[Federal Register Volume 71, Number 231 (Friday, December 1, 2006)]
[Rules and Regulations]
[Pages 69489-69492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-20394]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 212, 232, and 252

[DFARS Case 2004-D033]


Defense Federal Acquisition Regulation Supplement; Levy on 
Payments to Contractors

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD has adopted as final, with changes, an interim rule 
amending the Defense Federal Acquisition Regulation Supplement (DFARS) 
to address the effect of Internal Revenue Service (IRS) levies on 
contract payments. The rule requires DoD contractors to promptly notify 
the contracting officer if a levy may result in an inability to perform 
a contract.

DATES: Effective Date: December 1, 2006.

FOR FURTHER INFORMATION CONTACT: Mr. Bill Sain, Defense Acquisition 
Regulations System, OUSD(AT&L)DPAP(DARS), IMD 3C132, 3062 Defense 
Pentagon, Washington, DC 20301-3062. Telephone (703) 602-0293; 
facsimile (703) 602-0350. Please cite DFARS Case 2004-D033.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD published an interim rule at 70 FR 52031 on September 1, 2005, 
addressing policy and procedures that apply when an IRS levy may result 
in a contractor's inability to perform a DoD contract. DoD received 
comments from 6 sources in response to the interim rule. DoD considered 
all comments and has incorporated the following changes in the final 
rule:
    DFARS 212.301(f)--Addition of a prescription for use of the clause 
at 252.232-7010, Levies on Contract Payments, in contracts for the 
acquisition of commercial items.
    DFARS 232.7101 and 252.232-7010--Clarification that the requirement 
for the contractor to notify the contracting officer applies in 
situations where the levy may result in an ``inability to perform the 
contract.'' This change eliminates the term ``jeopardize contract 
performance,'' since that term may be understood as establishing a 
different standard than causing an inability to perform.
    DFARS 232.7102--Exclusion of micro-purchases from the requirement 
to use the clause at 252.232-7010.

[[Page 69490]]

    The following is a discussion of the public comments and the issues 
relating to the development of the final rule:
    1. Comment: One respondent recommended amendment of the rule at 
232.7101 and 252.232-7010 to provide that the contractor must notify 
the procuring contracting officer (PCO) in all instances when a levy is 
imposed. This would ensure that the PCO is aware of potential 
performance problems before they occur. Once notified of the levy, the 
PCO could monitor the contractor's performance and perform surveillance 
of the contractor's financial condition.
    DoD Response: DoD believes that notification should be limited to 
situations where the levy will be likely to cause an inability to 
perform the contract. To require reporting each time a levy is imposed, 
even when the contractor believes there will be no impact on the 
contract, would not provide useful data to the PCO, and could lead to 
unnecessary administrative effort on the part of the Government, as 
well as the contractor. The Paperwork Reduction Act (44 U.S.C. 3501, et 
seq.) requires that the Government minimize the reporting requirements 
incorporated into regulations.
    2. Comment: Two respondents recommended amendment of the rule to 
require that contractors notify both the PCO and the administrative 
contracting officer (ACO).
    DoD Response: DoD believes that the PCO is the best point of 
contact for this process, but has revised the rule to require that the 
contractor notify the PCO, in writing, with a copy to the ACO.
    3. Comment: One respondent commented that the rule unnecessarily 
requires a mandatory report to the PCO by the contractor (including a 
report of ``no effect'') regarding the assessment on national security, 
even if the contractor concludes that the levy will not create an 
``inability to perform'' and that the withholding will have no effect 
on national security. The respondent explained that it did not 
interpret the rule as requiring an automatic report under the first 
requirement unless the contractor concludes that the levy will actually 
jeopardize contract performance; however, the respondent believed that 
there is an ambiguity in the rule concerning the extent of the 
reporting requirement, particularly when the contract clause (at 
252.232-7010(b)) requires a mandatory report only when ``a levy is 
imposed . . . and the levy will jeopardize contract performance'' 
because the contractor is required to report on both the jeopardy to 
contract performance and whether there will be any effect on national 
security.
    DoD Response: The contractor is required to report to the 
contracting officer if, and only if, the contractor believes that the 
levy may cause an inability to perform the contract. This reporting 
requirement is necessary in order to apprise the PCO of circumstances 
that create barriers to successful contract performance. The contractor 
is also required (at DFARS 252.232-7010(b)(3)) to provide advice as to 
whether the inability to perform may adversely affect national 
security, with rationale and adequate supporting documentation.
    4. Comment: One respondent commented that the tests under the rule 
that apply to the two requirements are different. ``Jeopardize contract 
performance'' may have a limited impact, while ``inability to perform'' 
is more difficult for the contractor to assess.
    DoD Response: The interim rule did establish two different 
standards, ``jeopardize contract performance'' and causing an 
``inability to perform.'' The Government's interest is in knowing when 
the levy may cause an inability to perform, not necessarily in knowing 
of each impediment that may jeopardize operations and that can be 
overcome in the normal course of business. To clarify this requirement, 
the final rule now consistently refers to situations where the levy may 
result in an ``inability to perform.''
    5. Comment: One respondent commented that, while DFARS 232.7101(b) 
requires the contracting officer to notify the Director, Defense 
Procurement and Acquisition Policy, when the contractor's inability to 
perform may adversely affect national security or may result in 
significant increased costs to the Government, neither the policy 
description nor the clause requests information from the contractor as 
to whether the levy will have any impact on Government costs.
    DoD Response: The assessment as to whether an inability to perform 
on a contract will lead to significantly increased costs is an internal 
one for the buying activity. The PCO and the PCO's customer would be 
able to assess, based on such factors as cost/price analysis of the 
affected contract, alternative sources of supply, or existing 
inventories, whether a probability exists for significantly increased 
costs to the Government. Therefore, the final rule does not include a 
requirement for contractor information on this factor.
    6. Comment: One respondent recommended that the contract clause be 
revised to specify, consistent with DFARS 232.7101(c), that the 
contracting officer will provide the notification described in DFARS 
252.232-7010(c). The clause currently provides only that DoD will 
provide a notification to the contractor.
    DoD Response: DFARS 252.232-7010(c) has been revised to require 
that the PCO notify the contractor, in writing, of the DoD decision.
    7. Comment: One respondent recommended that DFARS Procedures, 
Guidance, and Information (PGI) be expanded to require notification by 
the PCO to the procuring agency's senior procurement executive, 
concurrent with the notification to the Director, Defense Procurement 
and Acquisition Policy, that is prescribed in the rule.
    DoD Response: DoD agrees that senior agency procurement leadership, 
possibly including the senior procurement executive, should be included 
in the notification process. Corresponding PGI coverage provides that 
the contracting officer will notify the Director, Defense Procurement 
and Acquisition Policy, in accordance with agency procedures. DoD 
believes that the individual DoD components should determine the 
specific routing of such notifications in their internal guidance.
    8. Comment: One respondent stated that DFARS 232.7100, Scope of 
subpart, should cite Internal Revenue Code 6331 and 6332, since those 
sections established the Federal Payment Levy Program.
    DoD Response: The coverage in DFARS Subpart 232.71, Levies on 
Contract Payments, addresses a narrow part of levies against payments, 
specifically, the process for dealing with collections against contract 
payments that may cause an inability to perform. Therefore, DoD 
believes that the current citation is appropriately precise.
    9. Comment: One respondent stated that the rule should indicate 
when the clause needs to be included in contracts, e.g., greater than 
$100,000. Similarly, another respondent recommended that contracts 
below the simplified acquisition threshold be excluded.
    DoD Response: While DoD understands that contracts below the 
simplified acquisition threshold have a reduced likelihood of impacting 
national security, the possibility exists that, in a critical 
situation, a levy could lead to such a circumstance. Therefore, DoD 
believes that the clause prescription should apply to contracts below 
the simplified acquisition threshold, with the exception of micro-
purchases. DFARS 232.7102 has been revised to exclude micro-purchases 
from the clause prescription.

[[Page 69491]]

    10. Comment: Two respondents requested clarification as to whether 
the clause applies to contracts for the acquisition of commercial 
items.
    DoD Response: While DoD understands that contracts for the 
acquisition of commercial items have a reduced likelihood of impacting 
national security, the scope of commercial items is very broad, and 
such contracts can be very large, even including critical items. 
Therefore, the possibility exists that, in a given situation, a levy 
could impact contract performance that, in a certain circumstance, 
could impact national security. DoD believes that the clause should be 
used in contracts for commercial items above the micro-purchase 
threshold. DFARS 212.301(f) has been amended to incorporate a 
prescription for inclusion of the clause at 252.232-7010 in contracts 
for the acquisition of commercial items.
    11. Comment: One respondent recommended that the clause 
prescription permit the contracting officer to waive (without 
significant procedural requirements) the inclusion of the clause in 
solicitations and contracts when the contracting officer believes the 
risk of a levy having an adverse impact on performance is low.
    DoD Response: While there may be contracts that have a reduced 
likelihood of impacting national security or leading to significantly 
higher costs to the Government in the event of an inability to perform, 
the possibility exists that, in a critical situation, a levy could lead 
to such a circumstance. Therefore, DoD did not make the suggested 
change.
    12. Comment: One respondent commented that the vast majority of DoD 
contracts contain the clause at FAR 52.232-23, Assignment of Claims, 
with Alternate I, which provides for a no-setoff commitment, and asked 
how DFARS 252.232-7010, Levies on Contract Payments, would interact 
with FAR 52.232-23, with Alternate I.
    DoD Response: Levies cannot be applied against payments for 
contracts that have been assigned in accordance with the clause at FAR 
52.232-23, Assignment of Claims, with Alternate I, unless the agency or 
the contracting officer has excluded the no-setoff commitment in 
accordance with DFARS 232.803(d).
    13. Comment: Two respondents had comments regarding the requirement 
for assessing the impact of an inability to perform on national 
security. One indicated that this should be a judgment for the 
Government, since contractors cannot possibly know such things. The 
other respondent indicated that this may be beyond the contractor's 
knowledge and capability.
    DoD Response: The contractor generally is not in a position to 
determine the impact on national security, and the rule assigns that 
responsibility to DoD. However, the policy at 232.7101, and the clause 
at 252.232-7010, call for advice from the contractor as to whether 
national security might be impacted. The advice may be helpful to the 
buying activity in developing a decision as to the impact on national 
security. No change in the rule is necessary.
    14. Comment: One respondent commented that the Background section 
of the Federal Register notice should be changed to make it consistent 
with DFARS 232.7101, Policy and Procedures. Specifically, that section 
should be revised to indicate that the contractor will notify the 
contracting officer when the contractor believes a levy imposed on a 
DoD contract payment will ``jeopardize contract performance.'' The 
respondent also recommended that the Paperwork Reduction Act section of 
the Federal Register notice be revised for consistency with DFARS 
232.7101, to indicate that the rule requires contractors to provide 
certain information to the Government when levies ``jeopardizing 
contract performance and adversely affecting national security'' are 
imposed on DoD contract payments.
    DoD Response: As discussed in the response to Comment 4 above, to 
avoid confusion, the final rule eliminates use of the term ``jeopardize 
contract performance'' and now consistently refers to requirements for 
the contractor to notify the contracting officer when a levy may result 
in an ``inability to perform.''
    15. Comment: One respondent recommended that DoD initiate actions 
to draft proposed legislation that will require all Federal agencies to 
provide notice by e-mail for all potential offsets at least 30 days in 
advance of the target offset date to certain contractor points of 
contact established in the Central Contractor Registration system. The 
respondent maintains that Federal agencies, and the Internal Revenue 
Service in particular, have not been compliant with the intent and 
spirit of the Debt Collection Improvement Act of 1996, in making the 
offsets to recover levies related to contract overpayment and tax 
underpayments.
    DoD Response: The comment is beyond the scope of this DFARS case. 
However, DoD notes that the Internal Revenue Service issues a 
Collection Due Process notice 30 days before collection action, such as 
a levy. Therefore, the contractor is already aware of the debt, and DoD 
believes that further notice should not be necessary.
    16. Comment: One respondent strongly encouraged DoD to review the 
interaction between DoD and the Federal Payment Levy Program and the 
Treasury Offset Program, with a particular focus on the procedural 
requirements to notify the contractor, to the maximum extent 
practicable, before DoD notifies the Treasury Department of a contract 
debt.
    DoD Response: FAR 32.610, Demand for Payment of Contract Debt, 
already provides for issuance of a demand for payment, and specifies 
that the contractor has 30 days to make payment without interest. DoD 
considers that the existing FAR requirements provide adequate notice to 
a contractor of a contract debt.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
because the rule applies to only those contractors that have a 
delinquent tax debt. The number of contractors that fall into this 
category is expected to be less than 10 per year.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply, because the rule does 
not impose any information collection requirements that require the 
approval of the Office of Management and Budget under 44 U.S.C. 3501, 
et seq. Although the rule requires contractors to provide certain 
information to the Government when an IRS levy may result in an 
inability to perform a contract, the number of contractors subject to 
this requirement is expected to be less than 10 per year.

List of Subjects in 48 CFR Parts 212, 232, and 252

    Government procurement.

Michele P. Peterson,
Editor, Defense Acquisition Regulations System.

0
Accordingly, the interim rule amending 48 CFR parts 232 and 252, which 
was published at 70 FR 52031 on September 1, 2005, is adopted as a 
final rule with the following changes:

[[Page 69492]]

0
1. The authority citation for 48 CFR Parts 212, 232, and 252 continues 
to read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 212--ACQUISITION OF COMMERCIAL ITEMS

0
2. Section 212.301 is amended by adding paragraph (f)(xi) to read as 
follows:


212.301  Solicitation provisions and contract clauses for the 
acquisition of commercial items.

    (f) * * *
    (xi) Use the clause at 252.232-7010, Levies on Contract Payments, 
as prescribed in 232.7102.

PART 232--CONTRACT FINANCING

0
3. Sections 232.7101 and 232.7102 are revised to read as follows:


232.7101  Policy and procedures.

    (a) The contracting officer shall require the contractor to--
    (1) Promptly notify the contracting officer when a levy may result 
in an inability to perform the contract; and
    (2) Advise the contracting officer whether the inability to perform 
may adversely affect national security.
    (b) The contracting officer shall promptly notify the Director, 
Defense Procurement and Acquisition Policy (DPAP), when the 
contractor's inability to perform will adversely affect national 
security or will result in significant additional costs to the 
Government. Follow the procedures at PGI 232.7101(b) for reviewing the 
contractor's rationale and submitting the required notification.
    (c) The Director, DPAP, will promptly evaluate the contractor's 
rationale and will notify the IRS, the contracting officer, and the 
payment office, as appropriate, in accordance with the procedures at 
PGI 232.7101(c).
    (d) The contracting officer shall then notify the contractor in 
accordance with paragraph (c) of the clause at 252.232-7010 and in 
accordance with the procedures at PGI 232.7101(d).


232.7102  Contract clause.

    Use the clause at 252.232-7010, Levies on Contract Payments, in all 
solicitations and contracts other than those for micro-purchases.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Section 252.232-7010 is amended by revising the clause date and 
paragraphs (b) and (c) to read as follows:


252.232-7010  Levies on Contract Payments.

* * * * *
LEVIES ON CONTRACT PAYMENTS (DEC 2006)
* * * * *
    (b) When a levy is imposed on a payment under this contract and the 
Contractor believes that the levy may result in an inability to perform 
the contract, the Contractor shall promptly notify the Procuring 
Contracting Officer in writing, with a copy to the Administrative 
Contracting Officer, and shall provide--
    (1) The total dollar amount of the levy;
    (2) A statement that the Contractor believes that the levy may 
result in an inability to perform the contract, including rationale and 
adequate supporting documentation; and
    (3) Advice as to whether the inability to perform may adversely 
affect national security, including rationale and adequate supporting 
documentation.
    (c) DoD shall promptly review the Contractor's assessment, and the 
Procuring Contracting Officer shall provide a written notification to 
the Contractor including--
    (1) A statement as to whether DoD agrees that the levy may result 
in an inability to perform the contract; and
    (2)(i) If the levy may result in an inability to perform the 
contract and the lack of performance will adversely affect national 
security, the total amount of the monies collected that should be 
returned to the Contractor; or
    (ii) If the levy may result in an inability to perform the contract 
but will not impact national security, a recommendation that the 
Contractor promptly notify the IRS to attempt to resolve the tax 
situation.
* * * * *

[FR Doc. E6-20394 Filed 11-30-06; 8:45 am]
BILLING CODE 5001-08-P