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Cracking Down on Construction Industry Fraud: FinCEN and IRS-CI Tackle Payroll Tax Evasion and Workers’ Compensation Schemes

Due DiligenceCracking Down on Construction Industry Fraud: FinCEN and IRS-CI Tackle Payroll Tax Evasion and Workers' Compensation Schemes

FinCEN has released a notice titled “FinCEN Highlights Payroll Tax Evasion and Workers’ Compensation Fraud in Construction.” The notice reveals that illicit actors are causing state and federal tax authorities to lose hundreds of millions of dollars annually through these fraudulent activities, primarily conducted through banks and check cashers.

The schemes involve the creation of shell companies to help construction contractors evade workers’ compensation premiums and payroll taxes. These shell companies obtain minimal workers’ compensation policies and rent or sell them to contractors with more employees than the policies can cover. This allows the shell companies to gain official business registration status, including licenses and tax documents, which they provide to contractors. This constitutes insurance fraud, which can also lead to federal charges under mail and wire fraud statutes, often associated with money laundering charges.

Contractors further use these shell companies to pay workers “off the books,” avoiding required state and federal payroll taxes. They write checks to the shell companies, creating the illusion of legitimate construction projects. These checks are either deposited into bank accounts with bulk cash withdrawals or cashed at check cashers, which are considered financial institutions obligated to report suspicious activities. The shell company operators return the cash to contractors after deducting a fee for their participation in the scheme. This results in payroll tax fraud as contractors evade their payroll tax and insurance responsibilities.

These schemes often involve undocumented workers and individuals operating the shell companies without documentation, which is also a federal offense.

The notice outlines 11 red flags to help financial institutions detect and report suspicious transactions associated with such schemes. However, some of these red flags require substantial knowledge or inquiry by the financial institution, posing challenges for assessment. Additionally, the term “shell company” is used frequently but may not always indicate illegitimate activity, making it difficult to determine if a corporate entity is being misused.

IRS-CI played a significant role in creating this notice, emphasizing the importance of BSA reports from financial institutions in their investigations. The notice introduces a new SAR filing instruction for this type of activity, classifying it as “FRAUD-Other” and mentioning “Payroll tax evasion” and/or “workers compensation” in the text box.

In conclusion, payroll tax evasion and workers’ compensation fraud in the construction industry are significant concerns for tax authorities and law enforcement, with FinCEN and IRS-CI actively addressing these issues. Financial institutions are advised to exercise caution, particularly with construction companies, and apply enhanced due diligence to those with certain characteristics, such as non-U.S. passport holders, substantial check cashing, or limited online

By FCCT Editorial Team

Disclaimer: The views expressed in this article are independent views solely of the author(s) expressed in their private capacity.

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