Navigating Tax Compliance: Uncovering Ghost Employers and IRS Penalties

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For today's blog, we delve into the world of ghost employers. Nothing spooky. The IRS has been uncovering cases what the Treasury refers to as "Ghost Employers". Employers who fail to report their employees' income accurately. From June 2018 to May 2023, 354 potential Ghost employers were identified, with some facing prosecution and hefty tax debts.

To avoid such pitfalls in the future, these Ghost employers should consider hiring self-employed individuals as 1099 contractors as one way out.

Learn more about navigating tax waters with these independent contractors.

Employment taxes make up a significant portion of total tax revenue $3.18 of $4.9 trillion, emphasizing the importance of accurate reporting. The Treasury has stringent penaltiesin place for Ghost Employers citing IRC 6651(f) could be used for such fraudulent practices. The Treasury's stance makes it clear to employers how crucial it is to address these issues avoiding potential scrutiny. Especially considering the IRS could potentially recover millions by pursuing these cases further as highlighted by the Treasury Inspector General.

Here are three key takeaways for employer taxpayers from 26 U.S. Code § 6651 - Failure to file tax return or to pay tax:

1. Penalties for Late Filing: If a taxpayer fails to file a required tax return by the due date (including extensions), they may incur a penalty of 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25%.

2. Penalties for Late Payment: There is a penalty for failing to pay the tax shown on the return by the due date, which is 0.5% of the unpaid tax for each month or part of a month that the payment is late, again up to 25% in total.

3. Minimum Penalty for Filing More Than 60 Days Late: If the tax return is filed more than 60 days after the due date, the minimum penalty will be the lesser of $435 (adjusted for inflation) or 100% of the unpaid tax. 

Taxpayers should strive to file and pay their taxes on time to avoid these penalties. If they are unable to do so, they should be aware of the potential charges they may face and seek to minimize penalties by filing and paying as soon as possible.

For more information on the latest updates from the U.S. Treasury Inspector General for Tax Administration, visit https://www.tigta.gov.

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