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Businesses Pay Stiff Penalties for Manipulating Unemployment Insurance Tax
RuralNorthwest.com
June 2, 2005
The Idaho Department of Commerce and Labor reported companies that transfer employees to a newly formed company in an effort to illegally avoid paying higher unemployment insurances taxes will face stringent financial and legal penalties beginning July 1.
The penalties, approved by the Idaho Legislature, target companies that try to obtain a lower tax rate by manipulating the unemployment insurance tax system through the practice of State Unemployment Tax Act dumping.
"SUTA dumping is a serious problem in Idaho. We’ve discovered more than $500,000 in taxes that companies have avoided by using this form of manipulation" said Mark Whitworth, Unemployment Insurance Division Administrator for Idaho Commerce & Labor. "As the department continues to investigate suspected SUTA dumping, we expect this number to grow."
SUTA dumping isn’t unique to Idaho. Like all other states, Idaho relies on an "experience-rating" system to determine unemployment tax rates, which makes the system a target for SUTA Dumping.
An experience rated system means each company's tax rate is determined by its experience with unemployment. If the total taxes paid by a business exceed the benefits paid to its former employees, the business will have a lower tax rate. If a business has a high number of lay-offs, and the benefits paid to these employees exceed the taxes paid, the business will have a higher tax rate. SUTA dumping occurs when a business trades it high tax rate for a lower rate through manipulation of the system.
Common methods of SUTA dumping include:
Setting up a shell company and transferring payroll from an existing business with a poor experience rating and high tax rate to the new company.
Setting up a shell company and transferring only a few low-turnover positions to that company in order to establish a tax rate that is even lower than the new business rate. A new business pays a set rate for three years. If at the end of that time period the business has had few layoffs, its tax rate can fall to as little as 0.2 percent. Once the company reaches the lowest rate it can, it then transfers the remaining employees from the higher taxed company to the new company.
Instead of starting a new business, a company purchases an existing business with a lower tax rate. The buyer ceases the activity of the purchased business and starts a new business activity with a lower tax rate.
New penalties for companies found guilty of SUTA dumping include:
A civil penalty equal to ten percent of an employer’s taxable wages for four consecutive quarters prior to the violation; and,
A civil penalty of up to $5,000 for each offense for individuals who advise companies on how to defraud the unemployment insurance tax system through SUTA dumping.
Businesses and individuals found guilty of SUTA dumping could also face felony criminal charges.
SUTA dumping wasn’t always illegal. Many business consulting firms openly advocated the process as a method for businesses to reduce their tax burden. But as states saw how SUTA Dumping was reducing unemployment tax revenue, more states passed legislation making the practice illegal. Idaho passed legislation in 2004 and on August 9, 2004, President George Bush signed the SUTA Dumping Prevention Act to curb the practice nationwide.
The federal act requires all 50 states to enact legislation and conform to the federal law, including adopting meaningful civil and criminal penalties for SUTA dumping, or risk losing federal grants that states use to administer unemployment insurance programs. In Idaho, that federal money amounts to about $17 million a year.
SUTA dumping hurts honest companies by increasing tax rates. SUTA dumping and other illegal activities can be reported to the Idaho Commerce & Labor's Unemployment Insurance Division at 1-800-448-2977, extension 3256. If the caller chooses not to provide their identity, the call may be made anonymously.
Whitworth and a team of unemployment insurance experts will join with the Idaho Association of Certified Public Accountants this month for a series of workshops throughout the state to explain the perils of engaging in SUTA dumping.
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