The American Institute of CPAs is urging Congress to repeal a 3 percent tax withholding rule facing government contractors and individuals such as farmers and medical professionals.

In congressional testimony last Thursday, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, said the provision would subject the contractors to 3 percent withholding on payments they receive for goods and services provided to federal, state and local governments.

“The AICPA strongly urges Congress to repeal the 3 percent withholding on payments made to government contractors, and for Medicare, farm and certain other payments,” Thompson said in testimony submitted to the House Small Business Subcommittee on Contracting and Workforce for the hearing record.  The subcommittee’s hearing examined the need to repeal the provision.

Thompson said AICPA members are reporting that state and local governments are concerned about the cost to reprogram their systems to comply with the law and that their clients are concerned about the law’s potential impact on cash flow.

Thompson noted that Congress delayed the effective date of the provision in 2009 from Jan. 1, 2011 to Jan. 1, 2012. The Internal Revenue Service issued final regulations on May 9 that included a further one-year delay in the effective date until Jan. 1, 2013. The 3 percent withholding provision was approved by Congress as part of the Tax Prevention and Reconciliation Act of 2005.

“Without compelling evidence of non-compliance by these persons and business entities in terms of non-payment of their federal tax liabilities, the additional burden may not be necessary,” Thompson said.

The IRS already has a number of tools it uses to thwart nonpayment of federal taxes by government contractors and granting of contracts to businesses that have unpaid federal taxes, she noted.

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