Given how many small businesses we represent in civil and criminal tax issues it is inevitable that we see business owners in Greenwich, Connecticut and elsewhere that have been victims of employee embezzlement. It would not be a normal year if we did not get half a dozen of these case through our door.
Having a trusted employee steal from you is always bad: the financial loss as well as the abuse of trust are very difficult to handle at any time. The federal tax impact of this can make the hurt much worse!
Aside from the financial loss it is not uncommon for the employee to have covered their tracks by altering financial records, including filing false federal income tax returns for the business and false payroll tax returns, and hiding IRS correspondence from the owner. Payroll issues are particularly bad because it puts both the business and the owner personally at risk due to the personal liability aspect of the trust fund portion of the unpaid payroll taxes. It is not uncommon for the IRS to pursue the owner personally for these unpaid payroll taxes that were used to pay the third and were actually stolen. In many ways the owner is not being victimized all over again!
If you or your client is a victim of employee embezzlement there are a number of steps we suggest they take right away.
Contact the police and file a police report!
Though I would not expect the police to do much about it (most police departments do not get excited about financial crimes) the report will be critical to bolstering a case for the loss for federal tax purposes.
Prepare corrected tax returns and take the losses due you
Preparing amended returns, or in some cases just fling correct original returns, is important to fix the tax situation with the IRS. Once of the actions the IRS will look at when considering to abate penalties is the timeliness of taking corrective action on the part of the business owner.
Seek Penalty Abatement
The IRS has an array of penalties, including negligence, accuracy, failure to file, failure to pay and civil fraud. These penalties hurt the business and owner financially, but also add insult to injury by penalizing the owner in this case for being an embezzlement victim. The IRS will allow for a penalty to be abated for “reasonable cause.” The fact that the money was stolen by the employee in our experience is generally viewed as reasonable cause, but bolstering your case by fling a police report timely and taking corrective action will help.
Consider going to the IRS Criminal Investigation Division
In cases where an employee has stolen money and falsified payroll records to cover the theft we have had significant success with using the IRS Criminal Investigation Division. Not only has money been stolen from the client, but funds have also been stolen from the federal government. In addition, most thieves do not report the money they stole on their tax return, which means they filed false income tax returns. It provides our clients with some satisfaction to see the federal government pursue the thief. It also helps their civil case (and often ends any trust fund liability).
If you or someone you know has been the victim of employee embezzlement and now has a federal tax issue because of the theft and you wish to discuss it or any other tax issue please feel free to contact me at (203) 285-8545 or firstname.lastname@example.org.
Eric L. Green, Esq
Green & Sklarz LLC
243 Tresser Boulevard, 17th Floor
Stamford, CT 06902
Ph. (203) 285-8545
Fax (203) 286-1311