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IRS provides application procedures for certified PEOs

Rev Proc 2016-33, 2016-25 IRB; IR 2016-83

In a Revenue Procedure and accompanying news release, IRS has issued the procedures for applying for certification as a Certified Professional Employer Organization (CPEO).

Background. Small businesses often contract with Professional Employer Organizations (PEOs), also known as employee leasing companies, to ensure compliance with workplace laws and regs. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees.

Before enactment of the Tax Increase Prevention Act of 2014 (TIPA, P.L. 113-295, 12/19/2014), when a business contracted with a PEO to administer its payroll functions, the business customer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the customer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.

Effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, as added by TIPA, allows a CPEO to be treated as the sole employer of the employees.

A CPEO is an organization that has been certified by the IRS as meeting certain requirements, which are intended to ensure that the PEO properly remits wages and employment taxes. As part of the certification program, which is voluntary, TIPA requires IRS to:

…complete background, credit, and tax compliance checks of PEOs;
…verify that the PEO has an active and approved surety bond;
…verify that the PEO satisfies the service agreement and financial review requirements (including the requirement to submit audited financial statements);
…collect a user fee of $1,000; and
…provide public disclosure of certified PEOs and certified PEOs whose certification has been suspended or revoked.

The certification was initially required under TIPA to be established by July 1, 2015, but IRS needed additional time to set it up and delayed the date that it would begin accepting applications for PEO certification until July 1, 2016.

Recent temporary regs. Back in May, IRS issued temporary regs that set out the requirements a person must satisfy in order to become and remain a CPEO, and also indicated at that time that it would be releasing a Revenue Procedure prescribing the specifics of the application process for a person to become a CPEO (see Weekly Alert ¶  28  05/12/2016).

Application procedures. As promised, IRS has issued Rev Proc 2016-33, which provides detailed procedures for applying to be certified as a CPEO.

Method of submission. A person seeking certification as a CPEO must electronically submit an online application for CPEO certification (“application,” made available on IRS’s website) and the accompanying forms and documentation required by Reg. § 301.7701-2T, Rev Proc 2016-33, and instructions accompanying the application. An individual submitting an application on the applicant’s behalf must be authorized by Code Sec. 6103(e) to inspect the applicant’s return, and each of the applicant’s responsible individuals must electronically submit a properly completed and executed online Responsible Individual Personal Attestation (RIPA) form and fingerprint card. (Rev Proc 2016-33, Sec. 2.01)

Applications by controlled group members. If more than one member of a controlled group seeks to be certified as a CPEO, each such member must submit a separate application. (Rev Proc 2016-33, Sec. 2.02)

User fee. Upon submission of the application, the individual that submits the application will be automatically directed to pay a $1,000 user fee through . No application will be processed until the fee is received, and once processing of the application has begun, the user fee will not be returned. (Rev Proc 2016-33, Sec. 2.03)

Proof of bond. With its application, a CPEO applicant must submit a signed surety letter confirming that the surety agrees to issue a bond that satisfies all applicable requirements to the applicant if and when it is certified as a CPEO. All CPEO members of a controlled group are required to be on the same bond. If IRS approves an application, the applicant has 30 days from the date IRS provides notice of certification to submit a Form 14751, Certified Professional Employer Organization Surety Bond (or, in the case of a CPEO applicant that is a member of a controlled group with existing CPEOs, to post a superseding bond using Form 14751) providing for a bond in the required amount and signed by both a qualified surety and the CPEO(s). (Rev Proc 2016-33, Sec. 2.04)

Submission of annual audited financial statements. With its application, a CPEO applicant must generally submit a copy of its annual audited financial statements for the most recently completed fiscal year as of the date it submits its application. However, if an application is submitted before the last day of the 6th month following its most recently completed fiscal year, and the audit of the financial statements for that fiscal year has not been completed at the time it submits its application, the applicant must provide the annual audited financial statements for the immediately preceding fiscal year then subsequently provide the annual audited financial statements for the most recently completed fiscal year by the last day of the 6th month after such fiscal year ends. In addition, for any fiscal year that ends after the CPEO applicant submits its application and on or before the effective date of certification, if applicable, the CPEO applicant must provide the annual audited financial statements by the last day of the 6th month after such fiscal year ends.

With each of these required annual audited financial statements, a CPEO applicant must submit an unmodified CPA opinion that such financial statements are presented fairly and in accordance with GAAP, reflect positive working capital (as defined by GAAP), and reflect that the applicant computes its taxable income under the accrual method of accounting, as well as a written declaration that the CPA is currently qualified as a CPA and is authorized to represent the applicant before IRS. A limited exception exists for an applicant whose financial statements reflect negative working capital but that satisfies certain requirements that generally establish to IRS that the positive working capital failure doesn’t present a material risk to IRS’s collection of employment taxes.

An applicant that was not operating as a provider of employment-related services for all or part of the most recently completed fiscal year as of the date it submits its application must also provide a copy of the audited financial statements of the following entity or entities, if applicable, for each applicable entity’s most recently completed fiscal year, accompanied by a CPA opinion similar to that described above: (i) any precursor entity (under Reg. § 301.7705-1T(b)(10)) of the CPEO applicant; or (ii) if the CPEO applicant does not have a precursor entity, any related entity described in Reg. § 301.7705-1T(b)(12)(ii)(B).

If an applicant is a member of a controlled group of which other members are CPEO applicants or CPEOs, the applicant must submit copies of combined or consolidated annual audited financial statements for all CPEO applicants and CPEOs in the controlled group, with an accompanying CPA opinion similar to those above. The statements and opinion must contain the name and EIN of each CPEO applicant and CPEO in the controlled group. Although the applicant isn’t required to provide a copy of its separate financial statements as part of its application, if the financial position of an applicant is unclear from the combined or consolidated financial statements of the controlled group of which the applicant is a member, IRS may request additional financial information. (Rev Proc 2016-33, Sec. 2.05)

Submission of quarterly assertions, attestations, and working capital statements. For the most recently completed calendar quarter as of the date of its application, an applicant must provide an assertion that it has withheld and made deposits of all federal employment taxes for which it is liable for the quarter; an examination level attestation from a CPA that this assertion is fairly stated in all material respects; and a statement verifying that the applicant has positive working capital. The CPEO applicant must continue to provide this documentation for every subsequently completed calendar quarter during which its application for certification is pending for some or all of the quarter. This documentation must be provided by the last day of the second month after the end of each such subsequent quarter, even if the CPEO applicant receives its certification before this deadline. Rev Proc 2016-33 notes, however, that certain “immaterial failures” won’t necessarily result in an applicant failing to satisfy this requirement, nor will negative working capital, provided that the applicant satisfies certain requirements that generally establish to IRS that the positive working capital failure doesn’t present a material risk to IRS’s collection of employment taxes. (Rev Proc 2016-33, Sec. 2.06)

Suitability and tax-compliance check. An applicant will be required to identify its related entities, precursor entities, and responsible individuals as part of the application for certification. IRS will investigate the accuracy of statements and representations made by an applicant and its responsible individuals in the application by conducting background checks, with which, by submitting an application, an applicant and its responsible individuals agree to cooperate. (Rev Proc 2016-33, Sec. 3)

Standards for granting certification as a CPO. An applicant will be certified as a CPEO only if its application and supporting documentation establish to the satisfaction of IRS that the applicant meets the relevant requirements so as not to present a material risk to the IRS’s collection of federal employment taxes. The application must be complete and accurate, and IRS can request additional information before approving or denying certification. The applicant must notify IRS of material changes relevant to its application for certification within 30 days of its occurrence. (Rev Proc 2016-33, Sec. 4)

Withdrawal of application. An application may be withdrawn only upon the written request of a responsible individual authorized to correspond with IRS on the applicant’s behalf, and IRS may retain and use for tax administration the application, all supporting documents, and the information submitted in connection with the withdrawal request. (Rev Proc 2016-33, Sec. 5)

Notice of certification. IRS will issue electronically or by mail a notice of certification to an applicant that has been approved for certification. If an applicant is a member of a controlled group and other members of the controlled group are also applying for certification, a separate notice of certification will be issued to each CPEO applicant member of the controlled group that has been approved for certification. The notice of certification will specify the effective date of certification and indicate that the effective date of certification is contingent upon timely receipt (within 30 days) of an acceptable Form 14751 signed by both a qualified surety and the CPEO (or CPEOs in the case of a controlled group), and in an amount prescribed by Reg. § 301.7705-2T(g)(2) . The effective date of certification will typically be the first day of the first calendar quarter following the date of the notice of certification. However, the effective date of certification for an applicant that submits a complete and accurate application before Sept. 1, 2016, and is certified will be Jan. 1, 2017, even if the date of its notice of certification is after Jan. 1, 2017. (Rev Proc 2016-33, Sec. 6)

Disclosure of CPEOs. IRS will publish a list of all CPEOs, and the effective date of their certification, at , which will be updated to reflect newly certified CPEOs by the 15th day of the first month of every calendar quarter. An organization will not appear on this list until IRS has received from it the proof of bond on Form 14751. (Rev Proc 2016-33, Sec. 7)

Denial of certification. If IRS decides that an application should be denied based on the applicant’s failure to satisfy one or more of the requirements of Reg. § 301.7705-2T, IRS will generally issue a notice of proposed denial that include the reason(s) for the denial of certification and advises the applicant of its opportunity to request review of the proposed denial by the IRS Office of Professional Responsibility (OPR). In certain situations (e.g., submission of an incomplete application or failure to timely respond to an IRS request for additional information), however, a denial is final with no opportunity for review.

To request a review, the applicant must submit to the IRS CPEO program office identified in the notice of proposed denial a written statement of the facts, law, and arguments in support of its position within 30 days from the date of the notice of proposed denial. If the IRS CPEO office agrees with the proposed denial, it will forward the request for review to OPR, which will review the denial for an abuse of discretion. The request for review may be withdrawn at any time before OPR issues its final determination. If the applicant doesn’t timely request review of a proposed denial, a notice of final denial will be issued. (Rev Proc 2016-33, Sec. 8)

Effective/application date. Rev Proc 2016-33 is effective July 1, 2016. (Rev Proc 2016-33, Sec. 9)

Yet more guidance coming soon. IRS also indicated that it will be issuing a further Revenue Procedure on the ongoing requirements that CPEOs must meet to maintain certification and the procedures relating to suspension and revocation of CPEO certification. (Rev Proc 2016-33, Sec. 1)

References: For certified PEO treated as sole employer of work site employees, see FTC 2d/FIN ¶  H-4861; United States Tax Reporter ¶  35,114; TaxDesk ¶  559,901; TG ¶  9147.