Congress Sends Repeal of 3% Government Contractor Withholding to President

November 17, 2011

Late on Wednesday, the House of Representatives passed a bill (H.R. 674) that will repeal a 3% government contractor withholding requirement. The vote was 422-0. The Senate approved the bill on Nov. 10, and it now goes to President Barack Obama for his signature.

The bill repeals Sec. 3402(t), which requires withholding of 3% of payments by the federal or state governments or their instrumentalities or subdivisions (including multistate agencies) to any person for services or property.

The AICPA had urged Congress to repeal the measure, which was enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222. Ed Karl, the AICPA’s vice president–Taxation, commended Congress for passing the legislation, and he urged the president to sign it quickly.

The bill contains a handful of other tax provisions. It creates tax credits—called returning heroes and wounded warriors work opportunity tax credits—for employers who hire military veterans. The credits will be available for eligible individuals who begin work for the employer after the date of enactment.

The bill also amends the definition of modified adjusted gross income under Sec. 36B(d)(2), which determines eligibility for certain health care benefits and insurance coverage provisions under the Patient Protection and Affordable Care Act of 2010, P.L. 111-148. This change will be effective on the date of enactment.

Finally, the bill allows the IRS to impose a 100% levy against payment due to a vendor of property sold or leased to the federal government if the vendor has an unpaid federal tax liability. Under current law only vendors of goods or services are subject to the 100% levy. It also directs the Treasury Department to conduct a study on tax compliance by vendors to the federal government.

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