By Sam Pollom
If you’re an attorney who provides advice to small businesses, it’s not uncommon for a new (or existing) business owner to ask your advice on which payroll service provider to use. Perhaps you have already worked with a payroll service provider that you trust and feel comfortable with, or maybe you have no idea who or what to recommend to your client. Either way, you should understand the importance of choosing the right payroll service provider. The primary concept that you and your client need to understand is that the employer is ultimately responsible for the remittance of payroll taxes and withholdings, regardless of the actions of the employer’s payroll service provider.
The payroll service industry is dominated by a few large providers, such as ADP and Paychex, but thousands of smaller payroll services have been created in recent years to compete in the small-business arena. A recent survey by a small-business trade group found that approximately 40 percent of small businesses use a third-party payroll service provider. Nearly one-third of those providers charge their clients more than $500 a month for those services, and some employers pay more than $1,000 per month. But are these smaller payroll service providers reliable? Most payroll service firms do a great job of issuing their client’s payroll checks, handling the filing requirements, and remitting employment taxes in a timely manner. However, there are a few bad actors.
Consider the story of AccuPay of Bel Air, Maryland. AccuPay was a payroll service provider for dozens of small businesses including veterinarians, dentists, construction firms, service businesses and retailers. But in March 2013, AccuPay filed for Chapter 7 bankruptcy. Later that same month, local police were investigating AccuPay for possible fraud, and have since handed the case over to the IRS. This is because AccuPay failed to remit millions of dollars of withheld income and employment taxes — funds withheld in trust from the employees of its clients. This left those businesses on the hook with the IRS (and the state of Maryland) for the unpaid taxes.
Adding insult to injury, if the businesses cannot pay the taxes, their owners and other responsible officers will be ultimately held personally liable for them — a liability that they themselves cannot discharge in a bankruptcy. Section 6672 of the Internal Revenue Code authorizes the IRS to assess a 100 percent Trust Fund Recovery Penalty on responsible officers. The IRS very aggressively pursues the full payment of this penalty using all the tools at its disposal including its power to levy business and personal bank accounts, and garnish wages, without a court order.
Having your payroll provider go out of business isn’t the only possible pitfall. Some individuals have gone to prison for their roles in employment tax scams. A lady from Long Island, New York, was sentenced to three years for a $20 million scam at her payroll company, and an owner of a Boise, Idaho, payroll company was sentenced to four years in prison for stealing approximately $1 million to pay off his personal debts.
The IRS and the courts have consistently held that an employer’s reliance on a third-party payroll service to remit taxes does not excuse the employer from liability for the failure to pay taxes, even when the employer is a victim of malfeasance by the payroll service provider.
So what can be done to protect your client? Do you have to always recommend the “big guys” to your clients needing payroll services? When choosing a payroll provider, ask your colleagues if they have any good recommendations. Check for any grievances filed with Dun & Bradstreet. Ask the payroll provider to give you three or four references and check their experiences.
Never allow a payroll provider to change the notice address of your client that is on file with the IRS. The IRS sends notifications to employers when there are problems such as missed filings or unpaid taxes. This is one of the tactics that AccuPay used to prevent its clients from receiving notification of unpaid and overdue taxes. Additionally, make sure the payroll service company uses the Electronic Federal Tax Payment System. This system allows your client to review and confirm that required payments are being made to the IRS. It’s also a great idea to search for a payroll service that has a fiduciary bond in place to help protect your client if the payroll service fails to make tax payments. A little due diligence goes a long way.•
• Samuel M. Pollom, JD, CPA is with BGBC Partners LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the author.