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Common types of employment tax fraud

On Behalf of | May 30, 2022 | Tax Crimes, Tax Evasion

 

While most people think of tax fraud in terms of personal income tax filings, employment tax fraud is another prevalent issue in the state of Massachusetts. Employment tax fraud is a tax crime committed by a company against the state and federal government. When investigated by the IRS, there are hefty fines and repercussions for the businesses involved, often leaving them in a serious bind. 

Here are some of the most prevalent forms of employment tax fraud:

Employment leasing

Employment leasing occurs when a company hires a third-party firm to staff and manage employee administrative duties, including payroll. It is occasionally referred to as a third-party taxpayer. This strategy is perfectly legal in normal circumstances, but some companies have used these leasing firms to evade taxes.

In this scenario, the company collects taxes from its employees but does not turn over the funds to the IRS. The money is typically funneled into the pocket of an owner or manager. Because this type of tax evasion is increasingly common among companies and small businesses, the IRS and Massachusetts tax authorities closely watch cases where they suspect employment leasing tax fraud. 

Pyramiding

In this scenario, an organization commits employment tax fraud by collecting taxes from employees but fails to submit the funds to the IRS. The company often files for bankruptcy, then starts a new business, avoiding any previously owed debts. 

Paying employees in cash

A company can avoid paying the full amount of taxes due if they pay all or part of its employee wages in cash. This type of tax fraud is taken seriously by the IRS since it results in a significant loss of tax income for the government. Paying in cash is perfectly legal if the transaction is well documented. If wages are not recorded, and there is no paper trail, paying employees in cash can be problematic since the IRS cannot track the correct tax liability. This scenario can result in hefty fines and penalties.  

Filing false payroll tax returns

Another typical tactic some businesses use to evade employment tax is preparing a fraudulent payroll tax return. In this practice, companies frequently understate the salary they pay their employees to minimize their own tax liability. 

Taxes from individuals and businesses help fund the state and the federal government, and significant income is lost every year due to tax evasion. Employment tax fraud is not uncommon, but the risks for these actions can be high, resulting in severe fines and penalties. 

 

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