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Inadequate Controls Raise Concerns over Employment Tax Fraud Risks

Saul Brenner, CPA, J.D., LL.M. 05.07.2015 | eVisor

A Treasury Inspector General for Tax Administration (TIGTA) report has found that employers using third-party payers for their federal employment tax withholding and tax payments are at risk of being defrauded.  The four most common third-party payer (TPP) arrangements are: payroll service provider (PSP), reporting agent, Section 3504 agent, and professional employer organization (PEO).

The report evaluated whether controls were adequate to protect the employer’s and government's interests when TPPs are not fulfilling requirements. There were instances where TPPs received funds from employers for payroll taxes, but did not remit those taxes to the IRS. This left the employers with an unpaid tax bill.  The report found that:  

  • Processes have not been established by the IRS to link employers with all TPPs;
  • The IRS does not always accurately process authorization forms; and
  • The IRS has not established an effective process to ensure that indicators are accurately assigned to Section 3504 agent and employer tax accounts.

TIGTA recommended that the IRS work with the Bureau of the Fiscal Service to establish a plan to use the Electronic Federal Tax Payment System to link a PSP with an employer. The Service should also establish a program where employers can inform the IRS of the PEOs they authorize to file and pay employment taxes. While reforms will eventually take place, employers should be aware that they remain responsible for ensuring tax compliance, including timely filing of returns and payment of taxes when using a TPP.

Questions? Contact your Berdon advisor or Saul Brenner at 212.331.7630 | sbrenner@berdonllp.com

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