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Hunting Season

Feds try to protect the little guy from payroll tax predators.

You hire a payroll firm to take care of paying employment taxes to the IRS. You send them the money, and they pass it on to the feds. Right? Well, not always. Therein lies the genesis of Sen. Olympia Snowe's (R-ME) amendment to the Tax Administration Good Government Act (H.R. 1528), which passed the Senate in May. The amendment gives the IRS tools to go after payroll/accounting firms that steal a client's employment tax payments, and protection to firms that hire those rogue firms.

In the first and, so far, last instance of the IRS and the Justice Department taking a payroll company to court, a federal court in Salt Lake City issued a preliminary injunction in April 2003 appointing a receiver to shut down a company called Provident Management Group. Provident allegedly failed to file at least 282 federal employment tax returns for their customers, and failed to make more than $2 million in required employment tax deposits on their behalf.

The amendment identifies payroll agents as "responsible persons," which will enable the IRS to assess 100 percent of penalties against those firms. By giving the IRS such authority against the payroll agents, the IRS would not automatically reassess the taxes due against the small-business taxpayer, which paid what it thought was its payroll tax obligation in good faith. The amendment would also require any payroll agent who collects and agrees to pay withheld payroll taxes to register with the IRS. Agents would also have to be bonded so there would be insurance for paying these payroll taxes should these agents breach their fiduciary duties and fail to turn the client's tax payments over to the government.

Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

This story appears in the September 2004 issue of Entrepreneur. Subscribe »