Employers: What should you do if an employee has embezzled funds?

Embezzlement is a far more common occurrence than most people realize. In fact, many businesses treat embezzlement as a common business risk. Accounting for embezzled losses and detecting embezzlement in the office is simply part of doing business.

But as an employer, what are your responsibilities? Especially when it comes to recovering the losses and reporting those recovered funds for tax purposes, it is critical to understand the basics of your rights and options.

What is embezzlement?

Embezzlement is a form of theft. But instead of a normal theft where someone simply takes assets that don’t belong to them, embezzlement is committed by someone who has been given legal access to the assets in question.

A recent press release out of Pennsylvania gives a good example of embezzlement. In this case, the defendant was the Director of Finance and Business Manager of a school district. According to the charges, he fabricated expenses and routed school money to himself.

The important thing to note is that, while the defendant had legal access to these funds in his role as Business Manager and Director of Finance, he was not authorized to make payments to himself and fabricate expenses. He is accused of taking possession of assets to which he had legal access but not an authorization to take possession.

Steps to take

If an employee has embezzled funds from the company, you have to protect your rights while still fulfilling your responsibility to the government. Here are the three basic steps you should take:

1. Seek legal advice: While you do have a legal obligation to report the crime, it is advisable to seek counsel from an experienced tax lawyer first. Each case is unique, and it’s important to report embezzlement in a way that protects your business’s future and reputation.
2. Report the crime: It is a clear legal obligation to report evidence of embezzlement and allow the police to investigate and bring charges, etc.
3. Report the losses and repayments for tax purposes: This is where the situation becomes most complicated. There are specific guidelines and regulations for reporting losses to embezzlement and other crimes, and it is important to get the specifics right. Similarly, there should be some kind of restitution/repayment requirement as part of a criminal sentence for embezzlement. Some of this can be received tax-free and some must be reported as taxable income, depending on a few important circumstances.

These are the three primary things you should do if you have discovered an employee embezzling from your company. Each of these involves numerous complications and considerations that will depend greatly on the specifics of your case. Failing to report the repayment income properly could land your business in serious tax trouble, for example.

Protect your business’s future by handling the reporting of embezzlement carefully and thoroughly.