You’ve been unlucky enough to find out that employees have been stealing from you. Do you prosecute them?

If you face this situation, you must ask yourself: Are these civil or criminal charges? An example of a civil charge is when you give your bookkeeper check-signing authority and he or she steals. A criminal charge is when your bookkeeper forges a check or has direct withdrawals taken from your bank account without being an authorized signatory on that account. As a rule, it’s easier to get a conviction with criminal charges.

What if the thieves offer to repay the funds? For example, they could have rich relatives willing to repay the money to keep them out of jail. Do you do it or not?

There is no correct answer to this question. It depends on how much hassle you are willing to put up with during the investigation and going to court. Some owners learn from the event, put the proper procedures in place and go on. They don’t want the hassles of lawyers and courts, and they don’t want the possibility of a lenient judge who gives no jail time to a first-time offender.

Others feel that thieves should be prosecuted no matter what. They put up with the few years of hassles for the satisfaction of seeing justice served.

Remember, if you only fire the accused thieves, they may steal from the next small-business owner they work for.

Report the theft

Whatever you decide, report the theft to the Internal Revenue Service. Many owners think they should report the theft on a 1099 or W-2 tax form. The best place to report it is probably on IRS form 3949A. This is an information referral form for reporting potential violations of the IRS law. 

That way, the IRS will potentially start an investigation and an audit. At least the thieves, if you don’t prosecute, have the potential of going through a tax audit.

Check with your accountant for the latest tax rulings. As of now, embezzled funds can be deducted in the year they are discovered. They are considered “other expenses.” Even if the theft has been happening for many years, the deduction can be used the year that it was discovered.

The tricky part is when you accept a repayment plan. These are taxable in subsequent years. If you charge interest, the repayment plan could be treated as a loan with interest. In these cases, the repayment would be considered a reduction of debt with the interest expense reported as income.

The best thing to do is get over the embarrassment of talking with your accountant. He or she has probably been involved with many small business embezzlement cases and can point you in the right direction with respect to handling the issue on your taxes.

Copyright Ruth King. All rights reserved. Write to Ruth King at Profitability Revolution LLC, 1650 Oakbrook Drive, Suite 405, Norcross, GA 30093; email; call (770) 729-8000.