IRS targets 'ghost employers'

The Internal Revenue Service's criminal investigators have been on the lookout for tax evasion by so-called "ghost employers" who don't pay employment taxes, and over 30 cases have been prosecuted in recent years, but the problem is far larger, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, examined the IRS's efforts to identify employers that issue Forms W-2 to their employees but don't bother to submit them to the Social Security Administration, nor file employment tax forms, nor make any federal tax deposits. In June 2020, the IRS established what it dubbed the "Ghost Employer Project" to try to systematically identify this type of noncompliance with the tax laws and pursue the offenders. Prior to the 2020 initiative, the agency didn't try to detect ghost employers. 

The report found that between June 2018 and May 2023, the IRS's Criminal Investigation unit identified 354 ghost employer leads, with 33 cases resulting in a successful prosecution as of May 2023, with an average restitution amount of $1.3 million. 

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But the real number of ghost employers seems to dwarf that amount. Separately, IRS researchers found more than 162,000 potential ghost employers with an estimated liability of $1.7 billion. The IRS then randomly picked 280 to be reviewed by the agency's compliance personnel. However, TIGTA found that the results of those cases weren't fully tracked by the Ghost Employment Project team, and it believes the civil enforcement efforts could be improved.

"Bringing noncompliant ghost employers into compliance would reduce the tax gap associated with employment tax noncompliance," said the report. 

Of the 280 potential ghost employer cases that were selected by the IRS's Research, Applied Analytics, and Statistics function, TIGTA's analysis found only seven cases actually involved ghost employers. The project did result in 20 fraud referrals, though, and pointed to the need to leverage an IRS application to improve the resources available to the agency's compliance employees who work on employment tax cases. 

TIGTA recommended that the IRS confer with the RAAS function for refinements to improve the identification of ghost employers. The report also suggested the agency improve the tracking of enforcement actions and results and ensure that cases which don't rise to the level of Criminal Investigation involvement are put into other civil enforcement workstreams. It should also address the recommendations provided by the Ghost Employer Project team, TIGTA recommended, and should remind its collection employees to refer ghost employer cases to the examination function for potential assessment of civil fraud penalties.  

IRS officials agreed with all four of the recommendations in the report and plan to take action to address them. For example, the RAAS function will confer with the Small Business/Self-Employed Division's collection function to explore refinements to filters needed to improve the identification of ghost employers, and the director of collection policy will issue a reminder to field collection employees to consider referring these types of cases for potential civil fraud penalties. 

"We acknowledge the importance of compliance in these types of taxpayers and appreciate TIGTA's recommendations for improvements in working employment tax nonfiler cases," wrote Lia Colbert, commissioner of the SB/SE Division, in response to the report. "CI places a high priority on investigating individuals who evade the payment of employment taxes."