by Brian Mahany
Just 2 months ago (July 5th) we warned of various payroll processing frauds that prey on small businesses. The IRS must have been listening since they too just issued a warning.
Because these frauds can bankrupt a business, the warnings bear repeating.
Many small and medium size businesses outsource their payroll processing and tax payment functions. Small business owners want to concentrate on what they do best – not pushing paper and calculating withholding on each employee’s check. That’s a lot of work, especially if payrolls are weekly.
Some fraudsters have capitalized on the popularity of third party payroll processing by sitting up phony companies. You provide them the payroll and time sheets each week. The employees get paid but the withholding never makes it to the IRS and state. The bad guys pocket the tax money. By the time the IRS figures things out, the business owners is in the hole by tens of thousands of dollars if not more.
Unfortunately, proof that the money was paid to the payroll processor is not a defense. the employer remains responsible for unpaid taxes. At best, a business owner may sometimes receive an abatement of the penalty but never the unpaid tax. That means the business owner has to pay twice.
Preventing fraud is relatively easy with just a little work. First, never allow notices to go solely to the payroll company. If there is a problem, you need to see the notices first. Most of the larger payroll frauds occur when the business’ address is changed to that of the processor. The IRS may mail increasingly urgent warnings but the business owner never sees them.
Making sure you always receive notices is an important first step but even then, it could take several months before the IRS starts take action. The best defense is to find a processor that uses the EFTPS for returns. This system, short for Electronic Federal Tax Payment System allows you to check in real time to insure that returns were timely filed and payment made. A few minutes per month can give you peace of mind that things are being handled properly.
If you find yourself the victim of a payroll fraud, contact us. We are unique among law firms in that we concentrate in both fraud recovery and tax matters. We can help you with any resulting IRS or state tax problems AND help you get your money back. For more information, call attorney Brian Mahany at (414)704-6731 (direct) or by email at We are full service tax lawyers that can help with a wide range of tax problems from audit defense to offshore taxation issues. All calls are completely confidential.
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & San Francisco, California. Services available nationwide.