Employers that retain payroll companies should be advised of IRS regulations, and changes, as they relate to payroll service companies. The Treasury Inspector General for Tax Administration (TIGTA) recently sent a report to the IRS, citing improvements needed to safeguard and protect employers that use payroll providers.
The TIGTA Audit Report No. 2015-40-023 states, Processes Are Needed to Link Third-Party Payers and Employers to Reduce Risks Related to Employment Tax Fraud.
The audit has triggers Internal Revenue Service’s Cracking Down on Payroll Service Providers. This crackdown may effect you as an employer, and you should know your rights. Learn about the responsibility of payroll companies, and their tax reporting obligations, and your payroll tax obligations.
The TIGTA noted that several payroll providers have not been compliant with payments and filing requirements. In simplest terms, this means that several payroll companies have impounded taxes on behalf of their client and then did not remit them to the Internal Revenue Service. The audit report also stated that processes are needed to link third party payers to employers, to reduce risks related to employment tax fraud.
TIGTA has classified four types of third party providers:
Payroll Service Providers (PSP), which have two types:
Basic PSPs that prepare signature-ready paper returns for employers to sign and file.
PSPs that also impound and pays taxes.
Reporting agents are common payroll service companies that are a type of PSP, but also file an 8655 with the IRS, process tax returns, sign as reporting agents, and impound and pay taxes.
Section 3504 agents, which file a 2678 with the IRS, report an aggregate return, and withhold and remit taxes.
Professional Employer Organizations (PEO) file a return with the PEO Federal Employer Identification Number (FEIN), and impound and pay taxes with the PEO FEIN.
The TIGTA report found that processes have not been established to link employers to third parties. Only the Section 3504 agents can be crosschecked. Also, as many PSPs know, the 8655 process is not completely accurate – and sometimes the IRS does not receive the 8655, and thus the connection is not established between the PSP and the employer. Many PSPs find this out when trying to resolve a notice and the IRS representative will not talk to the PSP since the 8655 has not been recorded by the IRS.
There are five recommendations for improvement made by TIGTA:
- The IRS can partner with the Bureau of the Fiscal Service to develop a plan to use the Electronic Federal Tax Payment System (EFTPS) to link the PSP with an employer. The IRS agrees with this recommendation.
- The IRS can establish a program whereby employers can inform the IRS of their PEO relationship and establish a certified PEO system. The IRS partially agrees with this recommendation, but does not have a budget to enforce this program.
- PEOs can attach a Schedule R (details of the individual clients) to the 941 filed each quarter. The IRS stated that they do not have the authority to require this with non-certified PEOs.
- The Commissioner, Wage and Investment Division, can develop a process to ensure 8655s are captured in the IRS system accurately. The IRS agrees with this recommendation (PSPs, rejoice!).
- The IRS can develop a process to ensure Section 3504 agents’ indicators are accurate. The IRS also agrees with this recommendation.
Rev Procedure 2012-32 is in effect, and PSPs are required to clearly state the IRS rules for impounding and remitting taxes in writing every quarter. Employers are also encouraged to check the deposits by enrolling in EFTPS. The language must be exact or similar to the following:
Please be aware that your clients are responsible for the timely filing of employment tax returns and the timely payment of employment taxes for their employees; even if they have authorized a third party to file the returns and make the payments. Therefore, the Internal Revenue Service recommends that they enroll in the U.S. Treasury Department’s Electronic Federal Tax Payment System (EFTPS) to monitor their account and ensure that timely tax payments are being made.
They can enroll in the EFTPS online at www.eftps.gov, or call (800) 555- 4477 for an enrollment form. State tax authorities generally offer similar means to verify tax payments. Contact the appropriate state offices directly for details. State governments, or at least some, have followed suit with the Internal Revenue Service.