Coalition, AICPA Fight Government Contractor Withholding Law

The AICPA has added its voice to those calling on Congress to repeal a law that would require federal, state and local governments to withhold 3% on payments made to government contractors, and on Medicare, farm, and certain other payments. The potential impact of the withholding requirement is evident in the size and breadth of the Government Withholding Relief Coalition, a 100-plus-member coalition that comprises a broad spectrum of local governments, industrial and professional associations, and interest groups ranging from the National Association of Counties and the American Clinical Laboratory Association to the U.S. Chamber of Commerce and National Corn Growers Association.


The withholding requirement (found in IRC § 3402(t)) was enacted as part of the Tax Increase Prevention and Reconciliation Act (PL 109-222) in 2006, with an extended effective date to give state and local governments sufficient time to make changes to their accounting and computer systems to comply with the law. Congress has postponed the effective date once since enactment, with the provision now set to become effective on Jan. 1, 2012.  


The 3% withholding was intended to ensure that contractors pay their full tax liability; however, the coalition maintains that it could do more harm than good. Patricia Thompson, chair of the AICPA’s Tax Executive Committee, commented in letters to the Senate and the House that not only will the law cause substantial cash flow and administrative problems for government contractors and others, it will also force state and local governments to spend limited funds to reprogram their systems. According to Thompson, farmers and fishermen, who receive payments from the Department of Agriculture, will be adversely affected, as well as doctors and other medical professionals who accept Medicare payments. “[W]e are not aware of any data suggesting that medical professionals (in general) are a compliance risk with respect to their payment of federal income taxes, considered the fundamental reason for imposing a withholding regime,” Thompson observed.


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