[Federal Register Volume 81, Number 88 (Friday, May 6, 2016)]
[Rules and Regulations]
[Pages 27315-27328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10700]



[[Page 27315]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 301 and 602

[TD 9768]
RIN 1545-BN20


Certified Professional Employer Organizations; Final and 
Temporary Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to certified professional employer organizations (CPEOs). The 
Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 
requires the IRS to establish a voluntary certification program for 
professional employer organizations. These final and temporary 
regulations contain the requirements a person must satisfy in order to 
become and remain a CPEO. The final and temporary regulations will 
affect persons that apply to be CPEOs and are certified by the IRS as 
meeting the applicable requirements. The text of these final and 
temporary regulations also serves, in part, as the text of the proposed 
regulations (REG-127561-15) set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: Effective Date: These final and temporary regulations are 
effective on May 6, 2016.
    Applicability Date: For date of applicability, see Sec.  301.7705-
2T(o).

FOR FURTHER INFORMATION CONTACT: Melissa L. Duce at (202) 317-6798 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collections of information contained in these regulations have 
been reviewed and, pending receipt and evaluation of public comments, 
approved by the Office of Management and Budget under control number 
1545-2266.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning this collection of information, 
where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referenced notice of 
proposed rulemaking on this subject in the Proposed Rules section in 
this issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

Overview

    The Stephen Beck, Jr., Achieving a Better Life Experience (ABLE) 
Act of 2014, enacted on December 19, 2014, as part of The Tax Increase 
Prevention Act of 2014 (Pub. L. 113-295), added new sections 3511 and 
7705 to the Internal Revenue Code (Code) relating to the federal 
employment tax \1\ consequences and certification requirements, 
respectively, of a certified professional employer organization (CPEO). 
The ABLE Act requires the IRS to establish a voluntary program for 
persons to apply to become certified as a CPEO. This document contains 
temporary regulations under section 7705 that, together with a 
forthcoming revenue procedure that will be published in the Internal 
Revenue Bulletin, describe the application process and certification 
requirements necessary for a person to become and remain a CPEO.
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    \1\ For purposes of this preamble, ``federal employment taxes'' 
refers to taxes imposed under subtitle C of the Code.
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    The temporary regulations in this document apply on and after July 
1, 2016, the date the IRS will begin accepting applications for CPEO 
certification. These temporary regulations, along with the forthcoming 
revenue procedure and the application forms and instructions that the 
IRS plans to release before July 1, 2016, provide guidance to enable 
persons that wish to apply to become CPEOs to prepare and submit 
applications on and after July 1, 2016, and to enable the IRS to begin 
processing these applications and make determinations as to whether to 
approve or deny certification.
    Proposed regulations published elsewhere in this issue of the 
Federal Register provide general guidance regarding the federal 
employment tax consequences under section 3511 for persons certified as 
CPEOs and their customers, as well as certain definitions under section 
7705 that are necessary to implement section 3511. The proposed 
regulations also propose to adopt the temporary regulations in this 
document by cross-reference.
    The regulations have been divided, as described, into temporary 
regulations and proposed regulations in order to balance the interest 
in considering public comments on rules before they apply with the 
desire to provide guidance on application procedures that is effective 
early enough to open the application process and implement the 
statutory provisions.
    The forthcoming revenue procedure will prescribe the specifics of 
the application process for a person to become a CPEO. In the future, 
the IRS intends to release another revenue procedure that prescribes 
the ongoing requirements that CPEOs must meet to maintain certification 
and describes the consequences of the failure to meet the ongoing 
requirements.

Professional Employer Organizations

    A professional employer organization (PEO), sometimes referred to 
as an employee leasing company, enters into an agreement with a client 
to perform some or all of the federal employment tax withholding, 
reporting, and payment functions related to workers performing services 
for the client. The terms of a PEO arrangement typically provide that 
the PEO is the employer (or ``co-employer'') of the client's employees 
and is responsible for paying the employees and for the related federal 
employment tax compliance. A PEO also may manage human resources, 
employee benefits, workers compensation claims, and unemployment 
insurance claims for the client. The client typically pays the PEO a 
fee based on payroll costs plus an additional amount. In most cases, 
however, the employees working in the client's business are the common 
law employees of the client for federal tax purposes, and the client is 
therefore legally responsible for federal employment tax compliance.

The ABLE Act of 2014

    The ABLE Act requires the IRS to establish a voluntary 
certification program for persons to become CPEOs. Section 7705 
provides a framework for the IRS to establish such a program. Section 
7705(a) defines a CPEO as a person who applies to be treated as a CPEO 
for purposes of section 3511 and has been certified by the Secretary as 
meeting the requirements of section 7705(b). Being certified as a CPEO 
has certain federal employment tax consequences under section 3511 that 
are described in the proposed regulations under that section published

[[Page 27316]]

in the Proposed Rules section in this issue of the Federal Register.
    Section 7705(b) sets forth the certification requirements that a 
person must satisfy in order to become a CPEO. Under the statute, a 
person meets the requirements of section 7705(b) if: (1) The person 
(and any owner, officer, and other person as may be specified in 
regulations) demonstrates that it meets such requirements as the 
Secretary shall establish, including requirements relating to tax 
status, background, experience, business location, and annual financial 
audits; (2) agrees to satisfy certain bond and financial review 
requirements; (3) agrees to satisfy reporting requirements imposed by 
the Secretary; (4) computes its taxable income using an accrual method 
of accounting unless the Secretary approves another method; (5) agrees 
to verify on such periodic basis as the Secretary may prescribe that it 
continues to meet the certification requirements; and (6) agrees to 
notify the Secretary in writing (within such time as the Secretary may 
prescribe) of any change that materially affects the continuing 
accuracy of any agreement or information that was previously made or 
provided to the IRS in order to meet the certification requirements.
    Section 7705(c) prescribes bond and independent financial review 
requirements that a person must satisfy in order to become and remain a 
CPEO. To meet these requirements, section 7705(c)(2) provides that a 
CPEO must post a bond for the payment of federal employment taxes (in a 
form acceptable to the Secretary) that is in an amount at least equal 
to a specified amount. This specified amount is, for the period 
beginning on April 1 of any calendar year through March 31 of the 
following calendar year, the greater of five percent of the CPEO's 
liability under section 3511 in the preceding calendar year (but not 
more than $1,000,000) or $50,000.
    Under section 7705(c)(3)(A), a CPEO must, as of the most recent 
audit date, cause to be prepared and provided to the Secretary (in such 
manner as the Secretary may prescribe) an opinion of an independent 
certified public accountant (CPA) as to whether the CPEO's financial 
statements are presented fairly in accordance with generally accepted 
accounting principles (GAAP). Section 7705(c)(6) states that the audit 
date for these purposes is six months after the completion of the 
CPEO's fiscal year.
    Section 7705(c)(3)(B) requires a CPEO to provide to the Secretary, 
by the last day of the second month beginning after the end of each 
calendar quarter, an assertion that the CPEO has withheld and made 
deposits of all federal employment taxes (other than Federal 
Unemployment Tax Act (FUTA) taxes under chapter 23 of the Code) and an 
examination level attestation from an independent CPA that states this 
assertion is fairly stated in all material respects.
    Section 7705(d) gives the Secretary the authority to suspend or 
revoke the certification of any person for purposes of section 3511 if 
the Secretary determines that such person is not satisfying the 
agreements or requirements of sections 7705(b) or (c), or fails to 
satisfy applicable accounting, reporting, payment, or deposit 
requirements. Section 7705(f) provides that the Secretary shall make 
available to the public the name and address of each person certified 
as a CPEO and each person whose certification is suspended or revoked.

November 2015 IRS Request for Information on PEO Industry Practices

    In an effort to streamline the implementation of a new federal CPEO 
program and better understand the potential impact of such a program on 
the PEO industry, on November 17, 2015, the IRS requested information 
from the public regarding certain PEO industry practices. See IRS News 
Release IR-2015-127. In particular, the IRS requested information on 
current PEO industry practices relating to financial audits, 
verification of payroll tax obligations, working capital and net worth 
requirements, and covered employees. In response to the IRS request for 
information, the IRS received comments from seven taxpayers, which were 
considered in developing the temporary regulations.

Explanation of Provisions

1. Applicable Definitions

    The temporary regulations define a CPEO as a person that applies to 
be certified as a CPEO in accordance with the temporary regulations and 
has been certified by the IRS as meeting the requirements under those 
regulations. Consistent with section 7705(b), most of the requirements 
in these temporary regulations apply both to persons that have been 
certified as CPEOs and to any person that has applied to be certified 
and whose application for certification is pending with the IRS 
(referred to in the temporary regulations as ``CPEO applicants'').
    Section 7705(b)(1) provides that the Secretary may establish 
requirements for certification that apply not only to the CPEO 
applicant or CPEO, but also to ``any owner, officer, and other persons 
as may be specified in regulations.'' Accordingly, the temporary 
regulations contain a number of requirements that apply to certain 
owners, officers, and other individuals (referred to in the regulations 
as ``responsible individuals''), as well as certain persons that are 
related to the CPEO (referred to as ``related entities'' and 
``precursor entities''). The remainder of this section 1 of the 
preamble explains the definitions of these categories of persons.
a. Responsible Individual
    The temporary regulations generally define a responsible individual 
as an individual in any of the following categories with respect to the 
CPEO applicant or CPEO: (1) Certain owners; (2) directors and officers; 
(3) individuals with ultimate responsibility for implementing the 
decisions of the organization's governing body; (4) individuals with 
ultimate responsibility for the organization's management and 
operations; (5) individuals with ultimate responsibility for managing 
the organization's finances; (6) managing members or general partners; 
(7) the sole proprietor of a sole proprietorship; and (8) any other 
individuals with primary responsibility for federal employment tax 
compliance of the organization.
    With respect to determining whether an individual is a responsible 
individual by reason of ownership, the temporary regulations specify 
that, in the case of a CPEO applicant or CPEO that is a corporation, a 
responsible individual includes any individual who owns 33 percent or 
more of the total combined voting power of all classes of stock of the 
corporation entitled to vote or the total value of shares of all 
classes of stock of the corporation. In the case of a CPEO applicant or 
CPEO that is a partnership (defined in the temporary regulations as a 
business entity that is classified as a partnership for federal tax 
purposes under Sec. Sec.  301.7701-1, 301.7701-2, and 301.7701-3), a 
responsible individual includes any individual who owns 33 percent or 
more of the profits interest or capital interest in the partnership. In 
both cases, ownership may be direct or indirect and is determined by 
applying the constructive ownership rules of section 1563(e) with 
respect to stock ownership and by substituting the term ``interest'' 
for the term ``stock'' and the term ``partnership'' for the term 
``corporation'' used in that section, as appropriate for purposes of 
determining whether an interest in a partnership is indirectly owned by 
any person. The Department of the Treasury (Treasury Department) and 
the IRS request

[[Page 27317]]

comments regarding the administrability of applying the definition of 
responsible individual with respect to ownership of profits interests 
in a partnership, the value of which may fluctuate over time.
    With respect to directors and officers of the CPEO applicant or 
CPEO, the temporary regulations provide that a director is any voting 
member of the governing body (such as the board of directors). An 
officer is determined by reference to the organization's organizing 
document, bylaws, or resolutions, or is otherwise designated consistent 
with state law (and often includes an organization's president, vice-
president, treasurer, and secretary).
    The temporary regulations also provide that a responsible 
individual includes any individual who, regardless of title, has 
ultimate responsibility for: (1) implementing the decisions of the 
organization's governing body (typically, the chief executive officer 
(CEO), executive director, or president); (2) supervising the 
management, administration, or operation of the organization 
(typically, the chief operating officer (COO)); or (3) managing the 
organization's finances (typically, the chief financial officer (CFO) 
or treasurer). Any individual who serves with the titles of executive 
director, president, CEO, COO, CFO, or treasurer will be considered to 
have the ultimate responsibilities that are consistent with that title. 
The temporary regulations also provide that an individual with this 
ultimate responsibility may include an individual who is not treated as 
an employee of the CPEO applicant or CPEO.
b. Related Entity
    The temporary regulations define a related entity of a CPEO 
applicant or CPEO as including any person that is a member of a 
controlled group (within the meaning of sections 414(b) and (c) and the 
regulations thereunder, with two adjustments) of which the CPEO is also 
a member. Section 414(b) incorporates by reference the controlled group 
definitions in section 1563. Likewise, the regulations prescribed under 
section 414(c)--Sec. Sec.  1.414(c)-2 and 1.414(c)-3--rely on 
principles that are substantially similar to the controlled group 
definitions in section 1563. However, with respect to persons that are 
not providers of employment-related services, the temporary regulations 
substitute ``more than 50 percent'' for ``at least 80 percent'' in each 
place the term appears in section 1563(a) and Sec.  1.414(c)-2. For 
persons that are providers of employment-related services, the 
temporary regulations substitute ``more than 5 percent'' for ``at least 
80 percent'' in each place the term appears in section 1563(a) and 
Sec.  1.414(c)-2. The temporary regulations define a provider of 
employment-related services as a person that provides payroll or other 
employment tax administration and compliance services to clients, 
including, but not limited to, collecting, reporting, and paying 
employment taxes with respect to wages or compensation paid by the 
provider of employment-related services to individuals performing 
services for the clients. A provider of employment-related services 
includes, but is not limited to, a PEO and a CPEO.
    A related entity of a CPEO applicant or CPEO also includes any 
provider of employment-related services if a majority of the directors 
or a majority of the officers of the CPEO applicant or CPEO are also 
directors or officers, respectively, of the provider of employment-
related services. Finally, a related entity includes any provider of 
employment-related services with an owner who is a responsible 
individual of both the provider of employment-related services and the 
CPEO applicant or CPEO by virtue of the individual's ownership 
percentage.
c. Precursor Entity
    The temporary regulations generally define a precursor entity as 
including any related entity of a CPEO applicant that is or was a 
provider of employment-related services and has ceased operations, 
dissolved, or made a substantial asset transfer to the CPEO applicant 
during the calendar year that the CPEO applicant applies for 
certification or any of the three preceding calendar years. A precursor 
entity also includes a related provider of employment-related services 
that plans to make a substantial asset transfer to the CPEO applicant 
while the application for certification is pending or in the 12-month 
period following the date of the CPEO applicant's application.
    For this purpose, the temporary regulations define a substantial 
asset transfer as any transfer of 35 percent or more of the value of 
the transferor's operating assets, whether through one or a series of 
transactions and whether accomplished through sale, lease, gift, 
assignment, succession, merger, consolidation, corporate separation, or 
any other means. The temporary regulations further provide that 
operating assets include both tangible and intangible resources related 
to the conduct of the transferor's trade or business, including but not 
limited to such intangible assets as contracts, agreements, 
receivables, employees, and goodwill (which includes the value of a 
trade or business based on expected continued customer patronage due to 
its name, reputation, or any other factors). In the case of a contract 
described in section 7705(e)(2) or service agreement described in Sec.  
31.3504-2(b)(2) \2\ with a provider of employment-related services, 
even if the contract or agreement is not sold, gifted, assigned, or 
otherwise formally transferred to a CPEO applicant, it will be 
considered transferred from a person to the CPEO applicant if the 
person entered into the contract or agreement but the CPEO applicant 
reports, withholds, or pays, under its employer identification number 
(EIN), any applicable federal employment taxes with respect to the 
wages of any individuals covered by the contract or agreement.
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    \2\ A service agreement described in Sec.  31.3504-2(b)(2) is a 
written or oral agreement pursuant to which the payor: (1) Asserts 
it is the employer (or ``co-employer'') of individuals performing 
services for the client; (2) pays wages or compensation to the 
individuals for services the individuals perform for the client; and 
(3) assumes responsibility to collect, report, and pay, or assumes 
liability for, any employment taxes with respect to the wages or 
compensation paid by the payor to the individuals performing 
services for the client.
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    Finally, the temporary regulations contain a rule for purposes of 
determining whether a provider of employment-related services that has 
ceased operations, dissolved, or made a substantial asset transfer to a 
CPEO applicant is a related entity of the CPEO applicant. Specifically, 
the provider of employment-related services is a related entity of a 
CPEO applicant if it would be or would have been a related entity of 
the CPEO applicant as described in section 1.b of the preamble at the 
time of the provider's ceasing of operations, dissolution, or 
substantial asset transfer, as applicable. This determination is based 
on the provider's ownership and responsible individuals at the time of 
its ceasing of operations, dissolution, or substantial asset transfer, 
as applicable, and the ownership and responsible individuals of the 
CPEO applicant at the time of its application.

2. Application Process and Effective Date of Certification

    The temporary regulations provide that in order to be certified, a 
CPEO applicant must submit a properly completed and executed 
application to the IRS. In addition, the CPEO applicant's responsible 
individuals must also submit the information required by the 
regulations and in further guidance.

[[Page 27318]]

    The IRS will notify the CPEO applicant as to whether its 
application for certification has been approved or denied and the 
effective date of its certification. If the IRS denies the application, 
the IRS will inform the CPEO applicant of the reason(s) for denial. The 
temporary regulations also state that if the IRS approves a CPEO 
applicant's application for certification, the IRS will make available 
to the public the name and address of the CPEO, as well as the 
effective date of its certification.

3. Requirements for Certification

    Section 7705(b)(1) provides that, to become and remain certified as 
a CPEO,\3\ a person, as well as any owner, officer, or other person 
specified in regulations (which, in the temporary regulations, is any 
responsible individual, related entity, or precursor entity), must meet 
such requirements as the Secretary shall establish in order for the 
person to be certified, including requirements with respect to tax 
status, background, experience, business location, and annual financial 
audits. The temporary regulations elaborate upon the requirements that 
a CPEO applicant and CPEO must meet in each of these categories to 
become and remain certified.
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    \3\ Section 7705(a)(1) provides that a person must be certified 
by the Secretary as meeting the requirements of section 7705(b) to 
become certified as a CPEO, and section 7705(b)(5) provides that the 
person must agree to verify that it continues to meet the 
requirements of section 7705(b) on such periodic basis as the 
Secretary may prescribe. In addition, section 7705(d) provides that 
the Secretary may suspend or revoke a certification of any person if 
the Secretary determines that such person is not satisfying the 
agreements or requirements of section 7705(b) (including the CPEO's 
agreement to verify that it continues to meet the requirements of 
section 7705(b) that it makes pursuant to section 7705(b)(5)).
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    The temporary regulations provide that the IRS may deny a CPEO 
applicant's application for certification or revoke or suspend a CPEO's 
certification if a CPEO applicant or CPEO, or any of the precursor 
entities, related entities, or responsible individuals of the CPEO 
applicant or CPEO, fails to meet any applicable requirement described 
in the regulations or other applicable guidance. The temporary 
regulations also provide that the IRS will deny a CPEO applicant's 
application for certification or revoke or suspend a CPEO's 
certification if the IRS determines, in its sole discretion, that such 
failure presents a material risk to the IRS's collection of federal 
employment taxes. In determining whether one or more failures to meet 
the requirements described in the regulations presents a material risk 
to the IRS's collection of federal employment taxes, the IRS will 
generally consider all relevant facts and circumstances, including the 
size, scope, nature, significance, recurrence, and timing of and reason 
for the failure(s), and, in the case of a CPEO, any prior failures of 
the CPEO to meet the requirements of this section.
a. Suitability
    The Treasury Department and the IRS view tax compliance of the CPEO 
applicant or CPEO, and of its responsible individuals, related 
entities, and precursor entities, as an important factor in determining 
whether the CPEO applicant's or the CPEO's certification presents a 
material risk to the IRS's collection of federal employment taxes. 
Therefore, the temporary regulations provide that the IRS may deny an 
application for certification, or suspend or revoke a CPEO's 
certification, if the CPEO applicant or CPEO, or any of its precursor 
entities, related entities, or responsible individuals, has failed to 
pay any applicable federal, state, or local taxes or file any required 
federal, state, or local tax or information returns in a timely and 
accurate manner, unless the failure to file or failure to pay is 
determined to be due to reasonable cause and not to willful neglect. In 
addition, the temporary regulations provide that a CPEO must be a 
business entity described in Sec.  301.7701-2(a) except that it may not 
be a disregarded entity for federal tax purposes under Sec. Sec.  
301.7701-2 and 301.7701-3 (without regard to the special rule in Sec.  
301.7701-2(c)(2)(iv) that provides that such entities are corporations 
for federal employment tax purposes). Under Sec.  301.7701-2(a), a 
business entity is any entity recognized for federal tax purposes that 
is not properly classified as a trust under Sec.  301.7701-4 or 
otherwise subject to special treatment under the Code.
    The Treasury Department and the IRS consider the criminal 
background of a CPEO applicant or CPEO and its responsible individuals 
to present a material risk to tax compliance and, therefore, the 
absence of such criminal background is another important requirement 
for certification. Consistent with section 7705(b)(1), which includes 
background as a category with respect to which the IRS may establish 
requirements for certification, the temporary regulations state that 
the IRS may deny an application for certification, or suspend or revoke 
a CPEO's certification, if the CPEO applicant or CPEO, or any of its 
precursor entities, related entities, or responsible individuals, has 
been charged or convicted of any criminal offense under the laws of the 
United States or of a state or political subdivision thereof, or is the 
subject of an active IRS criminal investigation. This is also 
consistent with suggestions made by the Joint Committee on Taxation, 
which noted that the regulations under section 7705(b)(1) could include 
requirements for favorable criminal background checks. See Staff of the 
Joint Committee on Taxation (JCS), General Explanation of Tax 
Legislation Enacted in the 113th Congress, JCS-1-15, at 233 (March 
2015) (General Explanation). Additionally, the IRS may consider whether 
the CPEO applicant or CPEO, or any precursor entities, related 
entities, or responsible individuals of the CPEO applicant or CPEO, is 
listed on any sanctions list compiled by the Office of Foreign Assets 
Control (OFAC) within the Department of Treasury, including but not 
limited to the OFAC Consolidated Sanctions List and the OFAC Specially 
Designated Nationals (SDN) List.
    The temporary regulations further state, consistent with section 
7705(b)(1), that the IRS may deny a CPEO applicant's application for 
certification, or suspend or revoke a CPEO's certification, if the CPEO 
applicant or CPEO, or any of its precursor entities, related entities, 
or responsible individuals, has been sanctioned or had a license, 
registration, or accreditation (including a license, registration, or 
accreditation relating to its status or ability to operate as a PEO) 
denied, suspended, or revoked by a court of competent jurisdiction, 
licensing board, assurance or other professional organization, or 
federal or state agency, court, body, board, or other authority for any 
misconduct that bears upon the suitability of the CPEO applicant or 
CPEO to perform its professional functions. Such misconduct may relate 
to dishonesty, fraud, or breach of trust and would include any criminal 
or civil penalties for violating any state laws prohibiting the 
transfer or acquisition of a business solely or primarily for the 
purpose of obtaining a lower unemployment tax rate or avoiding a higher 
unemployment tax rate.
    In addition, the temporary regulations provide that the IRS may 
deny a CPEO applicant's application for certification, or revoke or 
suspend a CPEO's certification, if the CPEO applicant or CPEO, or any 
of its precursor entities, related entities, or responsible 
individuals, fails to demonstrate a history of financial 
responsibility, which the IRS may assess through

[[Page 27319]]

checks on credit history and other similar indicators.
    With respect to the requirements relating to experience referred to 
in section 7705(b)(1), the Treasury Department and the IRS consider it 
important that a CPEO applicant or CPEO be managed by individuals with 
knowledge or experience regarding federal and state employment tax 
compliance and business practices relating to those compliance 
requirements. This is consistent with the suggestions made by the Joint 
Committee on Taxation. See General Explanation at 233. The temporary 
regulations provide that the IRS may deny a CPEO applicant's 
application for certification or revoke or suspend a CPEO's 
certification if the CPEO applicant or CPEO and its responsible 
individuals fail to demonstrate adequate collective knowledge or 
experience with respect to federal or state employment tax reporting, 
depositing, and withholding requirements; handling and accounting of 
payroll, tax payments, and other funds on behalf of others; effective 
recordkeeping systems; retention of qualified personnel and legal 
advisors; and general business and risk management.
    The temporary regulations provide that the IRS may deny a CPEO 
applicant's application for certification, or revoke or suspend a 
CPEO's certification, if the CPEO applicant or CPEO, or any of its 
responsible individuals, gives false or misleading information 
(including by intentionally omitting relevant information) or 
participates in any way in the giving of false or misleading 
information, to the IRS, knowing, or having reason to know, the 
information to be false or misleading. For these purposes, the term 
``information'' includes: facts or other matters contained in 
testimony, federal tax returns, and financial statements and opinions 
regarding such statements; applications for certification (and all 
accompanying documentation); affidavits, declarations, assertions, 
attestations, statements, and agreements; periodic verifications that 
the requirements of this section continue to be met; and any other 
information that is required to be provided by these temporary 
regulations, section 3511 and the regulations thereunder, or further 
guidance.
    In order to confirm the accuracy of information provided to the IRS 
with respect to these requirements, the temporary regulations require 
the CPEO applicant or CPEO, and each of its responsible individuals, to 
take such actions as are necessary to authorize the IRS to investigate 
the accuracy of statements and submissions made by the CPEO applicant 
or CPEO, including waiving confidentiality and privilege when 
necessary, and to conduct comprehensive background checks, including, 
but not limited to, checks on tax compliance, criminal background, 
professional experience (including through the contact of third-party 
references), credit history, and professional sanctions. In addition, 
each responsible individual of a CPEO applicant or CPEO must submit 
fingerprints in the time and manner and under the circumstances 
prescribed by the Commissioner in further guidance. The IRS is 
considering whether to expand the category of individuals who must 
authorize the IRS to conduct comprehensive background checks and submit 
fingerprint cards to include certain directors, officers, and owners of 
a CPEO applicant's or CPEO's related entities. Treasury and the IRS 
request comments regarding such possible expansion, including how any 
such expansion could be as administrable as possible. To submit 
comments, please follow the instructions in the ``Comments and Requests 
for Public Hearing'' section in the notice of proposed rulemaking on 
this subject in the Proposed Rules section of this issue of the Federal 
Register.
b. Business Location
    Section 7705(b)(1) specifically lists business location as one of 
the categories of certification requirements that the Secretary may 
establish. The temporary regulations require a CPEO applicant or CPEO 
to have one or more established physical business locations in the 
United States at which regular operations that constitute a trade or 
business within the United States (within the meaning of section 
864(b)) take place and at which a significant portion of its CPEO-
related functions are carried on and the administrative records 
relating to those functions are kept.\4\ The temporary regulations also 
require the CPEO applicant or CPEO to be created or organized in the 
United States or under the law of the United States or of any state. 
The temporary regulations further require that a majority of the CPEO 
applicant's or CPEO's responsible individuals be citizens or residents 
of the United States. Finally, a CPEO applicant or CPEO must use only 
financial institutions described in section 265(b)(5) to hold its cash 
and cash equivalents, receive payments from customers, and pay wages 
and federal employment taxes. Under section 265(b)(5), a financial 
institution is, among other requirements, a person who is subject to 
federal or state supervision as a financial institution or a bank or 
trust company that is subject to supervision and examination by state 
or federal authority having supervision over banking institutions.
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    \4\ This requirement is consistent with the General Explanation, 
which provides that ``the existence of an established business 
location within the United States at which significant operations 
regularly take place'' is a business location requirement that the 
Secretary could impose. General Explanation, at 234.
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c. Financial Statements
    In addition to the specific requirements with respect to financial 
statements in section 7705(c), section 7705(b)(1) provides that the 
Secretary may establish requirements with respect to annual financial 
audits. Pursuant to these provisions, the temporary regulations require 
a CPEO applicant to provide to the IRS, with its application, a copy of 
its annual audited financial statements for the most recently completed 
fiscal year as of the date it applies for certification. If a CPEO 
applicant applies for certification before the last day of the sixth 
month following its most recently completed fiscal year, and the audit 
of the financial statements for this fiscal year has not yet been 
completed at the time of application, a CPEO applicant must also 
provide to the IRS a copy of its audited financial statements for the 
immediately preceding fiscal year, if any. The temporary regulations 
provide that the CPEO applicant must subsequently provide to the IRS 
the financial statements for the most recently completed fiscal year by 
the last day of the sixth month after such fiscal year ends. In 
addition, for any fiscal year that ends after the CPEO applicant 
applies for certification and on or before the effective date of 
certification, if applicable, the CPEO applicant must provide the 
audited financial statements by the last day of the sixth month after 
such fiscal year ends. The obligation to provide the audited financial 
statements described in the preceding sentence continues to apply after 
the CPEO applicant is certified as a CPEO. Once certified, pursuant to 
section 7705(b)(1), a CPEO is required by the temporary regulations to 
provide a copy of its annual audited financial statements to the IRS 
within six months of the end of each fiscal year (beginning with the 
first fiscal year that ends after the CPEO's effective date of 
certification). For these purposes, a CPEO applicant's or CPEO's fiscal 
year will be considered completed once the last day of that fiscal year 
has ended, even if the CPEO was not operating or certified for the full 
fiscal

[[Page 27320]]

year or the fiscal year was a short year consisting of fewer than 12 
months.
    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.
    The temporary regulations provide special rules for newly 
established CPEO applicants. A CPEO applicant that was not operating as 
a provider of employment-related services for all or part of the most 
recently completed fiscal year as of the date it applies for 
certification must also provide a copy of the audited financial 
statements of any precursor entity for the precursor entity's most 
recently completed fiscal year as of the date of the application for 
certification, as well as a CPA opinion that these financial statements 
demonstrate positive working capital and are presented fairly in 
accordance with GAAP. The financial statements and CPA opinion for a 
precursor entity must be provided in such time and manner as the 
Commissioner may prescribe in further guidance.
    In accordance with section 7705(c)(3)(A), the temporary regulations 
require the opinion regarding a CPEO's financial statements to be 
provided by a CPA who is independent of the CPEO. For this purpose, the 
temporary regulations require a CPA to be independent as prescribed by 
the American Institute of Certified Public Accountants' Professional 
Standards, Code of Professional Conduct, and its interpretations and 
rulings. The Treasury Department and the IRS request comments regarding 
whether the CPA independence guidelines or requirements of other 
governmental agencies or departments or industry self-regulatory 
bodies, as adapted for a CPA of a CPEO, would better ensure the 
impartiality of CPAs providing opinions on CPEO's financial statements, 
such as: (1) The Department of Labor's guidelines on the independence 
of CPAs retained by employee benefit plans under 29 CFR 2509.75-9; (2) 
the Securities and Exchange Commission's (SEC) independence guidelines 
for auditors reporting on financial statements included in SEC filings; 
and (3) the Government Accountability Office's auditor independence 
requirements under Government Auditing Standards that cover federal 
entities and organizations receiving federal funds.
    As previously noted, section 7705(b)(5) requires a CPEO to verify 
on a periodic basis that it meets certification requirements. In 
accordance with this requirement and pursuant to the Secretary's 
general authority under section 7705(b)(1) to establish requirements 
for CPEOs to become and remain certified, the temporary regulations 
further require a responsible individual of the CPEO applicant or the 
CPEO to provide, by the last day of the second month after the end of 
each calendar quarter and beginning with the most recently completed 
quarter as of the date of the application for certification, a 
statement verifying under penalties of perjury that the CPEO applicant 
or the CPEO has positive working capital with respect to the most 
recently completed fiscal quarter. However, as with the requirement 
that annual financial statements reflect positive working capital, the 
temporary regulations also contain an exception to this requirement. 
The exception applies only if the CPEO does not have negative working 
capital at the end of the two fiscal quarters immediately preceding the 
fiscal quarter to which the statement relates. As with the exception 
provided with respect to annual financial statements that reflect 
negative working capital, the CPEO must also 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, and 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.
d. Quarterly Assertion and Attestation
    Section 7705(c)(3)(B) requires a CPEO to provide to the Secretary 
an assertion and examination level attestation regarding its compliance 
with federal employment tax withholding and depositing requirements. In 
accordance with this provision, the temporary regulations state that a 
CPEO must provide, on a quarterly basis and beginning with the first 
calendar quarter that ends after the CPEO's effective date of 
certification, an assertion signed by a responsible individual under 
penalties of perjury stating that the CPEO has withheld and made 
deposits of all federal employment taxes (other than taxes imposed by 
chapter 23 of the Code) as required for the quarter.\5\ In addition, 
the CPEO must provide an examination level attestation from a CPA 
stating that this assertion is fairly stated. The assertion and 
attestation must be provided by the last day of the second month after 
the end of each calendar quarter. These quarterly assertion and 
attestation requirements also apply to a CPEO applicant, who must 
provide the required assertion and attestation for the most recently 
completed calendar quarter as of the date of its application for 
certification and each subsequent calendar quarter while its 
application is pending. A CPEO applicant that was not operating as a 
provider of employment-related services during the most recently

[[Page 27321]]

completed calendar quarter as of the date of its application for 
certification or during any quarter that ends while its application for 
certification is pending must provide an assertion and attestation for 
any precursor entity in such time and manner as the Commissioner may 
prescribe in further guidance.
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    \5\ Although the temporary regulations (and section 
7705(c)(3)(B)) do not require the assertion to include a statement 
with respect to taxes imposed by chapter 23 of Code, the IRS expects 
to evaluate compliance with deposit requirements with respect to 
taxes imposed by chapter 23 through tax compliance checks.
---------------------------------------------------------------------------

    The temporary regulations provide that a CPEO applicant or CPEO 
will not fail to meet the quarterly assertion and attestation 
requirements if the CPA examination level attestation indicates that 
the CPEO applicant or CPEO has failed to withhold or make deposits in 
certain immaterial respects, provided that the attestation includes a 
summary of the immaterial failures that were found and states that the 
failures were immaterial and isolated and do not reflect a meaningful 
lapse in compliance with federal employment tax withholding and deposit 
requirements. Furthermore, in order for this exception for immaterial 
failures to apply, the IRS must determine, in its sole discretion, that 
the isolated and immaterial failures identified by the CPA do not 
present a material risk to the IRS's collection of federal employment 
taxes.
e. Bond Requirements
    Section 7705(c)(2) sets forth the bond requirements that a person 
must satisfy in order to become and remain a CPEO. The provisions of 
section 7101 and its accompanying regulations apply to bonds required 
by section 7705(c)(2), except to the extent modified in the temporary 
regulations. The temporary regulations provide that a CPEO must post a 
bond for the payment of federal employment taxes in a specified amount. 
This specified amount is, for each period beginning on April 1 of any 
calendar year (or, in the case of a newly certified CPEO, on the 
effective date of certification) and ending on March 31 of the 
following calendar year (the bond period), an amount that is at least 
equal to the greater of: (1) Five percent of the CPEO's liability under 
section 3511 (or, if applicable, the liability as determined for newly 
certified CPEOs, discussed in section 3.e.i of this preamble) during 
the calendar year preceding the bond period, but not more than 
$1,000,000; or (2) $50,000. The proposed regulations require the bond 
to be issued by a surety company that holds a certificate of authority 
from the Secretary as an acceptable surety on federal bonds and meets 
such other requirements as the Commissioner may prescribe in further 
guidance.
    One benefit of the bond requirement in section 7705(c) is that the 
CPEO must submit to the bonding surety's financial underwriting process 
to obtain the bond, which provides the IRS with a certain level of 
assurance concerning the financial condition of the CPEO. The Treasury 
Department and the IRS believe that this benefit is substantially 
diminished if the CPEO obtains the bond by posting collateral in the 
amount of the bond. For this reason, the temporary regulations provide 
that the CPEO must meet the bond requirements without posting 
collateral.
i. Calculating Five Percent of Liability Under Section 3511
    In calculating five percent of its liability under section 3511 
(or, if applicable, the liability described in the subsequent 
paragraph) during the preceding calendar year, the temporary 
regulations require that a CPEO base its calculation on the amount of 
applicable federal employment taxes \6\ it reported and paid in the 
preceding calendar year. However, if the CPEO or the IRS subsequently 
determines that the applicable federal employment tax liability for the 
preceding calendar year was higher than the amount reported and paid 
(and makes an adjustment or assessment, respectively, reflecting that 
determination), and if the bond that the CPEO had posted was less than 
$1,000,000, the CPEO must post a strengthening bond that, together with 
the initially-posted bond, equals a total amount that reflects the 
adjusted applicable federal employment tax liability up to $1,000,000. 
Alternatively, the CPEO could post a superseding bond in such an 
adjusted amount.
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    \6\ As noted in the Background section of this preamble, the 
term ``federal employment taxes'' includes all taxes imposed under 
Subtitle C of the Code, including income tax withholding and FICA, 
RRTA, and FUTA taxes. As such, the liability described in this 
paragraph is based on an amount that includes both the employee and 
employer shares of FICA and RRTA, as well as income tax withholding 
and FUTA.
---------------------------------------------------------------------------

    A newly certified CPEO will not have any liability under section 
3511 for the calendar year preceding its certification on which to base 
its calculation of the required bond amount. In such cases, the 
temporary regulations provide that, in calculating the bond amount, the 
liability used for the preceding calendar year (or portion thereof) \7\ 
when the CPEO was not certified is the federal employment tax liability 
of the CPEO \8\ and of any precursor entity of the CPEO that made a 
substantial asset transfer to the CPEO, that results from one or more 
service agreements described in Sec.  31.3504-2(b)(2). In determining 
the federal employment tax liability of a precursor entity of a CPEO 
for a preceding year, only liability amounts that resulted from service 
agreements that were transferred or are intended to be transferred to 
the CPEO (at the time that the amount of the bond is determined) are 
included. If no such precursor entity exists and the CPEO otherwise had 
no federal employment tax liability during the preceding calendar year, 
the amount of the bond will be $50,000.
---------------------------------------------------------------------------

    \7\ Unless the CPEO is certified effective January 1, the CPEO 
will not have liability under section 3511 for the portion of the 
calendar year in which it was certified that preceded its 
certification.
    \8\ For purposes of this paragraph, the term ``CPEO'' is 
intended to include the CPEO before it applied for certification and 
while its application for certification was pending.
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ii. Cancellation
    The temporary regulations provide that the bond posted by a CPEO 
must provide that it may be cancelled by the surety only after the 
surety gives written notice to the IRS and the CPEO. (See Form 14751, 
``Certified Professional Employer Organization Surety Bond,'' for 
details on the time and manner in which such written notice must be 
provided.) The bond must also provide that, if the surety cancels the 
bond without issuing a superseding bond to the CPEO, the surety will 
remain liable for all federal employment tax liability accrued by the 
CPEO during the period beginning with the effective date of the first 
bond issued by the surety to the CPEO in any consecutive series of 
bonds issued by that surety prior to cancellation and ending with the 
cancellation (the total bond period), up to the penal amount of the 
bond at the time of cancellation. The temporary regulations provide 
that a cancelling surety will remain liable for federal employment tax 
liability accrued during the total bond period up to the penal amount 
of the bond for as long as the Commissioner may assess and collect 
taxes for such period under sections 6501 and 6502.

4. Controlled Groups

    The temporary regulations provide that CPEO applicants and CPEOs 
that are members of a controlled group, within the meaning of sections 
414(b) and (c), will be treated as a single CPEO applicant or CPEO for 
purposes of the financial statement, quarterly assertion and 
attestation, and bond requirements described in this preamble, except 
that the annual and quarterly requirements imposed under the scope of 
sections 7705(b)(1) and 7705(b)(5) with respect to positive working 
capital apply to each CPEO applicant or CPEO on a separate basis.

[[Page 27322]]

5. Consents To Disclose

    In order to receive and maintain certification, the temporary 
regulations state that a CPEO applicant or CPEO must provide such 
consents for the IRS to disclose confidential tax information to its 
customers, and to other persons as necessary to carry out the purposes 
of these regulations, that relates to its certification and obligations 
to report, deposit, and pay federal employment taxes as the 
Commissioner may require in further guidance.

6. Periodic Verification and Notification of Material Changes

    Consistent with section 7705(b)(5), the temporary regulations 
require a CPEO to verify periodically that it continues to meet the 
certification requirements in such time and manner as the Commissioner 
may prescribe in further guidance. Consistent with section 7705(b)(6), 
the temporary regulations provide that a CPEO applicant or CPEO must 
notify the IRS, in the time and manner prescribed by the Commissioner 
in further guidance, of any change that materially affects the 
continuing accuracy of any agreement or information that was previously 
made or provided to the IRS. The Treasury Department and the IRS expect 
to provide further details regarding these requirements in a future 
revenue procedure that will prescribe the ongoing requirements that 
CPEOs must meet to maintain certification.

7. Accrual Method of Accounting

    Consistent with section 7705(b)(4), the temporary regulations 
require a CPEO to compute its taxable income using an accrual method of 
accounting or, if applicable, another method that the Commissioner 
prescribes in further guidance.

8. Compliance With Reporting Obligations

    The temporary regulations provide that a CPEO must make reports to 
the IRS and to its clients as provided in section 3511(g) and 
regulations issued thereunder. This includes the filing of all federal 
employment tax and information returns. The temporary regulations also 
require a CPEO to file all returns, schedules, reports, and other forms 
and documents on magnetic media when required to do so by section 
3511(g) and regulations issued thereunder, or by other Treasury 
regulations. With respect specifically to the requirement that CPEOs 
file Form 940, ``Employer's Annual Federal Unemployment (FUTA) Tax 
Return,'' and Form 941, ``Employer's QUARTERLY Federal Tax Return,'' on 
magnetic media, compliance with this requirement is a condition of 
certification. The CPEO program is a voluntary certification regime; a 
person that does not wish to file Forms 940 and 941 on magnetic media 
is not obligated to apply for or obtain certification as a CPEO.

9. Suspension and Revocation

    The temporary regulations provide that the IRS may suspend or 
revoke the certification of any CPEO as a result of a failure to meet 
any of the requirements for CPEOs, and the IRS will suspend or revoke 
certification if the IRS determines, in its sole discretion, that such 
failure presents a material risk to the IRS's collection of federal 
employment taxes. If a CPEO's certification is suspended, section 3511 
will not apply to any contract described in section 7705(e)(2) into 
which the CPEO enters during the suspension period. If a CPEO's 
certification is revoked, the organization will not be considered a 
CPEO for purposes of section 3511 after the effective date of such 
revocation unless and until it again applies and is again certified as 
a CPEO. However, an organization whose certification as a CPEO has been 
revoked may not re-apply to be certified as a CPEO until one year has 
passed since the effective date of its revocation. Neither the 
suspension nor the revocation of an organization's status as a CPEO 
will affect its potential liability under Sec.  31.3504-2.
    The temporary regulations provide that an organization whose 
certification as a CPEO has been suspended or revoked must notify its 
customers of the suspension or revocation (in the time and manner 
provided in further guidance). In addition, the IRS will make public a 
CPEO's suspension or revocation and may also individually notify the 
CPEO's customers of such suspension or revocation.

Effective/Applicability Date

    The IRS has announced that it plans to begin accepting applications 
for CPEO certification on July 1, 2016. Accordingly, the temporary 
regulations apply on and after July 1, 2016. Pursuant to section 
7805(e)(2), the temporary regulations expire on or before May 3, 2019.

Statement of Availability of IRS Documents

    IRS revenue procedures, revenue rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. For the applicability of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) please refer to the Special Analyses section of 
the preamble to the cross-referenced notice of proposed rulemaking 
published in the Proposed Rules section in this issue of the Federal 
Register. Pursuant to section 7805(f) of the Code, these regulations 
have been submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small business.

Drafting Information

    The principal authors of these regulations are Melissa Duce, Andrew 
Holubeck, and Neil Shepherd of the Office of Associate Chief Counsel 
(Tax Exempt and Government Entities). However, other personnel from the 
IRS and the Treasury Department participated in the development of 
these regulations.

List of Subjects

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 301.7705-1T also issued under 26 U.S.C. 7705(h).
    Section 301.7705-2T also issued under 26 U.S.C. 7705(h).
* * * * *

0
Par. 2. Sections 301.7705-1T and 301.7705-2T are added to read as 
follows:

[[Page 27323]]

Sec.  301.7705-1T  Certified professional employer organization.

    (a) Application. The definitions set forth in this section apply 
for purposes of this section, Sec.  301.7705-2T and sections 3302(h), 
3303(a)(4), 3511, 6053(c)(8), and 7528(b)(4).
    (b) Definitions--(1) Certified professional employer organization 
(CPEO) means a person that applies to be certified as a CPEO in 
accordance with Sec.  301.7705-2T(a) and has been certified by the 
Internal Revenue Service (IRS) as meeting the requirements of Sec.  
301.7705-2T. For purposes of Sec.  301.7705-2T(g)(2), the term CPEO 
also includes the person before it applied for certification and while 
its application is pending with the IRS. For all other purposes, a 
person is a CPEO as of the effective date of its certification (as 
specified in the certification notice described in Sec.  301.7705-
2T(a)(2)) and until its certification is revoked by the IRS (as 
described in Sec.  301.7705-2T(n)) or, if earlier and applicable, until 
the CPEO voluntarily terminates its certification in the time and 
manner prescribed by the Commissioner in further guidance.
    (2) CPEO applicant means a person that has applied to be certified 
as a CPEO in accordance with Sec.  301.7705-2T(a) and whose application 
is pending with the IRS.
    (3) CPEO contract. [Reserved]
    (4) Certified public accountant (CPA) means a certified public 
accountant who--
    (i) With respect to a CPEO applicant or CPEO, is independent of the 
CPEO applicant or CPEO (as prescribed by the American Institute of 
Certified Public Accountants' Professional Standards, Code of 
Professional Conduct, and its interpretations and rulings);
    (ii) Is not currently under suspension or disbarment from practice 
before the IRS;
    (iii) Is duly qualified to practice in any state;
    (iv) Files with the IRS a written declaration that he or she is 
currently qualified as a CPA and authorized to represent the CPEO 
applicant or CPEO before the IRS; and
    (v) Meets such other requirements as the Commissioner may prescribe 
in further guidance.
    (5) Covered employee. [Reserved]
    (6) Customer. [Reserved]
    (7) Federal employment taxes means the taxes imposed by subtitle C 
of the Internal Revenue Code.
    (8) Guidance includes guidance published in the Federal Register or 
Internal Revenue Bulletin, as well as administrative guidance such as 
forms, instructions, publications, or other guidance on the IRS.gov Web 
site.
    (9) Partnership means a business entity (as described in Sec.  
301.7701-2(a)) that is classified as a partnership for federal tax 
purposes under Sec. Sec.  301.7701-1, 301.7701-2, and 301.7701-3. 
Accordingly, any references to a managing member or general partner of 
a partnership mean a managing member or general partner of an entity 
that is classified as a partnership for federal tax purposes.
    (10) Precursor entity--(i) In general. A precursor entity means, 
with respect to a CPEO applicant, any related entity of the CPEO 
applicant that is or was a provider of employment-related services 
that--
    (A) Has made a substantial asset transfer to the CPEO applicant 
during the calendar year that the CPEO applicant applies for 
certification or any of the three preceding calendar years or plans to 
make such a substantial asset transfer while the application for 
certification is pending or in the 12-month period following the date 
of the CPEO applicant's application for certification; or
    (B) Has ceased operations or dissolved during the calendar year 
that the CPEO applicant applied for certification or any of the three 
preceding calendar years.
    (ii) Related. For purposes of this paragraph (b)(10), a provider of 
employment-related services is considered a related entity of a CPEO 
applicant if it is a related entity within the meaning of paragraph 
(b)(12) of this section or if it would be or would have been such a 
related entity based on the ownership and responsible individuals of 
the provider of employment-related services at the time of its 
substantial asset transfer, ceasing of operations, or dissolution, as 
applicable, and the ownership and responsible individuals of the CPEO 
applicant at the time of its application.
    (11) Provider of employment-related services means a person that 
provides employment tax administration, payroll services, or other 
employment-related compliance services to clients, including, but not 
limited to, collecting, reporting, and paying employment taxes with 
respect to wages or compensation paid by the person to individuals 
performing services for the clients. A provider of employment-related 
services includes, but is not limited to, a CPEO.
    (12) Related entity means, with respect to a CPEO applicant or 
CPEO, any person that meets one or more of the following criteria:
    (i) The person is a member of a controlled group of which the CPEO 
applicant or CPEO is also a member. For purposes of this paragraph 
(b)(12)(i), controlled group has the meaning given to such term by 
sections 414(b) and (c) and the regulations thereunder, except that--
    (A) With respect to a person that is not a provider of employment-
related services ``more than 50 percent'' will be substituted for ``at 
least 80 percent'' each place it appears in section 1563(a) (which is 
cross-referenced in section 414(b)) and Sec.  1.414(c)-2 of this 
chapter); and
    (B) With respect to a person that is a provider of employment-
related services, ``more than 5 percent'' will be substituted for ``at 
least 80 percent'' each place it appears in section 1563(a) and Sec.  
1.414(c)-2 of this chapter; or
    (ii) The person is a provider of employment-related services and--
    (A) A majority of the directors or a majority of the officers (as 
described in paragraph (b)(13)(ii) of this section) of the CPEO 
applicant or CPEO are directors or officers (as described in paragraph 
(b)(13)(ii) of this section), respectively, of the provider of 
employment-related services; or
    (B) An individual is a responsible individual of both the provider 
of employment-related services and the CPEO applicant or CPEO by reason 
of paragraph (b)(13)(i) of this section.
    (13) Responsible individual means, with respect to a CPEO applicant 
or CPEO, (or, for purposes of paragraphs (b)(10)(ii) or (b)(12)(ii) of 
this section, a provider of employment-related services), the following 
individuals:
    (i) Any individual who owns, directly or indirectly and applying 
the constructive ownership rules of section 1563(e) with respect to 
stock ownership and by substituting the term ``interest'' for the term 
``stock'' and the term ``partnership'' for the term ``corporation'' 
used in that section, as appropriate for purposes of determining 
whether an interest in a partnership is indirectly owned by any person, 
33 percent or more of--
    (A) In the case of a corporation, the total combined voting power 
of all classes of stock entitled to vote of such corporation or of the 
total value of shares of all classes of stock of such corporation; or
    (B) In the case of a partnership, the capital interest or profits 
interest of such partnership.
    (ii) Any individual who is a director or an officer. For purposes 
of this paragraph (b)(13)(ii), a director is a voting member of the 
governing body (that is, the board of directors or equivalent 
controlling body authorized under state law to make governance 
decisions on behalf of the organization),

[[Page 27324]]

and the officers are determined by reference to the organizing 
document, bylaws, or resolutions of the governing body, or otherwise 
designated consistent with state law. Officers may include a president, 
vice-president, secretary, and treasurer.
    (iii) Any individual who, regardless of title, has ultimate 
responsibility for implementing the decisions of the organization's 
governing body. An individual who serves with the title of chief 
executive officer, executive director, and/or president has this 
ultimate responsibility. An individual with this ultimate 
responsibility may include an individual who is not treated as an 
employee of the organization. If this ultimate responsibility resides 
with two or more individuals (for example, co-presidents), who may 
exercise such responsibility in concert or individually, then each 
individual is a responsible individual.
    (iv) Any individual who, regardless of title, has ultimate 
responsibility for supervising the management, administration, or 
operation of the organization. An individual who serves with the title 
of chief operating officer has this ultimate responsibility. An 
individual with this ultimate responsibility may include an individual 
who is not treated as an employee of the organization. If this ultimate 
responsibility resides with two or more individuals, who may exercise 
such responsibility in concert or individually, then each individual is 
a responsible individual.
    (v) Any individual who, regardless of title, has ultimate 
responsibility for managing the organization's finances. An individual 
who serves with the title of chief financial officer or treasurer has 
this ultimate responsibility. An individual with this ultimate 
responsibility may include an individual who is not treated as an 
employee of the organization. If this ultimate responsibility resides 
with two or more individuals who may exercise the responsibility in 
concert or individually, then each individual is a responsible 
individual.
    (vi) In the case of a partnership, any individual who is a managing 
member or general partner.
    (vii) In the case of a sole proprietorship, the sole proprietor.
    (viii) Any other individual with primary responsibility for the 
organization's federal employment tax compliance.
    (14) Self-employed individual. [Reserved]
    (15) Substantial asset transfer means any transfer of 35 percent or 
more of the value of the operating assets of the person making the 
transfer, whether through one or a series of transactions and whether 
accomplished through sale, lease, gift, assignment, succession, merger, 
consolidation, corporate separation, or any other means. For purposes 
of this paragraph (b)(15), operating assets include both tangible and 
intangible resources related to the conduct of the person's trade or 
business, including but not limited to such intangible assets as 
contracts, agreements, receivables, employees, and goodwill (which 
includes the value of a trade or business based on expected continued 
customer patronage due to its name, reputation, or any other factors). 
In the case of a contract described in section 7705(e)(2) or a service 
agreement described in Sec.  31.3504-2(b)(2) of this chapter entered 
into by a provider of employment-related services, even if the contract 
or agreement is not sold, gifted, assigned, or otherwise formally 
transferred to a CPEO applicant, it will be considered transferred from 
the provider of employment-related services to the CPEO applicant if 
the CPEO applicant reports, withholds, or pays, under its employer 
identification number (EIN), any applicable federal employment taxes 
with respect to the wages of any individuals covered by the contract or 
agreement.
    (c) Effective/applicability date--(1) In general. Except as 
provided in paragraph (c)(2) of this section, this section applies on 
and after July 1, 2016.
    (2) Definitions related to section 3511. [Reserved]
    (3) Expiration date. The applicability of this section expires on 
or before May 3, 2019.


Sec.  301.7705-2T  CPEO certification requirements.

    (a) Application requirement and certification--(1) Application. To 
be certified as a certified professional employer organization (CPEO), 
a person must submit a properly completed and executed application for 
certification as a CPEO in the time and manner prescribed by, and 
providing such information as required by, this section and any further 
guidance issued by the Commissioner. In addition, the applicant's 
responsible individuals must submit such information as is specified in 
this section and further guidance.
    (2) Notice. A CPEO applicant will be notified by the Internal 
Revenue Service (IRS) whether its application for certification has 
been approved or denied, and, if approved, the effective date of 
certification. If the IRS denies the application, the IRS will inform 
the CPEO applicant of the reason(s) for denial.
    (3) Public disclosure of certification. If the IRS approves a CPEO 
applicant's application for certification, the IRS will make available 
to the public the name and address of the CPEO, as well as the 
effective date of its certification, in the time and manner described 
in further guidance.
    (4) Effective date of certification. A CPEO's certification will be 
effective as of the effective date of certification specified in the 
notice described in paragraph (a)(2) of this section and in the public 
disclosure described in paragraph (a)(3) of this section and will 
continue in effect until the effective date of the revocation of the 
CPEO's certification, if any, as described in paragraph (n) of this 
section or, if earlier, the date that the CPEO voluntarily terminates 
its certification in the time and manner prescribed by the Commissioner 
in further guidance.
    (b) Requirements for certification. To receive and maintain 
certification, a CPEO applicant or CPEO must meet the requirements 
described in this section, as well as any additional requirements the 
Commissioner may prescribe in further guidance. In addition, any 
precursor entities, related entities, and responsible individuals (as 
defined in Sec. Sec.  301.7705-1T(b)(10), (12), and (13), respectively) 
of the CPEO applicant or CPEO must meet any requirements applicable to 
them described in this section and in further guidance. The IRS may 
deny an application for certification or revoke or suspend a CPEO's 
certification if a CPEO applicant or CPEO, or one or more of its 
precursor entities, related entities, or responsible individuals, fails 
to meet any applicable requirement described in this section or other 
applicable guidance, and the IRS will do so if the IRS determines, in 
its sole discretion, that such failure presents a material risk to the 
IRS's collection of federal employment taxes. In determining whether 
one or more failures to meet the requirements described in this section 
presents a material risk to the IRS's collection of federal employment 
taxes, the IRS generally will consider all relevant facts and 
circumstances, including the size, scope, nature, significance, 
recurrence, and timing of and reason for the failure and, in the case 
of a CPEO, any prior failures of the CPEO to meet the requirements of 
this section.
    (c) Suitability--(1) In general. The IRS may deny an application 
for certification or revoke or suspend a CPEO's certification for any 
of the following reasons:

[[Page 27325]]

    (i) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has failed to pay any 
applicable federal, state, or local taxes or file any required federal, 
state, or local tax or information returns in a timely and accurate 
manner, unless the failure is determined to be due to reasonable cause 
and not due to willful neglect.
    (ii) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has been charged or 
convicted of any criminal offense under the laws of the United States 
or of a state or political subdivision thereof, or is the subject of an 
active IRS criminal investigation.
    (iii) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, has been sanctioned, or 
had a license, registration, or accreditation (including a license, 
registration, or accreditation relating to its status or ability to 
operate as a professional employer organization) denied, suspended, or 
revoked, by a court of competent jurisdiction, licensing board, 
assurance or other professional organization, or federal or state 
agency, court, body, board, or other authority for any misconduct that 
involves dishonesty, fraud, or breach of trust or that otherwise bears 
upon the suitability of the CPEO applicant or CPEO to perform its 
professional functions (including, but not limited to, any civil or 
criminal penalty described in 42 U.S.C. 503(k)(1)(D) imposed by state 
law).
    (iv) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, is listed on any 
sanctions list compiled by the Office of Foreign Assets Control (OFAC) 
within the Department of Treasury, including, but not limited to the 
OFAC Consolidated Sanctions List and the OFAC Specially Designated 
Nationals (SDN) List.
    (v) The CPEO applicant or CPEO, or any of its precursor entities, 
related entities, or responsible individuals, fails to demonstrate a 
history of financial responsibility, which the IRS may assess by checks 
on credit history and other similar indicators.
    (vi) The CPEO applicant or CPEO and the responsible individuals of 
the CPEO applicant or CPEO fail to demonstrate adequate collective 
knowledge or experience with respect to:
    (A) Federal or state employment tax reporting, depositing, and 
withholding requirements;
    (B) Handling and accounting of payroll, tax payments, and other 
funds on behalf of others;
    (C) Effective recordkeeping systems;
    (D) Retention of qualified personnel and legal advisors as needed; 
and
    (E) General business and risk management.
    (vii) The CPEO applicant or CPEO, or any of its responsible 
individuals, gives false or misleading information (including by 
intentionally omitting relevant information), or participates in any 
way in the giving of false or misleading information, to the IRS, 
knowing, or having reason to know, that the information is false or 
misleading. For the purpose of this subsection, ``information'' 
includes (but is not limited to) facts or other matters contained in 
testimony, federal tax returns, and financial statements and opinions 
regarding such statements; applications for certification (and all 
accompanying documentation); affidavits, declarations, assertions, 
attestations, statements, and agreements; and periodic verifications 
that the requirements of this section continue to be met; and any other 
information that is required to be provided by this section, section 
3511(g) and regulations thereunder, or further guidance.
    (2) Must be a business entity that is not a disregarded entity. A 
CPEO must be a business entity described in Sec.  301.7701-2(a), except 
that a CPEO may not be a business entity that is disregarded as an 
entity separate from its owner for federal tax purposes under 
Sec. Sec.  301.7701-2 and 301.7701-3 (without regard to the special 
rule in Sec.  301.7701-2(c)(2)(iv) that provides that such entities are 
corporations for federal employment tax purposes). Accordingly, a CPEO 
may not be an individual or an entity classified as a trust under Sec.  
301.7701-4.
    (3) Authorization to investigate suitability. A CPEO applicant or 
CPEO, and each of its responsible individuals, must take such actions 
as are necessary to authorize the IRS to investigate the accuracy of 
statements and submissions, including waiving confidentiality and 
privilege when necessary, and to conduct comprehensive background 
checks, including, but not limited to, checks on tax compliance, 
criminal background, professional experience (including through the 
contact of third-party references), credit history, and professional 
sanctions. In addition, a CPEO applicant or CPEO, and any of its 
responsible individuals, must provide the IRS with such additional 
information as the IRS may request to facilitate such background 
investigations. Each responsible individual of a CPEO applicant or CPEO 
must also submit fingerprints in the time and manner and under the 
circumstances prescribed by the Commissioner in further guidance.
    (d) Business location--(1) State of organization. A CPEO applicant 
or CPEO must be created or organized in the United States or under the 
law of the United States or of any state.
    (2) Business location in the United States. A CPEO applicant or 
CPEO must have one or more established, physical business locations in 
the United States at which regular operations that constitute a trade 
or business within the United States (within the meaning of section 
864(b)) take place and at which a significant portion of its CPEO-
related functions are carried on and administrative records are kept.
    (3) United States responsible individuals. A majority of the CPEO 
applicant's or CPEO's responsible individuals must be citizens or 
residents of the United States.
    (4) Use of financial institution. A CPEO applicant or CPEO must use 
only financial institutions described in section 265(b)(5) to hold its 
cash and cash equivalents, receive payments from customers, and pay 
wages and federal employment taxes.
    (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.
    (2) CPEO applicants--(i) In general. A CPEO applicant must cause to 
be prepared and provided to the IRS, with its application, a copy of 
its annual audited financial statements and an opinion with respect to 
such financial statements (as described in paragraph (e)(1) of this 
section) for the most recently completed fiscal year as of the date it 
applies for certification. Notwithstanding the preceding sentence, if a 
CPEO applicant applies for certification before the last day of the 
sixth month following its most recently completed fiscal year, and the 
audit of the financial statements for this fiscal year has not yet been 
completed at the time of application, a CPEO applicant

[[Page 27326]]

must provide to the IRS, with its application, the financial statements 
and opinion described in paragraph (e)(1) of this section for the 
immediately preceding fiscal year, if any, and must subsequently 
provide to the IRS the financial statements and opinion described in 
paragraph (e)(1) of this section for the most recently completed fiscal 
year by the last day of the sixth month after such fiscal year ends. In 
addition, for any fiscal year that ends after the CPEO applicant 
applies for certification and on or before the effective date of 
certification, if applicable, the CPEO applicant must provide the 
audited financial statements and opinion described in paragraph (e)(1) 
of this section by the last day of the sixth month after such fiscal 
year ends. The obligation to provide the audited financial statements 
described in the preceding sentence continues to apply even if the CPEO 
applicant is certified as a CPEO prior to the date the audited 
financial statements are provided.
    (ii) Newly established CPEO applicants. In addition to the 
requirements in paragraph (e)(2)(i) of this section, a CPEO applicant 
that was not operating as a provider of employment-related services for 
all or part of the most recently completed fiscal year as of the date 
it applies for certification must provide a copy of the audited 
financial statements of any precursor entity, if one exists, and an 
opinion with respect to such financial statements (as described in 
paragraph (e)(1) of this section) for the precursor entity's most 
recently completed fiscal year as of the date of the application for 
certification in such time and manner as the Commissioner may prescribe 
in further guidance, as well as such additional information as the 
Commissioner may prescribe in further guidance.
    (3) Exception to positive working capital requirement. A CPEO 
applicant or CPEO with annual audited financial statements for a fiscal 
year that do not reflect positive working capital will not fail to meet 
the requirements of paragraph (e)(1)(ii) of this section if--
    (i) The CPEO applicant or CPEO has 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 
in the fiscal year) and the statements described in paragraph 
(f)(1)(ii) of this section (for any other fiscal quarter);
    (ii) The CPEO applicant or CPEO, or its CPA, provides, in such time 
and manner as the Commissioner may prescribe in further guidance, an 
explanation to the IRS describing the reason for the failure; and
    (iii) 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.
    (4) Completed fiscal year. For purposes of this paragraph (e), a 
fiscal year will be considered completed once the last day of that 
fiscal year has ended, regardless of whether the CPEO applicant or CPEO 
was in operation or certified for all 12 months of the fiscal year or 
the fiscal year consisted of fewer than 12 months.
    (f) Quarterly assertions and attestations--(1) CPEOs. By the last 
day of the second month after the end of each calendar quarter, and 
beginning with the first calendar quarter, that ends after the CPEO's 
effective date of certification, a CPEO must provide the following to 
the IRS:
    (i) An assertion, signed by a responsible individual under 
penalties of perjury, stating that the CPEO has withheld and made 
deposits of all federal employment taxes (other than taxes imposed by 
chapter 23 of the Code) as required by subtitle C for such calendar 
quarter and an examination level attestation from a CPA stating that 
such assertion is fairly stated in all material respects.
    (ii) A statement signed by a responsible individual under penalties 
of perjury verifying that the CPEO has positive working capital (as 
determined in accordance with GAAP) at the end of the most recently 
completed fiscal quarter, as well as such additional financial 
information that the Commissioner may specify in further guidance.
    (2) Exceptions--(i) Immaterial failures. A CPEO will not fail to 
meet the requirements of paragraph (f)(1)(i) of this section if the CPA 
examination level attestation indicates that the CPEO has failed to 
withhold or make deposits in certain immaterial respects, provided 
that--
    (A) The attestation provides a summary of the immaterial failures 
that were found;
    (B) The attestation states that the failures were immaterial and 
isolated and do not reflect a meaningful lapse in compliance with 
federal employment tax withholding and deposit requirements; and
    (C) The IRS determines, in its sole discretion, that the isolated 
and immaterial failures identified by the CPA do not present a material 
risk to the IRS's collection of federal employment taxes.
    (ii) Negative working capital. A CPEO with negative working capital 
at the end of a fiscal quarter will not fail to meet the requirements 
of paragraph (f)(1)(ii) of this section if--
    (A) The CPEO does not have negative working capital at the end of 
the two fiscal quarters immediately preceding such fiscal quarter, as 
demonstrated by the financial statements described in paragraph (e)(1) 
of this section, if available, or the statements described in paragraph 
(f)(1)(ii) of this section;
    (B) The CPEO provides an explanation to the IRS describing the 
reason for such negative working capital in such time and manner as the 
Commissioner may prescribe in further guidance; and
    (C) The IRS determines, in its sole discretion, that the negative 
working capital does not present a material risk to the IRS's 
collection of federal employment taxes.
    (3) CPEO applicants--(i) In general. By the last day of the second 
month after the end of each calendar quarter, beginning with the most 
recently completed calendar quarter as of the date of a CPEO 
applicant's application for certification and ending with the most 
recently completed calendar quarter as of the effective date of 
certification (if applicable), a CPEO applicant must provide to the IRS 
the assertion, examination level attestation, and working capital 
statement described in paragraph (f)(1) of this section, subject to the 
exceptions described in paragraph (f)(2) of this section (though 
substituting ``CPEO applicant'' for ``CPEO'').
    (ii) Newly established CPEO applicants. A CPEO applicant that was 
not operating as a provider of employment-related services during the 
most recently completed calendar quarter as of the date of its 
application for certification or during any calendar quarter that ends 
while its application for certification is pending must provide to the 
IRS the assertion, examination level attestation, and working capital 
statement described in paragraph (f)(1) of this section with respect to 
any precursor entity, if applicable, in such time and manner as the 
Commissioner may prescribe in further guidance, as well as such 
additional information as the Commissioner may prescribe in further 
guidance.
    (g) Bond--(1) In general. A CPEO must post a bond for the payment 
of federal employment taxes issued in the form and containing the terms 
prescribed by the Commissioner in further guidance and in an amount 
described in paragraph (g)(2) of this section.
    (2) Bond amount--(i) In general. The amount of the bond described 
in

[[Page 27327]]

paragraph (g)(1) of this section must be, for each period beginning on 
April 1 of any calendar year and ending on March 31 of the following 
calendar year (or, in the case of a newly certified CPEO, beginning 
with the effective date of certification and ending on the subsequent 
March 31) (the bond period), at least equal to the greater of--
    (A) Five percent of the CPEO's liability under section 3511 (or, if 
applicable, the liability described in paragraph (g)(2)(ii) of this 
section) during the calendar year preceding the beginning of the bond 
period, but not more than $1,000,000; or
    (B) $50,000.
    (ii) Amount of bond in first and second year as a CPEO. If a CPEO 
does not have any liability under section 3511 for all or a portion of 
a preceding calendar year because the CPEO was not certified as a CPEO 
for all or a portion of that preceding calendar year, the liability 
applied for purposes of paragraph (g)(2)(i)(A) of this section for the 
entirety or portion of the preceding calendar year during which the 
CPEO was not certified will be the federal employment tax liability of 
the CPEO, and of any precursor entity of the CPEO described in Sec.  
301.7705-1T(b)(10)(i)(A), that results from one or more service 
agreements described in Sec.  31.3504-2(b)(2) of this chapter. With 
respect to the federal employment tax liability of such precursor 
entity during a preceding calendar year, the liability will only be 
applied for purposes of paragraph (g)(2)(i)(A) of this section to the 
extent it results from service agreements that have been transferred or 
are intended to be transferred by the precursor entity to the CPEO at 
the time the bond amount is determined. For purposes of this paragraph 
(g)(2)(ii), an entity is considered a precursor entity of a CPEO 
described in Sec.  301.7705-1T(b)(10)(i)(A) if it was determined to be 
its precursor entity under that section at the time it was a CPEO 
applicant.
    (3) Cancellation--(i) Notice. A bond required under this paragraph 
(g) must provide that it may be cancelled by the surety only after the 
surety gives written notice of such cancellation to the IRS and the 
CPEO in such time and manner as the Commissioner may prescribe in 
further guidance.
    (ii) Ongoing liability. A bond required under this paragraph (g) 
must provide that, if a surety cancels the bond without issuing a 
superseding bond to the CPEO, the surety will, notwithstanding the 
cancellation, remain liable for all federal employment tax liability 
accrued by the CPEO during the period beginning with the effective date 
of the first bond issued by the surety to the CPEO in any consecutive 
series of bonds issued by that surety prior to cancellation and ending 
with the cancellation of the bond (the total bond period), up to the 
penal amount of the bond at the time of the cancellation. A cancelling 
surety will remain liable as described in this paragraph (g)(3)(ii) for 
federal employment tax liability accrued during the total bond period 
up to the penal amount of the bond for as long as the Commissioner may 
assess and collect taxes for such period under sections 6501 and 6502.
    (4) Strengthening bonds to reflect CPEO adjustment or IRS 
assessment. In calculating five percent of its liability under section 
3511 (or other applicable federal employment tax liability) for a 
preceding calendar year for purposes of determining a bond amount, a 
CPEO must base its calculation on the amount of applicable federal 
employment taxes that it reported and paid for that preceding calendar 
year. However, if the CPEO or the IRS subsequently determines during 
the period for which the bond amount applies that the applicable 
federal employment tax liability for the preceding calendar year was 
higher than the amount reported and paid (and makes an adjustment or 
assessment, respectively, reflecting such determination) and if the 
bond that the CPEO had posted was less than $1,000,000, the CPEO must 
post a strengthening bond that, together with the initially-posted 
bond, equals a total amount that reflects the adjusted applicable 
federal employment tax liability up to $1,000,000. Alternatively, such 
a CPEO could post a superseding bond in such adjusted amount.
    (5) No posting of collateral. A CPEO must meet the bond 
requirements of this paragraph (g) without posting collateral.
    (6) Requirements for surety. Any surety that issues a bond required 
by this paragraph (g) to a CPEO must be a surety company that holds a 
certificate of authority from the Secretary as an acceptable surety on 
federal bonds and meets such other requirements as the Commissioner may 
prescribe in further guidance.
    (h) Controlled group. All CPEO applicants and CPEOs that are 
members of a controlled group within the meaning of sections 414(b) and 
(c) will be treated as a single CPEO applicant or CPEO for purposes of 
paragraphs (e) (other than (e)(1)(ii)), (f) (other than (f)(1)(ii)), 
and (g) of this section.
    (i) Consents to disclose. To receive and maintain certification, a 
CPEO applicant or CPEO must provide such consents for the IRS to 
disclose confidential tax information to its customers, and to other 
persons as necessary to carry out the purposes of these regulations, 
that relates to its certification and obligations to report, deposit, 
and pay federal employment taxes as the Commissioner may require in 
further guidance.
    (j) Periodic verification. A CPEO must periodically verify that it 
continues to meet the requirements of this section in the time and 
manner prescribed by the Commissioner in further guidance.
    (k) Notification of material changes. A CPEO applicant or CPEO must 
notify the IRS, in the time and manner prescribed by the Commissioner 
in further guidance, of any change that materially affects the 
continuing accuracy of any agreement or information that was previously 
made or provided to the IRS.
    (l) Accrual method of accounting. A CPEO must compute its taxable 
income using an accrual method of accounting or, if applicable, another 
method that the Commissioner provides for in further guidance.
    (m) Compliance with reporting obligations--(1) In general. A CPEO 
must agree to make reports to the IRS and to its clients as provided in 
section 3511(g) and the regulations thereunder, including filing all 
federal employment tax returns and information returns as required.
    (2) Filing on magnetic media. A CPEO must file all returns, 
schedules, reports, and other forms and documents on magnetic media 
when required by section 3511(g) and the regulations thereunder or 
other Treasury regulations.
    (n) Suspension and revocation--(1) In general. The IRS may suspend 
or revoke the certification of any CPEO, in the time and manner and 
under the circumstances prescribed by the Commissioner in further 
guidance, as a result of one or more failures to meet any of the 
requirements for CPEOs described in this section, section 3511(g) and 
the regulations thereunder, and any further guidance and will suspend 
or revoke certification if the IRS determines, in its sole discretion, 
that such failure(s) present a material risk to the IRS's collection of 
federal employment taxes. See paragraph (b) of this section for the 
factors the IRS will consider in determining whether one or more 
failures to meet any of the requirements described in this section 
presents a material risk to the IRS's collection of federal employment 
taxes.
    (2) Suspension. Section 3511 will not apply to any contract 
described in section 7705(e)(2) into which the CPEO enters while its 
certification is suspended.

[[Page 27328]]

    (3) Revocation. If an organization's certification as a CPEO is 
revoked, the organization will not be considered a CPEO for purposes of 
section 3511 unless and until it again applies to be certified as a 
CPEO in accordance with paragraph (a) of this section and is again 
certified by the IRS as meeting the requirements of this section. An 
organization whose certification as a CPEO has been revoked may not re-
apply to be certified as a CPEO until one year has passed since the 
effective date of its revocation.
    (4) Disclosure of suspension and revocation--(i) Notification by 
the CPEO. An organization whose certification as a CPEO has been 
suspended or revoked must notify its customers of such suspension or 
revocation in the time and manner prescribed by the Commissioner in 
further guidance.
    (ii) Disclosure by the IRS. If the IRS suspends or revokes an 
organization's certification as a CPEO, the IRS will make available to 
the public the fact of such suspension or revocation in the time and 
manner described in further guidance. The IRS may also individually 
notify the organization's customers of such suspension or revocation.
    (o) Effective/applicability date--(1) In general. This section 
applies on and after July 1, 2016.
    (2) Expiration date. The applicability of this section expires on 
or before May 3, 2019.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 3. The authority citation for part 602 continues to read in part 
as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 4. In Sec.  602.101, paragraph (b) is amended by adding the 
following entries in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR Part or section where identified and described       Control No.
------------------------------------------------------------------------
 
                                * * * * *
301.7705-1T.............................................       1545-2266
301.7705-2T.............................................       1545-2266
 
                                * * * * *
------------------------------------------------------------------------


Kirsten B. Wielobob,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: April 28, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-10700 Filed 5-4-16; 4:15 pm]
 BILLING CODE 4830-01-P