[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
 H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT ACT; AND H.R. 1865, AMENDS 
 TITLE 31 OF THE UNITED STATES CODE BY AUTHORIZING A PILOT PROGRAM FOR 
 LOCAL GOVERNMENTS TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX 
                                 DEBTS

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 1870

 TO AMEND TITLE 31, UNITED STATES CODE, TO PROHIBIT DELINQUENT FEDERAL 
 DEBTORS FROM BEING ELIGIBLE TO ENTER INTO FEDERAL CONTRACTS, AND FOR 
                             OTHER PURPOSES

                                 AND ON

                               H.R. 1865

TO AMEND TITLE 31, UNITED STATES CODE, TO ALLOW CERTAIN LOCAL TAX DEBT 
      TO BE COLLECTED THROUGH THE REDUCTION OF FEDERAL TAX REFUNDS

                               __________

                             APRIL 19, 2007

                               __________

                           Serial No. 110-31

                               __________

Printed for the use of the Committee on Oversight and Government Reform

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                     http://www.oversight.house.gov

                                 ______
                                     
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             COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut   TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont                 JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
                    Michael McCarthy, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 19, 2007...................................     1
Text of H.R. 1865................................................     7
Text of H.R. 1870................................................     3
Statement of:
    Cornett, Mick, mayor, Oklahoma City, OK, representing the 
      U.S. Conference of Mayors; Barbara Ford-Coates, Tax 
      Collector, Sarasota County, FL, representing the National 
      Association of Counties and the National Association of 
      County Treasurers and Finance Officers; and Patricia Weth, 
      deputy treasurer, on behalf of the honorable Francis 
      O'Leary, treasurer, Arlington County, VA...................    65
        Cornett, Mick............................................    65
        Ford-Coates, Barbara.....................................    72
        Weth, Patricia...........................................    93
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, U.S. Government Accountability 
      Office; Paul A. Denett, Administrator, Office of Federal 
      Procurement Policy, Office of Management and Budget, 
      Executive Office of the President; and J. Russell George, 
      Treasury Inspector General for Tax Administration..........    17
        Denett, Paul A...........................................    37
        George, J. Russell.......................................    44
        Kutz, Gregory D..........................................    17
Letters, statements, etc., submitted for the record by:
    Cornett, Mick, mayor, Oklahoma City, OK, representing the 
      U.S. Conference of Mayors, prepared statement of...........    68
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statement of.........................   113
    Denett, Paul A., Administrator, Office of Federal Procurement 
      Policy, Office of Management and Budget, Executive Office 
      of the President, prepared statement of....................    40
    Ford-Coates, Barbara, Tax Collector, Sarasota County, FL, 
      representing the National Association of Counties and the 
      National Association of County Treasurers and Finance 
      Officers, prepared statement of............................    74
    George, J. Russell, Treasury Inspector General for Tax 
      Administration, prepared statement of......................    46
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, U.S. Government Accountability 
      Office, prepared statement of..............................    19
    Weth, Patricia, deputy treasurer, on behalf of the honorable 
      Francis O'Leary, treasurer, Arlington County, VA, prepared 
      statement of...............................................    95


 H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT ACT; AND H.R. 1865, AMENDS 
 TITLE 31 OF THE UNITED STATES CODE BY AUTHORIZING A PILOT PROGRAM FOR 
 LOCAL GOVERNMENTS TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX 
                                 DEBTS

                              ----------                              


                        THURSDAY, APRIL 19, 2007

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:10 p.m. in 
room 2154, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the subcommittee) presiding.
    Present: Representatives Towns, Bilbray, Platts, and 
Duncan.
    Also present: Representative Ellsworth.
    Staff present: Michael McCarthy, staff director; Velvet 
Johnson, counsel; Cecelia Morton, clerk; John Brosnan, minority 
senior procurement counsel; Edward Kidd and Kristina Husar, 
minority professional staff members; John Cuaderes and Larry 
Brady, minority senior investigators and policy advisors; and 
Benjamin Chance, minority clerk.
    Mr. Towns. Welcome to today's legislative hearing on two 
bills related to tax collection. One bill is the Contractor Tax 
Enforcement Act, which would prohibit award of contracts to 
companies that are seriously delinquent in paying taxes. We 
will also examine a bill introduced by Representative Tom Davis 
of Virginia, which authorizes a pilot program of local 
governments to offset Federal tax refunds to collect local tax 
debts.
    I ask unanimous consent that the gentleman from Virginia, 
Mr. Moran, and the gentleman from Indiana, Mr. Ellsworth, 
participate in today's hearing. Both have been working on the 
issue we will consider today. Without objection, so ordered.
    As American citizens file their taxes this week, they 
expect the Government to enforce the tax laws fairly and 
efficiently. Efficiency means that one part of the Government 
shouldn't pay out money to people or businesses that owe tax 
debts until those tax delinquencies are cured. Unfortunately, 
the Government frequently writes checks to people, even as 
their tax debts go uncollected. These two bills are designed to 
stop that.
    Contractors owe the Federal Government billions of dollars 
in delinquent taxes. My bill seeks to close this tax gap. GAO 
studies over the past few years have identified more than 
50,000 contractors owing nearly $8 billion--that is B as in 
boy--unpaid Federal taxes.
    If the sheer size of those numbers doesn't take your breath 
away, the details certainly will.
    One of the largest categories of tax debts is unpaid 
payroll taxes. These are amounts deducted from workers' 
paychecks for Social Security, Medicare, and individual income 
taxes, but never forwarded to the IRS.
    Companies that don't remit these withholdings are 
defrauding not only the taxpayer, but also their own employees. 
Yet, these companies are receiving millions of dollars in 
Federal contracts.
    One alarming example involved a contractor that provided 
services such as trash removal, building cleaning, and security 
to U.S. military bases. Although the company had revenues of 
over $40 million in 1 year, with over 25 percent of this coming 
from Federal agencies, it owed outstanding payroll taxes and 
defaulted on an IRS installment agreement. Meanwhile, the owner 
was receiving a six figure income and had borrowed nearly $1 
million from the business. The business also made a down 
payment for the owner's boat and bought several cars and a home 
outside the country.
    The Contractor Tax Enforcement Act would stop these 
egregious practices by requiring that tax compliance be a 
prerequisite for receiving a Federal contract. This bill would 
prohibit new awards to contractors who are seriously delinquent 
in paying taxes and authorize the IRS to inform contracting 
officers of the delinquency status of the applicants.
    I realize the administration has proposed a rule that is 
similar in many ways to my bill, but I do believe the 
administration's proposal does not go far enough. For example, 
it relies on self-certification by contractors that they are 
complying with tax laws, but has no verification of this fact 
through the IRS.
    Based on the examples we have found, I don't think we can 
simply take some of these companies at their word. With a 
mounting Federal budget deficit and rising obligations, the 
Federal Government cannot afford to leave billions of dollars 
in tax revenue uncollected.
    But these benefits of my bill go beyond just collecting 
more money for the Government. The bill will provide a level 
playing field for contractors that comply with our laws, who 
have to compete with companies that have lower costs because 
they are dodging their taxes. This is a serious concern that I 
have heard from responsible contractors over the years who 
support approaches like mine that target the bad actors, rather 
than pose burdensome requirements on all contractors.
    I look forward to hearing from our witnesses and gaining 
their perspectives as we work together to find a workable 
solution to something that we can all agree is a continuing 
problem.
    Let me say that I am pleased to co-sponsor this bill with 
Tom Davis of Virginia, who, of course, has had a special 
interest in this for a long, long time. It is my honor to work 
with him on it.
    [The texts of H.R. 1870 and 1865 follow:]

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    Mr. Towns. At this time I would like to yield to the 
gentleman from Indiana for remarks at this time.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    I didn't prepare a statement, but I would like to thank you 
for allowing me to join you today for such an important issue 
and to talk about this subject.
    When I had Mr. Kutz in my office a few weeks ago, one of 
the first things, when I was elected to Congress, that really 
caught my attention, the amount of outstanding taxes for people 
that were still getting Government contracts. I don't think the 
people in Indiana appreciate it. I pay my taxes, I am sure 
everybody in the audience pays their taxes, and so should the 
people that are receiving Government contracts.
    I appreciate your letting me be a part of this hearing. I 
look forward to the testimony.
    Mr. Towns. Thank you very much.
    It is a longstanding policy of this committee that we swear 
our witnesses in.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect that all responded in the 
affirmative.
    Let me introduce the panel, and we will move forward.
    Gregory Kutz is a Managing Director of the Government 
Accountability Office. He leads GAO's Forensic Audits and 
Special Investigations Unit, which conducts the most complex 
investigations of fraud, waste, and abuse. Mr. Kutz has managed 
GAO's work on contractors' abuse of the Federal tax system and 
he has prior experience with financial and operational 
management issues at the Internal Revenue Service.
    Paul Denett is the Administrator of the Office of Federal 
Procurement Policy at OMB, where he is the point person for the 
administration on issues of Federal contracting and 
acquisition. He has held a number of posts as a senior 
executive in acquisition in the Federal Government and the 
private sector.
    Russell George is the Treasury Inspector General for Tax 
Administration, which means he is responsible for audits and 
investigations of the Internal Revenue Service. Before becoming 
an Inspector General, he served for several years as staff 
director of this subcommittee. Welcome back.
    Your entire statement is in the record, gentlemen, of 
course, and I would like to ask that each witness summarize 
your testimony in the time provided. Of course, most of you 
know how the light works. The yellow light means your time is 
running down and getting close to the end, and the red light 
means that you are now violating the rules and that you are 
going overboard. We will try to be a little flexible and 
generous with the time, but we do want you to be able to try to 
get it in within 5 minutes.
    I would like to clarify my remarks. Tom Davis has not yet 
signed on as a co-sponsor of my bill, H.R. 1870, but I am 
hoping that he will do it in the very near future. Of course, 
knowing him, and he believes in good government, it is the kind 
of bill that he would want to be identified with. Let me just 
say that and leave it alone.
    At this point I would like to start with you, Mr. Kutz, and 
just come right down the line.

  STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
ACCOUNTABILITY OFFICE; PAUL A. DENETT, ADMINISTRATOR, OFFICE OF 
 FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET, 
   EXECUTIVE OFFICE OF THE PRESIDENT; AND J. RUSSELL GEORGE, 
       TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

                  STATEMENT OF GREGORY D. KUTZ

    Mr. Kutz. Mr. Chairman and Congressman Ellsworth, thank you 
for the opportunity to discuss Government contractors with tax 
problems.
    My testimony today summarizes our past work on Department 
of Defense, civilian agency, and GSA contractors. Specifically, 
our past investigations identified 27,000 DOD contractors with 
$3 billion of unpaid taxes, 33,000 civilian agency contractors 
with $3.3 billion of unpaid taxes, and 3,800 GSA contractors 
with $1.4 billion of unpaid taxes. These numbers are 
substantially understated because they exclude under-reporting 
of income and non-filing of required tax returns, which we have 
seen in certain contractors. According to the IRS, under-
reporting of income is the largest component of the over $300 
billion net tax gap.
    As part of our work we performed in-depth investigations of 
122 of these contractors, including the owners, officers, and 
any related companies. For all 122 cases, we found abusive and 
potentially criminal activity related to the Federal tax 
system. Many of these companies had unpaid payroll taxes, 
which, as you mentioned, Mr. Chairman, represent amounts 
withheld from an employee's wages for Social Security, 
Medicare, and individual income taxes. Willful failure to remit 
payroll taxes to the IRS is a felony.
    Most of the individuals that we investigated have made 
careers out of not paying their Federal taxes. Schemes used to 
avoid paying taxes include: under-reporting of income and non-
filing of required tax returns; large cash withdrawals and 
loans to owners and officers that were never repaid; closing 
the entity with tax debt and opening another with a similar 
name at the same address; and large cash transfers to foreign 
bank accounts or to purchase a home in the Caribbean.
    Some of the owners of the contractors that we investigated 
were simply poor business managers. Rather than pay their 
taxes, they chose to pay their utility bill or the rent. 
However, many accumulated substantial personal wealth at the 
same time they failed to pay their Federal taxes.
    The posterboard shows examples of the multi-million-dollar 
homes and luxury vehicles that we identified. They are also 
shown on the monitor. Other interesting assets include: a 
professional sports franchise, a shopping mall, a high-
performance aircraft, and a $25,000 men's bracelet.
    Our current and past investigations have shown that failure 
to pay Federal taxes isn't the only problem these individuals 
have. For example, we identified substantial other debt, 
including State and local taxes, personal income taxes, and 
delinquent student loans and child support payments. Criminal 
activity included assault, embezzlement, money laundering, 
burglary, and check fraud.
    The companies we investigated were typically small-to mid-
sized and closely held. Industries ranged from building 
maintenance, construction, and manufacturing, to security, 
weapons systems, and health care. Ironically, these potential 
felons are doing business with the Department of Justice and 
Homeland Security.
    These facts bring us to the key question of this hearing: 
what is being done to prevent the most egregious contractors 
from doing business with the Federal Government? For the 122 
cases that we investigated, the answer is nothing. Current 
Federal law does not prohibit tax deadbeats from getting 
Federal contracts.
    In conclusion, we strongly support prohibiting contractors 
with serious tax problems from doing business with the Federal 
Government. It is a matter of fairness, ethics, and just plain 
common sense. The vast majority of Federal contractors pay 
their Federal taxes, and I expect they would support a law that 
prevents tax cheats from getting Government contracts.
    Also, if we can't trust these contractors to pay their 
Federal taxes, then how can we trust them to secure Federal 
buildings, manufacture parts for the space shuttle, and provide 
health care to our wounded warriors?
    Mr. Chairman, I believe most of your constituents would 
find it hard to believe that the hard-earned money we collect 
from honest American taxpayers is being used to bankroll 
deadbeat Government contractors.
    Mr. Chairman, this ends my statement. I look forward to 
your questions.
    [The prepared statement of Mr. Kutz follows:]

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    Mr. Towns. Thank you very much, Mr. Kutz.
    Let me yield to the ranking member at this time for any 
opening statement or any comments he might have.
    Mr. Bilbray. Thank you, Mr. Chairman. I apologize for my 
tardiness, but the California Delegation, being a small, 
intimate group of 53 members, can drag on sometimes.
    I would like to say that this is an issue that we need to 
address. If nothing else, we need to air the issue.
    As somebody who grew up in a family that was involved with 
a tax practitioner business, I always try to remind all of us 
what the Government may think we owe and what we do owe many 
times is two distinctly different things. I think we need to 
make clear here that no one is proposing, hopefully, that we 
pre-determine what somebody, even a contractor, owes without 
the due process of the review process that the tax codes allow. 
We are talking about people here who have basically ignored a 
liability that has been adjudicated or authorized and 
identified.
    I think, Mr. Chairman, when we talk about people that feel 
that the tax code doesn't apply to them, child support laws 
don't apply to them, we are really talking about a segment of 
society that really has promulgated this culture of corruption 
that somehow everybody is breaking the rules so it is OK for me 
to break the rules. I think that it is quite well within our 
realm to consider the fact that being a contractor in any form, 
let alone with Government and especially the Federal 
Government, is not a right, it is a privilege, and that, even 
if it was a right, those rights can be negated by the violation 
of the law by not fulfilling the requirements, the minimum 
standards of requirements that apply across the board to the 
general population.
    I look forward to working with you, Mr. Chairman, on this 
item. I think that we need to make sure that a good idea 
addressing a bad problem is implemented in the appropriate way.
    In all fairness, as we address this concern, we have to 
remember that not everything we do to address a grievous wrong 
is the right thing to do. We have to do it the right way in the 
right manner to take care of the problem without creating 
bigger problems.
    I really think that this is something that is long overdue 
to be addressed. I appreciate the chance of your having this 
hearing, Mr. Chairman. I look forward to the rest of the 
testimony.
    Mr. Towns. Thank you very much, Congressman Bilbray.
    Mr. Denett.

                  STATEMENT OF PAUL A. DENETT

    Mr. Denett. Chairman Towns, Representative Bilbray, and 
members of the subcommittee, I appreciate the opportunity to 
appear before you today to discuss how the Federal acquisition 
system can be used to improve tax compliance by Federal 
contractors.
    The administration agrees with the subcommittee's goals to 
reduce contractor tax delinquency and improve tax compliance. 
This is a shared value and responsibility that requires 
Government-wide attention, and, as the Administrator for 
Federal Procurement Policy, I will discuss ways the community 
is increasing compliance and address the practical issues 
associated with implementing the proposed Contractor Tax 
Enforcement Act.
    Increasing tax compliance: following the February 2004, 
report by the Government Accountability Office regarding 
Defense contractors that abused the Federal tax system, the 
Office of Management and Budget participated on the Federal 
Contractor Tax Compliance Task Force to improve the sharing of 
information between the Internal Revenue Service and other 
Federal agencies, specifically the Department of Defense, for 
the purpose of collecting unpaid taxes.
    The Task Force, which has become a semi-permanent entity 
dedicated to improving contractor tax compliance, made 
significant and permanent improvements to policies and 
processes that directly result in increased debt collection.
    For example, IRS and other Federal agencies now share 
information electronically to identify contractors that should 
be subject to the Treasury Department's Federal payment levy 
program. Delinquent contractors are identified, and their 
Government payments levied. Alternatively taxpayer 
identification numbers, TINs, that are entered in the central 
contractor register data base, which is the Government's 
principal repository for contractor banking information, are 
validated to ensure that contractors subject to the levy 
program are correctly identified, ensuring that the names and 
TINs of the contractor match, increase the number of payments 
available for levy.
    The IRS is now using data from the Federal procurement data 
system to identify contractors with outstanding tax debts, 
which will assist the IRS in prioritizing future offset actions 
and increase tax debt recovery.
    Implementation of the proposed Contractor Enforcement Act: 
as I understand it, the proposed Contractor Tax Enforcement Act 
would prohibit delinquent Federal debtors, generally those who 
have not paid the tax, penalty, or interest within 180 days of 
assessment, from being eligible for Federal contracts. While I 
fully support the objective of the bill to increase tax 
compliance, I am concerned that implementation of this, as 
written, would result in a de facto debarment executed without 
regard to the suspension and debarment due process requirements 
provided in the Federal Acquisition Regulation [FAR].
    Suspension or debarment is a serious remedy designed to 
protect the Government from conducting business with non-
responsible contractors when this is in the Government's 
interest. The FAR establishes due process requirements to 
preserve transparency and fairness and afford both the 
Government and the contractor discrete rights throughout the 
process. These rights are necessary to ensure that the 
Government's interests are protected and that the nature and 
seriousness of the contractor's action warrant suspension or 
debarment. These decisions are made on a case-by-case basis by 
an informed official, and a decision against a contractor is 
not a punishment for non-responsibility but is a means for us 
to protect the Government.
    The proposed legislation appears to be inconsistent with 
the established process for suspension or debarment; however, a 
recently proposed change to the FAR provides much-needed 
support for ensuring that tax delinquencies are properly 
considered prior to contract award.
    The proposed regulatory solution: on March 30, 2007, a 
proposed change to the FAR was published in the Federal 
Register. The proposed rule requires prospective contractors to 
certify whether or not they have been convicted of or have had 
a civil judgment rendered against them for violating any tax 
law, failing to pay any tax, or have been notified of any 
delinquent taxes for which the liability remains unsatisfied 
within a 3-year period preceding the offer.
    Additionally, the proposed FAR change adds the following 
list of causes for debarment or suspension: delinquent taxes, 
not restricted to Federal taxes, about which the offer has been 
notified and that remain unpaid; unresolved tax liens; and 
convictions or civil judgments for violating tax laws or 
failing to pay taxes.
    Once this rule is finalized, the appropriate Federal 
officials may used tax delinquency as sufficient grounds for 
debarment or suspension, in accordance with the established 
process in the FAR for protecting the Government's interest.
    Mr. Chairman and members of the subcommittee, OFPP is 
committed to ensuring that Government contracts are awarded to 
responsible, law-abiding contractors who take their tax 
obligations seriously. The acquisition community is taking 
affirmative steps to raise the visibility of contractor tax 
delinquency, improve the ability of the Government to recover 
that debt, and ensure that contractors seeking Federal business 
disclose their tax liabilities and are accountable for their 
tax delinquencies.
    I feel the progress we have made as a community and the 
proposed change to the FAR preclude the need for the additional 
legislation.
    This concludes my remarks. I am happy to answer any 
questions you may have.
    [The prepared statement of Mr. Denett follows:]

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    Mr. Towns. Thank you very much, Mr. Denett.
    Mr. George.

                 STATEMENT OF J. RUSSELL GEORGE

    Mr. George. Thank you, Mr. Chairman. Let me at the outset 
say it is truly an honor to be here to work with your 
committee. As you noted earlier, I was staff director of this 
subcommittee over 12 years for approximately 7 years under the 
chairmanship of Steven Horn. It was truly an honor to work with 
you. Mr. Bilbray, we held field hearings up in your District, 
you may recall, and Mr. Platts, also, since we have interacted 
in my capacity as IG.
    You are considering very important legislation that you may 
recall that we looked at the issue over 7 years ago in 2000 
when Mr. Turner of Texas approached Mr. Horn about this very 
important area. I am so glad that you are bringing it back up 
today, sir.
    I thank you for the opportunity to testify--Mr. Ellsworth, 
it is nice to meet you--on two legislative proposals related to 
tax collection. The policies embodied in them have the 
potential to affect efforts to increase voluntary compliance, 
as well as enforced revenue collection.
    As mentioned, the contractor tax enforcement act would 
effectively make any person with an outstanding Federal tax 
debt ineligible to enter into a contract or to receive a loan 
from a Federal agency. In February 2006, the IRS estimated 
that, based on tax year 2001 data, the annual gross tax gap due 
to under-payment of taxes is $34 billion. Collecting additional 
taxes owed from potential Federal contractors could provide 
another means to help reduce the annual tax gap attributable to 
under-payment of Federal tax obligations.
    This compliance check would also appear to support the 
Secretary of the Treasury's comprehensive strategy for reducing 
the tax gap.
    Contractors receive an estimated $378 billion in Federal 
payments annually. It is for Congress and for the Department of 
the Treasury to consider whether, as a policy matter, 
eligibility for Federal contracts and loans should include tax 
compliance requirements.
    While my office has not performed work directly on this 
matter, our limited review of such requirements in other 
contexts would lead us to anticipate that the impact on the 
IRS's other tax administration efforts should be minimal. This 
assumes that the proposed requirement is implemented in a 
manner similar to IRS's current practices.
    The other draft bill before this subcommittee this 
afternoon would amend Title 31 of the United States Code to 
create a pilot program to examine the feasibility of collecting 
certain local tax debts. This proposal has the potential to 
assist local governments with their collection efforts based on 
experiences at the Federal level.
    The Internal Revenue code requires that a taxpayer's 
overpayment be applied to any outstanding child support or non-
tax Federal debt prior to issuing a refund or accrediting an 
overpayment to a future obligation. However, a tax overpayment 
must be offset to an outstanding tax debt before it may be 
offset to non-tax debts or applied as a credit to a future tax 
period.
    The IRS has facilitated these offsets since 1984. In 1996 
this committee moved the Debt Collection Improvement Act, which 
authorized the Treasury Department to consolidate its offset 
programs. Starting on January 11, 1999, the Department's 
Financial Management Service, Treasury Department's Financial 
Management Service, began refund offsets to pay outstanding 
child support or Federal agency debts, while offset of Federal 
tax refunds for State income tax debts began in January 2000.
    Since 1996, this program has collected $24 billion in 
outstanding debts. For example, in fiscal year 2005 the program 
collected $3 billion. Of that total, 90 percent of the 
collections were for overdue child support, Federal non-tax 
debt, and State income tax debt.
    Given the nature of the proposal under consideration, it is 
unlikely that its enactment would adversely affect the IRS or 
Federal Tax Administration. The proposal would establish a 
pilot program for past due, legally enforceable local 
government obligations. If current practice in analogous 
circumstances is an accurate indication, it is likely that the 
proposed pilot program would operate through the Treasury 
offset program, and therefore affect the Financial Management 
Service but not the Internal Revenue Service.
    Mr. Chairman and members of the subcommittee, thank you for 
the opportunity to provide background. I look forward to 
answering your questions.
    [The prepared statement of Mr. George follows:]

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    Mr. Towns. Thank you very much.
    Let me thank all three of you for your testimony.
    Let me begin with you, Mr. Denett. What is it that you do 
not like about the legislation?
    Mr. Denett. I don't like the fact that it deprives 
contractors of the due process that they normally would be 
afforded before they, in effect, were suspended or debarred, by 
prohibiting them from getting awards that, in effect, is like a 
debarment. We have careful steps where they have an opportunity 
to explain their side of it, go over the pros and cons, make 
sure everything is on the up and up before a decision is made 
to debar them so that they will not be able to get the award.
    Systems have errors in them and they are imperfect, and I 
would hate to deprive anybody of an opportunity to explain 
their side of it before we made the decision that they would 
not be allowed to receive any contract from the Federal 
Government.
    Mr. Towns. This would only apply to people who have 
actually received information in the course of due process 
taking place, and also we are talking about up to a certain 
amount, as well. I mean, you still think that we should do 
something else?
    Mr. Denett. I do. Again, we have been through this for many 
decades, a formal debarment process. I personally have been 
involved with a debarment process with several companies and, 
in fact, have debarred people. In the process of hearing 
directly from attorneys and companies, the circumstances 
involved with various things they are accused about, facts come 
out that you otherwise are not fully privy to, and you need to 
consider fully both sides before you take a significant action 
of barring them from any Government business.
    Some of these companies are small business. If they don't 
have the opportunity to earn Federal dollars, they may not even 
be able to meet repayment schedules with IRS if they no longer 
have any income.
    Mr. Towns. I guess you heard Mr. Kutz' testimony when he 
talked about in terms of the buying of boats, he talked about 
buying of luxury cars and homes and still not paying the taxes. 
I mean, I know you suggest a case-by-case basis, but that seems 
not to be working.
    Mr. Denett. Well, it is improving, and we collected $55 
million through the levy program. Now that they are tapping 
into the FPDS there is going to be more and more matches. In 
Defense Department they are allowed to levy 100 percent of the 
money that is going to them through contracts. On the civilian 
side I think it is 15 percent. I think legislation may be 
ultimately proposed--I don't know if it is currently--to take 
100 percent of money going to civilian contractors. I think all 
of that is a positive. It is a way to collect money. I find it 
deplorable when I see big houses and luxury boats and all that 
and people owe money. I mean, that is wrong. I am glad----
    Mr. Towns. Especially this time of the year when I have to 
pay mine. I pay my taxes.
    Mr. Denett. I agree with you. I pay mine, too.
    Mr. Towns. But doesn't it bother you when you hear about 
similar names at the same address, and, of course, they just 
change the name and continue to do business? Doesn't that 
bother you?
    Mr. Denett. Yes, it does bother me. I mean, I think it is 
wrong, and as we go through the due process I am describing, in 
those cases where they can't demonstrate that they should 
continue to get any Government business, they would be debarred 
and suspended and they would not get any further Government 
business.
    Mr. Towns. Mr. Kutz, I would like to hear your comments on 
this.
    Mr. Kutz. Well, a couple of things. I mean, the people we 
are talking about here are fraudsters. These people are 
involved in tax fraud, basically. With respect to due process 
on the tax side--and I think the ranking member was talking 
about this--while I talked about the billions of dollars we 
found, that was agreed-to taxes. That was not disputable taxes. 
You have compliance assessments, as they are called, that are 
not agreed-to taxes. Everything that I talked about was taxes 
either agreed to by the taxpayer or determined in the IRS's 
favor in a court of law, so the due process has happened.
    Mr. Towns. Happened.
    Mr. Kutz. I don't think necessarily the only solution to 
this is to go through the debarment process. Mr. George 
mentioned the Treasury offset program. You have tax and non-tax 
debt in that Treasury offset program that potentially one 
possible solution could be to systematically bump that against 
the central contract registry and show a notification to the 
central contract registry that someone is not eligible for a 
contract because they have a tax debt. So there are a lot of 
ways to do it. I think the implementation, there are a lot of 
ways to implement this. Hopefully at the highest level we can 
agree that we want to get these people out of the system. I 
think that is the key part of this testimony. There are various 
ways you can actually do it.
    The progress also that was discussed is a lot of back-end 
process. The levy program is where we are actually after--they 
are in the system and being paid. We are collecting a couple of 
pennies on the dollar at the back end, which I think we need to 
continue to do, regardless of what we do at the front end. But 
the purpose of this hearing today, as I understand it, is to 
talk about the front end of the process.
    Mr. Towns. Right. My time has expired, so I am going to 
yield to the ranking member.
    Mr. Bilbray. Thank you, Mr. Chairman. Mr. Chairman, let me 
just echo your concern about the changing names. As we are 
addressing this, we have to remember how some of these people 
operate in being able to avoid it. We have seen that, the 
abuses in the women in minority owned businesses and the way 
they use front people to be able to hide, basically, who is the 
power or the base, and that is going to be a big concern.
    I think that when you talk about practical application, we 
are going to have to figure out how do we track these people 
and who are they. Can they get around? Are their Social 
Security numbers there? Do we have a way of tracking who is 
actually the contract and who is not?
    Mr. George, you mentioned the issue of the offset from the 
Federal tax refunds, the 1865, and the potential for the 
collection there. Do you have any kind of number that we can 
grasp on that issue? Do you have an estimate at all of the kind 
of revenue source it could create for the local government if 
we can go back and tap that?
    Mr. George. As I noted in my written testimony, GAO has 
estimated, as Greg, I believe, indicated, that DOD, which 
serves as its own dispersing agent, collected at least $100 
million in unpaid taxes in fiscal year 2002. If it worked with 
the IRS, we estimate that at least that amount of money could 
be added.
    Mr. Bilbray. How much was that again? I am sorry.
    Mr. George. We are estimating that $100 million in unpaid 
taxes in 2002 could have been collected if DOD had worked with 
the IRS to effectively levy contractor payments.
    Federal Government contractors receive an estimated $377 
billion in Federal dollars, alone, but as for the local 
governments, the Treasury offset program has collected, since 
the Debt Collection Improvement Act was passed in 1996, $24 
billion.
    Mr. Bilbray. So we are talking about a nice----
    Mr. George. A significant amount of money. No question 
about it.
    Mr. Bilbray. Nice bundle.
    Mr. George. It is.
    Mr. Bilbray. I would just say to my colleagues, when we 
talk about issues like local government having first responder 
capabilities for homeland security and we talk about grants and 
providing Federal funds to local governments, here is an 
example where, if we just cooperate with them, we can help them 
get their own money back, and within their own jurisdictions, 
without all our strings and oversight problems that we have 
with the Federal Government, and to get the job done and 
protect the citizens by making sure that those who should be 
paying are finally paying the local communities, which really 
are the front line service providers for our citizens, contrary 
to what we like to think about here in Washington.
    The challenge I have is that your concern about innocent 
people getting caught or being disbarred, or whatever. Can you 
see a way for us to make sure that doesn't happen? We are 
talking about somebody basically whose due process has been 
executed. The challenge is that we have misidentification of 
the individual? Does somebody get hit there? What is your 
concern there? And do you have any answers for this legislation 
to make the implementation of this legislation practical?
    Mr. Denett. Well, again, I think the new regulation that is 
on the street now--we are collecting comments from industry and 
the citizenry--will be a major step in the right direction, 
because heretofore we did not list all these tax things as a 
specified reason for debarment and suspension, so this will 
facilitate making those calls. A step in the right direction.
    I think the IRS and others now tapping into the Federal 
procurement data system to see all of this nearly $400 billion 
awarded every year, any that have tax problems it will put 
flags on them and we will start to collect that money from 
them. Instead of them getting the check, in he Defense 
Department's case they can take 100 percent of the check. 
Civilian agencies is 15 percent, but being considered to go up 
to 100 percent. I mean, that is substantial and will be a major 
improvement over what we have been doing in previous years.
    Is it enough? I don't know. I think we need to get public 
comment and then try it and see what success we have with it.
    Mr. Bilbray. Mr. Chairman, just in closing, it tends to be 
a habit around here that we need props, and props are great for 
sending a message. Frankly, I don't care how big a house 
somebody has if they are skipping out on their taxes. I don't 
care if it is a little shack they are living in and they are 
drinking or taking drugs and there is no symbolism there.
    I don't care if they are living in poverty. If they are not 
paying their fair share of taxes and they are competing against 
a business that is trying to get a contract that is paying 
their fair share of taxes, common decency says we have to quit 
rewarding the people that are breaking the rules and not paying 
their taxes, because that, de facto, punishes those who are 
playing by the rules.
    Even if the guy playing by the rules lives in one of those 
big houses, he still has a right to be protected from unfair 
competition from those who aren't playing by the rules.
    I yield back, Mr. Chairman.
    Mr. Towns. Thank you very much.
    I yield to the gentleman from Indiana, Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    Is it a 5-minute rule?
    Mr. Towns. Five minute rule, yes, unless you are the 
chairman or the ranking member.
    Mr. Ellsworth. OK. I will keep an eye on my $29 men's 
bracelet I have on here, my Timex.
    Mr. Bilbray. Guess who is making the rules?
    Mr. Ellsworth. Thank you very much.
    I will ask you the first question. This is probably a 
pretty easy one. A person who knows they are going to not pay 
their taxes, would that not give them an advantage in a bid 
process if they knew on the end that they could low-ball that, 
knowing that they were not going in? Would you find that to be 
the case?
    Mr. Kutz. Yes, not just theoretically but in reality. We 
did drill down upon specific cases of especially wage-based 
industries where that had happened and taxpaying contractors 
were beat out by those that didn't pay their payroll and income 
taxes.
    Mr. Ellsworth. Mr. Denett, you talked about a self-
certification process that was in the works or in the hopper, 
you are thinking about implementing that. Is there a time? I 
have penned some legislation that did that. Is that on a 
timeframe that would be in place and implemented?
    Mr. Denett. It is on the street for comments now, published 
in the Federal Register. Comments are due by the end of May. We 
don't know if we are going to get ten comments or a thousand 
comments, but the normal cycle of reviewing the comments and 
then getting it finally issued, I would estimate we would have 
a rule out by November, perhaps sooner, based on my increased 
sensitivity to this subject and hearing some of what I am 
hearing today. It disturbs me also, so I am going to be as 
aggressive as I can be with getting it implemented.
    Mr. Ellsworth. I hope the commenters have to identify 
themselves, or we only get the ones from the contractors that 
are doing this. You are going to get a one-sided thing.
    I will go ahead out on a limb here and say that the people 
in Indiana, I can comment for them that they would like the 
people also paying their taxes and fairly before they got 
another contract.
    We talked about not doing this, that we wouldn't want 
anybody to not be awarded a contract unfairly. Do you have any 
numbers, the percentage of those that we have found that we 
checked on or held back from receiving a Federal contract that 
we then found that we were in the wrong, the Government was in 
the wrong and held them back unfairly, a percentage of how 
often that happens when we don't award a contract because they 
haven't paid any? Do we have examples of that where that has 
happened?
    Mr. Denett. I do not have any statistics on how often that 
happens.
    Mr. Ellsworth. So you based your comments on we sure 
wouldn't want that to happen, so that is why we are not--I 
guess I am gathering here, when you said we wouldn't want 
anybody to go in default or not be awarded a contract if we 
found a mistake, that has not happened?
    Mr. Denett. I am told by various departments that this, in 
fact, has happened, but I do not have any specific example with 
me today, nor do I know what small percentage of times that, in 
fact, does happen.
    Mr. Ellsworth. But it would be small, a small percentage?
    Mr. Denett. Yes. That would be my guess.
    Mr. Ellsworth. OK. And, Mr. George, I will go to you. I am 
still in the green. I might get a couple more in.
    In my former life in law enforcement we could find carpet 
fibers and DNA when we looked for them, and I am guessing that 
Jag and those big homes would be pretty easy to find, and I 
agree with the gentleman that I don't care what size house it 
is or what car. But how do you triage who you go after when you 
find these violations? I know it is going to cause your 
organization a burden to increase and roll it up, but wouldn't 
this money we take in help offset your costs or new employees? 
I am guessing we could hire quite a few employees for what we 
can make up.
    Mr. George. Mr. Ellsworth, that is a very good point. In 
similar programs that the Treasury Department operates--again, 
obviously not dealing with contractors--they are allowed to 
assess fees to the people from whom they collect the money, and 
in some ways that helps offset or pay for the activity that the 
Government has to engage in. But it is important to note, too, 
that, depending upon how the contractor is organized, whether 
it is through an incorporated organization or whatever so they 
are going to be very aggressive, innovative in ways to help 
bring that about. That is something that I would request that 
this subcommittee consider.
    Mr. Ellsworth. Would the self-certification that Mr. Denett 
was talking about then help solve that? Would that then, if 
they were found in violation when they self-certify, then they 
go to jail?
    Mr. George. Well, honest thieves who self-certify it would 
help, but the dishonest ones----
    Mr. Ellsworth. And then go to jail if they are caught self-
certifying when that was not the case?
    Mr. George. Well, I am not sure whether it require jail 
terms.
    Mr. Denett. There are criminal penalties for anybody who 
falsely certifies that information.
    Mr. Ellsworth. OK.
    Thank you, Mr. Chairman. Sorry for going over.
    Mr. Towns. Thank you very much.
    At this time I yield to the former chairman of this 
subcommittee from Pennsylvania, Mr. Platts.
    Mr. Platts. Thank you, Mr. Chairman. I appreciate your 
holding this hearing. Does the 5-minute rule apply to former 
chairmen? I will try to stay within the 5-minutes here.
    I do appreciate your holding the hearing and all of our 
witnesses. I think this is an issue that needs to be addressed 
head-on and is something that we didn't get to on our list, and 
I am glad that the chairman is taking the lead on it now with 
the new session.
    The numbers to me are staggering, as one who does my best 
to pay every penny I owe and use an accountant to make sure it 
is right, that we have people doing business with the Federal 
Government that aren't.
    I think a very important line is in the GAO report that 
says, Federal contractors that do not pay taxes could have an 
unfair competitive advantage in cost because they have lower 
cost than the tax-compliant contractors on Government 
contracts, because if you are paying your taxes you factor all 
that into your bid. The guy that is shorting the Federal 
Government isn't, so he gets the job and he is the one being 
unscrupulous to begin with.
    I do have a couple of quick questions. The numbers 
addressed, the $3 billion, and if you total it up I understand 
maybe some of it is over 63,000 different contractors, DOD 
contractors, 33,000 civilian and agency contractors, and 
another almost 4,000 GSA, that $3 billion is from throughout 
the Federal Government, not just DOD contracts?
    Mr. Kutz. We did three different pieces. We did Defense, 
civilian agencies, and GSA.
    Mr. Platts. So the $3 billion is the total of all of them?
    Mr. Kutz. No. There is $3 billion, $3.3, and $1.4, but 
there is overlap, so I would say at the end of the day you are 
talking about between $5 billion and $10 billion, but it is 
difficult to know. And keep in mind that is the known part.
    Mr. Platts. Right.
    Mr. Kutz. We said those are agreed-to taxes.
    Mr. Platts. Right.
    Mr. Kutz. It is very likely the bigger part is the unknown 
part.
    Mr. Platts. Right.
    DOD certainly has not done a very good job, and, as is 
referenced in Mr. George's testimony, in the 2002 fiscal year, 
where if they had worked more effectively with IRS, could have 
recouped it, and clearly haven't been very efficient.
    Is there any department or agency that stands out as doing 
a good job of making sure--DOD I think is an example of what we 
don't want to do. Is there an agency or department that, in 
dealing with contractors, is doing a good job?
    Mr. Kutz. Well, if I could address that, then Mr. George 
could followup with that, but what Mr. George was talking about 
was the back end of the process. This is levying contractors 
already in the system and taking 15 percent typically of their 
payments. No one was doing a very good job of that in the early 
2000's. That is where most of the progress has been made, as 
Mr. Denett described. And there has been good progress. We are 
collecting now at least tens of millions, and over times 
hundreds of millions and billions on the back end of the 
process.
    No one on the front end of the process is doing anything 
about the 122 cases I talked about. They all got in the system, 
basically----
    Mr. Platts. So still today there is no one to point to?
    Mr. Kutz. No. These people can get in the system today.
    Again, with respect to the self-certification, one point I 
would add is that these people are not voluntarily paying their 
taxes in a voluntary system. What leads us to conclude that 
they are going to voluntarily say I have a tax problem.
    Mr. Platts. Yes. And I think that is right on point. If 
they are being unscrupulous in paying what they owe, the 
likelihood--I think it is important to point out in the 
legislation that for this background in large contracting to 
occur, I mean, the information shared by Treasury to the 
relevant department or agencies, because the person coming 
forward for the contract authorized the information to be 
shared. So if you don't want to have this tax issue addressed, 
you have that choice of not pursuing the contract, but if you 
pursue the contract, then under this bill you are going to 
authorize the Secretary of the Treasury to disclose your tax 
status, so you are agreeing voluntarily to have it disclosed, 
and thus then be relevant to whether you are getting the 
contract.
    So I think that is an important part of this bill, that it 
is something that those who want the Federal business, want to 
have taxpayers fund their companies, they are agreeing to this 
procedure.
    I hope we are able to move forward in a positive way and 
get to that front end, not just the collection, because I think 
that is an important part, but that will be less important if 
we stop, up front, stop and address the problem in the first 
instance.
    Thank you, Mr. Chairman.
    Mr. Towns. Thank you very much, Mr. Platts.
    Let me ask a couple more questions here.
    Mr. Denett, help me. How could the current suspension and 
debarment process guarantee uniform treatment of companies with 
similar tax situations? I mean, how can you guarantee me that 
they are going to be treated the same under the present 
structure?
    Mr. Denett. Well, in the sense that anybody who is 
repeatedly not paying their taxes and on the list, I can't 
speak for every debarment official, but if I am the person 
looking at that, then I would suspend and debar them. But once 
that is done, that applies throughout the whole Federal 
Government, so nobody would be allowed to make awards to them.
    If you are saying, like, with every individual case that is 
being looked at would they reach the same conclusion in exactly 
the same way? I guess I don't have an absolute way to say that 
would happen, but I think just the fact that----
    Mr. Towns. This legislation would do that. It would make 
certain that people are treated fairly that fall into the 
category. That is my concern. I mean, I want everybody to be 
treated the same.
    Mr. Denett. Well, again, I am just concerned that it 
becomes a de facto debarment without giving them the normal 
debarment due process. I guess that is the procurement 
perspective that I am coming from. I don't think people should 
be debarred without having, under the Federal acquisition 
regulation, the process to have their opportunity to fully 
explain why they believe they should be allowed to continue to 
do Government service. Not the extreme cases that I am hearing 
Mr. Kutz describe, of super-sensitive ones or ones where it 
doesn't make sense, but there could be senses where it made 
sense to allow the person to continue to have Government 
business and pay off their debt.
    Mr. Towns. You really think, when you talk about the 
Federal acquisition regulations, that we require prospective 
contractors to certify whether or not they are delinquent in 
their taxes or have a history of tax fraud, you think we can 
rely on that?
    Mr. Denett. We currently rely on certification for small 
business side standards, lots of other things. Again, there are 
criminal penalties if they sign and say that they don't have 
any tax delinquencies and they do. Then the Justice Department 
can pursue them.
    We are working with the Justice Department now on a fraud 
task force where we are taking lots of steps to try to increase 
finding out people that are doing wrongdoing on all fronts. I 
think tax evasion would be included in that.
    Mr. Towns. What if they find out that the IRS is not going 
to verify. Couldn't they just sort of put down anything? These 
are people that have already defrauded the Government.
    Mr. Denett. That is of concern to me, and I would be 
willing to work with the committee, with Treasury Department 
and GAO to see what we can do to create a level playing field, 
because I don't want people winning contracts because of an 
unfair advantage of they are not paying taxes. That is not 
right. I would be glad to work with everybody to see what 
solutions we can come up with, considering your legislation, 
the regulation that we have proposed, which I think will help, 
and just see what else we can come up with.
    Mr. Towns. Let me just sort of throw this out for you, Mr. 
George and Mr. Kutz. What do you think really should happen?
    Mr. George. Well, I would point out, and I note this in my 
submitted testimony, that there is an analogous program called 
the electronic return originator which the IRS uses to qualify 
people who want to submit electronic tax returns on behalf of 
taxpayers. There is an elaborate process, but elaborate meaning 
that it is thorough, but it is not so complicated that people 
can't engage in it, where the IRS requires people to not only 
submit certifications about taxes being paid, but even 
fingerprint cards. So there are examples of Government programs 
that would help, I think, allay some of the concerns that Mr. 
Denett has noted.
    Mr. Towns. Mr. Kutz.
    Mr. Kutz. I think you have to have a fair system. Whatever 
is done has to be done systematically across the board. I agree 
with the concerns that different contracting officers would 
handle these cases differently.
    You have to set the criteria in law and then apply it to 
everyone, so that if it is 180 days, as your bill says, if that 
is what is determined, or whatever it might be, that applies to 
everyone, and then you can prohibit those people from getting 
future Government contracts and you could use some of the 
existing tools out there such as what Mr. George mentioned 
earlier, the Treasury offset program and the central contract 
registry, which everyone that can get a Federal contract is 
supposed to be registered in this central contract registry. 
That is one place where you could do periodic systematic 
validations to determine if people have tax issues.
    Mr. Towns. Right.
    I yield to the ranking member.
    Mr. Bilbray. Yes, Mr. Chairman.
    I think it should be agreed on that list should be reviewed 
so that, in a timely manner, if there is a problem contractors 
can be notified in time to be able to address the issue, rather 
than just rely on when they apply for a contract, because, 
let's face it, by that time any action taken is going to be 
onerous, at least from the contractor's point of view, because 
of the time lag to address those issues.
    So GAO came up with 122 referrals to the IRS. Do you have 
any information for us of what is the outcome of those 
referrals?
    Mr. Kutz. Unfortunately, there have been no indictments or 
prosecutions that we are aware of. I think that gets back to 
one of the issues. When we look at payroll taxes, which is 
effectively stealing money, it is like stealing money from a 
401(k) plan, and there is a law that calls it a felony. Those 
referrals, there is a lot of collection activity, kind of a lot 
of asking will you pay, etc. Very little aggressive action from 
a seizure standpoint, a levy standpoint, and we see little or 
no activity from a criminal standpoint. It is all civil.
    Mr. Bilbray. And let me just tell you I think that is an 
issue that Congress, as a whole, should be talking about, 
because this is a chronic problem across the board for the IRS. 
You have contractors out there that should be accruing these 
funds in the name of an employee and just sort of--it is easier 
to put it off, put it off, put it off, and once you start 
getting in the habit of doing that it is easy to ignore it 
until things get absolutely chronic.
    Mr. Chairman, I think that we have at least been able to 
sensitize the system to the fact that this is an issue that 
needs to be addressed, and I appreciate the panelists being 
before us today.
    I yield back.
    Mr. Towns. Thank you very much.
    Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    Mr. Denett, debarrings--I don't know what the proper name 
is--debarments do go on, right? You do that?
    Mr. Denett. Yes.
    Mr. Ellsworth. And so we have done those?
    Mr. Denett. Yes. I actually did one personally when I was 
at a department level, actually when I was at the Treasury 
Department.
    Mr. Ellsworth. So they can do them down to that level, at 
the department level?
    Mr. Denett. That is where it is done.
    Mr. Ellsworth. OK.
    Mr. Denett. Each department has their own debarring 
official and each one of them makes calls, and once they do it 
applies to the whole Government.
    Mr. Ellsworth. How long is the due process? A red flag 
comes up on a company that is bidding on a Federal contract. We 
put it into due process mode. How long does it take before you 
determine yes, we can award this, or no, they can't have it, 
that due process security that you are talking about that you 
would hate to see them go without due process. How long is 
that, the hearing and the process when a flag goes up?
    Mr. Denett. My recollection, from the one that I personally 
did, which was years ago, it took about 60 days.
    Mr. Ellsworth. And during that time, if it was a company 
that was purposefully defrauding us and not wanting to pay 
their taxes, would they still be awarded the Federal contract 
they were going after during that due process period? Is that 
possible? Or are they put on hold saying we have to investigate 
this?
    Mr. Denett. It depends if we are looking at this before an 
award or after an award. When we are doing it before an award, 
the contracting officer is trying to decide if a company that 
they are thinking of making the award to is responsible, and so 
there are several things they look at to decide if they are 
responsible. One of the things that we would like them to be 
considering is the position on taxes. That is before award.
    Mr. Ellsworth. Right.
    Mr. Denett. And if you decide they are not responsible, you 
would not make award to them.
    Then the next status is when somebody already has the award 
and you find out that they are tax delinquent or other serious, 
egregious things. You can examine it to see if they can be 
debarred and prohibited from future Government procurements.
    Mr. Ellsworth. OK. Thank you.
    Mr. Chairman, I have nothing further. Thank you very much.
    Mr. Towns. Thank you very much, Mr. Ellsworth.
    I yield to Congressman Duncan from Tennessee.
    Mr. Duncan. Thank you, Mr. Chairman. Since I just got here, 
I will be very brief and just ask a couple of questions.
    Mr. Kutz, you say in your statement that there ought to be 
a law that requires contractors to pay their taxes before 
participating in the Federal procurement system, but that we 
also should make sure that there is appropriate due process 
safeguards in the legislation. Do you think that you are 
satisfied with the due process safeguards in H.R. 1870?
    Mr. Kutz. Yes. I think that the due process relates to 
whether someone actually owes the tax and the flexibility 
allows, for example, the Secretary of Defense to waive the 
debarment for a contractor that provides a certain good or 
services that is necessary for national security, and there may 
be other flexibilities, but I believe the intent of what I have 
seen would get those issues. Disasters is another one I recall 
in your bill. Those are the kind of flexibilities we would 
think are important, so that you aren't just systematically 
prohibiting everyone, but you allow some flexibility.
    Mr. Duncan. Now, as I understand it, this bill would treat 
the eligibility to treat for a Federal contract like the 
eligibility to receive a Federal loan or a loan insurance 
guarantee; is that correct?
    Mr. Kutz. Yes. This would amend the Debt Collection 
Improvement Act, which already requires that for loans.
    Mr. Duncan. So it would put in tougher requirements for 
Federal contractors?
    Mr. Kutz. Yes.
    Mr. Duncan. And doesn't it seem to you that it would be 
appropriate to do that, since most Federal contracts are bigger 
than the great majority of Federal loans or loan guarantees?
    Mr. Kutz. Could you repeat the question? I didn't hear the 
last part.
    Mr. Duncan. Doesn't it make sense to you, or don't you 
think it is appropriate to treat Federal contractors a little 
tougher in that respect, because most of these Federal 
contracts are bigger certainly than most of the Federal student 
loans and things of that nature.
    Mr. Kutz. Yes. I think some of the members here have 
mentioned that it is a privileged----
    Mr. Duncan. Right.
    Mr. Kutz [continuing]. To do business with the Government.
    Mr. Duncan. That is what I am saying.
    Mr. Kutz. So you should be held to a higher standard than 
someone else.
    Mr. Duncan. Sure.
    Mr. Kutz. I agree with that.
    Mr. Duncan. Well, they have done a better job in expressing 
that than I did, but that is what I was getting at.
    Mr. Kutz. Yes.
    Mr. Duncan. All right. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Towns. I yield to Congressman Platts.
    Mr. Platts. Thank you, Mr. Chairman.
    Just one final question. The FAR proposal that stands out 
there, I guess your perspectives on what this proposed 
legislation will do that goes farther than that. How do you 
view the two in comparison?
    Mr. Denett. Well, I think if the proposed legislation would 
prohibit making awards, so what I am saying is that would be a 
de facto debarment. The regulation that we have out for comment 
now in the Federal Register would give people an opportunity to 
make it clear for contracting officers that anybody who is tax 
delinquent, that is a cause for debarment, for 
irresponsibility, etc. It is not now currently listed.
    Mr. Platts. Let me interrupt. If we take that approach, 
that makes it pretty subjective approach to this issue. One 
officer could deem this as a grounds for irresponsibility and 
not awarding the contract; somebody else may look at it and 
say, well, it is not that much owed back or they will pay it 
eventually if you give them this contract. It would make it 
more subjective, wouldn't it, whereas this is more objective. 
If you owe, you are delinquent, you are prohibited. I mean, 
this would be more consistent. Is that a fair statement?
    Mr. Denett. I think that is a fair statement, but each case 
is different and sometimes there are circumstances where it 
would be in the Government's best interest to allow a 
contractor to receive an award so that they can earn the money 
to pay their tax delinquencies.
    Mr. Platts. Well, the bill would not affect, if they were 
on a repayment schedule, they would not be prohibited. To be 
trying to pay $10 a week, $100 a month, whatever, how small or 
large, they could be doing that now and still get the contract 
under this bill. They would not be prohibited if they have a 
repayment schedule in place.
    Mr. Duncan. Will the gentleman yield just for a moment?
    Mr. Platts. Yes. I yield to the gentleman.
    Mr. Duncan. That raised the question in my mind, Mr. 
Denett. Has that ever been put in as a condition of an award? 
When you say there are cases in which contractors should be 
given a contract so that they can pay their delinquent taxes, 
has that ever been put in the contract award, a condition like 
that?
    Mr. Denett. Not to my knowledge.
    Mr. Duncan. We are going to give you this second contract, 
but we know you are delinquent, so you have to use a certain 
percentage of this money?
    Mr. Denett. I am not aware of that being put in any 
contract.
    Mr. Duncan. I yield back.
    Mr. Platts. And I assume there is no current authority to 
say we are going to give you this contract and this 10 percent 
we are going to pay right to the Treasury to make sure you are 
paying back?
    Mr. Denett. I mean, we have the system now where it has 
just been implemented where the payment officials in IRS check 
their data bases, and if there is any delinquency, rather than 
pay them the money, they can retain 100 percent of any going 
through a DOD contractor or 15 percent through any civilian.
    Mr. Platts. So they can allow that now?
    Mr. Denett. It, in fact, is happening.
    Mr. Platts. I was going to ask if that is commonly done.
    Mr. Denett. It is becoming more common.
    Mr. Platts. That is good.
    Mr. Denett. I mean, it has just been instituted in the last 
year or so.
    Mr. Platts. Coming back to my initial question, where that 
discretion is given, I can understand where there may be cases 
where it seems like in the Federal Government's best interest, 
that if you give them this contract then they will have a 
source of income and may be more likely to get those taxes. 
That, unfortunately, does not address the issue I raised with 
the GAO's statement to the law-abiding company that didn't 
violate the law in the first place that didn't get the contract 
because they were under-bid. That is an issue I think that we 
have to remember here, that this is also about fairness to 
anybody competing for those contracts, because they are going 
to be put at a disadvantage. Even if it is in the Federal 
Government's interest, it is still not going to be a fair 
process because of the individual not being straight up in the 
bid.
    Mr. Denett. I think we need to take a real close look at 
that. I am looking forward to working with the committee and 
learning more from Treasury and IRS and the GAO so that my 
office gets even more up to speed on this issue, because I am 
disturbed about the uneven playing field. However, every case 
is different, and I am very reluctant for somebody to, in 
effect, be debarred without having a chance to explain to the 
contracting officer what their particular circumstance is.
    Mr. Platts. I think the importance of this hearing and 
commend again the chairman, that is exactly what this hearing 
is about, to get the dialog developed as we go forward in 
trying to move a good piece of legislation.
    I yield back.
    Mr. Kutz. May I make one comment on that?
    Mr. Platts. If the chairman allows.
    Mr. Towns. Yes.
    Mr. Kutz. With respect to those 120 cases we investigated, 
it is kind of interesting, because I have studied those and we 
have been doing them for several years, and when you look at 
the IRS enforcement of the tax code you saw the reason they 
were able to buildup 10 or 20 years of unpaid taxes, it was 
because that is just what happened. They kept saying IRS things 
are going to get better. Let us have more time. Give us more 
time. It is just worse.
    Mr. Platts. That good faith wasn't rewarded.
    Mr. Kutz. I can't speak to the 122, but we have seen that. 
When I used to audit the IRS as their financial auditor, also, 
we saw it then, too, same thing. These are the bad 1, 2, 3 
percent of society kind of thing, but, you give them time, they 
are going to continue to do the same thing over and over again. 
You keep asking the same, you don't get different results.
    Mr. Platts. Well, thanks for the testimony, and each of you 
in your respective positions. Thanks for your service to your 
Nation and your fellow citizens.
    Thanks, Mr. Chairman.
    Mr. Towns. Thank you. Thank you very much.
    Let me thank all of you for your testimony. Of course, this 
panel has been dismissed.
    We will have a 30 minute recess. We have votes on and then 
we will return.
    Thank you very much.
    [Recess.]
    Mr. Towns. The committee will come to order.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect that they responded in 
the affirmative.
    Why don't we just move forward with you, Mayor Cornett, and 
come right down the line.

     STATEMENTS OF MICK CORNETT, MAYOR, OKLAHOMA CITY, OK, 
   REPRESENTING THE U.S. CONFERENCE OF MAYORS; BARBARA FORD-
 COATES, TAX COLLECTOR, SARASOTA COUNTY, FL, REPRESENTING THE 
 NATIONAL ASSOCIATION OF COUNTIES AND THE NATIONAL ASSOCIATION 
 OF COUNTY TREASURERS AND FINANCE OFFICERS; AND PATRICIA WETH, 
 DEPUTY TREASURER, ON BEHALF OF THE HONORABLE FRANCIS O'LEARY, 
                TREASURER, ARLINGTON COUNTY, VA

                STATEMENT OF MAYOR MICK CORNETT

    Mr. Cornett. Thank you, Mr. Chairman. I appreciate the 
opportunity to come before this subcommittee on behalf of the 
Nation's mayors. My name is Mick Cornett. I am the mayor of 
Oklahoma City. I am also the chairman of the Mayors Urban 
Economic Policy Committee.
    I am here today to show our support for proposed 
legislation that would create a 2-year pilot program to help 
local governments collect legally enforceable past due taxes by 
expanding the Federal tax offset program to include local tax 
debt. If enacted, this legislation would promote the kind of 
intergovernmental partnership that we have always believed 
should exist between the different levels of government. When 
we work together to achieve a common goal, particularly a goal 
as important as collecting past due taxes, all levels of 
government benefit, as well as the American people.
    First of all, we want to commend you, Mr. Chairman, for 
your strong support you have shown for local governments on a 
wide range of issues over the years. Thank you also for your 
leadership on this proposed legislation, particularly for 
focusing attention on the need to expand Federal assistance to 
help local governments collect past due taxes.
    We also want to commend the co-sponsors of this 
legislation: Representative Michael Turner, the former mayor of 
Dayton; Representative James Moran, the former mayor of 
Alexandria; Representative Tom Davis, the former county 
executive of Fairfax County; and Representative Bilbray, the 
former mayor of San Diego. Thank you for your support. These 
Members clearly understand the importance of intergovernmental 
partnership in addressing issues that affect all levels of 
government.
    Last year during our annual meeting, Mayor Laura Miller of 
Dallas reminded us that local governments often find it 
difficult to collect past due taxes. Sometimes we spend an 
enormous amount of time and energy trying to go after 
delinquent taxpayers, and we are not always successful in 
collecting past due taxes, particularly when those taxpayers 
may have left the area or don't have the resources to pay those 
taxes. It not only places a financial strain on local 
governments, but it unfairly burdens members of the community 
who do choose to pay their taxes promptly.
    Before I get too far into my testimony, I would like to 
share some background information on the delinquency problem in 
my city. Unlike some cities, Oklahoma City does not collect an 
income tax of any kind. We use property tax to fund our capital 
improvements through bond issues, and that property tax is 
actually collected by the county and distributed to us.
    We are mainly funded by the sales tax, especially on the 
operations side. That is collected by the State and, again, 
distributed to us.
    To prepare for this trip, I asked my staff to review our 
sales tax data to determine the delinquent rate. They reviewed 
our sales tax data for the last 6 months and came up with some 
estimates. From our review, we estimate that we have a 
delinquent sales tax rate somewhere between 5 and 7 percent, 
and so we believe it is safe to assume that our delinquent 
sales tax total is about $10 million a year.
    Now, according to information provided by our county 
treasurer's office, in the 1st year property taxes are due that 
delinquent tax amount is about 5 percent of the total amount 
levied for the year. If you go back to fiscal year 2005-2006, 
that amount totaled about $2 million. If you look over a longer 
period of time, an 8-year average ending in 2005-2006, the 
delinquent property tax rate settles out at about 1.4 percent, 
or about $4 million out of the total of $284 million levied 
during that period.
    Let me put that in perspective to show you some examples of 
what we would be able to do in our city if we were able to 
recapture those delinquent taxes.
    On average, we can resurface a lane mile of road for about 
$200,000. If you use that $2 million estimate, that means that 
is about 10 lane miles of road that we could be resurfacing, 
and if you use the $4 million estimate, you could double that 
to 20 lane miles of streets.
    Another good example of how those dollars could be used has 
to do with homeland security. In a post-9/11 world I know you 
all agree we need to increase our security. Indeed, the Federal 
Government is working closely with us to help secure our 
homeland. Many of our cities could use the funds currently due 
from delinquent taxes to hire new first responders. In Oklahoma 
City, the cost for me to hire a new fire fighter or a new 
police officer is about $60,000 a year. If you use the $2 
million estimate, that is about 33 new fire fighters or police 
officers that we could use. And if you use the $4 million, we 
could hire approximately 67 new fire fighters or police 
officers.
    Now, these are just a few examples of the critical public 
services that we could provide if we recaptured all or a 
significant portion of our past due taxes. And it is not true 
just for Oklahoma City, but cities and local governments all 
across the country.
    We are excited that you are considering creating 
legislation to assist us in this effort.
    During that annual meeting last June, Mayor Miller informed 
us about the Federal tax offset program and the original 
bipartisan bill, H.R. 3498, introduced by Representative 
Turner, Moran, and Davis. This bill would expand the program to 
include past due taxes owed to local governments. Under current 
law, the U.S. Department of Treasury is authorized to reduce a 
taxpayers' Federal tax overpayment refund by the amount that 
individual owes the State government in past due income taxes 
and child support obligations and send those funds to the 
appropriate State government.
    We understand that 36 States and the District of Columbia 
currently participate in the program, and that pending 
legislation will expand the program to authorize the Department 
of Treasury to reduce the Federal income tax refunds due a 
taxpayer by the amount of past due legally enforceable tax 
obligations that the taxpayer owes to a local government.
    Mayors attending our annual meeting last year unanimously 
supported adopting the resolution of supporting H.R. 3498. We 
are pleased that this proposal has been re-introduced to the 
110th Congress as 1865. Mr. Chairman, we stand ready to work 
with you in support of that bill.
    In addition to participating in the Federal tax offset 
program, a number of States have their own State offset 
program. So far, 14 States are permitting local governments to 
submit their delinquent tax accounts to the State for 
collection against any State tax refund or any lottery winnings 
owed to taxpayers. The way this works is, prior to issuing a 
taxpayer refund the State checks to see if there are any claims 
for past due debts submitted by a local government, and if so 
the State will delay sending the refund of the lottery winnings 
or the taxes pending notice to the taxpayer. After appropriate 
notice is given, the State will reduce the delinquent 
taxpayer's refund or lottery winnings by the amount owed and 
send those funds to the local government. In many States, this 
has proven to be a low-cost, highly effective system.
    We do have one recommendation that we would like to see you 
all consider, and we would ask for your consideration now or at 
a later date.
    The proposed legislation would establish a pilot program 
for no less than three and no more than five States. While we 
understand your concern about proceeding with caution, we would 
recommend expanding the number of pilot programs to no less 
than four and no more than eight. We feel like this would allow 
for the pilot program to be established in at least two States 
in every region of the country--north, south, east, and west. 
Not only would that give more local governments a chance to 
participate; it would give Congress a better chance to see how 
this might work in different States and different regions of 
the country.
    I want to thank you all for the opportunity to appear at 
this hearing. We appreciate your work and we appreciate your 
looking after us local governments, and remind everyone here 
that local governments are the ones closest to the people and 
we impact their lives every day.
    Thank you.
    [The prepared statement of Mayor Cornett follows:]

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    Mr. Towns. Thank you very much, Mr. Mayor, for your 
testimony.
    Mr. Cornett. Thank you.
    Mr. Towns. Ms. Barbara Ford-Coates is the elected tax 
collector of Sarasota County, FL. She is representing the 
National Association of Counties and National Association of 
County Treasurers and Finance Officers.
    We are delighted to have you.

                STATEMENT OF BARBARA FORD-COATES

    Ms. Ford-Coates. Thank you, Mr. Chairman.
    Chairman Towns, Ranking Member Bilbray I want to thank you 
for the opportunity to testify today. As the Chair has stated, 
my name is Barbara Ford-Coates, and I serve as president of the 
National Association of County Treasurers and Finance Officers. 
Our organization is affiliated with the National Association of 
Counties, and we represent all elected and appointed county 
treasurers, tax collectors, and finance officers in the United 
States.
    On May 1st I will complete 23 years as tax collector for 
Sarasota County, FL, and I have been able to serve the public 
all these years only because we provide exceptional customer 
service to the public. If you can take someone's money and have 
them still leave the office with a smile on their face, it has 
to be exceptional service.
    I also provide service to many governments, including the 
State of Florida, Sarasota County, four cities, a public 
hospital, the School Board, and numerous smaller taxing 
districts. We do all of this in a cost-effective, efficient 
manner.
    I bring this up to emphasize that good government is a 
bipartisan issue. I happen to be the only elected Democrat in a 
county of over 360,000 people. My voters care about good 
government.
    I applaud the committee for your interest in H.R. 1865 
because it is a prime example of local, State, and Federal 
cooperation to provide cost-effective efficiencies. I thank the 
Chair and ranking member, especially, for sponsoring this 
bipartisan effort.
    In particular, I want to point out that this bill is the 
antithesis of an unfunded mandate. The Federal Government would 
provide a service for local governments, and we would bear the 
cost. It is simply a win/win for government and the people we 
serve, or, as the ranking member said earlier, it is done the 
right way and in the right manner.
    I won't take up your time with the details, since I know 
they are being adequately or perhaps more addressed by Mayor 
Cornett and Deputy Treasurer Weth, who have a deeper knowledge 
of those specifics than I do at this point.
    But, simply put, the National Association of Counties and 
County Treasurers and Finance Officers are in full support of 
the legislation as proposed. However, I would like to mention 
that there are several things which appear in my written 
testimony which I hope we have the opportunity to discuss 
further with your staff and the staff of Treasury. These would 
increase flexibility and, we believe, make the program more 
effective.
    This legislation is a model for building a collaborative 
intergovernmental partnership. The key features are that it is 
voluntary, fee based, designed to avoid creating an undue 
burden, and offers both flexibility in implementation and a 
trigger to terminate the program if it does not achieve its 
objectives. It is an example of the golden rule: do unto others 
as you would have them do unto you.
    However, I have heard that there also is a golden rule of 
federalism: those who coin the gold make the rules. With that 
in mind, I do want to take this opportunity to mention two 
areas of concern which are the result of recently enacted and 
proposed legislation. These examples of that other golden rule 
are troubling because they are coercive rather than cooperative 
byproducts of the Federal Government, understandably striving 
to reduce its own tax gap. These would require local officials 
to collect Federal taxes, implement new reporting software or 
procedures, or provide Federal tax advice without consultation 
or payment of the costs involved.
    First, section 511 of the Tax Increase Prevention Act will 
soon require many counties to withhold 3 percent Federal taxes 
on nearly every payment for a service or product, from plumbing 
services to paper clips. This amounts to a Federal sales tax on 
county purchasing, will be very expensive for counties to 
implement, and will likely increase the costs of procurement 
and discourage contractors from bidding on county contracts.
    I urge members of this subcommittee to join with 
Representative Kendrick Meek from my State of Florida to co-
sponsor H.R. 1023 to repeal this unfunded mandate. And I would 
like to insert a copy of that legislation into the official 
hearing record, along with copies of our testimony and letters 
of support.
    The proposal on 3 percent withholding was a result of 
inserting a Joint Committee on Taxation staff recommendation in 
the conference report after the bill had been passed by the 
House and Senate.
    Another troubling example could stem from the recent 
proposal from the same source to require collectors of local 
taxes to determine whether our taxpayers can deduct items 
appearing on property tax bills. Then we would report that 
information to both the IRS and the taxpayer. The 
administrative burden would be enormous, and county officials 
charged with producing tax bills are, in the vast majority of 
cases, not qualified to make a determination of whether special 
assessments are deductible or non-deductible under the IRS 
code, nor do we have a method to collect the identity of 
property taxpayers or compel them to report Social Security 
numbers or taxpayer identification numbers as part of their 
property tax accounts.
    I would like to insert a copy into the official hearing 
record, along with our letters of opposition to that 
possibility.
    I thank you sincerely for your interest in good government. 
I know each of you has a local tax collector, treasurer, or 
finance officer to whom you are paying checks on a regular 
basis, and I urge you to continue to work with us in developing 
strategies to improve compliance with local, State, and Federal 
tax laws.
    H.R. 1865 is a step down the path of intergovernmental 
cooperation and should serve as a model for any future efforts 
to close the Federal tax gap with the assistance of State and 
local government.
    I thank you for the opportunity to provide testimony today 
and look forward to answering any questions.
    [The prepared statement of Ms. Ford-Coates follow:]

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    Mr. Towns. Thank you very much for your testimony.
    We also have today Patricia Weth, the deputy treasurer of 
Arlington County, VA.

                   STATEMENT OF PATRICIA WETH

    Ms. Weth. Good afternoon, Mr. Chairman, Representative 
Bilbray, and Representative Duncan. I am Patricia Weth, deputy 
treasurer and legal counsel to the Arlington County Treasurer, 
Frank O'Leary.
    Thank you for holding this important hearing today. I am 
here to ask your support, favorable consideration of H.R. 1865. 
I appreciate the subcommittee holding this hearing on the 
proposed pilot program legislation, which will greatly benefit 
your constituents, and I look forward to answering any of your 
questions that you may have on this legislation.
    I also ask that the written testimony be entered into the 
record.
    Like the Federal Government, State and local governments 
have tax gaps. Not everybody is willing to pay their taxes. The 
more each level of government can fairly collect the taxes that 
are owed, the less pressure there will be to increase taxes to 
the honest taxpayers who are paying their taxes timely.
    The Federal offset program was created in the 1980's after 
legislation was passed to allow States to submit child support 
arrearages to the offset program to offset Federal tax refunds 
of deadbeat dads. Later the program was expanded to allow 
Federal Government agency debt. And in 2000, legislation was 
passed to allow the States to submit delinquent income tax debt 
into the program.
    When my boss, Frank O'Leary, saw that States were allowed 
to submit State income tax debt, he thought that the logical 
and natural progression would be to allow local government tax 
debt into the program.
    We have worked with bipartisan Members, numerous government 
associations, and the Treasury to refine this legislation and 
to ensure that there would be no additional cost to the Federal 
and State government. Without this legislation, local 
governments are forced to assess greater taxes on the honest 
taxpayers to make up for the loss in revenue for those who are 
not paying the taxes.
    Under this legislation, the only cost is to the delinquent 
taxpayer, who is now forced to finally pay his outstanding tax 
obligation. In the proposed legislation for the pilot program, 
it does authorize Treasury and the States to charge to the 
local governments a fee to defray any administrative costs that 
they may have in processing these claims. Currently under the 
regulations, Treasury does collect a $25 fee from the State 
taxing authority for every claim where there is a refund match.
    Last year the Commonwealth of Virginia received over $16 
million for delinquent income tax debt. We estimate that 
Virginia local governments would recover between $65 and $70 
million during its first year of participation in the program. 
Virginia treasurers have a great deal of collection tools given 
to us by the Virginia General Assembly, but I feel that this 
pilot program will benefit all local governments, but 
especially those local governments that do not have a vast 
amount of collection tools at their disposal.
    This is a bipartisan good government bill. It makes an 
important step toward the coordination between three different 
levels of government to address the tax gap. It protects the 
honest taxpayer from any tax increase. The only cost is to the 
delinquent taxpayer, who now is finally paying his tax 
obligation.
    Thank you for your consideration. I am happy to answer any 
questions regarding the legislation.
    [The prepared statement of Ms. Weth follows:]

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    Mr. Towns. Thank you very much, too, for your testimony.
    Ms. Weth. Thank you.
    Mr. Towns. Let me begin with you, Mr. Mayor.
    Why do you suggest a pilot program rather than just doing 
it?
    Mr. Cornett. Well, I think we would just as soon just do 
it. I think that the pilot program, to a certain extent, isn't 
our idea. We are just willing to proceed with it and make it as 
large as possible.
    Mr. Towns. And you think that would sort of bring people on 
board that might not be on board?
    Mr. Cornett. Well, I don't know necessarily if it would do 
that, but I think the larger you could make it the better it 
would be for local government, the more of these delinquent 
taxes that we would be able to recoup. I know there is some 
reluctance to try to do this all across the country all at 
once, just because there might be some people on the other end 
of this that are leery that it will work as smoothly as we 
project, but we would like to see it.
    You have to understand that local governments work so 
differently throughout the country that I think it would be a 
good idea to try every different taxing situation you could 
find. The relationship between municipal government and county 
government and State government work distinctly different in 
almost all 50 States.
    Mr. Towns. Right.
    Mr. Cornett. It is going to work better in some places than 
it will in others.
    Mr. Towns. Right. I guess what we need to do is probably 
get a good definition of local taxes. I mean, what do you 
consider local taxes? I mean, I think we need to get a good 
definition, because when you look at parking tickets, library 
fines, sewer fees, and sometimes even trash collection----
    Mr. Cornett. I would consider local sales taxes and local 
property taxes as local taxes.
    Mr. Towns. Ms. Coates.
    Ms. Weth. Mr. Chairman, that was a concern of a lot of 
folks, that we would throw in library fines and parking tickets 
and different fees of that nature, but this is limited 
specifically to local government tax debt, so it would only be 
for a tax that a local government charges, so parking tickets 
and library fines would not be allowed to be submitted to 
Treasury.
    Mr. Towns. Right. Thank you, that is good to know.
    Ms. Weth. Mr. Chairman, also, as the mayor stated, 
sometimes things are called different things in different 
communities, so I believe the bill allows it up to Treasury to 
work on what would be considered a local tax. So there is a lot 
of flexibility in here, and I personally think that one of the 
best things about the pilot program is that it gives us an 
opportunity to work with Treasury and work out those details so 
that it makes common sense.
    Mr. Towns. Right. And I must admit that I sort of like the 
pilot program, too, sort of like test it before we really 
implement it fully.
    Ms. Ford-Coates. Right. And, of course, with States like 
Florida we have no income tax, and we are not sure exactly how 
those of us who have no income tax will fit into this in the 
future, but it is an area that we want to support or 
neighboring States and our colleagues in local government so 
that they can start that, and maybe there is a place for us 
down the road after all the details are worked out.
    Mr. Towns. Right. In your testimony you used the word 
flexibility twice. What do you really mean by flexibility? You 
said greater flexibility.
    Ms. Ford-Coates. We would like to see the Department of 
Treasury have the opportunity to decide on the number of pilot 
programs. If there are a certain number of States, as in the 
current bill, if there is a State that is suddenly ready 
sooner, we would like Treasury to have that opportunity to make 
some of those decisions as the process is worked through.
    Mr. Towns. Yes. Let me ask all three of you this question: 
what do you see that is not in there that should be in there, 
if we are looking for an ideal situation here?
    Ms. Weth. Mr. Chairman, I don't see anything missing in the 
legislation. I do agree it would be a wonderful thing to open 
it up to all the States and let all local governments 
participate, but I think we do need to make it a pilot program 
to allow the Treasury some time to evaluate the program and 
work out the kinks before it is allowed for each State and each 
local government. But I am afraid nothing comes to mind that I 
see specifically missing in the legislation as it is written 
now.
    Mr. Towns. All right.
    Ms. Ford-Coates. Mr. Chairman, we would like, again, an 
area that we believe that the Treasury could work out is the 
question on how certified mail is specified within the bill, 
because there are certain products that the Postal Service 
offers that change on a regular basis. Technology changes. We 
would prefer something along the lines of adequate notice, 
whatever. We want to make sure that the taxpayer knows what is 
going on. There is no question about that. But I think that is 
one of those things that Treasury could work out with your 
staff as the bill proceeds.
    Mr. Cornett. I have no suggestions.
    Mr. Towns. That means it is a good bill.
    Mr. Cornett. Nice work.
    Ms. Ford-Coates. We think so.
    Mr. Towns. Thank you very much.
    I yield to the ranking member.
    Mr. Bilbray. Thank you very much.
    I guess after being 18 years in local government and having 
worked with the Federal Government, I think even the mayor on 
second thought will look at this. Twenty-four months is a flash 
in the pan for the Federal Government. I think, Mr. Chairman, 
one of the biggest problems that those of us in local 
government have with the Federal Government isn't that they try 
new things or that they make mistakes, but they usually don't 
want to go back and correct the mistakes once they have made 
it.
    I think that one great advantage with a pilot program is 
that it does give political cover. I remember when I was 27 
years old when I was elected mayor, and I developed a policy of 
pilot programs because you could say let's try this, and then 
if it doesn't work out, instead of taking the political heat 
that it didn't work out you say, see, I was right to have it as 
a pilot program.
    I think that we are going to find things that need to work 
out, but I have to sort of agree with the mayor and, I know 
these numbers, but the four to eight is a workable number. I 
would only say, Mr. Chairman, we at least consider that aspect 
of it as the possible expansion, and as being one of the co-
sponsors on this I think that we ought to at least discuss that 
testimony and look into it.
    All I have to say is, to the gentlelady from Florida, my 
uncle was a tax assessor in Las Vegas for 30 years, a dyed-in-
the-wool Democrat, but he survived in that environment for 30 
years. So how tough you think it is, you can imagine being out 
there in the desert with all those slot machines.
    Ms. Ford-Coates. I sympathize.
    Mr. Bilbray. My question would be: how successful do you 
think the process is right now that we are building on here?
    Mr. Cornett. I guess the question I would have is what 
percentage of tax refunds now are coming in. Do most people get 
a refund? Do most people not get a refund? Even if this 
legislation were 100 percent effective it is still not going to 
solve 100 percent of our problem. But we are talking about 
millions of dollars, and at local government's level a lot can 
be done with those millions of dollars.
    Mr. Bilbray. I am out of order because I haven't done a tax 
return in probably 20 years, but my family has owned a business 
from the year I was born. I guess my mother decided to get out 
of having children and go into something more productive after 
she looked at me. But the one thing that is obvious for those 
of us that were tax consultants is the overwhelming majority of 
the rank and file that file returns are getting money back. 
That is the biggest incentive for people to file returns. There 
is a whole other problem with those that have outstanding debts 
with the Federal Government, but for those that are filing, 
there really is an incentive out there.
    I think on the negative side you might be able to say that 
some may not file now, knowing their withholdings won't be 
returned to them, but I think that is a very small number in 
reality. I think by the time they get hit with this it will be 
too late for them to know about not filing. So I think we need 
to build on this and hopefully we will be able to work out all 
the details.
    The challenges that we have with who we choose is going to 
be a tough one, but I hope that we all work together on this.
    I ask, because we are all sort of local government people 
here, that the separation of powers is so often talked about 
between the three branches of Federal Government, and I wish 
our government teachers would teach more often that the real 
separation of power is between the local, special district, 
city, county, and State. That is where the real power is, than 
those of us in the Federal Government.
    Mr. Chairman, I support this program and I support it for a 
big reason. I think those who always talk about that the 
Federal Government isn't sending enough resources down to what 
we call the first responders should look at this as a way, 
instead of us taking Federal money and controlling it and 
conditioning it and sending it down and making the local 
government say thank you, sir, for letting me have this little 
bit, ought to be empowering in working with the local 
government to get their own money from their own constituents 
so they can do it with no conditions and then the first 
providers won't be needing to come to us hat in hand, or a lot 
less hat in hand, because they will have those resources that 
are being denied them now, not by the Federal Government but by 
those deadbeat taxpayers out there, both women and men.
    I appreciate the chance for you to be here to day, and I 
yield back, Mr. Chairman.
    Mr. Towns. Thank you very much.
    I want to thank all of you for coming and testifying. I was 
wondering if there was any kind of collection tools that need 
to go into this. I mean, do you really feel that part is 
covered? Do we need any collection new rules that need to be 
changed from the Federal level in order to make it possible for 
you to be able to collect?
    Ms. Weth. Well, Mr. Chairman, I can speak about Virginia. 
In Virginia the local government treasurers look to the Code of 
Virginia for our power for our collection tools, and in 
Virginia we have an amazing amount of collection tools. We are 
able to lien bank accounts. We are able to seize vehicles. We 
are able to go into businesses and seize the property and the 
business. We do employment liens. So we have an amazing amount 
of collection tools, but I don't believe many of the counties 
and cities in the United States do not have the same powers 
that the treasurers in Virginia have.
    Mr. Bilbray. Would the gentleman yield a second?
    Mr. Towns. I would be delighted to yield.
    Mr. Bilbray. You hit on a point that I think all of us need 
to talk about. You are talking about, like, the bank accounts. 
I don't know about your neighborhood, but there was a big issue 
about what constitutes a proper documentation to open bank 
accounts, and there was this issue of foreign governments 
giving documents that aren't secure, and there is such 
potential for people to be opening bank accounts under false 
identities and hiding their resources. This is specifically why 
we have a Federal law that says you are supposed to be proving 
who you are when you open a bank account.
    I think, Mr. Chairman, we need to be very much on top of 
that in talking to the Finances Committee because just 
something like this, that somebody starts opening bank accounts 
under a different Social Security number or under a taxpayers 
ID number rather than one that we can track, they will use 
these for hiding.
    I want to say it because we don't think it bothers us until 
we get to exactly like you said and you know the people that 
are doing this will learn how to leverage the system and go 
over. So please, when we talk about the proper identification, 
things like implementation of a real ID is going to be 
essential to programs like this.
    I yield back, Mr. Chairman.
    Mr. Towns. Yes, thank you.
    Ms. Weth. I couldn't agree with you more, Representative 
Bilbray. I think that is an excellent point. I wasn't even 
aware that people were doing that these days, but in this area 
of identity theft and all the craziness that is out there, I 
think that is an excellent requirement.
    Mr. Towns. The reason I was late coming back here is that I 
am a sponsor of the spyware bill, and it was being marked up. 
That is what I was doing.
    Ms. Ford-Coates. I think everything has been said.
    Mr. Towns. Mr. Mayor.
    Mr. Cornett. No additional comments.
    Mr. Towns. All right. Thank you so much, all of you, for 
your testimony. We look forward to working very closely with 
you in the days and months ahead.
    I yield.
    Mr. Bilbray. I apologize, but I would ask unanimous consent 
to introduce into the record the opening statement by Ranking 
Member Davis.
    Mr. Towns. Without objection.
    Mr. Bilbray. Thank you.
    [The prepared statement of Hon. Tom Davis follows:]

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    Mr. Towns. Thank you so much for your testimony.
    Mr. Cornett. Thank you.
    Ms. Ford-Coates. Thank you.
    Ms. Weth. Thank you.
    Mr. Towns. The committee is now adjourned.
    [Whereupon, at 3:40 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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