Whether as employee or employer, taxes are a permanent workforce expectation. Here is the lowdown on the types of schemes the Internal Revenue Service (IRS) regards when initiating a civil tax audit or criminal tax investigation.
Let’s go over what we already know. Employers must withhold and pay employment taxes over to the IRS. Those taxes include federal income tax, social security, Medicare, and unemployment taxes. Despite all the grumbling, these taxes provide important benefits to employees who pay into these federal programs. Here is a rundown:
- Social security: Disability, survivors, and old age benefits are accrued by employees when they pay their social security taxes.
- Medicare: Hospital and medical benefits are funded by the Medicare program.
- Unemployment taxes: For workers out of a job, unemployment taxes can offer a lifeline of benefits and services.
- Federal income tax: Federal taxes taken at the paycheck level ensure federal income withholding amounts are tallied and paid as earned.
Collectively known as “employment taxes,” these monies can be easy pickings for business owners awash in red ink or looking to live beyond their means by keeping, rather than paying, these taxes.
Types of employment tax scams
Employment taxes can be tempting to those looking for a bigger payday. The IRS has identified a couple of common employment scams including these:
- Pyramiding: This well-known scheme is the one we talk the most about. An employer withholds employment taxes but fails to pay them over to the IRS. While this happens in the context of established, well-regarded businesses from time to time, it is also the domain of fly-by-night contractors who set up businesses like employment agencies. After doing business for a period of time, operators bank employment taxes and then quickly wind down the business by declaring bankruptcy before leaving town to set up shop in another town.
- Leasing employees: The use of third-party vendors to lease, or lease back, employees can lead to employment tax problems in a couple of ways. If you arrange with a third-party provider to hire and handle your HR needs, it saves you in-house hassle because the provider is handling administrative tasks—including collection and payover of employment taxes. Sometimes these providers skip town with the money, or develop offshore tax routes to defer taxes.
- False tax returns: Filing a fraudulent payroll tax return is an easy way to underreport wages earned. Failing to file at all is also a basic form of employment tax fraud.
Tax fraud happens. If you suspect there are gaps in your company tax reporting or filings—talk to an experienced tax attorney now. You may be able to resolve the problem less painfully than if you wait for a letter from the IRS.
Get guidance from an experienced legal team
Located in Cleveland and Chicago, the tax lawyers at Robert J. Fedor, Esq., LLC answer questions about criminal tax charges, foreign bank accounts, or tax litigation. When you need skilled tax advice locally or abroad, contact us or call 800-579-0997.