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USA: Trust, but verify – employers should monitor payroll tax service providers

07 August 2014   (0 Comments)
Posted by: Author: Mark Milton
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Author: Mark Milton (Husch Blackwell LLP)

In 2014, several payroll tax service providers allegedly embezzled millions of dollars in federal payroll tax payments from their clients. In June, the owner of Checkmaster Payroll Service in Massachusetts was indicted for allegedly stealing client funds that were supposed to have been used to pay clients’ federal employment taxes. The owner allegedly provided clients with "client copy” tax returns indicating that the taxes had been paid to the IRS, when they had not.  The owner also allegedly falsely told his clients that payroll tax delinquency notices that they had received from the IRS were the result of administrative errors by the IRS, not his company’s failure to remit the payroll taxes.

Similarly, in February, the owner of Fenton-based Paymaster Business Solutions was indicted for his alleged failure to remit taxes to the IRS that had been deducted from client bank accounts. Paymaster allegedly withheld, but failed to turnover to the proper taxing authorities, in excess of $2,700,000. Additionally, the owner, as power of attorney for Paymaster’s clients, allegedly covered up inquiries made by the IRS regarding the failed payments.  When clients learned that Paymaster had not forwarded their funds to the taxing authorities, the owner allegedly lied to them and told them that Paymaster had made the payments. In these types of fraud cases, the victim employer can still be held liable to the IRS for the unpaid payroll taxes even though they paid the funds to the service provider.  This poses a substantial risk to employers who use outside payroll tax service providers, but one that can be easily mitigated.

To avoid a costly payroll tax nightmare, employers should trust, but verify that third party payroll tax service providers are indeed making tax payments to the IRS.  First, confirm that your payroll tax service provider uses the Electronic Federal Tax Payment System (EFTPS) to make your payroll tax payments. EFTPS is a free service provided by the U.S. Department of Treasury that allows employers or their agents to make online tax payments. If your provider does not use EFTPS, you should find a new provider.  If your provider does use EFTPS, you or your employees can log onto the system and monitor payments yourself. Enrolling with EFTPS is simple, and provides the best way to monitor payroll tax payments.  Any missed payments should immediately raise a red flag.

Payroll tax compliance is burdensome enough without having to worry about your payroll tax service provider scamming you. By periodically logging onto the EFTPS system to monitor payments, you should be able to avoid a costly payroll tax nightmare.

This article first appeared on lexology.com.



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