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FinCEN, IRS-CI take steps to stem construction industry payroll tax fraud

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One construction workers' union calls it the industry's "dirty little secret." Tax officials call it a crime.

Both are talking about payroll tax evasion.

Today, the Financial Crimes Enforcement Network (FinCEN), in coordination with IRS Criminal Investigation (IRS-CI), jointly issued a formal notice to financial institutions alerting them to increases in state and federal payroll tax evasion and workers' compensation insurance fraud in the both residential and commercial construction industries.

Every year, state and federal tax authorities lose hundreds of millions of dollars to these schemes, which are perpetrated by illicit actors primarily through banks and check cashers, according to FinCEN and IRS-CI.

"FinCEN is committed to combating fraud by shedding light on how illicit actors within the construction industry are using shell companies and other tactics to commit workers' compensation fraud and avoid payroll taxes," said FinCEN Acting Director Himamauli Das.

Help tracking evasion networks: Officials say the notice provides financial institutions information they can use to help monitor, detect, and report suspicious activity that may indicate payroll tax evasion and workers' compensation fraud in the construction industry.

It describes how payroll tax evasion and workers' compensation fraud schemes may involve networks of individuals and the use of shell companies and fraudulent documents. These schemes affect the local and national construction job markets and put legitimate construction contractors and their employees at a competitive disadvantage.

FinCEN notes that this latest effort to stem payroll tax evasion aligns with its Anti-Money Laundering/Countering the Financing of Terrorism National Priorities established in 2021. That effort provides financial institutions with an overview of the underlying schemes, red flag indicators, and specific Suspicious Activity Report (SAR) filing instructions.

The notice also builds on FinCEN's ongoing efforts to combat the use of shell companies in illicit activity. FinCEN pointed to the final rule it issued last year establishing a beneficial ownership information reporting requirement, pursuant to the bipartisan Corporate Transparency Act.

That rule, which FinCEN calls "a historic step in support of U.S. government efforts to crack down on shell companies and illicit finance" required most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report to FinCEN information about their beneficial owners. Those are the persons who ultimately own or control the company.

This info, says FinCEN, will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and illicit actors within the construction industry referenced in the latest notice and others who would use anonymous shell companies to hide their illicit proceeds.

IRS investigators assistance: "We are proud of our collaboration with CI in issuing this Notice and exposing tax and insurance fraud that has plagued the construction industry and undermines law-abiding construction firms," Das added.

Jim Lee, chief of IRS-CI also noted how his investigators have used many of the tools highlighted by FinCEN.

"Earlier this year, we touted how Bank Secrecy Act data plays an instrumental role in the agency's criminal investigations, and we believe the data we receive in response to today's Notice will expose a number of payroll tax evasion and workman's compensation schemes," said Lee.

"By enlisting the help of financial institutions, we hope to crack down on fraudsters and level the playing field for legitimate business owners."

IRS-CI cited a successful prosecution of a payroll tax evasion case involving restauranters in its 2022 annual report's list of significant undercover operations.

Earlier this year, IRS CI announced the sentencing of an Oregon construction company operator to federal prison for his role in a multiyear scheme to evade paying payroll and income taxes on the wages of construction workers.

As with all tax evasion, schemes to avoid paying employment taxes cost not only the U.S. Treasury, but also hurts honest employers who do comply with state and federal tax law.

Employees and wrong withholding: Incorrect payroll tax payments also could put employees in difficult situations. In some nonpayment cases, employers are slow to or never issue W-2, Wage and Tax Statement, forms to employees. Other times, the amount of taxes listed on those annual earnings statements are incorrect.

If you don't get a W-2 or one that is wrong, regardless of whether fraud is involved, contact your employer first. There could be a simple explanation, and a replacement W-2 issued.

If that doesn't work, my post on how to deal with missing tax statements has additional steps you can take.

As for employment tax fraud, the good news is that employees are not on the hook for the missing money.

When an employer withholds taxes from workers' earned income, but does not pay these taxes to the IRS for whatever reason, the affected employees do not have to pay these taxes themselves.

As noted, you still are entitled to a credit for the withheld but not paid taxes if you file a substitute W-2, aka Form 4852. And if you are aware that the withholding issue is due to employment tax fraud, the IRS also would appreciate you letting the agency know.

You also might find these items of interest:



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