There are a number of situations when employers might authorize someone else to interact with the Internal Revenue Service for tax matters.
The extent of a third-party authorization can range from allowing an employee to discuss confidential tax information with IRS officials to granting an agent the right to act on behalf of the employer. There are various methods for employers to use in granting a third party the authority to assist in tax operations or to help resolve a tax issue.
All of the methods allow for the exchange of information between the third party and the IRS for purposes of resolving a tax issue.
This article examines several ways of authorizing third-party consent. The article also provides an overview of the levels and types of authorizations that are available to employers for authorizing third parties to interact with IRS on the employer's behalf.
Oral disclosure consent
The oral disclosure consent is a limited tax information authorization used to authorize a third party to respond to a specific notice from IRS.
An individual taxpayer may grant this consent to any individual by calling 1-800-829-1040. A business entity may grant this consent by calling the Business Master File (BMF) number 1-800-829-4933. In either case, the employer initiates the consent by providing the name of the designee for the specific notice issue. This consent may be granted to individuals, but not to business entities. For example, John Doe may be a designee, but the firm Doe and Doe LLC cannot.
Authorization is immediate, so this works well when the employer is with the designee making the call to IRS for information.
The authorization can also work when the employer is not with the designee. The employer calls in the authorization and it is recorded on the tax module available on IRS master file IDRS TXMOD (Integrated Data Retrieval System Tax Module). The name of the designee is recorded directly on the employer's account. The authorization is for oral information only and the designee cannot receive written notices from IRS.
Tip: Knowing the location of the authorization on the IRS system (IDRS TAXMOD for example) may be helpful if the IRS contact does not recognize the designee once authorization has been granted.
No Central Authorization File (CAF) or Reporting Agent File (RAF) number is required. The authorization may coexist with Form 2848, Power of Attorney and Declaration of Representative (POA). With the coexistence, the oral disclosure consent can allow a taxpayer representative to obtain oral information about a notice before the recording of a POA on the CAF.
Expiration of the authorization coincides with the resolution of the specific notice issue from which the authorization arose and is automatic.
This form of Tax Information Authorization (TIA), or check box authorization, is used to allow a third-party designee to exchange information, either written or orally, with IRS with regard to return processing issues and in regard to refunds and payments related to the return. The check boxes are available on Forms in the 94X (payroll tax) series. They also appear on forms such as those in the 1040 series and Forms 720, 1041, 1120, 2290, and CT-1.
The designee is not entitled to automatically receive copies of notices regarding the return. As in the case of the oral disclosure consent, the designee must be an individual and not a business entity. The authority does not extend to anyone other than the designated individual.
Caution: This limitation of the designation to individuals is indicated on the instructions for the forms (e.g. Form 941 Instructions, “Part 4. May we speak with your third-party designee?” on page 9) and is inconsistent with the information in IRS Publication 4019 (Rev. 5-2009), “Third Party Authorization, Levels of Authority.” The information on the tax forms is more recent and is likely more reliable than the publication.
Authorization is granted by completing the designation information section that appears on the tax return just above the signature line. The authorization is recorded at the beginning of IRS processing when the tax return is received. Recording the authorization on the IRS master file may take up to three weeks for an electronically filed return or four to six weeks for a paper submission.
Once recorded, the appointee designation information may be accessed by IRS on the tax module available on the IRS master file IDRS TXMOD/IMFOLR and BMFOLR. The employer and the third-party designee must have a shared personal identification number (PIN) that is recorded directly on the account. No Central Authorization File (CAF) or Reporting Agent File (RAF) number is required. The authorization may coexist with a Power of Attorney (POA) Form 2848.
The employer may revoke the authorization or the appointee may withdraw at any time. The authorization automatically expires one year from the due date of the tax return on which the authorization was granted
The Tax Information Authorization (TIA) allows appointees to receive information regarding employer specified tax matters and periods. The appointee is entitled to written and oral account information (transcripts) and can automatically receive copies of IRS notices related to the specified items. The appointee may be any individual or business such as a legal, accounting, or tax preparation firm. Authority extends to the employees of a business appointee.
This appointment is recorded on the CAF (Central Authorization File) system. If the appointee does not already have a CAF number, one will be issued with the appointee's first submission. The CAF number is assigned to the appointee and is used for all subsequent authorizations granted to that appointee without regard to who is granting the authorization. The authorization is available to the IRS on the IRS Master File and IDRS CFINK.
The authorization remains in effect until the employer revokes it or the appointee withdraws. Generally a new TIA supersedes an existing authorization unless otherwise specified with the new TIA. A TIA may coexist with a power of attorney Form 2848.
This level of authorization may be granted three ways.
• An oral TIA is granted by the employer calling 800-829-1040 for taxpayers who are individuals or the Business Master File (BMF) number 800-829-4933 for taxpayers that are business entities. Identity is verified and the call is transferred to the CAF unit for recording. Disclosure authorization becomes available immediately.
• A written Form 8821, Tax Information Authorization, may be submitted by fax or mail. If for a specific use, the form can be faxed or mailed to the IRS office handling the matter. The form also may be sent by fax or mail to the appropriate CAF unit listed on the form's instructions. Multiple designees can be appointed using the same Form 8821 by attaching a list of the designees, with the required information, to the Form 8821.
• An electronic equivalent of Form 8851 may be filed if the employer enters a PIN number in the boxes in the signature section of a signed paper Form 8851. This gives the appointee the authority to file the Form 8851 electronically using the PIN number as the employer's electronic signature. The electronic Form 8851 is filed through practitioner electronic services and the appointee must be registered with IRS to use the electronic services system. The disclosure authorization is available immediately through this method.
Power of attorney
Form 2848, Power of Attorney and Declaration of Representative, allows a third party to represent the taxpayer before IRS. The authorized individual can advocate, negotiate, and sign documents on the employer's behalf. In addition, the authorized representative may argue facts and the application of the law. Form 2848 (POA) allows appointees to receive information for employer-specified tax matters and periods. The appointee is entitled to written and oral account information (transcripts) and can automatically receive copies of IRS notices.
Generally, an appointment is limited to enrolled agents, lawyers, and certified public accountants. Enrolled actuaries and enrolled retirement-plan agents may be appointed with respect to issues related to particular fields of expertise. An individual taxpayer may appoint an immediate family member. A taxpayer that is an employer or organization may appoint an individual who is a full-time employee, a general partner, or a bona fide officer of the taxpayer. A student lawyer or student certified public accountant may be appointed with special permission. An unenrolled return preparer may be appointed to represent a taxpayer, subject to limited practice rules and only with respect to returns the designee prepared. “Unenrolled preparer” includes a registered tax return preparer who is not an enrolled agent, certified public accountant, or lawyer.
Appointment is limited to individuals. Each individual that is to be granted the authorization must be named on Form 2848 and qualify to act as representative. Unlike the TIA, which can be used to appoint a firm or business entity, POA authorization does not extend to employees or other members of an appointed representative's firm unless they qualify as Form 2848 representatives and are named on the form.
The POA form is recorded on the CAF (Central Authorization File) system. If the appointee does not already have a CAF number, one will be issued with the appointee's first submission. The CAF number is assigned to the appointee and is used for all subsequent authorizations granted to that appointee without regard to who is granting the authorization. The authorization is available to IRS on the IRS Master File and IDRS CFINK.
The authorization remains in effect until the employer revokes it or the representative withdraws. A new POA supersedes an existing POA unless otherwise specified with the new POA. A POA may coexist with a Tax Information Authorization (TIA).
The POA must be in writing, but may be submitted electronically or on paper. A written Form 2848 may be submitted by fax or mail. If the POA is for a specific use, the form may be faxed or mailed to the IRS office handling the specific matter. The form also may be sent by fax or mail to the appropriate CAF unit listed on the Form instructions.
An Electronic Equivalent of Form 2848 may be filed if the employer enters a PIN in the boxes of a paper Form 2848. This gives the appointee the authority to file the Form 2848 electronically using the PIN as the employer's electronic signature. This is done through the practitioner's electronic services and the appointee must be registered with IRS to use the e-services system. The disclosure authorization is available immediately through this method.
Use of Form 2848 is limited to appointing a representative. IRS will not accept a Form 2848 as valid unless the appointee is qualified to sign Part II of the form (Declaration of Representative). Invalid forms will be returned to the grantor and the form will not be used as authority for the person named in the form to receive tax information.
The third-party authorizations discussed up to this point in the article have been general in nature and apply to all taxpayers. The next three forms of third party arrangements apply specifically to employers with respect to employment tax matters.
Payroll service provider
Typically, a payroll service provider prepares employment tax returns for signature for a client who is a common law employer and may also process the withholding, deposit, and payment of the associated employment taxes for the client.
In this arrangement, a common law employer enters into an agreement with a payroll service provider that authorizes the service provider to perform one or more of the following acts on the employer's behalf:
• prepare the paychecks for the employees of the common law employer/client;
• prepare Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return, and Form 941, Employers Quarterly Federal Tax Return, for each separate common law employer/client using that client's Employer Identification Number (EIN);
• file Forms 940 and 941 for each separate common law employer/client that are signed by that client;
• make federal tax deposits and federal tax payments, and submit deposit and payment information for the taxes reported on the Forms 940 and 941; and/or
• prepare Forms W-2 for the employees of a common law employer/client that include the EIN of that client.
Use of a payroll service provider does not relieve the common law employer from its responsibility of ensuring that all of its federal employment tax duties are met. A service provider assumes no liability for its clients' employment tax withholding, reporting, payment, and filing duties.
An service provider arrangement will not permit IRS to disclose information or issue notices to the service provider unless one of the authorizations discussed above is granted or the service provider has reporting agent authorization.
Reporting agent authorization
The reporting agent authorization is a limited tax information authorization used to authorize a third party to sign and file certain returns and make deposits and payments for certain returns on behalf of the employer. The agent is authorized to receive written and oral information and may automatically receive notices. Information disclosure authorization extends only to returns filed by the agent and payments made by the agent.
The employer may grant this consent to any company, including reporting agents, and batch and bulk filers, approved under Revenue Procedure 2007-38 by filing Form 8655, Reporting Agent Authorization. The format is a paper submission and may be either mailed or faxed to the IRS. Authority extends to employees of the reporting agent. In the case of the reporting agent using IRS e-services, employees of the agent must be individually registered to use e-services and be authorized by the agent to use those services.
The authorization is recorded on the RAF (Reporting Agent File) and is available on the IRS Master File. No Central Authorization File or Reporting Agent File number is required. The appointment is reported on the taxpayer's employer identification number.
The authorization may coexist with existing Forms 8655, but only for nonoverlapping periods covered by the authorization. The authorization may coexist with a power of attorney Form 2848. The authorization expires when the employer revokes it or the agent withdraws.
Under this authorization, all returns filed by the agent, and all deposits and payments made by the agent are under the employer's identification number. If the agent serves several employers, the agent files separate returns for each client using that client's EIN.
The reporting agent is only able to file or make deposits as designated on Form 8655. Generally Form 8655 can be used to authorize the agent to sign and file Forms 941 and 940 electronically.
The form may also be used to authorize the agent to sign and file certain paper forms for which IRS does not have electronic filing capability. The POA Form 2848 is required to authorized the agent to sign and file paper Forms 941 and 940.
The employer, not the reporting agent, remains liable for assuring that all tax returns are filed timely and all deposits and payments are made timely. The reporting agent does not assume employment tax liability.
Section 3504 agent
Although this sounds similar to the Reporting Agent Authorization, a Section 3504 agent arrangement is quite different in scope. This authority is granted by filing Form 2678, Employer/Payer Appointment of Agent. A Section 3504 agent acts as the employer and assumes, along with the employer, liability for the employer's social security, Medicare, and federal income tax withholding responsibilities.
IRS can seek to collect any unpaid employment taxes from both the employer and the Section 3504 agent who was designated and authorized to pay such taxes. Generally, Section 3504 does not apply to FUTA tax, but there is a limited exception for certain household workers (Notice 2003-70).
The agent files aggregate returns (aggregating agent and employer information) using the agent's identification number rather than the employer's identification number. That is, the agent files returns under its own EIN which include the wage and tax information for the employees of the client as well as the agent's own employees.
The agent must use a Schedule R (Form 941) to allocate the aggregate information to itself and each client. The agent is responsible for the forms and taxes the employer specifically indicates on Form 2678.
The employer uses Form 2678 to request approval from IRS to appoint the agent or to revoke an existing appointment. The agent also signs the form to indicate willingness to accept the appointment. The form must be submitted by mail. The appointment is not effective until IRS sends a letter to the agent indicating approval of the request.
Until the request is approved by IRS, the agent is not responsible for filing any tax returns or making any deposits or payments.
This sort of agent arrangement is commonly used for employers who are receiving home-care services through a state or local program.
Relevant IRS guidance can be found in Revenue Procedure 70-6 for employment taxes unless the agent is a subagent for a state agent under Notice 2003-70.
This article was originally published in IOMA's monthly newsletter, 'Payroll Practitioner's Monthly'.