Guarding the Flock From Embezzlement
Elma
was a former CPA who moved to Virginia and became a member of the
Church of Ultimo Fe. There she found God, a job, and a source of funds.
Elma
first volunteered to be the treasurer for the church. The church had
two or
three employees and a related church academy with about 400 students
and 50
teachers. Eventually, Elma became the head of the school, known as “the
Academy.”
Elma
was responsible for paying bills for both entities, preparing
federal and state withholding tax returns and remitting to the taxing
authorities the withholding taken from employees’ compensation.
Unfortunately
Elma withheld but kept the funds due to the Government. In addition to
stealing
the employees’ money, she did not file income tax withholding returns
(Form
941). This
generated huge tax
liabilities for the Academy.
Approximately
12 years passed with Elma not filing 941 tax returns. In
order to avoid early detection, Elma issued W-2’s to the employees. Possibly to avoid or delay
detection, she did
not file a related form (W-3)that consolidates and reports total
compensation
for the year. The annual W-3 form is shared by the IRS and Social
Security
Administration, so that employees (here the Academy’s teachers) are
properly credited
with Social Security earnings. Since Elma had not filed the requisite
reports,
when some of the teachers retired, they did not have proper credit for
their
Social Security earnings.
In
short, the situation with Elma and Ultimo Fe was an ultimate mess. It is common to see news
stories about so and
so taking money from the Girl Scouts or similar organizations. How can
such
problems arise and how can they be avoided?
One
of the first avoidance mechanisms to be considered should be to
have a different member of the church or group (not the treasurer) do
the
monthly bank reconciliation.
Elma
was taking the church and Academy’s money for her own purposes. In
short, she was embezzling funds. If another member of the church had
been
balancing the checking account each month, this sort of treachery would
probably have been discovered.
Individuals
handling money for an organization should be screened, and
a written policy for screening should be enforced.
In particular, a former professional coming
from out of state may have chosen to relocate because of prior problems
in his
or her former state — Elma’s situation.
Another
protective step would be to make sure that the federal 941 and
similar state returns are filed with the IRS. Someone other than the
person
preparing them should look at the returns and verify if they are filed. This could be done by
getting transcripts
from the IRS and/or verifying that the remittance to the IRS has in
fact been
made.
Many
assume that a situation like that of the Academy and Elma cannot
go on for more than a year or so.
Not
true. We have seen
quite a few cases
where this has persisted for many years.
In this case, the IRS eventually prepared the missing
returns. By then
the Academy owed more than $1 million in withholding taxes and was
forced to
close.
There
is more. When 941 taxes are not paid to the IRS, the tax code
converts the amount of the unpaid withholding to a personal liability
for the
“responsible parties,” which we discussed in a series of our
newsletters in the
summer of 2004.
Elma
succeeded not only in making herself liable for the unpaid
withholding; she even caused the liability to be assessed against Reverend Right of Ultimo Fe.
This happened
because when Elma was away she asked the Reverend to sign the payroll
checks.
The
IRS tries to collect unpaid withholding by going after anyone who
signed payroll checks, even if it is the right Reverend Right.
It
is usually difficult to get someone removed from this liability, but
it is sometimes possible if it can be proven that the Reverend was
unaware of
what was going on and did not purposely elect to pay others and ignore
the
withholding tax debt.
While it may be offensive to some religious leaders, it is often advisable for church organizations not to have the religious leader as signatory on payroll checking accounts. If the religious leader is not a signatory on the payroll checking account, there is usually no way he or she can become liable for unpaid withholding unless he or she is aware of the misconduct and approved or acquiesced in it.
Copyright 2012
Published by the law firm of Newland &
Associates, PLC
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