Abo and Company Finally Agrees with the IRS(at least on tips for employers who outsource payroll duties) Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities. Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. We just received an alert from the IRS advising us that over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Hell, Abo and Company has so warned clients for years on this issue. We just dug up an Abo and Company 2006 client advisory where we spoke to a then recent tax court opinion which held the taxpayer, Pediatric Affiliates, “…is responsible for supervising the performance of an agent hired to prepare tax returns and make tax payments on the taxpayer’s behalf”. Here the service bureau, PAL, was Pediatric’s agent and the medical practice was held responsible for the service bureau’s failure to perform, EVEN THOUGH THE SERVICE BUREAU’S MANAGEMENT WAS CONVICTED OF EMBEZZLEMENT AND PERSONALLY USING THE UNREMITTED TAX PAYMENTS. The Court said that the taxes were, in fact, never paid to the IRS so Pediatric still owed them and the IRS could act to collect them. Double ouch. Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to its outsourced provider to make the required deposits or payments. Right after this past tax season, we passed along to a number of our clients an April 24, 2013 Wall Street Journal article that stated in the past five years federal officials have prosecuted at least a dozen mostly small payroll firms that together allegedly pocketed more than $300 million in taxes from their clients, according to the IRS tally based on public records. They commented that roughly 40% of small businesses use outside payroll services for tasks ranging from issuing paychecks to actually paying state and federal employee taxes. Hey, Abo and Company and even most of our CPA colleagues use a payroll service bureau to withhold, report and remit. Here are some steps Abo and Company, as well as the IRS, suggest an employer can take to protect themselves from unscrupulous third-party payers.
While we haven’t seen the IRS so suggesting, for added protection, we often recommend employers ask to see verifiable proof that the provider has some form of fiduciary bond in place to help protect against the service provider defaulting on its obligations. |