Common Tax Evasion Schemes The IRS Knows

Evading taxes is a huge affront to the Internal Revenue Service – and yet, countless employers attempt to do just this year after year. Whether employers refuse to pay because of personal convictions or financial difficulty, federal law requires this tax to eventually be paid. Employment tax evasion schemes have become prevalent enough the IRS has recognized and warned against five common methods. Below is brief description of each.

Filing False Payroll Tax Returns or Not Filing Any

Frequently, employers will try to avoid paying more by understating the amount of wages paid to their employees throughout the year. Filing false returns generally lowers the amount due. Some employers go as far to not file any returns at all.

Employment Leasing/Third-Party Payers

Employee leasing is a completely legal contractual agreement where a third-party company, frequently a Professional Employer Organization, is the official employer of a worker. However, this can be subject to abuse – especially when it comes to paying taxes. Sometimes the 'official employer' doesn’t pay the IRS its portion of collected employment taxes.

Paying Workers in Cash

A legal practice that can be taken too far. Employers can pay their staff in all cash, and some do to completely dodge employment taxes. Companies feel without a 'paper trail' they can get away with this – but the IRS claims to be able to locate employers engaging in this activity.

Misclassifying Employees

An estimated 3.4 million employees are currently considered independent contractors when they should have full employee status. Often, this is an honest mistake made when setting up a new worker. Though in some cases, employers purposefully misclassify employees to bypass employee taxes.

Pyramiding 

When an employer withholds the proper taxes from each and every employees’ paychecks, but then fails to remit them to the IRS, that employer is engaging in a practice known as 'pyramiding.' The term stems from the accumulation of quarterly employment tax liabilities – an employer creates a 'pyramid' by doing this. Often, employers that engage in this go under, file bankruptcy, and start the cycle again under a new company.

The IRS considers the above situations no joke; in fact, a total of 117 individuals have been sentenced to prison, home arrest, or halfway houses for partaking in these schemes over the past three years. The offenders were sentenced to an average of 17 months, with orders or restitution, plus interest.