A major fraud investigation has exposed a $90 million scheme at an Elkhart payroll processing firm, leaving small businesses across Indiana and other states responsible for taxes they believed were already paid. The case, announced by federal authorities on August 26, 2019, centers on Interlogic Outsourcing, Inc. and its owner, Najeeb Khan, who has been indicted for allegedly diverting worker tax deductions that should have been forwarded to the IRS. According to federal officials, Khan is accused of keeping the funds his company collected from clients for tax payments.
The money, intended for Social Security, Medicare, and income tax withholding, instead went into the company’s own accounts. The IRS, however, still holds the client businesses liable for the unpaid taxes, regardless of who stole them.
For some firms that used Interlogic in good faith, the resulting tax debt could reach hundreds of thousands of dollars, potentially forcing them into bankruptcy. The Interlogic case is not an isolated incident. At least four other payroll companies have faced similar charges over the past two years, with owners indicted for diverting funds meant for federal and state tax authorities.
The pattern remains consistent: a payroll processor collects money from clients, promises to remit it to tax agencies, and then pockets the funds. Clients typically discover the fraud only when the IRS contacts them about unpaid taxes.
The mechanics of such schemes exploit a regulatory gap. Payroll companies must submit applications to the IRS to authorize electronic tax payments, and their owners undergo credit and financial background checks. However, this vetting process failed in the Interlogic case.
The system relies heavily on trust in a largely unregulated industry. State regulations in Indiana and elsewhere do not align with federal requirements, and many payroll firms operate without proper registration or licensing from state authorities.
This regulatory disconnect creates a dangerous environment where unscrupulous actors can process large volumes of money for businesses while remaining largely invisible to government oversight. The gap between state and federal jurisdiction serves as the weak point that third-party processors exploit. For small businesses, the lesson is stark: using a payroll service does not transfer tax liability.
The business owner remains responsible for ensuring taxes are paid. If a processor steals the money, the business still owes the IRS.
There is no safety net, no guarantee, and no regulator watching the door. The investigation signals that federal authorities are now targeting the payroll processing industry with renewed scrutiny. However, closing the regulatory loopholes would require state and federal cooperation, mandatory licensing, regular audits, and clear lines of accountability—none of which currently exist. Until those gaps are addressed, the risk remains for small businesses that hand over their payroll data and tax money to third-party processors every week, assuming the system works and someone is watching.
The Interlogic case proves otherwise: the money can vanish, but the business still pays.
