Inspector Generals are watchdogs put in place to hold federal agencies accountable. These watchdogs are independent of the agencies they monitor, with the expectation that their investigations and recommendations will be completely impartial. As such, payroll service providers should be aware that the Treasury Inspector General for Tax Administration (TIGTA) has recommended the IRS begins scrutinizing the payroll service industry more closely.
In its most recent report, the TIGTA has made it clear that processes need to be put in place to ensure that payroll service providers and their clients do not run afoul of the law. The idea is to prevent tax fraud, whether incidental or purposeful.
The impetus for all of this is the increasing number of smaller payroll service providers that are being found withholding payroll taxes from employee paychecks but not submitting those taxes to the government. Thankfully, the number of payroll service companies engaging in such practices is very small. They are easily the minority in an industry that works very hard on behalf of clients.
BenefitMall, a Dallas-based payroll services provider, recommends companies in the payroll industry pay attention to the following over the next 6 to 12 months:
Linking Employers and Providers
The TIGTA has made it clear that the IRS can work with other federal agencies to establish links between payroll service providers and employers. Apparently, the IRS agrees with this assessment and plans to start working on implementing systems for doing just that. Where that will lead is anyone’s guess. However, the fact that the IRS intends to establish links also suggests they intend to pay a lot more attention to the potential of payroll fraud.
Information on Professional Employer Organizations
Professional employer organizations (PEO) perform some of the services of a payroll provider, but not all of them. A PEO can withhold payroll taxes and pay them on behalf of the employer, but they must use a PEO Federal Employer Identification Number (FEIN). Employers are being encouraged to inform the IRS of any relationships they have with PEOs. They may not be able to do anything with that information immediately due to budget constraints, but having it may help with future enforcement efforts.
Section 8655 and 3504 Agents
Payroll service providers are classified by IRS rules under certain sections of the law, with most of them being classified under section 3504. In its report, the TIGTA has said certain problems arise with section 8655 agents when no link can be established between those agents and their clients. The IRS is expected to develop new systems to ensure that 8655 agents are properly linked for enforcement purposes.
Most of the TIGTA report has to do with the responsibilities of payroll service providers like BenefitMall. However, the report does not absolve employers of their responsibilities. Payroll service providers need to continually remind their clients that employers are ultimately responsible for making sure Social Security and Medicare taxes are withheld and paid. Employers can leave the task to their payroll service providers, but they will be held accountable if something goes wrong.
In light of that, employers are encouraged to open their own EFTPS accounts online. These accounts give employers every opportunity to keep abreast of what payroll service providers are doing in terms of payroll taxes. The website provides up-to-date data about tax payments as they are made.
It would appear the IRS is gearing up to more closely scrutinize payroll service providers. Companies in our industry would do well to heed the TIGTA’s report for the purposes of maintaining compliance at all times.