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Recourse is available to employers victimized by payroll providers that fail to properly submit taxes on behalf of their clients, the national taxpayer advocate said March 2.
Numerous such failures have occurred in the past two years, including one in Maryland, Nina Olson said at the American Payroll Association's Capital Summit in Washington.
In March 2013, third-party payroll provider AccuPay of Bel Air, Md., reportedly failed to remit about $465,000 in taxes that it collected from 500 to 600 clients, according to the National Taxpayer Advocate's 2014 Annual Report to Congress, which cited press reports. AccuPay subsequently filed for Chapter 7 federal bankruptcy liquidation and its employer clients remained liable for the unpaid taxes, interest and penalties.
The Taxpayer Advocate Service “worked to alert former AccuPay clients of potential IRS collection action, and how to deal with the IRS regarding unpaid payroll taxes and unfiled returns,” the report said.
Sen. Barbara Mikulski (D-Md.), chairwoman of the Senate Appropriations Committee, “had a lot of constituents who got involved and worked with the Taxpayer Advocate in Baltimore to get relief for the folks who had been paying over to the payroll provider,” said Olson, whose office is an independent unit of the Internal Revenue Service.
Mikulski submitted language in the Consolidated Appropriations Act of 2014 (Pub. L. 113-76) and the Consolidated and Further Continuing Appropriations Act of 2015 (Pub. L. 113-235), directing the IRS to:
•issue dual address-change notices to the former and new addresses of employers making tax payments and
•require the agency to give special consideration to an offer-in-compromise request from a victim of payroll fraud or bankruptcy by a third-party payroll tax provider.
The dual-address change notices were meant to prevent unscrupulous payroll service providers from changing their clients' addresses of record with the IRS without their clients' consent, “which could keep an employer from learning it has delinquent tax deposits for months or even years, the National Taxpayer Advocate's 2014 Annual Report to Congress said.
In January 2015, the IRS started issuing the dual notices, Olson said.
Regarding offers in compromise, “employers remain liable for unpaid payroll taxes when a [payroll service provider] diverts employers' funds without paying the IRS the taxes due,” the report said. “These employers will be required, through no fault of their own, to pay the taxes a second time, along with interest and penalties,” it said.
“The IRS Restructuring and Reform Act of 1998 (RRA 98) introduced the concept of accepting offers in compromise based on effective tax administration,” the report said. “Offers in compromise provide the IRS” the flexibility to consider all of the circumstances that led to the delinquency, and allowing it to accept such offers “when such collection would create an economic hardship for the taxpayer,” it said. “The IRS has not embraced its effective tax administration (ETA) OIC authority as a viable collection alternative and has consistently underutilized this tool to provide relief to victims,” the advocate's report said, noting that the proposed interim guidance on offers is inadequate.
“The IRS says that the taxpayers have not paid the tax yet. Actually, they have,” Olson said. “They just haven’t paid it yet to the IRS. They’ve paid it to the payroll provider.”
“If one taxpayer owes $1,000 in taxes and another also owes $1,000 in taxes, but the first paid the amount to the IRS, and the other paid the amount to the payroll provider, both are still out $1,000,” Olson said. There is an economic disadvantage to making the second taxpayer pay the amount again to the IRS, she said.
In the summer of 2014, the Taxpayer Advocate Service worked with the IRS to develop an interim-guidance memorandum that addresses collection actions in cases involving third-party payers, initial contact with third-party payer clients and offers in compromise, the report said.
The Internal Revenue Manual section “was heavily negotiated, and with every negotiation you win some and lose some,” Olson said, noting that they were trying to get language into the guidance issued for revenue officers to suggest offers in compromise when they see such payroll-provider cases.
“We are doing a round two on that IRM, and we will see if we are successful in getting some changes to the language,” she said.
“I encourage you, if you are doing outreach and talking to others who may be victims of payroll service providers, suggest that they work on ETA offers in compromise,” she said.
The IRS's ability to respond to inquiries via the telephone has dropped dramatically in the past year, Olson said. Thirty-one percent of calls made to the IRS the week of Feb. 23 connected with someone at the agency after waiting an average of 26 minutes, she said. In the year-ago period, 76 percent of callers were connected to the IRS after waiting an average of 11 minutes.
Olson said the advocate's office has presented several alternative methods for taxpayers to communicate with IRS representatives before enforcement issues arise. The IRS is working on a pilot program for using e-mail and texting as communication methods, she said.
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