The IRS warns employers to be careful when using third-party payroll services because choosing the wrong one can end up being very expensive indeed.
IRS Commissioner Chuck Rettig explained to employers, “A business doing everything else right can suddenly find its future in doubt if it falls victim to an unscrupulous third party that fails to make the required payroll and withholding deposits.”
Employers who choose to outsource this function remain legally responsible for any and all payroll taxes due. These include any federal income taxes withheld and the employer and employee shares of Social Security and Medicare taxes.
One third-party arrangement that can reduce this risk is a Certified Professional Employer Organization company. Unlike other third parties, a CPEO is solely liable for paying the customer’s employment taxes, filing returns and making deposits and payments for the taxes in regard to wages and other compensation paid to employees.
Also deemed registered Reporting Agents (RAs), they have informed IRS of their relationships with particular clients (Form 8655, Reporting Agent Authorization, signed by the client). The RA is required to deposit clients’ taxes via the Electronic Federal Tax Payment System (EFTPS) and is authorized to exchange information with IRS on behalf of clients when an issue needs to be resolved.
To protect themselves, IRS says employers should take the following steps:
Enroll in EFTPS and make sure the PSP or RA uses EFTPS to make tax deposits. Available for free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, allowing them to monitor whether their PSP or RA is properly carrying out its tax deposit responsibilities.
It also gives employers the option to make any missed deposits themselves and allows them to pay other individual and business taxes electronically, either online or by phone.
Understand that the employer, not the RA or PSP, is ultimately liable for the timely filing of returns and payment of taxes. RAs are required to deposit clients’ taxes via EFTPS and, with limited exceptions, electronically file the tax returns. They also must provide clients with a written statement reminding the employer that it, not the reporting agent, is ultimately responsible for the timely filing of returns and tax payments.
This statement must be provided when entering into a contract with the employer and at least quarterly after that. See Reporting Agents File for more information. If the PSP fails to make the federal tax payments, the employer is liable for any taxes, penalties and interest due. In addition, the IRS also may choose to file liens and issue levies against the employer responsible for the tax payments.
Refrain from substituting the third party’s address for the employer’s address. Although employers can agree to this change, the IRS recommends continuing to use its own address as the one on record with the agency. This ensures the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also allows employers to monitor the third party and easily spot any improper diversion of funds.
Report PSP fraud. If an employer suspects its PSP of improper or fraudulent activities involving the deposit of federal taxes or the filing of returns, the employer can file a complaint using Form 14157 Complaint: Tax Return Preparer. Once received, PSP-identified complaints will receive expedited handling and investigation, the IRS says.
Don Fort, chief of IRS Criminal Investigation, stresses, “Those parties who do violate that trust may go to jail, but the defrauded employers’ problems are just beginning. There is no substitute for continued diligence in ensuring something so important is done right. Your employees are counting on you.”