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Third-party payroll companies, part 2: regulation lacking

In the first part of this post, we began discussing the subject of companies that provide payroll services for small businesses.

When a third-party company fails to make required tax payments, it can cause serious financial pain to affected businesses.

In this part of the post, let's look in more detail at the law enforcement response (or lack of response) to concerns about third-party providers of payroll services.

As we noted in our February 12 post, the government regulatory structure for payroll-service providers is rather week. In most states, such companies are not required to be bonded in order to do business.

Is it possible, however, that criminal charges can be effective at addressing losses suffered by businesses when third-party providers misappropriate funds?

Unfortunately, in the LA Payroll case - where the third-party company's owner apparently absconded with about $4 million in funds - there appears to be little chance of an immediate recovery.

Many clients of LA Payroll did file complaints with law enforcement agencies. Complaints were filed at the federal level with the IRS and the FBI. At the local level, there were complaints to the Los Angeles Police Department.

At least one business owner expressed frustration with the lack of law enforcement response, given the millions of dollars that were taken.

Arguably, however, the lack of regulatory safeguards is at least as much of a concern as low priority given by the justice system to investigating the LA Payroll case. The absence of a bonding requirement, in particular, leaves clients of payroll-services companies exposed to losses that they don't really expect to face.

Of course, it isn't only misconduct or outright criminal activity by payroll-services companies that can leave their business clients in the lurch. If payroll-services companies encounter financial problems, that too can leave small-business clients responsible for payroll tax payments they thought were covered.

Source: Los Angeles Times, "A payroll company leaves its clients in the lurch," Kim Christensen, Feb. 10, 2014

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