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 provi-
sions such as deductions for mortgage
interest, charitable contributions, and
state and local taxes. For some tax-re-
formpurists, these deductions are not
economically sound. But political re-
alists 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 problemis 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
I
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 Dem-
ocratic Party leader working together
to pass legislation. As you know, dif-
ferent and complex dynamics exist be-
tween the Senate and House, which
can add to the challenges of accom-
plishing 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 account-
ing profession can remem-
ber 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.
Time for Tax Reform
By Randy Respess, Tax Principal
8601 Robert Fulton Drive l Suite 210 l Columbia, MD 21046 l 410-720-5220 l Fax 410-381-2524 l www.uhy-us.com
Unallowable
Costs
Do contractors face
penalties for including
unallowable costs in their
incurred cost submissions?
By Marlon Bernal, Audit Principal
I
ts pretty well
known that if
the Defense
C o n t r a c t o r
Audit Agency
(DCAA) finds
unal l owabl e
costs in a con-
tractors annual
incurred cost submission, they will
recommend that the contracting
officer levy a penalty to the of-
fending contractor. Certain provi-
sions 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 prece-
dent, it is highly unlikely that the
U.S. government will be so forgiv-
ing during these times.
continued on page 2 continued on page 2
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For more information,
please contact Jim Peacock
at jpeacock@uhy-us.com
Government
Contractor
Insider
UHY Advisors
Mid-Atlantic MD, Inc.
Tax & Business Consultants
February 2014 Vol. 5 No. 1
UHY LLP brings specialists in government
contracting solutions in accounting and tax
Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a so-
licitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should
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with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed
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ranties of performance, merchantability, and fitness for a particular purpose.
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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 re-
duce the corporate rate from35 per-
cent to 25 percent and to reduce
the individual rates to 10 per-
cent and 25 percent. We
have a second-termpresi-
dent who does not ap-
pear to support tax
reform as President Rea-
gan 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 signif-
Time For Tax Reform
continued from page 1
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Unallowable Costs
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 Com-
mittee Chair, Dave Camp (R- MI), and a
There are two kinds of penalties. The
first is the penalty that applies to un-
allowable costs defined in the FAR
Part 31 or the corresponding Agency
FAR Supplements. The second
penalty applies where the contract-
ing 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 North-
rop Grumman and the government
succinctly illustrates the application of
the second penalty. Northrop Grum-
man paid $11.4 million to settle a U.S.
government claimbased on its failure
to abide by a 2002 settlement agree-
ment with the Defense Contract Man-
agement 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 un-
allowable 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 contrac-
tor, have reached an agreement with
the contracting officer over the al-
lowability 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
reform is necessary and would help
promote economic growth, none can
agree on the path to get there.

icant reformare 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 corpo-
rate 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
the initial House bill designation HR1
for the tax reform bill. That is an indi-
cation that tax reformis 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 con-
clude that although Rep. Camp and
Sen. Baucus have been diligent in
working on their tax reform bill, get-
ting together a proposal that is ac-
ceptable to both parties in this
legislative session will be more than a
long shot.