The Federal Tax Crimes blog recently highlighted a notable case, United States v. Snyder (2019), in which a criminal conviction of willful failure to collect or pay over tax (26 U.S. Code § 7202) was vacated after the taxpayer successfully appealed. The appellant, Charles David Snyder, cited the prosecutor’s use of “bad acts” evidence, which, with some exceptions, is generally prohibited by the Federal Rules of Evidence. However, though the court remanded Snyder’s case regarding the tax fraud charges – or in other words, called for a new trial – it did not vacate or alter Snyder’s other conviction pertaining to employee benefit embezzlement (18 U.S. Code § 664). Our tax defense attorneys discuss the offenses that Snyder was charged with committing, and explain how the Federal Rules of Evidence may bar the use of certain facts or statements against defendants who have been charged with tax evasion and related tax crimes.
The Federal Rules of Evidence, which were written by the Supreme Court and passed by Congress during the 1970s, dictate how evidence may and may not be used in federal court, including both civil and criminal tax cases. For example, Rule 502 touches on the scope and limitations of the attorney-client privilege, while Rule 615 sets forth criteria for excluding witnesses.
For the purposes of our discussion today, the most important rule is Rule 404, which deals with the admissibility of “Character Evidence” in criminal trials, such as trials over alleged tax fraud. Rule 404(a)(1), which sets restrictions on the use of character evidence, states the following: “Evidence of a person’s character or character trait is not admissible to prove that on a particular occasion the person acted in accordance with the character or trait.” Similarly, the following is provided by Rule 404(b)(1): “Evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.” Also vital is Rule 403, which states, in full, the following:
“The court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”
Put simply, this means the government generally may not use as evidence the defendant’s character traits or behaviors, which might not only be irrelevant to the matter at hand, but moreover, risk biasing the jury and leading to an unfair verdict. That being said, Rule 404 also creates various exceptions where character evidence is admissible – for instance, when its purpose is to show the defendant’s “motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident” (Rule 404(b)(2)).
As the Federal Rules of Evidence make clear, there are some situations where character evidence is valid, and others where it is inadmissible. In this particular instance, the court ruled that, due to substantial differences between the offenses, it was improper for the government to use as evidence Snyder’s past failures to file tax returns. (During his original trial, “Two IRS witnesses [had] testified that Snyder had failed to file personal income tax returns for many years,” something which began as early as 2004.)
This brings up a good question: What, exactly, are the differences between willful failure to file returns and willful failure to collect or pay over tax? While the former is self-explanatory – the deliberate non-filing of federal tax returns (such as Forms 1040) – the latter requires some background knowledge about employer tax responsibilities and so-called “trust fund” taxes (i.e. payroll taxes).
As the IRS explains, employers have a duty to (1) withhold from employee wages federal income, Medicare, and Social Security taxes (and in some cases, the Additional Medicare Tax); and (2) remit (“pay over”) those taxes to the IRS. These taxes are referred to as “trust fund” taxes because, until being remitted to the government, they are held in a trust – assuming the employer is complying with the Internal Revenue Code. If the employer fails to withhold the taxes, or keeps the money for personal use instead of paying the IRS, he or she can be hit with hefty trust fund recovery penalties (TFRPs), or even be charged with tax crimes under 26 U.S. Code § 7202, which provides criminal penalties of up to $10,000 and five years in prison. It depends on whether the taxpayer acted “willfully” (i.e. deliberately) or inadvertently, a crucial distinction which is discussed further here.
The TFRP – which may be imposed upon shareholders, corporate officers, payroll service providers, and various other “responsible persons” – can be a devastating penalty, equal to a full 100% of the withholdings required. The responsible person is liable for this amount, which can be considerable – especially when coupled with other civil or criminal tax penalties and interest charges. For more information about payroll tax fraud, employment tax compliance, and the TFRP, readers may wish to explore the following:
See our Employment Tax Law Q and A Library
If you are a small business owner, a corporate officer, a board member, a shareholder, the member of a partnership, part of a payroll service provider, or part of a professional employer organization, you could be deemed a responsible person – and be held liable for the TFRP. Worse, you could even be charged with tax fraud. Avoid these situations by working with a trusted and experienced business tax attorney, like David W. Klasing, who can help you navigate complex state and federal employment tax issues. For help with a federal or California employment tax question, including questions about an employment tax audit, contact us online to schedule a reduced-rate appointment, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
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