Payroll Service Employee Embezzles Funds

Employer held responsible for unpaid payroll taxes.

Pediatric Affiliates v. United States, 2007 WL 1113785 (3rd Cir. 2007)

The IRS notified an employer that it had underpaid its payroll taxes for two prior years. After some investigation, the employer discovered that an employee of its third party payroll service had misappropriated nearly $1 million it had transferred for the payment of taxes. The employee routinely underpaid the payroll taxes he forwarded to the IRS on behalf of the employer, and then pocketed the remaining funds. When the IRS informed the employer that it was responsible for the payroll taxes that remained outstanding, the employer filed suit in federal court. The employer insisted that it should not be held liable for unpaid payroll taxes and interest due to the embezzlement of funds it had transferred to the payroll service company for the payment of its tax obligations. A federal appeals court ruled against the employer based on "the well-established principle that a taxpayer's reliance on a third party to fulfill its tax obligations does not relieve the taxpayer of responsibility for those obligations …. The timely filing of returns and the payment of taxes are solely the duties of the taxpayer and are not delegable …. An employer is liable for payment of taxes that must be deducted and withheld from its employees' income. Misappropriation of funds by a third party does not relieve an employer of that obligation."

Tip. Does your church use a third party company to handle your payroll tax reporting obligations? If so, be aware that your church remains liable for the payment of all payroll taxes. The IRS offers employers the following advice: (1) If there are any issues with an account, the IRS will contact the employer. IRS correspondence is sent to the address of record so it is strongly suggested that the address not be changed to that of the payroll service provider as it may significantly limit the employer's ability to be timely informed of tax matters involving it. (2) For the employer's protection, the payroll service provider should be asked if it has a fiduciary bond in place. This could protect the employer in the event of default. (3) Employers should ask the service provider to enroll in and use EFTPS (Electronic Federal Tax Payment System), so the employer can confirm payments made on its behalf. EFTPS maintains a business's payment history for 16 months and can be viewed on-line after enrollment. The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process.

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