NEWSROOM

ABC April 16 testified before the Internal Revenue Service on how section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 should be implemented.  Section 511 requires that 3 percent of payments for goods and services made by federal, state and local governments and their agencies be withheld from government contractors.  

In the testimony ABC addressed the negative impact the withholding would have on the cash flow of small businesses.  Specifically, ABC pointed out that one of the stated goals of President Obama, to revive the economy and stimulate cash flow, will be hindered by the 3 percent withholding tax.  

“ABC believes that unless changes to current IRS approach are undertaken, there is a very real likelihood that any economic gains that have been made, and the achievement of the President’s goals, will both be severely imperiled if the Section 3402(t) withholding becomes effective as currently proposed,” testified Rich Shavell, CPA and immediate past chair of ABC National Tax Advisory Group.   

ABC suggested that to address cash flow concerns, IRS implement reporting requirements instead of withholding requirements and pointed out that when reporting requirements were implemented, compliance rose from 57 percent to 96 percent, but adding withholding requirements only slightly improved compliance further.  

“The implication is that if Congress were to simply implement reporting requirements on governmental payments, rather than extending withholdings to the payments, a significant level of compliance would still be achieved,” Shavell testified.  

In addition, ABC commended IRS for proposing rules that would exempt certain payments from the withholding, but noted that the recommended limit of $10,000 for payments and a corresponding $300 impact threshold was too low to be meaningful and suggested that IRS raise the threshold to at least $100,000.  

ABC also recommended permitting the amount withheld from a contractor be applied against the estimated tax liability for the specific tax quarter in which the withholding takes place; exempting payments from withholding where the three percent rate is expected to exceed the income tax the taxpayer will owe; establishing procedures so that vendors who are in compliance are not subject to withholding; and excluding S corporations, limited liability corporations and other pass-through entities from the requirements.  

“The hearing was a procession of various groups that universally panned the law itself,” Shavell noted after the hearing. “While the IRS may be stuck with implementing this law, it is Congress that needs to do something. This is bad law that was not properly vetted and is clearly not well thought out.”