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Mikulski to propose bill in wake of alleged Harford payroll firm tax fraud

Legislation is designed to protect small businesses

By Lorraine Mirabella, The Baltimore Sun

9:38 PM EDT, April 27, 2013

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Small businesses would be protected from the type of fraud allegedly committed by Harford County payroll firm AccuPay Inc. under legislation being proposed by Sen. Barbara A. Mikulski.

The Maryland Democrat plans to introduce a bill that would require payroll service providers to register with the Internal Revenue Service and be either bonded or certified by the tax agency. It also would set federal penalties for payroll firms that fail to send clients' tax payments to the government.

Mikulski, whose office has been contacted by several AccuPay clients that allegedly were defrauded, said in a statement that she's hoping "to protect our small businesses victimized by payroll service provider tax theft and fraud."

The proposed legislation, which Mikulski plans to unveil Monday at a restaurant that used AccuPay to process its payroll taxes, also would require the IRS to attempt to ease victimized taxpayers' tax liability through special compromise agreements.

Bel Air-based AccuPay is being investigated for allegedly defrauding clients, including many small businesses in Harford County, by failing for years to remit their federal and state withholding and unemployment tax payments to tax collectors. After several clients filed lawsuits against the payroll firm, AccuPay closed abruptly and filed for Chapter 7 bankruptcy liquidation in March.

AccuPay is under criminal investigation by the Internal Revenue Service. The Bel Air Police Department, which initiated the investigation, had warned that potential victims could number in the hundreds. The firm's president, Beverly Carden, could not be reached Friday. She has not commented publicly, including during a bankruptcy creditors' meeting earlier this month, when she invoked her Fifth Amendment rights and refused to answer questions about the company.

The proposed reforms also would help victims "cut through the red-tape to ensure they are not victimized again by the IRS," Mikluski said in the statement.

Many of the business owners who were AccuPay clients have said they not only were required to pay taxes twice, but also have faced mounting penalties and interest because payments were delayed. Many never knew their payments were missing or delayed because, they said, AccuPay changed clients' addresses on file with tax collectors so any notices went to the payroll company instead of the client.

The Mikulski-sponsored bill, expected to be introduced in early May, would require the IRS to notify a business directly when its address is changed by a third-party payroll service provider.

It would increase IRS oversight of the firms by requiring them to register with the tax agency and either post a bond to insure clients' tax payments or be certified quarterly by the IRS.

The quarterly certification is designed help smaller payroll firms that cannot afford bonding, a Mikulksi aide explained. The IRS would certify each quarter that payments that a firm collects are, in fact, going to the IRS, rather than permitting a fraud to occur over several quarters or even many years. Payroll firms also would be required to tell their clients that the ultimate responsibility for tax liability lies with the client.

The aide said the intent is to fill in gaps in regulation that exist because many states, including Maryland, don't require licensing or bonding of payroll firms.

Stuart Levine, a Towson attorney who represents several former AccuPay clients, said if bonding is required, the amount should be based on a payroll firm's size and be for the benefit of clients.

The goal of any legislation should be to help business owners identify "legitimate" payroll service providers while also protecting them in a case of theft or fraud, he said.

"Without a great deal of difficulty, I have to be able to ascertain that the payroll company I'm dealing with is legitimate, and if that company is legitimate… if I give 100 percent of what is owned, I don't owe a nickel after that," Levine said.

Under the legislation, the penalties for firms that fail to pay their clients' taxes would be set by the IRS after the bill is passed, the Mikulksi aide said. It might take the form of a percentage each month of the total tax liability.

While Mikulski's office had been contacted by small business owners in Maryland who said they were defrauded, the senator believes the problem is much more widespread, the aide said.

According to the office of the IRS Taxpayer Advocate, similar payroll firm schemes have cropped up in at least eight states over the past decade. Many of the cases, which involved theft or Ponzi schemes in which tax payments were taken and then repaid with other clients' money, have resulted in bankruptcies and criminal investigations.

In one case, according to the taxpayer advocate's office, the CEO of New York payroll services firm Ingentra HR Services Inc. was sentenced in 2011 to 78 months in prison and ordered to pay more than $19 million in restitution in connection with a scheme to collect tax payments from clients but then under reporting to the IRS and diverting the difference to Ingentra's accounts.

Mikulski plans to unveil the proposed legislation at DuClaw Brewing Co.'s restaurant in Bel Air. Owner Dave Benfield, who has filed a lawsuit against AccuPay, said the firm withdrew money from the restaurants' payroll accounts but never made the payments over a nearly 10-year period, leaving a liability of more than $400,000.

After the suit was filed, AccuPay quickly repaid most of what was owed to the IRS, but "we're going to have to double pay on some of the amounts," he said.

"It was purposefully, intentionally done, not only to us, but to a good bit of the other clients," Benfield said. "The payroll companies should be held liable."

Lorraine.mirabella@baltsun.com

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