Embezzlement or theft may be a more frequent issue faced by small and medium sized businesses than many people think. Often office managers or employees will improperly take money or assets from a business. Although, perhaps not as common as an employee misappropriating monies or assets, I have seen professionals, such as the businesses CPA embezzle or steal money, which when done is typically a much higher dollar amount and more damaging to the company. One means by which I have witnessed a CPA or professional embezzle monies from a business is through the employment tax (941 tax) process whereby federal tax deposits are paid to the IRS on a weekly or monthly basis. Below I have provided examples of this embezzlement or fraud scheme, which hopefully can prevent some business owners from falling victim.
One situation whereby I have witnessed a CPA or office manager involved with theft or embezzlement from a company was when the CPA or office manager was preparing the 941 employment tax returns and in charge of making the federal tax deposits. The scheme was conducted under the following facts & circumstances. The corporation would run payroll and net payroll checks would be paid to all employees and officers. A payroll report was provided to the corporation stating gross payroll, net payroll and the total employment tax liabilities. The correct amount(s) were withdrawn from the corporation’s bank account to pay the tax deposits, but the deposits were not paid to the federal government or state agencies. The deposits went to another account, usually an account under the control of the third party responsible for the embezzlement or fraud.
Thus, when looking at the bank statements, payroll records and 941 tax returns, everything would appear ok. The net payroll was paid to employees and the appropriate amount was being withdrawn for tax deposits. The internal books of the business would be in line. When preparing the 941 returns, the correct return was provided to the necessary parties or officers for review and signature, but then a zero ($0) 941 was filed or no 941 was ever filed at all. The business owners can be personally responsible for the trust fund portion of the 941 tax!
You may be asking yourself, how does the IRS catch on, or why did the IRS not catch on? The IRS will catch on, because in all likelihood the business must issue correct W-2s to employees so employees can file their individual returns. Eventually, the IRS will see that the W-2s are not matching up with the 941s and the federal ta deposits, but this could easily occur 12-24 months after the fact and thus the fraud could have been ongoing for 24-36 months. Furthermore, if the individual responsible for the fraud also receives the IRS notices and is responsible for IRS contacts, knowledge to the business owners could be further delayed.
As a business owner, what can you?
- Making the actual federal tax deposits yourself is the safest manner to prevent this fraud or embezzlement
- If you do not make the deposits, make sure you obtain receipts of the deposits paid through eftps.gov and check these deposits against the bank withdrawals and applicable documents
- Make sure the 941s are accurate based upon payroll and ensure they are filed. If filed and a balance is due, you would receive a notice within 15-60 days.
- Make sure you are receiving all IRS and tax notices.
If you or your business have been the victim of theft or fraud through a similar 941 scheme, please feel free to contact The McGuire Law Firm to discuss your options with the IRS.