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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Comments by IRS Officials at Los Angeles ASPA-IRS Conference

(Posted February 8, 2003)

Question 249: Derrin, you appeared with Richard Wickersham of the IRS at the Los Angeles ASPA Benefits Conference in a discussion of Rev. Proc. 2002-21. Did Dick make any comments that would add to our understanding of how the IRS will treat PEOs?

Answer: I think there were some very important clarifications of the IRS' position. Of course, as with any conference, one must recognize that colloquy at a podium is not a Revenue Ruling. But I believe the informal comments do provide a helpful indication of the direction the IRS is heading.

On my employerbook.com web site I have posted 3 files from the conference:

Those interested in the topic should particularly look at Mr. Wickersham's comments. Let me hit some of the high points here:

I'm a generous soul, so I was commending the Service for coming up with a creative solution that allows PEOs to "come in from the cold" without penalizing plan participants. Mr. Wickersham was far more pragmatic, explaining that the government simply did not have the resources to deal with this in a heavy-handed manner. In fact, he said that he hoped more enforcement would come from banks and other lenders refusing to extend credit to noncomplying PEOs than from having auditors track them down. I appreciate such pragmatism because it provides a solid, reliable footing for understanding the revenue procedure (and it doesn't disturb anyone's fondly held views that the IRS is not a charitable institution).

I regret to say that I was unsuccessful in pinning down Mr. Wickersham on a definition of the most important term of the revenue procedure: "PEO." He said, in effect, that if the ruling had provided a definition, it only would have inspired further questions. As he said that, I couldn't help but think of a sign from one of my favorite television series of all time, The Prisoner: "Questions are a burden for others; answers a prison for oneself."

Notwithstanding that, Mr. Wickersham seems to be working from a more limited definition of PEO than mine. Although he refused to define specifically a PEO, he did describe it as a business that primarily takes over all or virtually all the employees of a recipient-- in effect, to be the recipient's outsourced HR department. I know of several staffing firms who will be relieved to hear about that more limited definition.

Mr. Wickersham confirmed my impression that firms only leasing true temporary employees (e.g., a fill-in for the vacationing receptionist) are not PEOs. He did not comment about how to handle a staffing firm that handles both long-term and temporary workers.

Mr. Wickersham emphasized that the Service is looking for substantial compliance with the revenue procedure. Failure to dot every "i" and cross every "t" will not cause doom and disaster, because the IRS does not have the manpower resources to inflict doom and disaster except in the most abusive situations. (Perhaps they should consider using a staffing firm!)

Because we are now less than 3 months from the date that most PEOs will be making their decisions as to how to proceed under the revenue procedure, these are important clarifications. Of course, for a complete discussion of the revenue procedure, see chapter 4 of my book, Who's the Employer.

And, Mr. Wickersham, in case this column should cross your desk, if I have inadvertantly misstated any of your positions, either here or on my web site, please accept my apologies and let me know so I can set it right.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.