IRS Confirming Third-Party Payer Liability for ERC Claims

ERC Strategies for PEOs: Understanding IRS’s position on PEO liability associated with an improper ERC claim.

The IRS recently issued generic legal advice memorandum AM 2024-001, clarifying its position on the liability of various third-party payers for tax underpayments linked to faulty ERC claims.

The memorandum described three types of third-party payer arrangements. First, it focused on section 3504 agents. In situations in which a third-party payer pays the wages of an employee or group of employees of one or more employerclients, section 3504 provides that the third-party payer can be designated as an agent of the employer-clients for these purposes. The relevant regulation generally dictates that “all provisions of law (including penalties) and of the regulations applicable to an employer with respect to [the acts performed by the agent] shall be applicable to the agent.” According to the memorandum, this means that both the section 3504 agent and the
employer “are liable for underpayments of employment tax related to such wages.”

The second third-party payer arrangement addressed in the memorandum concerned a professional employer organization (PEO). The regulations say that if a third-party payer, such as a PEO, pays wages to individuals performing services for an employer-client under a service agreement, the third-party payer can be designated to perform acts of the employer, like filing employment tax returns and paying the corresponding taxes. The regulations also state that “all provisions of law (including penalties) and of the regulations applicable to an employer” are applicable to the PEO. The regulations add that the employer-client of the PEO remains subject to “all provisions of law (including penalties) and the regulations applicable to an employer with respect to these wages.” The memorandum concluded that, in situations involving a PEO that performs tasks under a service agreement, both the PEO and the employer “are liable for underpayments of employment tax related to wages paid by the PEO to those employees.”

The third third-party payer arrangement concerned a certified professional employer organization (CPEO). A CPEO normally is treated as the only employer, and it assumes all employment tax liabilities and responsibilities for the wages it pays to worksite employees of its “customers” (that is, its employer-clients).

The memorandum then turned to two relevant ERC laws, starting with the CARES Act.
It examined some provisions dealing with thirdparty payers. One says any ERC “shall be treated as a credit described in Section 3511(d)(2).” This language ensures that, when it comes to ERC claims based on services performed by an employee of an employer-client of a CPEO, the employer-client can claim the ERC and the amount is determined using the wages paid by the CPEO. The memorandum emphasized that this provision “does not address liability for an improperly claimed ERC.”

The second law, the Taxpayer Certainty and Disaster Tax Relief Act, added language to the effect that any forms, instructions, regulations, or other IRS guidance will require the employer client to be responsible for the accounting of ERCs and for any liability for improperly claimed ERCs, and will require the CPEO or other third-party payer to accurately report ERCs based on the information provided by the employer-client. As
explained above, the general rules, which were in place before the relief act came into existence, provided that the CPEO was responsible for underpayments triggered by improperly claimed credits. The relief act ensured that the employer client of a CPEO would also be liable for ERC related underpayments.

The IRS summarized its position in the memorandum as follows:

A third-party payer that is a section 3504 agent, PEO, or CPEO is liable for any underpayment resulting from any improper credit that the third-party payer claimed on behalf of the employer-client on the employment tax return filed under the third-party
payer’s own employer identification number when the credit is based on wages paid by the third-party payer to the employees of its employer-client. According to the IRS, “this rule applies to the ERC as it would any other employment tax credit.”