The IRS launched more than 200 investigations involving employment tax fraud in fiscal 2018 – a 28% rise from fiscal 2017. Of those cases, 48 people received prison sentences.
Employment tax fraud or tax evasion takes on a variety of forms with the most common methods including paying employees in cash only to avoid taxes, filing false payroll tax returns, or not filing any returns at all. Pyramiding is another example and involves businesses withholding taxes from employees’ wages but not sending the funds to the IRS. Instead, they start a new company to avoid liability.
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Examples of cases investigated by the IRS and Department of Justice in 2018 and concluded in 2019 include:
- The owner and operator of Gold and Silver Exchange in Albuquerque, New Mexico pleaded guilty to federal tax evasion. The owner concealed the nature and location of his business revenue from the IRS by placing funds in bank accounts belonging to nominee businesses and failing to file personal and business income tax returns.
- The owner of a Greenville, Ohio glass company pleaded guilty to failing to “truthfully account for and pay over employment taxes.” While she withheld taxes from her employees, she did not pay the amounts to the IRS or file quarterly returns.
- A Texas tax return preparer was convicted of conspiring to defraud the United States by aiding and assisting in the preparation of false tax returns.
With employment tax investigations increasing, it’s a good idea to follow best practices for withholding, paying, and reporting federal and state employment taxes. Choose a reputable CPA or payroll processing company and stay involved in the process by reviewing reports and verifying deposits.