Diary of a Bad, Bad Bookkeeper (Day 127) – The Payroll Tax Scam

Dear Diary,

Today, I was bored at work.  Really bored.  I mean – surf-the-internet-looking-for-designer-handbags bored.  (And I don’t even like designer handbags…although I wouldn’t mind a Brighton.)

Anyway…it was Payroll Day, which usually I’m happy about.  When payroll comes around, I take my sweet time entering all the timecards and wages.  I tell the boss it’s an all-day project, but in actuality, I’m done before lunchtime.  I usually bring the checks into his office around 4PM, thus I get the rest of the afternoon to screw around online.

So there I was, surfing Bag, Borrow or Steal, when the receptionist walked in.  I quickly switched the windows on my computer to show the payroll.  Ironically, it was my own check.

“When do you think the payroll checks will be ready?” the receptionist asked me.

“Why do you wanna know?” I asked in my most annoyed voice.

She inched toward the door, clearly uncomfortable by my unwelcoming persona.  “It’s just, I have to leave at lunchtime, and I’m going on vacation for the weekend.  I was kinda hoping to get that check before I left.”

“Oh.  Well then, I’ll put a rush on your paycheck,” I told her.

Her little ears actually turned pink with pleasure as she thanked me effusively and scooched out of my office.

That was when I turned my attention back to the monitor and realized something.  I had inadvertently changed my Federal tax deduction amount from $200 to $0.  I don’t think I’d ever realized before that it was so easy to change the payroll taxes before cutting a check.

It was my Ah-Ha moment – like Oprah always talks about.  I realized in that moment, I could zero out my taxes to get more money with every paycheck, but then still pay the regular tax amount to the IRS each and every payday.  Then, at the end of the year, I could file my taxes and get a BIG-FAT refund.  Even better, I could make my boss overpay the taxes on everyone every week and file the paperwork at the end of the year declaring that all of those excessive taxes were deducted from my paychecks alone, and then get an even larger refund.  If I could manage to make the weekly payroll amounts the same every payday, the boss wouldn’t think to look twice at the money being deducted from the account.

The question now is:  how much can I get away with paying before the boss notices a difference?
__________________________________________________________________________________
To Stop this Kind of Embezzlement:

This is one of the sneakiest types of embezzlement, especially because it’s common for an employer to pay a lot of money in payroll taxes.  Also, it’s common for bookkeepers to adjust individual government taxes for each pay period because usually, it’s only the individual employee who would have to face the consequences – that of dealing with the IRS at the end of the year and trying to get a refund or make up the difference.  The biggest embezzlement possibility happens when the final paperwork is filed at the end of the year – the paperwork that details out who paid what in employee/employer taxes.  It is on that paperwork where an embezzler can declare that they overpaid in their taxes and thus deserved to get ALL of that money back.

Therefore, to catch and prevent this kind of embezzlement, you need to:

1)      Look closely at the individual taxes of the person who creates the paychecks.  (This should be on an attached paystub.)  Compare it to someone who makes approximately the same amount during that period.  Look to see if the tax amounts are very different or only slightly skewed.  A big difference will either mean that the two individuals claim different deductions during the year, or that the tax numbers were overridden.

2)      Periodically, add up the individual taxes for all of the employees being paid.  Once you have a total tally, compare it to the payment that was made to the government.  (You should see this on the bank statement or credit card statement that was used to make the taxes.)  If the totals are not the same, then you definitely have a problem.  That problem could be embezzlement, or it could just be that your bookkeeper is dyslexic.

3)      Finally, have someone other than the person entering the payroll fill out the final payroll tax paperwork at the end of the year.  Even though it will cost you more to pay an accountant to do this, it could potentially save you thousands in overpaid taxes that an embezzler will claim as a refund.  All you have to do is send a copy of your bookkeeping file to your accountant, and then your accountant can take a closer look at anything that doesn’t look right.

If you have any other suggestions on how to stop this type of embezzlement, please share it.  The only way to stop embezzlers from destroying the companies they work with, is through educating each other about how they’re getting away with it.

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14 Responses to Diary of a Bad, Bad Bookkeeper (Day 127) – The Payroll Tax Scam

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  5. Small businesses should consider using an outside service to process payroll. The services also provide direct deposit so employees don’t have to wait for their checks. The payroll package arrives in confidential envelope that the owner would open before the bookkeeper. Not fail safe, but creates huge barriers for embezzlement and fraud.

  6. D deTreville says:

    Sorry, but payroll service bureaus are NOT the answer if you have under 100 employees. The amount you pay makes them not worthwhile since only Ceridian, PayChex, Century and ADP have been in business long enough for anyone who knows what damage they can do to feel safe. The only way to protect yourself is by constant vigilance on your checking account. I’ve been a full charge bookkeeper for over 20 years and have branched into forensic bookkeeping in the last few years. It is fascinating and horrifying. The one that really upset me was a small non-profit that was drained by an unscrupulous person. How can people sleep at night????

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