Tips to Protect Yourself from Employment Tax Fraud

Diverting employment taxes is easy—but how do you protect your business and prevent an employment tax dispute with the Internal Revenue Service (IRS)?

In a business of any size, employment tax collection and pay over to the IRS is an important responsibility. Depending on your business or corporate structure, responsibility for payment of employment taxes may land in the finance department, a sole accountant, or an outsourced vendor. Regardless of your business operation, you are responsible for the money owed to the IRS.

Some business owners are deep into deliverables, growth strategies, and staying afloat amid competition. Backroom operations like payroll are easy to delegate. In Ohio and elsewhere, the IRS expects employers to accurately report on income and taxes withheld. Turning over employment taxes to the IRS is part of that. Consider these tips for keeping your books and payments to the IRS above board:

1. Clarity: Classify and onboard employees properly. Misclassification of employees as contractors who are operating as employees is a quick tip-off that there are systemic business problems. Employee misclassification is a form of tax evasion. Whether you onboard your employees or use a service, be sure you can defend your classification.
2. Maintain process: Payroll accounting can be complicated. Employees without adequate training may not have the expertise and current understanding of regulations to handle the job. The individual, team, or vendor you put in place to manage your company finances and withholdings have direct impact on the viability of your company and your ability to respond without fear to an IRS audit. In short—be sure you can trust the people handling your money.
3. Checks and balances: Put checks and bounds in place to avoid payroll tax fraud. Appropriately restrict access to your accounting function and spread responsibility for different payroll functions between personnel. Choose your payroll accounting system software carefully and use alerts to track inconsistent or suspicious activity. Digital time-keeping should be part of the system to avoid payroll errors and collusion between employees and finance personnel in padding hours. Overall, ensure your process is being routinely reviewed and you are signing off on at least monthly reports that your operations are clean.

There is little to no defense for a business owner who claims they delegated their employment tax function to an employee or vendor. The IRS can apply a trust fund recovery penalty (TFRP) against the business owner and anyone in the organization who is responsible for paying withholdings but willfully fails to do so. With a TFRP, your personal income and assets are not protected if the IRS chooses to go after you.

Collection and remittance of payroll taxes is an important function for any business. Failure to account for employee withholdings has long-term consequences for the business owner, the business, and the employees whose social security benefits depend upon those payments.

If you suspect you have a payroll tax issue, speak to an experienced criminal tax attorney. Reviewing and correcting your employment tax payments now can save a great deal of difficulty and potential for tax litigation down the road.

Trusted legal advice if you are challenged by a tax controversy in Cleveland, Chicago, or abroad

If you are concerned about business compliance, an offshore tax question, or need guidance with an IRS audit, our tax lawyers at Robert J. Fedor, Esq., LLC can help. We deliver seasoned, strategic tax guidance. Call us at 800-579-0997 or contact us online.