Caution is advised when outsourcing payroll payments

Experienced Tax Accountant –Outsourcing of payroll and related tax duties to payroll service providers can allow employers to streamline their business operations and painlessly meet filing deadlines and deposit requirements. However, employers who outsource their payroll responsibilities remain liable for all taxes, penalties and interest due. Recently, a business learned this lesson the hard way when it was victimized by its third party provider. However, IRS said it would help the business set up a payment plan to repay the amount owed. And IRS's website offers practical tips on avoiding problems when using payroll service providers.

Background. In general, to be excused for failure to timely pay taxes owed, a taxpayer must show that the failure (1) did not result from willful neglect, and (2) was due to reasonable cause. (Code Sec. 6651) Under the case law, including the Supreme Court's decision in Boyle, (S Ct 1985) 469 US 241, 55 AFTR 2d 85-1535, reliance on an agent is not a reasonable cause and does not excuse a taxpayer's failure to timely file a tax return. Applying this principle in a payroll tax context, the Third Circuit, affirming the district court, has held that an employer remained liable for payroll taxes and interest, even though it relied on a payroll firm to fulfill its employment tax obligations and the payroll firm had embezzled the money. The employer's reliance on the payroll firm and the payroll firm's failure to perform its task properly did not amount to reasonable cause for failure to pay the taxes. (Pediatric Affiliates P.A., (CA 3 4/16/2007) 99 AFTR 2d ¶2007-845.

Recent case in point. Accent Payroll Services (APS) was hired to provide payroll processing services for Tytan International L.L.C. from 2008 to 2010. APS was responsible for paying the wages of Tytan's employees, withholding employment taxes, filing Tytan's employment tax returns, and paying withheld employment taxes to IRS. The owner of APS, John M. Moore, transferred more than $2 million in employment tax withholdings from Tytan's bank account to his company's bank account. However, he only paid IRS approximately $1.3 million. To keep Tytan from receiving notices from IRS that taxes were not paid, Moore gave IRS an address for Tytan at a post office box he controlled. Moore was sentenced to 78 months in federal prison for filing false tax returns. Now, Tytan owes more than $744,000 to IRS. (U.S. District Attorney's Office, Kansas City Division News Release, Johnson County Tax Preparer Sentenced For Filing False Tax Return, Wire Fraud, can be accessed at http://www.justice.gov/usao-ks/pr/johnson-county-tax-preparer-pleads-guilty-filing-false-tax-return-wire-fraud).

To mitigate the damage, IRS said it was willing to help the Kansas employer set up a payment plan to repay the amount owed. “Businesses who utilize a third party for paying their payroll taxes must realize that if the taxes aren't paid, they are ultimately responsible for the tax liability,” said Sybil Smith, Special Agent in Charge of IRS Criminal Investigation. “The IRS will work with victims to set up payment plans or possibly reduce penalties.”

Practice suggestions from IRS. IRS's recently updated web page called “Outsourcing Payroll Duties” has guidance for employers on how to avoid the situation that Tytan found itself in. Two useful suggestions:

If there are any issues with an account, IRS will send correspondence to the employer at the address of record. Thus, IRS strongly suggests that the employer not change its address of record to that of the payroll service provider as it may significantly limit the employer's ability to be informed of tax matters involving their business.

Employers should ensure their payroll service providers are using the Electronic Federal Tax Payment System (EFTPS) so that employers can confirm that payments are being made on their behalf. Everyone should use EFTPS, and IRS regs require electronic payment for payroll taxes over $200,000 in a calendar year. Employers should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments. A red flag should go up the first time a service provider misses or makes a late payment. 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.

If you would like more details about these, please do not hesitate to call. I look forward to hearing from you. Click this link to view our YouTube video http://youtu.be/EYJdQtbPZAI

Amare Berhie

AB Tax Accounting

info@abataxaccounting.com

(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396