TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION
IMPROVEMENTS HAVE BEEN MADE TO MONITOR EMPLOYERS THAT USE
PROFESSIONAL EMPLOYER ORGANIZATIONS, BUT MORE CAN BE DONE
Issued on September 19, 2007
Highlights
Highlights of
Report Number: 2007-30-169 to the Internal
Revenue Service Commissioner for the Small Business/Self-Employed Division.
IMPACT ON TAXPAYERS
A Professional Employer
Organization (hereafter referred to as a PEO or Organization) may enter into
contracts with numerous companies (clients) and is responsible for paying
employment taxes on wages paid to leased employees. If the Organization fails to pay these
employment taxes, large tax underpayments can occur in a short time span
because of the large number of employees that are affected. If the Organization defaults on paying the
employment taxes, it usually does not
have significant assets to collect against because it is only a service
company. The Internal Revenue Service’s (IRS) only recourse may be to collect the
amounts due from clients of the Organizations, which could result in significant additional
expense for the clients who have already paid fees to the Organization to cover
the costs of those payroll taxes.
WHY TIGTA DID THE AUDIT
This
audit was initiated because tax compliance by PEOs is a growing area of
risk. Instances of PEOs defrauding their
clients are becoming more prevalent. For
example, on December 7, 2004, the Chief Executive Officer of a large Organization
pled guilty to conspiring to defraud the
The overall objectives of this review were to
determine the steps the IRS is taking to address PEOs that default on paying
employment taxes and to determine what can be done to improve compliance
tracking for those businesses that terminate their
use of these Organizations.
WHAT TIGTA FOUND
The Office of Taxpayer Burden
Reduction of the IRS Small Business/Self-Employed Division convened a task
force which recommended changes to some of the forms and procedures used by the
IRS to control Organizations. TIGTA
agrees with the corrective actions taken as a result of the task force as an
important step in getting this compliance issue under control. However, TIGTA also found that current regulations
do not protect clients when Organizations default on paying employment
taxes. The Federal Government currently does not require bonding of Organizations,
like many States do, and does not require independent quarterly tax payment
reviews and annual financial reviews of Organizations.
WHAT TIGTA RECOMMENDED
TIGTA
recommended the Commissioner, Small
Business/Self-Employed Division, and the IRS Office of Chief Counsel work with
the Office of Tax Policy in the Department of the Treasury to (1) consider a
legislative proposal requiring all current and future PEOs to become certified,
which would include posting a bond for payment of taxes; and (2) explore all
options to establish accurate links between the PEOs and their clients. In addition, the Commissioner, Small Business/Self-Employed
Division, should fully implement the changes proposed by the task force
requiring the Employer’s Quarterly Federal Tax Return (Form 941) to list
clients, and ensure outreach efforts are adequate to sufficiently inform
taxpayers of the potential risks of using a PEO, which include remaining liable
for employment taxes left unpaid by the PEOs.
In
their response to the report, IRS officials agreed with the recommendations and
plan to work with the Office of Tax Policy in the Department of the Treasury to
consider a legislative proposal applicable to PEOs addressing certification and
bonding requirements as well as other requirements, such as reviews of
quarterly tax payments and annual financial reviews. The IRS also plans to work with the
Department of the Treasury to explore all options to establish links between
PEOs and their clients. The Director,
Specialty Programs, Small Business/Self-Employed Division, plans to explore a
proposal for PEOs to provide a list of every client whose wages the
organization is reporting to the IRS and will work to develop a mechanism
requiring this information. The
Director, Communications, Liaison and Disclosure, Small Business/Self-Employed
Division, plans to develop an outreach initiative to small business/industry
groups that addresses employment tax obligations when the services of a PEO are
used.
READ THE
FULL REPORT
To view the report,
including the scope, methodology, and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2007reports/200730169fr.html.
Email
Address: Bonnie.Heald@tigta.treas.gov
Phone Number: 202-927-7037
Web Site:
http://www.tigta.gov