Treasury Inspector General for Tax Administration
September 18, 2017
Contact: Karen Kraushaar, Director of Communications
WASHINGTON — The Internal Revenue Service (IRS) needs to reduce the risk of tax fraud by third-party payers called Professional Employer Organizations (PEO), according to an audit report that the Treasury Inspector General for Tax Administration (TIGTA) issued today.
Employers can appoint or enter into an agreement with a third party to take over some or all of the employer’s Federal employment tax withholding, tax return preparation, reporting, and tax payment responsibilities. One type of third-party payer arrangement is a PEO. PEOs that are certified by the IRS are required to notify the IRS of the specific employers who use their services. However, employers who continue to use the services of a PEO that chooses not to participate in the certification program remain at risk.
TIGTA initiated this audit because Congress enacted legislation in Calendar Year 2014 in an effort to reduce the risk of employment tax fraud by third-party payers, in particular PEOs. The legislation requires the IRS to issue a notice as confirmation of any address change relating to an employer making employment tax payments. To protect employers, payers, and taxpayers from abusive third-party payroll providers, the IRS is required to send a notice to both the employer’s former and new address. Although taxpayers are not required to respond to the notice, the intent of the notice is to have taxpayers let the IRS know when they did not authorize an address change. Separate legislation also requires the IRS to establish a voluntary program for PEOs to become Federally certified. TIGTA assessed the IRS’s actions to establish processes for certifying PEOs authorized for the filing and paying of employment taxes, and evaluated the dual notice process for address changes.
The IRS has taken steps to implement processes and procedures to issue a notice as confirmation of any business address change when required and to establish a voluntary program for PEOs to become Federally certified. However, the majority of PEOs do not participate in Federal certification, which results in the continued inability to link employers who use the services of these organizations. As of March 31, 2017, the IRS received applications for certification from 123 PEOs, whereas in September 2015, the National Association of PEOs estimated there were between 780 and 980 PEOs that represent 156,000 to 180,000 employers.
In addition, TIGTA found that processing time frames and procedures to periodically inform applicants as to the status of their application need to be developed. Finally, regarding the dual notice process, some notices were being issued erroneously and some notices were not being issued at all. For example, TIGTA identified 698,660 sets of notices that were unnecessarily issued to businesses whose addresses did not actually change. Using IRS cost data, TIGTA estimated that the issuance of these erroneous notices resulted in the IRS needlessly expending almost $3 million. TIGTA also identified 256,826 sets of notices that should have been issued to businesses whose addresses were changed but did not receive a notice as required.
“Certification by the IRS provides certain Federal employment tax protections for both Certified PEOs and the employers who use their services,” said J. Russell George, the Treasury Inspector General for Tax Administration. “However, unlike those PEOs that are Federally certified, no such protection exists for those employers who continue to use the services of a PEO that chooses not to participate in the program,” he added.
TIGTA recommended that the Commissioner, Small Business/Self-Employed Division, work with the Department of the Treasury to consider a legislative proposal requiring non-Certified PEOs to register with the IRS and establish timeliness standards for reviewing applications. In addition, TIGTA made several recommendations to the Commissioner, Wage and Investment Division, to refine the programming criteria for the dual notice process. The IRS agreed with all six of TIGTA’s recommendations.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.