DuClaw Brewing Co. of Harford County received notifications from the IRS that it was behind on payments. When DuClaw brought it up with AccuPay, the payroll firm said the tax collectors "were at fault and that it [AccuPay] would reconcile the account," according to the suit.
Instead of remedying the problem, AccuPay changed the address on file with the collectors and began receiving DuClaw's nonpayment notices, the suit said. DuClaw alleged that AccuPay misappropriated $306,000 in tax payments over several years.
Whatever happened with AccuPay and its clients, tax experts say there's no reason it should have gotten as out of hand as is alleged.
"In light of what happened in FirstPay and in light of all the litigation … if [the IRS] allowed the same thing to happen again, then shame on them," said Jeffrey M. Orenstein, an attorney based in Montgomery County who represents the FirstPay bankruptcy trustee.
The IRS is a reactive agency, said Gerald W. Kelly, a tax attorney based in Columbia who used to be an IRS revenue officer. He is not surprised it took so long for the IRS to seriously look into AccuPay, he said, because it's common for businesses tight on funds to be delinquent with their taxes.
"That can go on for two, three, four years without the IRS doing a thing except sending out a letter," Kelly said.
Since taxes remitted by payroll companies are monitored by the IRS in the same way as taxes sent in by individual businesses, often the dots don't get connected when it's not the business' fault, experts say.
"The easiest way to track it would be to spot check the payments being made by the payroll companies," Kelly said. The IRS creates an audit trail for tax preparers, so why not for payroll companies, he said.
Such a tracking program is the Taxpayer Advocate Service's No. 1 recommendation to cut down on bad-actor payroll providers. The IRS, the Taxpayer Advocate Service said in its most recent annual report, should develop a program that will select a payroll company for audit when "when the number of delinquent employment tax returns of clients of a PSP [payroll service provider] exceeds an established threshold."
The IRS would not comment for this article. In its written response to the Taxpayer Advocate Service, the agency said "it may not be feasible due to the extensive programming costs and relatively small number of impacted accounts."
W. Randolph Shump, a former IRS trial attorney who practices tax law in Towson, agreed that the cost of implementing such a system might not save that many businesses from grief but likely would result in payroll service fees going up.
Instead, he suggested, states could require payroll providers to be bonded to insure against losses from fraud. (Maryland does not require payroll providers to be licensed or bonded.)
One thing that the IRS has instituted recently to cut down on payroll fraud is a disclosure requirement, said Pete Isberg, president of the National Payroll Reporting Consortium, a trade group for payroll providers.
Last year, the IRS started requiring payroll companies to send out quarterly reminders that say it is the client, not the payroll company, who is responsible to ensure that taxes are paid, he said.
That step, which could be ignored easily by payroll processors, doesn't satisfy the Taxpayer Advocate Service. The watchdog wants the IRS to take an active role in stopping payroll service fraud.
"The IRS is not doing enough early intervention," Leith said. Bad payroll service providers "can really bury taxpayers."