IRS keeping employee leasing companies under the magnifying glass
Federal tax authorities are scrutinizing entities using this business model because some have used aspects of the structure for evasion.
An employee leasing company provides other business entities with payroll services, including the important function of collecting employment taxes for payment to the IRS. Sometimes called a type of third-party taxpayer, an employee leasing company can be a legitimate, above-board professional business, but because some people have used the business model as a vehicle for tax evasion, employee leasing businesses have come under intense scrutiny from tax authorities.
Employee leasing company operations
The tax-evasion schemes based on this model are simple. Basically, the employee leasing company collects money for employment taxes as deductions from employee paychecks for payment to tax authorities – just like any employer must to do to comply with tax laws – but instead of paying the taxes over to the IRS, the company (or someone within the company) fails to pay the deducted money. Instead, the wrongdoer diverts the money for personal use, in most cases.
In October 2018, the U.S. Department of Justice announced in a news release that the Chief Financial Officer of an Austin, Texas, employee leasing company had pleaded guilty to this kind of scheme. As CFO, he had authority over the company function of the payroll-deduction process, including payment of withheld employment taxes to the IRS.
Instead, the CFO took about $5 million for his own use, resulting in a federal tax deficit of over $13 million. According to the Justice Department, the defendant faces a maximum of five years in prison, supervised release, restitution (an order to repay money wrongly taken) and fines.
Engage legal counsel
Obviously, the penalties for tax evasion are very sobering. Anyone working at an employee leasing company must take care to carefully comply with the law in every aspect of tax collection and payment on behalf of employees and clients. The IRS is taking seriously the potential for criminal abuse of the positions of trust these companies hold to see that they properly pay money collected from employees to the IRS for payroll taxes owed.
Any executive, manager, director, officer or in another fiduciary position in an employee leasing company with questions about the appropriate way to handle the trust position their company is in vis-à-vis the collection and payment of employment taxes in the payroll process should seek experienced legal counsel.
If a government investigation is underway or charges already brought, immediate consultation with a skilled tax lawyer is essential. An attorney will carefully communicate and negotiate with authorities on behalf of the client, while providing to the client information, advice and vigorous defense.
The tax attorneys at Brown, PC, in Fort Worth, Texas, represent people and businesses under investigation for or accused of tax evasion or tax fraud involving employee leasing companies and other third-party taxpayers in Texas and across the country.