Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers (PSP) and reporting agents (RA). Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov.

Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov.

Here are some steps employers can take to protect themselves from unscrupulous third-party payers.

-Enroll in the Electronic Federal Tax Payment System  and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov.

-Refrain from substituting the third-party’s address for the employer’s address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer’s continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.

-Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information.

-For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer’s responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information.

Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates.

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1. If you file late and owe federal taxes, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

2. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you can. You should try other options to pay, such as getting a loan or paying by credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan with the IRS using the Online Payment Agreement tool on IRS.gov.

3. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

5. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

6. If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.

7. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time.

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The fake emails may include the following message: “Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

Recipients are directed to click on links that supposedly provide information about the “advocate” assigned to their case or that let them “review reported income.” The links lead to web pages that solicit personal information.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov. For more information, visit the IRS’s Report Phishing web page.

The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The IRS, including TAS, does not initiate contact with taxpayers by email, texting or any social media.

For more on scams to guard against see the “Dirty Dozen” list on IRS.gov.

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Do not give out social security, bank, or credit card numbers over the telephone or by email to anyone who cannot verify they are our employees. Have your clients ask the agent to confirm information on the tax notice we mailed to them or hang up and contact us immediately to talk to a live agent. We heard from people who received phone calls from scammers impersonating the Internal Revenue Service (IRS), telling the “would-be victims” that they owed taxes and, if the taxes not paid, they would be arrested. These scammers also told the taxpayers that the State of California would do the same and about their personal information and how much money they could immediately pay.

This is the second warning we issued in recent months. In October, we alerted the public of a report that scammers contacted elderly people in Beverly Hills and informed them they received a red light traffic ticket that was referred to us for collections. The scammer instructed the victims to load money on a prepaid debit card and send it to a bogus address. The scammer refers victims to an actual FTB phone number for reference.

Other scammers claim to represent FTB to lure people into revealing personal and financial information. This type of scam is called “phishing” and is aimed at getting personal information to commit identity theft. These types of scams often involve an email that masquerades as an offer to check the status of your state income tax refund.

State Controller John Chiang partnered with nonprofit groups and other state offices to help people understand current scams plaguing consumers and taxpayers. He held more than a dozen events designed specifically to help seniors protect their financial information. For more information about upcoming seminars, go to sco.ca.gov and search for tax scam seminars.

We take the safety and security of taxpayer information very seriously. If your clients receive a questionable contact from us, they should consider the following:

1. While we call people who owe taxes, we never ask taxpayers for personal identification numbers, passwords, or similar access information for credit cards, bank accounts, or other financial information.
2. If your client knows they don’t owe taxes or never receive a billing notice from us your client can verify account information by accessing MyFTBAccount or calling us directly at 800.852.5711 to review their account.
3. Our criminal investigators never solicit payment from debtors under the threat of incarceration.
4. We do not have the ability to process funds from third-party issued debit cards, prepaid credit cards, or wire transfers.
5. Taxpayers should only make state tax payments to us through our normal payment channels: online Web Pay or credit card services; or by mail with personal check, money order, cashier’s check, or Western Union Quick Collect payments.

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The recently enacted Small Business Jobs Act of 2010 requires landlords to report payments of $600 or more to each service-provider during the year to the IRS on Form 1099-MISC.

The $600 threshold is cumulative for a year. In other words, if you pay a maintenance person $350 on January 15, 2011, and pay that same person $400 on December 1, 2011, you must file a Form 1099-MISC reporting $750 paid to that person for 2011. The new information-reporting requirement applies to all payments made on or after January 1, 2011.

IRS Form W-9 is the form to be used to obtain the required information from service-providers. The service provider should use their Federal Tax Identification Number (tax ID number). However, if they don’t have one, they must instead provide their Social Security number. The form must be completed and signed by the service provider. As a convenience, we can provide you with a copy of the form if you contact us.  Copies may also be obtained on the IRS website at www.irs.gov.

It is best to have the W-9 completed by the service provider at the time you engage his or her services, but never later than the time you make payment. If you wait until after you make payment, you may not be able to find the service provider or the service-provider may be resistant to completing the form. You should have the W-9 completed even if the immediate services to be provided will be for less than $600, just in case you require additional services from the same provider later in the same year (remember, the $600 threshold is cumulative).

Note, that you may get resistance from service providers operating as corporations. Indeed, in 2011, you are not required to issue 1099s to corporations. However, that requirement changes in 2012 when you will be required to issue 1099s to corporations. As such, if your relationship with a corporate service provider were ongoing, it would be prudent to get the W-9 completed as soon as possible.

Note, too, the Small Business Jobs Act authorizes the IRS to issue de minimis rules. Under such rules, the IRS can provide that landlords whose gross receipts from rentals are below a certain level are exempt from 1099 requirements.

Although not required, it is advisable to obtain a tax ID number for yourself, if you do not already have one. The payor section of the 1099-MISC requires either your tax ID number or your Social Security number. For privacy purposes, it is not prudent or wise to issue documents that display your Social Security number.

The IRS will impose a penalty for failure to file the 1099 MISC of the greater of $250, or 10% of the amount that was required to have been reported, for each service provider. The state of California can even disallow the deduction in its entirety, if a required Form 1099 is not filed.

For payments made in 2011, you must provide the 1099-MISC to the service provider no later than January 31, 2012. We are available to help you comply with these new filing requirements.

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This is important because the name on your tax return must match SSA records. If they don’t, you’re likely to get a letter from the IRS about the mismatch. And if you expect a refund, this may delay when you’ll get it.

Be sure to contact SSA if:
– You got married or divorced and you changed your name.
– A dependent you claim had a name change. For example, this would apply if you adopted a child and that child’s last name changed.

File Form SS-5, Application for a Social Security Card, with the SSA to let them know about a name change. You can get the form on SSA.gov by calling 800-772-1213 or at an SSA office.

You can file Form SS-5 at an SSA office or by mail. Your new card will have the same SSN as before but will show your new name.

If you have an adopted child who does not have a SSN, use a temporary Adoption Taxpayer Identification Number on your tax form. You can apply for an ATIN by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. Get the form on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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