Payroll tax fraud committed by payroll service bureaus is not only devastating to the businesses that have fallen victim, but is equally devastating to the federal, state, and local economies. This type of fraud has a ripple effect that is felt by all and runs rampant throughout the industry.
Payroll tax fraud is possible and easily orchestrated by the payroll service bureau provider after the client signs a power of attorney form. By signing this form the client is allowing the payroll service bureau access to their client bank accounts and given check signing authority. Trust is now a huge issue in an unregulated industry with no safeguards to protect the client. The temptation to commit payroll tax fraud is immense and the client left vulnerable.
Once the service bureau has power of attorney, they utilize a practice known as tax impounding. This process involves the transfer of all funds for direct deposit of employee net pays and all payroll liabilities from client bank accounts, into their own interest bearing escrow account. The bureaus hold the funds until they are due to state and federal taxing agencies, at which time they are supposed to make payment on their clients behalf.
The shocking fact here is that once the bureau has possession of their clients funds, there is no regulation as to what the bureau can and cannot do with these funds that do not belong to them. The door is wide open, leaving clients open to fraud. Moreover, if fraud does occur, the client is held responsible for satisfying the tax debt. With no fiduciary responsibility to the bureau, the client tax debt is in affect doubled. Add in the penalties of up to 25% and interest that will be imposed by the taxing authorities, the burden resting solely on the client becomes substantial.
As you can see, this is a serious problem. Businesses in most cases cannot recover from their losses and ultimately go out of business, escalating an already high unemployment rate. The IRS and state agencies lose out on valuable payroll tax revenue, of which they most likely will not recover, and furthermore, are deprived of vital future payroll tax revenue.
Industries such as the legal profession are governed by rules and regulations with protections in place for their client escrow accounts. Payroll service bureaus are not required and in most cases do not afford their clients the same security. Client protection is desperately needed and in the best interest of the business owner and the federal and state governments. Most, if not all payroll service bureaus will file chapter 7 bankruptcy protections and cease operations after the fraud, leaving clients and taxing agencies with little or no opportunity to recoup defrauded funds.
In order for businesses to protect themselves, BMA Small Business Payroll Processing recommends the following questions be asked of the payroll service bureau if they utilize tax impounding.
- Are you, the client, protected against payroll tax fraud?
- Are you insured or bonded?
- Who is your carrier?
- What is your carriers phone number, and policy number?
These questions are extremely important to ask. If the provider is not insured or bonded to protect their clients, business owners are vulnerable to fraud. By asking for the payroll service bureaus carrier, phone number, and policy number, businesses are insuring that they have a means to prove that they are and remain protected. If the payroll service bureau cannot, or will not answer all of the above questions, business owners should look elsewhere for their payroll needs.