One provision within the 2006 Tax Increase Prevention and Reconciliation Act (TIPRA) is generating concern on the part of both businesses and governmental agencies. Section 511 requires many government agencies to withhold three percent from most payments for products or services they purchase. The change applies to government agencies with annual procurement budgets of $100 million or more, and to most purchases $10,000-plus. Some types of transactions are exempt from the legislation, including payments of interest and payments to tax-exempt organizations.

This provision initially was to go into effect for payments made after December 31, 2010. However, the stimulus package, AKA the American Recovery and Reinvestment Act of 2009, delayed the effective date for one year. Now, purchases made after December 31, 2011 will be subject to the mandate.

The reason behind Section 511? A number of contractors that do business with the federal government don’t pay their tax bills. According to a 2007 report by the Government Accountability Office, “Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System,” the amount of payroll and income taxes not paid by contractors to governmental agencies totals nearly $8 billion annually. What’s more, this estimate likely understates the true amount, the report indicated, because it doesn’t include contractors who neglected to file income tax returns or failed to report the full amount of taxes due.

As it now stands, the implementation date for Section 511 is about 18 months away. It’s possible that the provision will either be repealed or changed, although several bills that would have done this have failed to gain sufficient support. As a result, the agencies charged with implementing the measure may want to start planning the systems changes they’ll need. At the same time, organizations that do business with the government will want to begin estimating the likely impact on their cash flow, assuming the provision goes into effect on schedule.