5.1.24  Third-Party Payer Arrangements for Employment Taxes

Manual Transmittal

August 15, 2012

Purpose

(1) New IRM. This transmits new IRM 5.1.24, Field Collecting Procedures, Third-Party Payer Arrangements for Employment Taxes.

Material Changes

(1) The procedures in this IRM are intended to supplement existing guidance in other Internal Revenue Manual sections. Because there are a number of issues that are unique to employers who choose to enter into an agreement with a third party in which the third party agrees to perform some or all of the employer's federal employment tax obligations, it is helpful to have one source document with references to other IRM documents as needed.

(2) IRM 5.1.24.2 describes the various types of federal employment taxes.

(3) IRM 5.1.24.3 defines the term "employer" per Internal Revenue Code section 3401(d).

(4) IRM 5.1.24.4 describes the various types of third-party payer arrangements for employment taxes that exist and defines the parties responsible for federal employment tax withholding, reporting and payment in each arrangement.

(5) IRM 5.1.24.5 explains how third-party payer arrangements may affect collection actions.

(6) IRM 5.1.24.5.8 incorporates content from Interim Guidance Memorandum SBSE-05-0711-044, Interim Guidance for Conducting Trust Fund Recovery Penalty Investigations in Cases Involving a Third-Party Payer, dated July 01, 2011.

(7) IRM 5.1.24.6 describes a professional employer organization (PEO) arrangement with its client.

Effect on Other Documents

This IRM incorporates Interim Guidance Memorandum SBSE-05-0711-044, Interim Guidance for Conducting Trust Fund Recovery Penalty Investigations in Cases Involving a Third-Party Payer, dated July 01, 2011.

Audience

Collection Employees

Effective Date

(08-15-2012)

Scott D. Reisher
Director, Collection Policy
Small Business/Self-Employed Division

5.1.24.1  (08-15-2012)
Introduction

  1. An employer may choose to enter into an agreement with a third party in which the third party performs some or all of the employer's federal employment tax withholding, reporting and payment obligations. Collection issues arise when the third party fails to file returns, make deposits, or pay on behalf of the employer.

  2. The liability of the employer for employment taxes may shift depending on the type of third-party arrangement.

  3. Liability is always determined by the provisions of the Internal Revenue Code (IRC or Code) and cannot be altered by a private agreement or contract between an employer (see IRM 5.1.24.3) and a third party.

5.1.24.2  (08-15-2012)
Employment Taxes

  1. Federal employment taxes are imposed on wages paid to employees and are comprised of the Federal Insurance Contributions Act (FICA) tax, Federal Unemployment Tax Act (FUTA) tax, and income tax withholding (ITW). The Railroad Retirement Tax Act (RRTA) imposes a tax on compensation paid to railroad employees and employee representatives.

  2. FICA tax is composed of a tax for Old-Age, Survivors, and Disability Insurance (OASDI) and a tax for Hospital Insurance (HI). The OASDI portion of FICA tax is only imposed on wages up to the wage base for OASDI for that year. There is no dollar limit on the amount of wages subject to the HI portion of FICA tax.

  3. FUTA tax is only imposed on the first $7,000 of wages paid by an employer to an employee in a calendar year.

  4. There is no dollar limit on the amount of wages subject to ITW.

  5. The RRTA serves as the functional equivalent of FICA for railroad employers, employees, and employee representatives (a group unique to the railroad industry). Tax under the RRTA is divided into tiers and each tier finances different benefits. Tier 1 RRTA tax provides equivalent social security and Medicare benefits. IRC 3201(a) imposes Tier 1 RRTA on employees and IRC 3211(a) imposes Tier 1 RRTA tax on employee representatives.

5.1.24.3  (08-15-2012)
Employer

  1. Under IRC 3401(d) an employer is defined as the person for whom an individual performs or performed any services of whatever nature as an employee, except that under IRC 3401(d)(1) if the person for whom the individual performs or performed the services does not have control of the payment of wages for such services, then the term "employer" means the person having control of such wages.

5.1.24.3.1  (08-15-2012)
Common Law Employer

  1. A common law employer is any person who has the status of employer under the usual common law rules applicable in determining the employer-employee relationship.

  2. The existence of an employer-employee relationship generally is determined using the common law control test and is based on the facts and circumstances of each case.

  3. Generally, an employer-employee relationship exists under the common law when the person for whom the services are performed has the right to direct and control the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. In other words, an employee is subject to the will and control of the employer not only as to what shall be done, but how it shall be done. It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.

  4. To determine whether the common law control test is satisfied in a particular case, the IRS and Social Security Administration (SSA) compiled a list of 20 factors used in court decisions to determine worker status. These 20 factors were published in Rev. Rul. 87-41, 1987-1 C.B. 296, and are sometimes called the twenty-factor test. The twenty-factor test is an analytical tool and not a legal test for determining worker status. The legal test is whether there is a right to direct and control the means and details of the work. Because of the difficulty in applying the twenty-factor test and because business trends have changed over the years, the Service now uses a modified approach with respect to worker classification. Rather than listing items of evidence under the 20 factors, the approach now is to group the items of evidence into the following three main categories:

    • Behavioral control relates to facts that shows whether the business has a right to direct or control how the worker performs the specific tasks for which he or she is engaged, including instructions and training.

    • Financial control relates to facts that shows whether the business has a right to direct and control the financial and business aspects of the worker's activities, including the extent to which the worker has a significant investment, unreimbursed business expenses, or may realize a profit or loss, and the extent to which the worker makes his or her services available to the relevant market.

    • Relationship of the parties relates to facts that shows how the parties perceive their relationship. These facts may include the intent of the parties in establishing the relationship, written contracts, the permanency of the relationship, and the extent to which services performed by the worker are a key aspect of the regular business of the company.

  5. See IRM 4.23.5, Technical Guidelines for Employment Tax Issues, and its exhibits for further information.

  6. When the common law test outlined in 5.1.24.3.1(4) above is met, the person for whom services are performed is considered the common law employer and the individual who performs the services is considered an employee of the common law employer.

5.1.24.3.1.1  (08-15-2012)
Common Law Employer Obligations and Filing Requirements

  1. A common law employer generally is required to deduct and withhold ITW and FICA taxes from wages it pays to its employees under IRC 3402(a) and IRC 3102(a), respectively, and is separately liable for the employer's share of FICA taxes as well as for FUTA taxes under IRC 3111 and IRC 3301, respectively.

  2. A common law employer who pays compensation subject to the RRTA is required to deduct and withhold taxes from its employees' compensation under IRC 3202, and is separately liable for the employer's share of RRTA tax under IRC 3221.

  3. A common law employer who pays wages subject to FICA and ITW must file Form 941, Employer's QUARTERLY Federal Tax Return (or other Form 94X series return as applicable). See IRM 21.7.2, Employment and Railroad Tax Returns, for additional information on Form 94X series returns.

  4. A common law employer who pays wages subject to FUTA must file Form 940, Employer's Annual Federal Unemployment Tax Return. See IRM 21.7.3, Unemployment Taxes, for additional information on Form 940.

  5. A common law employer who pays compensation subject to RRTA must file Form CT-1, Employer's Annual Railroad Retirement Tax Return. See IRM 21.7.2.6, CT-1, CT-2 Railroad Tax Returns, for additional information on Form CT-1.

  6. A common law employer must file Forms W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, with the SSA and furnish a Form W-2 to each employee, reporting the amount of wages and taxes withheld.

  7. A common law employer must obtain an employer identification number (EIN) using Form SS-4, Application for Employer Identification Number, for use in filing employment tax returns, depositing taxes, and filing information returns with the SSA and employees. An EIN is a nine-digit number used by the IRS to identify tax accounts of employers. See IRM 21.7.13, Assigning Employer Identification Numbers (EINs), for further information.

  8. The IRS is not bound by any agreement or contract between a common law employer and a third party that purports to transfer the employment tax obligations of the common law employer to the third party.

  9. Employment tax obligations to withhold, report, and pay employment taxes are derived with reference to the common law employer.

  10. IRC 3401(d)(1) describes one very limited circumstance where a third party who is not the common law employer is treated as the employer for purposes of satisfying the employment tax obligations. See IRM 5.1.24.3.2.

5.1.24.3.2  (08-15-2012)
IRC 3401(d)(1) Employer

  1. IRC 3401(d)(1) provides that if the person for whom the individual performs or performed the services does not have control of the payment of wages for such person, the term "employer" means the person having control of the payment of such wages.

  2. In those limited circumstances when the common law employer does not have control of the payment of wages, the person having control of the payment of wages will be considered the employer who has the obligation to withhold, report, and pay employment taxes.

  3. While IRC 3401(d)(1) is a federal income tax withholding provision, courts have applied the IRC 3401(d)(1) definition of employer to determine the liability for the withholding and payment of FICA and FUTA taxes. See, e.g., Otte v. United States, 419 U.S. 43 (1974); In re Armadillo Corp. v. United States, 561 F.2d 1382 (10th Cir. 1977). Due to the similarity in the purpose and scope of RRTA to the purpose and scope of the FICA, the same definition also applies to RRTA taxes. Thus, an IRC 3401(d)(1) employer is responsible for withholding, reporting, and paying ITW, FICA, FUTA and RRTA taxes.

  4. A person in control of the payment of wages is commonly referred to as the "section 3401(d)(1) employer" or the "statutory employer" .

5.1.24.3.2.1  (08-15-2012)
Control of the Payment of Wages

  1. A third party is the section 3401(d)(1) employer only if it has exclusive control over the payment of wages. Treasury Regulation 31.3401(d)-1(f) provides that the term "employer" means the person having legal control of the payment of the wages. If it shares control with the common law employer, then the third party is not a section 3401(d)(1) employer.

  2. Whether or not a third party is in control of the payment of wages depends upon the facts and circumstances. Generally, the IRS considers a third party to be in control of the payment of wages if the payment is not contingent upon, or proximately related to, the third party having first received funds from the employer. Conversely, if the payment of wages is contingent on, or proximately related to, the common law employer's transfer of funds to the third party, the Service considers the common law employer to be in control of the payment of wages. Thus, the common law employer remains obligated to withhold, report, and pay employment taxes.

  3. The determination of whether a third party is a section 3401(d)(1) employer is based on the facts and circumstances. The third-party payer could be a section 3401(d)(1) employer for some payments and not for others.

5.1.24.3.2.2  (08-15-2012)
IRC 3401(d)(1) Employer Filing Requirements

  1. A section 3401(d)(1) employer is obligated to withhold, report, and pay employment taxes, as if it was the common law employer using its own EIN. See IRM 5.1.24.3.1.

  2. If a third-party payer controls the payment of wages within the meaning of section 3401(d)(1) for more than one common law employer, it must file employment tax returns that include all wages it paid on behalf of all of the common law employers' employees for the year.

  3. The section 3401(d)(1) employer is not required to identify any common law employers on its returns.

  4. Although a section 3401(d)(1) employer is liable for the payment of employment taxes, the determination of whether an employee has wages as defined by the FICA, FUTA, or ITW provisions of the Internal Revenue Code is made by reference to the common law employer. Thus, if an employee has multiple common law employers during a calendar year, the section 3401(d)(1) employer must apply a separate FICA and FUTA wage base for each common law employer. See Cencast Services v. United States, 62 Fed.Cl. 159 (2004).

  5. Similarly, the determination of whether an employee is engaged in employment as defined by the FICA or FUTA is made by reference to the common law employer. See Blue Lake Rancheria v. United States, 653 F.3d 1112 (9th Cir. 2011).

  6. A section 3401(d)(1) employer must file Forms W-2 and W-3 with the SSA and furnish a Form W-2 to each employee, reporting the amount of wages and taxes withheld using its own EIN.

5.1.24.4  (08-15-2012)
Types of Third-Party Payer Arrangements

  1. A common law employer or a section 3401(d)(1) employer may use a third party to perform some or all of the employer's federal employment tax withholding, reporting, and payment obligations. Additionally, the common law employer's use of a section 3401(d)(1) employer is itself a type of third-party payer arrangement.

  2. There are a variety of third-party payer arrangements. The most common are:

    • IRC 3401(d)(1) Employer (IRM 5.1.24.3.2)

    • Temporary Staffing Service

    • Payroll Service Provider

    • Reporting Agent

    • IRC 3504 Agent

    • IRC 3505 Lender, Surety, or Other Person

  3. See Exhibit 5.1.24-1 for a chart illustrating the differences between a payroll service provider, reporting agent, and IRC 3504 agent.

5.1.24.4.1  (08-15-2012)
Temporary Staffing Service

  1. A temporary staffing service (TSS) provides workers to supplement a firm's workforce for a short or indefinite period to address conditions such as employee absences, temporary skill shortages, or seasonal workloads. Typically, a TSS recruits and, in some cases, trains workers and assigns them to a firm/client on a non-permanent basis. The TSS also controls the payment of the workers' wages and provides the workers with other benefits.

  2. Workers provided by a TSS traditionally make up only a small portion of the TSS client's workforce and usually perform services for the client for a brief period.

  3. After a worker completes work for one client, the TSS typically reassigns workers to a different client.

5.1.24.4.1.1  (08-15-2012)
Temporary Staffing Service Filing Requirements

  1. A TSS who recruits, trains, and controls the job assignments of the workers and sets the workers' wages is likely to be the common law employer of the workers it provides to a client. When a TSS is the common law employer of workers it provides to a client, the TSS must withhold, report, and pay employment taxes consistent with its status as a common law employer. See IRM 5.1.24.3.1.

  2. When the TSS is a common law employer of workers provided by the TSS to the client, the client has no employment tax liability related to the workers provided by the TSS.

  3. Even though the workers may provide services for multiple clients of the TSS during the year, the TSS as the common law employer uses a single FICA and FUTA wage base when computing taxes.

  4. The TSS, who is a common law employer of workers it provides to a client, must file Forms W-2 and W-3 with the SSA and furnish a Form W-2 to each employee, reporting the amount of wages and taxes withheld using its own EIN.

5.1.24.4.2  (08-15-2012)
Payroll Service Provider

  1. A payroll service provider (PSP) is a third party that can help an employer administer payroll and employment taxes on behalf of an employer.

  2. An employer may enter into an agreement with a PSP under which the employer authorizes the PSP to perform one of more of the following acts on the employer's behalf:

    • Prepare the paychecks for the employees of the employer.

    • Prepare Forms 940 and 941 for the employer using the employer's EIN.

    • File Forms 940 and 941 for the employer, which are signed by the employer.

    • Make federal tax deposits (FTDs) and federal tax payments and submit this information for the taxes reported on the Forms 940 and 941.

    • Prepare Form W-3 and Forms W-2 for the employees of the employer using the employer's EIN.

  3. A PSP is not liable for an employer's employment taxes as either an employer or an agent.

  4. An employer's use of a PSP does not relieve the employer of its employment tax obligations or liability for employment taxes.

5.1.24.4.3  (08-15-2012)
Reporting Agent

  1. A reporting agent is a type of PSP. See IRM 5.1.24.4.2.

  2. An employer may enter into an agreement with a reporting agent under which the employer authorizes the reporting agent to perform one or more of the following acts on the employer's behalf:

    • Sign and file, often electronically, certain tax returns, such as Forms 940 and 941, using the EIN of the employer.

    • Make FTDs and federal tax payments, including using the Electronic Federal Tax Payment System (EFTPS), using the EIN of the employer.

    • Submit FTD and federal tax payment information, including to EFTPS, using the EIN of the employer.

    • Receive duplicate copies of official notices, correspondence, deposit requirements, and transcripts of certain other information.

  3. The IRS has prescribed Form 8655, Reporting Agent Authorization, as the appropriate authorization form for employers to designate a PSP as a reporting agent. See Rev. Proc. 2007–38 and Pub 1474, Technical Specifications for Reporting Agent Authorization and Federal Tax Depositors, for further information.

  4. A reporting agent may act for more than one employer, but must submit a separate Form 8655 for each employer.

  5. To authorize a reporting agent to sign and file paper Forms 940 and 941 on the employer's behalf, an employer must provide the Service with a completed Form 2848, Power of Attorney and Declaration of Representative.

    Note:

    A reporting agent has the authority to file amended forms on paper for any form it filed electronically for the employer.

  6. A reporting agent does not have to complete the paid preparer section of a Form 941 unless it offers legal advice to its client.

  7. An employer's use of a reporting agent does not relieve the employer of its employment tax obligations or liability for employment tax.

  8. Also see IRM 5.1.23.3.4, Authority Granted by Form 8655, for additional information.

5.1.24.4.3.1  (08-15-2012)
Reporting Agents File (RAF)

  1. Forms 8655 are processed to the Reporting Agents File (RAF) maintained by the Ogden Accounts Management Campus.

  2. Form 8655 information can be researched using IDRS command code RFINK.

  3. For more information on Form 8655 and RFINK, see IRM 21.3.9, Processing Reporting Agents File Authorizations.

5.1.24.4.4  (08-15-2012)
IRC 3504 Agent

  1. IRC 3504 provides that if a fiduciary, agent, or other person has control, receipt, custody, or disposal of, or pays wages to employees, the Service is authorized to designate the fiduciary, agent, or other person as an agent of the employer.

  2. This agent of the employer is commonly referred to as a "section 3504 agent" , a "Form 2678 agent" , or an "aggregate filer" .

  3. The IRS has prescribed Form 2678, Employer/Payer Appointment of Agent, as the appropriate authorization form for employers to authorize a person as a section 3504 agent. See Rev. Proc. 70–6, 1970-1 C.B. 420, for further information.

  4. A section 3504 agent may act as agent for more than one employer, but each employer must submit a separate Form 2678 seeking IRS approval.

  5. Once approved, a section 3504 agent may file the following returns on the employer's behalf:

    • Form 941, Employer's QUARTERLY Federal Tax Return

    • Form 943, Employer's Annual Federal Tax Return for Agricultural Employees

    • Form 944, Employer's ANNUAL Federal Tax Return

    • Form 945, Annual Return of Withheld Federal Income Tax

    • Form CT-1, Employer's Annual Railroad Retirement Tax Return

    • Form CT-2, Employee Representative's Quarterly Railroad Tax Return

  6. Generally, an employer can not appoint a section 3504 agent to report, deposit, and pay taxes reported on Form 940, unless the employer is a home care service recipient (HCSR). See Proposed Regulation §31.3504-1(b), published in the Federal Register on January 13, 2010 (75 FR 1735-01), for further information.

  7. See IRM 21.7.2.4.11.3(2) and (3) for more information on home care service recipients and section 3504 agents that act on behalf of HCSR employers.

  8. Since January 2007, a TC 971 Action Code 382, 383, 384, or 385 is input to the employer's account to indicate the appointment of a section 3504 agent. This 971 transaction code is displayed on IDRS Command Codes ENMOD and BMFOL"E" . It contains a cross reference to the section 3504 agent's EIN.

  9. Both the section 3504 agent and the employer are liable for the employer's employment taxes while the agent authorization is in effect.

5.1.24.4.4.1  (08-15-2012)
IRC 3504 Agent Filing Requirements

  1. A section 3504 agent must file an aggregate return for each tax-return period on behalf of the employers it represents, using the section 3504 agent's own EIN and address.

  2. Beginning with tax year 2010, a section 3504 agent filing an aggregate Form 941 on behalf of one or more employers must attach a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, to the Form 941. The Schedule R (Form 941) provides the IRS with client-specific information to support the totals reported by an agent on an aggregate Form 941. The Schedule R (Form 941) includes a list of employers as well as a breakdown of the payroll liability of each employer to support the aggregate totals reported by the agent on the Form 941. The Schedule R (Form 941) may be filed electronically or by paper submission. However, agents filing for 1,000 or more clients must file a paper return. Schedule R (Form 941) information is currently stored in the Servicewide Employment Tax Research System (SWETRS). See IRM 21.7.2.4.7.7, Schedule R (Form 941): Allocation Schedule for Aggregate Form 941 Filers, for further information.

  3. A section 3504 agent approved to file an aggregate Form 940 on behalf of one or more HCSR employers must attach a Schedule R (Form 940), Allocation Schedule for Aggregate Form 940 Filers, to the Form 940. The Schedule R (Form 940) includes a list of HCSR employers as well as a breakdown of the payroll liability of each HCSR employer to support the aggregate totals reported by the agent on the Form 940. See IRM 21.7.3.4.7, Schedule R (Form 940): Allocation Schedule for Aggregate Form 940 Filers, for further information.

    Note:

    The Schedule R (Form 941) and Schedule R (Form 940) are not interchangeable.

  4. Generally, a section 3504 agent must file Forms W-2 and W-3 with the SSA and furnish a Form W-2 to each employee, reporting the amount of wages and taxes withheld using its own EIN. (Special rules apply if the section 3504 agent is acting as an agent for two or more employers and pays social security wages to an employee in excess of the social security wage base).

5.1.24.4.5  (08-15-2012)
IRC 3505 Lender, Surety or Other Person

  1. Under IRC 3505, lenders, sureties, or other persons who are not employers may be personally liable for withheld taxes due. This can be an alternative means of collecting the withheld taxes.

5.1.24.4.5.1  (08-15-2012)
IRC 3505(a)

  1. Under IRC 3505(a), a third party that pays wages directly to employees of an employer may be personally liable for an amount equal to the full amount of withholding taxes due under the FICA, RRTA, and/or ITW provisions of the Code.

  2. See also IRM 5.17.7.2.1, Liability for Direct Payment of Wages - IRC 3505(a).

5.1.24.4.5.2  (08-15-2012)
IRC 3505(b)

  1. Under IRC 3505(b), a third party that supplies funds to an employer for the specific purpose of paying wages to the employer's employees may be personally liable for the withholding taxes under the FICA, RRTA and/or ITW provisions of the Code. However, the liability will not exceed 25% of the amount supplied for the payment of wages.

  2. The following two conditions must exist:

    • The third party must know the funds advanced are to be used specifically for the payment of wages, and

    • The third party must have actual notice or knowledge at the time the funds are advanced that the employer does not intend to or will not be able to pay the withheld taxes.

  3. See also IRM 5.17.7.2.2, Liability When Funds are Supplied - IRC 3505(b).

5.1.24.4.5.3  (08-15-2012)
Collection Under IRC 3505

  1. The assertion of liability on a lender, surety, or other person under IRC 3505 does not relieve the employer from liability. However, amounts paid to the United States under IRC 3505 will be credited against the liability of the employer. The employer, and not the third party, remains liable to file related employment tax returns and information reporting returns.

  2. To collect from a lender, surety, or other third party under IRC 3505, the United States must bring suit against the third party within 10 years after the assessment of the tax against the employer. The 10-year collection period is suspended when the collection period against the taxpayer employer is suspended under IRC 6503.

  3. See IRM 5.1.14.3, Liability for Third Party Paying Wages or Supplying Funds for Payment of Taxes, and IRM 5.17.7.2.3, Collection of Liabilities under IRC 3505(a) and (b), for more information.

5.1.24.5  (08-15-2012)
Collection Actions in Cases Involving Third-Party Payers

  1. The common law employer or section 3401(d)(1) employer is ultimately responsible to withhold, report, and pay federal employment taxes. Even though the employer may forward the tax amounts to a third party to make the tax payments, the employer remains liable unless the third party is the section 3401(d)(1) employer. This IRM section assumes the third party is not the employer.

  2. 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.

  3. Responsible persons of the employer may also be held personally liable under IRC 6672 for certain unpaid federal taxes. See IRM 5.1.24.5.8 for more information.

  4. For assistance on determining liability in third-party payer situations, contact CC:SBSE area counsel.

    Note:

    CC:SBSE area counsel will coordinate with CC:TEGE area counsel if necessary.

5.1.24.5.1  (08-15-2012)
Assignment of Third-Party Payer Client Cases

  1. Each Collection area has designated an individual to act as a liaison between revenue officers and Collection Policy for the sharing of information and the coordination of PSP and other third-party payer issues. A list of area coordinators and their contact information can be found at http://mysbse.web.irs.gov/Collection/toolsprocesses/EmployTax/tff/contacts/17431.aspx

  2. Employment tax non-compliance by a third-party payer may result in a large number of delinquent client accounts. Assignment of these cases, when identified, should be coordinated through the area's PSP/PEO coordinator. In certain circumstances, the area PSP/PEO coordinator may also be able to assist with the identification of a PSP's client list through internal sources.

  3. At the discretion of local management, Letter 4838 , Payroll Service Provider Client, may be used to make initial contact with clients of a non-compliant payroll service provider. At this time, Letter 4838 is only available through the Media and Publications IR Web site; it is not on ICS. See IRM 5.1.10.3(4) for procedures regarding the use of appointment letters.

  4. ICS sub code 505 is input to designate and track PSP client cases.

5.1.24.5.2  (08-15-2012)
Initial Contact with a Client of a Third-Party Payer

  1. In some of these cases, the initial contact by a revenue officer may be the first time the employer is learning of the noncompliance and tax delinquency. Therefore, during initial contact with an employer who may be unaware of nonpayment actions of a third-party payer, the revenue officer should be sensitive to the taxpayer's possible situation.

  2. In addition to following the procedures outlined in IRM 5.1.10.3.2, Effective Initial Contact, the revenue officer should encourage the employer's future compliance by:

    1. Advising the employer it remains responsible for the deposit and payment of employment taxes even though it may have entered into a third-party payer arrangement,

    2. Discussing the use of EFTPS to verify payments made by a third party on the employer's behalf (see IRM 5.1.24.5.3),

    3. Reviewing unauthorized changes of address by third-party payers (see IRM 5.1.24.5.4),

    4. Being alert to information received in discussions with the employer that indicate possible reasons for penalty abatement (see IRM 5.1.24.5.5), and

    5. Discussing an offer in compromise with Exceptional Circumstances (Effective Tax Administration) as part of the collection determination (see IRM 5.1.24.5.7).

  3. The revenue officer should review copies of the taxpayer's employment tax returns, W-2s and W-3 to determine if these records match the information that has been provided to the IRS and SSA. A tactic used by third-party payers intent on defrauding clients is to provide clients with accurate employment tax returns, W-2s and W-3 while filing employment tax returns with the IRS that understate the amount of wages on which taxes are owed. Checking IDRS Command Code BMFOL"U" will provide this information for prior years as well.

5.1.24.5.3  (08-15-2012)
Use of Electronic Federal Tax Payment System (EFTPS) for Payment Verification

  1. An employer should ensure its PSPs are using EFTPS so the employer can confirm payments are being made on its behalf. An employer can register on the EFTPS system to get its own PIN and use this PIN to periodically verify payments. A "red flag" should arise the first time a payroll service provider misses or makes a late payment.

  2. When an employer registers on EFTPS, it will have on-line access to its payment history for 16 months. In addition, EFTPS allows an employer to make any additional tax payments its third-party payer is not making on its behalf, such as estimated tax payments.

5.1.24.5.4  (08-15-2012)
Unauthorized Changes of Address by Third-Party Payer

  1. When there are issues with a taxpayer's account, the IRS sends correspondence to the employer at the address of record. Generally, the address of record is the master file address that posted from the most recently filed and properly processed return.

  2. Rev. Proc. 2010–16 describes the various ways taxpayers can give a new address to the Service.

  3. A third-party payer may sometimes improperly change its client's address of record to that of the third-party payer to limit the client's ability to be informed of tax matters involving its business.

  4. An employer may grant permission for the third-party payer to receive copies of IRS correspondence by using Form 8821, Tax Information Authorization, Form 2848, Power of Attorney and Declaration of Representative, or Form 8655, Reporting Agent Authorization, as appropriate. See IRM 5.1.23, Taxpayer Representation, for additional information. This is not a "change of address" , and the employer should continue to receive correspondence.

  5. An unauthorized change of address made by an employer's third-party payer is a potential indicator of fraud. See IRM 5.1.24.5.9 below for further information on employment tax fraud.

  6. See IRM 5.1.18, Locating Taxpayers and their Assets, for the various locator tools and sources available to revenue officers for locating taxpayers and the procedures for verifying their addresses.

5.1.24.5.5  (08-15-2012)
Penalty Abatement for Clients of Third-Party Payers

  1. Depending on the facts and circumstances, the IRS may abate certain penalties such as failure to pay, failure to file and failure to deposit. When working with an employer, practitioner, or PSP to resolve the employer's account, determine whether the facts and circumstances of each individual case meet reasonable cause criteria as discussed in IRM 20.1.1, Penalty Handbook, Introduction and Penalty Relief.

  2. Penalty relief may not be appropriate in all cases. Under no circumstances may interest be removed for reasonable cause. Some factors to consider in evaluating penalty abatement requests in these types of cases are:

    • The employer had sufficient funds available to pay the taxes at the time due, and the third-party payer timely received or debited the funds.

    • The period of time during which the employer was unable to comply with the law due to circumstances beyond the employer's control.

    • The timeliness of the employer's corrective actions, once the employer had actual knowledge of the tax problem(s).

    • The source of the financial problem(s) has been removed (such as the third-party payer has been replaced), and recent compliance clearly demonstrates the tax problem(s) was(were) solely the result of the third-party payer's actions.

    • Documentation supports the facts and circumstances presented by the employer.

  3. In certain circumstances where the employer has been harmed by its third-party payer, additional factors to consider for meeting reasonable cause include:

    • Whether the employer had knowledge of a pattern of noncompliance by the third-party payer at the time the delinquencies were accruing.

    • Whether the third-party payer used fraud or deception to conceal the noncompliance from detection by the client.

  4. For further information on failure to deposit penalties in cases involving third-party payers, see IRM 20.1.4.24.4.1, Third Party Mishandling.

5.1.24.5.5.1  (08-15-2012)
Reasonable Cause Assistant

  1. Use the Reporting Agent category in the Reasonable Cause Assistant (RCA) program for consideration of a penalty relief request from an affected employer whose third-party payer failed to pay employment taxes over to the IRS.

5.1.24.5.6  (08-15-2012)
Case Resolution

  1. An interview should be conducted with the employer to determine the appropriate case resolution. Encourage the employer to pay the liability in full to avoid the accrual of penalties and interest and the possibility of filing a Notice of Federal Tax Lien (NFTL). There are also fees associated with entering into an installment agreement or submitting an offer in compromise.

  2. If the employer is unable to full pay the liability, analyze the taxpayer's financial condition to make one or more of the following decisions:

    1. Make a lien filing determination (IRM 5.12.2.4).

    2. Enter into an Installment Agreement (IRM 5.14.1).

    3. Explain the Offer in Compromise provisions (IRM 5.8.1 and IRM 5.1.24.5.7).

    4. Report the account Currently Not Collectible (IRM 5.16.1).

    5. Initiate enforcement action if assets are available to pay the liability and the taxpayer is unwilling to resolve its account (IRM 5.10.1).

  3. When appropriate, deviations from the allowable living expense standards used for financial analysis must be thoroughly documented in the case history (IRM 5.15.1.7).

  4. If the taxpayer's liability includes trust fund employment taxes, a Trust Fund Recovery Penalty determination must be made. See IRM 5.7.4.1, Determination to Pursue and Recommend Assessment of the TFRP, and IRM 5.1.24.5.8 for further information.

5.1.24.5.7  (08-15-2012)
Offers in Compromise

  1. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. See IRM 5.8.1, Offer in Compromise - Overview, for further information.

  2. For an employer whose liability was affected by the actions of a third-party payer, an offer in compromise with Exceptional Circumstances (Effective Tax Administration) may be a viable collection alternative based on the facts and circumstances of the employer's individual case. The specific considerations for an offer in compromise with Exceptional Circumstances (Effective Tax Administration) are outlined in IRM 5.8.11, Effective Tax Administration.

  3. A revenue officer who secures an offer in compromise from an employer whose liability was affected by the actions of a third-party payer will write across the top of the original Form 656, Offer in Compromise, in red "Payroll Service Provider Offer" . The employee will also complete Form 657, Offer in Compromise/Revenue Officer Report. The original Form 656, the application fee and the appropriate TIPRA payment, collection information statements with attached substantiation, and the Form 657 must be forwarded within 24 hours to the appropriate COIC campus. See IRM 5.8.1.7.1, Initial Receipts of Offers Received Elsewhere in the Service, for additional information regarding the documents which should be submitted with the offer package.

5.1.24.5.8  (08-15-2012)
Trust Fund Recovery Penalty (TFRP) Investigations

  1. Under IRC 6672, the TFRP may be recommended against any person required to collect, account for, and pay over taxes held in trust (a responsible person) who willfully fails to perform any of these activities. In cases involving third-party payer arrangements, potentially responsible persons may include:

    • Payroll Service Provider

    • Responsible parties within a PSP

    • Professional Employer Organization

    • Responsible parties within a PEO

    • Responsible parties within the common law employer (client of PSP/PEO)

  2. Each recommendation for assertion of the TFRP against a third-party payer that is a related responsible person (RRP) must stand on its own merits based on the facts discovered during the TFRP investigation regarding "responsibility" and "willfulness" .

  3. Factors to be considered when determining the potential "responsibility" and "willfulness" of a third-party payer are:

    • Responsibility
      Identification of the person(s) within the third-party payer who had significant control over the payment of the client's employment taxes.

    • Willfulness
      Willful means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required.

  4. Factors to be considered for establishing "responsibility" and "willfulness" of a responsible person within a common law employer/client where there is a third-party payer arrangement are:

    • Responsibility
      The use of a third-party payer such as a PSP or a PEO does not relieve the common law employer and employees of the common law employer who are responsible for collecting, accounting for, and paying over the common law employer's employment taxes from the responsibility of ensuring that all of the common law employer's federal tax obligations are met.

    • Willfulness
      Willfulness means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required.

  5. Additional factors to be considered when determining "willfulness" :

    • Whether the responsible person had knowledge of a pattern of noncompliance by the third-party payer at the time the delinquencies were accruing.

    • Whether the third-party payer used fraud or deception to conceal the noncompliance from detection by the client.

    • Whether the client had received prior IRS notices indicating that employment tax returns had not been filed, or are inaccurate, or that employment taxes had not been paid.

    • The actions the client has taken to ensure its federal employment tax obligations have been met after becoming aware of the tax delinquencies, e.g. timely reporting the problem(s) to the IRS and the proper authorities, ensuring current tax debts have been timely reported and paid, and working with the IRS on a reasonable plan to resolve past debts.

  6. The same guidance for contacting third parties and for issuing L3164A, as outlined in IRM 5.7.4.2.2, Third Party Interviews and Third Party Contact Considerations, applies when working TFRP investigations involving third-party payers.

  7. Consult with local area counsel in any case involving whether a third-party payer is a responsible person(s) under IRC 6672 for the TFRP.

  8. See IRM 5.7.3, Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty (TFRP), IRM 5.7.4, Investigation and Recommendation of TFRP, and IRM 5.17.7, Liability of Third Parties for Unpaid Employment Taxes, for further information.

5.1.24.5.9  (08-15-2012)
Employment Tax Fraud

  1. When investigating cases involving unpaid payroll taxes and third-party payer arrangements, a revenue officer should look for potential indicators of fraud. See IRM 25.1.2, Recognizing and Developing Fraud, and IRM 25.1.8.2, Trust Fund Violations, for further information.

  2. When initial indicators of fraud are identified, the revenue officer will discuss the case with the group manager. If the group manager concurs with the fraud potential, the revenue officer should contact the local fraud technical advisor (FTA).

  3. When there is an indication of multiple clients being harmed by a third-party payer, contact the area PSP/PEO coordinator for assistance in identifying the client list through internal sources. A list of area coordinators and their contact information can be found at http://mysbse.web.irs.gov/Collection/toolsprocesses/EmployTax/tff/contacts/17431.aspx

  4. In some instances, revenue officers will be assigned cases involving the clients of a fraudulent third-party payer who is under criminal investigation. There may or may not be a TC 914, Active Criminal Investigation, placed on the client accounts. Therefore, it is important to check with Criminal Investigation (CI) and see if they have an open case on the third-party payer. When CI has an open investigation, follow procedures for parallel investigations outlined in IRM 5.1.5, Balancing Civil and Criminal Cases. Also advise the area PSP/PEO coordinator of the parallel investigations.

5.1.24.6  (08-15-2012)
Professional Employer Organization (Employee Leasing Company)

  1. A professional employer organization (PEO), sometimes referred to as an employee leasing company, enters into an agreement with a client to perform some or all of the federal employment tax withholding, reporting, and payment functions related to workers performing services for the client. A PEO also may manage human resources, employee benefits, workers compensation claims and unemployment insurance claims for the client.

  2. A PEO may represent to a client that the PEO is the employer of the workers providing services to the client. In these cases, a PEO may not request authorization from the Service on Form 8655 to be a reporting agent, or on Form 2678 to be a section 3504 agent.

  3. The Internal Revenue Code does not define PEO.

  4. A majority of states have enacted laws that require licensing of PEOs. Some states may also require each PEO to report its clients to the state. The location for PEO licensing and reporting of information varies by state. State PEO laws have no bearing on the determination of an entity's liability for federal employment tax purposes.

  5. The determination of an entity's liability for federal employment tax purposes must be determined under the Code and applicable regulations.

  6. For assistance on determining liability in PEO situations, contact CC:SBSE area counsel.

    Note:

    CC:SBSE area counsel will coordinate with CC:TEGE area counsel if necessary.

5.1.24.6.1  (08-15-2012)
Impact of a PEO Arrangement on Client

  1. If the contractual documents provide that the PEO assumes some or all of the employer rights and obligations, in particular with regard to payroll and applicable taxes, a client may believe it is not liable for federal employment tax obligations. However, the rules established in the IRC determine which party is liable for employment taxes, and the Service is not bound by any agreement between an employer and a third party.

  2. Use of a PEO does not relieve a client from its employment tax obligations if the client is the employer of the workers who perform services for the client and the PEO is not the section 3401(d)(1) employer. See IRM 5.1.24.3 and IRM 5.1.24.3.2. An employer cannot contract away its responsibility to withhold, report and pay applicable employment taxes. In any employment tax case, a determination of who is the employer must be made to determine employment tax liability.

  3. Whether the client is the common law employer depends on the facts and circumstances, such as whether the client directs and controls the day-to-day performance of the workers' duties, retains the authority to hire and fire the workers, and sets the hourly wage or salary. A PEO may not exhibit the degree of direction and control over workers providing services to a client to satisfy the common law standard and thus, may not become liable under the Code as the common law employer.

  4. Depending on the facts and circumstances, a PEO may not be in control of the payment of wages within the meaning of section 3401(d)(1). The Service's position is that an entity is in control of the payment of wages within the meaning of section 3401(d)(1) if the entity pays wages to the employees regardless of whether the common law employer advances funds to pay the wages. Conversely, if the payment of the employees is contingent on, or proximately related to, the transfer of funds from the common law employer to the third party, the third party is not in control of the payment of wages.

  5. When a PEO files employment tax returns and Forms W-2 using its own name and EIN without identifying its clients or allocating wages to its clients on employment tax returns, the client will not get credit for having paid employment taxes. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

5.1.24.6.2  (08-15-2012)
Pursuing Collection from PEOs

  1. It is important to secure a copy of the contract or agreement for service from the PEO or its client(s) as part of a collection investigation to determine the relationship between the PEO and its client(s). However, a contract is only representative of the parties understanding of the relationship and is not binding on the Service. Even though the contract may attempt to transfer the employment tax obligations to the PEO, the determination of who is the employer is a facts and circumstances analysis.

  2. If the facts and circumstances indicate that a PEO is liable for employment taxes, the revenue officer must pursue collection from the PEO. For a discussion of liability as a responsible party under IRC 6672, see IRM 5.1.24.5.8.≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. Some PEOs are structured to have one parent company with multiple subsidiaries, each having its own EIN and employment tax filing requirements. Each subsidiary is set up to manage a different group of clients. Clients may be grouped by industry or location. It is important to determine a PEO's structure, and when appropriate, to conduct cross compliance on all related BMF entities.

5.1.24.6.2.1  (08-15-2012)
Pursuing Collection from Successor PEO Entities

  1. One problem encountered with PEOs is the closing of one PEO entity immediately followed by the opening of another PEO entity under a new EIN. The new entity often performs the same type of work and has the same clients, assets, location, and employees operating the new business.

  2. Once the assets and income of a liable PEO entity have been transferred, the "successor entity" theory may be used to collect from the new PEO entity. For further information on the use of the successor entity theory to collect against transferred assets or from the income and assets of the new entity, see IRM 5.1.30.8, Successor Entities.

5.1.24.6.2.2  (08-15-2012)
Injunctive Relief

  1. When administrative collection actions fail to bring a PEO into compliance, it may be necessary to initiate injunctive relief measures to stop a PEO from pyramiding. See IRM 5.7.2.5, Referrals for Civil Enforcement, and IRM 5.17.4.17, Civil Injunctions Under IRC 7402(a) to Restrain Pyramiding, for complete procedures.

5.1.24.6.3  (08-15-2012)
Pursuing Collection from PEO Clients

  1. When a PEO fails to pay employment taxes on wages attributable to any client employees, if the facts and circumstances indicate that the client remained the employer, the IRS should attempt to identify the client with unpaid liabilities and assess the appropriate amount of employment taxes against the client. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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5.1.24.6.4  (08-15-2012)
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  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Exhibit 5.1.24-1 
Third-Party Arrangement Chart

Third-Party Arrangement Authority Payroll Service Provider (PSP) Reporting Agent Form 8655
(RA)
IRC 3504 Agent Form 2678 Agent Aggregate Filer
Can file certain employment tax returns? Yes. The PSP prepares a separate return for each client using the client’s EIN.  After client signs the return, either the client or the PSP may file the return on paper. Yes. The RA signs and is generally required to file electronically a separate return for each client, using the client’s EIN. The RA must e-file returns listed in Rev. Proc. 2007-38 and shown on the Form 8655 authorization request, if the forms are available for electronic filing. Only forms that are not able to be electronically filed can be filed using paper forms. Yes. The agent files an aggregate return for all clients, using the agent’s EIN. Agent can file those returns listed on Form 2678 appointment request.
Can make deposits and payments for employment taxes reported on returns? Yes. The PSP deposits and pays tax liabilities on behalf of each client, using the client’s separate EIN, according to each client’s deposit requirements. Yes. The RA deposits and pays tax liabilities on behalf of each client, using the client’s separate EIN, according to each client’s deposit requirements. Yes. The agent deposits and pays for tax liabilities the agent has aggregated and reported using the agent’s EIN, according to the agent’s deposit requirements.  Agent can make deposits and payments for those employment taxes reported on returns listed on Form 2678 appointment request.
Can file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return? Yes. After client signs the return, client or PSP files separate returns using client’s EIN. Yes. RA signs and generally files electronically separate returns using client’s EIN. No. Clients must file FUTA tax returns using their own EINs. However, there is an exception for Home Health Care Recipients through a state or local program.
Has employment tax liability? No. Client/Employer, not the PSP, remains liable for ensuring all tax returns are filed timely and all deposits and payments are made timely. No. Client/Employer, not RA, remains liable for ensuring all tax returns are filed timely and all deposits and payments are made timely. Yes. Client/Employer and agent are both liable for paying the client’s employment taxes, filing returns, and making deposits and payments for the taxes reported.
Specific guidance in addition to IRC, regulations and Publication 15, Circular E.   Rev. Proc. 2007-38 Rev. Proc. 70-6; Notice 2003-70 (state and local governmental agencies)

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