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25.1.2.6
(01-01-2003)
Employment Tax Fraud
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The package audit policy described in Policy Statement
P–4–4, IRM 1.2.1.4.2 (IRM 1.2.1, Policies of the Internal Revenue
Service) particularly relates to the examination of employment tax liabilities.
Frequently taxpayers fail to treat as employees persons they generally designate
as
"self-employed or casual labor."
There may also be
willful attempts to camouflage salary payments or to list as wages, payments
where no services have been performed. The most common employment tax fraud,
however, is simply not remitting trust fund taxes to the Government. Multiple
schemes have been concocted to evade employment tax. The following paragraphs
describe the major identified schemes. Also, please see IRM 9.5.3.3.1.1 for
a discussion of various employment tax schemes.
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Pyramiding liabilities occur where the subject withholds the tax but
does not pay it over. After several quarters, the subject moves the assets
to a new corporation and abandons the old business activity. The subject continues
the withholding but does not pay the tax over, and again abandons the second
company when financial problems occur, and forms a new company. When this
is accompanied by bankruptcy of the predecessor companies, further complications
arise.
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Employee leasing companies are a growing area of fraud. This is an industry
where an employee leasing company contracts with a client company to handle
the client company's administrative duties and hire some or all of the client
company's employees, leasing back these employees to the client company. When
the leasing company does not pay the employment taxes due on the employees
it leases, huge tax deficiencies can occur in a short span of time because
the leasing company can be responsible for several client companies. Generally,
the employee leasing company will not have any significant assets to collect
against, as it is only a service company. When there is indicia of fraud indicating
that an employee leasing company was established to fraudulently evade federal
employment taxes, consideration should be given to referring the case for
CI consideration.
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A scheme commonly referred to as the 861 refund scheme, uses Forms 941C,
or some other claim for refund, to request a refund of all employment taxes
paid. The promoters of these schemes also advise employers to opt out of the
income tax system and stop withholding taxes and filing employment tax returns.
25.1.2.6.1
(01-01-2003)
Payroll Padding
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Payrolls may be padded for numerous reasons. The
purpose is usually the same: to get funds out of a business in the form of
a deduction without the recipient paying income tax on the income. This method
is commonly used where the paying enterprise is in the type of business which
does not sell for cash and money can only be taken out by check. This method
could be used as a tax evasion scheme enabling the taxpayer to obtain funds
needed for extortion, to pay for personal expenses or to repay gambling losses
or debts to loan sharks.
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Another way to pad the payroll is to have political
party workers on the payroll even though the employee performs no services
for the payor company.
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To detect indications of payroll padding, focus
special attention on payroll records:
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If there is a suspicion or knowledge that fictitious
employees are being used, then the negotiation of the check should be pursued.
If checks are cashed at the same bank or through other parties, the payee
may be known at the bank or by the reendorsers.
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If Forms W–2 are returned by the Post Office
as undeliverable, all payroll checks to such employees should be thoroughly
scrutinized as to their disposition and the route they took back to the bank.
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Social Security numbers on W–2’s should
be verified for legitimacy. Because each employee is required to have a Social
Security number, a listing of duplicate numbers might reveal ghost employees
(used by permission of the Association of Certified Fraud Examiners).
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An analysis of payroll withholdings might reveal
either ghost employees or trust account abuses. Ghost employees often will
have no withholding taxes, insurance or other normal deductions. Therefore,
a listing of any employee without these items might reveal a ghost employee
(used by permission of the Association of Certified Fraud Examiners).
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If the company provides or assists in insurance
coverage, pension plans, etc., test employee terminations to determine whether
the employee was also withdrawn from the payroll.
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A company may continue issuing checks to an employee
who has left. Randomly select employees and compare endorsements at various
times during the year.
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Key employees or officers may be loaned to political
parties to perform various services while being paid their salary by their
employer. Attempts should be made to determine where the employees’
services were performed during the payroll periods in question. Examination
of expense reimbursement reports would be of assistance in determining the
geographical location of the employee at a particular time. This information
may serve as a basis for a follow-up interview of the employee.
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Some prominent figures in organized crime have
no legitimate source of income. They receive income only through illegal activities.
Therefore, in order to prove how they support themselves and their family,
they must have a source of legitimate income to report for income tax purposes.
These individuals will find a business willing to put them on the payroll
and issue them regular payroll checks, even though the employee performs no
services. The employer is frequently a retail outlet owned by or associated
with some other member of organized crime. In most cases these payroll payments
are returned to the payer in cash and diverted.
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Extend the examination to the suspected prominent
figure and trace the disposition of their payroll checks to determine if any
of the money was returned to the corporation.
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When the entity being examined is suspected of
being used as a salary haven by a prominent figure in organized crime, the
examining agent should look for certain indications to support the suspicion.
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Determine if checks are cashed by the employer.
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Establish whether the employee has the qualifications
to perform the function for which he/she receives the salary.
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If records indicate the employee is still on the
payroll at the time of examination, the compliance employee should attempt
to establish whether they are actually present on the premises.
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If the employee holds a position as outside salesman,
the compliance employee should determine who the customers are and establish
whether the employee actually contacts these customers.
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