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IRS Fixes Date Of Contractors Tax Hearing

September 2011 - Tax & Private Client. Legal Developments by Hassans.

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The United States Internal Revenue Service (IRS) has announced that a hearing will be held on September 12 to consult on the proposed introduction of the 3% contractors' withholding tax, which could come into force on January 1, 2013.

Section 511 of the Tax Prevention and Reconciliation Act of 2005 requires federal, state and local governments to withhold 3% from nearly all of their contract, Medicare and farm payments. When it was first enacted, Congress immediately delayed its implementation for five years until the end of 2011. Subsequently, the IRS further delayed payments of the withholding requirement until after December 31, 2012 because, they said, implementation would be too difficult.

The announcement of the hearing was made in the Federal Register on August 17, with its subject being the notice of proposed rulemaking which had been originally published in May this year.

The original intention of the 3% withholding requirement was to close the tax gap, but it has been pointed out that, while it would place an increased burden on businesses of all types, small businesses would be hurt the most.

Small businesses today already operate on thin profit margins with little room for any additional withholding, the Chairman of the House of Representatives Small Business Subcommittee on Contracting and Workforce Mick Mulvaney had said earlier this year. Many small business contractors work for the government for less than a 3% profit margin. This 3% withholding requirement would force these contractors to wait until the end of the tax year to fully recoup their expenses, much less take home any profit.

He added that, even worse that implementing this 3% withholding requirement means treating all small business contractors with suspicion. Instead of rewarding those small businesses that choose to compete for and win contracts, the government essentially pre-accuses them of cheating on their taxes and withholds 3% of all payments.

Patricia Thompson, from the American Institute of Certified Public Accountants, concluded that, 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. The IRS already has a number of tools it uses to thwart non-payment of federal taxes by government contractors and granting of contracts to businesses that have unpaid federal taxes.

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