Tax & Accounting Blog

Repealed! President Signs Tax Law Repealing the Requirement for Federal, State and Local Governments to Withhold 3% of Many Payments to Vendors

1099, Tax Information Reporting, Trust Tax November 30, 2011

Thursday morning, November 21, the President signed H.R. 674, which enacts repeal of Section 3402(t) of the Internal Revenue Code – that is, the requirement for federal, state and local governments and their agencies and instrumentalities to withhold 3% federal income tax from many payments for services and payments for property (tangible property such as goods, materials, equipment and so on).
The now-repealed Section 3402(t) tax law was originally enacted in 2005 as a means of collecting more of the federal tax money legitimately owed but not paid by government contractors.  The effective date of the mandatory withholding was postponed several times, however, until now the law has been repealed before ever having gone into effect.
As a different means of addressing the problem of government contractors not paying their taxes, the repeal act changes the rules for IRS levies against federal government contractors.  It authorizes the IRS to collect 100% of federal government payments to contractors (rather than the currently authorized 15%) under a levy due to the contractor’s failure to pay federal tax due.  This 100% levy is applicable to vendors of property, goods or services sold or leased to the federal government.
The Vow to Hire Heroes Act was also enacted in the same H.R. 674, which the President signed this morning.  The Vow to Hire Heroes Act is a package of job training programs and related forms of assistance, and an employer tax credit for hiring unemployed veterans.