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Volume 15 Issue 3

May/June 2003

Embezzlement Scorecard?

© by Tax & Business Professionals

In embezzlement, as in golf, the score can be important. Why should you worry about the score in embezzlement? There are a number of reasons, not the least of which is claiming the theft loss, plus restitution through local courts.

For accountants and attorneys who advise small businesses, it is important to consider some of the measures used in dealing with the aftermath of an embezzlement.

Often, the embezzler is an inside office manager, and it is rather common for the embezzler to use funds supposedly allocated to tax payments as the source for the embezzled funds. Why?

Unfortunately, the federal and state governments are usually very slow in knocking on the door and prosecuting “failure to pay, failure to file” cases. A smart embezzler therefore can divert the funds used to pay taxes and count on the taxing authorities not showing up until long after other creditors appear demanding payment.

The Loss

First of all, embezzlement losses can be deductible business theft losses and need to be calculated if they are to be claimed as a theft loss. Expressed differently, if your company is audited, it is necessary to prove both the amount and the timing of the theft loss.

Penalty Abatements

In addition to substantiating the theft loss, it may often be necessary to prove to tax collection officials at the federal and state levels the reason why tax returns were not filed, or if filed why the payment was not timely or deposits were not made on a timely basis, in order to avoid late filing and late payment penalties.

The business will want to make sure that any late filing or late payment penalties are abated. Some taxing authorities will abate the penalties for late filing, late payment and late deposits, where there is adequate proof of the embezzlement and evidence that the business was not careless.

Having the offending employee prosecuted criminally also shows the taxing authorities that the responsibility for the tax liabilities or late payment was the fault of the embezzler, not the company.

Another major penalty can be the Trust Fund penalty for unpaid withholding taxes. In some situations, it may be possible to have this federal penalty (and similar state penalties) imposed only against the embezzler and not against the business owners.

Evening the Score

Restitution is often ordered by local courts when the embezzler is prosecuted or pleads guilty. Often, white-collar criminals, such as embezzlers, do not go to jail and will plead guilty to receive a suspended sentence. As part of the sentencing procedure, often a judge will order restitution. Many businesses do not think through the restitution process, namely how much should it be and who should receive it.

If, for example, the business is so crippled by the embezzlement that it is forced to go under, and must go through voluntary or involuntary bankruptcy, or perhaps liquidation, then the question is to whom should the restitution be paid? Thinking ahead, if the principal of the business is not going to continue operations, then the restitution should be paid to the individual, as opposed to a defunct business. If the restitution order is made to the business, and then the business folds, it will be necessary to go back to court to get an amended order that the restitution be paid to the prior owner, individually.

Both federal and local prosecutors have a tendency to “cherry-pick” embezzlement cases, which means that prosecutors take the most easily proved facts and present them to the court. Thus, if there were questionable amounts embezzled that are hard to prove, the prosecuting attorney may choose not to include those amounts as proof of embezzlement. Sometimes, it may be advisable to suggest that IRS Special Agents become involved (if possible) since they are better at measuring such losses than many local police officials. It may often be advisable to bring in auditors to help establish the extent of the loss.

If restitution is received, it may be necessary to recognize taxable income if the theft loss was deducted in an earlier year.

For more information or assistance in dealing with an embezzlement case, call The Tax and Business Professionals.

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Published jointly by The Tax & Business Professionals, Inc. and the law firm of Newland & Associates as a service to their clients.

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