In News Release IR-2017-103 the IRS announced that it has finally approved the first batch of certified professional employer organizations (CPEOs)   The legislation authorizing CPEOs was passed in late 2015 and the legislation originally targeted January 1, 2016 as the date employers could begin using such organizations.

However, the IRS took time to publish the rules under which an application could be made and to process such an application, so the program got off to a late start.  Now the IRS has issued notices of certification to 84 organizations.

Image copyright dinozzz / 123RF Stock Photo

Just in time for the program to get underway, the IRS provided details on the rules for maintaining Certified Professional Employer Organization (CPEO) status under IRC §7705 in Revenue Procedure 2017-14.

If a business uses a CPEO to handle its payroll for a qualifying worksite, the business will not be held liable for the unpaid payroll taxes (including trust fund taxes) should the CPEO fail to properly make the payments when due.  That is an exception to the general rule that continued to hold the employer liable for such taxes even if, unbeknownst to the employer, the payroll service had not paid the taxes—even if the payroll had been involved in a scheme to simply steal the funds from the employer.

Image copyright payungkead / 123RF Stock Photo

This article is a revision of the article originally published in June to take into account the revisions later made by Notice 2016-49 to the requirements for the program.

The IRS has released a Revenue Procedure (Revenue Procedure 2016-33) that outlines how organizations will apply for Certified Professional Employer Organization (CPEO) status.  The CPEO status, added by the Tax Increase Prevention Act of 2014, is meant to address an issue that arises when PEOs collect payroll taxes from employers but fail to pay those taxes over to the government.

Normally in such a situation the organization that hired the PEO remains on the hook for the payroll taxes, even if they were the victim of a fraud perpetrated by the PEO to walk off with payroll taxes.  See the case of  City Wide Transit, Inc. v. Commissioner, CA2, 2013-1 U.S.T.C. ¶50,211, reversing TC Memo 2011-279, 3/1/13.

Image Copyright surawutob / 123RF Stock Photo

The IRS has released a Revenue Procedure (Revenue Procedure 2016-33) that outlines how organizations will apply for Certified Professional Employer Organization (CPEO) status. The CPEO status, added by the Tax Increase Prevention Act of 2014, is meant to address an issue that arises when PEOs collect payroll taxes from employers but fail to pay those taxes over to the government.

Normally in such a situation the organization that hired the PEO remains on the hook for the payroll taxes, even if they were the victim of a fraud perpetrated by the PEO to walk off with payroll taxes. See the case of City Wide Transit, Inc. v. Commissioner, CA2, 2013-1 U.S.T.C. ¶50,211, reversing TC Memo 2011-279, 3/1/13.

The IRS has issued temporary (TD 9768, Regs. §§301.7705-1T and 301.7705-2) and proposed regulations (REG-127561-15, Proposed Regs. §§31.3511-1, 301.7705-1 and 301.7701-2) that will govern the Certified Professional Employer Organization (CPEO) program that Congress enacted as IRC §7705 at the end of 2014 as part of the ABLE Act of 2014.  The program, which was supposed to begin accepting applicants in the summer of 2015 will actually begin accepting applications on July 1, 2016.

As part of the release of the regulations, the IRS also announced the agency’s intent to release a pair of Revenue Procedures, one outlining the application process to become a PEO and another detailing the ongoing requirements to maintain certification.

The IRS has announced that it is pushing back for one year the date on which it will begin accepting applications for entities to be classified as a certified professional employer organization under IRC §§3511(a)(1) and.7705.

These organizations, created as part of the Achieving a Better Life Experience (ABLE) Act of 2014, would provide protection for employers who use such organizations regarding the payment of payroll taxes.  Employers generally are responsible for the deposit of taxes withheld from their employee’s payroll and, prior to this provision, that responsibility could not be shifted to another party.