Sunday, October 14, 2012

Once again a payroll company in Iowa has been charged and liens enforced due to negligence in remitting payroll taxes withheld from client employees. If the I.R.S. cannot recover the monies they then will go back to the employers and the employer will have to pay the federal income taxes that were withheld from the employees pay and the company will have to pay the FICA taxes a second time direct to the I.R.S.

This is a surprising revelation for many businesses. After all, we outsource the payroll functions to become more cost efficient, reduce overall cost and to make sure we are in compliance with the ever changing payroll laws. The vast majority of times this is an effective strategy to manage one of the most detailed and time consuming administrative tasks facing a business.  To appoint a third party as the company's representative for payroll functions, the company must complete Form 8655 designating the payroll company as their "Reporting Agent".

When the payroll function is outsourced the normal process is for the business to outsource the remittance of the appropriate payroll taxes as well. In most arrangements the employer submits the payroll information to the payroll provider who processes the payroll and then instructs the company to transfer the necessary funds into an account the payroll company and employer both control. In most real world scenarios the employer does not get any information on this "payroll account" trusting the payroll company to make the appropriate deposits. This is where the issues occur. The Iowa case referred to earlier is a perfect example of how this plan goes awry.

If the payroll company does not make the payroll tax deposits then a series of events will begin to unfold. First the I.R.S. will contact the payroll company to determine why the deposits have not been made timely. They will also begin to send letters to the employer notifying them that the deposits are not current. Many times this can take several quarters therefore by the time the issue is revealed the tax liability is significant. If the I.R.S. cannot recover the monies owed from the payroll provider they will turn to the employer and force them to pay the tax withholding again.  This liability is clearly stated on Form 8655. Above the signature line is printed "I understand that this agreement does not relieve me, as the taxpayer, of the responsibility to ensure that all tax returns are filed and that all deposits and payments are made."



The I.R.S. recently updated the guidance on how to designate a Reporting Agent and the guidelines the Reporting Agents and employers must follow.

1. Reporting agents must submit the appropriate taxes via the electronic system used by the I.R.S. called EFTPS.

2. When a new Reporting Agent authorization must be submitted

3. Requiring the Reporting Agent to notify the employer (client) that the authorization does not relieve the employer of the tax liability.

If a business decides to outsource the payroll functions including remittance of taxes here are some recommendation to protect your financial interests.

1. Use only companies with a verifiable track record and reputation.

2. Ask the payroll provider to be bonded and have the contract stipulate that if the company does not fulfill its fiduciary responsibilities the company can make a claim against the bond.

3. Verify that deposits have been made via the EFTPS system on a regular basis.

4. If a problem is discovered, address the issue immediately. Interest begins to accrue on late payments from day one.

If you have questions regarding the I.R.S. guidance regarding Reporting Agents please contact gary@illulminaregroupinc.com.

Gary O. Garner, Enrolled Agent

The Illuminare Group, Inc.