Definition of CPEo Applicant
Rev. Proc. 2016-33, section 1.01(5)
5) The term “CPEO applicant” means a person that submits or has submitted an application to be certified as a CPEO in accordance with § 301.7705-2T, this revenue procedure, and instructions accompanying the application. A CPEO applicant remains a CPEO applicant until the CPEO applicant withdraws its application; receives a notice of certification described in section 6.01 and timely and correctly submits a proof of bond, as described in section 6.02; or receives a notice of final denial, as described in section 8.04.
Notice 2016-49, § VI
Furthermore, section 2.06(2) of Rev. Proc. 2016-33 will be revised to require that the written declaration accompanying the quarterly examination level attestation state only that the CPA is currently qualified as a CPA.
VI. REQUIREMENT THAT A CPEO BE A BUSINESS ENTITY THAT IS NOT A DISREGARDED ENTITY
The temporary regulations provide in §301.7705-2T(c)(2) that a CPEO may not be a business entity that is disregarded as an entity separate from its owner for federal tax purposes under §§301.7701-2 and 301.7701-3 (without regard to the special rule in § 301.7701-2(c)(2)(iv) that provides that such entities are corporations for federal employment tax purposes1). Commenters have explained that professional employer organizations are structured in varied ways, and that it is not uncommon for professional employer organizations to be entities disregarded as separate from their corporate, partnership, or individual owner. Commenters emphasized that professional employer organizations may choose such a structure for legitimate business reasons, such as to reduce the overall compliance burden with respect to filing of state income tax returns. Commenters expressed concern that precluding disregarded entities from being certified as CPEOs would unfairly prevent a number of existing professional employer organizations from applying to the CPEO program without undergoing restructuring.
To address this concern, and in recognition that disregarded entities are generally treated as corporations for federal employment tax purposes, Treasury and IRS anticipate that the final regulations under section 7705 will not prohibit a business
1 Section 301.7701-2(c)(2)(iv)(B) provides that, with certain exceptions, an entity that is disregarded as an entity separate from its owner for any purpose under §301.7701-2 is treated as a corporation with respect to taxes imposed under Subtitle C—Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and 25 of the Internal Revenue Code).
Entity that is disregarded as separate from its owner under §§301.7701-2 and 301.7701- 3 from becoming a CPEO. Instead, it is anticipated that the final regulations will provide that a business entity that is disregarded as an entity separate from its owner for any purpose under §301.7701-2 and that is wholly owned directly (including through one or more disregarded entities organized in the United States) by a United States person (as defined in section 7701(a)(30)) may apply for certification as a CPEO. Treasury and IRS anticipate that, consistent with §301.7705-2T(d)(1), the final regulations will continue to require that a CPEO applicant or CPEO must be created or organized in the United States or under the law of the United States or of any state. Therefore, only domestic disregarded entities would be eligible to apply for certification. Treasury and IRS request comments on the appropriateness of allowing a disregarded entity that is domestically organized but not wholly owned directly by a United States person to apply for certification as a CPEO.
In addition, Treasury and IRS anticipate revising the definition of “responsible individual,” as provided in §301.7705-1T(b)(13) and section 1.01(11) of Rev. Proc. 2016-33, to also include: (1) in the case of a disregarded entity owned by a corporation or partnership, the responsible individuals of that corporation or partnership (as defined by the regulations); and (2) in the case of a disregarded entity owned by an individual, the individual owner. Finally, Treasury and IRS anticipate providing in the final regulations that CPEO applicants and CPEOs that, but for their status as disregarded entities would separately be members of a controlled group, are treated as members of a controlled group for purposes of section 7705 and related regulations.
The temporary regulations also provide in §301.7705-2T(c)(2) that a CPEO must be a business entity described in §301.7701-2(a). Because an individual conducting business through a sole proprietorship is not a business entity described in §301.7701- 2(a), an individual may not be a CPEO under the temporary regulations. One commenter expressed concern that this rule precludes certification of smaller professional employer organizations that are operated by individuals through their sole proprietorships. In response to this comment and to ensure parity between sole proprietorships and disregarded entities that are wholly owned by individuals, Treasury and IRS anticipate that the final regulations will expressly allow sole proprietorships to apply for certification as a CPEO.