IRS plans to examine employee leasing

IRS officials are looking closely at the way professional employer organizations (PEOs) operate and are developing new tax reporting guidelines for PEOs and their client companies. According to several HR professionals and analysts familiar with the practice of employee leasing, the IRS guidance is sorely needed in an industry that has suffered from some image problems of late.

"It's something that we have been pushing for and working on actively behind the scenes for five or six years," said Jane McGoggins, associate director of the Little Rock, Ark.-based Employee Services Assurance Corp. (ESAC), a nonprofit accreditation organization for PEOs.

An IRS spokesman said that the agency expects to release employee leasing guidance before the end of the year.

PEOs and the practice of employee leasing present unique problems to the IRS in terms of identifying which business actually employs a leased worker. The complicated hiring arrangements between PEOs and client corporations can make it difficult to determine which company is ultimately responsible for withholding and reporting an employee's income and payroll taxes.

"Many times, you have to drill down through several layers to find where the tax-reporting responsibilities really lie," said Bruce Friedland, IRS spokesman.

Some business owners allegedly have taken advantage of complicated employee leasing arrangements to evade paying payroll taxes and to skim substantial sums of money from employee withholding funds.

In January, the U.S. Department of Justice filed an injunction to bar several businesses in Oklahoma City from operating PEOs, alleging that they had created an "elaborate corporate shell game," transferring employees back and forth among PEOs to convolute and hide tax-related records.

Although the mishandling of payroll taxes is not unique to PEOs, "it happens. I wouldn't say that it is a common practice," said one HR professional who worked for a PEO for two years but declined to be identified for this article. "It's a practice that has given PEOs a black eye. Most PEOs are completely on the up and up and offer great services to their clients, but there definitely have been some rotten apples in the bunch, which has damaged the industry's reputation."

Industry spokesmen have strived to promote a positive image for PEOs and say that tax dodge schemes are an aberration in an industry that for the most part is well run and law-abiding.

"If you break the law, you will get caught," said Milan Yager, executive vice president of the National Association of Professional Employer Organizations. "There have been HR professionals or accountants who have run afoul of the law, but that doesn't mean all HR professionals or accountants are crooked."

COPYRIGHT 2004 Society for Human Resource Management
COPYRIGHT 2004 Gale Group