Working Capital Requirements
Rev. Proc. 2016-33, section 2.05(2-4)
(2) CPA opinion. With each of these required annual audited financial statements, a CPEO applicant must submit an opinion of a CPA that such financial statements–
(a) Are presented fairly and in accordance with generally accepted accounting principles (GAAP);
(b) Reflect positive working capital (as defined by GAAP) or, only if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements; andRev. Proc. 2016-33, section 2.05(2-4)
(2) CPA opinion. With each of these required annual audited financial statements, a CPEO applicant must submit an opinion of a CPA that such financial statements–
(a) Are presented fairly and in accordance with generally accepted accounting principles (GAAP);
(b) Reflect positive working capital (as defined by GAAP) or, only if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements; andRev. Proc. 2016-33, section 2.05(2-4)
(2) CPA opinion. With each of these required annual audited financial statements, a CPEO applicant must submit an opinion of a CPA that such financial statements–
(a) Are presented fairly and in accordance with generally accepted accounting principles (GAAP);
(b) Reflect positive working capital (as defined by GAAP) or, only if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements; andRev. Proc. 2016-33, section 2.05(2-4)
(2) CPA opinion. With each of these required annual audited financial statements, a CPEO applicant must submit an opinion of a CPA that such financial statements–
(a) Are presented fairly and in accordance with generally accepted accounting principles (GAAP);
(b) Reflect positive working capital (as defined by GAAP) or, only if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements; andRev. Proc. 2016-33, section 2.05(2-4)
(2) CPA opinion. With each of these required annual audited financial statements, a CPEO applicant must submit an opinion of a CPA that such financial statements–
(a) Are presented fairly and in accordance with generally accepted accounting principles (GAAP);
(b) Reflect positive working capital (as defined by GAAP) or, only if the requirements of section 2.05(4) are met, reflect negative working capital, with the opinion in either case setting forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements; and(c) Reflect that the CPEO applicant computes its taxable income using an accrual method of accounting.
(3) CPA opinion must be unmodified. The CPA opinion must be unmodified (such that it cannot be a qualified opinion, an adverse opinion, or a disclaimer of opinion) and accompanied by a written declaration, signed by the CPA, that the CPA is currently qualified as a CPA and is authorized to represent the CPEO applicant before the IRS.
(4) Exception for negative working capital. A CPA opinion described in section 2.05(2) may state that a CPEO applicant’s annual audited financial statements reflect negative working capital, but in that case the opinion will meet the requirements of section 2.05(2) only if–
(a) The CPEO applicant has negative working capital for no more than two consecutive fiscal quarters of the fiscal year, as demonstrated by the required annual audited financial statements or the statements described in section 2.06(3), or the submission of quarterly unaudited financial statements;
(b) The CPEO applicant or its CPA provides with the CPA opinion a detailed calculation of its negative working capital and an explanation to the IRS describing the reason for the failure; and
(c) The IRS determines, in its sole discretion, that the failure does not present a material risk to the IRS’s collection of federal employment taxes. The determination of whether the failure presents a material risk to the IRS’s collection of federal employment taxes may depend, in part, on whether the CPEO applicant has identified facts and circumstances that will result in positive working capital in the near future.
§301.7705-2T(e)(1)
(e)Financial statements—(1) CPEOs. By the last day of the sixth month after the end of each fiscal year, and beginning with the first fiscal year that ends after the CPEO’s effective date of certification, a CPEO must cause to be prepared and provided to the IRS a copy of its annual audited financial statements for the fiscal year and an opinion of a certified public accountant (CPA) that such financial statements—
(i)Are presented fairly in accordance with GAAP; and
(ii)Reflect positive working capital or, only if the CPEO satisfies the requirements of paragraph (e)(3) of this section, reflect negative working capital, with such opinion in either case setting forth in detail a calculation of the CPEO’s working capital as reflected in the financial statements.
Preamble to Final and Temporary Regulations, section 3(c)
…Additionally, the Treasury Department and the IRS believe a CPEO with annual audited financial statements that reflect positive working capital (as determined in accordance with GAAP) presents a materially lower risk to the IRS’s collection of federal employment taxes than a CPEO without such financial statements. Accordingly, pursuant to section 7705(b)(1) and consistent with several state PEO certification and registration laws, the temporary regulations require a CPEO applicant or CPEO to cause to be prepared and provided to the IRS, by the same date it must provide a copy of its annual audited financial statements, an opinion of an independent CPA that such financial statements reflect positive working capital for the fiscal year, unless the exception described in the next paragraph applies. In addition, the temporary regulations require this opinion to set forth in detail a calculation of the CPEO applicant’s or CPEO’s working capital. Consistent with section 7705(c)(3)(A), this CPA opinion must also generally state that the financial statements are presented fairly in accordance with GAAP.
The Treasury Department and the IRS recognize that working capital may fluctuate over the course of a CPEO’s fiscal year due to normal business operations. To allow for some fluctuation in working capital, the temporary regulations contain an exception to the positive working capital requirement. Under this exception, a CPEO applicant or CPEO will not fail to meet the positive working capital requirement if three requirements are satisfied. First, the CPEO applicant or CPEO must have negative working capital for no more than two consecutive fiscal quarters of that fiscal year (as demonstrated by the financial statements for the final fiscal quarter of the fiscal year or the quarterly statements described in this section 3.c of the preamble for any other fiscal quarter). Second, the CPEO applicant or CPEO or its CPA must provide an explanation to the IRS describing the reason for the failure in such time and manner as the Commissioner may prescribe in further guidance. Third, the IRS must determine, in its sole discretion, that the failure does not present a material risk to the IRS’s collection of federal employment taxes.
See also Notice 2016-49, § III
…To ensure consistency with the AICPA guidelines applicable to CPA opinion letters, Treasury and IRS anticipate revising the requirements of §301.7705-2T(e)(1) and section 2.05(2) of Rev. Proc. 2016-33 to require a CPEO applicant or 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 that states that the financial statements reflect positive working capital or that the CPEO applicant or CPEO satisfies the requirements of §301.7705-2T(e)(3). The Note described in the previous sentence must also provide in detail a calculation of the working capital. In the case of a CPEO applicant that is a member of a controlled 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 of §301.7705-2T(e)(3), in either case setting forth in detail a calculation of each individual CPEO applicant’s or CPEO’s working capital. Similarly, Treasury and IRS anticipate revising the requirements of section 2.05(6) of Rev. Proc. 2016-33 to allow the name and EIN of each member of the controlled group that is included within the consolidated audited financial statements of the controlled group 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 penalties of perjury, rather than in the CPA opinion.