Using a reputable firm or group can protect employers from fraud; options include PSPs, RAs and CPEOs
IR-2020-186, August 19, 2020
WASHINGTON — The IRS reminded employers today to carefully choose their payroll service providers following continuing concerns that some disreputable organizations can fail to deposit employment taxes, leaving businesses vulnerable to unpaid bills.
Many employers outsource their payroll and related tax duties to third parties. This streamlines 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.
"A business doing everything else right can suddenly find its future in doubt if it falls victim to an unscrupulous third party that fails to make the required payroll and withholding deposits," said IRS Commissioner Chuck Rettig. "We want to encourage all employers to understand their obligations and choose wisely when it comes to selecting a trusted payroll service to carry out this critical function. This is especially important right now as businesses face unique challenges because of the pandemic."
Though most of these businesses provide quality service, there are, unfortunately, some who do not have their clients' best interests at heart. Each year, a few of these third parties fail to remit the payroll taxes entrusted to them and close their doors abruptly. The damage hits their unsuspecting clients hard.
"Most third-party payroll services do a good job helping small businesses meet their deadlines and payroll obligations," said Eric Hylton, Commissioner, Small Business/Self Employed Division. "But each year some employers fall prey to unscrupulous third-parties that fail to send the IRS the taxes entrusted to them. We are vigilant in pursuing these third parties, but too often their clients – the employers − are left on the hook. The IRS wants all employers to take the necessary steps to protect themselves."
Like employers who handle their own payroll duties, employers who outsource this function are in most instances 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 shares of Social Security and Medicare taxes. This is true even if the employer forwards tax amounts to the third party to make the required deposits or payments.
One third-party arrangement that can reduce this risk is the certified professional employer organization (CPEO). Unlike other third parties, in most circumstances, the CPEO is solely liable for paying the customer's employment taxes, filing returns and making deposits and payments for the taxes reported with regard to wages and other compensation it pays to its employees. More information on CPEOs can be found on IRS.gov.
Other third parties, such as payroll service providers (PSPs) and reporting agents (RAs) may also be right for many employers. A reporting agent is a PSP that has informed IRS of its relationship with its client (via Form 8655, Reporting Agent Authorization, which is signed by the client). A reporting agent is required to deposit its client's taxes via the Electronic Federal Tax Payment System and is authorized to exchange information with IRS on behalf of its client, such as to resolve an issue.
For an overview of how the roles and obligations of PSPs, reporting agents and CPEOs differ from one to another, see the Third Party Arrangement Chart on IRS.gov.
"Employers should remember to watch out and do due diligence to help safeguard themselves – and their employees − from a payroll service provider failing to do what the law requires," Rettig said.
"IRS Criminal Investigation is committed to investigating all tax criminals, especially professionals who have fiduciary responsibilities and violate the trust of their clients," said Don Fort, Chief of IRS Criminal Investigation. "Those parties who do violate that trust may go to jail, but the defrauded employers' problems are just beginning. There is no substitute for continued diligence in ensuring something so important is done right. Your employees are counting on you."
The IRS urges employers to take a number of steps to protect themselves from unscrupulous third parties.
- Enroll in the Electronic Federal Tax Payment System and make sure the PSP or Reporting Agent uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their PSP or RA is properly carrying out its tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477 or visit www.eftps.gov.
- Reporting Agents are required to deposit clients' taxes via EFTPS and, with limited exception, electronically file the tax returns. They are also required to provide clients a written statement reminding the employer that it, not the reporting agent, is ultimately responsible for the timely filing of returns and payment of taxes. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information.
- Refrain from substituting the third party's address for the employer's address. Though employers are allowed to make or agree to such a change, the IRS recommends that an employer continue to use its own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices, and other account-related correspondence from the IRS. It also gives employers a way to monitor the third party and easily spot any improper diversion of funds.
Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third party. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933, or visit a local IRS office. See Notices for Past Due Tax Returns on IRS.gov for more information.