The IRS-Criminal Investigation (IRS-CI) has been actively looking into employers who issue Forms W-2 to employees but do not submit the forms to the Social Security Administration or file employment tax forms with the IRS. These employers, referred to as “Ghost Employers,” are being investigated under the newly established Ghost Employer Project, which aims to identify noncompliance with tax laws. The efforts of the IRS have shown some progress, but there is still room for improvement, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA).
Employers are required to keep records of their employees’ pay and withholding amounts, including income taxes at various levels and employment taxes. Noncompliant employers may withhold taxes from employee paychecks but fail to remit those taxes to the authorities, leading to compliance issues. Some employers may engage in fraud by misusing withheld taxes for personal gain, while others may repeatedly fail to remit taxes quarter after quarter, a practice known as pyramiding. The failure to file employment tax returns makes it difficult for authorities to detect these ghost employers, contributing to the tax gap associated with employment tax noncompliance.
The IRS-CI has been utilizing forms-matching to identify delinquent employers by matching Forms W-2 with the IRS payroll tax database to determine if corresponding taxes have been filed and paid. This has led to the identification of thousands of employers who have been withholding employment taxes but not submitting them to the IRS. The IRS has initiated investigations into these cases, with some resulting in prosecution. One such case involved a Washington man who was sentenced to two years for failing to pay taxes and misusing withheld funds for personal expenses.
In a separate effort, the Research, Applied Analytics, and Statistics (RAAS) function identified over 162,000 potential ghost employers with an estimated liability of $1.7 billion. However, only a small number of cases met the criteria for ghost employers, leading to limited success in identifying noncompliance activity. TIGTA recommended that the IRS improve its identification of ghost employers, track enforcement actions, address recommendations from the Ghost Employer Project team, and refer cases to Examination for potential assessment of civil fraud penalties.
IRS management has agreed with the recommendations and is taking steps to address them. The SB/SE Division Commissioner emphasized the importance of investigating individuals who evade the payment of employment taxes and noted that NCIU referred 104 employment tax program leads to IRS-CI field operations in FY 2023. Despite some shortcomings in the project to identify ghost employers, the IRS is committed to improving its efforts and ensuring compliance with tax laws.
