Summary of Revenue Procedure

The CPEO application form (and the forms that must be completed by all Responsible Individuals) will be submitted through an online portal; paper applications will not be accepted. [As noted, the forms are not yet available.]

• CPEO Applicant: The CPEO’s application must be submitted by a person authorized under Internal Revenue Code (IRC) § 6103(e) to inspect the return of a CPEO applicant (generally an officer of a corporation or a partner of a partnership).
• Responsible Individual Forms and Fingerprint Rules: Each Responsible Individual must file the Responsible Individual Personal Attestation (RIPA) form and must also provide a fingerprint card form (FD-258). Unlike some other IRS programs, the revenue procedure does not provide any exceptions to the fingerprint card requirement. [Note that FD-258 appears to be the standard FBI fingerprint card which can be viewed here. However, we do not yet know whether the IRS will require specific cards for CPEO Responsible Individuals.]
• Complete and Accurate Application Required: An application is not complete and accurate if it does not contain all of the items required by the statute and the IRS under the final and temporary regulations, the revenue procedure, and the instructions accompanying the application. The IRS anticipates that the online application system will not permit the submission of an application unless it is complete. If an incomplete application is submitted, the IRS generally will request from the CPEO applicant additional information needed for a completed application. However, the IRS may deny an incomplete application without requesting additional information.

Each member of a controlled group that wishes to become certified must submit a separate application and each member must pay a $1,000 user fee. User fees will not be returned, even if an application is withdrawn or denied. Since the IRS does not provide for CPEO applicants in the same controlled group to apply jointly on one application, the IRS has provided special procedures (discussed below) for dealing with the bond and financial review requirements which must, by statute, be met by treating all CPEOs in the controlled group as a single organization.

CPEO applicants must submit with their application a signed letter from a qualified surety confirming that the surety “agrees to issue a bond to the CPEO applicant if and when it is certified.” The surety letter must state that the surety agrees to issue a bond in the amount required under the SBEA and pursuant to the terms set forth in (yet-to-be released) Form 14751, Certified Professional Employer Organization Surety Bond.

• Controlled Group: All CPEOs or CPEO applicants in a controlled group that are or will be covered by the bond must be listed in the surety letter (with name and EIN provided). The revenue procedure states that all CPEO members of the controlled group are required to be on the same bond (i.e., two CPEOs in a controlled group could not have their own bonds even if the total protection provided was sufficient to meet the statutory requirement).
• Timing of Bond: Once the PEO’s application is approved, the CPEO applicant has 30 days from the date the IRS provides notice of certification to submit the bond form (or to post a superseding bond if the CPEO applicant is a member of a controlled group with existing CPEOs).

With its application, a CPEO applicant must generally submit a copy of its annual audited financial statements for the most recently completed fiscal year as of the date it submits its application. However, if the application is submitted within 6 months of the end of the most recently completed fiscal year (and the audit of that fiscal year is not yet complete at the time of the application) then the CPEO must (1) submit audited financial statements for the immediately preceding fiscal year and (2) submit the audited financial statements for the most recently completed year within 6 months after it ends.

• CPA Opinion: The annual audited financial statements must be accompanied by an unmodified CPA opinion that such financial statements:

1. Are presented fairly and in accordance with GAAP.

2. “Reflect positive working capital (as defined by GAAP)” (or, if certain requirements are met, reflect negative working capital for no more than two consecutive fiscal quarters and the IRS determines that negative working capital does not present a material risk based in part on whether the CPEO applicant has identified facts and circumstances that will result in positive working capital in the near future). In all instances, the opinion must set forth in detail a calculation of the CPEO applicant’s working capital as reflected in the financial statements.

3. Reflect that the CPEO applicant computes its taxable income using an accrual method of accounting.

• CPA Statement: The CPA must also provide a signed written declaration to accompany the opinion, stating that the CPA is currently qualified as a CPA and is authorized to represent the CPEO applicant before the IRS. The revenue procedure further clarifies that this authorization to represent the CPEO must be provided in accordance with the requirements of Treas. Reg. § 601.503(a), the general provisions governing powers of attorney. [Note that Code § 601 and Treas. Reg. § 601.503(a) provide that the power of attorney must include a “clear expression of the taxpayer’s intention concerning the scope of authority granted to the recognized representative(s),” and thus they specifically allow the scope of the CPA’s representation to be limited.]

• Newly Established PEO: Special financial statement rules are provided for newlyestablished CPEOs that generally require financial statements from any precursor entity (or, if the CPEO applicant does not have any precursor entities, from any related entity as defined in the final and temporary CPEO regulations).
• Controlled Group: If a CPEO applicant is a member of a controlled group with other CPEO applicants or CPEOs, the CPEO applicant must submit copies of combined or consolidated annual audited financial statements for all CPEO applicants and CPEOs in the controlled group. Such statements may include all members of the controlled group that are not CPEOs/CPEO applicants. The IRS may request additional information specific to the CPEO applicant (e.g., balance sheet, income statement, cash flow statement) if the applicant’s financial position is unclear from the combined/consolidated statements. The financial statements and CPA opinion must contain the name and EIN of each controlled group CPEO or CPEO applicant and, if included in the statements and opinion, members of the controlled group that are not CPEOs or CPEO applicants. In addition, the revenue procedure confirms that the CPA opinion must address the working capital issue with respect to each CPEO or CPEO applicant independently. However, it also provides that one CPEO or CPEO applicant’s failure to satisfy the working capital requirement will not influence the treatment of the other CPEOs or CPEO applicants in the controlled group.

The CPEO applicant must, for the most recently completed quarter as of the date of the application (and for all subsequent quarters), provide the following:

• Assertion: An assertion of a responsible individual of the CPEO applicant (under penalties of perjury) that the CPEO applicant has withheld and made deposits of all federal employment taxes (other than FUTA) for the calendar quarter.
• CPA Attestation: An examination level attestation from an independent CPA stating that this assertion is fairly stated in all material respects and that the assertion complies with the AICPA Statements of Standards for Attestation Engagements, including the specific requirements for Examination Reports.
• Working Capital Statement: A statement from a Responsible Individual of the CPEO applicant (under penalties of perjury) verifying that the CPEO applicant has positive working capital. The statement must include a detailed calculation of the CPEO applicant’s working capital and be accompanied by a copy of the CPEO applicant’s unaudited financial statements for the most recently completed fiscal quarter, if such statements are available. [As with other working capital requirements, up to two consecutive quarters of negative working capital will not cause the CPEO applicant to fail to meet the positive working capital requirement, but only if the IRS approves.]
• Controlled Group: If a CPEO applicant is a member of a controlled group with other CPEO applicants or CPEOs, the quarterly assertions and attestations must be submitted on a controlled group basis, but the quarterly working capital statement must relate to the CPEO applicant alone. As with the annual working capital requirement with respect to the annual audited financial statements, one CPEO or CPEO applicant’s failure to satisfy the working capital requirement will not influence the treatment of the other CPEOs or CPEO applicants in the controlled group.
• Special Transition Rule: CPEO applicants that submit an application before September 1, 2016, may include with the application the quarterly requirements with respect to Q1 2016 (instead of Q2), as long as such items are submitted with respect to Q2 2016 by September 1, 2016.

The IRS will investigate the accuracy of statements and representations made by a CPEO applicant and its Responsible Individuals in the CPEO applicant’s application by conducting background checks of the CPEO applicant, any related entities or precursor entities, and responsible individuals. These background checks may include checks on tax compliance, criminal background, professional experience, credit history, professional sanctions, and other relevant facts.

• Additional Information: Even if an application is complete, the IRS may request additional information (e.g., the IRS may ask a CPEO applicant to support its representations with respect to its knowledge or experience by providing a written work history or third-party references).
• Responsibility to Provide Additional Information: By submitting an application, a CPEO applicant and its Responsible Individuals agree to provide the IRS with such additional information as the IRS may request to facilitate its background investigations. The revenue procedure requires that a CPEO applicant and each of its Responsible Individuals “must take such actions as are necessary to authorize the IRS to conduct background checks and to investigate the accuracy of statements and submissions, including waiving confidentiality and privilege in situations in which the IRS is otherwise unable to obtain information.” Failure to provide such information or take such action may result in denial of certification.
• Withdrawal of Applications: Applications may be withdrawn, but the IRS may retain and use all information submitted for purposes of tax administration.

A CPEO applicant will be certified as a CPEO only if its application establishes to the satisfaction of the IRS that the CPEO applicant meets the requirements of the law, this revenue procedure, and the instructions accompanying the application, so as not to present a material risk to the IRS’s collection of federal employment taxes.

Within 30 days of its occurrence, a CPEO applicant must notify the IRS of any change that materially affects the continuing accuracy of any agreement or information that was previously made or provided to the IRS as a part of its application for certification. Material changes include:

• Change in the tax compliance, criminal background, or professional license or registration status of the CPEO applicant, its precursor entities, related entities, or Responsible Individuals.
• Change to the CPEO applicant’s fiscal year.
• Change that results in another individual being considered a Responsible Individual of the CPEO applicant or another entity being considered a precursor entity or a related entity of the CPEO applicant.
• The discovery of significant errors in or new facts relevant to any agreement or information provided to the IRS as part of the application.

The IRS will issue electronically or by mail a notice of certification to a CPEO applicant that has been approved for certification. If a CPEO applicant is a member of a controlled group and other members of the controlled group are also applying for certification, the IRS will issue a separate notice of certification to each CPEO applicant member of the controlled group that has been approved for certification.

• Certification Contingent: The IRS notice will make clear that the certification is contingent on IRS receipt of the surety bond form.
• Effective Date: The effective date of certification will generally be the first day of the first calendar quarter following notice of certification, except that for CPEO applicants that submit a complete and accurate application before September 1, 2016, their certification date will be January 1, 2017, even if notice of certification is received after January 1, 2017.
• Public Disclosure of Certification: The IRS will publish a list of certified PEOs on the IRS website at www.irs.gov/CPEOs. That list will be updated by the 15th day of each calendar quarter. A CPEO will not appear on the list until the IRS has received the surety bond form.

If the IRS decides that an applicant does not satisfy the requirements for certification, the IRS will issue a notice of proposed denial that will include the reasons for the denial and inform the CPEO applicant of its opportunity to request review.

• Denial Without Review: However, in situations that are not subject to factual or legal dispute (e.g., an incomplete application; failure to respond to an IRS request for additional information; a failure to provide a surety bond; a modified CPA opinion on the financial statements; or negative working capital that does not fit within an exception), the IRS notification that certification has been denied will be final with no opportunity for review.
• Review Process: In all other cases, CPEO applicants that have received a notice of proposed denial may request a review by the IRS Office of Professional Responsibility (OPR). The CPEO applicant will be required to file a request for review with a written statement of the facts, law, and arguments in support of its position within 30 days from the date of the proposed denial. The revenue procedure provides that statements should be based on facts and that arguments concerning the material risk of collection of federal employment taxes will not be considered. If a request for review is filed, the IRS will first review and reevaluate the proposed denial. If the IRS CPEO program office maintains its position, the matter will be referred to OPR for review. If OPR finds that the IRS has abused its discretion in denying certification, then a notice of certification will be issue by the IRS.