The Risk of Certifying as Small Without Tax Returns

March 6, 2018

By Antonio R. Franco
Practice Areas: Business & Corporate Law and Government Contracts Law

We are regularly contacted at this time of year, before tax returns are due, by companies that wish to pursue small business set-aside contracts but have not yet filed their tax returns. These inquiries stem from the belief by some firms that, because their tax returns have not been completed, they may still self-certify as a small business while knowing, or suspecting, that their immediate, prior year revenues make them large. This misunderstanding of the size regulations can have dire consequences on a firm that erroneously certifies to being small. Given the risk of not only a size protest but also civil (and criminal) penalties, firms competing for small business set-asides are well advised to exercise caution when making a size self-certification before their tax returns are completed.

Because the Small Business Administration (“SBA”) relies on tax returns in determining a firm’s size, some firms believe they can self-certify as small until their returns indicating otherwise have been filed. However, just because a firm’s income tax returns have not been filed does not mean it can disregard other available information that may be used in determining size. The SBA reviews financial statements, books of accounts, and other records to determine a firm’s size when income tax returns are unavailable.

Likewise, firms certifying as small at this time of year should rely on similar information and run their numbers by their accountants. Just because tax returns are unavailable does not give a firm a license to self-certify as small without regard to information on its books proving differently. If its size is protested, the SBA will consider the other documents that a government contractor should have available. If the tax returns are prepared and later show that the firm was actually large, a protest will be sustained notwithstanding information relied on by the firm, which led it to believe it was small.

In addition to losing the contract, there is a risk that such a firm may also be found to have intentionally misrepresented its size long after the contract award. The SBA and procuring agencies may protest a firm’s size at any time, including months, if not years, after an award. If a protest is filed and the government concludes that the firm intentionally misrepresented its size, it may be forced to return all the proceeds on the contract under the presumed loss rule.

About the Author: Tony Franco is a senior partner with PilieroMazza and oversees the Government Contracts and Small Business Programs & Advisory Services Groups. He may be reached at afranco@pilieromazza.com.