In recent years, funding decisions by Congress have required the IRS to do more with reduced resources. One of the ways the IRS has adjusted to this new reality is by devoting the resources it does have to areas with the potential for a significant return on the payroll tax audit and enforcement dollar. Thus, while the IRS may be less likely to audit individual taxpayers with modest incomes, it is more likely to audit companies where hundreds of thousands or millions of dollars in payroll tax revenue appear to be missing or unaccounted for.
Another way the IRS is trying to do less with more is bringing and simultaneously highly publicizing a greater number of criminal tax enforcement actions. Since the IRS does not have the resources to audit as many taxpayers as they traditionally have, they are responding with increasing the other way they attempt to keep honest taxpayers honest and dissuade the continued tax fraud by those that are not. By criminally prosecuting taxpayer that are caught committing income and employment tax fraud for example.
Types of Payroll Tax Fraud the IRS is Taking Action Against
Over the years business owners, bookkeepers, and other responsible parties have developed and attempted an array of fraudulent strategies to conceal their payroll tax fraud activities. However, without fail, these schemes are eventually detected and audits and criminal tax investigations are launched. Some common forms of payroll tax fraud that the IRS is particularly aggressive in combatting as of late include:
- Employee leasing company fraud – The use of employee-leasing companies is a fraud strategy that has long been employed by businesses looking to gain a temporary boost through tax fraud. Employee leasing companies are vulnerable to controlling parties using tax funds for personal, luxury expenses. Often, these companies will liquidate as suspicion increases leaving hundreds of thousands or millions of dollars in unsatisfied payroll tax obligations. What the public needs to be aware of, that is not intuitive or even fair is, even if you have fully funded the payroll tax obligations of your employees, if the employee leasing company you made payment to absconds with the payroll tax and income tax withholding you have dutifully contributed, you remain primarily liable for those funds.
- Non-filing or purposeful underreporting of an employment tax return – Some business owners seem to believe that if they do not report economic activity to the IRS, the tax agency has no alternative means of obtaining this information. Be aware that the IRS has multiple means of detecting failures to file or purposeful underreporting of employment tax returns.
- Paying workers “under the table” – Some business owners may believe that paying workers “under the table” is a win-win proposition. However, paying workers under the table hurts the company, management, and the workers. Businesses that routinely pay workers under the table frequently must shut down due to the sheer scope of unpaid employment taxes, penalties and interest when this type of scheme is eventually discovered.
- From a civil context, Management and other responsible parties will be held personally liable for the unpaid employment taxes, penalties and interest.
- From a criminal tax perspective, if employees are paid in cash and no W2 or 1099 is cut, those responsible could be charged with aiding and abetting the income tax evasion of another or conspiracy to the commit evasion along with the affected employees whom quite often will fail to report such income in the absence of the required W2 or 1099 reporting. Workers will also face serious issues by failing to earn Social Security and other benefits, like unemployment and disability insurance, due to their “under the table” employment. The failure of the employer to carry worker’s compensation insurance creates exposure for employees, the company and its owners and management as well if an under the table employee is hurt on the job.
- Pyramiding – Pyramiding is a variation on the practice of burning through multiple entities (i.e. C Corporations) when employment tax obligations ultimately become due. Pyramiding owners will use the withheld but unremitted payroll taxes to pay business expenses, boost profitability, and for other personal purposes.
When responsible parties are involved in significant payroll fraud situations, they face extremely serious consequences. Depending on the circumstances, they may face potential personal liability for the unpaid taxes. Furthermore, parties that engage in payroll tax fraud and attempt to conceal their actions are extremely likely to face criminal tax charges after the payroll tax fraud is discovered.
Who Is at Risk of Facing Payroll Fraud Audits or Investigations?
Simply put, any business with employees that has a payroll tax obligation can theoretically face a payroll tax investigation. Additionally, employers with large amounts of compensation paid to independent or outside contractors are at risk. However, certain risk factors can increase the odds that an audit or criminal tax investigation is conducted sooner rather than later.
As set forth above, some businesses will intentionally fail to file income tax, employment tax, and other required tax documents. The business owner may think that the IRS will be unable to learn about the fraud. However, business entities can appear on the IRS’s radar for a variety of reasons including because a company had deals that produced a tax impact for another entity that was reported to the IRS. Through these types of audits, IRS agents can detect potential payroll tax fraud at a company.
Similarly, at companies that pay workers off the books, detection is merely a phone call away. While it is most common for an affected employee to call, any person could theoretically report the business for paying workers under the table, failing to report workers, and other fraudulent practices. Employees who run into issues with a manager may make reports to relevant government agencies. Alternatively, a competitor who becomes aware of improper payroll practices may file a report to secure a competitive advantage.
Other businesses may simply come under scrutiny because of the nature of the industry. For instance, the IRS is known to place additional scrutiny on businesses in areas where tax fraud is rampant. For one, many home improvement contractors may face additional scrutiny because misclassification of workers is prevalent in the industry.
Another reason why the IRS can believe that a company or industry is more likely to commit various forms of tax fraud is when the company utilizes cash extensively or exclusively. The IRS believes that the use of cash provides a greater opportunity for fraud. Furthermore, at least some business owners seem to believe that cash will make their fraud undetectable and are therefore more likely to make an attempt. Business owners of gas stations, retail stores, and other cash intensive businesses are more likely to face these consequences.
Concerns about Payroll Tax Fraud at Your Business?
The consequences of payroll tax allegations can arrive swiftly and unexpectedly disrupt a business’s day-to-day operations and its continuing viability. Frequently, business owners are surprised at the aggressive tactics that revenue agents will employ when working a case of this type. In many cases, business owners have likened their experience regarding a payroll tax audit or investigation to “guilty until proven innocent.”
The tax lawyers and tax professionals of the Tax Law Offices of David W. Klasing can assist business owners who are concerned about payroll tax mistakes or who are facing an employment tax audit. To schedule a confidential reduced rate tax consultation, call our Los Angeles or Irvine law office at 800-681-1295 or contact us online today.
