CPAs may be responsible for clients' payroll tax penalties.

AuthorLewis, Jan F.
PositionCertified public accountants

Payroll tax penalties are scary when they are assessed against a client. They are even scarier if they are assessed against a CPA who provides payroll services to the client. The Erwin case is an important reminder that an accountant can be held liable for a client's unpaid employment taxes. In it, the court concluded that accountants had significant authority over the finances of the client, so they were "responsible persons" under Sec. 6672 (Erwin, No. 1:06CV59 (M.D.N.C. 2/5/13)). Of course, the owner of the business was held to be a responsible person as well. Nevertheless, the two accountants were each found jointly and severally liable for $325,000 plus penalties and interest. That is a time-consuming and expensive lesson. This item reviews the relevant requirements, procedures, or other issues for CPAs who offer payroll services.

Follow an Engagement Letter

CPAs who perform payroll and sales tax return preparation--which might not be within the purview of the Statements on Standards for Accounting and Review Services (SSARS)--should use engagement letters for those services. Two-party, signed engagement letters can minimize confusion and clarify responsibilities between the client and the CPA, outline fee and payment terms, and emphasize the importance of fifing deadlines, logistics, and other key aspects of the client arrangement, such as how the CPA can resign from the engagement. In Erwin, if the accountants had promptly resigned in writing, they may have avoided such hard scrutiny.

Procedures for CPAs That Process Clients' Payroll Checks and Make Tax Deposits

CPAs processing payroll checks and making tax deposits online should consider access and security issues and be careful if they have access to a financially troubled client's bank account. If the CPA is printing payroll checks, the checks should be kept in a locked, secure cabinet, and only personnel who process payroll should have access to them. For online tax deposits made via the Electronic Federal Tax Payment System (EFTPS) or various state websites, the user names and passwords for the client should also be kept secure, and this also applies to the passwords for software used to process the payroll and for direct deposit of paychecks.

If a CPA is performing accounts payable or bookkeeping functions for a client that is facing financial difficulties, as in Erwin, he or she should not follow the client's instructions to pay other creditors if he or she knows the payroll...

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