The IRS has been cracking down on “ghost employers” who withhold taxes from employees but fail to remit them to the authorities. These noncompliant employers create a significant tax gap, contributing to the overall tax compliance problem. The IRS initiated the Ghost Employer Project in June 2020 to identify and investigate these employers who are not submitting W-2 forms, filing employment tax forms, or making federal tax deposits. The project aims to bring noncompliant ghost employers into compliance with tax laws.
Employers are required to withhold taxes from employee paychecks, including income taxes and various employment taxes. Failure to remit these taxes can occur due to various reasons such as financial strain, fraud, or pyramiding. Pyramiding involves withholding taxes but intentionally failing to pay them quarter after quarter. The IRS estimates that noncompliance with employment taxes accounts for a significant portion of the tax gap, with unpaid taxes totaling billions of dollars.
The IRS has made some progress in identifying ghost employers through forms-matching and data analysis. By matching Forms W-2 with the IRS payroll tax database, the IRS has identified thousands of employers withholding taxes but not remitting them. This initiative has led to active investigations and potential prosecutions of noncompliant employers. One case involved a Washington man sentenced to two years for failing to pay taxes and using the withheld funds for personal expenses.
Despite some successes, the Ghost Employer Project faced challenges and limited success in identifying significant noncompliance activity. The IRS did not fully track the results of the 280 potential ghost employer cases identified through data analysis. TIGTA recommended improvements in refining the identification of ghost employers, tracking enforcement actions, and developing a compliance strategy. The IRS management agreed with the recommendations and pledged to take appropriate action to address them.
The COVID-19 pandemic disrupted efforts to track and investigate ghost employers, leading to the premature end of the Ghost Employer Project in May 2022. However, the IRS remains committed to investigating individuals who evade the payment of employment taxes, with the NCIU referring leads to IRS-CI field operations. Technology will play a crucial role in future identification and investigation of ghost employer cases, as noted by TIGTA in its recommendations for improving tax compliance in this area.
Overall, the IRS continues its efforts to crack down on noncompliant employers who fail to remit withholding taxes to the authorities. The Ghost Employer Project has exposed numerous cases of tax noncompliance and fraud, leading to investigations and potential prosecutions. By addressing the recommendations provided by TIGTA and improving enforcement actions, the IRS aims to reduce the tax gap associated with employment tax noncompliance and ensure that all employers fulfill their tax obligations.
