AICPA Cheers Repeal of 3 Percent Withholding Requirement

January 9, 2012

The American Institute of CPAs cheered repeal of the 3 percent withholding requirement it had urged Congress to revoke.  President Obama signed the bill into law on Nov. 21, 2011 after Congress overwhelmingly repealed the requirement on Nov. 16, 2011.

The repealed provision would have generally required federal, state and local governments to withhold 3 percent on payments made to government contractors, as well as certain other payments such as Medicare. 

Edward Karl, CPA, AICPA vice president of taxation, said the AICPA had “strongly supported” H.R. 674, the bill passed by Congress to repeal 3 percent withholding requirement, and commended Congress for “recognizing it makes sense to repeal the requirement.”

In an Oct. 10, 2011 letter to the U.S. House of Representatives Committee on Ways and Means, Patricia Thompson, CPA, chair of the AICPA Tax Executive Committee, said, “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.”

“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.”

Thompson also 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.

The 3 percent withholding requirement became law in 2005 as part of the Tax Increase Prevention and Reconciliation Act and would have been effective on Jan. 1, 2013.  Congress delayed the effective date of the provision in 2009 from Jan. 1, 2011 to Jan. 1, 2012, and the Internal Revenue Service issued final regulations on May 9, 2011 delaying it until Jan. 1, 2013.  President Obama included a provision in his American Jobs Act of 2011 that would have delayed 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.  H.R. 674 became Public Law No. 112-56.