From time to time, competent criminal defense lawyers recognize the need of providing business advice to business clients as a critical component to a successful defense of a criminal tax case. For instances, small business that experienced relative success as the macro-economy experienced success, will suffer disproportionate losses when the economy turns sour. Even a short down spell in the greater economy will highlight to small businesses a certain lack of skill in business planning and operation. Add to this downward slide, an inability or refusal to recognize the need to cut costs – and personnel – and the results are devastating.
Too often, a small business spiraling out of control makes paying income and sales tax as a low priority. Most, justify that they can make good on the delinquency when the economy rebounds, but nonetheless make no business adjustments to account for the down trend and to recover with any rebound in the economy. Sales tax payments are often the first thing to go. We have actually seen clients whose only “profit” was sales tax the company failed to remit. We saw the failure to remit grow from tens of thousands, to hundreds, to multiples of millions of dollars. (Always giving credit to co-counsel, we successfully resolved an in excess of $4,000,000.00 Ohio sales tax dispute with no prosecution and an Ohio Sales Tax Resolution Agreement.)
Because criminal enforcement of nonpayment of sales tax can be sporadic and is often less publicized, some in the small business community have the mistaken impression that criminal prosecution is a lesser priority. Tax prosecutions continue to be a priority. In fact, in 2002, the Ohio Department of Taxation praised itself as being the first tax department in the nation to have an accredited law enforcement unit. The IRS Treasury Inspector General for Tax Administration reported an increase in investigation, prosecution and sentencing for tax crimes since both 2004 and 2008. http://www.treasury.gov/tigta/auditreports/2010reports/201030074fr.pdf (January 31, 2011.)
Failure to pay sales tax can amount to a number of criminal offenses. For instance, the failure to remit sales tax can be a straight theft per R.C. 2913.02. The danger, of course, is when the value exceeds $5,000.00 its now a felony of the fourth degree and the over $100,000.00 it is a felony of the third degree. And, most small business will pass the $100,000.00 threshold in a blink. Then are the tax specific Ohio Revised Code provisions; one of the most common is the failure to collect or remit sales tax per R.C. 5739.12 which is a felony of the fourth degree per R.C. 5739.99(E). And, R.C. 5739.33 imposes personal financial liability on an employee or officer having control or responsibility for filing the returns or making the payments. What might start innocently enough as a cash flow budgeting decision in response to challenging business climate, will quickly become a series of very serious felony criminal offenses that in addition to fines and prison incarceration, can include the loss of the right to have a future vendors license.
Criminal defense lawyers confronted with these circumstances will immediately recognize that forensic accounting is necessary to understand the true realities of the misdeed. That said, in that process, the underlying cause for the company’s condition may also materialize. Even if the misdeeds are obvious, a business evaluation may be a useful tool in the defense of a criminal tax case. (Of course, provided the consultant is appropriately secured to protect the insights as privileged attorney work product.) Take advantage of this opportunity to understand and correct the business systems. Not only will this benefit the underlying business, but it will enhance the criminal defense lawyer’s understanding of how and why the condition and misdeeds occurred. With this deeper understanding, certain defenses and mitigation evidence will develop.
Often even more important, the company will be able to demonstrate to the Ohio Department of Taxation or local county prosecutor the business deficiencies and the corrective measures. This will also be important and also critical information in negotiating an Ohio Sales Tax Resolution Agreement and avoiding criminal prosecution. With the business in the process of being righted, the Ohio Department of Taxation can have confidence that the client will meet its payment obligations in the resolution agreement. This is one of those times criminal defense attorneys can be a “counselor” in a richer sense.
