Tax, Audit, Firm and Regulatory News

Today’s Fraud Topic (April 6, 2018)

]

How dishonest employees use shell companies to commit fraud

For many entrepreneurs, getting a “doing business as” (DBA) certificate enables them to open a small business. However, DBAs can also be used to open shell companies. These businesses, which have no assets of their own, may be legitimate — for example, when they’re used to hold another company’s assets. But they also can be used to perpetrate fraud.

Stealing on the cheap

For most businesses, the biggest threat posed by shell companies is that unscrupulous employees will use them to perpetrate billing fraud. Such schemes can take two forms.

1.    An employee sets up a shell company to send out ― and collect on ― fictitious bills. Of course, perpetrators don’t even have to send the bills for nonexistent goods and services to the company for which they work. But it’s easier, and can help them evade detection, if they do.

Consider, for example, an accounting employee who knows that her company rarely scrutinizes invoices for less than $2,500. She gets a DBA certificate for a fictitious business, using a post office box, and opens a business account at a local bank. Voila! She’s ready to bill her employer for services that cost less than $2,500 per invoice.

2.    An employee sets up a shell company to sell products to his or her employer at a marked-up price. Because the employee’s shell company has no overhead or expenses, the employee pockets the proceeds.

Following the paper trail

Shell company schemes can go undetected for a long time, particularly if the fraudsters are savvy enough to attempt to cover their tracks — and don’t get too greedy. Most perpetrators, however, leave a paper trail of invoices that:

  • Vaguely define their products or services,
  • Have a company address that matches an employee’s home address,
  • Use a post office box as their return address,
  • Arrive more than once a month, or
  • Show an increased number of purchases over time.

Shell company scams work only if the employee can pay the invoices or get the shell company authorized as a legitimate vendor. A quick credit check on a new vendor will reveal whether it has an operating history and deserves greater scrutiny.

System of checks

Familiarize yourself with the signs of shell company abuse and put in place a system so that you’ll catch billing fraud before it begins. Contact us for help.

 

© 2018

About Topel Forman

What makes our firm special

Contact Us

Reach out to Topel Forman

Services

Learn what we have to offer

Related News Posts

Understanding Basis and Other Limits on Loss Deductions

Understanding Basis and Other Limits on Loss Deductions

Understanding when you can deduct losses isn’t as simple as looking at your tax basis. Additional layers including the at-risk rules, passive activity loss limits, and the excess business loss limitation determine how much loss you can claim and when. This article breaks down each rule and explains how they interact so taxpayers can better anticipate the tax impact of their investments and business activities.

read more
S-corporations 101: FAQs for business owners

S-corporations 101: FAQs for business owners

S-corporations are one of the most frequently discussed (but often misunderstood) tax structures for small business owners. While they can offer real savings on self-employment taxes, the benefits aren’t automatic – they depend on your income level, involvement in the business, and whether you’re ready to manage the added compliance responsibilities. Here’s what you need to know about how S-corps work, who they’re right for, and what’s required to maintain one.

read more
Understanding the IRS’s new deduction for qualified overtime compensation

Understanding the IRS’s new deduction for qualified overtime compensation

The IRS has introduced a new federal income tax deduction for qualified overtime compensation, effective for tax years 2025 through 2028. Eligible workers can deduct up to $12,500 (or $25,000 on joint returns) of the overtime premium they earn above their regular rate of pay. This deduction reduces is available to FLSA-covered employees who meet specific eligibility requirements, including valid Social Security numbers and certain filing status conditions.

read more