Using a third-party service provider to process payroll is generally an efficient, cost effective way to handle an organization's payroll needs. However, a recent court case highlights potential problems for companies that utilize payroll processors without proper controls in place.

In the court case, a medical practice hired a third-party service to process its payroll and make the required tax deposits. The provider gave the doctors correctly prepared payroll returns and based on these returns, the doctors transferred funds to the provider to cover the required tax deposits. However, the provider then prepared understated returns that were submitted along with a lower amount of taxes, to the IRS and the provider pocketed the difference. When the scheme was discovered, the service provider wound up in jail and the doctors ended up with a substantial bill from the IRS for taxes, penalties, and interest, related to a liability they thought they had paid. The key point is that even if a third party is making the deposits, the employer (or its officers) remain the responsible party.

To avoid a similar situation, it is advisable that the employer make sure its address (rather than the service provider's) is on the payroll returns. In the event that there are problems with an employer's payroll tax account, the IRS will notify the taxpayer at the address of record, which is why it is important that the address be that of the employer rather than the service provider.

Furthermore, it would be prudent to ask to see verifiable proof that the payroll service provider has a fiduciary bond in place to help protect against the service provider defaulting on its obligations. And finally, if a service provider will be making tax deposits on behalf of the employer, it would be wise to make sure the service provider is utilizing the EFTPS. Doing so should allow the employer to easily confirm that the proper payments are being made on its behalf.



For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.