The IRS has updated its procedures under which professional employer organizations (PEOs) can apply to become—and maintain their status as—"certified" PEOs using a certification process authorized under 2014 legislation (Rev. Proc. 2023-18 (Mar. 10, 2023)). The IRS's March 2023 guidance addresses application submitters, procedures for denying, suspending, and revoking CPEO status, and related reporting requirements.

For more information, see Standard Document, PEO Client Services Agreement..

As background, federal legislation enacted in 2014 required the IRS to create a voluntary certification program for PEOs, as reflected in two sections of the Internal Revenue Code (Code) (Tax Increase Prevention Act of 2014 (TIPA), Pub. L. No. 113-295 (2014); 26 U.S.C. §§ 3511 and 7705). In May 2016, the IRS issued implementing regulations that addressed requirements for becoming a CPEO and retaining that status (81 Fed. Reg. 27315 (May 6, 2016); see Legal Update, Certified PEO Applications To Be Accepted Beginning July 1, 2016). Since then, the IRS has issued additional guidance on CPEO procedures and requirements, including:

(For more information on the IRS's CPEO guidance, see Standard Document, PEO Client Services Agreement: Drafting Note: Federal PEO Legislation.)

The IRS's March 2023 guidance (Rev. Proc. 2023-18) updates, consolidates, and expressly supersedes various aspects of the IRS's earlier CPEO guidance (including Rev. Procs. 2016-33 and 2017-14).

Under prior IRS guidance, an individual who submits a CPEO certification application or information and documents on the CPEO applicant's behalf had to be authorized to inspect the CPEO's returns and return information.

The March 2023 guidance adds a definition for "application submitter." To be an application submitter, an individual must either:

An application submitter's responsibilities include:

The March 2023 guidance also updates the procedures regarding:

The guidance addresses the situation where the IRS has proposed to deny a CPEO applicant's application (because the application failed to satisfy a requirement), but the CPEO applicant is given a chance to request review of the proposed denial. In this situation, the IRS's CPEO program office will not consider any new information or arguments submitted by the CPEO applicant after it requests a review—unless certain exceptions apply. These exceptions are that:

Additionally, the IRS's CPEO program office may permit a 30-day extension of the deadline by which a CPEO applicant must request review of a proposed denial. The CPEO applicant must request this extension within 20 days of the date of the proposed denial notice. Only one extension can be requested.

If the CPEO program office upholds its proposed denial of certification, it will forward the administrative record to the IRS's Office of Professional Responsibility (OPR) for review. OPR may not consider any information that is not included in the administrative record. During OPR's review, the CPEO program office and the CPEO applicant may not contact OPR, except to ask about the review's status or request an estimated completion date.

Other procedures address the situation where an approved CPEO's certification is revoked. After revocation of a CPEO certification, an entity seeking re-certification must submit an entirely new application. The applicant must:

CPEOs must report to the IRS:

This reporting, which also must include a client's name and federal employer taxpayer identification number (TIN), is completed using Form 8973 (CPEO/Customer Reporting Agreement).

The IRS acknowledged that CPEOs sometimes are unable to obtain a client's signature on Form 8973. The March 2023 guidance therefore includes a process—to be used sparingly—for submitting a Form 8973 that has not been signed by the client. When a CPEO submits Form 8973 without the client's signature (but with the CPEO's own signature), it also must include a statement containing:

According to the IRS, the occasional submission of an unsigned Form 8973 will not result in suspension or revocation of a CPEO's certification. However, multiple submissions of unsigned Forms 8973 from the same CPEO may result in a notice of suspension and proposed revocation.

Entities that are part of the same controlled group (that is, under the Code Section 414 rules) must submit separate applications for CPEO certification through the IRS's Online Registration System (26 U.S.C. § 414; see Practice Note, Controlled Group and Affiliated Service Group Rules). Controlled group members are not allowed to submit one online application that covers all the members.

Under a rule intended to streamline administrative complexity, however, the March 2023 guidance requires CPEOs and CPEO applicants that are members of a controlled group in which multiple members are CPEOs or CPEO applicants to create a "controlled group license" in the IRS's system. The license requirement is intended to:

The IRS requires CPEO "responsible individuals" to provide a fingerprint card (Form FD-258) as part of the application process. (Regarding the meaning of responsible individuals in the CPEO context, see Legal Update, Certified PEO Applications To Be Accepted Beginning July 1, 2016: Responsible Individuals and 26 C.F.R. § 301.7705-1(b)(13).) The March 2023 guidance updated this requirement to provide that:

Responsible individuals must submit new fingerprints electronically by June 1, 2023.

The IRS has acknowledged that not all organizations that work as PEOs have become certified under the CPEO procedures. (Under the 2014 enabling legislation, as noted, the IRS was only authorized to create a voluntary certification program for PEOs.) However, the IRS's CPEO certification procedures have been on the books for several years now—long enough to be well-known in the marketplace for PEO services. As a result, employers that are considering PEO candidates from among non-CPEOs may nonetheless seek assurances that these candidates can demonstrate their financial well-being in a way that is at least comparable to entities that have met the rigorous financial standards under the CPEO rules (which include audited financials, CPA opinions, bond requirements, and statements of working capital).