IRS Delays Start of Contractor Withholding Rule for One Year

The Internal Revenue Service is delaying by one year the start of a rule requiring federal, state and many local governments to withhold taxes from payments to contractors.

The IRS said today that the rule, which requires governments to withhold 3 percent of all contract funds, would apply to payments made after Dec. 31, 2012. The agency had planned to implement the rule on Jan. 1, 2012.

Congress created the withholding requirement in 2006 and the Obama administration in March called for a three-year delay. Opponents of the measure, which include defense contractors, construction companies and state governments, said the delay gives them more time to press Congress to repeal the rule.

“It’s a good thing from the standpoint that it gives us time for it to be repealed,” said Cornelia Chebinou, the Washington director of the National Association of State Auditors, Comptrollers and Treasurers. “It doesn’t solve the issues generally.”

Defense contractors including Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC) have led the lobbying effort to undo the withholding requirement. Congress already delayed the start date for withholding from 2011 as part of the 2009 stimulus law.

Seeking Rule’s Repeal

Roger Jordan, vice president of government relations for the Arlington, Virginia-based Professional Services Council, the nation’s largest trade association for contractors, said he would have preferred a three-year delay. His group will press for the regulation’s repeal, he said, maintaining that the rule will cause contractors to charge more to the government.

“They’re going to want to recoup the cost,” he said. “The only way they’re going to be able to do that is by potentially charging higher rates to the government.”

Representative Wally Herger, a California Republican who is a member of the Ways and Means Committee, has introduced legislation that would repeal the rule. The bill has not advanced, in part because of uncertainty over offsetting its cost. A 2009 congressional estimate pegged the 10-year cost of repeal at $10.9 billion.

Ways and Means Chairman Dave Camp, a Michigan Republican, has expressed interest in the issue. He hasn’t scheduled a hearing on the rule.

Lawmakers established the 3 percent withholding requirement to reduce tax cheating. The Government Accountability Office said in 2007 that federal contractors owed more than $3.3 billion in taxes. A March report from the Treasury Inspector General for Tax Administration said the IRS hasn’t moved quickly enough to suspend payments to some of its own contractors that owed taxes.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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