Payroll processors get immunity for employer tax fraud—IRS loses audit power

What it does

This bill creates a new tax rule that shields payroll tax processors (like payroll companies and professional employer organizations) from liability when they rely on false information from employers—unless the processor knew or should have known the information was wrong. It also prevents the IRS from delaying tax credits or auditing an employer solely because their payroll processor filed an erroneous return based on the employer's false certification.

Why we flagged it

The bill's operative mechanism is a liability carve-out for third-party payroll processors. It does not establish new tax obligations or revenue measures; it narrows who can be held responsible when payroll taxes are misreported, benefiting the processor industry at the expense of tax compliance and IRS enforcement capacity.

What the text implies

• The 'constructive knowledge' standard in subsection (f) creates a safe harbor: processors are deemed NOT to have constructive knowledge if they 'accurately reported' what the employer certified and 'verified' aggregate wages—but verification of aggregate wages does not catch fraud in eligibility, wage calculations, or credit qualification, leaving major loopholes.
• Subsection (d) prevents the IRS from auditing an employer or delaying their tax credits solely because their processor filed an erroneous return. This ties the IRS's hands: even if a processor's error is systematic or repeated, the IRS cannot use that pattern to scrutinize the employer's underlying claims.
• The bill applies retroactively to 'audits, examinations, and assessments initiated or made after the date of enactment'—potentially shielding processors from liability in ongoing disputes and creating a windfall for firms that have already filed erroneous returns.
• Payroll processors (including professional employer organizations and certified PEOs) are major intermediaries in the gig economy and small-business payroll market. Shielding them from liability reduces their incentive to implement robust compliance controls, potentially increasing systemic payroll-tax evasion.
• The bill does not require processors to disclose errors they discover after filing, nor does it mandate corrective action—only that they not be held liable if they 'relied' on employer certification.

Section numbers refer to the bill text the analysis read — linked under Primary records below.

Who it affects

Ordinary workers and the public bear the cost through reduced tax compliance and enforcement. The bill shields payroll processors from liability for errors they should have caught, shifting the burden to employers (who may pass it to workers via wage cuts or job losses) and ultimately to the IRS and honest taxpayers who must cover unpaid taxes and lost revenue. The 'constructive knowledge' standard is permissive—processors can claim ignorance even when red flags exist.

Who stands to gain

• payroll processing companies
• professional employer organizations (PEOs)
• certified professional employer organizations (CPEOs)
• payroll service providers
• tax preparation and filing intermediaries

Named in the bill

Internal Revenue Code of 1986, IRC Section 3513 (new), IRC Section 3504, third-party payors, professional employer organizations (PEOs), certified professional employer organizations (CPEOs), employers, IRS, payroll tax credits

Where it stands

25 cosponsors: 15 Republicans, 10 Democrats.

• May 6, 2025 — Introduced · Congress.gov: “Introduced in House”
• May 6, 2025 — Referred to House Committee on Ways and Means · Congress.gov: “Referred to the House Committee on Ways and Means”

Dates and quoted wording are Congress.gov's action record; the timeline shows status changes, not every procedural step.

Money around this bill

7 lobbying clients named this bill on 12 disclosure filings across 2 quarters, Dec 2025 to Jun 2026. Those filings disclosed $960,000 in lobbying spend. A filing names 1 bills on average, so that figure is what each filing reported, not a share belonging to this bill.

More lobbying clients named this bill than 86% of bills with at least one filing.

Mike Thompson, the sponsor, reported $1,956,640 in PAC receipts in the 2026 cycle.

• National Association of Professional Employer Organizations — $410,000 on 2 filings
• Trinet Group Inc. — $220,000 on 1 filing
• National Association of Professional Employer Organizations — $120,000 on 2 filings
• Trinet Usa, Inc. — $120,000 on 2 filings
• Insperity Services, L.p. — $50,000 on 1 filing

Lobbying Disclosure Act filings through Jul 20, 2026. A filing shows who paid to lobby on a bill it names, not what changed.