Countless employers delegate some or their entire payroll and associated tax duties to third-party payroll service providers. Managing payroll is complicated and consumes a significant amount of time. This is especially true for small businesses with no dedicated employee to administer the company’s payroll. As such, employers often enter into agreements with third-party payroll companies to handle the employer’s employment tax withholding, reporting and payment responsibilities and obligations.
Earlier this year, the owner of an Akron-based payroll tax service was found guilty of four counts of theft and sentenced to prison for swindling local businesses out of more than $500,000. The owner operated a third-party payroll company engaged in accounting, payroll and tax services. Through the payroll services provided to customers, the owner had access to his clients’ bank accounts and withdrew money that was supposed to be used to pay local, state, and federal taxes. Instead of remitting that money to the appropriate governmental authorities, the owner diverted a portion of that money to his personal affairs. And sadly, this Akron case is not the only one of its kind. According to Attorney Susan Morgenstern with the IRS’ Taxpayer Advocate Service, similar cases are popping up all over the country.
Why is this important to understand? Typically, in the event of a default by a third-party payroll company, the employer remains responsible for the deposit of the federal tax liabilities and timely filing of returns. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer's account. The employer is liable for all taxes, penalties, and interest due.
In the case of many of the companies involved in the litigation against the Akron-based payroll and tax company, they were held liable for the taxes that went unpaid despite having remitted those amounts in good faith to their payroll service provider. In order to obtain abatement of penalties related to late submission of taxes and a potential reduction in the amount owed, these companies are involved in lengthy appeals processes within the IRS. According to Attorney Morgenstern, it is unknown at this time how much relief will be granted to these victims.
Further, when there are issues with a taxpayer’s account, the IRS sends correspondence to the employer at the address of record. Generally, that address is garnered from the most recently filed tax return. Unfortunately, these third-party payers sometimes improperly change their clients’ addresses of record to their own address to prevent the clients from receiving notifications related to the tax matters involving its business. In an effort to curb these fraudulent acts, the IRS now sends a confirmation of address change to both the new address AND the old address on file to alert taxpayers of the change.
IMPORTANT - Employers should ensure their payroll service providers are using EFTPS (Electronic Federal Tax Payment System) so they can confirm that payments have been properly submitted on their behalf. Employers should also register on the EFTPS system themselves to obtain their own PIN to monitor that their tax payments have been made. According to the IRS website, when an employer registers on EFTPS they will have on-line access to their payment history for 16 months. In addition, EFTPS allows employers to make any additional tax payments that their third-party provider is not making on their behalf such as estimated tax payments. Enroll online at www.eftps.gov or call (800) 555-4477 for an enrollment form.