Like thousands of businesses, Pediatric Affiliates PA outsourced its payroll to a payroll firm. Such firms generally prepare and file payroll tax forms for businesses. As part of this function, such firms typically calculate the taxes due, request the funds from their client, and then pay them over to the IRS on behalf of their clients. Unfortunately, for Pediatric Affiliates PA, the company they were using was stealing the tax deposits instead of paying them over to the IRS.
Eventually, the IRS sought to collect the missing tax deposits from Pediatric Affiliates. The company claimed it didn't owe the taxes or interest on the taxes since they had paid them over to the payroll firm. The District Court held that this was not reasonable cause, and found Pediatric Affiliates responsible for the missing taxes and interest. This decision has now been upheld by the 3rd Circuit Court of Appeals.
The IRS is not entirely unsympathetic to taxpayers. While holding employers liable for such embezzeled taxes and interest, it does offer advice to employers to avoid becoming a victim. Their suggestions include:
--Keeping the IRS address of record with the employer's address and not with the payroll service provider. In this way, the IRS will contact the employer if there are any problems with the account.
--Try to use payroll service providers that have a fiduciary bond.
--The employer, through the service provider, should be enrolled in and use the Electronic Federal Tax Payment System (EFTPS). Since the system maintains payment history online, the employer can regularly confirm that payroll payments are being made (for example, as part of regular bank reconciliations).
Pediatric Affiliates P.A., 99 AFTR 2d ¶2007-845 (CA3 4/07)