The Financial Crimes Enforcement Network (FinCEN) is a U.S. government agency responsible for combating financial crimes. The agency collects, analyzes, and disseminates financial data to law enforcement agencies and regulatory authorities. By doing so, FinCEN helps enforce compliance with anti-money laundering regulations and plays a critical role in safeguarding the integrity of the U.S. financial system.
On August 15, 2023, FinCEN issued a notice to address the growing issue of payroll tax evasion and Workers’ Compensation fraud within the U.S. real estate construction sectors. These fraudulent activities involve utilizing shell companies and falsifying documents to evade payroll taxes and manipulate work injury claims. Such activities have caused the U.S. government to incur a substantial amount of tax loss. Accordingly, bad actors may be subject to criminal employment tax prosecution.
If you need help dealing with a tax issue, seek support from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295.
The Financial Crimes Enforcement Network (FinCEN), in collaboration with IRS Criminal Investigation, has issued a notice addressing the escalating issue of payroll tax evasion and Workers’ Compensation fraud in the U.S. real estate construction industry. Illicit actors exploit banks and check cashers to execute these schemes, causing significant financial losses to state and federal tax authorities annually.
These fraudulent activities involve manipulating shell companies and other tactics within the construction industry to evade payroll taxes and commit Workers’ Compensation fraud. FinCEN's Acting Director, Himamauli Das, emphasized their commitment to exposing these practices, providing financial institutions with crucial information to remain vigilant in detecting and reporting suspicious activities related to these fraudulent practices.
By collaborating with financial institutions, IRS Criminal Investigation aims to employ Bank Secrecy Act data to uncover payroll tax evasion and Workers’ Compensation fraud schemes. The notice outlines the methods these schemes employ, including networks of individuals, shell companies, and falsified documents. These fraudulent activities impact both local and national construction job markets, placing legitimate contractors and employees at an unfair disadvantage.
The notice aligns with national priorities against money laundering and terrorism financing, offering financial institutions insights into the schemes' inner workings, red flag indicators, and instructions for filing Suspicious Activity Reports (SARs).
This notice also builds on FinCEN's efforts to curb the misuse of shell companies in unlawful activities. The agency's previous rule mandated beneficial ownership information reporting, reinforcing transparency and integrity in the financial system to thwart various criminal actors, including those within the construction industry who exploit anonymous shell companies for hiding ill-gotten gains.
If you have been, or are at risk of being accused of a form of payroll tax evasion or Workers’ Compensation fraud, then it is crucial that you hire legal representation as quickly as possible. Our Dual-Licensed Tax Lawyers & CPAs can review your case and identify the appropriate course of action.
Payroll tax evasion takes various forms, each involving different tactics to manipulate financial systems and avoid tax obligations. Fortunately, our legal team can assist if you have been accused of any of the following:
This form of evasion involves employers wrongly categorizing employees as independent contractors to avoid paying employment taxes, such as Social Security and Medicare taxes. Independent contractors are responsible for their own taxes, so by misclassifying employees, employers can escape their tax responsibilities.
For instance, a construction company may label its workers as independent contractors even though they work exclusively for the company and are subject to its directives. This misclassification allows the company to sidestep its share of employment taxes, leaving the burden on the workers themselves.
Off-the-books payments occur when employers pay workers "under the table" without reporting the payments to tax authorities on a Form 1099 or W2. This evasion method allows employers to avoid payroll taxes, income tax withholding, and other employment-related obligations. It also enables the employees of such an employer to evade income taxes on the cash basis income.
For example, a restaurant owner might pay a portion of their employees' earnings in cash without any record of the transactions. This tactic enables the employer to evade reporting the cash-based income and evade the necessary employment taxes associated with these wages.
This fraud pattern is well known to the IRS and California FTB and is prosecuted often.
In a pyramid scheme, a business withholds payroll taxes from its employees' wages but intentionally fails to remit these taxes to the appropriate tax authorities. Instead, the business uses the withheld funds for other purposes, effectively using the tax money as a source of short-term financing.
For instance, a construction company might collect payroll taxes from its workers' wages but divert these funds to cover equipment purchases or operational expenses instead of remitting them to the IRS. Over time, this can lead to significant tax debts accumulating.
Like payroll tax evasion, Workers’ Compensation fraud can come in several forms. Employers who have committed the following may be subject to serious consequences:
Employers falsely include non-existent individuals on their Workers’ Compensation insurance policy to overstate their workforce. By inflating the employee count, they may secure a policy at a lower premium and potentially claim benefits for non-existent injuries. As an illustration, a construction company could add imaginary workers to its insurance policy, artificially increasing its workforce size to pay lower premiums while potentially intending to file claims for injuries that never occurred.
Employers misclassify employees as independent contractors to avoid providing Workers’ Compensation coverage. This allows them to sidestep insurance premiums and evade their legal responsibility to cover medical expenses for injured workers. For example, a delivery service might label its delivery drivers as independent contractors, even though they are subject to company schedules and guidelines, in order to avoid paying Workers’ Compensation insurance for potential driver injuries.
Collusion between employees and medical providers can lead to fraudulent claims. Medical professionals may over-diagnose or over-treat injuries, while employees may cooperate in exchange for kickbacks. For instance, an employee might conspire with a doctor to fabricate symptoms of a work-related injury, resulting in unnecessary medical treatments and prolonged absence from work. The doctor then bills the insurer for expensive procedures that were never required.
Get assistance from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or click here to schedule a reduced rate initial consultation.