FBI Investigating Alleged Payroll Fraud Leaving Employees Without Wages and Unpaid Tax Withholding

Various news outlets are reporting an ongoing FBI investigation of alleged payroll fraud by a New York-based payroll services provider, MyPayrollHR, that abruptly shut down in upstate New York earlier this month. Thousands of employees’ accounts have been drained and up to $35 million dollars, if $9 million of unpaid tax withholding is included, has disappeared.

Albany’s Times Union reports that MyPayrollHR’s abrupt shutdown was accompanied with an automated message to its 4,000 clients, stating: “We regret to inform you that due to unforeseen circumstances, we are no longer able to process any further payroll transactions.”1The message continued to advise its clients to find alternative methods for processing payrolls.

Fully appreciating the egregiousness of payroll fraud, such as what’s alleged here, requires a little background. Most employees probably do not understand the behind-the-scenes process of getting paid when employers work with one or more third parties to ensure that income is deposited into employees’ bank accounts.

Typically, a company such as MyPayrollHR regularly submits a file to another company, a “clearing house” (in this case, that other company was Cachet Financial Services) with instructions for crediting employee accounts. In other words, the file shows the employers’ deposits, the amount each employee is owed and depositing instructions. Subsequently, the funds are deposited into a holding account maintained by the clearing house.

According to People, Cachet’s general counsel explained to TechTarget, that:

  • MyPayrollHR manipulated the account numbers in that electronic file so that the money was taken out of the employer’s accounts and put into an account controlled by MyPayrollHR, not a Cachet settlement account, as it should’ve been.2

News outlets report that some employees were doubly shocked in that paychecks already deposited were withdrawn more than once, leaving them with negative bank accounts.

The FBI has posted a questionnaire seeking victim information in this investigation at: https://www.fbi.gov/resources/victim-services/seeking-victim-information/seeking-victim-information-in-mypayrollhr-investigation.

Remember, according to the IRS, the employer, not a third-party payroll service provider, is ultimately responsible for the deposit and payment of federal taxes. If the third-party fails to make the payments, the IRS may assess penalties and interest against the employer. Employers should consider regularly pulling IRS transcripts to confirm that the third-party is doing its job.

Significantly, payroll taxes are considered trust fund taxes for which “responsible officers” of companies may be personally assessed for the willful failure to remit the liabilities to the IRS. However, victims of payroll tax fraud have a “non-willful” defense if the IRS attempts to make a personal assessment against them. Our office has successfully defended many taxpayers who were victims of payroll tax fraud – navigating the complicated state and federal tax issues involved.

If you have questions or concerns about payroll tax issues such as these, contact Frost Law today at (410) 497-5947.



Tags: Blog, Tax Crimes