A court has ruled that the IRS doesn’t have to return to defrauded clients a bankruptbureau’s tax deposits that were collected from them but were used to make deposits for other clients. The defrauded clients, therefore, have paid twice—once to the service bureau and again to the IRS, which demanded their tax deposits. They’re now out of luck for getting back their embezzled, undeposited . (Wolff v. U.S., No. 05-01695, U.S. Bkrpty. Ct. D. Md., 2012)
Ponzi scheme. Ponzi schemes operate by taking money from one person and paying it to another. Roughly speaking, that’s what happened here. The service bureau took money that was slated for tax deposits from some clients to make tax deposits for other clients. The defrauded clients wanted those tax deposits voided and the money returned to the bankrupt company’s estate for distribution to them.
After several rounds of appeals, a Bankruptcy Court denied the clients’ request. Court: The bankruptcy code allows pre-bankruptcy transactions to be voided, and the money returned to the bankruptcy estate for distribution to creditors, but only if the debtor has some legal interest in the property transferred. The service bureau had no legal interest in its defrauded clients’ funds, the court concluded, because it held those funds in trust for the IRS.
Taking the risk out of this business. This service bureau was able to perpetrate fraud and embezzlement by keeping its clients in the dark.
Some clients received notices from the IRS regarding their undeposited taxes. Others didn’t, because the service bureau changed the addresses on their Forms 941 so it received IRS correspondence that should have gone to the clients. Warning: Companies are always responsible for their payroll taxes, even in shady circumstances such as these.
Since payroll taxes accumulate quickly, take these steps to ensure that your service bureau is doing the job you hired it to do.
- Don’t sign blank tax returns or allow IRS notices to be sent to the service bureau.
- Don’t allow the service bureau to sign tax returns. Confirm that deposits were made and returns were filed by separately enrolling in the IRS’ Electronic Federal Tax Payment System (EFTPS). Tip: Don’t reveal your EFTPS PIN or password.
- Regularly request a transcript of your company’s tax accounts from the IRS.