Taxpayer Pays TWICE For Embezzlement | USTaxAid

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Taxpayer Pays TWICE For Embezzlement

Written by Diane Kennedy, CPA on November 1, 2012


More small businesses are lost due to embezzlement than any other reason. There is something tragic about a small business owner who takes a risk when no one else would, provides a job for people, invests in a community, skips a paycheck and benefits when his employees never do and then, finally, against all odds makes enough to take a profit. And then an employee steals it.

That’s what embezzlement is. It’s a person that you helped, that you trained, that you opened up your business life to and then they stole from you.

That money that was stolen could be your working capital, the amount you need to weather a storm or the money you need to grow your business.

So you’ve lost money and you’ve lost opportunity. But that’s not all you lost.

Recently one of my clients went through an audit of his business. It was of a time period a few years ago when he couldn’t get good accounting records out of his in-house bookkeeper. (Luckily, he realized there was something really wrong when a bookkeeper can’t produce records and outsourced the bookkeeping.)

When he made the change, he didn’t actually find that the guy who had been doing the in-house bookkeeping had actually stolen, but he did get enough proof that something was wrong. So he let him go.

Last year, when he went through his books with our help he discovered that there was indeed money missing. Because there was no chance of recovering it, we prepared a Form 1099-MISC for the money he took. It doesn’t get the money back, but it does mean that he’s going to have to pay tax on what he took and my client will get the write-off.

So that’s where we were when my client got audited. The auditor discovered that the stealing had gone deeper than just taking some money. He had also been paying off his personal American Expense (AMEX) bills with company funds and paying for meals and travel with the company card.

The auditor correctly said, “There aren’t any receipts.” Obviously there weren’t. That’s because there was no business purpose for the crooked employee stealing money.

But in the tax world, no receipts and no business purpose also means – no deduction.

So my client not only lost money from the theft and lost money when the employee used company funds, but now he had to pay tax on the lost money.

That’s right. My client had to pay tax on the lost money

We had to go back and amend two years’ of tax returns and my client had to pay tax, penalties and interest.

The only good news in that is that the crooked employee is going to get another Form 1099 this year (2012) for the amount of misappropriated funds.

The lesson is all of this is that embezzlement hurts your business, more than you might even realize.

Make sure you have good accounting controls on your business. Separate activities. Check the numbers. And if something seems wrong, ask. It’s your money and it’s your business.

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