IRS Delays Enforcement of 3% Withhold Rule

June 3, 2011

The Internal Revenue Service has announced that it will suspend enforcement of the 3% withhold rule until January 1, 2013.  Originally enacted as part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), this law requires all federal agencies withhold an amount equivalent to 3% of the federal payments made to individuals or corporations providing services to the federal government (including Medicare). The revenues collected through this withhold would be held by the Treasury Department to be applied against a future tax liability that might be incurred by this taxpayer. Although this law was enacted in 2005, enforcement of the law has been delayed by Congress.  Until this most recent announcement by the IRS, the law was slated to take effect on January 1, 2012.  Now that has been delayed until 2013.


The IRS is adopting a $10,000 threshold for the 3% withhold meaning that the government agency (or it's contractor) will only be required to withhold the 3% on payments in excess of $10,000.  The $10,000 threshold applies on a payment-by-payment basis; therefore, if a government entity makes a single payment of $10,000 or more for multiple items or services, the entity must withhold 3% of the payment.


For Medicare, this means that if a physician's practice bills Medicare $3,000 each day for five days for services provided to Medicare beneficiaries during those days, and the Medicare contractor makes a single payment of $15,000 ($3,000 X 5 days), the payment threshold applies to the $15,000 payment.  If, however, the Medicare contractor remits a daily payment to the provider (i.e. $3,000 per day) these multiple payments to the practice will generally not be aggregated in applying the $10,000 threshold.  Because each payment was less than the $10,000 threshold, there would be no withhold. 


Finally, it should be noted that the IRS is adopting certain "anti-abuse" policies to prevent an agency from dividing payments into multiple payments to avoid the threshold.  For example, if a government contractor (MAC, FI, etc.) is scheduled to make a payment to a provider of Medicare services in the amount of $15,000 for services on July 2, 2013, but divides the payment into payments of $7,000 on July 1, 2013, and $8,000 on July 2, 2013, respectively, to avoid withholding, the government entity will be treated as having made a single payment of $15,000 on July 1, 2013.


HBMA and other organizations are actively encouraging Congress to either repeal this law entirely or, at a minimum, repeal this law as it relates to Medicare payments.  Several bills have been introduced in Congress to repeal the 3% withhold but to date, none have been voted on by Congress.


Please be on the lookout for future messages on how you can help encourage Congress to repeal this cumbersome and unnecessary law.

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