New Year = New Withholding Beware of Fraudulent Withholding Schemes on the Rise
By Marilou C. Vroman, CPA, CFE
Whether you choose to file your tax return by April 15th or file for an extension, your personal tax obligation is still due on this day. Ever since starting my first job and learning the rules of federal withholding, I was the one who thought that it was better to withhold a little extra along the way, than to get hit with a large tax bill and have to write a painful check.
However, not all employees are so conservative and some, may go to any length to find a way to beat the system.
Dealership’s have a wide array of personnel with varying tax situations. From individuals claiming complete exemption from federal income tax withholding, to those who claim zero allowances and, well, let’s just go ahead and request some additional withholding while we are at it. Employees complete a form W-4 for the payroll department to process the correct withholding amount based on their personal tax position. While most payroll systems will automatically calculate the withholding amounts based on income, benefits and withholding allowances, are you sure the withholding amounts your dealership pays to the IRS is the exact same as the amount that was deducted from your employees?
A creative yet difficult to detect fraud scheme is the manipulation of federal tax withholding. It’s essentially a deferred cash benefit where the perpetrator’s tax bill can be partially or fully paid by the dealer without their knowledge. In a traditional payroll process, funds are withheld from employee compensation and remitted via tax deposits to the Department of the Treasury. These tax deposits are typically the aggregate payment of federal income tax withholding plus employee and employer portions of FICA and Medicare. Since employers pay a share of FICA and Medicare taxes, each payroll will generate a certain amount of payroll tax expense on the books. The fraud scheme kicks in when an employee with access to the payroll or federal tax deposits is able to increase the recorded amount of their own personal withholding without having the amount deducted from their pay. Instead, the extra withholding is simply recorded as payroll tax expense. Here are a few suggestions to keep an eye on payroll:
The payroll registers should be reviewed by the Controller or Office Manager.
Employee withholding amounts per payroll records should be periodically inspected for reasonableness relative to earnings, tied out to the federal tax deposits and agreed to the related entries in the GL.
A periodic W-4 test should be performed to validate allowances vs. amounts withheld.
Payroll tax expense should be recalculated and reconciled to the amount recorded on the GL.
Tax deposits should be traced back to the source pay registers to ensure the funds were deducted from employees, and not expensed to the dealership.
As we often say, when someone knows they are being watched, they are less likely to misbehave. Why let the IRS have all the fun? Do your own payroll tax audit to keep everyone on their toes.