Tax fraud committed by both ghost employees and ghost employers is scary and costly

Ghost sightings are common this time of year.

Some companies, however, find that ghost employees haunt their businesses year-round.

Ghoulish tax tricks are also played on workers by some ghost employers.

In both cases, the actions are not just criminal, but also are costly to all, including Uncle Sam, who are victims of these scary tax evasion tactics. 

Haunted by ghost workers: A ghost employee is a fictitious employee set up in a company's human resource and/or payroll system that receives paychecks.

Basically, ghost workers are a form of embezzlement, as the nonexistent employees — or more accurately, the people who created them — pocket some added pay.

One way to create a ghost employee is to wait for an actual worker to leave the company, either for a temporary absence or permanently, and then keep that person on the payroll records. The person who maintains those records then collects the fraudulent pay, often by setting up a new direct deposit account for the gone employee.

Another, more elaborate, ghost employee scheme is to create an entirely fake employee in the system. That nonexistent worker's earnings then are routed to the ghost's creator, typically through direct deposit.

It may seem like it would be easier to hide ghost employees in large companies, but HW & Co., a CPA an advisory firm with offices in five Ohio cities, notes that small businesses, where a single employee may handle all the payroll accounting, are more vulnerable.

"In some cases, the perpetrator enlists a friend or relative to forge endorsements or deposit checks; in others, no assistance is necessary. The thief simply exploits weaknesses in the payroll system," says HW & Co.

Spooky employers, too: Then there's the ghost employees counterpart, the spooky employers who cheat the payroll system, and the Internal Revenue Service.

Ghost employers are companies that give their employees a W-2, but don't file employment tax returns or provide payroll information to the Social Security Administration.

These cases definitely are fright for Uncle Sam, but they also are scary for the employees who think the boss is taking care of payroll taxes.

Employer payroll tax fraud could mean workers owe the government the unreported taxes, often required to be paid all at once.

In the longer run, a boss' shorting of payroll taxes could mean workers are ineligible to receive unemployment, disability, Social Security, or Medicare benefits when you need them.

And just a friendly reminder to non-spectral bosses. Employers' next quarterly payroll tax return for July-September is due by, you got it, Halloween, Oct. 31. The IRS recommends companies file it electronically.

Tax Felon Friday: Employment fraud by both employers and employees is a top target of the IRS Criminal Investigation unit.

Just this week, a Louisiana man was sentenced today to 24 months in prison for willfully failing to report and pay over the IRS employment taxes that his construction company withheld from employees' paychecks.

Julian Russ of Houma, Louisiana, was Chief Financial Officer (CFO) of a Mississippi-based pipeline maintenance and construction company. As CFO, he was responsible for collecting, accounting for, and submitting the company's employment taxes.

Prosecutors charged Russ with not filing, from at least 2012 to 2018, the firm's quarterly employment tax returns and not paying the IRS the taxes withheld from employees' wages.

That failure, according to court documents, led to a federal tax loss of more than $6 million.

Russ pleaded guilty to the employment tax crime charges in June.

At his sentencing hearing on Oct. 26, the presiding U.S. District Court judge not only delivered the jail term, but also ordered Russ to serve three years of supervised release, and to pay $2,714,280.71 in restitution to the U.S. Treasury.

As evidenced by this case, and others cited in the weekly Tax Felon Friday feature, tax investigators are pretty darn good at their job.

You can catch up on previous tax crime posts, including those that were published long before I gave them a special designation, in the, what else, tax crimes category. You'll find this post at the top of that collection right now, so just scroll down for more.

One more spooky item: Check out my tumblr blog Tumbling Taxes' Halloween post, which includes a clip from one of my favorite television shows, CBS' version of the UK show "Ghosts."

You also might find these items of interest:

• 5 Halloween tax break treats
• 4 ways the IRS is scary, on Halloween and year-round
• Ghost preparers are among continuing scary tax scams
• Halloween costumes, movies, and (scariest of all!) taxes

 

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