AICPA Supports Repeal of 3 Percent Withholding Requirement

October 13, 2011

The American Institute of Certified Public Accountants urged Congress to repeal the law that generally requires federal, state and local governments to withhold 3 percent on payments made to government contractors, as well as certain other payments such as Medicare.

“We strongly support H.R. 674,” which would repeal the 3 percent withholding requirement Congress passed in 2005 as part of the Tax Increase Prevention and Reconciliation Act, Patricia Thompson, chair of the AICPA Tax Executive Committee, said in an Oct. 10 letter to members of the House Ways and Means Committee. 

“Our CPA members who provide services to state and local governments are hearing that these governmental entities consider the 3 percent withholding law to be an unfunded mandate, forcing them to incur a costly reprogramming of their accounting and procurement systems during difficult economic times,” she said.

“Moreover, in the absence of repeal, the withholding law will likely have a pronounced (but negative) impact on government contractors with low profit margins, potentially threatening their operations due to a tightening of cash flow,” Thompson said.  “Our members have also heard from clients that the withholding law will have a negative impact from a Medicare payment perspective on physicians, nurses, medical support staff, and hospital administrators.  We emphasize this latter point, particularly since we 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.”

The 3 percent withholding requirement is set to become effective on Jan. 1, 2013.  The withholding requirement has been delayed twice, and President Obama included a provision in his American Jobs Act of 2011 that would delay implementation until 2014.

H.R. 674 was introduced by Representative Wally Herger, who is a Republican from California and a member of the House Ways and Means Committee.  The bill has 262 co-sponsors and was approved by the Ways and Means Committee on Oct. 13.

Earlier this year, Thompson wrote U.S. Senators and submitted written testimony to the U.S. House of Representatives Small Business Subcommittee on Contracting and Workforce  in support of repeal.
More information is available in the May 11 Journal of Accountancy article.