Tax Evasion (SUTA Dumping)
- What is SUTA Dumping?
- What harm does SUTA Dumping cause?
- What are some examples of SUTA Dumping schemes?
- Is SUTA Dumping illegal?
- What is the Department doing to fight SUTA Dumping?
- How do I report SUTA Dumping?
State Unemployment Tax Act (SUTA) dumping, one of the biggest issues facing the Unemployment Insurance (UI) Program, is a tax evasion scheme where shell companies are formed and creatively manipulated to obtain low UI tax rates. When a low rate is obtained, payroll from another entity with a high UI tax rate is shifted to the account with the lower rate. The entity with the higher rate is then "dumped." Such abusive schemes leave other employers making up for the unpaid tax. SUTA dumping is also referred to as state unemployment tax avoidance and tax rate manipulation.
What harm does SUTA Dumping cause?
Under the experience rating system, employers pay unemployment taxes at rates commensurate with claims activities by their employees. Employers with high unemployment activity pay higher unemployment tax rates, and employers with lower activity pay less. Employers who engage in SUTA dumping (or other tax manipulation schemes) to avoid paying their fair share unfairly shift their costs to other employers. According to the U.S. Department of Labor, SUTA dumping is harmful because it:
- Compromises the integrity of the UI system.
- Results in an uneven playing field.
- Eliminates the incentive for employers to avoid layoffs.
- Adversely affects tax rates for all employers.
- Costs the UI trust fund millions of dollars each year.
SUTA dumping hurts everyone – employers, employees, and taxpayers make up the difference in higher taxes, lost jobs, lost profits, lower wages, and higher costs for goods and services.
What are some examples of SUTA Dumping schemes?
There are several variations on the schemes some businesses use to inappropriately lower their UI tax rate. Employers should become aware of these schemes and their potential legal ramifications. Examples of SUTA dumping schemes:
Purchased Shell Transaction - A business with a large payroll and a high UI rate purchases a corporate shell with a low UI rate and transfers its payroll to the purchased entity.
Affiliated Shell Transaction - A new corporation is registered, and a small payroll is reported each year until a low or minimum UI rate is achieved. Once the low rate is achieved, large payroll amounts from another related corporation are transferred into this account.
New Employer Rate - An employer with a high UI rate files a registration form requesting a new employer account number, which has a lower rate (new employers pay 2.0% in Arizona), then the payroll is transferred to the new account.
Reporting under a client's Employer Account Number - An employee leasing company or professional employer organization (PEO) with a high UI rate shifts its payroll to the account number of one of its clients with a lower UI rate.
High Plus High Equals Low - A high UI rate account with a large payroll is transferred into another high UI rate account with a small payroll at the beginning of the year. Since the calculation of the average base payroll is on a calendar year basis, only the small payroll is considered. However, the taxes from the large payroll are added to the reserve account balance as of June 30, resulting in a very low UI rate being established for the next year.
Partial Reserve Account Acquisition - A newly registered business applies for a partial reserve account balance of another company. When the small reserve balance is acquired, a correspondingly small average base payroll is also acquired. A related entity then shifts hundreds of millions of payroll into the small account. Because the average base payroll is tallied on a calendar-year basis and reserve accounts accumulate quarterly, the result is to flood the reserve balance in relation to the small average base payroll. A minimum rate is attained in the succeeding year.
Buffering Potential Negative Reserve Account Charges - A company that hires temporary workers forms a new entity and obtains a separate account number. The temporary workers are paid through this account. When they are laid off and file UI claims, the newly formed company goes out of business and the negative reserve account charges get distributed to other businesses in the state. This typically occurs when a labor action is contemplated and temporary workers are hired knowing they will be laid off after the labor action. Another variation on this scheme is when a company is planning to downsize. Employees to be laid off are transferred to a subsidiary account. This buffers the reserve account of the initial company from UI charges.
Employers who engage in SUTA dumping or other rate manipulation schemes knowingly misrepresent facts about their business. It is illegal under Arizona statutes to knowingly make false statements and omit material facts on UI tax documents in order to reduce UI taxes. In addition, new laws have recently been passed to combat SUTA dumping:
- SUTA Dumping Prevention Act of 2004 - Signed by President Bush in August 2004, this law requires each state to enact laws to prevent employers from inappropriately lowering the UI contribution rates. The law not only bans SUTA dumping but also levies heavy penalties on those who engage in or promote such abusive practices.
- Arizona HB-2093 - With the passage of HB-2093, which added section 23-733.01 to the Arizona Revised Statutes, Arizona now has enacted legislation as a result of the federal SUTA Dumping Prevention Act. This new law, effective August 12, 2005, requires employers who are caught illegally lowering their UI rates to pay at the highest rate provided by law, or at their current rate plus an additional two percent, whichever is greater. The new law also provides for a $5,000 penalty for anyone who is not an employer who knowingly advises another person or business to violate Arizona's UI rate and reporting laws. It also makes changes in the law regarding the application and transfer of UI reserve account balances. It specifies that whenever an employer transfers its business to another employer, the reserve account will be transferred if they are under common ownership, management, or control. The new law also provides that if the acquisition was for the purpose of getting a lower UI rate, the transfer will be denied.
What is the Department doing to fight SUTA Dumping?
The Department of Economic Security actively pursues and prosecutes employers who participate in SUTA dumping and other tax manipulation schemes and has the authority to subpoena records and individuals in its investigations. In addition, DES regularly conducts outreach with employers and tax advisors to ensure they are aware of these schemes and to help them avoid future legal trouble.
If you think someone is committing fraud or engaging in SUTA dumping, please report it to us immediately. All allegations of fraud are taken seriously. Please provide as much of the following information as you can:
- Employer name, address, and telephone number
- Employer account number
- What they are doing
- When they started doing it
- Your name, address, and telephone number (optional).
REMEMBER: You are a very important source of information and a critical component in the Department's efforts to combat SUTA dumping fraud!
TO REPORT SUTA DUMPING FRAUD: Email: [email protected].