IRS Delays 3% Withholding Requirement Another Year

It's not the outright repeal many are hoping for, but it is at least a brief reprieve: last week the IRS released the final regulations for the upcoming requirement that government agencies withhold 3% of most payments, and it included a surprise provision delaying the starting date a year - to January 1, 2013.

Time Required to Implement Regulations: For over two years, the IRS has been accepting public comments on their proposed regulations, and considered these comments in the formulation of the final rules. According to the IRS, "numerous commenters indicated that an extended period of time following the issuance of final regulations would be necessary" to fully implement those regulations. Sensitivity to these practical concerns prompted the one-year extension of the date the rules take effect.

Second Delay: This is the second time the effective start date of the legislation has been extended: withholding was originally slated to begin on January 1, 2011, but in 2009 Congress passed an extension which put off implementation until January 1, 2012.

Existing Contracts: Contracts that already exist on January 1, 2013 (and aren't changed significantly after that date) will not be subject to the 3% withholding requirement during 2013. However, beginning on January 1, 2014, all applicable payments will be subject to withholding, regardless of the contract's date.

Ongoing Repeal Efforts: The intention behind this latest delay by the IRS is to give businesses and governments enough time to prepare for the administrative, policy, and cash-flow challenges of the new law. Many, however, hope that it will also offer more time for a full repeal of the law by Congress. There are a number of repeal efforts currently pending:

• S. 89 and S. 164 - similar Senate measures, both of which have been in the Committee on Finance since January
• H. R. 674 - House bill (similar to the ones in the Senate) that has been in the Committee on Ways and Means since March, and has been steadily adding cosponsors in the mean time (it currently has 116)

The main obstacle to repeal is money. While the actual financial impact of the withholding (and even whether it will be positive or negative) is the subject of much debate, the official projections by the Joint Committee on Taxation from 2006 show nearly $7 billion of revenue over the first six years. To offset the uncertain costs associated with repeal, S. 164 would rescind $39 billion of discretionary funds that have been appropriated by various agencies but which are still unobligated.

Mike Purdy's Public Contracting Blog 

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