IRS PEO Guidance Addresses Certification Procedures | Practical Law

IRS PEO Guidance Addresses Certification Procedures | Practical Law

The Internal Revenue Service (IRS) has issued guidance that includes procedures for entities that wish to become certified professional employer organizations (CPEOs). The IRS plans to begin accepting applications for CPEO certification on July 1, 2016, and the new guidance will assist CPEO applicants in submitting applications to become certified.

IRS PEO Guidance Addresses Certification Procedures

Practical Law Legal Update w-002-5479 (Approx. 6 pages)

IRS PEO Guidance Addresses Certification Procedures

by Practical Law Employee Benefits & Executive Compensation
Law stated as of 07 Jun 2016 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued guidance that includes procedures for entities that wish to become certified professional employer organizations (CPEOs). The IRS plans to begin accepting applications for CPEO certification on July 1, 2016, and the new guidance will assist CPEO applicants in submitting applications to become certified.
On June 3, 2016, the IRS issued Revenue Ruling 2016-33, which addresses the certification procedures for becoming a certified professional employer organization (CPEO) under the Tax Increase Prevention Act of 2014 (TIPA) (see Standard Document, PEO Client Service Agreement and Legal Update, Tax Relief Extension Includes Provisions on Multiemployer Pension Plans, Transportation Benefits, and PEOs). The guidance expands on recently issued IRS regulations governing CPEO certification and the federal employment tax liabilities and requirements for CPEOs (see Legal Update, Certified PEO Applications To Be Accepted Beginning July 1, 2016).

CPEO Submission Procedures Include Rules for Controlled Groups

A CPEO must submit its application for certification electronically, along with the forms and documentation required under implementing IRS guidance. The electronic filing requirement also applies to any documents submitted:
  • After an application is submitted.
  • While the application is pending with the IRS.
Paper submissions will not be accepted and the IRS will handle a paper submission as an incomplete application.

Attestation By CPEO Responsible Individuals

In addition, a "responsible individual" affiliated with the CPEO applicant (that is, an owner, director, or certain other high-level individuals) must electronically submit a form called the Responsible Individual Personal Attestation (RIPA), along with a fingerprint card, to accompany the CPEO's application (see Legal Update, Certified PEO Applications To Be Accepted Beginning July 1, 2016: Responsible Individuals).

Rules for Controlled Groups

Each member of a controlled group that seeks to be certified as a CPEO must submit a separate application (regarding the IRS's controlled group rules in the employee benefits context, see Practice Note, Controlled Group and Affiliated Service Group Rules). Controlled group members may not apply jointly on one application. Also, special bond and financial review requirements apply to CPEO applicants that are members of a controlled group.

Nonrefundable $1,000 User Fee Required

A user fee of $1,000 is collected from CPEO applicants at the initial certification (through www.pay.gov). The IRS has stated that it will not process an application for which the user fee is not paid. The user fee is nonrefundable once processing of the application begins, even if the application is later withdrawn or denied.

Bond and Audited Financial Statement Requirements

As part of the certification process, a CPEO applicant must satisfy bond requirements and be able to demonstrate its financial well-being. In part, these requirements are intended to assure the IRS that a CPEO applicant does not present a material risk to the IRS's collection of federal employment taxes.

Bond Requirements

CPEO applications must include a signed letter from a qualified surety stating that the surety will issue a bond in the required amount to the applicant if it is certified as a CPEO. If a CPEO applicant is a controlled group member, the surety letter must state the name and employer identification number (EIN) of each CPEO applicant and CPEO that is (or will be) covered by the bond. All CPEO members of a controlled group must be on the same bond in the amount required under implementing regulations, which is applied as if all the CPEO members were one organization.
The CPEO applicant has 30 days from the date of its notice of certification to submit proof of a bond, using IRS Form 14751, which must be signed by both a qualified surety and the CPEO. If a CPEO applicant does not provide proof of a bond within 30 days:
  • Its certification will not become effective.
  • The CPEO applicant will be sent a final denial notice, with no opportunity to request review of the denial.

Audited Financials

A CPEO application also must include a copy of the CPEO applicant's annual audited financial statements for the most recently completed fiscal year, as of the date the CPEO submits its application. A limited exception applies for applications submitted within six months of the end of an applicant's most recent fiscal year.
The financial statements must include the "unmodified" opinion of a certified public accountant (CPA), meaning that the opinion is not a qualified or adverse opinion, and is not subject to a disclaimer. The opinion generally must:
  • Indicate that the CPEO applicant has positive working capital, though an exception is available in certain circumstances where working capital is not negative for more than two consecutive fiscal quarters of the year.
  • Be consistent with generally accepted accounting principles (GAAP).
Additional requirements apply for newly-established CPEOs.
Combined or consolidated annual audited financial statements must be submitted for CPEOs or CPEO applicants that are part of a controlled group of employers. The IRS indicated that it may request additional information from individual controlled group members if the individual member's financial condition is unclear from the combined financials.

Representations Regarding Employment Tax Withholding

CPEO applicants must represent that they have withheld and made deposits of all federal employment taxes for which the CPEO applicant is liable. This representation regarding withholding is:
  • For the most recently completed quarter.
  • Signed under penalties of perjury by the CPEO applicant's responsible individual.

Background Checks and General Tax Compliance

A CPEO applicant must identify its related and "precursor" entities, and responsible individuals as part of the application for certification. The IRS plans to investigate the accuracy of statements and representations made in a CPEO's application by conducting background checks of:
  • The CPEO applicant and any related entities or precursor entities.
  • The applicant's responsible individuals.
These background checks may include checks on:
  • General tax compliance and criminal background.
  • Professional experience and sanctions.
  • Credit histories.
  • Other relevant facts.
Also, according to the IRS, a CPEO applicant could be asked to substantiate its representations regarding its knowledge or experience by providing:
  • A written work history.
  • Third-party references.

Applications Must Be Complete and Accurate

CPEO applications must be complete and accurate. According to the IRS, the online application system likely will not permit incomplete applications to be submitted. However, if an incomplete application is submitted, the IRS may either:
  • Request information from the CPEO applicant to complete the application.
  • Simply deny the application without requesting additional information.
Even if an application is complete, the IRS may request additional information before approving or denying certification.

Updating Required for Material Changes

A CPEO applicant must notify the IRS of changes that materially affect the accuracy of information provided to the IRS as part of a CPEO application for certification. This follow-up notification must be provided within 30 days of the change's occurrence. Material changes could include any change:
  • In the tax compliance, criminal background, or professional license or registration status of a CPEO applicant, its related entities, or responsible individuals.
  • That results in another individual being considered the CPEO applicant's related entity or responsible individual.
  • To the CPEO applicant's fiscal year.
A material change also includes discovery of significant errors in (or new facts relevant to) any agreement or information provided to the IRS as part of a CPEO application.

Notice of Certification, Effective Date, and Published List of CPEOs

The IRS will provide notice to a CPEO applicant in electronic form or by mail if its application is approved. For CPEO applicants that are controlled group members, the IRS will provide a separate notice to each CPEO applicant member of the controlled group that is approved for certification. The notice of certification will indicate:
  • The certification's effective date.
  • If applicable, that the certification's effective date is contingent on timely receipt by the IRS of additional information.

Effective Date of Certification

In general, the effective date of certification is the first day of the first calendar quarter following the date of the notice of certification.
However, the effective date of certification for complete and accurate applications that are submitted before September 1, 2016 (and certified) will be January 1, 2017. This rule applies even if the date of a CPEO applicant's notice of certification is after January 1, 2017.

Published List of CPEOs

The IRS plans to publish a list (at www.irs.gov/CPEOs) that includes:
  • Entities that are certified as CPEOs.
  • The effective date of each CPEO's certification.
The list will be updated to include newly certified CPEOs by the 15th day of the first month of each quarter.

Additional IRS Guidance Addressing CPEOs to Follow

According to the IRS guidance, the government will issue additional guidance addressing:
  • The requirements for a CPEO to remain certified.
  • Procedures governing suspension and revocation of a CPEO certification.
The IRS also intends to provide more guidance concerning:
  • What qualifies as a material change.
  • How and when a CPEO, once certified, must inform the government of material changes.

Practical Impact

Many of the general financial requirements addressed in the IRS's latest CPEO guidance will be familiar to PEOs who have considered obtaining CPEO status. However, would-be applicants may be surprised by the scope of background vetting to which they become subject as part of the certification process. By submitting an application, the CPEO applicant and its responsible individuals agree to provide the IRS with additional information, as requested by the IRS for its investigation. This also includes:
  • Authorizing the IRS to conduct background checks and investigate the accuracy of statements and submissions.
  • Waiving otherwise applicable confidentiality and privileges.
If a CPEO applicant or responsible individual fails to provide this information, the IRS may deny its application. (The new guidance includes procedures that apply for certification denials.)
Moreover, the IRS may retain, and use for future tax administration, any CPEO application that is withdrawn by the applicant.