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IRS Posts Guidance Regarding Third Party Payroll Providers

Third Party Payroll Provider

The IRS has posted guidance regarding third party payroll providers.  The guidance warns that companies must do their due diligence, must follow through with what their providers are doing with their money, and realize that the companies are ultimately responsible for payroll taxes being paid.

Due to the increasing complexity of payroll taxes and the inefficiencies it creates, many firms are sourcing out their payroll functions.  This in and of itself works well. The problem is that while payroll services are an up and coming industry, the problems are up and coming as well.  Too often we read cases where the company and its accounting department are well intentioned and appropriately pay their taxes and fees to their third party payroll service.  Sometimes the payroll service, illegally of course, will convert the funds for their own use. This may go on for potentially years before a company realizes they are being swindled. In the meantime, typically the payroll service will tell the company to ignore IRS notices as they have the situation under control. The unscrupulous also have no issue with changing your address within the IRS so you may not even get notices. The liability piles up until the IRS sends an agent. It is at that point the company realizes the extent of the situation and they realize they are on the bill for often LARGE withholding liabilities.

Editor’s Comment

Do not put blind trust into people with your money! The IRS suggests that companies utilize third party payroll services verify that payroll taxes are being paid to the US Treasury.  The IRS recommends: Do not substitute the third party service’s address for your address, contact the IRS about notices as soon as possible, know the rules about reporting, and be familiar with the due dates.

I would further say that the company should from time to time call and ask in order to verify if there are any withholding liabilities if you are using a third party provider. I don’t want to discourage anyone from using a third party payroll service, but be sure that your taxes are getting paid!

By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors