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We had an employee embezzle over $500,000. She also gave our…

We had an employee...

We had an employee embezzle over $500,000. She also gave our accountant bad numbers for our taxes, causing us to under report income. My question is do we need to prosecute in order to have solid proof of the theft for the IRS?

Accountant's Assistant: What state are you in? It matters because laws vary by location.

CA

Accountant's Assistant: Has anything been filed or reported?

Not yet

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3/7/2018
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,401
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

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You as the employer should report the embezzled income on form 1099-MISC as non-employee-compensation. You must prepare a form 1099-MISC for each tax year the employee embezzled funds.

Restoration of embezzled funds does not affect the reporting requirement. Income is recognized at the time the embezzler takes control of the funds, and, is, therefore, not affected by subsequent restitution.

It is the responsibility of the embezzler to prove to the IRS that the amounts reported by his or her employer to the IRS are not correct. Their proof would also help you should you decide to prosecute but you are not required to in order to claim the amount for taxes.

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Customer reply replied 5 months ago
Thank you. ***** need to be more specific. We are on the fence about prosecuting. The embezzler has a young family and want to sign their house over to us. Our biggest concern is if we claim the theft to the IRS does that rise a red flag to be audited and would we need to prosecute to protect ourselves?

No it does not mean you would be audited. No you are not required to prosecute. As I said the embezzler would need to show proof that the amount you claim on the 1099MISC is more than they owe the company back. The value of the property they offer and you accept would reduce the $500k and unless this happened in one year you have to calculate how much in each year was stolen and issue a 1099MISC for each year.

Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,401
Experience: 15years with H & R Block. Divisional leader, Instructor
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