Payroll Tax Services – Who is Responsible to the IRS?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

As a Forensic CPA, I often hear stories about clients or their partners, employees, or spouses who have stolen or have hidden assets. But there’s one scam which you don’t hear about very often and which should scare every business owner: what happens when your trusted payroll service fails to make your tax payments to the IRS?

Just today a small business owner confessed to me that his payroll service stole $7 million from him and other businesses. The payroll service collected tax monies from their clients, and instead of making the payments to the IRS, the owners of the service simply pocketed the money. The trusting small business owner was required to pay the IRS nearly $40,000; in effect paying the payroll tax obligation twice.

Who is responsible?

More and more we hear about trusted people and businesses stealing from their clients and associates. Violation of fiduciary responsibility inevitably escalates during periods of economic hardship, but the potential to be a victim of ‘white collar crime’ is always present. As a business owner, it is important to continually verify that employees and business partners are doing what is expected of them.

Who is responsible in the case of non-payment of payroll taxes when a payroll service has been engaged? The Internal Revenue Service regulations state quite clearly:

  • The employer is ultimately responsible for the deposit of Federal tax liabilities.
  • The employer is liable even if a third party payer fails to make the payroll tax deposits in a timely manner.
  • It is the employer, not the payroll service, who is liable for unpaid taxes, penalties and interest.
  • The employer has a duty to review their EFTPS account to verify that the third party payer actually paid the taxes.

An ounce of prevention is always worth the proverbial pound of cure.  To avoid the headaches and financial distress of misplaced trust, CJBS recommends that business owners follow this Five Step Anti-Swindle procedure:

  1. Examine checks clearing the bank accounts monthly.
  2. Have someone verify payroll tax deposit credits on-line.
  3. Examine customer credit memos regularly.
  4. Examine delinquent accounts receivable.
  5. Spot check cash payments.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at if you have any questions about this posting or if I may be of assistance in any way.