Backdoor Payroll Theft of Withholdings

This relatively unknown fraud can be dangerous

The Theft

Gertrude, the payroll clerk, intentionally overpays state withholding taxes by $25,000. She then amends her own W–2 so that it includes the excess payment (the $25,000 is added to her state withholding total). Once Gertrude files her personal state tax return, she receives an extra $25,000. In effect, she is using the state government as a funnel for theft.

In this business, Gertrude processes payroll, files all related payroll tax reporting information, makes payroll withholding payments and records payroll entries in the general ledger—not uncommon in a smaller organization. Also, no second person reviews the W-2s before mailing.

Backdoor Payroll Fraud

Picture is courtesy of AdobeStock.com

The Weakness

One person is performing all payroll functions, so her actions are not visible to anyone else. Also, no second person–in addition to Gertrude–is reviewing the W-2s before filing.

The Fix

Have someone outside the payroll department review and mail the W-2s. (If the W-2s are returned to the payroll clerk, she could change them.)

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