Paying workers in cash could be a red flag that the company is involved in a payroll tax scheme. (Photo by Curated Lifestyle for Unsplash+)
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Treasury is leading a multi-agency effort to discover and stop “exploitation of the U.S. financial system by non-work authorized populations and their employers.” Tax-to-English translation: It’s going after payroll tax evasion schemes.
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It’s no secret that the U.S. Treasury and Internal Revenue Service have long targeted payroll tax schemes.
Today, Treasury Secretary Scott Bessent was in Houston where, among other events, he met with the city’s bankers to urge them to be vigilant against one type of payroll ploy, the unlawful hiring of undocumented workers.
Bessent’s message comes on the heels of a new multi-agency effort to enlist the private sector in stopping all “fraud schemes and other suspicious or potentially criminal activities” that pose “risks to the integrity of the U.S. financial system.”
Employers who use off-the-books payroll arrangements to hire and conceal personnel who aren’t authorized to do the work “can gain an unfair advantage over legitimate U.S. businesses,” said Treasury’s Financial Crimes Enforcement Network (FinCEN) in a June 5 advisory to financial institutions.
The Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, and National Credit Union Administration, in coordination with the IRS, joined FinCEN in making the announcement.
Unlawful hiring schemes also tend to depress wages for all workers; lead to identity theft of individuals legally allowed to work in the United States, including American citizens; and “steal millions of dollars in federal and state payroll tax revenue meant for government benefit programs,” according to the advisory.
Those stolen millions contribute significantly to the Tax Gap, notes FinCEN. In 2025 alone, financial institutions reported more than $2.5 billion in suspicious activity associated with payroll tax fraud schemes.
Government-wide effort: The FinCEN advisory is part of a “whole-of-government effort to address the risks associated with the exploitation of the U.S. financial system by non-work authorized populations and their employers.”
It was spurred by the Trump administration’s May 19 Executive Order 14406, Restoring Integrity to America’s Financial System. That EO specifically cited payroll tax evasion as a risk to the U.S. financial system.
That is why the advisory instructs banks and other institutions to look for payroll scheme indicators, particularly in sectors where authorities have found widespread use of undocumented workers.
Those include, per the advisory, the agriculture, construction, domestic service, and hospitality industries.
Ways payroll schemes are instituted: FinCEN et al note that some employers contract with labor brokers, who establish shell companies to create the appearance of a legitimate business.
These shell companies, often operating as unregistered money services businesses, then pay workers using cash, checks, or peer-to-peer platforms.
Not only do the arrangements often exploit the undocumented workers, the payment transactions often fall below Bank Secrecy Act and record keeping thresholds. This allows the schemes to operate without regulatory or law enforcement interference.
ITINs as one risk factor: Workers employed under payroll schemes often have Individual Taxpayer Identification Numbers, or ITINs. These are issued by the IRS to individuals who are not eligible to obtain a Social Security number.
An ITIN does not authorize the holder to work in the United States. But they can use their unique nine-digit number when they file federal taxes to report any income they have earned.
The advisory acknowledges the value of ITINs in helping holders comply with U.S. tax law. However, it also encourages banks to “assess whether the use of an ITIN may be a relevant risk factor” when presented in lieu of a Social Security number or valid employment authorization to open an account or obtain credit.
While noting that “no single red flag is determinative of illicit or suspicious activity, no single red flag should be taken in isolation.” That’s why FinCEN advises financial institutions to consider all facts and circumstances, such as a customer’s historical financial activity or whether the transactions are in line with prevailing business practices.
Employment scheme participant red flags: However, a collection of suspicious activities could indicate a bank customer, either individuals or business, is involved in a suspicious payroll arrangement.
Among the eight possible risk red flags for customers are —
- Uses a Social Security number that, upon verification, does not match or is inconsistent with the Social Security Administration’s records;
- Works in the agriculture, construction, domestic service, hospitality, or staffing industries and opens a bank account with an ITIN with little to no transactional activity besides remittances to foreign jurisdictions;
- Opens an account using a non-U.S. passport or ITIN claiming to be self-employed or operating a small business in the agriculture, construction, domestic service, hospitality, or staffing industries and is receiving a significant amount and volume of recurring check deposits from multiple companies;
- Receives recurring peer-to-peer payments (via Venmo, Zelle, or similar payment apps) from a small, recently established company in the agriculture, construction, domestic service, hospitality, or staffing industries;
You can find the other bank customer payroll scheme red flags, as well as 10 suspicious indicators for large and small businesses on pages 10 and 11 of the FinCEN advisory.
Federal officials urge banks to report: To prevent any payroll scheme adverse effects, financial institutions are urged to file a Suspicious Activity Report (SAR) with FinCEN and include the key term “FINANCIALINTEGRITY-2026-A002” in SAR field 2 (Filing Institution Note to FinCEN) and the report narrative.
Timely reporting can prevent extreme payroll schemes where, notes the advisory, “access to financial services and unlawfully obtained wages can be leveraged to facilitate the financing of transnational criminal organizations (TCOs)—several of which have been designated as Foreign Terrorist Organizations (FTOs)—and their global criminal enterprises, including drug trafficking, human trafficking, and other illegal activity in the United States.”
Tax Felon Friday: Regular readers of the ol’ blog know that payroll fraud is a common item in the Tax Felon Friday feature.
So, it’s not surprising that on June 3 the Department of Justice announced that a Texas man and woman pleaded guilty to operating a significant under-the-table cash payroll at their nationwide nail salon business.
Court documents and statements in the case show that the couple owned and managed a business comprised of more than 60 high-end nail salons across the United States. The salons employed nail technicians, a significant portion of whose compensation was paid in cash.
At the end of each year, according to the Justice Department, the business prepared tax forms reporting each nail technician’s compensation. To help the technicians conceal that income and evade taxes, these forms did not include the cash compensation.
The couple, court records show, trained salon managers to operate the under-the-table cash payroll. They also prepared false Forms 1099 and instructed employees to keep the true payroll hidden.
As part of his plea agreement, Vinh Q. Ho agreed that between 2016 and 2024 the nail salons paid more than $116 million in cash compensation that was not reported to the IRS. That resulted in estimated federal tax loss of at least $32 million.
Ho and co-defendant Thanh Lan Do both pleaded guilty to one count of conspiracy to defraud the United States, and Ho also pleaded guilty to one count of tax evasion.
The couple will be sentenced in federal district court at a later date. Ho faces a maximum penalty of 10 years in prison. Do could be sentenced to a maximum five-year prison term.
You can catch up on tax miscreants who have been charged and/or convicted at the aforementioned Tax Felon Friday page.
You also can find tax crime posts, notably those that were published long before I gave them a special end-of-week feature moniker, in the ol’ blog’s tax crimes category. You’ll find this post at the top of that collection right now, so just scroll down for more.
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