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Tax fraud charges and professional employer organizations

Reducing employment tax fraud by third-party payers, professional employer organizations (PEOs), has been a federal initiative since 2014. A certification program was designed to require a PEO to notify the IRS of employers using their services.

Yet as of March 31, 2017, only 123 PEOs had applied for certification. Our most recent post on the topic detailed the release by the IRS of its first list of certified PEOs (CPEOs). In this post, we will discuss why the program has not caught on and we'll survey some of the related fraud convictions over the last two years.

Lack of action in the industry

Somewhere between nearly 800 and 1,000 PEOs represent as many as 180,000 employees. The reasons few have sought certification may relate to administrative burdens and complexity of the application. Potential customers may not yet be demanding certification.

The IRS has no current way of tracking employer use of the service either. PEOs file aggregate tax returns for all the employers using their services paying the employment taxes owed under the PEO Employer Identification Number (EIN). There is a no cross-referencing system that lets the IRS identify which employer is using a specific PEOs service or when they terminate that service. Recently, the Treasury Inspector General for Tax Administration (TIGTA) recommended that cross-referencing EINs would be another way to reduce fraud.

Willfully failing to pay over employment taxes

Since the middle of 2015, a number of CEOs, presidents and owners of PEOs have been charged with fraud after they failed to pay Federal payroll taxes. Prison sentences for those convicted have ranged from 60 months to 144 months and include lengthy supervised release terms.

Restitution in these past cases may indicate the amount of time it took for issue to cause a red flag. In one case, a CEO used funds collected to pay other company expenses and personal expenditures. The restitution ordered in the case was more than $29 million. Another sentence of a PEO president included restitution order of $17 million.

But the most recent convictions carried restitution of $377,163. This may indicate that law enforcement is becoming even more aggressive in identifying and pursuing these cases.

Failing to send payroll taxes for a quarter or even over a couple pay periods could result in federal fraud charges. As a business owner in a growing field, you must seek counsel from an experienced tax attorney if there is any indication of an investigation into accounting practices or the timing of employment tax payments.

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