Guys, I do not know how the IRS works in the USA. But here is it how it works in France :
During our investigations we sometimes come accross some shady shit. Possible smuggling, drug dealing, illegal activites, embezzling, ghost employees, etc. Now, as tax people, when confronted to a situation like this, we do two things :
-Tax the stuff. Illegal income is still income. Illegal spending is still spending. For company taxes, every expense has to be done in the best interest of the company. We do not judge on opportunity of spending (you should have bought a cheaper car, etc), but we have our word to say on useless, unrelated spending that is not done in any way benefits the company. Not sure how it works in the US, but in France, it's the benefits that are taxed, meaning that some companies to do some bullshit spending to artificially reduce benefits. Ghost employees fall under that stuff. So what we do is substract the employee salary to the amount of spending they choose to deduce to their taxes, effectively ending in additional taxation. Again, let's take the case of how it works here : Suppose someone was paid a 100 k€ yearly salary and the company fails to prove that said person is actually doing stuff, we conclude she's a ghost employee and that she shouldn't be on their payroll. Company had record of benefit of 150k€ which "normally" (it's more complicated than that") is taxed 50k€. Well, without that ghost employee, the taxation should be out of 250k€, meaning they should pay (250/3) 88.3k€ instead of 50k€.
This leads to 33k€ of additional tax for each year we see this bullshit. We're allowed to go back three years, which means in this case the ghost employee will cost an additional 100 k€ to the company. And should we see any attempt at trying to dissimulate this or lie to us, we can fine an extra 40%, 80% or 100% (depending on how severe the fraud or opposition).
This kind of amount can effectively kill a company that is not doing that great.
-Depending on how severe and certain the stuff we see, there is usually a talk among the inspector and his heirarchy over the opportunity to denounce the fraud to legal authorities who can also fine severely said company, putting the final nail in the coffin, and forbidding the guy running the companies to ever have responsabilities again.
Again, that's just here, but I wouldn't be shocked if it's not that much different over here.