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CPEO Suspensions and Revocations Addressed in IRS Guidance
Practical Law Legal Update w-005-2457 (Approx. 6 pages)
CPEO Suspensions and Revocations Addressed in IRS Guidance
by Practical Law Employee Benefits & Executive Compensation
| Published on 04 Jan 2017 • USA |
The Internal Revenue Service (IRS) has provided additional guidance on the requirements for certified professional employer organizations (CPEOs). Among other issues, the guidance addresses the requirements for CPEOs to remain certified and the procedures for suspensions and revocations of CPEO certification.
On January 3, 2017, the Internal Revenue Service (IRS) issued Revenue Procedure 2017-14, which addresses (among other issues) the requirements for a certified professional employer organization (CPEO) to remain certified and the procedures for suspension and revocation of CPEO certification. The revenue procedure expands on prior guidance governing CPEO status, including:
- Revenue Ruling 2016-33 (June 2016) and Notice 2016-49 (August 2016) (see Legal Updates, IRS PEO Guidance Addresses Certification Procedures and IRS Softens the Rules for CPEO Certification).
- IRS regulations governing CPEO certification and the federal employment tax liabilities and requirements for CPEOs, issued in May 2016 (see Legal Update, Certified PEO Applications To Be Accepted Beginning July 1, 2016).
(For additional resources addressing professional employer organizations (PEOs), see Standard Document, PEO Client Service Agreement and Legal Update, Tax Relief Extension Includes Provisions on Multiemployer Pension Plans, Transportation Benefits, and PEOs.)
Maintaining CPEO Status
Revenue Procedure 2017-14 addresses numerous requirements that CPEOs must satisfy to maintain their CPEO status, including requirements under the IRS's implementing regulations (26 C.F.R. § 301.7705-2T). Under Revenue Procedure 2017-14, for example, CPEOs must:
- Submit a properly completed and executed verification each year.
- Pay a $1,000 user fee (through www.pay.gov), which must accompany the annual verification.
- Agree to provide the IRS additional information for it to complete a background investigation of the CPEO's tax compliance, criminal history, professional history, credit history, professional sanctions, and other information.
Bond Requirement
In addition to the bond that must be posted when a CPEO first becomes certified, the CPEO must continue to post a bond from a qualified surety (a defined entity under Revenue Procedure 2017-14) for the payment of federal employment taxes, using Form 14571 ("Certified Professional Employer Organization Surety Bond"). (Regarding the bond requirements at CPEO certification, see Legal Update, IRS PEO Guidance Addresses Certification Procedures: Bond Requirements.) The guidance addresses the bond amount, potential annual increases to the bond amount, the need for riders and strengthening bonds, and how a CPEO must handle bond cancellation.
Annual Audited Financial Statements
Other ongoing CPEO certification requirements include:
- Copies of financial statements, a CPA opinion, and a working capital statement (see Legal Update, IRS PEO Guidance Addresses Certification Procedures: Audited Financials).
- Quarterly attestations regarding the withholding and depositing of federal employment taxes, and an examination-level attestation by a CPA.
Regarding some of these requirements, special rules apply in the controlled group context (see Practice Note, Controlled Group and Affiliated Service Group Rules).
Reporting Requirements
Subject to penalties and additional taxes under the Internal Revenue Code (Code), a CPEO must report:
- The start or termination of any CPEO contract between the CPEO and a customer.
- Any service agreement between the CPEO and a client.
The name and employer identification number (EIN) of the customer or client also must be reported, using Form 8973 ("Certified Professional Employer Organization/Customer Reporting Agreement"). Form 8973 must be provided to the IRS within 30 days of the start or termination of the CPEO contract or service agreement.
Also, a CPEO that is treated as an employer of a covered employee (a defined term under Revenue Procedure 2017-14 that generally includes individuals who perform services for a CPEO's customer) must satisfy applicable employment tax reporting and recordkeeping requirements.
Material Changes
A CPEO applicant must notify the IRS of changes that materially affect the accuracy of any information or agreement provided to the IRS. This follow-up notification generally must be provided within 30 days of the change's occurrence. The revenue procedure includes a lengthy list of material changes for this purpose. For example, material change reporting would apply if a CPEO is charged with, or convicted of any federal, state, or local criminal offense.
A material change also includes discovery of significant errors in (or new facts relevant to) any agreement or information provided to the IRS as part of a CPEO application.
Required Contractual Provisions
In general, a "CPEO contract" is a service contract between a CPEO and its customer that meets the statutory requirements for such a contract (26 U.S.C. § 7705(e)(2)). A contract that is not a CPEO contract must notify (or be accompanied by a notification) to the client or customer that the contract:
- Is not covered by Section 3511 of the Internal Revenue Code (Code) (that is, the provision governing CPEOs) (26 U.S.C. § 3511).
- Does not change a client or customer's liability for federal employment taxes.
Revenue Procedure 2017-14 addresses a number of situations in which Code Section 3511 does not apply to a CPEO contract (for example, if a CPEO enters into the arrangement while its certification is suspended by the IRS).
Suspension and Revocation of CPEO Certification
Revenue Procedure 2017-14 addresses various circumstances that may lead the IRS (in its sole discretion) to suspend or revoke a CPEO certification. These circumstances include:
- A failure to timely complete an annual verification, to timely submit annual audited financial statements and an accompanying CPA opinion, or to timely submit a quarterly assertion, attestation, or working capital statement.
- A failure to maintain a bond or bonds in the required bond amount.
- A failure to satisfy the reporting requirements (addressed above, including a CPEO's failure to inform the IRS of a material change).
- The charging or conviction of a CPEO with (or for) any criminal offense under US law, or the laws of a state or political subdivision.
- If a CPEO is the subject of an active IRS criminal investigation.
- A CPEO's failure (excluding immaterial and isolated failures) to pay applicable federal, state, or local taxes, or to file required federal, state, or local tax or information returns in a timely and accurate manner (unless the failure is due to reasonable cause and not willful neglect).
- The assessment of fraud penalties against the CPEO by the IRS or another tax authority.
- The discovery of errors or omissions in any annual audited financial statements or working capital statements previously submitted to the IRS that would require a restatement of previously submitted statements.
If the IRS believes that suspension or revocation is warranted, the process begins with issuance of a notice of suspension and proposed revocation. The notice will:
- Explain the reason and consequences of the suspension and proposed revocation.
- Advise a CPEO of the opportunity to request review of the proposal.
A CPEO must provide written notice to its customers of the notice, and the IRS will publish a list of suspended CPEOs on its website. Additional procedures address how a CPEO can request review of a proposed revocation. The IRS will issue a notice of final revocation if no review request is submitted. A CPEO that requests review will have an opportunity to cure its failure(s), and a review procedure involving the IRS's Office of Professional Responsibility (OPR) may apply.
The guidance also addresses the consequences of final revocation, which include IRS publication of a CPEO's revoked certification on its website. A separate process outlined in the guidance addresses voluntary terminations of CPEO certification.
Effective Date for Notice of CPEO Certifications Received After January 1, 2017
According to the IRS, CPEOs that receive a notice of certification during Q1 2017 (and which is effective January 1, 2017) will be able to comply with CPEO employment tax reporting requirements by the first quarter deadline (that is, April 30, 2017). Also, special transition relief is available regarding the CPEO bond requirement for certain CPEOs that are certified with an effective date of January 1, 2017.
Practical Impact
For PEOs that have pursued certified status, this latest guidance provides a fuller picture of the accompanying CPEO procedures – especially those that apply on an ongoing basis, following initial certification. CPEOs also will be interested in reviewing the types of conduct that will lead the IRS to invoke its suspension and revocation procedures. While some of the items on that list may not seem especially surprising (for example, IRS criminal investigations and assessments of penalties for fraud), others may be (for example, a failure to notify the IRS of a material change). Also, it is worth noting that the IRS does not view this list as exhaustive – other conduct not specifically included may result in suspension and proposed revocation.