Maintaining proper payroll records and timely filing helps ensure that if the Internal Revenue Service (IRS) audits a business, the review remains focused on compliance rather than enforcement. During periods of economic stress, some businesses may be tempted to delay or avoid payroll tax obligations, but the long-term consequences often outweigh any short-term relief.
The IRS periodically releases information about employment tax schemes uncovered through enforcement efforts. These cases often serve as cautionary examples for businesses considering improper payroll practices. One such case involved a Honduran national and others accused of participating in a long‑running $38 million payroll tax evasion scheme.
According to court records, the individual operated an illegal payroll system that allowed construction contractors and subcontractors to pay workers off the books. This arrangement avoided payroll taxes and defrauded workers’ compensation insurers. Over nearly a decade, the operation relied on unlicensed check‑cashing services and cash courier arrangements connected to shell entities.
A shell company is a business entity with little or no active operations. While shell companies may sometimes serve limited legitimate purposes, they are often misused to conceal income, move funds, or facilitate tax evasion. In payroll tax schemes, shell entities are frequently used to obscure the true employer and avoid employment tax obligations.
In this case, the parties also filed false tax returns to conceal payroll tax violations. A false tax return involves the deliberate misrepresentation or omission of required information with the intent to evade lawful taxation. The ebook “Employment Tax Fraud: What Every Business Owner Needs to Know,” provides additional background on common employment tax issues.
Generally speaking, though, employment tax fraud may include any or all of the following:
Knowingly underreporting earned income
Providing falsified documents in support of this false reporting
Claiming deductions to which the business is not actually entitled
While most businesses are not engaged in elaborate shell company operations, similar practices can still draw IRS scrutiny. These may include paying workers in cash, misclassifying employees as independent contractors, failing to deposit payroll taxes, or underreporting wages.
Filing a false tax return becomes a felony when the government can demonstrate that the return was filed knowingly and with the intent to evade taxes or mislead the government. Even if the tax return did not successfully mislead the IRS, it only has to demonstrate that it could have been the result, and that it was the intent of the filing business.
In this case, the conduct met the threshold for felony charges. At the time of writing, the individual faces a potential sentence of up to five years in prison per conspiracy count, while others involved also face significant penalties.
Payroll tax matters involving misclassification, reporting errors or allegations of fraud can expose a business to significant financial and legal consequences. At Robert J. Fedor, Esq., L.L.C., we advise businesses facing IRS employment tax examinations and related investigations. Contact our legal team at 440‑250‑9709 to discuss your situation. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.