The American Institute of CPAs has written to the leaders of Congress's main tax-writing committee urging them to repeal a requirement that would soon force federal,state and local governments to withhold 3 percent on the payments they made to most government contractors,including certain other payments such as Medicare.

A bill introduced by Rep.Wally Herger,R-Calif.,known as H.R.674,would repeal the 3 percent withholding requirement,which Congress originally passed in 2005 as part of the Tax Increase Prevention and Reconciliation Act.The AICPA asked Congress to support Herger's bill.

"Our CPA members who provide services to state and local governments are hearing that these governmental entities consider the 3 percent withholding law to be an unfunded mandate,forcing them to incur a costly reprogramming of their accounting and procurement systems during difficult economic times,"said AICPA Tax Executive Committee chair Patricia Thompson,in a letter to the leaders of the House Ways and Means Committee,chairman Dave Camp,R-Mich.,and ranking Democratic member Sander Levin,D-Mich.Herger is also a member of the committee.

"Moreover,in the absence of repeal,the withholding law will likely have a pronounced(but negative)impact on government contractors with low profit margins,potentially threatening their operations due to a tightening of cash flow,"Thompson said."Our members have also heard from clients that the withholding law will have a negative impact from a Medicare payment perspective on physicians,nurses,medical support staff and hospital administrators.We emphasize this latter point,particularly since we are not aware of any data suggesting that medical professionals(in general)are a compliance risk with respect to their payment of federal income taxes,considered the fundamental reason for imposing a withholding regime.”

The withholding requirement has already been delayed twice.Congress delayed the effective date of the provision in 2009 from Jan.1,2011 to Jan.1,2012,and the Internal Revenue Service issued final regulations on May 9 that included a further one-year delay in the effective date until Jan.1,2013.President Obama included a provision in his American Jobs Act of 2011 that would delay implementation until 2014.

Herger's bill has 262 co-sponsors and may be considered by the Ways and Means Committee this week.