Embezzlement

SafeSurfer

Who is liable for income tax when monies have been embezzled from a business by an employee?

MBateson

As far as I know, it's theft so no one is liable for income tax, same as goods which are shoplifted. You'd need to reported it to the Garda though and be able to show same if the Revenue queried it.

SafeSurfer

MBateson wrote: »

As far as I know, it's theft so no one is liable for income tax, same as goods which are shoplifted. You'd need to reported it to the Garda though and be able to show same if the Revenue queried it.

Apparently not

http://www.breakingnews.ie/business/interim-examiner-appointed-to-eddie-rockets-franchise-517210.html#ixzz1VVIXu3OO

si_guru

To be fair the issue is with the company's "significant" revenue underpayment. The company still owe the revenue money.

SafeSurfer

si_guru wrote: »

To be fair the issue is with the company's "significant" revenue underpayment. The company still owe the revenue money.

So a business is still liable to pay tax on money that has been stolen from them by an employee?

Employee x skims off 10k in cash from a business over a number of years and due to audit etc the scam is found out and the business is liable for the tax on the income that has been stolen from it.

Is this correct?

si_guru

I think there are two issues... if I read it right.

Counsel said the ex-employee in question, who falsely claimed to be qualified to audit the firm's books and records, "took money due to Revenue and used it for their own purposes." The same ex-employee also "significantly underestimated" the firm's liability to Revenue.

Can't comment on the theft, but it seems the revenue was also unpaid anyway.

SafeSurfer

si_guru wrote: »

I think there are two issues... if I read it right.

Counsel said the ex-employee in question, who falsely claimed to be qualified to audit the firm's books and records, "took money due to Revenue and used it for their own purposes." The same ex-employee also "significantly underestimated" the firm's liability to Revenue.

Can't comment on the theft, but it seems the revenue was also unpaid anyway.

So the revenue liability is from the employees underestimation of the liability rather than his taking of money from the business.

Would the 2 not necessarily have to happen in tandem?

In order for money to be embezzled, the true tax liability of the business would have to be understated.

barneystinson

SafeSurfer wrote: »

So the revenue liability is from the employees underestimation of the liability rather than his taking of money from the business.

Would the 2 not necessarily have to happen in tandem?

In order for money to be embezzled, the true tax liability of the business would have to be understated.

I'm not familiar with the case (having only read the linked article), but I'd imagine something like this could happen in a case like that:

If the same person has control of banking the cash and recording the takings, then they could easily not bank all of the takings and skim some of the cash for themselves.

The till rolls would show the actual takings, so a Revenue audit could uncover this activity, and even though the money had been embezzled, it would look as though the company had systematically been leaving Revenue short...

Equally, the person responsible for dealing with the Revenue filings could submit the returns, with amounts on them reflecting the understated liabilities due to the above, but rather than sending the cheque to Revenue, they could pocket it themselves, and treat it in the books of the company as having been paid to Revenue.

So, double whammy, the books of the company have understated the amount of liability due to Revenue in the first instance, and not all of the liability that has been declared has been paid...

mari2222

The prevailing view seems to be that the company - who appointed and managed the staff who embezzled - should pay to Revenue what is due, probably on the grounds that they were partly responsible, as they were the people "in charge". It must seem like a double-whammy for the business, but any other view would put the public in general out of pocket.

SafeSurfer

mari2222 wrote: »

The prevailing view seems to be that the company - who appointed and managed the staff who embezzled - should pay to Revenue what is due, probably on the grounds that they were partly responsible, as they were the people "in charge". It must seem like a double-whammy for the business, but any other view would put the public in general out of pocket.

In other jurisdictions, such as the United States the person who embezzles the money is liable for income tax, not the business that has suffered the loss.

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.[12] Under U.S. tax law, lawful as well as unlawful gains are includable in gross income[13] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”[14] When the embezzler returns the victim’s funds either directly or indirectly (i.e. restitution) then the embezzler may have a reduction in taxable income.


It seems very severe to punish a business with interest and penalties on income that was lost to them, in effect they pay twice for income they did not enjoy. Pursuing the guilty party for the tax liability seems a much more reasonable course of action.

barneystinson

SafeSurfer wrote: »

In other jurisdictions, such as the United States the person who embezzles the money is liable for income tax, not the business that has suffered the loss.

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.[12] Under U.S. tax law, lawful as well as unlawful gains are includable in gross income[13] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”[14] When the embezzler returns the victim’s funds either directly or indirectly (i.e. restitution) then the embezzler may have a reduction in taxable income.


It seems very severe to punish a business with interest and penalties on income that was lost to them, in effect they pay twice for income they did not enjoy. Pursuing the guilty party for the tax liability seems a much more reasonable course of action.

In the case of the US above it would have to be proven who has embezzled the funds, the embezzler would have to have been convicted of the offence (I presume) in order to be assessed to tax on it. In Ireland under the CAB provisions I'm sure a person woulc also be taxed on the proceeds of their criminal activity.

Surely responsibility for the security of their takings / monies is the business owners', not the state's.

If it became accepted policy that when you get a tax audit you could just say "Oh yes, one of our staff had reaaaallllly sticky fingers" will get you off the hook for understating your income, can you imagine how the rate of supposed defalcation would go..??

dbran

Hi

If the funds were taken from the till by the employee or just not rung up, the company would still be liable to pay the VAT on the undeclared sales even though the proceeds had actually been stolen. An income tax/corporation tax deduction would be allowed for the theft. If it turned out that the cash was used to pay casual wages then they would be liable for PAYE also.

In a cash business such as this, proper internal controls are vital that the management have effective control over the business. It is very easy for a member of staff to gain trust and through collusion with other staff members, to circumvent those controls and defraud the company.

It is interesting that the directors were unaware that the accountant was not qualified to audit the company's accounts.

dbran

EamonOSullivan

I am aware of a business which got a deduction for employee fraud - the matter was reported to the Gardai, however the employee in question had spent the money and was unable to repay it.

The business owner got a deduction in his accounts, and the back-up documentation was a report of the incident by the owner. It was never questioned by Revenue.

There was never a criminal case, as the owner was aware that the employee had problems and didn't want to have the hassle and publicity of admitting that the money was stolen from him 'from under his nose' as he put it himself.