unpaid payroll taxes, taxes
these employers had collected from their workers but failed to
forward to the U.S. Treasury.
Despite those debts, however, a significant number of the
same business owners and other individuals with delinquent tax
debts are receiving millions of dollars in Federal benefits and
new loans. H.R. 4181 would prohibit that outrageous practice
from continuing. The bill would require the Internal Revenue
Service to report the tax status of all applicants for Federal
loans, loan guarantees, and Federal contracts to the agency
granting the loan or issuing the contract.
Admittedly, this places an additional administrative
responsibility on an agency, the Internal Revenue Service, and
that agency, as we know, is already beleaguered by serious
financial and operational challenges, but that cannot be any
excuse for picking up the nontax debt and the tax debt.
Today we will examine whether the Internal Revenue Service
can meet this responsibility.
We will also hear from representatives of other Federal
agencies who will discuss their views on the legislation. I
commend Mr. Turner for seeking to remedy this appalling abuse
of taxpayers' money and yield to him to discuss his bill.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. Mr. Turner.
Mr. Turner. Thank you, Mr. Chairman.
First of all, I want to thank you for granting a hearing to
this bill; and I thank you for your cosponsorship of the
legislation. I also want to thank Mr. Davis and Mr. Ose who
have joined with us, along with Mr. Burton, Mr. Waxman, Mr.
Owens, Mrs. Biggert, Mrs. Maloney, Mr. Walden of our committee;
also, I thank Mr. Shays and Mr. Mica, Mr. Tierney, Mr. Gilman,
on our full committee, have joined with us in this effort.
It is no secret that taxpayers owe the Federal Government
billions of dollars in delinquent taxes, and to figure out how
to collect that is one of the tasks that this committee under
Chairman Horn's leadership has struggled with on many fronts.
According to the IRS records, the Federal Government was
owed $231 billion in unpaid taxes, penalties, and interest. In
a hearing before this subcommittee in August of last year, the
General Accounting Office revealed that nearly 2 million
businesses owed $49 billion in cumulative unpaid payroll taxes.
An additional $15 billion in penalties had been assessed
against the 185,000 individuals responsible for the nonpayment
of these payroll taxes.
The GAO also reported that a significant number of
businesses with unpaid payroll taxes and individuals with
outstanding penalties are also receiving billions of dollars in
Federal benefits. One alarming example was of a freight handler
company which owed an estimated $2 million in unpaid payroll
taxes. They routinely funneled corporate funds to an affiliated
company, one owned by one of the corporate officers, to acquire
trucks and other equipment for the affiliated company's
expansion. Eventually it turned out the IRS discovered that
funds for the unpaid payroll taxes were also being used for
corporate officers' personal expenses, including the
installation of a private swimming pool and maintenance of at
least eight antique cars owned by one of the corporate
officers. The most disturbing aspect of this story is the fact
that during this time Federal contracts accounted for 85
percent of this particular company's revenues.
Additionally, we learned that about 12,500 taxpayers, both
businesses and individuals with outstanding payroll liabilities
totaling about $280 million, had received SBA loan
disbursements totaling about $2.4 billion.
In a 1992 GAO report that studied 26,000 businesses that
had Federal contracts valued at over $25,000, the GAO
discovered that 21 percent or more than 5,700 of these Federal
contractors owed $773 million in delinquent taxes, interest,
and penalties, and another 4 percent of them, almost 1,100 of
these Federal contractors, were under investigation for not
filing Federal tax returns.
Can you believe that tax debtors enjoy Federal contracts
and Federal loan assistance? They can under current law, and
this legislation intends to change it.
We introduced this bill, H.R. 4181, the Debt Payment
Incentive Act of 2000, to remedy this problem. This bipartisan
legislation builds upon the success of the Debt Collection
Improvement Act of 1996 which banned Federal loans and loan
guarantees to delinquent nontax debtors.
H.R. 4181 amends the Debt Collection Improvement Act to bar
delinquent Federal debtors from obtaining Federal contracts, as
well as Federal loan assistance already covered under existing
law. The bill expands the Debt Collection Improvement Act to
include tax debt in generally the same manner that nontax debt
is already included under the provisions of the Debt Collection
Act. This is the first time tax debt has been brought under
Federal law.
Strong precedent already exists for this legislation. OMB
Circular A-129 already requires that Federal agencies determine
whether applicants for Federal loan assistance are delinquent
on any Federal debt, including tax debt.
Under this circular, agencies must include a question on
loan application forms asking applicants if they have such
delinquencies. Processing of applications should be suspended
until the debtor satisfactorily resolves the debt. However,
implementation of Circular A-129 has been uneven and the GAO
reported that many agencies are not even following the
requirements.
While I think we can all agree that those who fail to pay
their taxes should not receive these Federal benefits, loans,
and Federal contracts, I realize that there are a number of
implementation issues surrounding the legislation.
I want to thank the numerous individuals and organizations
who have submitted testimony and suggestions on our
legislation: The U.S. Chamber of Commerce, the National Farmers
Union, the Aerospace Industries Association, the National
Defense Industry Association, National Federation of
Independent Businesses, the National Taxpayers Union, the Small
Business Administration, the Department of the Treasury, the
IRS, the USDA, the GSA, of course the GAO, OMB, the Financial
Management Services, the Department of Defense, and the Family
Farm Coalition all commented or are prepared to testify
regarding this legislation.
In an effort to find a workable solution to the problem
that we have discussed, each of these people have been very
open, each of these groups, in trying to offer their best
assistance to achieve the goal that we all agree upon.
First, I recognize that the IRS is currently modernizing
its computer systems; and a few weeks ago at our hearing, I
asked Commissioner Rossotti to comment on this bill. He
concluded that the IRS could handle the requirements of this
new legislation if they were given time to implement the system
to make it workable.
Therefore, it seems to me that the effective date of this
legislation should take into account that there should be some
lag time to be sure the IRS can handle this responsibility.
It is not the intent of this bill to delay the process by
which the Federal Government awards contracts or loans, and it
has also been suggested that perhaps during this interim period
before the legislation becomes fully effective that a pilot
project should be initiated, to be sure that it is workable and
that the IRS can handle the task.
Second, with regards to procurement I still believe that
making tax compliance is a prerequisite to awarding Federal
contracts and that it is a legitimate screening tool.
Currently, Federal agencies can consider tax delinquency in
making their contract awards. Under this legislation, the
agency head and the Treasury can waive the bar to contracts. It
is worthy of consideration that perhaps our legislation should
delegate this responsibility to the chief procurement officer
rather than solely being an authority granted to the agency
head.
Third, I think it is important for us to be sure that our
definition of delinquency will cover those who are still
involved in legitimate disputes with the IRS. It has been
suggested that perhaps our definition should have some
refinement, and I am certainly open to the suggestions that
will be made today to accomplish that.
We do not want to take any right of appeal away from any
taxpayer by this legislation. We simply want to be sure that
after all appeals and remedies are exercised by the taxpayer
that if they still owe the Federal Government taxes, then they
are barred from Federal contracts or loans.
Fourth, in order to clear up any confusion about what type
of acquisitions are covered under this legislation, I would
suggest, and it has been suggested, that we exempt small
purchases under $2,500 which under current law do not require a
formal contract.
Fifth, with regard to the provisions relating to the
penalties for trust fund taxes, it has been suggested that
perhaps we should limit coverage of this bill to only partners
with 25 percent ownership or more. I had originally suggested
perhaps 10 percent. I am certainly open on that point as well.
In closing, let me make one final point. There are usually
multiple policy goals involved when the Federal Government
makes a loan or contract for services. One goal, it seems to
me, should be to ensure that applicants applying for loans and
businesses contracting with the government are not delinquent
in their taxes. Exactly how we achieve that goal is the subject
of this hearing today, and I welcome the testimony from each of
our witnesses and again I thank the Chairman and the members of
this committee who have joined in cosponsoring this bill. Thank
you, Mr. Chairman.
[The prepared statement of Hon. Jim Turner follows:]
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Mr. Horn. Thank you very much for that summary of your
legislation. The further opening statements will be limited to
5 minutes. We give the author more leeway. And I am delighted
now to call on the Representative from Northern Virginia, Mr.
Davis.
Mr. Davis. I have no comments.
Mr. Horn. I now call on Mrs. Maloney, Representative from
New York, if she has any opening comments for 5 minutes.
Mrs. Maloney. I support this legislation, and it is part of
the continuum work that you and I have done together on working
together to make government be more responsible and effective
for the taxpayer and the citizens. I am glad to be here in
support of this legislation. Thank you. I yield back my time.
Mr. Horn. We thank you. The gentleman from California, Mr.
Ose.
Mr. Ose. No, sir.
Mr. Horn. OK. We will then start with the first panel. Let
me just note for some of you that might not have been here
before, we will ask you all and any of your assistants that are
there that might whisper in your ear to take the oath when I
have you stand on that. Then those that have written records,
they will go in the hearing record at the point in which you
are introduced on the panel. They will automatically be in
there. I don't have to go through this mumbo-jumbo with every
witness.
Then we would like you to keep your oral testimony to,
let's say, 7 minutes or so, and we might give a little more
leeway to the General Accounting Office because of the study
here, but it is important that we get out the summary of your
testimony on behalf of either the administration, the agencies,
the GAO, so that we can have a dialog and then we will try to
get everybody involved. So let us stand and raise your right
hands and swear you in and your assistants. The clerk will
count the people in the back row which are one, two, three,
four, five backing up and then six witnesses.
[Witnesses sworn.]
Mr. Horn. The clerk will note that the six witnesses have
affirmed and so have the assistants.
So we will start down the line in the order in which
individuals are put on here, and that is with Cornelia M.
Ashby, the Associate Director, Tax Policy and Administration
Issues for the General Accounting Office.
Ms. Ashby is accompanied with Gregory D. Kutz, the
Associate Director, Governmentwide Accounting and Financial
Management Issues, and Tom Armstrong, the assistant general
counsel. So Ms. Ashby.
STATEMENTS OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR, TAX POLICY
AND ADMINISTRATION ISSUES, GENERAL ACCOUNTING OFFICE,
ACCOMPANIED BY GREGORY D. KUTZ, ASSOCIATE DIRECTOR,
GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, AND
TOM ARMSTRONG, ASSISTANT GENERAL COUNSEL; DEIDRE LEE, ACTING
DEPUTY DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT AND
BUDGET; JOE MIKRUT, TAX LEGISLATIVE COUNCIL, DEPARTMENT OF THE
TREASURY; CAROL COVEY, DEPUTY DIRECTOR OF DEFENSE PROCUREMENT,
DEPARTMENT OF DEFENSE; AND SALLY THOMPSON, CHIEF FINANCIAL
OFFICER, DEPARTMENT OF AGRICULTURE
Ms. Ashby. Mr. Chairman and members of the subcommittee, we
are pleased to be here today to assist the subcommittee in its
consideration of H.R. 4181. Our remarks are based on work we
did for the subcommittee on unpaid payroll taxes and associated
tax penalties and our audits of IRS.
We support the concept of barring delinquent taxpayers from
receiving Federal contracts and loan assistance. However, with
respect to H.R. 4181, we believe there are significant
implementation issues involving the capability of IRS' current
information systems, additional burden on the Federal
acquisition process and using 90 days after assessment as the
only determinant of delinquent status.
First, let me describe the current situation. As we
reported to this subcommittee last August and as you mentioned
earlier, Mr. Chairman, nearly 2 million businesses owed $49
billion in delinquent unpaid payroll taxes as of September 30,
1998; and 185,000 individuals responsible for the nonpayment of
delinquent payroll taxes owed $15 billion in tax fund recovery
penalties. Nearly 50 percent of the businesses were delinquent
for more than one tax period, and nearly 25,000 individuals
with trust fund recovery penalties had been assessed such
penalties for more than one business.
Further, the majority of the unpaid payroll taxes and the
associated trust fund recovery penalties are not likely to be
collected. A significant number of businesses with delinquent
unpaid payroll taxes and individuals with outstanding trust
fund recovery penalties also receive substantial payments from
the Federal Government. For example, our analysis indicated
that as of September 30, 1998, over 1,700 businesses and
individual taxpayers had received SBA loans estimated at nearly
$449 million after accumulating unpaid payroll tax
delinquencies of almost $32 million.
Against this backdrop, H.R. 4181 may provide several
benefits. The general barring provisions of the bill would
prevent delinquent taxpayers from benefiting from Federal loan
assistance or contracts. Other provisions of the bill would end
the practice by some multiple tax offenders of using Federal
loans and contracts to start new businesses while the payroll
taxes of other businesses they were or are associated with
remain unpaid because of some willful action on their part.
In addition, the provisions of the bill could serve as an
incentive for individuals and businesses to comply with their
tax obligations. Also, the bill would provide fairness to
compliant taxpayers who consistently fulfill their tax
obligations while a portion of their tax payments are used to
finance Federal loans and contracts for those who do not pay
their fair share.
However, accompanying these potential benefits are three
implementation issues. First, IRS currently does not have the
systems that would enable it to consistently provide Federal
agencies with timely and accurate information on a taxpayer's
delinquency status. IRS is undergoing a major systems
modernization program which will likely take several more years
to complete. If modernization efforts are successful, IRS may
be able to provide accurate, real time delinquency status
information.
OMB currently directs administrators of Federal loan
assistance programs to determine whether an applicant has
delinquent Federal debt, including tax debt, to assess
creditworthiness. Because of this directive, agencies should
have time built into their application processes to determine
whether a loan applicant has Federal tax debt. Even so, because
of IRS's limitations, we recommend that Congress provide that
H.R. 4181 requirements be implemented on a pilot basis for one
or more loan assistance programs to determine whether IRS'
current systems could effectively and efficiently handle the
expected volume of delinquency status requests.
The second implementation issue involves the Federal
acquisition process. In recent years, both Congress and the
administration have attempted to streamline the government
procurement system in an effort to reduce costs. Because
Federal agencies do not currently have to check a prospective
contractor's tax delinquency status, H.R. 4181 could add
considerable burden to the acquisition process. However, this
burden could decrease if IRS' modernization efforts allow a
real time tax delinquency check system. To help reduce the
burden on the acquisition process, we recommend that Congress
defer the application of the barring provisions of H.R. 4181
for Federal contracts until the results of the pilot program
for loan assistance and IRS' systems modernization efforts are
known.
The third implementation issue is a definitional one.
Generally, with the exception of taxpayers that have made
arrangements with IRS to make payments on their debts, H.R.
4181 would deny loan assistance or contracts to all taxpayers
with tax debts that have been outstanding for more than 90 days
after the date of assessment. As a starting point, the 90 days
after assessment standard is not unreasonable. However, this
provision may be too restrictive because it may not allow
enough time for taxpayers to fully exercise their due process
rights for collection actions or to negotiate payment
agreements.
To help ensure that taxpayers are not barred from receiving
Federal contracts or loan assistance prematurely, we recommend
that the Congress require the Secretary of the Treasury to
prescribe additional standards for IRS to use in determining
when a taxpayer has a tax debt in delinquent status for
purposes of barring under H.R. 4181.
Mr. Chairman, this concludes our statement. We would be
pleased to answer any questions you or members of the
subcommittee may have.
Mr. Horn. Thank you very much. We appreciate that very
thorough statement.
[The prepared statement of Ms. Ashby follows:]
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Mr. Horn. Our next presenter is Deidre Lee, the Acting
Deputy Director for Management, Office of Management and
Budget. Nice to have you here again.
Ms. Lee. Good morning. Chairman Horn, Congressman Turner,
and members of the subcommittee, I have been asked to discuss
the administration's views on H.R. 4181, the Debt Payment
Incentive Act of 2000. The bill would amend Title 31 of the
U.S. Code to bar delinquent debtors from obtaining Federal
contracts. It also adds delinquent debt as a bar to obtaining
not only Federal contracts but other types of Federal
assistance.
The administration shares the subcommittee's goal to reduce
delinquency. We supported the Debt Collection Improvement Act
of 1996 which provided a comprehensive set of tools for
agencies to use at their discretion to improve account
servicing and debt collection, such as consolidating and cross
servicing the Treasury offset program and loan sales assets.
The tools have allowed us to reduce our delinquent nontax debt
from $60 billion in fiscal year 1998 to $53 billion in 1999,
and we expect a continued decline as agencies sell delinquent
loan assets to the private sector and refer greater amounts of
delinquent debt to Treasury for cross servicing, but this is
not enough. We need to continue to reduce that debt.
We have supported H.R. 436, Government Waste, Fraud, and
Error Reduction Act of 1999, which would have strengthened the
provisions of the Debt Collection Improvement Act, including
barring delinquent nontax debtors from receiving Federal
benefits.
In support of these legislative efforts, the President has
declared improved management of Federal receivables to be a
priority management objective. Priority management objections
are OMB's highest management priorities for the Federal
Government. These objectives are areas in need of reform and
receive ongoing attention from the administration in the most
senior levels of OMB and the agencies.
Notwithstanding our support for improved debt collection,
we are concerned that the bill, without modification, may undo
some of the important progress this committee has helped us to
achieve in reforming the procurement process.
I would like to highlight for you how H.R. 4181 would
affect the procurement process, some concerns we have with
certain provisions, and some suggestions that we would like to
offer. I will defer to the Department of Treasury on the
implementation of their aspects of the bill.
As you know, an efficient, economical, and well functioning
procurement system requires the award of contracts to
individuals and organizations that meet high standards of
integrity and business ethics. The government should only be
doing business with high performing and successful companies
that work to maintain a good record of compliance with their
responsibilities as entities within the community. At the same
time, we have been striving in recent years to ensure that our
procurement tools provide the flexibility to acquire those
goods and services necessary to carry out the mission of the
agency in an efficient and expeditious manner.
As we work together to strengthen our debt collection
efforts, we also need to preserve the achievements of our
recent procurement reform efforts. The ability of the
contracting officer to exercise good business judgment in their
contracting decisions has been critical to procurement reform.
The bill provides exceptions for national security and disaster
relief but there may be other circumstances where exceptions
should apply.
For example, the bill could provide contracting officers
with the discretion to assess on a case by case basis whether a
delinquent debtor should be barred from Federal contracting.
I am also concerned that the lack of contracting officer
discretion may have adverse impact on small business. As you
know, many small businesses need the constant cash-flow, and we
need to balance the ongoing contracts they have in the offset
and collection procedures and perhaps evaluate how that would
impact them.
I would also suggest a dollar threshold. As Mr. Turner
mentioned, we have a large number of small dollar activities
that from timeframe and sheer volume we should look at their
impact and how these could be assessed.
The simplified acquisition procedure of $100,000 might be a
threshold to consider.
This bill requires verification of not only corporate
debtor status but also the status of officers and major
shareholders who have been assessed a penalty for failure to
collect and account for payroll taxes. This means that the
contracting officer will have to check the delinquent status of
not only the corporation but the officers and major
shareholders, and similarly this will affect partnerships that
have many partners. So our concern here, again, and I think it
has been mentioned by others, is how do we set up that system
to ensure that we can check this large number of individuals
and do that on a fairly quick turnaround to provide the
information.
The bill defines a delinquent tax debt as a debt that is
not paid within 90 days, and as already addressed by Ms. Ashby,
we think there are some definitional issues that could be
straightened out or clarified here. For example, someone may be
in recovery status and they are still delinquent but they are
recovering that debt. How do we address that in this bill?
In light of these concerns, careful consideration should be
given to strengthening the current mechanisms for dealing with
delinquent debtors. For example, pursuant to the Debt
Collection Improvement Act, the Treasury Department maintains
an offset program to collect nontax debt. Under this program
contract payments owed by a Federal contractor may be used to
offset debts the contractor owes to the Federal Government.
Federal agencies routinely report their contractor's taxpayer
identification number to the IRS when contracts are awarded so
that the IRS is aware of the companies with whom Federal
agencies do business.
This process enables the IRS to issue tax levies if a
contractor has an unpaid debt. Under this process, amounts
otherwise paid to the contractor are paid to the IRS to offset
the tax debt. An alternative to the bill under consideration
might be to expand or improve these programs.
Notwithstanding the final language of the bill, again as
Ms. Ashby stated, we should include a provision that would
allow time to make sure the verification system is in place and
then, of course, in addition to that there are some
considerations on how we put into place the Federal acquisition
guidelines to explain to the contracting officers and the
contractors how this process will operate.
Like this committee, the administration strongly supports
collection of debts owed to the government. We met recently
last week with your staff to discuss several of the issues that
I have discussed today, and we would be glad to continue that
dialog.
I hope we can work together to formulate a proposal with
the goals that we can both share, and reduce the delinquent
debt. This concludes my formal remarks and I would be happy to
answer any questions.
Mr. Horn. Thank you very much.
[The prepared statement of Ms. Lee follows:]
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Mr. Horn. Our next presenter is Joe Mikrut, the Tax
Legislative Counsel for the Department of the Treasury.
Mr. Mikrut. Thank you, Mr. Chairman.
Mr. Chairman, Ranking Member Turner, distinguished members
of the subcommittee, good morning. I appreciate the opportunity
today to discuss with you the Federal tax policy aspects of the
provisions of H.R. 4181, the Debt Payment Incentive Act of
2000. Section 3720(b) of Title 31 the U.S. Code enacted as part
of the Debt Collection Improvement Act of 1996 currently bars a
person from obtaining loans, loan guarantees, or loan insurance
administered by a Federal agency if the person has an
outstanding Federal debt other than a tax debt that is in
delinquent status.
H.R. 4181 would amend section 3720(b) in two key aspects.
First, it would extend the act to persons applying for Federal
contracts. Second, it would extend the act to tax debts as well
as nontax debts.
Treasury supports efforts to reduce delinquent debt, both
tax debt and nontax debt. To effectively achieve this result,
however, a number of policy and technical issues must be
addressed.
The two primary policy issues deal with the effects on
voluntary tax compliance and the effects on taxpayer privacy
rights.
The more general tax policy issue raised by the bill that
must be considered is its effect on voluntary tax compliance.
Ours is a system of voluntary tax compliance dependent upon
self-assessment. We rely upon taxpayers to personally determine
or assess their tax liabilities, to file tax returns, and to
timely remit any taxes owed. The role of the IRS is to
facilitate, monitor, and enforce this process. Anytime a
person's tax status becomes relevant for nontax purposes, an
incentive is created to misreport or, in some cases, to fail to
report a tax liability in order to obtain this other benefit.
Because it takes longer for a taxpayer who does not file a
tax return to be reflected as delinquent in the IRS records,
the bill could have the potential effect of encouraging people
not to file returns to avoid detection. On the other hand, the
bill could have the opposite effect on enhancing tax compliance
by encouraging taxpayers to avoid tax delinquent status by
either paying their tax debts or pursuing other appropriate
procedural avenues.
The second important policy consideration that the bill
deals with is with respect to taxpayer privacy. In general, in
order to encourage tax compliance, current law makes private a
taxpayer's confidential tax information. Current law contains
certain exceptions to this rule. H.R. 4181, by necessity, would
require a disclosure of taxpayer information, that is, the
taxpayer's delinquency status, to administering Federal
agencies. We have some suggestions on how to best achieve the
conflicting goals of taxpayer privacy and the need for
information under the bill.
Under the bill, in connection with the loan application or
a contract proposal, taxpayers would be required to authorize
the Secretary of the Treasury to disclose whether they had a
debt under the Internal Revenue Code that is in delinquent
status. Treasury would be required to develop a form for such
purposes. The authority for such disclosure would be under
section 6103 of the Code which permits the disclosure of
returns or return information upon consent.
Treasury recommends that the disclosures contemplated by
the bill should be made, instead, by amending section
6103(l)(3), which currently provides explicit statutory
authority for similar types of disclosures without the
taxpayer's consent. This is consistent with the statutory
scheme of 6103, generally, under which large scale disclosures,
as contemplated by the bill, typically are achieved through an
explicit statutory exception that grants an agency automatic
access to return information.
In addition, different rules and procedures apply to
disclosures pursuant to 6103(c) than are pursuant to explicit
statutory exceptions. Explicit statutory exceptions typically
specify exactly which information can be disclosed, to whom and
for what purposes.
In addition, many of the disclosures are subject to special
recordkeeping and safeguarding procedures. Disclosures pursuant
to consent under 6103(c), by contrast, have none of these
limitations.
Finally, while statutory disclosures are typically at least
partly automated, 6103(c) waivers typically involve a paper
process and are subject to review for compliance with certain
regulatory requirements by the IRS.
Currently, about 2 million third party consents are
processed each year by the IRS. The disclosures required by
this bill would add substantially to that number and would be
difficult to administer and thus create delays in granting
loans and contracts.
Another important consideration relevant to disclosure of
return information under this provision is that many Federal
agencies use contracts to administer their programs. The
Congress traditionally has restricted access to return
information by contractors even when disclosure otherwise may
have been authorized due to concerns about taxpayer privacy.
In order to protect taxpayer privacy, the amendment to
section 6103(l)(3) should make explicit that disclosures to
contractors of the agencies administering the loans or entering
into contracts will be permitted for purposes only of this
provision, subject to the contractor's agreement to otherwise
maintain the confidentiality of information, and subject to the
agency's demonstrated oversight of the contractor's compliance
with these safeguards.
We certainly recognize the value of notice provided by
requiring taxpayers to authorize the necessary disclosures. We
suggest that such notice should be incorporated into the loan
application process or the contracting process without each
notice having the legal effect of authorizing disclosure as
would happen under section 6103(c) consent.
In addition to concerns about the effects of voluntary tax
compliance and taxpayer privacy, we have certain technical
comments on the bill. The most fundamental is the definition of
tax delinquency. The bill currently defines tax delinquent
status to be any Federal tax debt that has not been paid within
90 days of assessment.
Treasury recommends modification or deletion of this
provision. The language may be unnecessary in light of section
3720(B)(a) which grants Treasury the authority to define
delinquent status. Alternatively, we believe that the bill
should make it explicit that a debt will not be considered to
be in tax delinquent status if the taxpayer has either already
administratively or judicially appealed or still has the
opportunity to administratively or judicially appeal a
determination of the IRS.
This is generally consistent with the approach of 3720(B).
It should be noted, however, that it can take a significant
amount of time for a taxpayer to exhaust all its administrative
and judicial remedies with respect to a Federal tax debt.
In any case, Treasury should have the authority and the
flexibility to determine additional standards for consideration
of a tax debt to be in delinquent status. For example, it might
be appropriate to exclude delinquencies of nominal amounts.
Regardless of how precisely a tax delinquent account is
defined, significant procedural and systems changes would be
necessary for the IRS to be able to track, analyze, and
communicate the information necessary to implement the
provisions of the bill.
At least initially the process would involve labor
incentive analysis of each relevant taxpayer's account. The IRS
preliminarily estimates that the procedural changes could take
at least 18 months to implement. Automation of this process, if
possible, would require significant systems changes on top of
the IRS' already planned modernization efforts and could be
years off.
We have had additionally suggested technical modifications
to the bill which we have shared with the majority and with
minority staffs and we look forward to working with the
subcommittee in developing these proposals.
In general, Mr. Chairman, in light of Treasury's policy and
technical concerns with the bill, we suggest that, if it were
enacted, you give careful consideration to the GAO's
recommendation that it be initiated as a pilot program or some
similar form. This would permit an overall evaluation of the
effectiveness of the program, including its effect on tax
compliance, and would provide the IRS with an opportunity to
develop procedures or the systems necessary to implement this
program.
This concludes my prepared remarks. We look forward to
working with the Congress in addressing these concerns as the
legislation develops, and I would be happy to respond to your
questions.
Mr. Horn. Those are very helpful comments and we appreciate
that.
[The prepared statement of Mr. Mikrut follows:]
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Mr. Horn. Carol Covey is the Deputy Director of Defense
Procurement for the Department of Defense. Ms. Covey.
Ms. Covey. Mr. Chairman and members of the subcommittee,
thank you for the opportunity to appear before you today to
talk about the views of the Department of Defense on H.R. 4181.
H.R. 4181 would prohibit Federal agencies from awarding
contracts to individuals who are delinquent in the payment of a
tax debt or any other Federal debt. The Department of Defense
is concerned that prohibiting the award of contracts to Federal
debtors may be more punitive than is necessary and that it may
not accomplish the goal of providing an incentive to delinquent
debtors to pay their debts but may instead be counterproductive
to the prompt payment of Federal debts.
It may be more effective to expand or improve existing
programs for collecting Federal debt from contractors than to
prohibit the award of contracts to Federal debtors. These
programs ensure the government is able to recoup contractor
debts in a timely manner.
These programs include the ones mentioned by Ms. Lee
earlier, the Treasury offset program for nontax debt, and the
IRS levy program for tax debt.
The Department is also concerned that compliance with this
bill's requirements would compel Federal agencies to implement
a contract clearance process with the Treasury Department to
ensure no contract was awarded to a delinquent debtor. This
process would undoubtedly delay contract awards until automated
systems were implemented. DOD awards hundreds of thousands of
contracts annually that could be delayed as a result, and I
would like to note that Mr. Turner mentioned potentially
setting a threshold at $2,500 for contract actions. That is the
micro-purchase threshold.
If the threshold were set at that level for the Department
of Defense alone, we would estimate that the number of actions
covered in a fiscal year would be about 6.3 million actions. So
we are talking a large number of individual contract actions.
The Department's other concerns are the definition of
delinquent tax debt may not provide adequate due process for
contractors, particularly if the debt is disputed. We have
looked at the definition included in Treasury regulations for
delinquent nontax debt, and that appears to be a very
satisfactory alternative. It provides due process for debtors,
including situations where the debt is disputed.
We would recommend that a similar definition be considered
for inclusion in the bill.
The Department is also concerned that the bill could hurt
small businesses. A small business that relies on the Federal
Government for much of its income may be put out of business if
all Federal contract awards stop. This would seem to reduce the
probability that the company would be able to repay any debts
it owes to the Government.
The bill also currently provides an exception for contracts
designated by the President as necessary to the national
security. We recommend that the bill be revised to enable the
Department of Defense to establish exceptions to meet national
security needs rather than maintaining that authority at the
Presidential level.
I would add that over the past 6 years or so Congress has
acted to streamline the Federal Government acquisition process.
The bill as currently structured is really inconsistent with
congressional reform efforts for the acquisition system.
The Department of Defense would be happy, though, to work
with the committee staff and with the other agencies to try to
recraft the bill into something that administratively is more
workable. Thank you for providing me the opportunity to present
the Department's concerns with the bill and I would be happy to
answer any of the subcommittee's questions.
Mr. Horn. Thank you very much. Those are helpful comments.
[The prepared statement of Ms. Covey follows:]
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Mr. Horn. Our last presenter is Sally Thompson, the Chief
Financial Officer for the Department of Agriculture. Glad to
see you here again.
Ms. Thompson. Thank you, and good morning, Mr. Chairman, as
well as Congressman Turner and other members of the
subcommittee. On behalf of Secretary Glickman, I would like to
thank you for the opportunity this morning to discuss House
bill 4181.
As you know, we are a steward of a $104 billion loan and
debt portfolio at USDA, and we consider improving debt
collection and ensuring the integrity of our loan programs to
be a critical part of the mission of our agency.
Your committee and staff always have recognized the
significant contributions that these loan programs play in
strengthening rural America. Our portfolio includes assistance
for socially disadvantaged persons, farm operations, emergency
disaster relief efforts, and rural housing and development
projects that all require very specialized services. We are the
lender of first opportunity for a broad range of Americans who
cannot get assistance from other private lending institutions.
We too support the intent of this act to ensure that
individuals and corporations that owe debts to the Federal
Government must resolve these outstanding issues before
qualifying to receive additional assistance from the Federal
Government.
We support the provisions that exempt individuals or
service providers from the requirement of this act during
national disasters or national security efforts because, as you
know, we do provide immediate relief and assistance in both
domestic and international events.
However, Mr. Chairman, USDA has serious concerns regarding
this legislation's provision that require our loanmaking and
contracting officers to verify or, in effect, audit with the
Internal Revenue that applicants are not delinquent in Federal
debt. In other words, we do require a statement that they are
not delinquent; and of course if they are, we stop right there.
However, this is not an audit, and we do not verify that with
the IRS.
This additional verification process would add significant
delays to our loanmaking and contracting process.
Currently, program managers rely on the instant information
or they wait 2 or 3 days from the commercial credit bureaus or
from the Credit Alert Interactive Voice Response system, the
CAIVR system; and also we check with Social Security, who has
an automated system. We attribute the portion of our low
delinquency debt to these credit checks, but as you know for
confidentiality purposes the IRS does not report its
delinquencies to the on-line credit resources.
I have put up a chart for you, and I see you really can't
read it, but trying to give you some sort of an overall view of
the volume of agencies, such as USDA loan processing and
contracting. In the rural development mission area, farm and
foreign agriculture services are our major credit agencies.
In 1999, rural development delivered over 73,000 loans
worth $9.9 billion to rural housing, businesses,
telecommunications, distant learning projects, and also
infrastructure. In addition to that, rural development has over
850 county-based offices that create and take in a lot of these
loan applications.
In the same fiscal year, our farm and foreign agriculture
services made approximately 33,000 nondisaster-related loans
for about $3.6 billion.
Of this total, which is very unique in some respects, FSA
made approximately 17,000 of these loans during the time of
March and April to finance the production of seed for farmers.
Historical records reflect that those majority of our loans are
made during that period of time, and so that would say that we
are very concerned about the timing and the turnaround that
this would add making sure that there was money available for
our farmers to get their seed in the ground at the right time.
Also, we have over 2,400 offices that are also processing
those loan applications; and when I am beginning to try to
paint the picture is how that information would be coming in
from all these different locations from all over the country.
In addition to this, FSA is also responsible for
administering the Commodity Credit Corporation, which aids
producers through loans and purchases and payments and
operations, materials and facilities in the manufacturing and
marketing of agricultural products, which then also includes
exports.
Again, we have a timing on that, and we have made over
207,000 loans last year for a total of about $8 billion. You
begin to get the picture of the magnitude of trying to get this
process through IRS and the delays that it might create for us
at USDA and, most importantly, for our clients that we are
trying to serve.
Several of the people here this morning have also mentioned
about the contracting challenges, and I would agree with all of
those. We face the same contracting challenges.
I would certainly support the fact that you are looking at
putting a pilot program in. I would certainly support the fact
that you are looking at a delayed implementation because we too
are concerned with systems, not only our own systems that you
heard me talk about but also being able to talk to IRS systems
as well.
In addition to this, we also would support very strongly
some sort of a cap on this. One of the things, I believe, that
maybe wasn't even mentioned today but is the smart card that we
use for small purchases.
We have over 20,000 people at USDA that have this card. We
made over $1 million worth of purchases last year. It is
growing at a very rapid rate, and for us--how do you know, you
know, when our people are out there buying a purchase from any
number of commercial establishments, whether they have any tax
debt or any of their shareholders or principal officers have a
tax debt? We also buy off a GSA schedule a lot, and then in
those particular cases we do not do the same verification or at
least have a signed statement from the business that we are
contracting with on their delinquent debt.
We assume that GSA has taken care of that, and that's a
concept that hasn't come up this morning as well.
So in conjunction with that, Mr. Chairman, as you know, we
have worked very hard over the last couple of years to get our
delinquency down and collect those. We have collected over $136
million in delinquent debt this last year through the programs
that were mentioned here today, the offset program and other
delinquent collection tools. We have increased our collections
by over 45 percent from 1999 over 1998, and that was an
increase from 1997, as well; and we have also dropped our
delinquency over 15 percent in the last couple of years.
Of course, all of these figures, as you know, don't include
the tax debt that we are talking about today; but I do think it
shows that the criteria that was put in the original debt
collection act is working and that it is moving right along.
So, again, as I said, USDA does support the principle of
the bill. We agree with both the suggestions that Congressman
Turner made this morning, as well as the suggestions that have
been made here by GAO, Treasury, OMB, and the Department of
Defense; and I would be more than willing to answer any
questions you might have.
Mr. Horn. That is very helpful, as usual. I am glad so many
of you are at least with it in principle.
I am reminded of ``Yes, Minister,'' that great British show
where the career civil servant, Mr. Humphrey, always says,
``But, Minister, we agree to that in principle.''
[The prepared statement of Ms. Thompson follows:]
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Mr. Horn. We will get down to the nitty-gritty in these
questions. I want to first call on the gentleman from Virginia,
Mr. Davis, for 5 minutes of questioning.
Mr. Davis of Virginia. Thank you, Mr. Chairman.
Ms. Lee, let me ask you, in looking at your testimony, you
noted--you state I think toward the end, the bill defines a
delinquent tax debt as a debt that has not been paid within 90
days of an assessment of a tax penalty or interest under the
Internal Revenue Code of 1986. Then you say it is not clear
that this definition would provide adequate due process for
contractors on disputed debts. That may be right, but isn't
that--when I go back to blacklisting and everything else--it
seems to me that has been one of our concerns that some of the
other regulations that have been proposed by OMB and the
administration have not provided adequate due process for
contracts.
Is this a consistent view, or is this a selective view?
Ms. Lee. Mr. Davis, again and one of the things I tried to
emphasize was the flexibility versus the total debarment. In
this case, if you get the answer back that yes you are
delinquent, whether if its on a recovery program, days, weeks
or amounts, the response is you cannot award a contract. Under
contractor responsibility, the contractor is asked and given
input as to where they are with respect to a debt. There is a
requirement for the contracting officer then to discuss those
issues with the contractor so they have a process.
There is still a decision to be made at the end, but
contracting officers have a little more input. It is not just
that we got a report back that said the answer is yes;
therefore, I cannot award you a contract. There is a little
difference in flexibility.
Mr. Davis of Virginia. Well, there is. On the one hand,
though, when you talk about due process you are leaving it in
the hands of a contracting officer to make a decision versus
the law to make a decision, and you could argue almost that you
could get a different outcome based on different contracting
officers under your scenario whereas under this scenario at
least it is uniform.
Ms. Lee. Correct. Correct.
Mr. Davis of Virginia. OK. I thought it was interesting. We
are concerned about that, and that is something I think we will
try to address as we move through.
I want to ask some questions about the Circular A-129. This
is the policies for Federal credit programs and nontax
receivables. Are you familiar with it? It requires agencies to
determine whether loan applicants have delinquent Federal
debts, including tax debt. A-129 also requires agencies, as I
understand it, to include a question on their loan application
forms asking applicants if they have such delinquencies.
According to GAO's testimony, agencies are not complying
with this directive. Now, what I would ask you is to what
extent do you think agencies are complying with the A-129 in
asking loan applicants if they have Federal delinquencies? Do
you have a feel for that?
Ms. Lee. I don't have a good feel for that. I certainly
would be happy to go back and look at the format. There is a
lot going on regarding assistance agreements and trying to make
that more accessible to agencies from a standardized format,
particularly in grants. I would be happy to look at that and
see how we can address that.
Mr. Davis of Virginia. In addition to that, what steps do
agencies generally take to ensure that loan applicants are not
delinquent on their tax obligation, or is that just ignored
right now as a matter of course?
Ms. Lee. Specific tax----
Mr. Davis of Virginia. I will ask anybody else if they
would like to address either one of those, too. They may better
have a better familiarity in some of the other departments that
are doing this hands on every day.
Ms. Thompson. Mr. Congressman, when we take a loan
application, as it says in the A-129 Circular, there is a
question on there that asks, Are you delinquent on your tax
debt? Obviously----
Mr. Davis of Virginia. Does anybody ever check that and say
they are delinquent?
Ms. Thompson. Occasionally, yes. And quite often those are
the same ones that show up on the credit checks that we do, and
they are delinquent in other areas of debt as well.
My point, in my testimony, was that we don't verify or
audit that; and this would require that, and then we got into
the processing.
Mr. Davis of Virginia. Don't you argue--that's pretty
burdensome to go through and audit all of that, isn't it? Isn't
it?
Ms. Thompson. Yes, that's what I was saying and certainly
until we get the systems in place and we can electronically
transfer that information, I tried to give you a feel of the
thousands of locations that are making loans.
Mr. Davis of Virginia. Well, let me ask this--and I will
ask this to everybody--are agencies contacting the IRS to
ascertain the creditworthiness of Federal loan applicants?
Ms. Thompson. No, they are not.
Mr. Davis of Virginia. OK. Nobody is doing that right now?
Ms. Thompson. Nobody is verifying the information. We ask
for tax returns as well, and we get copies of their tax
returns. But do we verify those were the actual ones filed with
the IRS? No.
Mr. Davis of Virginia. OK. Does everybody agree with that,
it is not done as a general rule?
To what extent does the Department of Agriculture screen
loan applicants to determine whether they are delinquent on
other nontax debts?
Ms. Thompson. Every application is verified either through
the credit bureau or that CAIVR system.
Mr. Davis of Virginia. How often do you find the loan
applicants are delinquent on other Federal nontax debts?
Ms. Thompson. I couldn't answer that percentage as well. I
would suppose probably about 20 percent maybe.
Mr. Davis of Virginia. OK. I think my time is up. Thank
you.
Ms. Thompson. Remember the type of clientele that we are
doing. We call this our lender of first opportunity. Others
call it the last opportunity.
Mr. Davis of Virginia. I understand. Thanks.
Mr. Horn. I yield 5 minutes of questioning to the author of
the bill, Mr. Turner of Texas, and then we will go back to Mr.
Ose and Mr. Davis.
Mr. Turner. Thank you, Mr. Chairman.
I think Mr. Davis has perhaps uncovered something we all
needed to hear about because apparently we are not doing a very
good job of implementing the current A-129 OMB Circular.
It would seem to me that it is important here to be
sensitive to the concerns of the Treasury and the IRS in terms
of implementation, and I want to work with you to accomplish
that.
But I don't--somebody testified just a minute ago that the
IRS was performing about 2 million of these type of checks a
year. I forget which witness said that. Mr. Mikrut, what was
that reference to?
Mr. Mikrut. Sir, that is with respect to consents, where
the taxpayer consents for the release of his tax information to
someone else; and that often happens, for instance, if you are
looking for a home mortgage, you may give a consent to the bank
that they can ask the IRS for certain tax information.
Mr. Turner. So when they talk about increasing the burden
on the IRS, they are already doing 2 million of these type of
searches a year now?
Mr. Mikrut. That is correct.
Mr. Turner. So it is our obligation, I guess, to try to
figure out what the additional burden is going to be here? It
is not that the IRS is not doing this. I guess a lot of it is
being done manually, done by hand, without the use of some
realtime computer system that would give you the answer
immediately?
Mr. Mikrut. That is correct. The consent request is
generally a manual paper-type of process; and to the extent you
would expand that, for instance, under the student loan
application, there may be another 10 million of these such
requests. As you know, some sort of system that would be more
automated would probably be much more efficient.
Mr. Turner. All right. I think I tend to agree with you
with regard to trying to fine tune our definition or use of the
word ``assessment.'' You know, in the bill as originally
drafted, we talked about 90 days after the assessment of a tax
or penalty; and we also said we were not including debts that
were the subject of an installment agreement or a compromise in
settlement. Obviously, from what you are saying, we haven't
quite gone far enough to ensure that we are not cutting off
some taxpayer's right to exercise another step in the appeal
process, and we want to clear that up because I don't think any
of us have any intent of cutting off anyone's right to appeal
to the last step when they have no other recourse and they owe
the tax. Ninety days after that is when we want to bar them
from Federal contracts or loans.
So help us on that, to get over that hurdle.
With regard to the Department of Defense's concerns, Ms.
Covey, I wanted to ask you, you mentioned if we exempt the
$2,500 and below, which I think is an appropriate suggestion,
it has been said by several witnesses because you can go in
with a government credit card and purchase something under
$2,500 and obviously we can't check whether those particular
vendors owe taxes or not, but you mentioned there were 6.7
million actions, you said.
Ms. Covey. 6.3 contract awards, 6.3 million contract awards
over $2,500.
Mr. Turner. How many contractors are there as opposed to
contract awards? What we are checking here are contractors, not
contracts, however many you have every year. How many
contractors?
Ms. Covey. But we have to do it on a contract-award by
contract-award basis, I mean unless you are suggesting, for
instance, that if we annually checked for a particular
contractor that might be sufficient as well.
Right now we estimate that we are doing business with
about, 180,000 contractors annually. We have a central system
by which we register them, and that estimate is based on how
many are registered in the system.
Mr. Turner. Well, work with us on this, because obviously
we would like to check out the contractors, not every contract.
If there are 6.3 million of them. Perhaps we can do a
semiannual check and be sure these contractors are paying their
taxes or something like that; would be more plausible, I think.
As you know, we put a provision in the bill allowing this bar
in this legislation to be waived in the interest of national
security. We said the President should do it. You suggested it
ought to be in the Department of Defense. We don't object to
that.
Frankly, I kind of felt like when we put in an exception
for national defense we put a hole in the bill you can drive a
truck through anyway by the Pentagon, so work with us. We are
trying to not get in your way. We are just trying to be sure we
accomplish the goal that we all concur on.
Ms. Covey. We appreciate that.
Mr. Turner. I think that most of the issues that were
raised today were very legitimate ones, and I think that we
can, as the staff continues to work with you, resolve every one
of them. I don't see any of them that are insurmountable.
The one I am going to struggle with the most is information
that reveals that the IRS doesn't have the technical capability
to provide this information timely, and I really need to look
into that further.
I do think a pilot program of some type with an effective
date at a later time for full implementation is probably the
right way to go.
Thank you, Mr. Chairman.
Mr. Horn. Well, we thank you and there will be further
rounds here. Five minutes for Mr. Ose, the gentleman from
California.
Mr. Ose. Thank you, Mr. Chairman.
Ms. Ashby, I want to make sure I understand something that
I think you said, and that is that OMB agrees with a connection
between awarding additional contracts to nontax delinquent
debtors? I wasn't quite sure if I understood you correctly.
Ms. Ashby. No, I did not say that. I was talking about OMB
Circular A-129 that requires agencies--or directs agencies--to
check on the delinquency status of prospective loan applicants.
Mr. Ose. OK. Does GAO have a position regarding the concept
of barring delinquent taxpayers from receiving Federal
contracts?
Ms. Ashby. Well, as I said in my short statement and as we
said in our longer statement for the record, we agree in
concept to the barring of delinquent taxpayers.
Mr. Ose. OK.
Ms. Ashby. But we also recognize that there are key
significant implementation issues that need to be resolved, and
many of those have been talked about here this morning.
Mr. Ose. Your testimony here this morning also talks about
unpaid payroll taxes, which I find one of the most egregious
examples of nonpayment. It just kind of drives me nuts. Your
testimony highlights an estimate of $49 billion in unpaid
payroll taxes as of September 30, 1998 owed by over 1.8 million
businesses?
Ms. Ashby. That's correct.
Mr. Ose. And this is not a unique occurrence for about 50
percent of those businesses.
Ms. Ashby. That's right. For about 50 percent, they owed
for more than one tax period, more than one quarter.
Mr. Ose. I just wanted to make sure I understood the scope
of the issue here.
Ms. Lee, I want to go to a question about one of the things
you mentioned. You said that in 1998 there were about $60
billion worth of nontax outstanding obligations, and that by
1999 that had been reduced to $53 billion. For that I want to
applaud you. I do want to explore that number a little bit.
Did we actually collect $7 billion in that period of time?
Ms. Lee. Well, I can get you the exact figures, but we have
reduced the debt. That could be collection as well as
dismissals or for some reason resolution that we weren't going
to collect. So I would have to get you the exact number and say
whether it was collected.
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Mr. Ose. So it is not necessarily that we have $7 billion
that we didn't have any more; it is that we have either
negotiated, been paid or settled?
Ms. Lee. Correct.
Mr. Ose. $7 billion?
Ms. Lee. Correct.
Mr. Ose. We might have only had $1 billion? We might have
taken 10 cents on the dollar? We might have gotten a dollar,
but we might have only taken 10 cents, too?
Ms. Lee. Correct.
Mr. Ose. OK.
Ms. Lee. Some sort of resolution for that $7 billion.
Mr. Ose. OK. I just wanted to get it clear in my head that,
while the face value of the outstanding amount has reduced, it
doesn't mean we have actually put in our pocket a whole bunch
more money.
Ms. Lee. Right.
Mr. Ose. OK. I appreciate that.
Ms. Covey, you testified there were 6.3 million contract
awards at the DOD that would be subjected to the $2,500
threshold. How many would be subjected to the $100,000
threshold?
Ms. Covey. Less than 100,000 actions.
Mr. Ose. So we basically have like a 97 percent reduction?
Ms. Covey. Right.
Mr. Ose. So that would go to 100K.
Then in the ag department, Ms. Thompson, how many
contracts, if you will, would be affected? Like the DOD has 6.3
million different awards that would be affected if the
threshold was set at $2,500. At the ag department, how many are
we talking about?
Ms. Thompson. I would say probably about 157,000, and about
500 contractors throughout the country.
That threshold would certainly, as we said, do away with
credit card transactions.
Mr. Ose. If we went to the $100,000 threshold, how many
would we have?
Ms. Thompson. I would have to get you that number.
Mr. Ose. If you could, please.
Ms. Thompson. We do an awful lot of small business. As OMB
talked about, probably 41 percent of the contracting business
we do are with small businesses so, you know, off the top of my
head I would say that it would eliminate a large percentage of
those, maybe as much as 50 percent; but I would have to go back
and look.
Mr. Horn. Without objection, that letter to the committee
and Mr. Ose will be put in the record at this point.
Mr. Ose. Thank you, Mr. Chairman. My time is up.
Mr. Kutz. Congressman, can I make one point with that? I
think it is important to note that most of the 1.8 million
businesses that owe those taxes are indeed small, closely held
businesses, restaurants, construction companies, etc. So in
looking at this threshold, it is important to consider that
probably most of the delinquent taxpayers are indeed getting
very small contracts in all likelihood. I just wanted to make
it understood that the 1.8 million taxpayers are indeed very
small businesses.
Mr. Ose. If I could have just a moment, Mr. Chairman.
Mr. Horn. Sure.
Mr. Ose. You bring up an interesting point in that if we
have small businesses who are not paying their employee taxes
and we set the threshold at $100,000, then how do we keep from
rewarding those people who aren't paying their employee taxes?
Are you suggesting we need a stable----
Mr. Kutz. I am suggesting that the problem is with small
businesses so that you need to be cautious in setting a
threshold too high so that you are going to--I mean, the big
businesses in this country are generally compliant taxpayers.
The defense contractors, such as General Dynamics and General
Electric and the other ones that are going to do much bigger
contracts, they are not the ones that are the problem here. It
is generally small businesses we are talking about.
Mr. Ose. I am trying to figure out how to scale the
enforcement mechanism, if you will. So I appreciate you
bringing that up. That's a good point.
Mr. Horn. The gentleman from Texas, Mr. Turner, for 5
minutes.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Mikrut, I want to talk to you about a couple of your
other suggestions. I think we have resolved that we can come up
with language that clears up what we mean by assessment, or do
that. I don't see any great problem there.
Your suggestion about limiting the examination of
shareholders to those who own 25 percent of the shares of stock
in a corporation, I think I mentioned I had suggested 10. Do
you see any reason, big reason, to choose 10 or 25?
Mr. Mikrut. No, Mr. Turner. It is just a matter of how much
more of a burden you would have on the administrating agencies
and the IRS, but I think there should be some threshold for
partnerships as you do have for corporations. I think that
would be appropriate.
Mr. Turner. OK. With regard to the way we carried out the
disclosure, our intent here was to be sure that the taxpayers
who get loans from the Government and contract with the
Government knew that when they contracted or when they apply
for a loan, that somebody is going to check and be sure they
are current in their Federal taxes. I think I understand why
you have suggested we go under 6103(l)(3), and I don't think
there is any reason to object to going that route.
If we do what you suggested in your written testimony when
you said in order to protect taxpayer privacy the amendment to
section 6103(l)(3) should make explicit that disclosures to
contractors of the agencies administering the loans or entering
into contracts will be permitted for purposes only of this
provision subject to the contractor's agreement to otherwise
maintain the confidentiality of the information and subject to
the agency's demonstrated oversight of its contractor's
compliance with the safeguard requirements of 6103(p)(4) and to
the Secretary's satisfaction, and we need some help in drafting
that language.
If we already are required under the OMB circular to find
out if somebody is current in their taxes, I assume that there
is some kind of disclosure process currently ongoing saying
that before you get this loan you have to be current in your
taxes.
So it seems to me that if we extend that to parties that
contract with the Government, that we have probably done all we
should have to do to assure that the taxpayer who is the
contracting party or who is the loan applicant knows that there
is going to be a check to be sure that they are in compliance
with this statute.
Does that seem satisfactory to you?
Mr. Mikrut. I believe so, Mr. Turner. As I understand it,
your concern is that the loan applicant or the contracting
party should be aware that questions are going to be asked of
the IRS regarding their tax status. And you can do that under
6103(l)(3) simply by putting that provision in the contract or
in the loan application or some place there, so that the
taxpayer knows that's going to happen.
It does not have to be done under 6103(c) under the consent
form, although they clearly have notice under consents. It is
really a technical tax distinction which subsection you come
under, but we think we can accomplish your goals regarding
taxpayer notice as well as our goals regarding taxpayer privacy
by simply putting it under (l)(3).
Mr. Turner. Well, work with us on that. I think your
suggestions are well taken.
It is an interesting discussion we have had this morning
because I almost feel like that it is like a fellow who is
walking along and he stumbles into a hornet's nest and the
hornets are going everywhere because the truth of the matter is
that we have had the requirement in law, not in law but in OMB
regulations since January 1993, requiring agencies before they
make a loan to find out if somebody owes Federal taxes. And it
doesn't sound like to me, from the answers to Mr. Davis'
question, that we are doing a very good job of carrying out
that OMB circular that's been out there since 1993.
So perhaps that having stumbled into that hornet's nest, it
is good we have the opportunity to at least understand that we
have a ways to go. And by reaching out and covering tax debt in
a more formal way than the OMB circular on loan applicants and
extending it to government contractors perhaps might get us in
a position where what common sense would tell us becomes
reality, and that is if you owe taxes to the Federal Government
you shouldn't get the benefits of Federal contracts, nor should
you get the benefits of Federal loans.
I think we can resolve the Department of Defense problem,
and I look forward to working with you, Ms. Covey, to do that.
Mr. Chairman, thank you for the opportunity to have the
hearing this morning.
Mr. Horn. Well, we thank you.
The gentleman from California, Mr. Ose, do you have further
questions?
Mr. Ose. Thank you, Mr. Chairman. I did want to cover a
comment. I want to commend our friend from Texas for his good
work on this. I think he has come across something that I think
will be a useful tool in ensuring that. For instance, we get
the employee taxes that are supposed to have been collected and
to which employees have basically contributed half from their
pay as it relates to Social Security, if nothing else.
So I want to compliment Mr. Turner on that.
I also want to associate myself with the--I don't want to
say the amusement, but the irony or the conundrum we face as it
relates to the blacklisting issue that Ms. Lee and Mr. Davis
and I have discussed on separate occasions as reflected in her
testimony today. It did not escape us in my office either, the
contradiction, if you will, that seems to be there--it probably
isn't, but appears to be there--in the testimony as it relates
to the blacklisting issue.
So with that, Mr. Chairman, I will yield back.
Mr. Horn. Well, thank you. I have a few closing questions
here directed at Ms. Ashby and Ms. Lee.
In March 1992, during the House Ways and Means Committee
hearing, the General Accounting Office said this that in
considering the issue of whether tax compliance should be a
prerequisite to awarding a Federal contract, ``The goal of
ensuring that Federal contractors comply with tax laws must be
balanced against other national goals.''
Now, Ms. Ashby, I am curious. In your testimony today, you
state that the GAO supports the concept of barring delinquent
taxpayers from receiving Federal contracts, and I am curious
what caused the General Accounting Office to change its views
on this issue since 1992.
Ms. Ashby. I don't think we really have changed our views
and let me explain. In 1992--and I am very familiar with that
testimony because I was an assistant director working for
Jennie Stathis who testified, and I probably wrote parts of
that testimony, the part dealing with the Federal contractors.
And the testimony was delivered in the context of work that we
had done where we had actually looked at--compared Federal
contract amounts, award amounts, with IRS' records of unpaid
taxes, not just payroll taxes. We had numerous examples of
contractors who were, in fact, delinquent, who seemed to have
resources that could have been used to pay off some of the
debt; and our primary focus on that work was to determine how
much money IRS might collect by levying the contract payments.
In the course of doing that work and discussing our
results, it became obvious that, well, there are numerous cases
where there are actually delinquent taxpayers benefiting from
Federal contracts and should that be, was sort of the issue we
raised. But at the same time, we saw that there were other
policy issues. Implementation issues, policy issues--I think
the words probably mean a lot of the same things--and we
recognized at that time and today that there are numerous
public policy goals, one of which is to collect delinquent
taxes. And there are others including acquiring goods and
services in a cost effective and efficient manner, securing the
national defense and so forth.
So it was then and now a recognition that there are
multiple issues here that need to be resolved, and we at GAO
can't make a recommendation, just as at this point I don't
think anyone feels that they can make a recommendation for the
answer to this problem. But it is an evolutionary process that
we are going through, and we are getting various viewpoints;
and we will get to a workable solution, I am sure.
I think back in 1992 and perhaps even before that, we were
pretty much where we are today, that we recognize that there is
an issue here. There is an issue of fairness; there is an issue
of providing public benefits to those who are not fulfilling
their public responsibilities.
Mr. Horn. Well, I think that's well said.
Ms. Lee, do you agree with the GAO's position on this
issue?
Ms. Lee. Yes. There is the balance and how do you take into
account all of this information and make sure you apply it to
relevancy, and how do we make sure that those receiving the
Federal benefits, in some case if we really need their product
or service or whatever, that we then employ the offset so that
we can also recover? It is an interesting balance on how do we
make sure that we have those policy issues all moving forward
together.
Mr. Horn. Well, I would ask the whole panel here, what is
your guess, in your agency, do the benefits associated with
this bill outweigh the added costs of the procurement process
that were identified by some of the witnesses and some of the
statements from various potential witnesses that will be put in
the record later?
I am just curious. Agriculture, Department of Defense,
Treasury, how would you answer that question, the cost-benefit
ratio?
Ms. Covey. You are saying the cost-benefit ratio----
Mr. Horn. Right.
Ms. Covey [continuing]. For the Department of Defense as
the bill is structured right now?
Mr. Horn. Right.
Ms. Covey. I think it fails the test. I think the costs
associated with the revised process versus the limited benefits
to be gained from the bill, I just don't think it meets the
cost benefit test. That's why the Department had proposed that
we use the systems we already have, the offset system that
Treasury administers for nontax Federal debt and the IRS levy
program for tax debt and that we look at expanding those
systems because we feel that they impact the process, the
procurement process, much less than would this type of
clearance process.
Ms. Thompson. I believe that the cost benefit would
certainly be reduced significantly in terms of administrative
burden once the IRS had an electronic process where we could
send the names in electronically and they could then, within a
2 or 3-day turnaround time, get back to us.
As I mentioned, I am really concerned about farm loans and
the amount of the workload during the months of March and
April. I think more the cost of it is--the administrative cost
is significant, but I think the cost of not getting the money
into the farmers' hands, how do you evaluate that? How do you
put a dollar amount on to that? That becomes significant.
I think when we talked about loans, mortgage loans, if you
think of the amount of time it takes to get a mortgage loan to
the private sector, and then you add to that the type of
clientele that we are serving out in rural America, you begin
to see the amount of the costs there as well.
I am also concerned, of course, as we have talked, Mr.
Chairman, about the administrative staff and how that has
shrunk so significantly over the last few years, and then you
add the burden to that of more administrative work on them,
which would then impact the delivery of programs.
Mr. Horn. Well, do you have any studies where you can give
us a cost-benefit ratio with some evidence?
Ms. Thompson. No.
Mr. Horn. I would ask that of the Department of Defense
also. This is off the top of the head, I think, isn't it?
Ms. Covey. Yes, this is off the top of my head. No, we have
no studies to support this.
Mr. Horn. OK. And to what extent are your records
electronically available so you could send them over to IRS for
that 1 day, 2 day quick that Ms. Thompson is talking about?
Ms. Covey. It may be in Department of Defense we are a
little bit unique because we have a contractor registration
system that's on-line. We can give the IRS access to that
system. It contains taxpayer identification numbers for every
contractor we do business with, other than those where we use
the purchase card. So we may be unique in that regard, but we
could certainly make that information available to the IRS.
I think an alternative that maybe wasn't discussed this
morning was whether the IRS could put up some sort of on-line
system where the agencies could automatically access this
information on-line.
Again, I think that would resolve a lot of the
implementation problems associated with this sort of process.
Mr. Horn. Any comments from the Treasury?
Mr. Mikrut. I think with respect to the on-line program Ms.
Covey mentioned, it would be interesting. I think it would be a
great deal of work to get that in a place where it could be
effective.
Finally, I think in general, with respect to taxpayer
disclosures, we try to limit as many taxpayer disclosures as
possible. I think there would be a real concern if the tax
information of all taxpayers was suddenly available to any one
agency.
For instance, the IRS in the past had put in place
implementations to restrict what is known as ``agent
browsing,'' that they just can't simply look through taxpayer
records without a sufficient reason to, and we have concerns in
that respect if all taxpayer information made was available to
all Federal agencies.
Mr. Kutz. Mr. Chairman, let me say something on this, too.
I think Congressman Turner's bill provides a preventive control
rather than a detective control, and there are some significant
benefits to preventing taxpayer delinquencies from ever getting
into IRS' records. You are aware that IRS has records of $231
billion of unpaid taxes, and there is a significant cost to IRS
carrying those records over the course of 10 years.
So to the extent that you can prevent delinquencies, you do
save the Government some of the administrative costs, incurred
by the IRS, including sending out all the various notices and
you know all the administrative debt collection processes you
have heard discussed today by the various witnesses. To the
extent you don't let taxpayers become delinquent, you eliminate
those costs up front.
So the bill has a significant benefit not only from the
preventive side but for future compliance, which you can't
quantify.
Mr. Horn. I think you are absolutely correct on that. What
got me started in this business in 1995 was in the Farmer's
Home Administration where this multimillionaire had a ranch. He
hadn't paid back the mortgage, and he then moved to Santa
Barbara, a rather posh place; and he gets another loan to the
millions and doesn't pay that back.
How do you let this person get away with it and just sit
there?
So I would hope that if you have some real data here as to
the impact, fine; but I don't see it when millions are going
down the drain and nobody is doing anything about it. At least
that's the way it sounds in part of the testimony this morning,
that well, you know, we have a problem and so forth and so on.
I think Mr. Kutz is saying if the word gets out, don't mess
around with the Federal Government if you have a contract. We
know a lot of the major defense contractors have--very little
taxes are paid. They have numerous ways to get out of it. We
ought to be taking a look at that; and the taxpayers that do
pay their bills and pay their taxes would sure appreciate it,
in other words, the average citizen.
Would the gentleman from Texas have any further questions
he would like to ask this panel?
Mr. Turner. Mr. Chairman, I just thank you again for the
opportunity to have the hearing, and I thank all the witnesses
and will continue to work with them to try to come up with a
piece of legislation that accomplishes our goals in the least
obtrusive and burdensome manner.
Thank you, Mr. Chairman.
Mr. Horn. Well, we thank you.
Let me put a few documents in the record of witnesses that
could not be with us today. One is from the National Defense
Industrial Association. One is from the Aerospace Industries
Association. One is from the U.S. Small Business Administration
from the chief counsel for advocacy. And without objection they
will be put in the record at this point.
I would like to thank the staffs, both majority and
minority, for their work. I think it is a very good panel we
have here, and we thank you for coming. J. Russell George,
staff director, chief counsel of the House Subcommittee on
Government Management Information Technology; to my left, to
your right, is Mr. Kaplan. Randy Kaplan is counsel to the
subcommittee. Bonnie Heald is director of communications. Bryan
Sisk is our clerk. And we have for Mr. Turner, as ranking
member; Trey Henderson, his counsel; and Jean Gosa, minority
clerk. The court reporter is Mindi Colchico. We have two
interns working their hearts out, and that's Elizabeth Seong
and Michael Soon.
So with that, we are recessing this hearing until 2 this
afternoon.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
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