The Financial Crimes Enforcement Network (FinCEN) has recently reported a noticeable uptick in state and federal payroll tax evasion, as well as workers’ compensation fraud, particularly within the U.S. residential and commercial real estate construction industries.
FinCEN’s Commitment to Fighting Fraud
In response to this concerning trend, FinCEN is taking proactive steps to combat fraud within the industry. Acting Director Himamauli Das expressed FinCEN’s dedication to addressing these issues by shining a light on how certain individuals within the construction sector are employing tactics involving shell corporations to carry out workers’ compensation fraud and evade payroll taxes.
Understanding How Payroll Tax Evasion Occurs
In an official FinCEN Notice issued on August 15, 2023, the agency detailed the methods used by companies to evade payroll taxes. Here’s a simplified breakdown of the key steps:
- Construction contractors write checks payable to a shell corporation, creating the appearance that the shell company is engaged in construction projects.
- The operator of the shell company then deposits these checks at a check cashing facility or into a shell company bank account.
- Subsequently, the shell company returns the cash to the construction contractor, after deducting a fee. This fee is for renting the workers’ compensation insurance policy and handling payroll-related transactions.
- Construction contractors use this cash to pay their workers without properly withholding payroll-related taxes or covering workers’ compensation premiums.
Red Flags for Financial Institutions
The FinCEN notice also outlines several “red flags” that can help financial institutions detect and prevent suspicious transactions associated with shell companies involved in payroll tax evasion and workers’ compensation fraud in the construction industry. Some of these red flags include:
- A customer is a new, small construction company (less than two years old) specializing in a specific construction trade.
- Beneficial owners of the shell company have no prior involvement in the construction industry, and non-U.S. passports are used for identification.
- Frequent weekly deposits that exceed normal account activity from multiple construction contractors in various trades.
- Large volumes of checks for under $1,000 drawn on the company’s bank account, payable to individual workers, which are subsequently converted to cash.
- Minimal to no tax- or payroll-related payments to tax authorities despite substantial deposits from clients.
The Impact and What You Can Do
Although the statement did not provide specific statistical data, it emphasized the significant financial losses suffered by state and federal tax authorities annually, reaching hundreds of millions of dollars. These fraudulent schemes are primarily conducted through banks and check cashing services.
We encourage anyone in the construction industry to remain vigilant and take measures to ensure compliance within your operations. Should you have concerns or questions about how these developments may affect your tax obligations or financial transactions, we are here to assist you. Our team can provide expert guidance tailored to your specific circumstances.