The IRS would apply the withholding to physicians' tax obligations for the year. The remainder would be refunded after doctors file their tax returns the following spring, but in the meantime, the federal government would hold that money, interest-free.
Physician practices face a 3% reduction in payments, as well as potential accounting headaches, under a little-noticed tax provision.
A little-known provision tucked into a 2005 tax bill requires the Internal Revenue Service, starting in 2012 at the earliest, to withhold 3% of payments to any contractor doing work for federal, state or local governments. The Medicaid program is excluded because it provides services based primarily on patient need. But Medicare, which is age-based, is not exempt.
The GAO issued another report in March 2007 finding that approximately 5% of physicians and others who billed for Medicare Part B services continued to receive money from the program, despite having significant outstanding federal payroll and income tax liabilities.
Supporters of the withholding concept say it is a necessary response to widespread failures by contractors both to pay their taxes and to render good service.
Physicians may be able to escape the withholding, even if the provision remains in place by 2012. The MGMA's Smith said defense contractors, not the medical community, appear to be the intended target of the 2005 policy. He remains hopeful that physician practices will be exempted.