Backdoor Thefts of Payroll Withholdings

Common payroll frauds include ghost employees, inflated time cards, and improper changes to pay rate files. These payroll frauds are usually discussed in fraud prevention classes, but backdoor thefts of payroll withholdings are not. So how is this fraud carried out?

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A payroll clerk intentionally overpays payroll withholdings (for the business as a whole), alters his or her personal W–2 withholdings to include the excess payment, and later receives a tax refund that includes the overpayment.

For example, if Gertrude, the payroll clerk, intentionally overpays state tax withholdings by $25,000, she can amend her W–2 so that it reflects the excess payment as withheld from her paycheck (though it was not); once she files her state tax return, she gets an extra $25,000. In effect, she is using the state government as a funnel for her theft. Since payroll tax deposits are seldom monitored by a second person, it’s an easy way to steal.

The potential for this scheme increases if one person processes payroll, files all related payroll tax reporting information, makes payroll withholding payments, and records payroll entries in the general ledger—not uncommon in smaller organizations or businesses. As a preventive measure, have someone outside of the payroll department review all W–2s before they are issued; this person should also physically mail the W-2s (to prevent the payroll clerk from making changes after the review).

Governmental Fraud Prevention Book

This fraud is discussed in my book: The Little Book of Local Government Fraud Prevention. The book covers dozens of common local government frauds and how to prevent them. For a limited time you can purchase the Kindle version on Amazon for only $4.99

The photo is courtesy of iStockphoto.com.