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An Employers Liability for Payroll Company’s Failure to Remit Taxes

Many business owners have heard about Accupay, the payroll company who deducted employment taxes from their customer’s bank accounts, but never paid those taxes to the IRS or the State of Maryland.  Now the taxing authorities are looking to the various companies that were scammed to pay the overdue payroll taxes.  Accupay was not the first, nor will it likely be the last, payroll company to create such problems for its clients.   

The IRS and local taxing authorities hold employers wholly responsible for reporting and paying their tax liabilities.  Payment of taxes to a third party payroll company, book keeper or accountant does not relieve the employer of its obligations to report and pay such taxes to the IRS and the state.   Therefore, if a third party service withholds, yet fails to remit tax payments, the employer remains liable for any unpaid taxes, along with any penalties and interest that may be assessed for the failure to file and pay taxes.   The IRS, state, and a number of state courts have held that an employer’s reliance on a third party service to remit its taxes does not excuse the employer from liability for the failure to pay taxes, even when the employer is a victim of a scam.  The IRS has specified even if an employer can show it used reasonable care in selecting and monitoring the third party agent such actions may still be insufficient to permit abatement of interest and penalties normally assessed.

Not only does the employer entity become liable for the failure to pay taxes, individuals who are considered to be “responsible persons” are also personally liable for the unpaid taxes, penalties and interest.   Responsible persons include those company personnel who have control the over the employer's finances, those who have signature authority on a payroll accounts, and those who are corporate officers.   Certain payroll tax liabilities are non-dischargeable in bankruptcy and will follow the individuals until they are paid in full.

The IRS has issued written guidance for employers to help prevent and catch third party scams early.   Employers should not allow a third party payroll provider to change the notice address on file with the IRS.  The IRS sends warnings related to employer account deficiencies, such as unfiled forms and unpaid or underpaid taxes, to the employer’s address of record on file with the IRS.  Changing the address for notices with the IRS was one of the tactics that Accupay used to prevent its customers from receiving notification of overdue or underpaid taxes.   All employers should also require that their payroll service use the Electronic Federal Tax Payment System.  This system allows employers to review and confirm payments are being made to the IRS as required. Employers can also protect themselves by searching for payroll services which have a fiduciary bond in place to help protect the employer if the service fails to make payments.

In response to the Accupay case, Senator Barbara Mikulski has announced that she will formally introduce the Small Businesses Tax Fraud Prevention Act sometime in early May.   This bill would require that all payroll service companies register with the IRS.  The bill would also require quarterly certification of payroll companies or would require they be bonded so that there would be funds available to offset financial liability for mismanagement of an employer tax account.  

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