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TIGTA: IRS Can Improve Civil Enforcement of 'Ghost Employer' Cases

S.J. Steinhardt
Published Date:
Apr 22, 2024

The IRS's Criminal Investigation (CI) unit has been successful in identifying tax evasion by "ghost employers," but the agency can still improve its civil enforcement efforts, according to a report issued by the Treasury Inspector General for Tax Administration (TIGTA), Accounting Today reported.

Ghost employers are defined by the IRS as employers that issue Forms W-2 to their employees but do not submit them to the Social Security Administration, do not file employment tax forms with the IRS, and do not make any federal tax deposits, the TIGTA report stated.

In June 2020, the IRS established what it dubbed the "Ghost Employer Project" to try to "systematically identify this type of noncompliance with the tax laws" and pursue the offenders. Prior to the 2020 initiative, the agency didn't try to detect ghost employers, TIGTA stated.

The report found that between June 2018 and May 2023, the CI identified 354 ghost employer leads. As of May 2023, 136 of the 354 leads were still active cases, 125 had been closed or were discontinued cases, and 93 cases had been adjudicated or were in the pipeline for potential prosecution. Of the adjudicated cases, 33 resulted in a successful prosecution, with an average restitution amount of $1.3 million.

“Bringing noncompliant Ghost Employers into compliance would reduce the Tax Gap associated with employment tax noncompliance,” TIGTA stated. In fiscal year 2022, $1.42 trillion in tax receipts were employment taxes and $1.76 trillion were Federal payroll income tax withholding, accounting for $3.18 trillion (about 65 percent) of the $4.9 trillion total tax receipts,

TIGTA found that the he IRS did not fully track the results of the 280 potential Ghost Employer cases that were selected by its Research, Applied Analytics, and Statistics (RAAS) function that also initiated a project to identify ghost employers.

“Overall, our analysis of the 280 cases found only seven cases involving Ghost Employers,” said TIGTA. “The project did result in 20 fraud referrals and identified the need to leverage an IRS application to improve the resources available to compliance employees working employment tax cases.”

TIGTA recommended that the IRS take the following actions: confer with RAAS for refinements to improve the identification of ghost employers; improve the tracking of enforcement actions and results and ensure that cases which do not rise to the level of CI involvement are placed into other civil enforcement workstreams; address the recommendations provided by the Ghost Employer Project team; and remind collection employees to refer ghost employer cases to the IRS's Examination division for potential assessment of civil fraud penalties.

IRS management agreed with all four recommendations and will be taking appropriate actions to address TIGTA's recommendations.

"We acknowledge the importance of compliance in these types of taxpayers and appreciate TIGTA's recommendations for improvements in working employment tax nonfiler cases," wrote Lia Colbert, commissioner of the SB/SE Division, to Accounting Today in response to the report. "CI places a high priority on investigating individuals who evade the payment of employment taxes."

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