According to the IRS, employment tax fraud can happen in a number of ways, including:
[1] pyramiding, [2] employee leasing, [3] paying employees in cash, [4] filing false payroll tax returns or failing to file payroll tax returns. The majority of these instances can fall under the umbrella term of payroll tax fraud.
The IRS cautions that “evading employment taxes can have serious consequences for employers and the employees.” Id. Let’s explore each of these listed methods of employment tax fraud.
[1] What is “Pyramiding”?
This occurs when an employer withholds taxes from his employees but then he fails to remit those funds to the IRS, and does so intentionally or “willfully.” Often what will happen is that the employer is in the practice of turning “flipping” businesses but, instead of selling them, he is filing for bankruptcy so that he can discharge the liability that has accrued. After he does this, he will then start a new business, under a new name, and repeat the process.
[2] What is “employment leasing”?
This occurs when an employer hires out a payroll company to deal with the administrative and payroll matters for the employees, but then that company does not pay over to the IRS the employment taxes that were collected. Instead, the payroll company will use the funds for its own purposes — either business or personal. In egregious cases, the business will dissolve, and it results in millions of dollars in employment taxes that go unpaid to the IRS.
[3] What about paying employees in cash? What’s wrong with that?
When an employer pays his employees in cash, it may result in a loss in tax revenue to the government. This is because the employer fails to indicate that the amount was paid, and the employee fails to include the amount in her gross income. It’s a sort-of “don’t-ask-don’t-tell” situation between the employer and the employee. This is a dangerous practice, however, as both may be liable for their actions. From a policy viewpoint, the IRS does not like this practice since it will result in less funds supplying Social Security and Medicare benefits to employees.
[4] False Returns or Non-Filing.
A false return is fairly straightforward. When someone aids another to prepare a false payroll tax return (sometimes called “tax preparer fraud”), she is liable. This occurs, for example, when the amount to be included in the gross income is understated, or when too many allowable deductions, exemptions, or credits are taken. For more information on tax preparer fraud, see:
The fraud that results for willfully failing to file a return is simpler yet: When the employee or employer has a tax liability, and he willfully fails to file his income tax return, that constitutes an evasion of employment taxes.
If you have been charged (or merely at risk of being charged) for one of the forgoing crimes, we can help. The IRS is the world’s most powerful collection agency, with tremendous resources. Competent legal counsel will be able to provide a vigorous defense of your case.
