Is Fraud Baked Into Your Employee Benefits?

Most companies offer basic benefits to their employees. Whether it's health insurance or wellness and retirement programs, business owners have a choice of what they want to provide and how much they want to pay for the perk.

Business owners also have a responsibility to abide by regulations, classify their employees correctly, and withhold and turn over payroll taxes, among other things. Our law firm works with business owners who find themselves on the wrong side of employment tax crime. We aim to defer charges or develop strategies to obtain the best outcomes. However, the Internal Revenue Service (IRS) also works to identify tax fraud that is cooked into defined benefit or retirement plans.

In working to deter abusive tax shelters and tax evasion, the IRS lists transactions that it considers close to what it considers tax avoidance schemes. Some of these transactions include:

• Policies associated with retirement plans that increase deductible contributions even as they reduce taxable amounts due when the plan reaches distribution.
• Arrangements around life insurance policies that depress the cash surrender value of the policy as the policy is transferred to the employee. Following the transfer, the value of the policy increases.
• The IRS may question life insurance contracts where the death benefit exceeds the actual participant death benefit defined under the plan.

For compliance, business owners should also be aware of double dipping related to certain vendor programs offered to employees—like Wellness or Health Awareness plans. You may be marketed a Wellness program that utilizes pre-tax wage deductions and later returns those deductions upon participation in a health maintenance or prevention program. The IRS draws a line on some of these programs. Be wary of programs that are not employer-funded or where the worker receives tax-free payments throughout the year that are not related to an actual medical expense. 

There are also other types of fringe benefits, such as freebies offered by an employer that cost them nothing to offer, like this week’s season ticket, or one-time benefits of so little value they need not be reported as income—unless the IRS thinks they should. Bottom line—if you are offering creative tax benefits in your employee benefits package—speak with a tax attorney to ensure you steer clear of the IRS.

Received an audit or inquiry letter from the IRS?  Call us for trusted advice

From offices in Chicago and Cleveland, Robert J. Fedor, Esq., LLC offers strong legal guidance to clients throughout the U.S. and abroad on IRS audits, criminal tax investigations, payroll tax issues, and more. When you have questions about individual or business tax compliance, call 440-250-9709 or contact us online today.