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H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT

ACT; AND H.R. 1865, AMENDS TITLE 31 OF THE

UNITED STATES CODE BY AUTHORIZING A

PILOT PROGRAM FOR LOCAL GOVERNMENTS

TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX DEBTS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

ON

H.R. 1870

TO AMEND TITLE 31, UNITED STATES CODE, TO PROHIBIT DELINQUENT

FEDERAL DEBTORS FROM BEING ELIGIBLE TO ENTER INTO FEDERAL

CONTRACTS, AND FOR OTHER PURPOSES

AND ON

H.R. 1865

TO AMEND TITLE 31, UNITED STATES CODE, TO ALLOW CERTAIN

LOCAL TAX DEBT TO BE COLLECTED THROUGH THE REDUCTION OF

FEDERAL TAX REFUNDS

APRIL 19, 2007

Serial No. 110–31

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

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

(

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

——— ———

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

CAROLYN B. MALONEY, New York

BRIAN P. BILBRAY, California

TODD RUSSELL PLATTS, Pennsylvania,

JOHN J. DUNCAN, JR., Tennessee

MICHAEL MCCARTHY, Staff Director

(III)

C O N T E N T S

Page

Hearing held on April 19, 2007 .............................................................................. 1

Text of H.R. 1865 ..................................................................................................... 7

Text of H.R. 1870 ..................................................................................................... 3

Statement of:

Cornett, Mick, mayor, Oklahoma City, OK, representing the U.S. Conference of Mayors; Barbara Ford-Coates, Tax Collector, Sarasota County, FL, representing the National Association of Counties and the National Association of County Treasurers and Finance Officers; and Patricia Weth, deputy treasurer, on behalf of the honorable Francis

O’Leary, treasurer, Arlington County, VA .................................................. 65

Cornett, Mick ............................................................................................. 65

Ford-Coates, Barbara ................................................................................ 72

Weth, Patricia ............................................................................................ 93

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office; Paul A. Denett, Administrator, Office of Federal Procurement Policy, Office of Management and Budget, Executive Office of the President; and J. Russell

George, Treasury Inspector General for Tax Administration ................... 17

Denett, Paul A. .......................................................................................... 37

George, J. Russell ...................................................................................... 44

Kutz, Gregory D. ....................................................................................... 17

Letters, statements, etc., submitted for the record by:

Cornett, Mick, mayor, Oklahoma City, OK, representing the U.S. Conference of Mayors, prepared statement of ................................................... 68

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 113

Denett, Paul A., Administrator, Office of Federal Procurement Policy,

Office of Management and Budget, Executive Office of the President,

prepared statement of ................................................................................... 40

Ford-Coates, Barbara, Tax Collector, Sarasota County, FL, representing

the National Association of Counties and the National Association of

County Treasurers and Finance Officers, prepared statement of ............. 74

George, J. Russell, Treasury Inspector General for Tax Administration,

prepared statement of ................................................................................... 46

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, prepared statement

of ..................................................................................................................... 19

Weth, Patricia, deputy treasurer, on behalf of the honorable Francis

O’Leary, treasurer, Arlington County, VA, prepared statement of .......... 95

(1)

H.R. 1870, THE CONTRACTOR TAX ENFORCEMENT ACT; AND H.R. 1865, AMENDS TITLE 31

OF THE UNITED STATES CODE BY AUTHORIZING A PILOT PROGRAM FOR LOCAL GOVERNMENTS TO OFFSET FEDERAL TAX REFUNDS TO COLLECT LOCAL TAX DEBTS

THURSDAY, APRIL 19, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 1:10 p.m. in room

2154, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the subcommittee) presiding.

Present: Representatives Towns, Bilbray, Platts, and Duncan.

Also present: Representative Ellsworth.

Staff present: Michael McCarthy, staff director; Velvet Johnson,

counsel; Cecelia Morton, clerk; John Brosnan, minority senior procurement counsel; Edward Kidd and Kristina Husar, minority professional staff members; John Cuaderes and Larry Brady, minority

senior investigators and policy advisors; and Benjamin Chance, minority clerk.

Mr. TOWNS. Welcome to today’s legislative hearing on two bills

related to tax collection. One bill is the Contractor Tax Enforcement Act, which would prohibit award of contracts to companies

that are seriously delinquent in paying taxes. We will also examine

a bill introduced by Representative Tom Davis of Virginia, which

authorizes a pilot program of local governments to offset Federal

tax refunds to collect local tax debts.

I ask unanimous consent that the gentleman from Virginia, Mr.

Moran, and the gentleman from Indiana, Mr. Ellsworth, participate

in today’s hearing. Both have been working on the issue we will

consider today. Without objection, so ordered.

As American citizens file their taxes this week, they expect the

Government to enforce the tax laws fairly and efficiently. Efficiency

means that one part of the Government shouldn’t pay out money

to people or businesses that owe tax debts until those tax delinquencies are cured. Unfortunately, the Government frequently

writes checks to people, even as their tax debts go uncollected.

These two bills are designed to stop that.

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Contractors owe the Federal Government billions of dollars in delinquent taxes. My bill seeks to close this tax gap. GAO studies

over the past few years have identified more than 50,000 contractors owing nearly $8 billion—that is B as in boy—unpaid Federal

taxes.

If the sheer size of those numbers doesn’t take your breath away,

the details certainly will.

One of the largest categories of tax debts is unpaid payroll taxes.

These are amounts deducted from workers’ paychecks for Social Security, Medicare, and individual income taxes, but never forwarded

to the IRS.

Companies that don’t remit these withholdings are defrauding

not only the taxpayer, but also their own employees. Yet, these

companies are receiving millions of dollars in Federal contracts.

One alarming example involved a contractor that provided services such as trash removal, building cleaning, and security to U.S.

military bases. Although the company had revenues of over $40

million in 1 year, with over 25 percent of this coming from Federal

agencies, it owed outstanding payroll taxes and defaulted on an

IRS installment agreement. Meanwhile, the owner was receiving a

six figure income and had borrowed nearly $1 million from the

business. The business also made a down payment for the owner’s

boat and bought several cars and a home outside the country.

The Contractor Tax Enforcement Act would stop these egregious

practices by requiring that tax compliance be a prerequisite for receiving a Federal contract. This bill would prohibit new awards to

contractors who are seriously delinquent in paying taxes and authorize the IRS to inform contracting officers of the delinquency

status of the applicants.

I realize the administration has proposed a rule that is similar

in many ways to my bill, but I do believe the administration’s proposal does not go far enough. For example, it relies on self-certification by contractors that they are complying with tax laws, but

has no verification of this fact through the IRS.

Based on the examples we have found, I don’t think we can simply take some of these companies at their word. With a mounting

Federal budget deficit and rising obligations, the Federal Government cannot afford to leave billions of dollars in tax revenue uncollected.

But these benefits of my bill go beyond just collecting more

money for the Government. The bill will provide a level playing

field for contractors that comply with our laws, who have to compete with companies that have lower costs because they are dodging their taxes. This is a serious concern that I have heard from

responsible contractors over the years who support approaches like

mine that target the bad actors, rather than pose burdensome requirements on all contractors.

I look forward to hearing from our witnesses and gaining their

perspectives as we work together to find a workable solution to

something that we can all agree is a continuing problem.

Let me say that I am pleased to co-sponsor this bill with Tom

Davis of Virginia, who, of course, has had a special interest in this

for a long, long time. It is my honor to work with him on it.

[The texts of H.R. 1870 and 1865 follow:]

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Mr. TOWNS. At this time I would like to yield to the gentleman

from Indiana for remarks at this time.

Mr. ELLSWORTH. Thank you, Mr. Chairman.

I didn’t prepare a statement, but I would like to thank you for

allowing me to join you today for such an important issue and to

talk about this subject.

When I had Mr. Kutz in my office a few weeks ago, one of the

first things, when I was elected to Congress, that really caught my

attention, the amount of outstanding taxes for people that were

still getting Government contracts. I don’t think the people in Indiana appreciate it. I pay my taxes, I am sure everybody in the audience pays their taxes, and so should the people that are receiving

Government contracts.

I appreciate your letting me be a part of this hearing. I look forward to the testimony.

Mr. TOWNS. Thank you very much.

It is a longstanding policy of this committee that we swear our

witnesses in.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect that all responded in the affirmative.

Let me introduce the panel, and we will move forward.

Gregory Kutz is a Managing Director of the Government Accountability Office. He leads GAO’s Forensic Audits and Special Investigations Unit, which conducts the most complex investigations

of fraud, waste, and abuse. Mr. Kutz has managed GAO’s work on

contractors’ abuse of the Federal tax system and he has prior experience with financial and operational management issues at the Internal Revenue Service.

Paul Denett is the Administrator of the Office of Federal Procurement Policy at OMB, where he is the point person for the administration on issues of Federal contracting and acquisition. He

has held a number of posts as a senior executive in acquisition in

the Federal Government and the private sector.

Russell George is the Treasury Inspector General for Tax Administration, which means he is responsible for audits and investigations of the Internal Revenue Service. Before becoming an Inspector General, he served for several years as staff director of this subcommittee. Welcome back.

Your entire statement is in the record, gentlemen, of course, and

I would like to ask that each witness summarize your testimony in

the time provided. Of course, most of you know how the light

works. The yellow light means your time is running down and getting close to the end, and the red light means that you are now violating the rules and that you are going overboard. We will try to

be a little flexible and generous with the time, but we do want you

to be able to try to get it in within 5 minutes.

I would like to clarify my remarks. Tom Davis has not yet signed

on as a co-sponsor of my bill, H.R. 1870, but I am hoping that he

will do it in the very near future. Of course, knowing him, and he

believes in good government, it is the kind of bill that he would

want to be identified with. Let me just say that and leave it alone.

At this point I would like to start with you, Mr. Kutz, and just

come right down the line.

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STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR,

FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; PAUL A. DENETT, ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET, EXECUTIVE

OFFICE OF THE PRESIDENT; AND J. RUSSELL GEORGE,

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

STATEMENT OF GREGORY D. KUTZ

Mr. KUTZ. Mr. Chairman and Congressman Ellsworth, thank you

for the opportunity to discuss Government contractors with tax

problems.

My testimony today summarizes our past work on Department of

Defense, civilian agency, and GSA contractors. Specifically, our

past investigations identified 27,000 DOD contractors with $3 billion of unpaid taxes, 33,000 civilian agency contractors with $3.3

billion of unpaid taxes, and 3,800 GSA contractors with $1.4 billion

of unpaid taxes. These numbers are substantially understated because they exclude under-reporting of income and non-filing of required tax returns, which we have seen in certain contractors. According to the IRS, under-reporting of income is the largest component of the over $300 billion net tax gap.

As part of our work we performed in-depth investigations of 122

of these contractors, including the owners, officers, and any related

companies. For all 122 cases, we found abusive and potentially

criminal activity related to the Federal tax system. Many of these

companies had unpaid payroll taxes, which, as you mentioned, Mr.

Chairman, represent amounts withheld from an employee’s wages

for Social Security, Medicare, and individual income taxes. Willful

failure to remit payroll taxes to the IRS is a felony.

Most of the individuals that we investigated have made careers

out of not paying their Federal taxes. Schemes used to avoid paying taxes include: under-reporting of income and non-filing of required tax returns; large cash withdrawals and loans to owners

and officers that were never repaid; closing the entity with tax debt

and opening another with a similar name at the same address; and

large cash transfers to foreign bank accounts or to purchase a

home in the Caribbean.

Some of the owners of the contractors that we investigated were

simply poor business managers. Rather than pay their taxes, they

chose to pay their utility bill or the rent. However, many accumulated substantial personal wealth at the same time they failed to

pay their Federal taxes.

The posterboard shows examples of the multi-million-dollar

homes and luxury vehicles that we identified. They are also shown

on the monitor. Other interesting assets include: a professional

sports franchise, a shopping mall, a high-performance aircraft, and

a $25,000 men’s bracelet.

Our current and past investigations have shown that failure to

pay Federal taxes isn’t the only problem these individuals have.

For example, we identified substantial other debt, including State

and local taxes, personal income taxes, and delinquent student

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loans and child support payments. Criminal activity included assault, embezzlement, money laundering, burglary, and check fraud.

The companies we investigated were typically small-to mid-sized

and closely held. Industries ranged from building maintenance,

construction, and manufacturing, to security, weapons systems,

and health care. Ironically, these potential felons are doing business with the Department of Justice and Homeland Security.

These facts bring us to the key question of this hearing: what is

being done to prevent the most egregious contractors from doing

business with the Federal Government? For the 122 cases that we

investigated, the answer is nothing. Current Federal law does not

prohibit tax deadbeats from getting Federal contracts.

In conclusion, we strongly support prohibiting contractors with

serious tax problems from doing business with the Federal Government. It is a matter of fairness, ethics, and just plain common

sense. The vast majority of Federal contractors pay their Federal

taxes, and I expect they would support a law that prevents tax

cheats from getting Government contracts.

Also, if we can’t trust these contractors to pay their Federal

taxes, then how can we trust them to secure Federal buildings,

manufacture parts for the space shuttle, and provide health care to

our wounded warriors?

Mr. Chairman, I believe most of your constituents would find it

hard to believe that the hard-earned money we collect from honest

American taxpayers is being used to bankroll deadbeat Government contractors.

Mr. Chairman, this ends my statement. I look forward to your

questions.

[The prepared statement of Mr. Kutz follows:]

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Mr. TOWNS. Thank you very much, Mr. Kutz.

Let me yield to the ranking member at this time for any opening

statement or any comments he might have.

Mr. BILBRAY. Thank you, Mr. Chairman. I apologize for my tardiness, but the California Delegation, being a small, intimate group

of 53 members, can drag on sometimes.

I would like to say that this is an issue that we need to address.

If nothing else, we need to air the issue.

As somebody who grew up in a family that was involved with a

tax practitioner business, I always try to remind all of us what the

Government may think we owe and what we do owe many times

is two distinctly different things. I think we need to make clear

here that no one is proposing, hopefully, that we pre-determine

what somebody, even a contractor, owes without the due process of

the review process that the tax codes allow. We are talking about

people here who have basically ignored a liability that has been adjudicated or authorized and identified.

I think, Mr. Chairman, when we talk about people that feel that

the tax code doesn’t apply to them, child support laws don’t apply

to them, we are really talking about a segment of society that really has promulgated this culture of corruption that somehow everybody is breaking the rules so it is OK for me to break the rules.

I think that it is quite well within our realm to consider the fact

that being a contractor in any form, let alone with Government and

especially the Federal Government, is not a right, it is a privilege,

and that, even if it was a right, those rights can be negated by the

violation of the law by not fulfilling the requirements, the minimum standards of requirements that apply across the board to the

general population.

I look forward to working with you, Mr. Chairman, on this item.

I think that we need to make sure that a good idea addressing a

bad problem is implemented in the appropriate way.

In all fairness, as we address this concern, we have to remember

that not everything we do to address a grievous wrong is the right

thing to do. We have to do it the right way in the right manner

to take care of the problem without creating bigger problems.

I really think that this is something that is long overdue to be

addressed. I appreciate the chance of your having this hearing, Mr.

Chairman. I look forward to the rest of the testimony.

Mr. TOWNS. Thank you very much, Congressman Bilbray.

Mr. Denett.

STATEMENT OF PAUL A. DENETT

Mr. DENETT. Chairman Towns, Representative Bilbray, and

members of the subcommittee, I appreciate the opportunity to appear before you today to discuss how the Federal acquisition system can be used to improve tax compliance by Federal contractors.

The administration agrees with the subcommittee’s goals to reduce contractor tax delinquency and improve tax compliance. This

is a shared value and responsibility that requires Government-wide

attention, and, as the Administrator for Federal Procurement Policy, I will discuss ways the community is increasing compliance

and address the practical issues associated with implementing the

proposed Contractor Tax Enforcement Act.

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Increasing tax compliance: following the February 2004, report

by the Government Accountability Office regarding Defense contractors that abused the Federal tax system, the Office of Management and Budget participated on the Federal Contractor Tax Compliance Task Force to improve the sharing of information between

the Internal Revenue Service and other Federal agencies, specifically the Department of Defense, for the purpose of collecting unpaid taxes.

The Task Force, which has become a semi-permanent entity dedicated to improving contractor tax compliance, made significant and

permanent improvements to policies and processes that directly result in increased debt collection.

For example, IRS and other Federal agencies now share information electronically to identify contractors that should be subject to

the Treasury Department’s Federal payment levy program. Delinquent contractors are identified, and their Government payments

levied. Alternatively taxpayer identification numbers, TINs, that

are entered in the central contractor register data base, which is

the Government’s principal repository for contractor banking information, are validated to ensure that contractors subject to the levy

program are correctly identified, ensuring that the names and TINs

of the contractor match, increase the number of payments available

for levy.

The IRS is now using data from the Federal procurement data

system to identify contractors with outstanding tax debts, which

will assist the IRS in prioritizing future offset actions and increase

tax debt recovery.

Implementation of the proposed Contractor Enforcement Act: as

I understand it, the proposed Contractor Tax Enforcement Act

would prohibit delinquent Federal debtors, generally those who

have not paid the tax, penalty, or interest within 180 days of assessment, from being eligible for Federal contracts. While I fully

support the objective of the bill to increase tax compliance, I am

concerned that implementation of this, as written, would result in

a de facto debarment executed without regard to the suspension

and debarment due process requirements provided in the Federal

Acquisition Regulation [FAR].

Suspension or debarment is a serious remedy designed to protect

the Government from conducting business with non-responsible

contractors when this is in the Government’s interest. The FAR establishes due process requirements to preserve transparency and

fairness and afford both the Government and the contractor discrete rights throughout the process. These rights are necessary to

ensure that the Government’s interests are protected and that the

nature and seriousness of the contractor’s action warrant suspension or debarment. These decisions are made on a case-by-case

basis by an informed official, and a decision against a contractor

is not a punishment for non-responsibility but is a means for us to

protect the Government.

The proposed legislation appears to be inconsistent with the established process for suspension or debarment; however, a recently

proposed change to the FAR provides much-needed support for ensuring that tax delinquencies are properly considered prior to contract award.

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The proposed regulatory solution: on March 30, 2007, a proposed

change to the FAR was published in the Federal Register. The proposed rule requires prospective contractors to certify whether or

not they have been convicted of or have had a civil judgment rendered against them for violating any tax law, failing to pay any

tax, or have been notified of any delinquent taxes for which the liability remains unsatisfied within a 3-year period preceding the

offer.

Additionally, the proposed FAR change adds the following list of

causes for debarment or suspension: delinquent taxes, not restricted to Federal taxes, about which the offer has been notified

and that remain unpaid; unresolved tax liens; and convictions or

civil judgments for violating tax laws or failing to pay taxes.

Once this rule is finalized, the appropriate Federal officials may

used tax delinquency as sufficient grounds for debarment or suspension, in accordance with the established process in the FAR for

protecting the Government’s interest.

Mr. Chairman and members of the subcommittee, OFPP is committed to ensuring that Government contracts are awarded to responsible, law-abiding contractors who take their tax obligations

seriously. The acquisition community is taking affirmative steps to

raise the visibility of contractor tax delinquency, improve the ability of the Government to recover that debt, and ensure that contractors seeking Federal business disclose their tax liabilities and

are accountable for their tax delinquencies.

I feel the progress we have made as a community and the proposed change to the FAR preclude the need for the additional legislation.

This concludes my remarks. I am happy to answer any questions

you may have.

[The prepared statement of Mr. Denett follows:]

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Mr. TOWNS. Thank you very much, Mr. Denett.

Mr. George.

STATEMENT OF J. RUSSELL GEORGE

Mr. GEORGE. Thank you, Mr. Chairman. Let me at the outset say

it is truly an honor to be here to work with your committee. As you

noted earlier, I was staff director of this subcommittee over 12

years for approximately 7 years under the chairmanship of Steven

Horn. It was truly an honor to work with you. Mr. Bilbray, we held

field hearings up in your District, you may recall, and Mr. Platts,

also, since we have interacted in my capacity as IG.

You are considering very important legislation that you may recall that we looked at the issue over 7 years ago in 2000 when Mr.

Turner of Texas approached Mr. Horn about this very important

area. I am so glad that you are bringing it back up today, sir.

I thank you for the opportunity to testify—Mr. Ellsworth, it is

nice to meet you—on two legislative proposals related to tax collection. The policies embodied in them have the potential to affect efforts to increase voluntary compliance, as well as enforced revenue

collection.

As mentioned, the contractor tax enforcement act would effectively make any person with an outstanding Federal tax debt ineligible to enter into a contract or to receive a loan from a Federal

agency. In February 2006, the IRS estimated that, based on tax

year 2001 data, the annual gross tax gap due to under-payment of

taxes is $34 billion. Collecting additional taxes owed from potential

Federal contractors could provide another means to help reduce the

annual tax gap attributable to under-payment of Federal tax obligations.

This compliance check would also appear to support the Secretary of the Treasury’s comprehensive strategy for reducing the

tax gap.

Contractors receive an estimated $378 billion in Federal payments annually. It is for Congress and for the Department of the

Treasury to consider whether, as a policy matter, eligibility for

Federal contracts and loans should include tax compliance requirements.

While my office has not performed work directly on this matter,

our limited review of such requirements in other contexts would

lead us to anticipate that the impact on the IRS’s other tax administration efforts should be minimal. This assumes that the proposed

requirement is implemented in a manner similar to IRS’s current

practices.

The other draft bill before this subcommittee this afternoon

would amend Title 31 of the United States Code to create a pilot

program to examine the feasibility of collecting certain local tax

debts. This proposal has the potential to assist local governments

with their collection efforts based on experiences at the Federal

level.

The Internal Revenue code requires that a taxpayer’s overpayment be applied to any outstanding child support or non-tax Federal debt prior to issuing a refund or accrediting an overpayment

to a future obligation. However, a tax overpayment must be offset

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to an outstanding tax debt before it may be offset to non-tax debts

or applied as a credit to a future tax period.

The IRS has facilitated these offsets since 1984. In 1996 this

committee moved the Debt Collection Improvement Act, which authorized the Treasury Department to consolidate its offset programs. Starting on January 11, 1999, the Department’s Financial

Management Service, Treasury Department’s Financial Management Service, began refund offsets to pay outstanding child support

or Federal agency debts, while offset of Federal tax refunds for

State income tax debts began in January 2000. Since 1996, this program has collected $24 billion in outstanding debts. For example, in fiscal year 2005 the program collected $3

billion. Of that total, 90 percent of the collections were for overdue

child support, Federal non-tax debt, and State income tax debt.

Given the nature of the proposal under consideration, it is unlikely that its enactment would adversely affect the IRS or Federal

Tax Administration. The proposal would establish a pilot program

for past due, legally enforceable local government obligations. If

current practice in analogous circumstances is an accurate indication, it is likely that the proposed pilot program would operate

through the Treasury offset program, and therefore affect the Financial Management Service but not the Internal Revenue Service.

Mr. Chairman and members of the subcommittee, thank you for

the opportunity to provide background. I look forward to answering

your questions.

[The prepared statement of Mr. George follows:]

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Mr. TOWNS. Thank you very much.

Let me thank all three of you for your testimony.

Let me begin with you, Mr. Denett. What is it that you do not

like about the legislation?

Mr. DENETT. I don’t like the fact that it deprives contractors of

the due process that they normally would be afforded before they,

in effect, were suspended or debarred, by prohibiting them from

getting awards that, in effect, is like a debarment. We have careful

steps where they have an opportunity to explain their side of it, go

over the pros and cons, make sure everything is on the up and up

before a decision is made to debar them so that they will not be

able to get the award.

Systems have errors in them and they are imperfect, and I would

hate to deprive anybody of an opportunity to explain their side of

it before we made the decision that they would not be allowed to

receive any contract from the Federal Government.

Mr. TOWNS. This would only apply to people who have actually

received information in the course of due process taking place, and

also we are talking about up to a certain amount, as well. I mean,

you still think that we should do something else?

Mr. DENETT. I do. Again, we have been through this for many

decades, a formal debarment process. I personally have been involved with a debarment process with several companies and, in

fact, have debarred people. In the process of hearing directly from

attorneys and companies, the circumstances involved with various

things they are accused about, facts come out that you otherwise

are not fully privy to, and you need to consider fully both sides before you take a significant action of barring them from any Government business.

Some of these companies are small business. If they don’t have

the opportunity to earn Federal dollars, they may not even be able

to meet repayment schedules with IRS if they no longer have any

income.

Mr. TOWNS. I guess you heard Mr. Kutz’ testimony when he

talked about in terms of the buying of boats, he talked about buying of luxury cars and homes and still not paying the taxes. I

mean, I know you suggest a case-by-case basis, but that seems not

to be working.

Mr. DENETT. Well, it is improving, and we collected $55 million

through the levy program. Now that they are tapping into the

FPDS there is going to be more and more matches. In Defense Department they are allowed to levy 100 percent of the money that

is going to them through contracts. On the civilian side I think it

is 15 percent. I think legislation may be ultimately proposed—I

don’t know if it is currently—to take 100 percent of money going

to civilian contractors. I think all of that is a positive. It is a way

to collect money. I find it deplorable when I see big houses and luxury boats and all that and people owe money. I mean, that is

wrong. I am glad——

Mr. TOWNS. Especially this time of the year when I have to pay

mine. I pay my taxes.

Mr. DENETT. I agree with you. I pay mine, too.

53

Mr. TOWNS. But doesn’t it bother you when you hear about similar names at the same address, and, of course, they just change the

name and continue to do business? Doesn’t that bother you?

Mr. DENETT. Yes, it does bother me. I mean, I think it is wrong,

and as we go through the due process I am describing, in those

cases where they can’t demonstrate that they should continue to

get any Government business, they would be debarred and suspended and they would not get any further Government business.

Mr. TOWNS. Mr. Kutz, I would like to hear your comments on

this.

Mr. KUTZ. Well, a couple of things. I mean, the people we are

talking about here are fraudsters. These people are involved in tax

fraud, basically. With respect to due process on the tax side—and

I think the ranking member was talking about this—while I talked

about the billions of dollars we found, that was agreed-to taxes.

That was not disputable taxes. You have compliance assessments,

as they are called, that are not agreed-to taxes. Everything that I

talked about was taxes either agreed to by the taxpayer or determined in the IRS’s favor in a court of law, so the due process has

happened.

Mr. TOWNS. Happened.

Mr. KUTZ. I don’t think necessarily the only solution to this is to

go through the debarment process. Mr. George mentioned the

Treasury offset program. You have tax and non-tax debt in that

Treasury offset program that potentially one possible solution could

be to systematically bump that against the central contract registry

and show a notification to the central contract registry that someone is not eligible for a contract because they have a tax debt. So

there are a lot of ways to do it. I think the implementation, there

are a lot of ways to implement this. Hopefully at the highest level

we can agree that we want to get these people out of the system.

I think that is the key part of this testimony. There are various

ways you can actually do it.

The progress also that was discussed is a lot of back-end process.

The levy program is where we are actually after—they are in the

system and being paid. We are collecting a couple of pennies on the

dollar at the back end, which I think we need to continue to do,

regardless of what we do at the front end. But the purpose of this

hearing today, as I understand it, is to talk about the front end of

the process.

Mr. TOWNS. Right. My time has expired, so I am going to yield

to the ranking member.

Mr. BILBRAY. Thank you, Mr. Chairman. Mr. Chairman, let me

just echo your concern about the changing names. As we are addressing this, we have to remember how some of these people operate in being able to avoid it. We have seen that, the abuses in the

women in minority owned businesses and the way they use front

people to be able to hide, basically, who is the power or the base,

and that is going to be a big concern.

I think that when you talk about practical application, we are

going to have to figure out how do we track these people and who

are they. Can they get around? Are their Social Security numbers

there? Do we have a way of tracking who is actually the contract

and who is not?

54

Mr. George, you mentioned the issue of the offset from the Federal tax refunds, the 1865, and the potential for the collection

there. Do you have any kind of number that we can grasp on that

issue? Do you have an estimate at all of the kind of revenue source

it could create for the local government if we can go back and tap

that?

Mr. GEORGE. As I noted in my written testimony, GAO has estimated, as Greg, I believe, indicated, that DOD, which serves as its

own dispersing agent, collected at least $100 million in unpaid

taxes in fiscal year 2002. If it worked with the IRS, we estimate

that at least that amount of money could be added.

Mr. BILBRAY. How much was that again? I am sorry.

Mr. GEORGE. We are estimating that $100 million in unpaid

taxes in 2002 could have been collected if DOD had worked with

the IRS to effectively levy contractor payments.

Federal Government contractors receive an estimated $377 billion in Federal dollars, alone, but as for the local governments, the

Treasury offset program has collected, since the Debt Collection

Improvement Act was passed in 1996, $24 billion.

Mr. BILBRAY. So we are talking about a nice——

Mr. GEORGE. A significant amount of money. No question about

it.

Mr. BILBRAY. Nice bundle.

Mr. GEORGE. It is.

Mr. BILBRAY. I would just say to my colleagues, when we talk

about issues like local government having first responder capabilities for homeland security and we talk about grants and providing

Federal funds to local governments, here is an example where, if

we just cooperate with them, we can help them get their own

money back, and within their own jurisdictions, without all our

strings and oversight problems that we have with the Federal Government, and to get the job done and protect the citizens by making sure that those who should be paying are finally paying the

local communities, which really are the front line service providers

for our citizens, contrary to what we like to think about here in

Washington.

The challenge I have is that your concern about innocent people

getting caught or being disbarred, or whatever. Can you see a way

for us to make sure that doesn’t happen? We are talking about

somebody basically whose due process has been executed. The challenge is that we have misidentification of the individual? Does

somebody get hit there? What is your concern there? And do you

have any answers for this legislation to make the implementation

of this legislation practical?

Mr. DENETT. Well, again, I think the new regulation that is on

the street now—we are collecting comments from industry and the

citizenry—will be a major step in the right direction, because heretofore we did not list all these tax things as a specified reason for

debarment and suspension, so this will facilitate making those

calls. A step in the right direction.

I think the IRS and others now tapping into the Federal procure- ment data system to see all of this nearly $400 billion awarded

every year, any that have tax problems it will put flags on them

and we will start to collect that money from them. Instead of them

55

getting the check, in he Defense Department’s case they can take

100 percent of the check. Civilian agencies is 15 percent, but being

considered to go up to 100 percent. I mean, that is substantial and

will be a major improvement over what we have been doing in previous years.

Is it enough? I don’t know. I think we need to get public comment and then try it and see what success we have with it.

Mr. BILBRAY. Mr. Chairman, just in closing, it tends to be a habit

around here that we need props, and props are great for sending

a message. Frankly, I don’t care how big a house somebody has if

they are skipping out on their taxes. I don’t care if it is a little

shack they are living in and they are drinking or taking drugs and

there is no symbolism there.

I don’t care if they are living in poverty. If they are not paying

their fair share of taxes and they are competing against a business

that is trying to get a contract that is paying their fair share of

taxes, common decency says we have to quit rewarding the people

that are breaking the rules and not paying their taxes, because

that, de facto, punishes those who are playing by the rules.

Even if the guy playing by the rules lives in one of those big

houses, he still has a right to be protected from unfair competition

from those who aren’t playing by the rules.

I yield back, Mr. Chairman.

Mr. TOWNS. Thank you very much.

I yield to the gentleman from Indiana, Mr. Ellsworth.

Mr. ELLSWORTH. Thank you, Mr. Chairman.

Is it a 5-minute rule?

Mr. TOWNS. Five minute rule, yes, unless you are the chairman

or the ranking member.

Mr. ELLSWORTH. OK. I will keep an eye on my $29 men’s bracelet

I have on here, my Timex.

Mr. BILBRAY. Guess who is making the rules?

Mr. ELLSWORTH. Thank you very much.

I will ask you the first question. This is probably a pretty easy

one. A person who knows they are going to not pay their taxes,

would that not give them an advantage in a bid process if they

knew on the end that they could low-ball that, knowing that they

were not going in? Would you find that to be the case?

Mr. KUTZ. Yes, not just theoretically but in reality. We did drill

down upon specific cases of especially wage-based industries where

that had happened and taxpaying contractors were beat out by

those that didn’t pay their payroll and income taxes.

Mr. ELLSWORTH. Mr. Denett, you talked about a self-certification

process that was in the works or in the hopper, you are thinking

about implementing that. Is there a time? I have penned some legislation that did that. Is that on a timeframe that would be in place

and implemented?

Mr. DENETT. It is on the street for comments now, published in

the Federal Register. Comments are due by the end of May. We

don’t know if we are going to get ten comments or a thousand comments, but the normal cycle of reviewing the comments and then

getting it finally issued, I would estimate we would have a rule out

by November, perhaps sooner, based on my increased sensitivity to

this subject and hearing some of what I am hearing today. It disVerDate 11-MAY-2000 12:44 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 C:\DOCS\39021.TXT HGOVREF1 PsN: HGOVREF1
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turbs me also, so I am going to be as aggressive as I can be with

getting it implemented.

Mr. ELLSWORTH. I hope the commenters have to identify themselves, or we only get the ones from the contractors that are doing

this. You are going to get a one-sided thing.

I will go ahead out on a limb here and say that the people in Indiana, I can comment for them that they would like the people also

paying their taxes and fairly before they got another contract.

We talked about not doing this, that we wouldn’t want anybody

to not be awarded a contract unfairly. Do you have any numbers,

the percentage of those that we have found that we checked on or

held back from receiving a Federal contract that we then found

that we were in the wrong, the Government was in the wrong and

held them back unfairly, a percentage of how often that happens

when we don’t award a contract because they haven’t paid any? Do

we have examples of that where that has happened?

Mr. DENETT. I do not have any statistics on how often that happens.

Mr. ELLSWORTH. So you based your comments on we sure

wouldn’t want that to happen, so that is why we are not—I guess

I am gathering here, when you said we wouldn’t want anybody to

go in default or not be awarded a contract if we found a mistake,

that has not happened?

Mr. DENETT. I am told by various departments that this, in fact,

has happened, but I do not have any specific example with me

today, nor do I know what small percentage of times that, in fact,

does happen.

Mr. ELLSWORTH. But it would be small, a small percentage?

Mr. DENETT. Yes. That would be my guess.

Mr. ELLSWORTH. OK. And, Mr. George, I will go to you. I am still

in the green. I might get a couple more in.

In my former life in law enforcement we could find carpet fibers

and DNA when we looked for them, and I am guessing that Jag

and those big homes would be pretty easy to find, and I agree with

the gentleman that I don’t care what size house it is or what car.

But how do you triage who you go after when you find these violations? I know it is going to cause your organization a burden to increase and roll it up, but wouldn’t this money we take in help offset

your costs or new employees? I am guessing we could hire quite a

few employees for what we can make up.

Mr. GEORGE. Mr. Ellsworth, that is a very good point. In similar

programs that the Treasury Department operates—again, obviously

not dealing with contractors—they are allowed to assess fees to the

people from whom they collect the money, and in some ways that

helps offset or pay for the activity that the Government has to engage in. But it is important to note, too, that, depending upon how

the contractor is organized, whether it is through an incorporated

organization or whatever so they are going to be very aggressive,

innovative in ways to help bring that about. That is something that

I would request that this subcommittee consider.

Mr. ELLSWORTH. Would the self-certification that Mr. Denett was

talking about then help solve that? Would that then, if they were

found in violation when they self-certify, then they go to jail?

57

Mr. GEORGE. Well, honest thieves who self-certify it would help,

but the dishonest ones——

Mr. ELLSWORTH. And then go to jail if they are caught self-certifying when that was not the case?

Mr. GEORGE. Well, I am not sure whether it require jail terms.

Mr. DENETT. There are criminal penalties for anybody who falsely certifies that information.

Mr. ELLSWORTH. OK.

Thank you, Mr. Chairman. Sorry for going over.

Mr. TOWNS. Thank you very much.

At this time I yield to the former chairman of this subcommittee

from Pennsylvania, Mr. Platts.

Mr. PLATTS. Thank you, Mr. Chairman. I appreciate your holding

this hearing. Does the 5-minute rule apply to former chairmen? I

will try to stay within the 5-minutes here.

I do appreciate your holding the hearing and all of our witnesses.

I think this is an issue that needs to be addressed head-on and is

something that we didn’t get to on our list, and I am glad that the

chairman is taking the lead on it now with the new session.

The numbers to me are staggering, as one who does my best to

pay every penny I owe and use an accountant to make sure it is

right, that we have people doing business with the Federal Government that aren’t.

I think a very important line is in the GAO report that says,

Federal contractors that do not pay taxes could have an unfair

competitive advantage in cost because they have lower cost than

the tax-compliant contractors on Government contracts, because if

you are paying your taxes you factor all that into your bid. The guy

that is shorting the Federal Government isn’t, so he gets the job

and he is the one being unscrupulous to begin with.

I do have a couple of quick questions. The numbers addressed,

the $3 billion, and if you total it up I understand maybe some of

it is over 63,000 different contractors, DOD contractors, 33,000 civilian and agency contractors, and another almost 4,000 GSA, that

$3 billion is from throughout the Federal Government, not just

DOD contracts?

Mr. KUTZ. We did three different pieces. We did Defense, civilian

agencies, and GSA.

Mr. PLATTS. So the $3 billion is the total of all of them?

Mr. KUTZ. No. There is $3 billion, $3.3, and $1.4, but there is

overlap, so I would say at the end of the day you are talking about

between $5 billion and $10 billion, but it is difficult to know. And

keep in mind that is the known part.

Mr. PLATTS. Right.

Mr. KUTZ. We said those are agreed-to taxes.

Mr. PLATTS. Right.

Mr. KUTZ. It is very likely the bigger part is the unknown part.

Mr. PLATTS. Right.

DOD certainly has not done a very good job, and, as is referenced

in Mr. George’s testimony, in the 2002 fiscal year, where if they

had worked more effectively with IRS, could have recouped it, and

clearly haven’t been very efficient.

Is there any department or agency that stands out as doing a

good job of making sure—DOD I think is an example of what we

58

don’t want to do. Is there an agency or department that, in dealing

with contractors, is doing a good job?

Mr. KUTZ. Well, if I could address that, then Mr. George could

followup with that, but what Mr. George was talking about was the

back end of the process. This is levying contractors already in the

system and taking 15 percent typically of their payments. No one

was doing a very good job of that in the early 2000’s. That is where

most of the progress has been made, as Mr. Denett described. And

there has been good progress. We are collecting now at least tens

of millions, and over times hundreds of millions and billions on the

back end of the process.

No one on the front end of the process is doing anything about

the 122 cases I talked about. They all got in the system,

basically——

Mr. PLATTS. So still today there is no one to point to?

Mr. KUTZ. No. These people can get in the system today.

Again, with respect to the self-certification, one point I would add

is that these people are not voluntarily paying their taxes in a voluntary system. What leads us to conclude that they are going to

voluntarily say I have a tax problem.

Mr. PLATTS. Yes. And I think that is right on point. If they are

being unscrupulous in paying what they owe, the likelihood—I

think it is important to point out in the legislation that for this

background in large contracting to occur, I mean, the information

shared by Treasury to the relevant department or agencies, because the person coming forward for the contract authorized the information to be shared. So if you don’t want to have this tax issue

addressed, you have that choice of not pursuing the contract, but

if you pursue the contract, then under this bill you are going to authorize the Secretary of the Treasury to disclose your tax status,

so you are agreeing voluntarily to have it disclosed, and thus then

be relevant to whether you are getting the contract.

So I think that is an important part of this bill, that it is something that those who want the Federal business, want to have taxpayers fund their companies, they are agreeing to this procedure.

I hope we are able to move forward in a positive way and get to

that front end, not just the collection, because I think that is an

important part, but that will be less important if we stop, up front,

stop and address the problem in the first instance.

Thank you, Mr. Chairman.

Mr. TOWNS. Thank you very much, Mr. Platts.

Let me ask a couple more questions here.

Mr. Denett, help me. How could the current suspension and debarment process guarantee uniform treatment of companies with

similar tax situations? I mean, how can you guarantee me that

they are going to be treated the same under the present structure?

Mr. DENETT. Well, in the sense that anybody who is repeatedly

not paying their taxes and on the list, I can’t speak for every debarment official, but if I am the person looking at that, then I would

suspend and debar them. But once that is done, that applies

throughout the whole Federal Government, so nobody would be allowed to make awards to them.

If you are saying, like, with every individual case that is being

looked at would they reach the same conclusion in exactly the same

59

way? I guess I don’t have an absolute way to say that would happen, but I think just the fact that——

Mr. TOWNS. This legislation would do that. It would make certain

that people are treated fairly that fall into the category. That is my

concern. I mean, I want everybody to be treated the same.

Mr. DENETT. Well, again, I am just concerned that it becomes a

de facto debarment without giving them the normal debarment due

process. I guess that is the procurement perspective that I am coming from. I don’t think people should be debarred without having,

under the Federal acquisition regulation, the process to have their

opportunity to fully explain why they believe they should be allowed to continue to do Government service. Not the extreme cases

that I am hearing Mr. Kutz describe, of super-sensitive ones or

ones where it doesn’t make sense, but there could be senses where

it made sense to allow the person to continue to have Government

business and pay off their debt.

Mr. TOWNS. You really think, when you talk about the Federal

acquisition regulations, that we require prospective contractors to

certify whether or not they are delinquent in their taxes or have

a history of tax fraud, you think we can rely on that?

Mr. DENETT. We currently rely on certification for small business

side standards, lots of other things. Again, there are criminal penalties if they sign and say that they don’t have any tax delinquencies and they do. Then the Justice Department can pursue

them.

We are working with the Justice Department now on a fraud

task force where we are taking lots of steps to try to increase finding out people that are doing wrongdoing on all fronts. I think tax

evasion would be included in that.

Mr. TOWNS. What if they find out that the IRS is not going to

verify. Couldn’t they just sort of put down anything? These are people that have already defrauded the Government.

Mr. DENETT. That is of concern to me, and I would be willing to

work with the committee, with Treasury Department and GAO to

see what we can do to create a level playing field, because I don’t

want people winning contracts because of an unfair advantage of

they are not paying taxes. That is not right. I would be glad to

work with everybody to see what solutions we can come up with,

considering your legislation, the regulation that we have proposed,

which I think will help, and just see what else we can come up

with.

Mr. TOWNS. Let me just sort of throw this out for you, Mr.

George and Mr. Kutz. What do you think really should happen?

Mr. GEORGE. Well, I would point out, and I note this in my submitted testimony, that there is an analogous program called the

electronic return originator which the IRS uses to qualify people

who want to submit electronic tax returns on behalf of taxpayers.

There is an elaborate process, but elaborate meaning that it is

thorough, but it is not so complicated that people can’t engage in

it, where the IRS requires people to not only submit certifications

about taxes being paid, but even fingerprint cards. So there are examples of Government programs that would help, I think, allay

some of the concerns that Mr. Denett has noted.

Mr. TOWNS. Mr. Kutz.

60

Mr. KUTZ. I think you have to have a fair system. Whatever is

done has to be done systematically across the board. I agree with

the concerns that different contracting officers would handle these

cases differently.

You have to set the criteria in law and then apply it to everyone,

so that if it is 180 days, as your bill says, if that is what is determined, or whatever it might be, that applies to everyone, and then

you can prohibit those people from getting future Government contracts and you could use some of the existing tools out there such

as what Mr. George mentioned earlier, the Treasury offset program

and the central contract registry, which everyone that can get a

Federal contract is supposed to be registered in this central contract registry. That is one place where you could do periodic systematic validations to determine if people have tax issues.

Mr. TOWNS. Right.

I yield to the ranking member.

Mr. BILBRAY. Yes, Mr. Chairman.

I think it should be agreed on that list should be reviewed so

that, in a timely manner, if there is a problem contractors can be

notified in time to be able to address the issue, rather than just

rely on when they apply for a contract, because, let’s face it, by

that time any action taken is going to be onerous, at least from the

contractor’s point of view, because of the time lag to address those

issues.

So GAO came up with 122 referrals to the IRS. Do you have any

information for us of what is the outcome of those referrals?

Mr. KUTZ. Unfortunately, there have been no indictments or

prosecutions that we are aware of. I think that gets back to one

of the issues. When we look at payroll taxes, which is effectively

stealing money, it is like stealing money from a 401(k) plan, and

there is a law that calls it a felony. Those referrals, there is a lot

of collection activity, kind of a lot of asking will you pay, etc. Very

little aggressive action from a seizure standpoint, a levy standpoint, and we see little or no activity from a criminal standpoint.

It is all civil.

Mr. BILBRAY. And let me just tell you I think that is an issue

that Congress, as a whole, should be talking about, because this is

a chronic problem across the board for the IRS. You have contractors out there that should be accruing these funds in the name of

an employee and just sort of—it is easier to put it off, put it off,

put it off, and once you start getting in the habit of doing that it

is easy to ignore it until things get absolutely chronic.

Mr. Chairman, I think that we have at least been able to sensitize the system to the fact that this is an issue that needs to be

addressed, and I appreciate the panelists being before us today.

I yield back.

Mr. TOWNS. Thank you very much.

Mr. Ellsworth.

Mr. ELLSWORTH. Thank you, Mr. Chairman.

Mr. Denett, debarrings—I don’t know what the proper name is—

debarments do go on, right? You do that?

Mr. DENETT. Yes.

Mr. ELLSWORTH. And so we have done those?

61

Mr. DENETT. Yes. I actually did one personally when I was at a

department level, actually when I was at the Treasury Department.

Mr. ELLSWORTH. So they can do them down to that level, at the

department level?

Mr. DENETT. That is where it is done.

Mr. ELLSWORTH. OK.

Mr. DENETT. Each department has their own debarring official

and each one of them makes calls, and once they do it applies to

the whole Government.

Mr. ELLSWORTH. How long is the due process? A red flag comes

up on a company that is bidding on a Federal contract. We put it

into due process mode. How long does it take before you determine

yes, we can award this, or no, they can’t have it, that due process

security that you are talking about that you would hate to see

them go without due process. How long is that, the hearing and the

process when a flag goes up?

Mr. DENETT. My recollection, from the one that I personally did,

which was years ago, it took about 60 days.

Mr. ELLSWORTH. And during that time, if it was a company that

was purposefully defrauding us and not wanting to pay their taxes,

would they still be awarded the Federal contract they were going

after during that due process period? Is that possible? Or are they

put on hold saying we have to investigate this?

Mr. DENETT. It depends if we are looking at this before an award

or after an award. When we are doing it before an award, the contracting officer is trying to decide if a company that they are thinking of making the award to is responsible, and so there are several

things they look at to decide if they are responsible. One of the

things that we would like them to be considering is the position on

taxes. That is before award.

Mr. ELLSWORTH. Right.

Mr. DENETT. And if you decide they are not responsible, you

would not make award to them.

Then the next status is when somebody already has the award

and you find out that they are tax delinquent or other serious,

egregious things. You can examine it to see if they can be debarred

and prohibited from future Government procurements.

Mr. ELLSWORTH. OK. Thank you.

Mr. Chairman, I have nothing further. Thank you very much.

Mr. TOWNS. Thank you very much, Mr. Ellsworth.

I yield to Congressman Duncan from Tennessee.

Mr. DUNCAN. Thank you, Mr. Chairman. Since I just got here,

I will be very brief and just ask a couple of questions.

Mr. Kutz, you say in your statement that there ought to be a law

that requires contractors to pay their taxes before participating in

the Federal procurement system, but that we also should make

sure that there is appropriate due process safeguards in the legislation. Do you think that you are satisfied with the due process safeguards in H.R. 1870?

Mr. KUTZ. Yes. I think that the due process relates to whether

someone actually owes the tax and the flexibility allows, for example, the Secretary of Defense to waive the debarment for a contractor that provides a certain good or services that is necessary for naVerDate 11-MAY-2000 12:44 Jan 14, 2008 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 C:\DOCS\39021.TXT HGOVREF1 PsN: HGOVREF1
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tional security, and there may be other flexibilities, but I believe

the intent of what I have seen would get those issues. Disasters is

another one I recall in your bill. Those are the kind of flexibilities

we would think are important, so that you aren’t just systematically prohibiting everyone, but you allow some flexibility.

Mr. DUNCAN. Now, as I understand it, this bill would treat the

eligibility to treat for a Federal contract like the eligibility to receive a Federal loan or a loan insurance guarantee; is that correct?

Mr. KUTZ. Yes. This would amend the Debt Collection Improvement Act, which already requires that for loans.

Mr. DUNCAN. So it would put in tougher requirements for Federal contractors?

Mr. KUTZ. Yes.

Mr. DUNCAN. And doesn’t it seem to you that it would be appropriate to do that, since most Federal contracts are bigger than the

great majority of Federal loans or loan guarantees?

Mr. KUTZ. Could you repeat the question? I didn’t hear the last

part.

Mr. DUNCAN. Doesn’t it make sense to you, or don’t you think it

is appropriate to treat Federal contractors a little tougher in that

respect, because most of these Federal contracts are bigger certainly than most of the Federal student loans and things of that

nature.

Mr. KUTZ. Yes. I think some of the members here have mentioned that it is a privileged——

Mr. DUNCAN. Right.

Mr. KUTZ [continuing]. To do business with the Government.

Mr. DUNCAN. That is what I am saying.

Mr. KUTZ. So you should be held to a higher standard than someone else.

Mr. DUNCAN. Sure.

Mr. KUTZ. I agree with that.

Mr. DUNCAN. Well, they have done a better job in expressing that

than I did, but that is what I was getting at.

Mr. KUTZ. Yes.

Mr. DUNCAN. All right. Thank you very much.

Thank you, Mr. Chairman.

Mr. TOWNS. I yield to Congressman Platts.

Mr. PLATTS. Thank you, Mr. Chairman.

Just one final question. The FAR proposal that stands out there,

I guess your perspectives on what this proposed legislation will do

that goes farther than that. How do you view the two in comparison?

Mr. DENETT. Well, I think if the proposed legislation would prohibit making awards, so what I am saying is that would be a de

facto debarment. The regulation that we have out for comment now

in the Federal Register would give people an opportunity to make

it clear for contracting officers that anybody who is tax delinquent,

that is a cause for debarment, for irresponsibility, etc. It is not now

currently listed.

Mr. PLATTS. Let me interrupt. If we take that approach, that

makes it pretty subjective approach to this issue. One officer could

deem this as a grounds for irresponsibility and not awarding the

contract; somebody else may look at it and say, well, it is not that

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much owed back or they will pay it eventually if you give them this

contract. It would make it more subjective, wouldn’t it, whereas

this is more objective. If you owe, you are delinquent, you are prohibited. I mean, this would be more consistent. Is that a fair statement?

Mr. DENETT. I think that is a fair statement, but each case is different and sometimes there are circumstances where it would be in

the Government’s best interest to allow a contractor to receive an

award so that they can earn the money to pay their tax delinquencies.

Mr. PLATTS. Well, the bill would not affect, if they were on a repayment schedule, they would not be prohibited. To be trying to

pay $10 a week, $100 a month, whatever, how small or large, they

could be doing that now and still get the contract under this bill.

They would not be prohibited if they have a repayment schedule

in place.

Mr. DUNCAN. Will the gentleman yield just for a moment?

Mr. PLATTS. Yes. I yield to the gentleman.

Mr. DUNCAN. That raised the question in my mind, Mr. Denett.

Has that ever been put in as a condition of an award? When you

say there are cases in which contractors should be given a contract

so that they can pay their delinquent taxes, has that ever been put

in the contract award, a condition like that?

Mr. DENETT. Not to my knowledge.

Mr. DUNCAN. We are going to give you this second contract, but

we know you are delinquent, so you have to use a certain percentage of this money?

Mr. DENETT. I am not aware of that being put in any contract.

Mr. DUNCAN. I yield back.

Mr. PLATTS. And I assume there is no current authority to say

we are going to give you this contract and this 10 percent we are

going to pay right to the Treasury to make sure you are paying

back?

Mr. DENETT. I mean, we have the system now where it has just

been implemented where the payment officials in IRS check their

data bases, and if there is any delinquency, rather than pay them

the money, they can retain 100 percent of any going through a

DOD contractor or 15 percent through any civilian.

Mr. PLATTS. So they can allow that now?

Mr. DENETT. It, in fact, is happening.

Mr. PLATTS. I was going to ask if that is commonly done.

Mr. DENETT. It is becoming more common.

Mr. PLATTS. That is good.

Mr. DENETT. I mean, it has just been instituted in the last year

or so.

Mr. PLATTS. Coming back to my initial question, where that discretion is given, I can understand where there may be cases where

it seems like in the Federal Government’s best interest, that if you

give them this contract then they will have a source of income and

may be more likely to get those taxes. That, unfortunately, does not

address the issue I raised with the GAO’s statement to the lawabiding company that didn’t violate the law in the first place that

didn’t get the contract because they were under-bid. That is an

issue I think that we have to remember here, that this is also

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about fairness to anybody competing for those contracts, because

they are going to be put at a disadvantage. Even if it is in the Federal Government’s interest, it is still not going to be a fair process

because of the individual not being straight up in the bid.

Mr. DENETT. I think we need to take a real close look at that.

I am looking forward to working with the committee and learning

more from Treasury and IRS and the GAO so that my office gets

even more up to speed on this issue, because I am disturbed about

the uneven playing field. However, every case is different, and I am

very reluctant for somebody to, in effect, be debarred without having a chance to explain to the contracting officer what their particular circumstance is.

Mr. PLATTS. I think the importance of this hearing and commend

again the chairman, that is exactly what this hearing is about, to

get the dialog developed as we go forward in trying to move a good

piece of legislation.

I yield back.

Mr. KUTZ. May I make one comment on that?

Mr. PLATTS. If the chairman allows.

Mr. TOWNS. Yes.

Mr. KUTZ. With respect to those 120 cases we investigated, it is

kind of interesting, because I have studied those and we have been

doing them for several years, and when you look at the IRS enforcement of the tax code you saw the reason they were able to

buildup 10 or 20 years of unpaid taxes, it was because that is just

what happened. They kept saying IRS things are going to get better. Let us have more time. Give us more time. It is just worse.

Mr. PLATTS. That good faith wasn’t rewarded.

Mr. KUTZ. I can’t speak to the 122, but we have seen that. When

I used to audit the IRS as their financial auditor, also, we saw it

then, too, same thing. These are the bad 1, 2, 3 percent of society

kind of thing, but, you give them time, they are going to continue

to do the same thing over and over again. You keep asking the

same, you don’t get different results.

Mr. PLATTS. Well, thanks for the testimony, and each of you in

your respective positions. Thanks for your service to your Nation

and your fellow citizens.

Thanks, Mr. Chairman.

Mr. TOWNS. Thank you. Thank you very much.

Let me thank all of you for your testimony. Of course, this panel

has been dismissed.

We will have a 30 minute recess. We have votes on and then we

will return.

Thank you very much.

[Recess.]

Mr. TOWNS. The committee will come to order.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect that they responded in the affirmative.

Why don’t we just move forward with you, Mayor Cornett, and

come right down the line.

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STATEMENTS OF MICK CORNETT, MAYOR, OKLAHOMA CITY,

OK, REPRESENTING THE U.S. CONFERENCE OF MAYORS;

BARBARA FORD-COATES, TAX COLLECTOR, SARASOTA

COUNTY, FL, REPRESENTING THE NATIONAL ASSOCIATION

OF COUNTIES AND THE NATIONAL ASSOCIATION OF COUNTY TREASURERS AND FINANCE OFFICERS; AND PATRICIA

WETH, DEPUTY TREASURER, ON BEHALF OF THE HONORABLE FRANCIS O’LEARY, TREASURER, ARLINGTON COUNTY,

VA

STATEMENT OF MAYOR MICK CORNETT

Mr. CORNETT. Thank you, Mr. Chairman. I appreciate the opportunity to come before this subcommittee on behalf of the Nation’s

mayors. My name is Mick Cornett. I am the mayor of Oklahoma

City. I am also the chairman of the Mayors Urban Economic Policy

Committee.

I am here today to show our support for proposed legislation that

would create a 2-year pilot program to help local governments collect legally enforceable past due taxes by expanding the Federal

tax offset program to include local tax debt. If enacted, this legislation would promote the kind of intergovernmental partnership that

we have always believed should exist between the different levels

of government. When we work together to achieve a common goal,

particularly a goal as important as collecting past due taxes, all

levels of government benefit, as well as the American people.

First of all, we want to commend you, Mr. Chairman, for your

strong support you have shown for local governments on a wide

range of issues over the years. Thank you also for your leadership

on this proposed legislation, particularly for focusing attention on

the need to expand Federal assistance to help local governments

collect past due taxes.

We also want to commend the co-sponsors of this legislation:

Representative Michael Turner, the former mayor of Dayton; Representative James Moran, the former mayor of Alexandria; Representative Tom Davis, the former county executive of Fairfax

County; and Representative Bilbray, the former mayor of San

Diego. Thank you for your support. These Members clearly understand the importance of intergovernmental partnership in addressing issues that affect all levels of government.

Last year during our annual meeting, Mayor Laura Miller of Dallas reminded us that local governments often find it difficult to collect past due taxes. Sometimes we spend an enormous amount of

time and energy trying to go after delinquent taxpayers, and we

are not always successful in collecting past due taxes, particularly

when those taxpayers may have left the area or don’t have the resources to pay those taxes. It not only places a financial strain on

local governments, but it unfairly burdens members of the community who do choose to pay their taxes promptly.

Before I get too far into my testimony, I would like to share some

background information on the delinquency problem in my city.

Unlike some cities, Oklahoma City does not collect an income tax

of any kind. We use property tax to fund our capital improvements

through bond issues, and that property tax is actually collected by

the county and distributed to us.

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We are mainly funded by the sales tax, especially on the operations side. That is collected by the State and, again, distributed

to us.

To prepare for this trip, I asked my staff to review our sales tax

data to determine the delinquent rate. They reviewed our sales tax

data for the last 6 months and came up with some estimates. From

our review, we estimate that we have a delinquent sales tax rate

somewhere between 5 and 7 percent, and so we believe it is safe

to assume that our delinquent sales tax total is about $10 million

a year.

Now, according to information provided by our county treasurer’s

office, in the 1st year property taxes are due that delinquent tax

amount is about 5 percent of the total amount levied for the year.

If you go back to fiscal year 2005–2006, that amount totaled about

$2 million. If you look over a longer period of time, an 8-year average ending in 2005–2006, the delinquent property tax rate settles

out at about 1.4 percent, or about $4 million out of the total of $284

million levied during that period.

Let me put that in perspective to show you some examples of

what we would be able to do in our city if we were able to recapture those delinquent taxes.

On average, we can resurface a lane mile of road for about $200,000. If you use that $2 million estimate, that means that is

about 10 lane miles of road that we could be resurfacing, and if you

use the $4 million estimate, you could double that to 20 lane miles

of streets.

Another good example of how those dollars could be used has to

do with homeland security. In a post-9/11 world I know you all

agree we need to increase our security. Indeed, the Federal Government is working closely with us to help secure our homeland. Many

of our cities could use the funds currently due from delinquent

taxes to hire new first responders. In Oklahoma City, the cost for

me to hire a new fire fighter or a new police officer is about

$60,000 a year. If you use the $2 million estimate, that is about

33 new fire fighters or police officers that we could use. And if you

use the $4 million, we could hire approximately 67 new fire fighters or police officers.

Now, these are just a few examples of the critical public services

that we could provide if we recaptured all or a significant portion

of our past due taxes. And it is not true just for Oklahoma City,

but cities and local governments all across the country.

We are excited that you are considering creating legislation to assist us in this effort.

During that annual meeting last June, Mayor Miller informed us

about the Federal tax offset program and the original bipartisan

bill, H.R. 3498, introduced by Representative Turner, Moran, and

Davis. This bill would expand the program to include past due

taxes owed to local governments. Under current law, the U.S. Department of Treasury is authorized to reduce a taxpayers’ Federal

tax overpayment refund by the amount that individual owes the

State government in past due income taxes and child support obligations and send those funds to the appropriate State government.

We understand that 36 States and the District of Columbia currently participate in the program, and that pending legislation will

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expand the program to authorize the Department of Treasury to reduce the Federal income tax refunds due a taxpayer by the amount

of past due legally enforceable tax obligations that the taxpayer

owes to a local government.

Mayors attending our annual meeting last year unanimously

supported adopting the resolution of supporting H.R. 3498. We are

pleased that this proposal has been re-introduced to the 110th Congress as 1865. Mr. Chairman, we stand ready to work with you in

support of that bill.

In addition to participating in the Federal tax offset program, a

number of States have their own State offset program. So far, 14

States are permitting local governments to submit their delinquent

tax accounts to the State for collection against any State tax refund

or any lottery winnings owed to taxpayers. The way this works is,

prior to issuing a taxpayer refund the State checks to see if there

are any claims for past due debts submitted by a local government,

and if so the State will delay sending the refund of the lottery

winnings or the taxes pending notice to the taxpayer. After appropriate notice is given, the State will reduce the delinquent taxpayer’s refund or lottery winnings by the amount owed and send

those funds to the local government. In many States, this has proven to be a low-cost, highly effective system.

We do have one recommendation that we would like to see you

all consider, and we would ask for your consideration now or at a

later date.

The proposed legislation would establish a pilot program for no

less than three and no more than five States. While we understand

your concern about proceeding with caution, we would recommend

expanding the number of pilot programs to no less than four and

no more than eight. We feel like this would allow for the pilot program to be established in at least two States in every region of the

country—north, south, east, and west. Not only would that give

more local governments a chance to participate; it would give Congress a better chance to see how this might work in different States

and different regions of the country.

I want to thank you all for the opportunity to appear at this

hearing. We appreciate your work and we appreciate your looking

after us local governments, and remind everyone here that local

governments are the ones closest to the people and we impact their

lives every day.

Thank you.

[The prepared statement of Mayor Cornett follows:]

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Mr. TOWNS. Thank you very much, Mr. Mayor, for your testimony.

Mr. CORNETT. Thank you.

Mr. TOWNS. Ms. Barbara Ford-Coates is the elected tax collector

of Sarasota County, FL. She is representing the National Association of Counties and National Association of County Treasurers

and Finance Officers.

We are delighted to have you.

STATEMENT OF BARBARA FORD-COATES

Ms. FORD-COATES. Thank you, Mr. Chairman.

Chairman Towns, Ranking Member Bilbray I want to thank you

for the opportunity to testify today. As the Chair has stated, my

name is Barbara Ford-Coates, and I serve as president of the National Association of County Treasurers and Finance Officers. Our

organization is affiliated with the National Association of Counties,

and we represent all elected and appointed county treasurers, tax

collectors, and finance officers in the United States.

On May 1st I will complete 23 years as tax collector for Sarasota

County, FL, and I have been able to serve the public all these years

only because we provide exceptional customer service to the public.

If you can take someone’s money and have them still leave the office with a smile on their face, it has to be exceptional service.

I also provide service to many governments, including the State

of Florida, Sarasota County, four cities, a public hospital, the

School Board, and numerous smaller taxing districts. We do all of

this in a cost-effective, efficient manner.

I bring this up to emphasize that good government is a bipartisan issue. I happen to be the only elected Democrat in a county of

over 360,000 people. My voters care about good government.

I applaud the committee for your interest in H.R. 1865 because

it is a prime example of local, State, and Federal cooperation to

provide cost-effective efficiencies. I thank the Chair and ranking

member, especially, for sponsoring this bipartisan effort.

In particular, I want to point out that this bill is the antithesis

of an unfunded mandate. The Federal Government would provide

a service for local governments, and we would bear the cost. It is

simply a win/win for government and the people we serve, or, as

the ranking member said earlier, it is done the right way and in

the right manner.

I won’t take up your time with the details, since I know they are

being adequately or perhaps more addressed by Mayor Cornett and

Deputy Treasurer Weth, who have a deeper knowledge of those

specifics than I do at this point.

But, simply put, the National Association of Counties and County

Treasurers and Finance Officers are in full support of the legislation as proposed. However, I would like to mention that there are

several things which appear in my written testimony which I hope

we have the opportunity to discuss further with your staff and the

staff of Treasury. These would increase flexibility and, we believe,

make the program more effective.

This legislation is a model for building a collaborative intergovernmental partnership. The key features are that it is voluntary,

fee based, designed to avoid creating an undue burden, and offers

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both flexibility in implementation and a trigger to terminate the

program if it does not achieve its objectives. It is an example of the

golden rule: do unto others as you would have them do unto you.

However, I have heard that there also is a golden rule of federalism: those who coin the gold make the rules. With that in mind,

I do want to take this opportunity to mention two areas of concern

which are the result of recently enacted and proposed legislation.

These examples of that other golden rule are troubling because

they are coercive rather than cooperative byproducts of the Federal

Government, understandably striving to reduce its own tax gap.

These would require local officials to collect Federal taxes, implement new reporting software or procedures, or provide Federal tax

advice without consultation or payment of the costs involved.

First, section 511 of the Tax Increase Prevention Act will soon

require many counties to withhold 3 percent Federal taxes on nearly every payment for a service or product, from plumbing services

to paper clips. This amounts to a Federal sales tax on county purchasing, will be very expensive for counties to implement, and will

likely increase the costs of procurement and discourage contractors

from bidding on county contracts.

I urge members of this subcommittee to join with Representative

Kendrick Meek from my State of Florida to co-sponsor H.R. 1023

to repeal this unfunded mandate. And I would like to insert a copy

of that legislation into the official hearing record, along with copies

of our testimony and letters of support.

The proposal on 3 percent withholding was a result of inserting

a Joint Committee on Taxation staff recommendation in the conference report after the bill had been passed by the House and Senate.

Another troubling example could stem from the recent proposal

from the same source to require collectors of local taxes to determine whether our taxpayers can deduct items appearing on property tax bills. Then we would report that information to both the

IRS and the taxpayer. The administrative burden would be enormous, and county officials charged with producing tax bills are, in

the vast majority of cases, not qualified to make a determination

of whether special assessments are deductible or non-deductible

under the IRS code, nor do we have a method to collect the identity

of property taxpayers or compel them to report Social Security

numbers or taxpayer identification numbers as part of their property tax accounts.

I would like to insert a copy into the official hearing record, along

with our letters of opposition to that possibility.

I thank you sincerely for your interest in good government. I

know each of you has a local tax collector, treasurer, or finance officer to whom you are paying checks on a regular basis, and I urge

you to continue to work with us in developing strategies to improve

compliance with local, State, and Federal tax laws.

H.R. 1865 is a step down the path of intergovernmental cooperation and should serve as a model for any future efforts to close the

Federal tax gap with the assistance of State and local government.

I thank you for the opportunity to provide testimony today and

look forward to answering any questions.

[The prepared statement of Ms. Ford-Coates follow:]

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Mr. TOWNS. Thank you very much for your testimony.

We also have today Patricia Weth, the deputy treasurer of Arlington County, VA.

STATEMENT OF PATRICIA WETH

Ms. WETH. Good afternoon, Mr. Chairman, Representative

Bilbray, and Representative Duncan. I am Patricia Weth, deputy

treasurer and legal counsel to the Arlington County Treasurer,

Frank O’Leary.

Thank you for holding this important hearing today. I am here

to ask your support, favorable consideration of H.R. 1865. I appreciate the subcommittee holding this hearing on the proposed pilot

program legislation, which will greatly benefit your constituents,

and I look forward to answering any of your questions that you

may have on this legislation.

I also ask that the written testimony be entered into the record.

Like the Federal Government, State and local governments have

tax gaps. Not everybody is willing to pay their taxes. The more

each level of government can fairly collect the taxes that are owed,

the less pressure there will be to increase taxes to the honest taxpayers who are paying their taxes timely.

The Federal offset program was created in the 1980’s after legislation was passed to allow States to submit child support arrearages to the offset program to offset Federal tax refunds of deadbeat

dads. Later the program was expanded to allow Federal Government agency debt. And in 2000, legislation was passed to allow the

States to submit delinquent income tax debt into the program.

When my boss, Frank O’Leary, saw that States were allowed to

submit State income tax debt, he thought that the logical and natural progression would be to allow local government tax debt into

the program.

We have worked with bipartisan Members, numerous government associations, and the Treasury to refine this legislation and

to ensure that there would be no additional cost to the Federal and

State government. Without this legislation, local governments are

forced to assess greater taxes on the honest taxpayers to make up

for the loss in revenue for those who are not paying the taxes.

Under this legislation, the only cost is to the delinquent taxpayer, who is now forced to finally pay his outstanding tax obligation. In the proposed legislation for the pilot program, it does authorize Treasury and the States to charge to the local governments

a fee to defray any administrative costs that they may have in

processing these claims. Currently under the regulations, Treasury

does collect a $25 fee from the State taxing authority for every

claim where there is a refund match.

Last year the Commonwealth of Virginia received over $16 million for delinquent income tax debt. We estimate that Virginia local

governments would recover between $65 and $70 million during its

first year of participation in the program. Virginia treasurers have

a great deal of collection tools given to us by the Virginia General

Assembly, but I feel that this pilot program will benefit all local

governments, but especially those local governments that do not

have a vast amount of collection tools at their disposal.

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This is a bipartisan good government bill. It makes an important

step toward the coordination between three different levels of government to address the tax gap. It protects the honest taxpayer

from any tax increase. The only cost is to the delinquent taxpayer,

who now is finally paying his tax obligation.

Thank you for your consideration. I am happy to answer any

questions regarding the legislation.

[The prepared statement of Ms. Weth follows:]

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Mr. TOWNS. Thank you very much, too, for your testimony.

Ms. WETH. Thank you.

Mr. TOWNS. Let me begin with you, Mr. Mayor.

Why do you suggest a pilot program rather than just doing it?

Mr. CORNETT. Well, I think we would just as soon just do it. I

think that the pilot program, to a certain extent, isn’t our idea. We

are just willing to proceed with it and make it as large as possible.

Mr. TOWNS. And you think that would sort of bring people on

board that might not be on board?

Mr. CORNETT. Well, I don’t know necessarily if it would do that,

but I think the larger you could make it the better it would be for

local government, the more of these delinquent taxes that we would

be able to recoup. I know there is some reluctance to try to do this

all across the country all at once, just because there might be some

people on the other end of this that are leery that it will work as

smoothly as we project, but we would like to see it.

You have to understand that local governments work so differently throughout the country that I think it would be a good

idea to try every different taxing situation you could find. The relationship between municipal government and county government

and State government work distinctly different in almost all 50

States.

Mr. TOWNS. Right.

Mr. CORNETT. It is going to work better in some places than it

will in others.

Mr. TOWNS. Right. I guess what we need to do is probably get

a good definition of local taxes. I mean, what do you consider local

taxes? I mean, I think we need to get a good definition, because

when you look at parking tickets, library fines, sewer fees, and

sometimes even trash collection——

Mr. CORNETT. I would consider local sales taxes and local property taxes as local taxes.

Mr. TOWNS. Ms. Coates.

Ms. WETH. Mr. Chairman, that was a concern of a lot of folks,

that we would throw in library fines and parking tickets and different fees of that nature, but this is limited specifically to local

government tax debt, so it would only be for a tax that a local government charges, so parking tickets and library fines would not be

allowed to be submitted to Treasury.

Mr. TOWNS. Right. Thank you, that is good to know.

Ms. WETH. Mr. Chairman, also, as the mayor stated, sometimes

things are called different things in different communities, so I believe the bill allows it up to Treasury to work on what would be

considered a local tax. So there is a lot of flexibility in here, and

I personally think that one of the best things about the pilot program is that it gives us an opportunity to work with Treasury and

work out those details so that it makes common sense.

Mr. TOWNS. Right. And I must admit that I sort of like the pilot

program, too, sort of like test it before we really implement it fully.

Ms. FORD-COATES. Right. And, of course, with States like Florida

we have no income tax, and we are not sure exactly how those of

us who have no income tax will fit into this in the future, but it

is an area that we want to support or neighboring States and our

colleagues in local government so that they can start that, and

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maybe there is a place for us down the road after all the details

are worked out.

Mr. TOWNS. Right. In your testimony you used the word flexibility twice. What do you really mean by flexibility? You said greater

flexibility.

Ms. FORD-COATES. We would like to see the Department of

Treasury have the opportunity to decide on the number of pilot programs. If there are a certain number of States, as in the current

bill, if there is a State that is suddenly ready sooner, we would like

Treasury to have that opportunity to make some of those decisions

as the process is worked through.

Mr. TOWNS. Yes. Let me ask all three of you this question: what

do you see that is not in there that should be in there, if we are

looking for an ideal situation here?

Ms. WETH. Mr. Chairman, I don’t see anything missing in the

legislation. I do agree it would be a wonderful thing to open it up

to all the States and let all local governments participate, but I

think we do need to make it a pilot program to allow the Treasury

some time to evaluate the program and work out the kinks before

it is allowed for each State and each local government. But I am

afraid nothing comes to mind that I see specifically missing in the

legislation as it is written now.

Mr. TOWNS. All right.

Ms. FORD-COATES. Mr. Chairman, we would like, again, an area

that we believe that the Treasury could work out is the question

on how certified mail is specified within the bill, because there are

certain products that the Postal Service offers that change on a

regular basis. Technology changes. We would prefer something

along the lines of adequate notice, whatever. We want to make

sure that the taxpayer knows what is going on. There is no question about that. But I think that is one of those things that Treasury could work out with your staff as the bill proceeds.

Mr. CORNETT. I have no suggestions.

Mr. TOWNS. That means it is a good bill.

Mr. CORNETT. Nice work.

Ms. FORD-COATES. We think so.

Mr. TOWNS. Thank you very much.

I yield to the ranking member.

Mr. BILBRAY. Thank you very much.

I guess after being 18 years in local government and having

worked with the Federal Government, I think even the mayor on

second thought will look at this. Twenty-four months is a flash in

the pan for the Federal Government. I think, Mr. Chairman, one

of the biggest problems that those of us in local government have

with the Federal Government isn’t that they try new things or that

they make mistakes, but they usually don’t want to go back and

correct the mistakes once they have made it.

I think that one great advantage with a pilot program is that it

does give political cover. I remember when I was 27 years old when

I was elected mayor, and I developed a policy of pilot programs because you could say let’s try this, and then if it doesn’t work out,

instead of taking the political heat that it didn’t work out you say,

see, I was right to have it as a pilot program.

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I think that we are going to find things that need to work out,

but I have to sort of agree with the mayor and, I know these numbers, but the four to eight is a workable number. I would only say,

Mr. Chairman, we at least consider that aspect of it as the possible

expansion, and as being one of the co-sponsors on this I think that

we ought to at least discuss that testimony and look into it.

All I have to say is, to the gentlelady from Florida, my uncle was

a tax assessor in Las Vegas for 30 years, a dyed-in-the-wool Democrat, but he survived in that environment for 30 years. So how

tough you think it is, you can imagine being out there in the desert

with all those slot machines.

Ms. FORD-COATES. I sympathize.

Mr. BILBRAY. My question would be: how successful do you think

the process is right now that we are building on here?

Mr. CORNETT. I guess the question I would have is what percentage of tax refunds now are coming in. Do most people get a refund?

Do most people not get a refund? Even if this legislation were 100

percent effective it is still not going to solve 100 percent of our

problem. But we are talking about millions of dollars, and at local

government’s level a lot can be done with those millions of dollars.

Mr. BILBRAY. I am out of order because I haven’t done a tax return in probably 20 years, but my family has owned a business

from the year I was born. I guess my mother decided to get out of

having children and go into something more productive after she

looked at me. But the one thing that is obvious for those of us that

were tax consultants is the overwhelming majority of the rank and

file that file returns are getting money back. That is the biggest

incentive for people to file returns. There is a whole other problem

with those that have outstanding debts with the Federal Government, but for those that are filing, there really is an incentive out

there.

I think on the negative side you might be able to say that some

may not file now, knowing their withholdings won’t be returned to

them, but I think that is a very small number in reality. I think

by the time they get hit with this it will be too late for them to

know about not filing. So I think we need to build on this and

hopefully we will be able to work out all the details.

The challenges that we have with who we choose is going to be

a tough one, but I hope that we all work together on this.

I ask, because we are all sort of local government people here,

that the separation of powers is so often talked about between the

three branches of Federal Government, and I wish our government

teachers would teach more often that the real separation of power

is between the local, special district, city, county, and State. That

is where the real power is, than those of us in the Federal Government.

Mr. Chairman, I support this program and I support it for a big

reason. I think those who always talk about that the Federal Government isn’t sending enough resources down to what we call the

first responders should look at this as a way, instead of us taking

Federal money and controlling it and conditioning it and sending

it down and making the local government say thank you, sir, for

letting me have this little bit, ought to be empowering in working

with the local government to get their own money from their own

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constituents so they can do it with no conditions and then the first

providers won’t be needing to come to us hat in hand, or a lot less

hat in hand, because they will have those resources that are being

denied them now, not by the Federal Government but by those

deadbeat taxpayers out there, both women and men.

I appreciate the chance for you to be here to day, and I yield

back, Mr. Chairman.

Mr. TOWNS. Thank you very much.

I want to thank all of you for coming and testifying. I was wondering if there was any kind of collection tools that need to go into

this. I mean, do you really feel that part is covered? Do we need

any collection new rules that need to be changed from the Federal

level in order to make it possible for you to be able to collect?

Ms. WETH. Well, Mr. Chairman, I can speak about Virginia. In

Virginia the local government treasurers look to the Code of Virginia for our power for our collection tools, and in Virginia we have

an amazing amount of collection tools. We are able to lien bank accounts. We are able to seize vehicles. We are able to go into businesses and seize the property and the business. We do employment

liens. So we have an amazing amount of collection tools, but I don’t

believe many of the counties and cities in the United States do not

have the same powers that the treasurers in Virginia have.

Mr. BILBRAY. Would the gentleman yield a second?

Mr. TOWNS. I would be delighted to yield.

Mr. BILBRAY. You hit on a point that I think all of us need to

talk about. You are talking about, like, the bank accounts. I don’t

know about your neighborhood, but there was a big issue about

what constitutes a proper documentation to open bank accounts,

and there was this issue of foreign governments giving documents

that aren’t secure, and there is such potential for people to be opening bank accounts under false identities and hiding their resources.

This is specifically why we have a Federal law that says you are

supposed to be proving who you are when you open a bank account.

I think, Mr. Chairman, we need to be very much on top of that

in talking to the Finances Committee because just something like

this, that somebody starts opening bank accounts under a different

Social Security number or under a taxpayers ID number rather

than one that we can track, they will use these for hiding.

I want to say it because we don’t think it bothers us until we get

to exactly like you said and you know the people that are doing

this will learn how to leverage the system and go over. So please,

when we talk about the proper identification, things like implementation of a real ID is going to be essential to programs like this.

I yield back, Mr. Chairman.

Mr. TOWNS. Yes, thank you.

Ms. WETH. I couldn’t agree with you more, Representative

Bilbray. I think that is an excellent point. I wasn’t even aware that

people were doing that these days, but in this area of identity theft

and all the craziness that is out there, I think that is an excellent

requirement.

Mr. TOWNS. The reason I was late coming back here is that I am

a sponsor of the spyware bill, and it was being marked up. That

is what I was doing.

Ms. FORD-COATES. I think everything has been said.

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Mr. TOWNS. Mr. Mayor.

Mr. CORNETT. No additional comments.

Mr. TOWNS. All right. Thank you so much, all of you, for your

testimony. We look forward to working very closely with you in the

days and months ahead.

I yield.

Mr. BILBRAY. I apologize, but I would ask unanimous consent to

introduce into the record the opening statement by Ranking Member Davis.

Mr. TOWNS. Without objection.

Mr. BILBRAY. Thank you.

[The prepared statement of Hon. Tom Davis follows:]

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Mr. TOWNS. Thank you so much for your testimony.

Mr. CORNETT. Thank you.

Ms. FORD-COATES. Thank you.

Ms. WETH. Thank you.

Mr. TOWNS. The committee is now adjourned.

[Whereupon, at 3:40 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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