Payroll Taxes Are Your Responsibility, Even If You Use A Payroll Service Bureau

Published April 15, 2008

 

Plenty of companies save themselves the payroll-processing headache by outsourcing the function. But if you're unlucky enough to pick a dishonest payroll service bureau, you could get hit with a major tax headache. In a recent case, the IRS didn't show much sympathy to a client company whose payroll taxes were embezzled by the owner of a payroll service bureau; it fined the client for failing to deposit those taxes, which, of course, weren't deposited because they had been stolen.

The service bureau's owner defrauded the client company by preparing two 941 forms. The form for the client was accurate; the one filed with the IRS understated the client's tax liability. The difference was embezzled by the service bureau's owner. Total stolen: upwards of $1.2 million. 

The service bureau owner eventually got 37 months in the federal pen and was ordered to pay $841,959 in restitution to the client. Missing from the list of victims was the IRS, which still wanted the undeposited payroll taxes, so it sued the client. The client wanted the failure-to-deposit penalty abated, and argued that the embezzlement was reasonable cause. A federal trial court was sympathetic, but disagreed, and ruled for the IRS.

On appeal, the client argued that it was inconsistent for the IRS to throw the service bureau owner in jail and also collect the outstanding taxes from it. The appeals court disagreed. Court: The government is entitled to criminally prosecute the owner for attempting to defeat a tax obligation — his own or someone else's — and also to collect the delinquent taxes the client owed because of the embezzlement.

The client also contended that it wasn't liable for interest on its delinquent payroll taxes because the IRS held its case in abeyance until the criminal prosecution was resolved. The client struck out again. Court: It wasn't unreasonable for the IRS to pursue the criminal prosecution first. Moreover, the client could have prevented interest from accruing by paying the delinquency while its case was pending. (Pediatric Affiliates, P.A. v. U.S., 3rd Cir., No. 06-1979, 2007)

Your company is always responsible for its payroll taxes, even if it hires a service bureau to handle payroll. Protect your organization in case of a default.

• Ensure that the service bureau obtains a fiduciary bond.
• Limit the scope of authority you grant the service bureau when signing Form 8655, Reporting Agent Authorization.
• Don't authorize the service bureau to sign a tax return.
• Don't allow tax correspondence to be sent to the service bureau.
• Have the service bureau deposit payroll taxes via the IRS's Electronic Federal Tax Payment System (EFTPS), so you can confirm that deposits were made and returns were filed. EFTPS tracks deposit history for 16 months and can be viewed online.
• Request that the IRS provide you with a transcript of the company's tax accounts on a regular basis, as a backup.

Don't find your company at the mercy of an outside payroll service bureau. You need to have someone within your organization who understands the payroll process. With AHI's Payroll Compliance Handbook, a service bureau won't be able to pull a fast one on you.

 

Related Topic(s): Payroll Management