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When a business opportunity turns sour it can leave entrepreneurs struggling to pay their employees and satisfy their creditors, including the IRS. A recent Court of Appeals decision shows how decisions made in a failing company led to criminal tax charges for that company’s business owner, and how personal and corporate tax filings do or don’t relate to one another.
David Snyder was the co-founder and CEO of Attevo, a technology consulting firm founded in 2004. When the Great Recession in 2007 and 2008 caused his firm’s clients to tighten their belts, the money to fund the company began to come up short. Snyder began to prioritize among his debts, putting salaries, health insurance and corporate credit cards at the top of the list. Paying his employee’s FICA taxes and 401(k) contributions didn’t make the cut.
Attevo continued to withhold its employees’ deductions for Social Security, Medicaid, and retirement contributions. It even filed the appropriate FICA tax returns. But the checks that were supposed to go with them never made it to the plan administrator or the Internal Revenue Service. In total, Avetto owed more than $1.2 million in FICA taxes by the time the company went out of business.
At one point, Snyder had arranged installment payments with the IRS to resolve the unpaid tax debt. But eventually, even that financial plan failed. After the company folded in 2013, the IRS came seeking its money. In the end, Snyder faced criminal tax charges for willfully failing to pay over taxes, and embezzling from the failing company’s employee-benefit plan.
At the trial on the criminal tax charges, the IRS had to establish that Snyder had willfully failed to pay his company’s taxes. To do that, it presented two IRS agents as witnesses. Each agent testified that Snyder had failed to file his personal taxes during the same time that the company was failing. But in United States v Snyder, the Sixth Circuit Court of Appeals (which covers Ohio and other parts of the Midwest) said that when it came to criminal tax charges for business owners, what they did with their personal taxes was not automatically evidence of their intent on behalf of the company.
The court said the evidence about Snyder’s tax returns qualified “propensity” evidence, presenting a person’s prior “bad acts” to show he was more likely to commit the crime charged. Under federal evidence rules, “bad acts” usually cannot be admitted as evidence except in limited circumstances. One of those circumstances is when prosecutors are trying to show a taxpayer’s behavior was willful.
However, even in willfulness cases, the defendant’s prior “bad acts” must be substantially similar to their current criminal tax charges. For example, failure to file personal tax returns one year could be used as evidence for failure to file the same returns in another year. The court said that charges based on Attevo’s failure to pay FICA taxes were not substantially similar to his previous failure to file his own tax returns.
When evidence is improperly used at trial, a judge can sometimes use a jury instruction to tell the jurors how that evidence should or should not be used in reaching a verdict. This is a useful strategy for tax attorneys and prosecutors alike to correct small mistakes or when witnesses say more than they should. But telling someone to ignore a piece of evidence doesn’t work when the prosecutors are pointing arrows at it. When the IRS presented its case for criminal tax charges against Snyder as a business owner, it presented two witnesses and expressly asked each of them about Snyder’s personal tax returns. Then, the government attorney highlighted the testimony during closing arguments:
“[I]n addition to what the defendant did on behalf of Attevo, you heard testimony that the defendant wasn’t even paying his own taxes. He’d done it before, and he was doing it this time.”
Those are exactly the kind of character-based conclusions the “bad acts” rule is designed to keep jurors from making. The Court of Appeals said that a simple jury instruction wasn’t going to be enough to ensure that Snyder had a fair trial on his criminal tax charges based solely on his role as a business owner. While the court upheld Snyder’s embezzlement conviction, the criminal tax charges were reversed.
If there is one lesson to be learned from Snyder, its that when a business is in trouble, CEOs, CFOs, and other corporate officers need the help of experienced accountants and tax attorneys to keep priorities straight and avoid criminal tax charges for business owners. By talking to trusted tax professionals early, corporate executives can avoid making the mistakes Snyder did and can make arrangements for installment payments to satisfy the IRS before their bad management decisions cause them to end up in court.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding the criminal tax charges, contact Joe Viola to schedule a free consultation.