| Protecting Tax Rate Integrity |
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| Tax Rate Manipulation |
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What is rate manipulation?
What is the harm in rate manipulation?
How is rate manipulation done?
What is the penalty for engaging in rate manipulation?
Why should an employer voluntarily come forward?
What do I do if I think rate manipulation is taking place with another employer?
Do you really know who is rate manipulating?
Is rate manipulation confined to Oregon?
Where can I get more information about rate manipulation?
What is rate manipulation?
SUTA rate manipulation is a tax evasion scheme involving the manipulation of an employer’s unemployment insurance (UI) tax rate to achieve a lower rate, and thereby pay less UI taxes. Typically, rate manipulation occurs when a business transfers payroll out of an existing company or organization to a new or different organization solely or primarily to reduce UI taxes.
What is the harm in rate manipulation?
There are several ways in which rate manipulation harms employers and the state’s UI trust fund.
- Rate manipulation goes against the fundamental tenet of an experience-rated tax system that is widely supported by the employer community. The UI tax rate is based on an employer’s history of benefit charges. With rate manipulation, an employer with a high UI tax rate attempts to hide behind a different company with a lower tax rate and dump their UI costs on all other employers.
- Rate manipulation creates a competitive cost advantage for employers practicing UI tax evasion.
- Rate manipulation reduces money in Oregon’s UI trust fund, causing an increase in unemployment tax rates for all employers.
- Rate manipulation has already affected Oregon employers by reducing the tax dollars going into the UI trust fund.
- Rate manipulation reduces funds available to pay unemployment benefits to unemployed workers.
- Rate manipulation puts those employers at a disadvantage who try to manage their work and maintain steady employment for their employees.
- Rate manipulation rewards employers for dumping their UI responsibility for past benefit charges on the rest of employers.
Although only a small percentage of employers are involved in rate manipulation, all employers are impacted because the cost of unemployment the rate manipulators are not paying are costs paid by other Oregon employers.
How is rate manipulation done?
There are three common ways, along with many variations, that are most often used to manipulate the tax rate. They are:
- Vertical method – Create a “new” employer that is assigned a “new” employer tax rate of 2.1% and transfer payroll to the new employer.
- Horizontal method – Transfer payroll to a subsidiary with a lower UI tax rate.
- Acquired rate method – Find another employer with a low UI tax rate and arrange to transfer payroll to that employer.
All types of businesses have been discovered participating in rate manipulation schemes – for profit and nonprofit employers, small and large businesses, and across all industries. Some employers do not even realize they are participating in a rate manipulation scheme. They are simply following the advice of a business consultant or accountant. In fact, most employers become involved in rate manipulation at the suggestion of a consultant or accountant.
What is the penalty for engaging in rate manipulation?
Under ORS 657.480, a person (employer) may not engage in or advise another person (employer) to engage in activity to transfer or acquire, or attempt to transfer or acquire, a trade or business or any portion of a trade or business solely or primarily for the purpose of obtaining a lower unemployment insurance (UI) tax rate. If a person (employer) knowingly engages in such activity, the highest UI tax rate (currently 5.4%) will be assigned to that trade or business for the tax year in which the activity occurred and for the next three years. However, if the person (employer) is already subject to the highest tax rate for the year or if the amount of increase in the tax rate is less than 2%, an additional penalty tax rate of 2% will be added to the calculated tax rate. In addition, if a person (employer) advises another person (employer) to engage in this activity, they may be assessed a civil penalty not to exceed $10,000. Criminal penalties for engaging in tax avoidance schemes may also be imposed.
Why should an employer voluntarily come forward?
We are already actively reviewing employer unemployment tax accounts looking for potential rate manipulation cases, and the agency is aggressively building cases that may result in civil, administrative, and, in some cases, criminal penalties.
What do I do if I think rate manipulation is taking place with another employer?
Please contact our office at 503-947-1488. You will be asked to provide some basic information regarding the situation. All information provided will be kept confidential.
Do you really know who is rate manipulating?
We have developed several methods to uncover this type of tax avoidance. In addition, the agency is using an automated detection software package, specifically developed to identify rate manipulation cases.
Is rate manipulation confined to Oregon?
No, rate manipulation is a national problem. In fact, Congress passed, and the President signed, legislation in August 2004, requiring all states to amend their unemployment insurance laws to close loopholes that some employers are using to engage in rate manipulation.
Where can I get more information about rate manipulation?
Visit our website at www.Oregon.gov/EMPLOY/TAX. Information about rate manipulation is on the agency’s Home Page, and there are links to additional information. Employers can also call 1-503-947-1488. Staff is available weekdays from 8:00 a.m. to 5:00 p.m.
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