I recently received a phone call from a former client with a big problem. We had negotiated an Offer in Compromise for this client in 2012, saving her business a few hundred thousand dollars. One of the conditions when the IRS accepts an Offer in Compromise is that the taxpayer must not accrue any new balance due for five years after acceptance, or the Offer will default, and the original amount due will be reinstated (plus penalties and interest). It appeared that this client had accrued more liability to the IRS, although she could not understand how that happened, because she had hired a payroll service to make her deposits and file her returns on her behalf. Her problem was that she had assumed that the payroll service would not make any mistakes, and that she did not need to pay attention to tax compliance. She thought she could “set it and forget it,” and it nearly cost her hundreds of thousands of dollars.
Even the best payroll service can occasionally make a mistake, as my client learned. Therefore, I always advise my clients to at least learn the basics of tax compliance, to improve the chances that they will catch a mistake before it turns into a disaster. A basic working knowledge of tax compliance requirements will also make a business owner better prepared to handle the taxes on his own, if he has to end the relationship with a payroll service.
My client’s problem started with filing compliance. She was unaware of the filing requirements, and, as a result, didn’t notice when some of the 941s were not filed by the payroll service. This is the first aspect of compliance that every business owner should familiarize themselves with. You need to know what returns your business is required to file with the State and with the IRS, when those returns are due, and where they need to be sent. You should also clarify with the payroll service exactly which of the required returns they will file on your behalf, and how you will receive confirmation that the returns have been filed. If my client had been aware of what returns were required from her business, and what to expect from her payroll service, she would have noticed the delinquent returns, and could have avoided some of the nastiness that followed.
Perhaps more importantly, as a business owner, you must know how to make sure your tax deposits are being made in full and on time. To be perfectly diligent, it is a good idea to have an idea of how much the Federal and State deposits will be for a given payroll amount. My client knew that funds were being withdrawn from her bank account whenever a deposit was due, but she did not know whether those funds were sufficient to pay her employees, along with all of the employment taxes. If you have an idea of what the total should be, and your payroll service withdraws a different amount for payroll, you need to notice, and find out why the dollar amount was not what you expected. An even better idea is to request a payroll report from your payroll service for each payroll. That way, you can see exactly how the funds withdrawn from your bank account were used to pay the employees, and make the tax deposits.
The IRS issued notices about the missing returns and insufficient deposits, but my client did not read them. She had granted power of attorney to the payroll service, and assumed that they would address any problems that arose. The payroll service had hundreds of other clients – some have thousands – and my client’s notices slipped through the cracks. If you are a business owner, take a few minutes to read any mail you receive from the taxing authorities. They often give you time to resolve a problem before any penalty assessment. You can’t trust a payroll service to care as much about your business as you do.
Finally, you need to be aware of the terms of your contract with the payroll service. I have had clients who got into big trouble because they were not aware of events that would cause their payroll service to stop providing services, or they assumed the payroll service would be handling an aspect of compliance that was not called for in their contract. For example, many payroll services will prepare the returns, then send them to the business owner to sign and mail to the taxing authorities. If you think the returns are being mailed to the taxing authorities, that can cause a problem. Other plans call for tax deposits to be made, but not for returns to be prepared, meaning the business owner must prepare and file on his own. Similarly, many payroll services will stop providing assistance altogether if there are insufficient funds to cover gross payroll on the due date. In some cases I have seen, the payroll service has not notified the business owner that those services have ceased. Read your contract carefully, and make sure you know exactly what you are hiring the payroll service to do, and what is expected of you as the business owner. If you don’t understand from reading the contract, talk to somebody at the payroll service, to make sure you understand.
This article is in no way intended to disparage payroll services. They are a wonderful tool, and can handle a fairly complex aspect of running a business very smoothly and efficiently. Just remember that, as the owner of the business, any negative impacts of non-compliance fall on you and your business, not the payroll service, so it is best to be able to keep track of compliance on your own.
As for my client with the defaulting Offer in Compromise, she re-hired me, and we worked with the payroll service to resolve the problem. There had been a mistake with the payroll service’s computer software, which had led to the balances due. They indemnified my client, and worked hard to resolve the delinquencies, pay the new penalties, and ensure that the Offer did not default. In the end, she was fine and her business continues to thrive after the fresh start we gave it five years ago. You can bet that she watches her payroll service a little more closely these days, though.