Certified Professional Employer Organization Temporary and Proposed Regulations Issued by IRS

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.

Congress created the CPEO program to allow PEOs to apply to the IRS for a special status (CPEO) which serves, if other criteria are met, to allow the entities employing such PEOs to transfer full responsibility for any nonpayment of such taxes. To obtain this status an organization must apply for the status with the IRS, pay a fee and meet other criteria.

The bill provided the IRS was to begin accepting applications on July 1, 2015 with the program to start in full on January 1, 2016, but the IRS was unable to meet that deadline and instead pushed the program back one year. The IRS earlier in 2016 published temporary and proposed regulations for the program (TD 9768, Regs. §§301.7705-1T and 301.7705-2, REG-127561-15, Proposed Regs. §§31.3511-1, 301.7705-1 and 301.7701-2, 5/6/16) with this Revenue Procedure providing specifics for applying for the program.

The IRS will begin accepting applications on July 1, 2016 with the program officially getting underway on January 1, 2017. The applications will be submitted electronically to the IRS, along with a $1,000 user fee.

As part of the application the organization must submit proof of a surety bond where a surety agrees to issue a bond upon acceptance (a surety letter) followed by a Form 14751 showing actual issuance of the bond after acceptance as a CPEO.

The applicant also will need to include an annual financial statement accompanied by a report from an independent CPA. The CPA in question must:

  • Be currently independent of the CPEO applicant per AICPA Standards
  • Not currently be under suspension or disbarment from practice before the IRS
  • Must be duly qualified to practice in any state and
  • File a written declaration with the IRS that the person qualifies as a CPA and submit an auth orization, pursuant to §601.503(a), to represent the CPEO before the IRS

The financial statement must include a report from the CPA that provides an opinion that:

  • The financial statements are presented fairly in accordance with generally accepted accounting principles
  • The financial statements reflect positive working capital or meet the requirements for the limited cases when the working capital may be negative, as well as a detailed computation of working capital and
  • Reflect that the CPEO computes its taxable income on the accrual basis of accounting.

The auditor’s opinion must be an unmodified opinion—that is, any modification would disqualify the organization from obtaining CPEO status.

The organization will also need to submit quarterly assertions that it has withheld and made all applicable payroll tax deposits and will need to submit an examination level attestation from an independent CPA indicating that statement is fairly stated. As well, the procedures provides:

The attestation must be accompanied by a written declaration, signed by the CPA, that the CPA is currently qualified as a CPA and is authorized to represent the CPEO applicant before the IRS.

The ruling goes to provide additional information on the process that will be undertaken, including background and tax compliance checks the IRS will make regarding the applicant and responsible individuals of the organization.

The IRS will issue notification of acceptance of a CPEO and will also make the list of such organizations public (though the latter will happen only after the IRS receives the Form 14751). Normally the effective date of a certification would be the first date of the first quarter beginning after the certification is issued, but the IRS will grant a January 1, 2017 effective date to all organizations that submit an accurate and complete application before September 1, 2016.

The procedure also describes options an applicant has in the situation where an application is denied, including situations in which no appeal will be possible.

The Revenue Procedure was given a July 1, 2016 effective date which, not coincidentally, is the day on which the IRS will begin to accept applications for CPEO status.