Questionable new IRS requirement postponed for bit longer

According to IRS tax attorneys and other tax professionals, the IRS is giving governmental agencies a bit more time to implement changes needed to meet new IRS requirements. Specifically, the IRS has postponed a three percent (3%) withholding tax to be levied on contractors providing products and/or services worth more than ten thousand dollars ($10,000.00).

The final IRS rule, which was just published in the Federal Register today, delays a requirement that all federal, state and local governments (with expenditures exceeding $100 million annually) withhold three percent (3%) of payments due on vendor contracts, including classified and non-confidential contracts, grants to for-profit companies, and farm and Medicare payments.

Originally, the new requirements were scheduled to take effect January 1, 2012, but now they’ve been extended twelve (12) months to apply to payments on new contracts made after December 31, 2012. Further, the new rule will affect all contracts starting on December 31, 2013.

Many tax lawyers argue the legislation requires federal, state and local governments to become compliance police for the IRS. What’s more, these same tax attorneys maintain the requirements are unnecessarily burdensome, particularly during a difficult economic period, and point out other less problematic compliance measures are available to help ensure contractors pay their taxes.

Some business experts and tax lawyers are very concerned the IRS rule is nothing more than a scheme to get contractors to pay taxes in advance. They worry that contractors will then have to wait for the IRS to send them a refund after the government has held their money for a year or more. What’s worse, they warn that taking three percent (3%) of the contract value off the top as withholding taxes will adversely affect cash flow in small businesses where cash flow is king. It may also cause inflationary pressures on government contracts, the higher contract price to off-set the withholding tax.

Most tax lawyers, business experts and politicians agree that postponing the IRS requirement made good sense. Some assert it is a bad policy at a bad time in the economy. While a few contractors may end-up owing back taxes and/or having unfiled returns, and the new IRS requirement will certainly improve compliance if implemented as planned, many tax lawyers, politicians and business experts still question whether this is the best way to help ensure contractor tax compliance and help keep them from owing back taxes in the future.

If you are a contractor providing products and/or services to a government entity and have questions about this new IRS rule, back taxes, unfiled returns or any host of tax related questions, you should consult a competent tax attorney or other tax professional to get the answers you need.


Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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