[House Hearing, 106 Congress] [From the U.S. Government Publishing Office] H.R. 4181, THE DEBT PAY INCENTIVE ACT OF 2000 ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTH CONGRESS SECOND SESSION ON H.R. 4181 TO AMEND TITLE 31, UNITED STATES CODE, TO PROHIBIT DELINQUENT FEDERAL DEBTORS FROM BEING ELIGIBLE TO ENTER INTO FEDERAL CONTRACTS, AND FOR OTHER PURPOSES __________ MAY 9, 2000 __________ Serial No. 106-201 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform U.S. GOVERNMENT PRINTING OFFICE 70-748 WASHINGTON : 2001 _______________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania JOHN L. MICA, Florida PATSY T. MINK, Hawaii THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio Carolina ROD R. BLAGOJEVICH, Illinois BOB BARR, Georgia DANNY K. DAVIS, Illinois DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts ASA HUTCHINSON, Arkansas JIM TURNER, Texas LEE TERRY, Nebraska THOMAS H. ALLEN, Maine JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois DOUG OSE, California ------ PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont HELEN CHENOWETH-HAGE, Idaho (Independent) DAVID VITTER, Louisiana Kevin Binger, Staff Director Daniel R. Moll, Deputy Staff Director David A. Kass, Deputy Counsel and Parliamentarian Lisa Smith Arafune, Chief Clerk Phil Schiliro, Minority Staff Director ------ Subcommittee on Government Management, Information, and Technology STEPHEN HORN, California, Chairman JUDY BIGGERT, Illinois JIM TURNER, Texas THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania GREG WALDEN, Oregon MAJOR R. OWENS, New York DOUG OSE, California PATSY T. MINK, Hawaii PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York Ex Officio DAN BURTON, Indiana HENRY A. WAXMAN, California J. Russell George, Staff Director and Chief Counsel Randy Kaplan, Counsel Bryan Sisk, Clerk Michell Ash, Minority Counsel C O N T E N T S ---------- Page Hearing held on May 9, 2000...................................... 1 Text of H.R. 4181................................................ 2 Statement of: Ashby, Cornelia M., Associate Director, Tax Policy and Administration Issues, General Accounting Office, accompanied by Gregory D. Kutz, Associate Director, Governmentwide Accounting and Financial Management Issues, and Tom Armstrong, Assistant General Counsel; Deidre Lee, Acting Deputy Director for Management, Office of Management and Budget; Joe Mikrut, Tax Legislative Council, Department of the Treasury; Carol Covey, Deputy Director of Defense Procurement, Department of Defense; and Sally Thompson, Chief Financial Officer, Department of Agriculture......... 18 Letters, statements, etc., submitted for the record by: Ashby, Cornelia M., Associate Director, Tax Policy and Administration Issues, General Accounting Office, prepared statement of............................................... 20 Covey, Carol, Deputy Director of Defense Procurement, Department of Defense, prepared statement of............... 58 Horn, Hon. Stephen, a Representative in Congress from the State of California, prepared statement of................. 7 Lee, Deidre, Acting Deputy Director for Management, Office of Management and Budget: Information concerning non-tax receivables............... 75 Prepared statement of.................................... 43 Mikrut, Joe, Tax Legislative Council, Department of the Treasury, prepared statement of............................ 51 Thompson, Sally, Chief Financial Officer, Department of Agriculture, prepared statement of......................... 66 Turner, Hon. Jim, a Representative in Congress from the State of Texas, prepared statement of............................ 11 H.R. 481, THE DEBT PAY INCENTIVE ACT OF 2000 ---------- TUESDAY, MAY 9, 2000 House of Representatives, Subcommittee on Government Management, Information, and Technology, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding. Present: Representatives Horn, Biggert, Davis, Ose, Turner, and Maloney. Staff present: J. Russell George, staff director and chief counsel; Randy Kaplan, counsel; Bonnie Heald, director of communications; Bryan Sisk, clerk; Michael Soon and Elizabeth Seong, interns; Michelle Ash and Trey Henderson, minority counsels; and Jean Gosa, minority assistant clerk. Mr. Horn. A quorum being present, the Subcommittee on Government Management, Information, and Technology will come to order. Today we will examine a bill introduced by the ranking member of this subcommittee, Representative Jim Turner of Texas. [The text of H.R. 4181 follows:] [GRAPHIC] [TIFF OMITTED] T0748.001 [GRAPHIC] [TIFF OMITTED] T0748.002 [GRAPHIC] [TIFF OMITTED] T0748.003 [GRAPHIC] [TIFF OMITTED] T0748.004 Mr. Horn. Mr. Turner's bill is a superb one as far as I am concerned, and I am glad to be a cosponsor of it. H.R. 4181, the Debt Payment Incentive Act of 2000 would prohibit delinquent tax debtors from receiving Federal loans or contracts until their delinquencies are resolved. The bill expands the Debt Collection Improvement Act of 1996, which bars delinquent nontax debtors from receiving Federal loans or loan guarantees. That law only applied to non- tax related delinquent debts. Frankly, the reason it applied only to that is that if we wanted the bill to get through in 1996 we had to ride the train leaving the station, and that meant don't get bogged down in the Committee on Ways and Means. These overdue debtors that are referred to in the nontax- related delinquent debts, who are overdue in paying off their student loans and home mortgages, farm or business loans, currently owe the Federal Government a total of $46 billion. However, the 1996 law does not apply to the tax-related debt, as we noted, which is estimated to be $231 billion in overdue taxes, penalties, and interest. At a hearing last summer, the General Accounting Office testified that unpaid payroll taxes is one of the largest categories of that outstanding tax debt. GAO investigators found that nearly 2 million business owners owed the Federal Government nearly $50 billion in unpaid payroll taxes, taxes these employers had collected from their workers but failed to forward to the U.S. Treasury. Despite those debts, however, a significant number of the same business owners and other individuals with delinquent tax debts are receiving millions of dollars in Federal benefits and new loans. H.R. 4181 would prohibit that outrageous practice from continuing. The bill would require the Internal Revenue Service to report the tax status of all applicants for Federal loans, loan guarantees, and Federal contracts to the agency granting the loan or issuing the contract. Admittedly, this places an additional administrative responsibility on an agency, the Internal Revenue Service, and that agency, as we know, is already beleaguered by serious financial and operational challenges, but that cannot be any excuse for picking up the nontax debt and the tax debt. Today we will examine whether the Internal Revenue Service can meet this responsibility. We will also hear from representatives of other Federal agencies who will discuss their views on the legislation. I commend Mr. Turner for seeking to remedy this appalling abuse of taxpayers' money and yield to him to discuss his bill. [The prepared statement of Hon. Stephen Horn follows:] [GRAPHIC] [TIFF OMITTED] T0748.005 Mr. Horn. Mr. Turner. Mr. Turner. Thank you, Mr. Chairman. First of all, I want to thank you for granting a hearing to this bill; and I thank you for your cosponsorship of the legislation. I also want to thank Mr. Davis and Mr. Ose who have joined with us, along with Mr. Burton, Mr. Waxman, Mr. Owens, Mrs. Biggert, Mrs. Maloney, Mr. Walden of our committee; also, I thank Mr. Shays and Mr. Mica, Mr. Tierney, Mr. Gilman, on our full committee, have joined with us in this effort. It is no secret that taxpayers owe the Federal Government billions of dollars in delinquent taxes, and to figure out how to collect that is one of the tasks that this committee under Chairman Horn's leadership has struggled with on many fronts. According to the IRS records, the Federal Government was owed $231 billion in unpaid taxes, penalties, and interest. In a hearing before this subcommittee in August of last year, the General Accounting Office revealed that nearly 2 million businesses owed $49 billion in cumulative unpaid payroll taxes. An additional $15 billion in penalties had been assessed against the 185,000 individuals responsible for the nonpayment of these payroll taxes. The GAO also reported that a significant number of businesses with unpaid payroll taxes and individuals with outstanding penalties are also receiving billions of dollars in Federal benefits. One alarming example was of a freight handler company which owed an estimated $2 million in unpaid payroll taxes. They routinely funneled corporate funds to an affiliated company, one owned by one of the corporate officers, to acquire trucks and other equipment for the affiliated company's expansion. Eventually it turned out the IRS discovered that funds for the unpaid payroll taxes were also being used for corporate officers' personal expenses, including the installation of a private swimming pool and maintenance of at least eight antique cars owned by one of the corporate officers. The most disturbing aspect of this story is the fact that during this time Federal contracts accounted for 85 percent of this particular company's revenues. Additionally, we learned that about 12,500 taxpayers, both businesses and individuals with outstanding payroll liabilities totaling about $280 million, had received SBA loan disbursements totaling about $2.4 billion. In a 1992 GAO report that studied 26,000 businesses that had Federal contracts valued at over $25,000, the GAO discovered that 21 percent or more than 5,700 of these Federal contractors owed $773 million in delinquent taxes, interest, and penalties, and another 4 percent of them, almost 1,100 of these Federal contractors, were under investigation for not filing Federal tax returns. Can you believe that tax debtors enjoy Federal contracts and Federal loan assistance? They can under current law, and this legislation intends to change it. We introduced this bill, H.R. 4181, the Debt Payment Incentive Act of 2000, to remedy this problem. This bipartisan legislation builds upon the success of the Debt Collection Improvement Act of 1996 which banned Federal loans and loan guarantees to delinquent nontax debtors. H.R. 4181 amends the Debt Collection Improvement Act to bar delinquent Federal debtors from obtaining Federal contracts, as well as Federal loan assistance already covered under existing law. The bill expands the Debt Collection Improvement Act to include tax debt in generally the same manner that nontax debt is already included under the provisions of the Debt Collection Act. This is the first time tax debt has been brought under Federal law. Strong precedent already exists for this legislation. OMB Circular A-129 already requires that Federal agencies determine whether applicants for Federal loan assistance are delinquent on any Federal debt, including tax debt. Under this circular, agencies must include a question on loan application forms asking applicants if they have such delinquencies. Processing of applications should be suspended until the debtor satisfactorily resolves the debt. However, implementation of Circular A-129 has been uneven and the GAO reported that many agencies are not even following the requirements. While I think we can all agree that those who fail to pay their taxes should not receive these Federal benefits, loans, and Federal contracts, I realize that there are a number of implementation issues surrounding the legislation. I want to thank the numerous individuals and organizations who have submitted testimony and suggestions on our legislation: The U.S. Chamber of Commerce, the National Farmers Union, the Aerospace Industries Association, the National Defense Industry Association, National Federation of Independent Businesses, the National Taxpayers Union, the Small Business Administration, the Department of the Treasury, the IRS, the USDA, the GSA, of course the GAO, OMB, the Financial Management Services, the Department of Defense, and the Family Farm Coalition all commented or are prepared to testify regarding this legislation. In an effort to find a workable solution to the problem that we have discussed, each of these people have been very open, each of these groups, in trying to offer their best assistance to achieve the goal that we all agree upon. First, I recognize that the IRS is currently modernizing its computer systems; and a few weeks ago at our hearing, I asked Commissioner Rossotti to comment on this bill. He concluded that the IRS could handle the requirements of this new legislation if they were given time to implement the system to make it workable. Therefore, it seems to me that the effective date of this legislation should take into account that there should be some lag time to be sure the IRS can handle this responsibility. It is not the intent of this bill to delay the process by which the Federal Government awards contracts or loans, and it has also been suggested that perhaps during this interim period before the legislation becomes fully effective that a pilot project should be initiated, to be sure that it is workable and that the IRS can handle the task. Second, with regards to procurement I still believe that making tax compliance is a prerequisite to awarding Federal contracts and that it is a legitimate screening tool. Currently, Federal agencies can consider tax delinquency in making their contract awards. Under this legislation, the agency head and the Treasury can waive the bar to contracts. It is worthy of consideration that perhaps our legislation should delegate this responsibility to the chief procurement officer rather than solely being an authority granted to the agency head. Third, I think it is important for us to be sure that our definition of delinquency will cover those who are still involved in legitimate disputes with the IRS. It has been suggested that perhaps our definition should have some refinement, and I am certainly open to the suggestions that will be made today to accomplish that. We do not want to take any right of appeal away from any taxpayer by this legislation. We simply want to be sure that after all appeals and remedies are exercised by the taxpayer that if they still owe the Federal Government taxes, then they are barred from Federal contracts or loans. Fourth, in order to clear up any confusion about what type of acquisitions are covered under this legislation, I would suggest, and it has been suggested, that we exempt small purchases under $2,500 which under current law do not require a formal contract. Fifth, with regard to the provisions relating to the penalties for trust fund taxes, it has been suggested that perhaps we should limit coverage of this bill to only partners with 25 percent ownership or more. I had originally suggested perhaps 10 percent. I am certainly open on that point as well. In closing, let me make one final point. There are usually multiple policy goals involved when the Federal Government makes a loan or contract for services. One goal, it seems to me, should be to ensure that applicants applying for loans and businesses contracting with the government are not delinquent in their taxes. Exactly how we achieve that goal is the subject of this hearing today, and I welcome the testimony from each of our witnesses and again I thank the Chairman and the members of this committee who have joined in cosponsoring this bill. Thank you, Mr. Chairman. [The prepared statement of Hon. Jim Turner follows:] [GRAPHIC] [TIFF OMITTED] T0748.006 [GRAPHIC] [TIFF OMITTED] T0748.007 [GRAPHIC] [TIFF OMITTED] T0748.008 [GRAPHIC] [TIFF OMITTED] T0748.009 [GRAPHIC] [TIFF OMITTED] T0748.010 [GRAPHIC] [TIFF OMITTED] T0748.011 Mr. Horn. Thank you very much for that summary of your legislation. The further opening statements will be limited to 5 minutes. We give the author more leeway. And I am delighted now to call on the Representative from Northern Virginia, Mr. Davis. Mr. Davis. I have no comments. Mr. Horn. I now call on Mrs. Maloney, Representative from New York, if she has any opening comments for 5 minutes. Mrs. Maloney. I support this legislation, and it is part of the continuum work that you and I have done together on working together to make government be more responsible and effective for the taxpayer and the citizens. I am glad to be here in support of this legislation. Thank you. I yield back my time. Mr. Horn. We thank you. The gentleman from California, Mr. Ose. Mr. Ose. No, sir. Mr. Horn. OK. We will then start with the first panel. Let me just note for some of you that might not have been here before, we will ask you all and any of your assistants that are there that might whisper in your ear to take the oath when I have you stand on that. Then those that have written records, they will go in the hearing record at the point in which you are introduced on the panel. They will automatically be in there. I don't have to go through this mumbo-jumbo with every witness. Then we would like you to keep your oral testimony to, let's say, 7 minutes or so, and we might give a little more leeway to the General Accounting Office because of the study here, but it is important that we get out the summary of your testimony on behalf of either the administration, the agencies, the GAO, so that we can have a dialog and then we will try to get everybody involved. So let us stand and raise your right hands and swear you in and your assistants. The clerk will count the people in the back row which are one, two, three, four, five backing up and then six witnesses. [Witnesses sworn.] Mr. Horn. The clerk will note that the six witnesses have affirmed and so have the assistants. So we will start down the line in the order in which individuals are put on here, and that is with Cornelia M. Ashby, the Associate Director, Tax Policy and Administration Issues for the General Accounting Office. Ms. Ashby is accompanied with Gregory D. Kutz, the Associate Director, Governmentwide Accounting and Financial Management Issues, and Tom Armstrong, the assistant general counsel. So Ms. Ashby. STATEMENTS OF CORNELIA M. ASHBY, ASSOCIATE DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY GREGORY D. KUTZ, ASSOCIATE DIRECTOR, GOVERNMENTWIDE ACCOUNTING AND FINANCIAL MANAGEMENT ISSUES, AND TOM ARMSTRONG, ASSISTANT GENERAL COUNSEL; DEIDRE LEE, ACTING DEPUTY DIRECTOR FOR MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; JOE MIKRUT, TAX LEGISLATIVE COUNCIL, DEPARTMENT OF THE TREASURY; CAROL COVEY, DEPUTY DIRECTOR OF DEFENSE PROCUREMENT, DEPARTMENT OF DEFENSE; AND SALLY THOMPSON, CHIEF FINANCIAL OFFICER, DEPARTMENT OF AGRICULTURE Ms. Ashby. Mr. Chairman and members of the subcommittee, we are pleased to be here today to assist the subcommittee in its consideration of H.R. 4181. Our remarks are based on work we did for the subcommittee on unpaid payroll taxes and associated tax penalties and our audits of IRS. We support the concept of barring delinquent taxpayers from receiving Federal contracts and loan assistance. However, with respect to H.R. 4181, we believe there are significant implementation issues involving the capability of IRS' current information systems, additional burden on the Federal acquisition process and using 90 days after assessment as the only determinant of delinquent status. First, let me describe the current situation. As we reported to this subcommittee last August and as you mentioned earlier, Mr. Chairman, nearly 2 million businesses owed $49 billion in delinquent unpaid payroll taxes as of September 30, 1998; and 185,000 individuals responsible for the nonpayment of delinquent payroll taxes owed $15 billion in tax fund recovery penalties. Nearly 50 percent of the businesses were delinquent for more than one tax period, and nearly 25,000 individuals with trust fund recovery penalties had been assessed such penalties for more than one business. Further, the majority of the unpaid payroll taxes and the associated trust fund recovery penalties are not likely to be collected. A significant number of businesses with delinquent unpaid payroll taxes and individuals with outstanding trust fund recovery penalties also receive substantial payments from the Federal Government. For example, our analysis indicated that as of September 30, 1998, over 1,700 businesses and individual taxpayers had received SBA loans estimated at nearly $449 million after accumulating unpaid payroll tax delinquencies of almost $32 million. Against this backdrop, H.R. 4181 may provide several benefits. The general barring provisions of the bill would prevent delinquent taxpayers from benefiting from Federal loan assistance or contracts. Other provisions of the bill would end the practice by some multiple tax offenders of using Federal loans and contracts to start new businesses while the payroll taxes of other businesses they were or are associated with remain unpaid because of some willful action on their part. In addition, the provisions of the bill could serve as an incentive for individuals and businesses to comply with their tax obligations. Also, the bill would provide fairness to compliant taxpayers who consistently fulfill their tax obligations while a portion of their tax payments are used to finance Federal loans and contracts for those who do not pay their fair share. However, accompanying these potential benefits are three implementation issues. First, IRS currently does not have the systems that would enable it to consistently provide Federal agencies with timely and accurate information on a taxpayer's delinquency status. IRS is undergoing a major systems modernization program which will likely take several more years to complete. If modernization efforts are successful, IRS may be able to provide accurate, real time delinquency status information. OMB currently directs administrators of Federal loan assistance programs to determine whether an applicant has delinquent Federal debt, including tax debt, to assess creditworthiness. Because of this directive, agencies should have time built into their application processes to determine whether a loan applicant has Federal tax debt. Even so, because of IRS's limitations, we recommend that Congress provide that H.R. 4181 requirements be implemented on a pilot basis for one or more loan assistance programs to determine whether IRS' current systems could effectively and efficiently handle the expected volume of delinquency status requests. The second implementation issue involves the Federal acquisition process. In recent years, both Congress and the administration have attempted to streamline the government procurement system in an effort to reduce costs. Because Federal agencies do not currently have to check a prospective contractor's tax delinquency status, H.R. 4181 could add considerable burden to the acquisition process. However, this burden could decrease if IRS' modernization efforts allow a real time tax delinquency check system. To help reduce the burden on the acquisition process, we recommend that Congress defer the application of the barring provisions of H.R. 4181 for Federal contracts until the results of the pilot program for loan assistance and IRS' systems modernization efforts are known. The third implementation issue is a definitional one. Generally, with the exception of taxpayers that have made arrangements with IRS to make payments on their debts, H.R. 4181 would deny loan assistance or contracts to all taxpayers with tax debts that have been outstanding for more than 90 days after the date of assessment. As a starting point, the 90 days after assessment standard is not unreasonable. However, this provision may be too restrictive because it may not allow enough time for taxpayers to fully exercise their due process rights for collection actions or to negotiate payment agreements. To help ensure that taxpayers are not barred from receiving Federal contracts or loan assistance prematurely, we recommend that the Congress require the Secretary of the Treasury to prescribe additional standards for IRS to use in determining when a taxpayer has a tax debt in delinquent status for purposes of barring under H.R. 4181. Mr. Chairman, this concludes our statement. We would be pleased to answer any questions you or members of the subcommittee may have. Mr. Horn. Thank you very much. We appreciate that very thorough statement. [The prepared statement of Ms. Ashby follows:] [GRAPHIC] [TIFF OMITTED] T0748.012 [GRAPHIC] [TIFF OMITTED] T0748.013 [GRAPHIC] [TIFF OMITTED] T0748.014 [GRAPHIC] [TIFF OMITTED] T0748.015 [GRAPHIC] [TIFF OMITTED] T0748.016 [GRAPHIC] [TIFF OMITTED] T0748.017 [GRAPHIC] [TIFF OMITTED] T0748.018 [GRAPHIC] [TIFF OMITTED] T0748.019 [GRAPHIC] [TIFF OMITTED] T0748.020 [GRAPHIC] [TIFF OMITTED] T0748.021 [GRAPHIC] [TIFF OMITTED] T0748.022 [GRAPHIC] [TIFF OMITTED] T0748.023 [GRAPHIC] [TIFF OMITTED] T0748.024 [GRAPHIC] [TIFF OMITTED] T0748.025 [GRAPHIC] [TIFF OMITTED] T0748.026 [GRAPHIC] [TIFF OMITTED] T0748.027 [GRAPHIC] [TIFF OMITTED] T0748.028 [GRAPHIC] [TIFF OMITTED] T0748.029 [GRAPHIC] [TIFF OMITTED] T0748.030 [GRAPHIC] [TIFF OMITTED] T0748.031 Mr. Horn. Our next presenter is Deidre Lee, the Acting Deputy Director for Management, Office of Management and Budget. Nice to have you here again. Ms. Lee. Good morning. Chairman Horn, Congressman Turner, and members of the subcommittee, I have been asked to discuss the administration's views on H.R. 4181, the Debt Payment Incentive Act of 2000. The bill would amend Title 31 of the U.S. Code to bar delinquent debtors from obtaining Federal contracts. It also adds delinquent debt as a bar to obtaining not only Federal contracts but other types of Federal assistance. The administration shares the subcommittee's goal to reduce delinquency. We supported the Debt Collection Improvement Act of 1996 which provided a comprehensive set of tools for agencies to use at their discretion to improve account servicing and debt collection, such as consolidating and cross servicing the Treasury offset program and loan sales assets. The tools have allowed us to reduce our delinquent nontax debt from $60 billion in fiscal year 1998 to $53 billion in 1999, and we expect a continued decline as agencies sell delinquent loan assets to the private sector and refer greater amounts of delinquent debt to Treasury for cross servicing, but this is not enough. We need to continue to reduce that debt. We have supported H.R. 436, Government Waste, Fraud, and Error Reduction Act of 1999, which would have strengthened the provisions of the Debt Collection Improvement Act, including barring delinquent nontax debtors from receiving Federal benefits. In support of these legislative efforts, the President has declared improved management of Federal receivables to be a priority management objective. Priority management objections are OMB's highest management priorities for the Federal Government. These objectives are areas in need of reform and receive ongoing attention from the administration in the most senior levels of OMB and the agencies. Notwithstanding our support for improved debt collection, we are concerned that the bill, without modification, may undo some of the important progress this committee has helped us to achieve in reforming the procurement process. I would like to highlight for you how H.R. 4181 would affect the procurement process, some concerns we have with certain provisions, and some suggestions that we would like to offer. I will defer to the Department of Treasury on the implementation of their aspects of the bill. As you know, an efficient, economical, and well functioning procurement system requires the award of contracts to individuals and organizations that meet high standards of integrity and business ethics. The government should only be doing business with high performing and successful companies that work to maintain a good record of compliance with their responsibilities as entities within the community. At the same time, we have been striving in recent years to ensure that our procurement tools provide the flexibility to acquire those goods and services necessary to carry out the mission of the agency in an efficient and expeditious manner. As we work together to strengthen our debt collection efforts, we also need to preserve the achievements of our recent procurement reform efforts. The ability of the contracting officer to exercise good business judgment in their contracting decisions has been critical to procurement reform. The bill provides exceptions for national security and disaster relief but there may be other circumstances where exceptions should apply. For example, the bill could provide contracting officers with the discretion to assess on a case by case basis whether a delinquent debtor should be barred from Federal contracting. I am also concerned that the lack of contracting officer discretion may have adverse impact on small business. As you know, many small businesses need the constant cash-flow, and we need to balance the ongoing contracts they have in the offset and collection procedures and perhaps evaluate how that would impact them. I would also suggest a dollar threshold. As Mr. Turner mentioned, we have a large number of small dollar activities that from timeframe and sheer volume we should look at their impact and how these could be assessed. The simplified acquisition procedure of $100,000 might be a threshold to consider. This bill requires verification of not only corporate debtor status but also the status of officers and major shareholders who have been assessed a penalty for failure to collect and account for payroll taxes. This means that the contracting officer will have to check the delinquent status of not only the corporation but the officers and major shareholders, and similarly this will affect partnerships that have many partners. So our concern here, again, and I think it has been mentioned by others, is how do we set up that system to ensure that we can check this large number of individuals and do that on a fairly quick turnaround to provide the information. The bill defines a delinquent tax debt as a debt that is not paid within 90 days, and as already addressed by Ms. Ashby, we think there are some definitional issues that could be straightened out or clarified here. For example, someone may be in recovery status and they are still delinquent but they are recovering that debt. How do we address that in this bill? In light of these concerns, careful consideration should be given to strengthening the current mechanisms for dealing with delinquent debtors. For example, pursuant to the Debt Collection Improvement Act, the Treasury Department maintains an offset program to collect nontax debt. Under this program contract payments owed by a Federal contractor may be used to offset debts the contractor owes to the Federal Government. Federal agencies routinely report their contractor's taxpayer identification number to the IRS when contracts are awarded so that the IRS is aware of the companies with whom Federal agencies do business. This process enables the IRS to issue tax levies if a contractor has an unpaid debt. Under this process, amounts otherwise paid to the contractor are paid to the IRS to offset the tax debt. An alternative to the bill under consideration might be to expand or improve these programs. Notwithstanding the final language of the bill, again as Ms. Ashby stated, we should include a provision that would allow time to make sure the verification system is in place and then, of course, in addition to that there are some considerations on how we put into place the Federal acquisition guidelines to explain to the contracting officers and the contractors how this process will operate. Like this committee, the administration strongly supports collection of debts owed to the government. We met recently last week with your staff to discuss several of the issues that I have discussed today, and we would be glad to continue that dialog. I hope we can work together to formulate a proposal with the goals that we can both share, and reduce the delinquent debt. This concludes my formal remarks and I would be happy to answer any questions. Mr. Horn. Thank you very much. [The prepared statement of Ms. Lee follows:] [GRAPHIC] [TIFF OMITTED] T0748.032 [GRAPHIC] [TIFF OMITTED] T0748.033 [GRAPHIC] [TIFF OMITTED] T0748.034 [GRAPHIC] [TIFF OMITTED] T0748.035 [GRAPHIC] [TIFF OMITTED] T0748.036 Mr. Horn. Our next presenter is Joe Mikrut, the Tax Legislative Counsel for the Department of the Treasury. Mr. Mikrut. Thank you, Mr. Chairman. Mr. Chairman, Ranking Member Turner, distinguished members of the subcommittee, good morning. I appreciate the opportunity today to discuss with you the Federal tax policy aspects of the provisions of H.R. 4181, the Debt Payment Incentive Act of 2000. Section 3720(b) of Title 31 the U.S. Code enacted as part of the Debt Collection Improvement Act of 1996 currently bars a person from obtaining loans, loan guarantees, or loan insurance administered by a Federal agency if the person has an outstanding Federal debt other than a tax debt that is in delinquent status. H.R. 4181 would amend section 3720(b) in two key aspects. First, it would extend the act to persons applying for Federal contracts. Second, it would extend the act to tax debts as well as nontax debts. Treasury supports efforts to reduce delinquent debt, both tax debt and nontax debt. To effectively achieve this result, however, a number of policy and technical issues must be addressed. The two primary policy issues deal with the effects on voluntary tax compliance and the effects on taxpayer privacy rights. The more general tax policy issue raised by the bill that must be considered is its effect on voluntary tax compliance. Ours is a system of voluntary tax compliance dependent upon self-assessment. We rely upon taxpayers to personally determine or assess their tax liabilities, to file tax returns, and to timely remit any taxes owed. The role of the IRS is to facilitate, monitor, and enforce this process. Anytime a person's tax status becomes relevant for nontax purposes, an incentive is created to misreport or, in some cases, to fail to report a tax liability in order to obtain this other benefit. Because it takes longer for a taxpayer who does not file a tax return to be reflected as delinquent in the IRS records, the bill could have the potential effect of encouraging people not to file returns to avoid detection. On the other hand, the bill could have the opposite effect on enhancing tax compliance by encouraging taxpayers to avoid tax delinquent status by either paying their tax debts or pursuing other appropriate procedural avenues. The second important policy consideration that the bill deals with is with respect to taxpayer privacy. In general, in order to encourage tax compliance, current law makes private a taxpayer's confidential tax information. Current law contains certain exceptions to this rule. H.R. 4181, by necessity, would require a disclosure of taxpayer information, that is, the taxpayer's delinquency status, to administering Federal agencies. We have some suggestions on how to best achieve the conflicting goals of taxpayer privacy and the need for information under the bill. Under the bill, in connection with the loan application or a contract proposal, taxpayers would be required to authorize the Secretary of the Treasury to disclose whether they had a debt under the Internal Revenue Code that is in delinquent status. Treasury would be required to develop a form for such purposes. The authority for such disclosure would be under section 6103 of the Code which permits the disclosure of returns or return information upon consent. Treasury recommends that the disclosures contemplated by the bill should be made, instead, by amending section 6103(l)(3), which currently provides explicit statutory authority for similar types of disclosures without the taxpayer's consent. This is consistent with the statutory scheme of 6103, generally, under which large scale disclosures, as contemplated by the bill, typically are achieved through an explicit statutory exception that grants an agency automatic access to return information. In addition, different rules and procedures apply to disclosures pursuant to 6103(c) than are pursuant to explicit statutory exceptions. Explicit statutory exceptions typically specify exactly which information can be disclosed, to whom and for what purposes. In addition, many of the disclosures are subject to special recordkeeping and safeguarding procedures. Disclosures pursuant to consent under 6103(c), by contrast, have none of these limitations. Finally, while statutory disclosures are typically at least partly automated, 6103(c) waivers typically involve a paper process and are subject to review for compliance with certain regulatory requirements by the IRS. Currently, about 2 million third party consents are processed each year by the IRS. The disclosures required by this bill would add substantially to that number and would be difficult to administer and thus create delays in granting loans and contracts. Another important consideration relevant to disclosure of return information under this provision is that many Federal agencies use contracts to administer their programs. The Congress traditionally has restricted access to return information by contractors even when disclosure otherwise may have been authorized due to concerns about taxpayer privacy. In order to protect taxpayer privacy, the amendment to section 6103(l)(3) should make explicit that disclosures to contractors of the agencies administering the loans or entering into contracts will be permitted for purposes only of this provision, subject to the contractor's agreement to otherwise maintain the confidentiality of information, and subject to the agency's demonstrated oversight of the contractor's compliance with these safeguards. We certainly recognize the value of notice provided by requiring taxpayers to authorize the necessary disclosures. We suggest that such notice should be incorporated into the loan application process or the contracting process without each notice having the legal effect of authorizing disclosure as would happen under section 6103(c) consent. In addition to concerns about the effects of voluntary tax compliance and taxpayer privacy, we have certain technical comments on the bill. The most fundamental is the definition of tax delinquency. The bill currently defines tax delinquent status to be any Federal tax debt that has not been paid within 90 days of assessment. Treasury recommends modification or deletion of this provision. The language may be unnecessary in light of section 3720(B)(a) which grants Treasury the authority to define delinquent status. Alternatively, we believe that the bill should make it explicit that a debt will not be considered to be in tax delinquent status if the taxpayer has either already administratively or judicially appealed or still has the opportunity to administratively or judicially appeal a determination of the IRS. This is generally consistent with the approach of 3720(B). It should be noted, however, that it can take a significant amount of time for a taxpayer to exhaust all its administrative and judicial remedies with respect to a Federal tax debt. In any case, Treasury should have the authority and the flexibility to determine additional standards for consideration of a tax debt to be in delinquent status. For example, it might be appropriate to exclude delinquencies of nominal amounts. Regardless of how precisely a tax delinquent account is defined, significant procedural and systems changes would be necessary for the IRS to be able to track, analyze, and communicate the information necessary to implement the provisions of the bill. At least initially the process would involve labor incentive analysis of each relevant taxpayer's account. The IRS preliminarily estimates that the procedural changes could take at least 18 months to implement. Automation of this process, if possible, would require significant systems changes on top of the IRS' already planned modernization efforts and could be years off. We have had additionally suggested technical modifications to the bill which we have shared with the majority and with minority staffs and we look forward to working with the subcommittee in developing these proposals. In general, Mr. Chairman, in light of Treasury's policy and technical concerns with the bill, we suggest that, if it were enacted, you give careful consideration to the GAO's recommendation that it be initiated as a pilot program or some similar form. This would permit an overall evaluation of the effectiveness of the program, including its effect on tax compliance, and would provide the IRS with an opportunity to develop procedures or the systems necessary to implement this program. This concludes my prepared remarks. We look forward to working with the Congress in addressing these concerns as the legislation develops, and I would be happy to respond to your questions. Mr. Horn. Those are very helpful comments and we appreciate that. [The prepared statement of Mr. Mikrut follows:] [GRAPHIC] [TIFF OMITTED] T0748.037 [GRAPHIC] [TIFF OMITTED] T0748.038 [GRAPHIC] [TIFF OMITTED] T0748.039 [GRAPHIC] [TIFF OMITTED] T0748.040 [GRAPHIC] [TIFF OMITTED] T0748.041 Mr. Horn. Carol Covey is the Deputy Director of Defense Procurement for the Department of Defense. Ms. Covey. Ms. Covey. Mr. Chairman and members of the subcommittee, thank you for the opportunity to appear before you today to talk about the views of the Department of Defense on H.R. 4181. H.R. 4181 would prohibit Federal agencies from awarding contracts to individuals who are delinquent in the payment of a tax debt or any other Federal debt. The Department of Defense is concerned that prohibiting the award of contracts to Federal debtors may be more punitive than is necessary and that it may not accomplish the goal of providing an incentive to delinquent debtors to pay their debts but may instead be counterproductive to the prompt payment of Federal debts. It may be more effective to expand or improve existing programs for collecting Federal debt from contractors than to prohibit the award of contracts to Federal debtors. These programs ensure the government is able to recoup contractor debts in a timely manner. These programs include the ones mentioned by Ms. Lee earlier, the Treasury offset program for nontax debt, and the IRS levy program for tax debt. The Department is also concerned that compliance with this bill's requirements would compel Federal agencies to implement a contract clearance process with the Treasury Department to ensure no contract was awarded to a delinquent debtor. This process would undoubtedly delay contract awards until automated systems were implemented. DOD awards hundreds of thousands of contracts annually that could be delayed as a result, and I would like to note that Mr. Turner mentioned potentially setting a threshold at $2,500 for contract actions. That is the micro-purchase threshold. If the threshold were set at that level for the Department of Defense alone, we would estimate that the number of actions covered in a fiscal year would be about 6.3 million actions. So we are talking a large number of individual contract actions. The Department's other concerns are the definition of delinquent tax debt may not provide adequate due process for contractors, particularly if the debt is disputed. We have looked at the definition included in Treasury regulations for delinquent nontax debt, and that appears to be a very satisfactory alternative. It provides due process for debtors, including situations where the debt is disputed. We would recommend that a similar definition be considered for inclusion in the bill. The Department is also concerned that the bill could hurt small businesses. A small business that relies on the Federal Government for much of its income may be put out of business if all Federal contract awards stop. This would seem to reduce the probability that the company would be able to repay any debts it owes to the Government. The bill also currently provides an exception for contracts designated by the President as necessary to the national security. We recommend that the bill be revised to enable the Department of Defense to establish exceptions to meet national security needs rather than maintaining that authority at the Presidential level. I would add that over the past 6 years or so Congress has acted to streamline the Federal Government acquisition process. The bill as currently structured is really inconsistent with congressional reform efforts for the acquisition system. The Department of Defense would be happy, though, to work with the committee staff and with the other agencies to try to recraft the bill into something that administratively is more workable. Thank you for providing me the opportunity to present the Department's concerns with the bill and I would be happy to answer any of the subcommittee's questions. Mr. Horn. Thank you very much. Those are helpful comments. [The prepared statement of Ms. Covey follows:] [GRAPHIC] [TIFF OMITTED] T0748.042 [GRAPHIC] [TIFF OMITTED] T0748.043 [GRAPHIC] [TIFF OMITTED] T0748.044 [GRAPHIC] [TIFF OMITTED] T0748.045 [GRAPHIC] [TIFF OMITTED] T0748.046 Mr. Horn. Our last presenter is Sally Thompson, the Chief Financial Officer for the Department of Agriculture. Glad to see you here again. Ms. Thompson. Thank you, and good morning, Mr. Chairman, as well as Congressman Turner and other members of the subcommittee. On behalf of Secretary Glickman, I would like to thank you for the opportunity this morning to discuss House bill 4181. As you know, we are a steward of a $104 billion loan and debt portfolio at USDA, and we consider improving debt collection and ensuring the integrity of our loan programs to be a critical part of the mission of our agency. Your committee and staff always have recognized the significant contributions that these loan programs play in strengthening rural America. Our portfolio includes assistance for socially disadvantaged persons, farm operations, emergency disaster relief efforts, and rural housing and development projects that all require very specialized services. We are the lender of first opportunity for a broad range of Americans who cannot get assistance from other private lending institutions. We too support the intent of this act to ensure that individuals and corporations that owe debts to the Federal Government must resolve these outstanding issues before qualifying to receive additional assistance from the Federal Government. We support the provisions that exempt individuals or service providers from the requirement of this act during national disasters or national security efforts because, as you know, we do provide immediate relief and assistance in both domestic and international events. However, Mr. Chairman, USDA has serious concerns regarding this legislation's provision that require our loanmaking and contracting officers to verify or, in effect, audit with the Internal Revenue that applicants are not delinquent in Federal debt. In other words, we do require a statement that they are not delinquent; and of course if they are, we stop right there. However, this is not an audit, and we do not verify that with the IRS. This additional verification process would add significant delays to our loanmaking and contracting process. Currently, program managers rely on the instant information or they wait 2 or 3 days from the commercial credit bureaus or from the Credit Alert Interactive Voice Response system, the CAIVR system; and also we check with Social Security, who has an automated system. We attribute the portion of our low delinquency debt to these credit checks, but as you know for confidentiality purposes the IRS does not report its delinquencies to the on-line credit resources. I have put up a chart for you, and I see you really can't read it, but trying to give you some sort of an overall view of the volume of agencies, such as USDA loan processing and contracting. In the rural development mission area, farm and foreign agriculture services are our major credit agencies. In 1999, rural development delivered over 73,000 loans worth $9.9 billion to rural housing, businesses, telecommunications, distant learning projects, and also infrastructure. In addition to that, rural development has over 850 county-based offices that create and take in a lot of these loan applications. In the same fiscal year, our farm and foreign agriculture services made approximately 33,000 nondisaster-related loans for about $3.6 billion. Of this total, which is very unique in some respects, FSA made approximately 17,000 of these loans during the time of March and April to finance the production of seed for farmers. Historical records reflect that those majority of our loans are made during that period of time, and so that would say that we are very concerned about the timing and the turnaround that this would add making sure that there was money available for our farmers to get their seed in the ground at the right time. Also, we have over 2,400 offices that are also processing those loan applications; and when I am beginning to try to paint the picture is how that information would be coming in from all these different locations from all over the country. In addition to this, FSA is also responsible for administering the Commodity Credit Corporation, which aids producers through loans and purchases and payments and operations, materials and facilities in the manufacturing and marketing of agricultural products, which then also includes exports. Again, we have a timing on that, and we have made over 207,000 loans last year for a total of about $8 billion. You begin to get the picture of the magnitude of trying to get this process through IRS and the delays that it might create for us at USDA and, most importantly, for our clients that we are trying to serve. Several of the people here this morning have also mentioned about the contracting challenges, and I would agree with all of those. We face the same contracting challenges. I would certainly support the fact that you are looking at putting a pilot program in. I would certainly support the fact that you are looking at a delayed implementation because we too are concerned with systems, not only our own systems that you heard me talk about but also being able to talk to IRS systems as well. In addition to this, we also would support very strongly some sort of a cap on this. One of the things, I believe, that maybe wasn't even mentioned today but is the smart card that we use for small purchases. We have over 20,000 people at USDA that have this card. We made over $1 million worth of purchases last year. It is growing at a very rapid rate, and for us--how do you know, you know, when our people are out there buying a purchase from any number of commercial establishments, whether they have any tax debt or any of their shareholders or principal officers have a tax debt? We also buy off a GSA schedule a lot, and then in those particular cases we do not do the same verification or at least have a signed statement from the business that we are contracting with on their delinquent debt. We assume that GSA has taken care of that, and that's a concept that hasn't come up this morning as well. So in conjunction with that, Mr. Chairman, as you know, we have worked very hard over the last couple of years to get our delinquency down and collect those. We have collected over $136 million in delinquent debt this last year through the programs that were mentioned here today, the offset program and other delinquent collection tools. We have increased our collections by over 45 percent from 1999 over 1998, and that was an increase from 1997, as well; and we have also dropped our delinquency over 15 percent in the last couple of years. Of course, all of these figures, as you know, don't include the tax debt that we are talking about today; but I do think it shows that the criteria that was put in the original debt collection act is working and that it is moving right along. So, again, as I said, USDA does support the principle of the bill. We agree with both the suggestions that Congressman Turner made this morning, as well as the suggestions that have been made here by GAO, Treasury, OMB, and the Department of Defense; and I would be more than willing to answer any questions you might have. Mr. Horn. That is very helpful, as usual. I am glad so many of you are at least with it in principle. I am reminded of ``Yes, Minister,'' that great British show where the career civil servant, Mr. Humphrey, always says, ``But, Minister, we agree to that in principle.'' [The prepared statement of Ms. Thompson follows:] [GRAPHIC] [TIFF OMITTED] T0748.047 [GRAPHIC] [TIFF OMITTED] T0748.048 [GRAPHIC] [TIFF OMITTED] T0748.049 [GRAPHIC] [TIFF OMITTED] T0748.050 Mr. Horn. We will get down to the nitty-gritty in these questions. I want to first call on the gentleman from Virginia, Mr. Davis, for 5 minutes of questioning. Mr. Davis of Virginia. Thank you, Mr. Chairman. Ms. Lee, let me ask you, in looking at your testimony, you noted--you state I think toward the end, the bill defines a delinquent tax debt as a debt that has not been paid within 90 days of an assessment of a tax penalty or interest under the Internal Revenue Code of 1986. Then you say it is not clear that this definition would provide adequate due process for contractors on disputed debts. That may be right, but isn't that--when I go back to blacklisting and everything else--it seems to me that has been one of our concerns that some of the other regulations that have been proposed by OMB and the administration have not provided adequate due process for contracts. Is this a consistent view, or is this a selective view? Ms. Lee. Mr. Davis, again and one of the things I tried to emphasize was the flexibility versus the total debarment. In this case, if you get the answer back that yes you are delinquent, whether if its on a recovery program, days, weeks or amounts, the response is you cannot award a contract. Under contractor responsibility, the contractor is asked and given input as to where they are with respect to a debt. There is a requirement for the contracting officer then to discuss those issues with the contractor so they have a process. There is still a decision to be made at the end, but contracting officers have a little more input. It is not just that we got a report back that said the answer is yes; therefore, I cannot award you a contract. There is a little difference in flexibility. Mr. Davis of Virginia. Well, there is. On the one hand, though, when you talk about due process you are leaving it in the hands of a contracting officer to make a decision versus the law to make a decision, and you could argue almost that you could get a different outcome based on different contracting officers under your scenario whereas under this scenario at least it is uniform. Ms. Lee. Correct. Correct. Mr. Davis of Virginia. OK. I thought it was interesting. We are concerned about that, and that is something I think we will try to address as we move through. I want to ask some questions about the Circular A-129. This is the policies for Federal credit programs and nontax receivables. Are you familiar with it? It requires agencies to determine whether loan applicants have delinquent Federal debts, including tax debt. A-129 also requires agencies, as I understand it, to include a question on their loan application forms asking applicants if they have such delinquencies. According to GAO's testimony, agencies are not complying with this directive. Now, what I would ask you is to what extent do you think agencies are complying with the A-129 in asking loan applicants if they have Federal delinquencies? Do you have a feel for that? Ms. Lee. I don't have a good feel for that. I certainly would be happy to go back and look at the format. There is a lot going on regarding assistance agreements and trying to make that more accessible to agencies from a standardized format, particularly in grants. I would be happy to look at that and see how we can address that. Mr. Davis of Virginia. In addition to that, what steps do agencies generally take to ensure that loan applicants are not delinquent on their tax obligation, or is that just ignored right now as a matter of course? Ms. Lee. Specific tax---- Mr. Davis of Virginia. I will ask anybody else if they would like to address either one of those, too. They may better have a better familiarity in some of the other departments that are doing this hands on every day. Ms. Thompson. Mr. Congressman, when we take a loan application, as it says in the A-129 Circular, there is a question on there that asks, Are you delinquent on your tax debt? Obviously---- Mr. Davis of Virginia. Does anybody ever check that and say they are delinquent? Ms. Thompson. Occasionally, yes. And quite often those are the same ones that show up on the credit checks that we do, and they are delinquent in other areas of debt as well. My point, in my testimony, was that we don't verify or audit that; and this would require that, and then we got into the processing. Mr. Davis of Virginia. Don't you argue--that's pretty burdensome to go through and audit all of that, isn't it? Isn't it? Ms. Thompson. Yes, that's what I was saying and certainly until we get the systems in place and we can electronically transfer that information, I tried to give you a feel of the thousands of locations that are making loans. Mr. Davis of Virginia. Well, let me ask this--and I will ask this to everybody--are agencies contacting the IRS to ascertain the creditworthiness of Federal loan applicants? Ms. Thompson. No, they are not. Mr. Davis of Virginia. OK. Nobody is doing that right now? Ms. Thompson. Nobody is verifying the information. We ask for tax returns as well, and we get copies of their tax returns. But do we verify those were the actual ones filed with the IRS? No. Mr. Davis of Virginia. OK. Does everybody agree with that, it is not done as a general rule? To what extent does the Department of Agriculture screen loan applicants to determine whether they are delinquent on other nontax debts? Ms. Thompson. Every application is verified either through the credit bureau or that CAIVR system. Mr. Davis of Virginia. How often do you find the loan applicants are delinquent on other Federal nontax debts? Ms. Thompson. I couldn't answer that percentage as well. I would suppose probably about 20 percent maybe. Mr. Davis of Virginia. OK. I think my time is up. Thank you. Ms. Thompson. Remember the type of clientele that we are doing. We call this our lender of first opportunity. Others call it the last opportunity. Mr. Davis of Virginia. I understand. Thanks. Mr. Horn. I yield 5 minutes of questioning to the author of the bill, Mr. Turner of Texas, and then we will go back to Mr. Ose and Mr. Davis. Mr. Turner. Thank you, Mr. Chairman. I think Mr. Davis has perhaps uncovered something we all needed to hear about because apparently we are not doing a very good job of implementing the current A-129 OMB Circular. It would seem to me that it is important here to be sensitive to the concerns of the Treasury and the IRS in terms of implementation, and I want to work with you to accomplish that. But I don't--somebody testified just a minute ago that the IRS was performing about 2 million of these type of checks a year. I forget which witness said that. Mr. Mikrut, what was that reference to? Mr. Mikrut. Sir, that is with respect to consents, where the taxpayer consents for the release of his tax information to someone else; and that often happens, for instance, if you are looking for a home mortgage, you may give a consent to the bank that they can ask the IRS for certain tax information. Mr. Turner. So when they talk about increasing the burden on the IRS, they are already doing 2 million of these type of searches a year now? Mr. Mikrut. That is correct. Mr. Turner. So it is our obligation, I guess, to try to figure out what the additional burden is going to be here? It is not that the IRS is not doing this. I guess a lot of it is being done manually, done by hand, without the use of some realtime computer system that would give you the answer immediately? Mr. Mikrut. That is correct. The consent request is generally a manual paper-type of process; and to the extent you would expand that, for instance, under the student loan application, there may be another 10 million of these such requests. As you know, some sort of system that would be more automated would probably be much more efficient. Mr. Turner. All right. I think I tend to agree with you with regard to trying to fine tune our definition or use of the word ``assessment.'' You know, in the bill as originally drafted, we talked about 90 days after the assessment of a tax or penalty; and we also said we were not including debts that were the subject of an installment agreement or a compromise in settlement. Obviously, from what you are saying, we haven't quite gone far enough to ensure that we are not cutting off some taxpayer's right to exercise another step in the appeal process, and we want to clear that up because I don't think any of us have any intent of cutting off anyone's right to appeal to the last step when they have no other recourse and they owe the tax. Ninety days after that is when we want to bar them from Federal contracts or loans. So help us on that, to get over that hurdle. With regard to the Department of Defense's concerns, Ms. Covey, I wanted to ask you, you mentioned if we exempt the $2,500 and below, which I think is an appropriate suggestion, it has been said by several witnesses because you can go in with a government credit card and purchase something under $2,500 and obviously we can't check whether those particular vendors owe taxes or not, but you mentioned there were 6.7 million actions, you said. Ms. Covey. 6.3 contract awards, 6.3 million contract awards over $2,500. Mr. Turner. How many contractors are there as opposed to contract awards? What we are checking here are contractors, not contracts, however many you have every year. How many contractors? Ms. Covey. But we have to do it on a contract-award by contract-award basis, I mean unless you are suggesting, for instance, that if we annually checked for a particular contractor that might be sufficient as well. Right now we estimate that we are doing business with about, 180,000 contractors annually. We have a central system by which we register them, and that estimate is based on how many are registered in the system. Mr. Turner. Well, work with us on this, because obviously we would like to check out the contractors, not every contract. If there are 6.3 million of them. Perhaps we can do a semiannual check and be sure these contractors are paying their taxes or something like that; would be more plausible, I think. As you know, we put a provision in the bill allowing this bar in this legislation to be waived in the interest of national security. We said the President should do it. You suggested it ought to be in the Department of Defense. We don't object to that. Frankly, I kind of felt like when we put in an exception for national defense we put a hole in the bill you can drive a truck through anyway by the Pentagon, so work with us. We are trying to not get in your way. We are just trying to be sure we accomplish the goal that we all concur on. Ms. Covey. We appreciate that. Mr. Turner. I think that most of the issues that were raised today were very legitimate ones, and I think that we can, as the staff continues to work with you, resolve every one of them. I don't see any of them that are insurmountable. The one I am going to struggle with the most is information that reveals that the IRS doesn't have the technical capability to provide this information timely, and I really need to look into that further. I do think a pilot program of some type with an effective date at a later time for full implementation is probably the right way to go. Thank you, Mr. Chairman. Mr. Horn. Well, we thank you and there will be further rounds here. Five minutes for Mr. Ose, the gentleman from California. Mr. Ose. Thank you, Mr. Chairman. Ms. Ashby, I want to make sure I understand something that I think you said, and that is that OMB agrees with a connection between awarding additional contracts to nontax delinquent debtors? I wasn't quite sure if I understood you correctly. Ms. Ashby. No, I did not say that. I was talking about OMB Circular A-129 that requires agencies--or directs agencies--to check on the delinquency status of prospective loan applicants. Mr. Ose. OK. Does GAO have a position regarding the concept of barring delinquent taxpayers from receiving Federal contracts? Ms. Ashby. Well, as I said in my short statement and as we said in our longer statement for the record, we agree in concept to the barring of delinquent taxpayers. Mr. Ose. OK. Ms. Ashby. But we also recognize that there are key significant implementation issues that need to be resolved, and many of those have been talked about here this morning. Mr. Ose. Your testimony here this morning also talks about unpaid payroll taxes, which I find one of the most egregious examples of nonpayment. It just kind of drives me nuts. Your testimony highlights an estimate of $49 billion in unpaid payroll taxes as of September 30, 1998 owed by over 1.8 million businesses? Ms. Ashby. That's correct. Mr. Ose. And this is not a unique occurrence for about 50 percent of those businesses. Ms. Ashby. That's right. For about 50 percent, they owed for more than one tax period, more than one quarter. Mr. Ose. I just wanted to make sure I understood the scope of the issue here. Ms. Lee, I want to go to a question about one of the things you mentioned. You said that in 1998 there were about $60 billion worth of nontax outstanding obligations, and that by 1999 that had been reduced to $53 billion. For that I want to applaud you. I do want to explore that number a little bit. Did we actually collect $7 billion in that period of time? Ms. Lee. Well, I can get you the exact figures, but we have reduced the debt. That could be collection as well as dismissals or for some reason resolution that we weren't going to collect. So I would have to get you the exact number and say whether it was collected. [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T0748.051 Mr. Ose. So it is not necessarily that we have $7 billion that we didn't have any more; it is that we have either negotiated, been paid or settled? Ms. Lee. Correct. Mr. Ose. $7 billion? Ms. Lee. Correct. Mr. Ose. We might have only had $1 billion? We might have taken 10 cents on the dollar? We might have gotten a dollar, but we might have only taken 10 cents, too? Ms. Lee. Correct. Mr. Ose. OK. Ms. Lee. Some sort of resolution for that $7 billion. Mr. Ose. OK. I just wanted to get it clear in my head that, while the face value of the outstanding amount has reduced, it doesn't mean we have actually put in our pocket a whole bunch more money. Ms. Lee. Right. Mr. Ose. OK. I appreciate that. Ms. Covey, you testified there were 6.3 million contract awards at the DOD that would be subjected to the $2,500 threshold. How many would be subjected to the $100,000 threshold? Ms. Covey. Less than 100,000 actions. Mr. Ose. So we basically have like a 97 percent reduction? Ms. Covey. Right. Mr. Ose. So that would go to 100K. Then in the ag department, Ms. Thompson, how many contracts, if you will, would be affected? Like the DOD has 6.3 million different awards that would be affected if the threshold was set at $2,500. At the ag department, how many are we talking about? Ms. Thompson. I would say probably about 157,000, and about 500 contractors throughout the country. That threshold would certainly, as we said, do away with credit card transactions. Mr. Ose. If we went to the $100,000 threshold, how many would we have? Ms. Thompson. I would have to get you that number. Mr. Ose. If you could, please. Ms. Thompson. We do an awful lot of small business. As OMB talked about, probably 41 percent of the contracting business we do are with small businesses so, you know, off the top of my head I would say that it would eliminate a large percentage of those, maybe as much as 50 percent; but I would have to go back and look. Mr. Horn. Without objection, that letter to the committee and Mr. Ose will be put in the record at this point. Mr. Ose. Thank you, Mr. Chairman. My time is up. Mr. Kutz. Congressman, can I make one point with that? I think it is important to note that most of the 1.8 million businesses that owe those taxes are indeed small, closely held businesses, restaurants, construction companies, etc. So in looking at this threshold, it is important to consider that probably most of the delinquent taxpayers are indeed getting very small contracts in all likelihood. I just wanted to make it understood that the 1.8 million taxpayers are indeed very small businesses. Mr. Ose. If I could have just a moment, Mr. Chairman. Mr. Horn. Sure. Mr. Ose. You bring up an interesting point in that if we have small businesses who are not paying their employee taxes and we set the threshold at $100,000, then how do we keep from rewarding those people who aren't paying their employee taxes? Are you suggesting we need a stable---- Mr. Kutz. I am suggesting that the problem is with small businesses so that you need to be cautious in setting a threshold too high so that you are going to--I mean, the big businesses in this country are generally compliant taxpayers. The defense contractors, such as General Dynamics and General Electric and the other ones that are going to do much bigger contracts, they are not the ones that are the problem here. It is generally small businesses we are talking about. Mr. Ose. I am trying to figure out how to scale the enforcement mechanism, if you will. So I appreciate you bringing that up. That's a good point. Mr. Horn. The gentleman from Texas, Mr. Turner, for 5 minutes. Mr. Turner. Thank you, Mr. Chairman. Mr. Mikrut, I want to talk to you about a couple of your other suggestions. I think we have resolved that we can come up with language that clears up what we mean by assessment, or do that. I don't see any great problem there. Your suggestion about limiting the examination of shareholders to those who own 25 percent of the shares of stock in a corporation, I think I mentioned I had suggested 10. Do you see any reason, big reason, to choose 10 or 25? Mr. Mikrut. No, Mr. Turner. It is just a matter of how much more of a burden you would have on the administrating agencies and the IRS, but I think there should be some threshold for partnerships as you do have for corporations. I think that would be appropriate. Mr. Turner. OK. With regard to the way we carried out the disclosure, our intent here was to be sure that the taxpayers who get loans from the Government and contract with the Government knew that when they contracted or when they apply for a loan, that somebody is going to check and be sure they are current in their Federal taxes. I think I understand why you have suggested we go under 6103(l)(3), and I don't think there is any reason to object to going that route. If we do what you suggested in your written testimony when you said in order to protect taxpayer privacy the amendment to section 6103(l)(3) should make explicit that disclosures to contractors of the agencies administering the loans or entering into contracts will be permitted for purposes only of this provision subject to the contractor's agreement to otherwise maintain the confidentiality of the information and subject to the agency's demonstrated oversight of its contractor's compliance with the safeguard requirements of 6103(p)(4) and to the Secretary's satisfaction, and we need some help in drafting that language. If we already are required under the OMB circular to find out if somebody is current in their taxes, I assume that there is some kind of disclosure process currently ongoing saying that before you get this loan you have to be current in your taxes. So it seems to me that if we extend that to parties that contract with the Government, that we have probably done all we should have to do to assure that the taxpayer who is the contracting party or who is the loan applicant knows that there is going to be a check to be sure that they are in compliance with this statute. Does that seem satisfactory to you? Mr. Mikrut. I believe so, Mr. Turner. As I understand it, your concern is that the loan applicant or the contracting party should be aware that questions are going to be asked of the IRS regarding their tax status. And you can do that under 6103(l)(3) simply by putting that provision in the contract or in the loan application or some place there, so that the taxpayer knows that's going to happen. It does not have to be done under 6103(c) under the consent form, although they clearly have notice under consents. It is really a technical tax distinction which subsection you come under, but we think we can accomplish your goals regarding taxpayer notice as well as our goals regarding taxpayer privacy by simply putting it under (l)(3). Mr. Turner. Well, work with us on that. I think your suggestions are well taken. It is an interesting discussion we have had this morning because I almost feel like that it is like a fellow who is walking along and he stumbles into a hornet's nest and the hornets are going everywhere because the truth of the matter is that we have had the requirement in law, not in law but in OMB regulations since January 1993, requiring agencies before they make a loan to find out if somebody owes Federal taxes. And it doesn't sound like to me, from the answers to Mr. Davis' question, that we are doing a very good job of carrying out that OMB circular that's been out there since 1993. So perhaps that having stumbled into that hornet's nest, it is good we have the opportunity to at least understand that we have a ways to go. And by reaching out and covering tax debt in a more formal way than the OMB circular on loan applicants and extending it to government contractors perhaps might get us in a position where what common sense would tell us becomes reality, and that is if you owe taxes to the Federal Government you shouldn't get the benefits of Federal contracts, nor should you get the benefits of Federal loans. I think we can resolve the Department of Defense problem, and I look forward to working with you, Ms. Covey, to do that. Mr. Chairman, thank you for the opportunity to have the hearing this morning. Mr. Horn. Well, we thank you. The gentleman from California, Mr. Ose, do you have further questions? Mr. Ose. Thank you, Mr. Chairman. I did want to cover a comment. I want to commend our friend from Texas for his good work on this. I think he has come across something that I think will be a useful tool in ensuring that. For instance, we get the employee taxes that are supposed to have been collected and to which employees have basically contributed half from their pay as it relates to Social Security, if nothing else. So I want to compliment Mr. Turner on that. I also want to associate myself with the--I don't want to say the amusement, but the irony or the conundrum we face as it relates to the blacklisting issue that Ms. Lee and Mr. Davis and I have discussed on separate occasions as reflected in her testimony today. It did not escape us in my office either, the contradiction, if you will, that seems to be there--it probably isn't, but appears to be there--in the testimony as it relates to the blacklisting issue. So with that, Mr. Chairman, I will yield back. Mr. Horn. Well, thank you. I have a few closing questions here directed at Ms. Ashby and Ms. Lee. In March 1992, during the House Ways and Means Committee hearing, the General Accounting Office said this that in considering the issue of whether tax compliance should be a prerequisite to awarding a Federal contract, ``The goal of ensuring that Federal contractors comply with tax laws must be balanced against other national goals.'' Now, Ms. Ashby, I am curious. In your testimony today, you state that the GAO supports the concept of barring delinquent taxpayers from receiving Federal contracts, and I am curious what caused the General Accounting Office to change its views on this issue since 1992. Ms. Ashby. I don't think we really have changed our views and let me explain. In 1992--and I am very familiar with that testimony because I was an assistant director working for Jennie Stathis who testified, and I probably wrote parts of that testimony, the part dealing with the Federal contractors. And the testimony was delivered in the context of work that we had done where we had actually looked at--compared Federal contract amounts, award amounts, with IRS' records of unpaid taxes, not just payroll taxes. We had numerous examples of contractors who were, in fact, delinquent, who seemed to have resources that could have been used to pay off some of the debt; and our primary focus on that work was to determine how much money IRS might collect by levying the contract payments. In the course of doing that work and discussing our results, it became obvious that, well, there are numerous cases where there are actually delinquent taxpayers benefiting from Federal contracts and should that be, was sort of the issue we raised. But at the same time, we saw that there were other policy issues. Implementation issues, policy issues--I think the words probably mean a lot of the same things--and we recognized at that time and today that there are numerous public policy goals, one of which is to collect delinquent taxes. And there are others including acquiring goods and services in a cost effective and efficient manner, securing the national defense and so forth. So it was then and now a recognition that there are multiple issues here that need to be resolved, and we at GAO can't make a recommendation, just as at this point I don't think anyone feels that they can make a recommendation for the answer to this problem. But it is an evolutionary process that we are going through, and we are getting various viewpoints; and we will get to a workable solution, I am sure. I think back in 1992 and perhaps even before that, we were pretty much where we are today, that we recognize that there is an issue here. There is an issue of fairness; there is an issue of providing public benefits to those who are not fulfilling their public responsibilities. Mr. Horn. Well, I think that's well said. Ms. Lee, do you agree with the GAO's position on this issue? Ms. Lee. Yes. There is the balance and how do you take into account all of this information and make sure you apply it to relevancy, and how do we make sure that those receiving the Federal benefits, in some case if we really need their product or service or whatever, that we then employ the offset so that we can also recover? It is an interesting balance on how do we make sure that we have those policy issues all moving forward together. Mr. Horn. Well, I would ask the whole panel here, what is your guess, in your agency, do the benefits associated with this bill outweigh the added costs of the procurement process that were identified by some of the witnesses and some of the statements from various potential witnesses that will be put in the record later? I am just curious. Agriculture, Department of Defense, Treasury, how would you answer that question, the cost-benefit ratio? Ms. Covey. You are saying the cost-benefit ratio---- Mr. Horn. Right. Ms. Covey [continuing]. For the Department of Defense as the bill is structured right now? Mr. Horn. Right. Ms. Covey. I think it fails the test. I think the costs associated with the revised process versus the limited benefits to be gained from the bill, I just don't think it meets the cost benefit test. That's why the Department had proposed that we use the systems we already have, the offset system that Treasury administers for nontax Federal debt and the IRS levy program for tax debt and that we look at expanding those systems because we feel that they impact the process, the procurement process, much less than would this type of clearance process. Ms. Thompson. I believe that the cost benefit would certainly be reduced significantly in terms of administrative burden once the IRS had an electronic process where we could send the names in electronically and they could then, within a 2 or 3-day turnaround time, get back to us. As I mentioned, I am really concerned about farm loans and the amount of the workload during the months of March and April. I think more the cost of it is--the administrative cost is significant, but I think the cost of not getting the money into the farmers' hands, how do you evaluate that? How do you put a dollar amount on to that? That becomes significant. I think when we talked about loans, mortgage loans, if you think of the amount of time it takes to get a mortgage loan to the private sector, and then you add to that the type of clientele that we are serving out in rural America, you begin to see the amount of the costs there as well. I am also concerned, of course, as we have talked, Mr. Chairman, about the administrative staff and how that has shrunk so significantly over the last few years, and then you add the burden to that of more administrative work on them, which would then impact the delivery of programs. Mr. Horn. Well, do you have any studies where you can give us a cost-benefit ratio with some evidence? Ms. Thompson. No. Mr. Horn. I would ask that of the Department of Defense also. This is off the top of the head, I think, isn't it? Ms. Covey. Yes, this is off the top of my head. No, we have no studies to support this. Mr. Horn. OK. And to what extent are your records electronically available so you could send them over to IRS for that 1 day, 2 day quick that Ms. Thompson is talking about? Ms. Covey. It may be in Department of Defense we are a little bit unique because we have a contractor registration system that's on-line. We can give the IRS access to that system. It contains taxpayer identification numbers for every contractor we do business with, other than those where we use the purchase card. So we may be unique in that regard, but we could certainly make that information available to the IRS. I think an alternative that maybe wasn't discussed this morning was whether the IRS could put up some sort of on-line system where the agencies could automatically access this information on-line. Again, I think that would resolve a lot of the implementation problems associated with this sort of process. Mr. Horn. Any comments from the Treasury? Mr. Mikrut. I think with respect to the on-line program Ms. Covey mentioned, it would be interesting. I think it would be a great deal of work to get that in a place where it could be effective. Finally, I think in general, with respect to taxpayer disclosures, we try to limit as many taxpayer disclosures as possible. I think there would be a real concern if the tax information of all taxpayers was suddenly available to any one agency. For instance, the IRS in the past had put in place implementations to restrict what is known as ``agent browsing,'' that they just can't simply look through taxpayer records without a sufficient reason to, and we have concerns in that respect if all taxpayer information made was available to all Federal agencies. Mr. Kutz. Mr. Chairman, let me say something on this, too. I think Congressman Turner's bill provides a preventive control rather than a detective control, and there are some significant benefits to preventing taxpayer delinquencies from ever getting into IRS' records. You are aware that IRS has records of $231 billion of unpaid taxes, and there is a significant cost to IRS carrying those records over the course of 10 years. So to the extent that you can prevent delinquencies, you do save the Government some of the administrative costs, incurred by the IRS, including sending out all the various notices and you know all the administrative debt collection processes you have heard discussed today by the various witnesses. To the extent you don't let taxpayers become delinquent, you eliminate those costs up front. So the bill has a significant benefit not only from the preventive side but for future compliance, which you can't quantify. Mr. Horn. I think you are absolutely correct on that. What got me started in this business in 1995 was in the Farmer's Home Administration where this multimillionaire had a ranch. He hadn't paid back the mortgage, and he then moved to Santa Barbara, a rather posh place; and he gets another loan to the millions and doesn't pay that back. How do you let this person get away with it and just sit there? So I would hope that if you have some real data here as to the impact, fine; but I don't see it when millions are going down the drain and nobody is doing anything about it. At least that's the way it sounds in part of the testimony this morning, that well, you know, we have a problem and so forth and so on. I think Mr. Kutz is saying if the word gets out, don't mess around with the Federal Government if you have a contract. We know a lot of the major defense contractors have--very little taxes are paid. They have numerous ways to get out of it. We ought to be taking a look at that; and the taxpayers that do pay their bills and pay their taxes would sure appreciate it, in other words, the average citizen. Would the gentleman from Texas have any further questions he would like to ask this panel? Mr. Turner. Mr. Chairman, I just thank you again for the opportunity to have the hearing, and I thank all the witnesses and will continue to work with them to try to come up with a piece of legislation that accomplishes our goals in the least obtrusive and burdensome manner. Thank you, Mr. Chairman. Mr. Horn. Well, we thank you. Let me put a few documents in the record of witnesses that could not be with us today. One is from the National Defense Industrial Association. One is from the Aerospace Industries Association. One is from the U.S. Small Business Administration from the chief counsel for advocacy. And without objection they will be put in the record at this point. I would like to thank the staffs, both majority and minority, for their work. I think it is a very good panel we have here, and we thank you for coming. J. Russell George, staff director, chief counsel of the House Subcommittee on Government Management Information Technology; to my left, to your right, is Mr. Kaplan. Randy Kaplan is counsel to the subcommittee. Bonnie Heald is director of communications. Bryan Sisk is our clerk. And we have for Mr. Turner, as ranking member; Trey Henderson, his counsel; and Jean Gosa, minority clerk. The court reporter is Mindi Colchico. We have two interns working their hearts out, and that's Elizabeth Seong and Michael Soon. So with that, we are recessing this hearing until 2 this afternoon. 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