The Treasury Inspector General for Tax Administration (TIGTA) recently sent a report to the IRS that noted a need for improvements to protect employers that use payroll providers. The TIGTA audit report found that several payroll providers had not been fulfilling their tax reporting and payroll tax obligations.
As an employer, it is important to know how these changes may affect you, and how they are designed to help reduce risks related to employment tax fraud.
Unfortunately, what was uncovered was that several payroll companies were impounding tax on behalf of their client and not remitting them to the Internal Revenue Service.
The report classified several types of third party providers:
- Basic Payroll Service Providers (PSP) that prepare signature-ready paper returns for employers to sign and file.
- PSPs that impound and pay taxes.
- Reporting agents are another classified third party provider that work similarly to traditional PSPs, but are also able to file 8655 forms, process tax returns, sign as reporting agents, as well as impound and pay taxes.
- Section 3504 agents that file 2678 forms with the IRS, report on aggregate returns, and withhold and remit taxes.
- Professional Employer Organization (PEO) that file returns and pay taxes with the PEO Federal Employer Identification Number.
The lack of processes to establish links between employers and third party providers has made it difficult for the PSPs and IRS to effectively resolve issues. Even with the current 8655 process in place, its inaccuracy often results in an inability for the PSP to be recognized as a reporting agent.
The TIGTA has made five recommendations for improvement:
- The IRS can partner with the Bureau of the Fiscal Service to develop a plan to utilize the Electronic Federal Tax Payment System (EFTPS) in order to link an employer with the PSP. The Internal Revenue Service agrees with this stipulation.
- While the IRS partially acknowledges this 2nd recommendation, which is establishing a program where employers can inform the IRS of their PEO relationship and establish a certified PEO system, there is no monies to effectively enforce this program.
- The IRS agrees with the recommendation to develop a process to ensure Section 3504 agents’ indicators are accurate.
- PEOs can attach a Schedule R to the 941 filed each quarter. The IRS noted that they can not legally require non-certified PEOs to accomplish this.
- The Commissioner, Wage and Investment Division can create a process to ensure 8655s are accurately caught in the IRS system. The IRS concurs with this recommendation made by TIGTA.
Employers are encouraged to check remitting tax deposits by enrolling in EFTPS online or by calling (800) 555-4477 for an enrollment form. It is the responsibility of the employer to file employment tax returns in a timely manner and to make the appropriate payments of employment taxes for their employees as required.