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Swindled payroll clients come up short in the end

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in Office Management,Payroll Management

The IRS does not have to return to a bankruptcy estate a bankrupt payroll service bureau’s tax deposits that were collected from clients, but that were embezzled, a federal appeals court has ruled.

Double trouble: The defrauded clients will have paid twice—once to the service bureau, which stole their money, and again to the IRS. (In Re: Net Pay Solutions, Inc., d/b/a/ Net Pay Payroll Services, Debtor Markian R. Slobodian v. U.S., No. 15-2833, 3rd Cir., 2016)

Voidable transfers. The bankrupt service bureau collected money from these clients, which they intended as their payroll tax deposits, but deposited the money into a general operating account. In essence, it commingled all funds and used the same account to pay the IRS on its own behalf and for its clients.

The bankruptcy trustee sought to void and recover certain transfers made to the IRS by the debtor for these clients’ benefit. Problem: Not all transfers are voidable. Transfers worth less than $5,850 and transfers in which a debtor has no ownership interest aren’t voidable.

Five transfers were in dispute. Four were below the $5,850 threshold. The appellate court ruled that those transfers couldn’t be aggregated to get above the threshold. The trustee argued that the fifth transfer could be voided because the debtor had an ownership interest in the funds. Neither a trial court nor the appellate court agreed. Appellate court: Because a debtor doesn’t own property held in trust for another, the property—in this case tax deposits—isn’t a voidable transfer.

Taking the risk out of this business. This case is now over for these clients, who have come up short with the IRS. Warning: The IRS isn’t sympathetic. Companies are always responsible for their payroll taxes.

Since payroll taxes accumulate quickly, take these steps to ensure that your service bureau is doing the job you hired it to do.

  • Hire only bonded service bureaus
  • Don’t sign blank tax returns or allow IRS notices to be sent to the service bureau
  • Confirm that deposits were made and returns filed by separately enrolling in the IRS’ Electronic Federal Tax Payment System (EFTPS) or use your IRS-issued Inquiry PIN to track deposits without enrolling in EFTPS
  • Request that the IRS provide you with a transcript of the company’s tax accounts on a regular basis
  • If you suspect that your service bureau is playing fast and loose with your tax deposits or not filing your 941s you can file Form 14157, Complaint: Tax Return Preparer, with the IRS. Upon receipt, the IRS will expedite the handling and investigation of your case.

A step-by-step payroll compliance guide to each pay period, month and calendar quarter of the year is now available. Download it free here.

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