Legal Question

"Rusty Vandura - www.tinyurl.com/keepoppo" (rustyvandura)
06/12/2019 at 18:34 • Filed to: None

Someone I know told me a year or two ago that they’d had an employee steal money from them, to the tune of around $20k. He terminated the employee and, he claims, added up all that the employee had embezzled and submitted a 1099 to the IRS for that amount. In other words, report the stolen amount as money he paid to the employee, so IRS would come after the employee for the tax bill.

DISCUSSION (21)

BrianGriffin thinks “reliable” is just a state of mind > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 18:16

Yes - that’s what we in the Service would recommend they do, too.

haveacarortwoorthree2 > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 18:16

Yes, loss by theft. Same thing that you can do if someone breaks into your house and steals stuff not covered by insurance.

wafflesnfalafel > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 18:24

yep - and I have a beautiful Employee Theft policy I could sell him. (I am amazed at how many small businesses get stolen from by a single, long term “trusted” employee...)

Rusty Vandura - www.tinyurl.com/keepoppo > haveacarortwoorthree2
06/12/2019 at 18:34

I think I was not entirely clear. The idea is, instead of pursuing legal action against the thieving employee, just report what the employee stole as having been paid to the employee, so the IRS comes after the taxes.

Thomas Donohue > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 18:48

I would be very hesitant to file my taxes with a $20,000 undocumented 1099 (or via W-2) . If you haven’t filed legal action against a person, they aren’t technically guilty of anything. Nor did you pay them the $20,000 via a paycheck.

Even if you did take this route, the person could pay ~$6,000 to the IRS and still keep the stolen money. I don’t see how this is a good solution either way.

His Stigness > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 18:53

Granted I’m not an attorney or a CPA, but that sounds like fraud on the part of your friend. Either he could have reported the lost income as theft to the IRS, thus reducing his tax burden, or file legal action against the employee. Or both (and later report the regained money as income). But I don’t think he can report to the IRS he paid him that money, because he didn’t.

So now it’s entirely possible your friend just created a shit storm for himself when he should have just sued the employee.

dogisbadob > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 19:03

Illegal income is taxable just like legal income, regardless of whether the company issues a 1099. Remember that the employer is also required to send a copy of that 1099 to the employee.

The IRS generally doesn’t like an employer issuing both a W2 and a 1099 to the same employee because they want the 1099 income to be included on the W2 they’d already be receiving. But this case is an exception since it is stolen money.

One thing to note, if employer and employee made some sort of agreement for the employee to pay the money back, but the employer settles for less than the full amount that was embezzled, that difference would be considered taxable income and reported on a 1099-C

It depends on how exactly the income was reported. If it was reported as a loss from theft, a canceled debt, or just regular income.

If employer reported it as regular income, the employee could file an 89 19 for having received both a W2 and 1099. The employer would be responsible for payroll taxes of the 1099 amount.

Rusty Vandura - www.tinyurl.com/keepoppo > Thomas Donohue
06/12/2019 at 19:14

As it was presented to me originally, the employer was not interested in trying to recoup the money with an investigation and figured that the recipient of the 1099 wouldn’t want to challenge it because of the investigation it might stir up. I wish I could remember who told me that story originally...

Rusty Vandura - www.tinyurl.com/keepoppo > His Stigness
06/12/2019 at 19:17

I mean, it sounded like a great way to stick it to the employee, but then again... What you are saying sounds like the responsible option.

How’s your smog shop doing?

Rusty Vandura - www.tinyurl.com/keepoppo > dogisbadob
06/12/2019 at 19:26

Thank you. That fleshes it out a bit. But either way, if the story has some basis in truth, then the person who told me the story would have still had to pay payroll taxes on the 1099'd income? So he’d pay a payroll tax on the embezzled money?

His Stigness > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 19:29

But responsible isn’t always as fun.

I’m still here, but business sucks so I don’t get any bonuses, so working six days a week has gotten old. I’ve tried to get a small raise to compensate for not getting a bonus (which is why I took a pay cut in the first place: I thought I’d make it back in bonuses). But the job market here sucks. ImmoralMinority gave me excellent advice and told me to look into going to work in Ag. So I have been meaning to look into that. I just don’t want to bug him too much to put me in touch with his clients as he’s a very busy man.

BrianGriffin thinks “reliable” is just a state of mind > dogisbadob
06/12/2019 at 19:32

The “recipient” of the 1099 may file a 8919, but it’s unlikely that it would be approved. The income from which that 1099 was derived was outside the scope of employment...3401 is a bit convoluted on this, but depending on how and when the funds were stolen, I’d take the bat that they’re not wages.

Of course, it’s unlikely the thief will take this action. Just like it would be unlikely they’d sue the employer for a “false” 1099 that isn’t really false.

Issuing that 1099 gets the embezzler in the system, fairly reports the compensation from a corporate perspective, and keeps a “loss from theft” off of the books. I can tell you that I universally recommend doing 1099s in my fraud cases where the employer does not wish to press charges.

dogisbadob > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 19:33

Yes, he’d pay a payroll tax if it was reported the way you describe it

It was reported specifically as stolen income, or canceled debt, he wouldn’ t have to pay the payroll tax. He should’ve used a 1099-C

dogisbadob > His Stigness
06/12/2019 at 19:37

I’m not a CPA or attorney either, but suing or reporting as a theft loss would’ve been the better way to go about it

If the embezzlement was reported as regular income, the employer would have to pay payroll taxes on the stolen amount. Otherwise, the IRS really doesn’t care as long as they get their money.

Perhaps he could’ve reported it as canceled debt with a 1099-C. He could say the employee agreed to pay it back, but never did. Or he could say they settled for less than the full amount owed. Either way , canceled debt is considered taxable income.

dogisbadob > His Stigness
06/12/2019 at 19:37

I thought you owned your new shop

Rusty Vandura - www.tinyurl.com/keepoppo > dogisbadob
06/12/2019 at 19:41

He may’ve. If I could remember who told me the story, I’d ask him. The story just sounded deliciously ironic on its surface.

BrianGriffin thinks “reliable” is just a state of mind > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 19:46

Not at first. The recipient of the 1099 would file a claim saying that the income should have been wages; but they would have to prove WHY they should be considered wages. Since “stealing money from the boss” was not part of their regular course of duties, I doubt exam would approve the 8919.

Rusty Vandura - www.tinyurl.com/keepoppo > BrianGriffin thinks “reliable” is just a state of mind
06/12/2019 at 20:14

It just sounds on it's face like a way to poke the embezzler in the eye, but from dogisabob, sounds like the employer would also have to pay a payroll tax.

BrianGriffin thinks “reliable” is just a state of mind > Rusty Vandura - www.tinyurl.com/keepoppo
06/12/2019 at 20:16

Like I said: no, they wouldn’t have to pay the payroll tax, unless the embezzler fought the 1099 and won. Which is an unlikely series of events.

Rusty Vandura - www.tinyurl.com/keepoppo > BrianGriffin thinks “reliable” is just a state of mind
06/12/2019 at 20:31

Gotcha. Thanks for the input. I have a good relationship with a proprietor of a franchise convenience store/gas station nearby. Sharp young guy of 30 who took over the operation from his dad. I mentioned this story to him and he’s going to ask his guy about it. As you relate it, I don’t see how the former employee c ould want to challenge it.

haveacarortwoorthree2 > Rusty Vandura - www.tinyurl.com/keepoppo
06/13/2019 at 16:54

Oh, you did say 1099. My fault for skimming the post instead of reading it.