Payroll Taxes

Rate manipulation is a tax evasion scheme where an employer manipulates their Unemployment Insurance (UI) payroll tax rate to achieve a lower rate, and thereby pay less 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 payroll taxes. 

Rate manipulation hurts employers and harms the state’s Unemployment Insurane Trust Fund.

• Rate manipulation goes against the experience-rated tax system that is widely supported by the business community. The Unemployment Insurance payroll tax rate is based on an employer’s history of benefit charges. With rate manipulation, an employer with a high payroll tax rate attempts to hide behind a different company with a lower tax rate and dump their payroll costs on all other employers.
• Rate manipulation creates a competitive cost advantage for employers practicing this type of tax evasion.
• Rate manipulation reduces money in Oregon’s Unemployment Insurance Trust Fund, causing an increase in tax rates for all employers.
• Rate manipulation has already affected Oregon employers by reducing the tax dollars going into the Unemployment Insurance Trust Fund.
• Rate manipulation reduces funds available to pay Unemployment Insurance benefits to unemployed workers.
• Rate manipulation puts employers who try to manage their work and maintain steady employment for their employees at a disadvantage.
• Rate manipulation rewards employers for dumping their tax responsibility on the rest of employers.

The three most common ways (with many variations) include:

• Vertical method – Create a “new” employer that is assigned a “new” employer tax rate of 3.3% (2011) and transfer payroll to the new employer.
• Horizontal method – Transfer payroll to a subsidiary with a lower payroll tax rate.
• Acquired rate method – Find another employer with a low payroll tax rate and arrange to transfer payroll to that employer.

We've discovered all types of businesses, across all industries, participating in rate manipulation schemes – for profit and nonprofit employers, small and large businesses.

Some employers don't realize they are participating in a rate manipulation scheme, but 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.

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.

We are already actively reviewing employer accounts looking for potential rate manipulation cases, and we aggressively build cases that may result in civil, administrative, and, in some cases, criminal penalties.

Please contact us.  You will be asked to provide some basic information regarding the situation.  All information provided will be kept confidential.

We have developed several methods to uncover this type of tax avoidance. Additionally, we use an automated detection software package that was specifically developed to identify rate manipulation cases.