NPRC Assists IRS and Congress in Addressing Tax Refund Fraud
NPRC is assisting the IRS and states as they rapidly consider measures to combat identity theft and tax refund fraud. NPRC offered testimony at IRS and IRS Oversight Board hearings and has held many discussions with IRS and state tax authorities and the U.S.
Senate Finance Committee on potential measures.
In August 2014, GAO report 14-633 identified acceleration of employer W-2 reporting deadlines as perhaps the most promising answer. Indeed, employer W-2 reports should be available to the IRS and states during the income tax season so that claims of refund can be validated. Many filing deadlines are unnecessarily late, and increased electronic filing would facilitate access. NPRC supports such changes to the W-2 reporting system and stands ready to assist in evaluating specific proposals.
New IRS Regulations Require Payroll Firms to Make Quarterly Disclosures to Clients
On July 26, 2012, the Internal Revenue Service (IRS) released Revenue Procedure 2012–32, which provides requirements for payroll firms and others that act as “Reporting Agents.” Authorized Reporting Agents sign and electronically file federal employment tax returns, such as Forms 940, 941 and W-2, and make federal tax deposits electronically via the Electronic Federal Tax Payment System (EFTPS).
The IRS Revenue Procedure specifies that Reporting Agents must notify and remind clients at least quarterly that the taxpayer remains liable for employment taxes, even if they outsource tax filings and/or payments to a third party. The disclosure statement must suggest that the employer use the IRS EFTPS system to periodically confirm that deposits have been made as expected, and note that state tax authorities may offer similar verification programs.
This disclosure statement has long been a best practice among NPRC member companies, which collaborated with the American Payroll Association and other industry associations, as well as the IRS Taxpayer Advocate, the U.S. Department of the Treasury, IRS and congressional tax-writing committees to advocate for IRS adoption of such a disclosure requirement within IRS rules.
Disclosures serve an important function in reminding employers to be cautious in the selection and monitoring of any service provider entrusted with the administration of federal taxes.
Over the years, the federal government and various states have considered policy measures to eliminate the risk of diversion of tax funds held by third parties. While extremely rare, incidents of this nature have seriously affected the client companies involved. State and federal policymakers broadly agree that there is no better safeguard than raising awareness of the risks, and providing tools (e.g., www.EFTPS.gov) by which businesses can protect themselves.
Revenue Procedure 2012-32 is effective November 19, 2012
IRS Taxpayer Advocate's 2011 Report to Congress
NPRC wrote to the IRS Taxpayer Advocate to express concerns over the characterization of the payroll services industry within the 2011 TAS Report to Congress. One section of the report implied that payroll service providers may contribute to the "tax gap"; however the explanation and justification are incorrect. We offered to meet with TAS staff to provide appropriate background information on the payroll services industry and its role in tax administration.
NPRC Urges Prioritization of Suggested enhancements to Reporting Agent Regulations
As requested by the Service, NPRC provided recommendations for the IRS Annual Guidance Priority Plan, asking that the IRS prioritize proposed disclosure requirements that would improve the safety of client funds entrusted to payroll service providers. The IRS has not yet adopted the suggested recommendations.
NPRC Releases Study of Employer Wage and W-2 Reporting
In early 2011, IRS Commissioner Shulman presented a new IRS vision for improved information reporting systems, with the ultimate goal that returns such as Forms W-2 and 1099 would be on file with the IRS during the tax season rather than after. Members of the National Payroll Reporting Consortium subsequently discussed the issues with senior IRS officials, and determined that a background study of the factors involved might be helpful.
Coincidentally, similar questions arose in the context of state unemployment insurance reporting. As a result of the ARRA of 2009, 22 states adopted a more recent “base period” for qualifying earnings, which put pressure on the quarterly wage reporting systems to make employer-reported wages available sooner. The issues and questions for both systems were essentially the same.
NPRC asked Ernst & Young to summarize the processes that businesses follow in preparing Forms W-2; challenges businesses face in reporting such information timely; the impact to employers of accelerating current filing deadlines, and policy considerations that may hasten the availability of W-2 and quarterly wage data. NPRC participated minimally its preparation and the report should not be viewed as a reflection of the views of NPRC or its members. The study was merely intended to inform those involved in considering IRS Information Reporting improvements. It does not generally offer recommendations, other than noting that the extended March 31 deadline for electronically filed returns could be eliminated without difficulty.
Ernst & Young also concluded that expanding electronic filing is very effective in achieving more rapid access to such data (e.g., Massachusetts noted that electronically filed wage records are available two days after receipt; whereas paper reports took a month to process).
NPRC members have been privileged to work with the IRS, SSA and state tax authorities for many years to improve employment tax administration. NPRC actively supports appropriate electronic filing systems as the most effective way to improve the efficient flow of employment tax returns and related reporting.
Industry Disclosure Regs Pending to Safeguard Client Funds
In recent years, there have been a handful of incidents in which a small payroll processing firm failed to pay the employment taxes of its clients. The incidence of such failures is very rare, but each occurrence created significant problems for the affected clients.
Fortunately, technology is already available to address the problem. The IRS Electronic Federal Tax Payment System (EFTPS) makes it easy for businesses to verify federal tax payments made on their behalf. If employers had been aware of and used EFTPS, every past incident would have been detected almost immediately and losses minimized.
The payroll industry trade associations, led by NPRC, worked together to develop standard disclosures that would effectively prevent future losses, and asked the IRS to revise existing regulations to require payroll service providers to make these disclosures at least quarterly. The IRS is considering revised regulations at this time. In the meantime, payroll service providers should consider including the following message prominently within periodic tax reports to clients.
IMPORTANT INFORMATION FROM THE IRS:
The employer is ultimately responsible for the deposit and payment of federal tax liabilities, even if a third party is making the deposits. The IRS recommends that employers enroll in and use EFTPS (Electronic Federal Tax Payment System) to confirm payments made on their behalf. Enroll online at www.eftps.gov, or call 800-555-4477 for an enrollment form.
State tax authorities generally offer similar means to verify tax deposits. Contact the applicable state offices directly for details.
W-2 Reporting Deadlines
IRS Commissioner Shulman announced an initiative to reconsider core information reporting programs (e.g., W-2s & 1099s) to make the data available to the IRS during the tax season, which may involve accelerating employer reporting due dates. NPRC wrote to the commissioner to express support and interest in working with the IRS to consider alternatives.
Implementation of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
NPRC responded to questions from the Administration about the implementation of H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), which was enacted on December 17, 2010 and effective January 1, 2011. The Act affected every U.S. worker and employer, and is notable due to its late enactment relative to the effective date.
NPRC advised the Treasury Department that large payroll service providers are probably the best equipped to handle last-minute tax law changes. Despite significant challenges, the payroll services industry successfully implemented the tax changes on time, and the change was largely seamless to clients and their employees. The Treasury was advised that other employers who may rely on payroll software which is not frequently updated, or that handle payroll calculations manually, may not meet the deadlines.
Final IRS Preparer Tax Identification Number (PTIN) regulations were published on September 30. Reporting Agents that do not provide tax advice to clients, and that comply with Rev. Proc 2007-38 are not subject to the regulation. [“A tax return preparer does not include … an individual described in § 301.7701–15(f).”] The PTIN regime for tax preparers generally includes registration, fees, testing for competency and background checks, which might have applied to employees of Reporting Agents.
Reporting Agents that provide tax advice to clients, and/or that do not comply with IRS Rev. Proc 2007-38 should generally register for a PTIN and familiarize themselves with the new PTIN regulations.
Electronic Federal Tax Payments are Mandatory in 2011
IRS regulations expected to be final in December, will eliminate the paper Federal Tax Deposit coupon system, a system that dates back to World War I, according to the IRS.
All but the smallest businesses must use the IRS Electronic Federal Tax Payment System (EFTPS) for all federal tax payments beginning in January 2011. EFTPS is free and easy to use, and can reduce errors. However, employers will face new 10% penalties for taxes not paid electronically, on top of the roughly eight million IRS penalty notices employers receive annually for payroll taxes alone. Payroll tax penalties average over $1,100 per employer annually.
Large payroll service providers have been at the forefront of electronic tax administration since the early 1980’s; generally paying and reporting all client taxes electronically for enhanced accuracy and efficiency.
Given the penalty exposure for non-electronic deposits, those who are converting to EFTPS for the first time should review all related procedures and back-up systems. For example, be sure to register far enough in advance, and consider potential problems like lost passwords, input cutoff times, unexpected absence of responsible individuals, power or Internet interruptions, inclement weather and coordination with tax advisors.
NPRC provides additional comments on IRS PTIN regulations
The IRS issued separate regulations regarding fees for registering as a Return Preparer to obtain a Preparer Tax Identification Number (PTIN). This is related to the March “Preparer” regulations (which excluded Reporting Agents); however, RAs were not excluded from this regulation, and the IRS suggested that NPRC respond to this as well. This letter also addresses a proposal to require background checks for RA employees with access to IRS e-Services.