Tax Avoidance Or Tax Evasion?

Employment Tax Evasion Schemes

California employers: be careful! Employment tax evasion schemes can take a variety of forms. Los Angeles County, Santa Barbara County, Orange County and Ventura County employers use a few of the most common techniques. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns

Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.

Employment Leasing

Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.


“Pyramiding” of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.

Paying Employees in Cash

Paying employees, whole or partially, in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.

Other schemes include:

Unreliable Third Party Payers.

Frivolous Arguments.

Offshore Employee Leasing.

Misclassifying worker status.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns.

S Corporation Officers Compensation Treated as Corporate Distributions.

For further reading, look at IR-2004-47, titled “IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices.”

To resolve and fix these and other tax problems, call Mitchell A. Port at 310. 559.5259.