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.
In June and August of 2016 the IRS had issued procedures for the initial application to obtain CPEO status (Revenue Procedure 2016-33 and Notice 2016-49) after earlier releasing temporary and proposed regulations governing the program (TD 9798 and REG-127561-15). Revenue Procedure 2017-14 carries on where the earlier Revenue Procedure and Notice left off, now looking to maintenance of the status once the initial application is approved under the earlier guidance.
Section 2 of the Procedure outlines the general procedures for maintaining CPEO status. These procedures include:
- Undergoing an annual verification procedure, including payment of a user fee each year and undergoing a background check and tax compliance check [Section 2.02]
- Obtaining and maintaining a bond equal to the computed minimum bond for the CPEO based on the CPEO’s total liability under these rules for the prior quarter [Section 2.03]
- Submission of audited financial statements by the last day of the sixth month following the end of each fiscal year. The audit report of the independent CPA must be an unmodified opinion that the statements are presented fairly and in accordance with GAAP. In addition, the notes to the financial statements or the CPA’s opinion must contain statements regarding compliance with minimum working capital provisions of the law. [Section 2.04]
- Quarterly submissions of assertions related to proper deposits of taxes, an examination level attestation of the independent CPA on that assertion and statement on compliance with the working capital rules. [Section 2.05]
- Reporting the commence of termination of a CPEO contract with a customer on Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement within 30 days and meeting of all employment tax reporting under the arrangement. The organization must also report to the IRS certain material events that may take place. [Section 2.06]
Section 3 of the Revenue Procedure deals with suspension and revocation of CPEO status. The ruling allows the IRS to suspend or revoke the CPEO’s status for one or more failures to comply with the requirements in the Code, regulations, or other guidance.
The procedure provides the following specific circumstances that may result in suspension or revocation, though the notice points out that this is not an exhaustive list of such circumstances:
- A failure to timely complete an annual verification, timely submit annual audited financial statements and an accompanying CPA opinion, or timely submit a quarterly assertion, attestation, or working capital statement, as provided in sections 2.02, 2.04, and 2.05 of this revenue procedure;
- A failure to maintain a bond or bonds in the required bond amount, as provided in section 2.03 of this revenue procedure;
- A failure to satisfy the reporting requirements provided in section 2.06 of this revenue procedure, including a failure of the CPEO or a responsible individual of the CPEO to notify the IRS of a material change (as provided in sections 2.06(3) and 2.06(4) of this revenue procedure);
- The charging or conviction of the CPEO, or a related entity or a responsible individual of the CPEO, with or for any criminal offense under the laws of the United States or a state or political subdivision;
- The CPEO, or a related entity or a responsible individual of the CPEO, being the subject of an active IRS criminal investigation;
- A failure (other than an immaterial and isolated failure that does not reflect a meaningful lapse in compliance with federal employment tax withholding and deposit requirements) by the CPEO or any responsible individual to pay any applicable federal, state, or local taxes or file any required federal, state, or local tax or information returns in a timely and accurate manner, unless the failure is determined to be due to reasonable cause and not due to willful neglect;
- The assessment of fraud penalties against the CPEO or any of its responsible individuals or related entities by the IRS or another tax authority; and
- The discovery of any errors or omissions in any annual audited financial statements or working capital statements previously submitted to the IRS in accordance with sections 2.04 and 2.05 of this revenue procedure, sections 2.05 and 2.06 of Rev. Proc. 2016-33, and §§ 301.7705-2T(e) and (f), that would require a restatement of previously submitted statements.
A CPEO who has been notified of its suspended or revoked status must notify its customers of the matter within 10 days in writing of the development. The procedure also provides for a mechanism for the CPE to request an administrative review of the loss of its status.
The ruling in Section 4 outlines how a CPEO may voluntarily withdraw from the program.
Section 5 outlines certain special transition rules that will initially apply to grant relief in certain circumstances initially to CPEOs.