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Government Contractor Insider

UHY LLP brings specialists in government contracting solutions in accounting and tax

February 2014 Vol. 5 No. 1

Time for Tax Reform

By Randy Respess, Tax Principal s there hope for true tax reform? And if there were, what would that look like? To get there, it would take the president, a Republican Party leader and a Democratic Party leader working together to pass legislation. As you know, different and complex dynamics exist between the Senate and House, which can add to the challenges of accomplishing true tax reform. Now, to many, current thinking says Congress would enact a simplified rate system for individuals and a simplified tax code that broadens the tax base and closes loopholes and special interest tax shelters. But is that really possible? Veterans of the tax accounting profession can remember the Tax Reform Act of 1986. President Reagan, along with House Ways and Means Committee Chairman Dan Rostenkowski (D-IL) and Senate Finance Committee Chair Bob Packwood (R-OR), worked to get bipartisan support for the 1986 act.

Unallowable Costs
Do contractors face penalties for including unallowable costs in their incurred cost submissions?
By Marlon Bernal, Audit Principal ts pretty well known that if the Defense Contractor Audit Agency (DCAA) finds unallowable costs in a contractors annual incurred cost submission, they will recommend that the contracting officer levy a penalty to the offending contractor. Certain provisions are available, however, to contractors to have the penalties waived. Those provisions include instances where the unallowable costs are less than ten thousand dollars or simply convincing the contracting officer that it was an isolated omission and it will not happen again. Given recent precedent, it is highly unlikely that the U.S. government will be so forgiving during these times.
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While the act was a highly debated and controversial topic back then, it was also a significant victory for the power of political compromise with both parties giving concessions to get it passed. (The act passed by a vote of 292-136 in the House and by a vote of 74-23 in the Senate.) The result was a tax code with fewer tax loopholes and a simplified rate structure (15 percent and 28 percent). The act did leave in popular provisions such as deductions for mortgage interest, charitable contributions, and state and local taxes. For some tax-reform purists, these deductions are not economically sound. But political realists say these provisions are either too popular with the general public or too politically sensitive to consider cutting. The act also raised corporate and capital gain tax rates. The problem is that while the act changed the tax code, it did not change the system by which our tax laws are enacted. By 1993, the top individual tax rate was back to 39.6 percent spread among five tax brackets. Since 1986, there have been an estimated
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Time For Tax Reform continued from page 1 15,000 changes to the tax code. The tax code now is more complex than it has ever been and contains many of the special interest provisions that the 1986 act tried to remove. So where do we stand today? We have a House Ways and Means Committee Chair, Dave Camp (R- MI), and a icant reform are built into the system. Tax bills must be revenue neutral. That means that spending cuts cannot be used to offset reductions in tax rates. Also corporate tax loopholes must be eliminated to pay for corporate rate reductions and individual tax loopholes must be eliminated to pay for individual rate reductions. On a positive note, Speaker of the House John Boehner has reserved Unallowable Costs continued from page 1
There are two kinds of penalties. The first is the penalty that applies to unallowable costs defined in the FAR Part 31 or the corresponding Agency FAR Supplements. The second penalty applies where the contracting officer determines that a cost submitted by the contractor in its proposal includes a cost that has been previously determined to be unallowable for that contractor. This latter penalty could get costly as it is double the amount of unallowable costs charged to the contract(s). A recent settlement between Northrop Grumman and the government succinctly illustrates the application of the second penalty. Northrop Grumman paid $11.4 million to settle a U.S. government claim based on its failure to abide by a 2002 settlement agreement with the Defense Contract Management Agency (DCMA). Northrop charged costs related to deferred compensation to key employees to U.S. government contracts even though it had agreed not to do so as part of the 2002 settlement. The contracting officer found that Northrop had failed to honor its commitment and assessed a penalty equal to twice the amount of the unallowable costs. Northrop appealed to the U.S. Court of Federal Claims in Washington, D.C., but later decided to settle the matter for $11.4 million. Lesson learned: If you, as a contractor, have reached an agreement with the contracting officer over the allowability of certain costs, be sure to exclude the same or similar costs from any billings or incurred cost submissions. If not, it may come back to haunt you!

While all the parties involved agree that

agree on the path to get there.

promote economic growth, none can

reform is necessary and would help

Senate Finance Committee Chair, Max Baucus (D- MT), who have said their goal is to introduce tax reform that will eliminate tax loopholes and lower rates. Rep. Camps proposal is to reduce the corporate rate from 35 percent to 25 percent and to reduce the individual rates to 10 percent and 25 percent. We have a second-term president who does not appear to support tax reform as President Reagan did. Congress does not seem as inclined to compromise as it did back then. While all the parties involved agree that reform is necessary and would help promote economic growth, none can agree on the path to get there. Some of the obstacles to signifthe initial House bill designation HR1 for the tax reform bill. That is an indication that tax reform is going to be a priority in the next legislative session. The 1986 Tax Act took a good two years to assemble and pass. Both Rep. Camp (Committee Chair term limited) and Sen. Baucus (retiring and becoming the ambassador to China) will not be in their leadership roles in 2015. Add to this mix, the 2014 elections and we must conclude that although Rep. Camp and Sen. Baucus have been diligent in working on their tax reform bill, getting together a proposal that is acceptable to both parties in this legislative session will be more than a long shot.

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