The Internal Revenue Service and the Treasury Department are providing new guidance on the requirements for professional employer organizations seeking voluntary certification, relaxing some of the original requirements for submitting written opinions and attestations from CPAs.
In May, the IRS proposed temporary regulations for a new voluntary certification program for PEOs, in accordance with a 2014 law known as the ABLE Act (see IRS Provides Voluntary Certification Program for Professional Employer Organizations). PEOs handle payroll administration and tax reporting responsibilities for business clients and are usually paid a fee based on their payroll costs. To be certified under the new program, PEOs are supposed to meet certain tax status, background, experience, business location, financial reporting, bonding and other requirements. In June, the IRS released a revenue procedure detailing how a company can become a certified PEO (see IRS Details Certification Process for PEOs).
This month, the Treasury and the IRS issued Notice 2016-49, which provides interim guidance on certain requirements for those businesses seeking to become Certified Professional Employer Organizations, or CPEOs.
It noted that the Treasury and the IRS received comments on the proposed regulations and revenue procedure objecting to some of the requirements, including a requirement that a CPEO applicant provide a CPA opinion that its annual audited financial statements reflect positive working capital (or meet certain rules that allow for negative working capital under limited circumstances) and that it compute its taxable income using an accrual method of accounting.
Other comments took issue with a requirement that a CPEO applicant or a CPEO submit a written declaration from an independent CPA, who submits opinions and attestations regarding the CPEO applicant’s or CPEO’s annual audited financial statements and ongoing federal employment tax compliance, declaring that the CPA is authorized to represent the CPEO applicant or CPEO before the IRS. Other comments objected to a requirement that a CPEO be a business entity that is not a disregarded entity.
The new notice describes modifications to these requirements that the Treasury and the IRS plan to make before publishing the final regulations and updating the revenue procedure. Taxpayers will be able to rely on the guidance in the notice until the final regulations and an updated revenue procedure are released.
On top of that, the Treasury and the IRS said they are aware that, for those submitting applications during the first year of the program, the audited financial statements that must be included as part of the application for certification might not include some of the elements required by the regulations because the statements relate to fiscal years that end before or shortly after the regulations were issued. To address this issue, the notice is providing transition relief for meeting those requirements.
Finally, the notice extends until Sept. 30, 2016, the deadline by which a complete and accurate application for certification needs to be submitted in order to be eligible for an effective date of certification of Jan. 1, 2017.
The Treasury and IRS received comments suggesting that CPAs might be prevented from including statements on working capital and the accrual method in their opinions due to certain limitations from the American Institute of CPAs on what can be included in a CPA opinion. These commenters requested clarification that the inclusion of these items in the financial statements, which are covered by the CPA opinion, rather than in the CPA opinion itself, would satisfy the regulatory requirements. To ensure consistency with the AICPA guidelines on CPA opinion letters, the Treasury and IRS anticipate they will revise the requirements to require a CPEO applicant or a CPEO to submit a copy of its annual audited financial statements and an unmodified opinion of a CPA that the annual audited financial statements are presented fairly in accordance with GAAP, provided that the audited financial statements covered by the opinion include a note to the financial statements stating that the financial statements reflect positive working capital or that the CPEO applicant or CPEO satisfies the requirements.
The note must also provide in detail a calculation of the working capital. In the case of a CPEO applicant that is a member of a group of which other members are CPEO applicants or CPEOs, the note to the financial statements of the combined or consolidated annual audited financial statements for the controlled group must state that the individual financial statements of each CPEO applicant or CPEO that is a member of the controlled group reflect positive working capital (as defined by GAAP) or that the individual CPEO applicant or CPEO satisfies the requirements, in either case detailing a calculation of each individual CPEO applicant’s or CPEO’s working capital.
Similarly, the Treasury and the IRS plan to revise the requirements to allow the name and Employer Identification Number of each member of the controlled group included within the consolidated audited financial statements to be listed in either the note to the financial statements or in a separate attachment signed by a responsible individual of the CPEO applicant or CPEO under penalty of perjury, rather than in the CPA opinion. Because GAAP requires the use of an accrual method of accounting and the required CPA opinion must state that a CPEO applicant’s or CPEO’s audited annual financial statements are presented fairly in accordance with GAAP, the requirement for a CPA opinion stating that the financial statements “reflect that the CPEO . . . computes its taxable income using an accrual method of accounting” is unnecessary. The Treasury and the IRS expect to revise the revenue procedure to eliminate that paragraph.