January 25, 2008, Newsletter Issue #47: Corporate Tax Evasion

Tip of the Week

There are a variety of ways for businesses and corporations to partake in IRS tax evasion. The end result hurts two parties: the federal government, and the individual employees. The federal government suffers due to loss income. The individual employees suffer due to decreased funding of their future social security and/or Medicare benefits.

Failure to file. When employers fail to file payroll and employment tax returns, they are committing tax evasion. By not filing a payroll tax return, the IRS will have no record of how much the business owes in taxes.

Filing false payroll tax returns. If an employer files payroll tax returns reporting the improper amount of wages that taxes are based on, this can be viewed as tax evasion by the IRS.

Pyramiding. This tax evasion scheme involves employers withholding payroll and employment taxes from the employees paychecks, but not reporting or paying the taxes to the IRS. Usually, the company will do this for a while, accumulate the liabilities, and then just file for bankruptcy. Upon filing for bankruptcy, the payroll tax liability is discharged. Once this happens, the company will open up under a new name and start the process all over again.

Outsourcing/Employee Leasing. When an employer hires an outside firm or individual to do certain company tasks, this process is known as outsourcing or employee leasing. In and of itself, it is a legal practice/business. For instance, instead of the company doing its own payroll or administrative tasks, they ‘outsource’ an independent firm to do the payroll processing work. However, employee leasing and outsourcing have been known to be involved a tax evasion scheme. The independent firm prepares payroll, withholds the employee taxes, but does not submit the taxes to the IRS. This is a form of tax evasion, and is one known scheme used for this purpose.

Paying in cash. Paying employees and business vendors in cash is a common way for employers to avoid paying both income and payroll taxes. Usually employers who operate via the cash transaction route, will not report any payroll tax withholding to the IRS, since they do not withhold any taxes from the employee’s pay.

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