If a tax preparer files fraudulent tax returns for a taxpayer, the IRS holds the associated taxpayer responsible for the filing. The IRS may require the taxpayer to pay additional taxes, interest and be subject to penalties. However, this does not mean that the tax preparer won’t face separate criminal penalties of their own.
Bookkeeping Payroll Tax Fraud
In January 2021, a 65-year-old owner of a payroll tax service firm in Massachusetts was charged and plead guilty to defrauding her clients out of funds they had set aside for payroll taxes.
Her scheme ran from 2017 to 2020. During this period, she would withdraw money from her clients’ bank account meant to cover their payroll tax. Then, rather than forward the funds to the IRS, she deposited the funds into her business firm’s checking account.
As the scheme progressed, her clients received notices from the IRS concerning their missing payroll taxes. When they contacted her about it, she told them that it was all a mistake that she’d rectify with the IRS. She’d then pay the taxes late. When her clients began closing their businesses due to COVID-19, many learned that she had not paid a large amount of their payroll taxes to the IRS.
Though some clients tried to sue her for the money she stole, they were unsuccessful. By the time they took action, she had already filed for bankruptcy. All her clients summarily saw their lawsuits dismissed in court. In total, her actions cost her clients over $1.1 million in taxes. Additionally, the IRS required her clients to pay the taxes that she failed to deliver on their behalf.
Pleading guilty, she lessened her punishment through a plea deal. Instead of a possible 20 years in prison, she will now serve only five. She must also pay $1,393,430 in restitution, including the $1.1 million she failed to deliver for her clients, and an additional $272,138 in penalties to the IRS.
Avoiding bookkeeping fraud
The firm owner was able to execute her scheme because of her clients’ high level of trust in her. She had full authority to withdraw from their bank accounts and issue payments. To prevent bookkeeping fraud in your business, adhere to the following best practices:
- Refrain from delegating bookkeepers the authority to withdraw funds from your account without your authorization. If you feel that they need this capability, require a two-person authentication or dual control.
- Practice robust data security procedures and ensure your bookkeeper does the same. Make sure they also have a written policy on how to handle confidential information.
- Periodically audit your accounts for suspicious activity.
- Never sign blank checks, even for a trusted bookkeeper.
If the IRS contacts you regarding suspicious issues on your account, work with the IRS and, if necessary, seek legal counsel. An attorney can help you in verifying that the problem gets resolved. Failing to fix it quickly could create more liabilities for you in the future.