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Tax evasion and fraud charges lead to prison sentence

As concerns begin to mount about the length of the current expansion, damage from the last downturn continues to unwind in court. In 2017, a 34-count indictment was filed against a biotech investment fund founder for a scheme to siphon money from investors that started in 2007. By 2013, millions were missing.

A northern California judge recently sentenced the man to 30 months in federal prison and three years of supervised release. He had pleaded guilty to one count of investment-adviser fraud and federal tax evasion.

Restitution will be addressed at a January hearing, but investors have already recovered some of their funds through civil lawsuits.

When economic downturn struck

In the sentencing memo, the man's attorney referenced the “once-in-a-generation economic downturn” as a factor. The firm founder argued he had to cut corners to try to keep the business operating. He took management fees before they were due in part to cover payroll and business expenses. He claimed he had intended to pay them back.

Multiple agency investigations and individuals charged

An investigation by the U.S. Securities and Exchange Commission concluded in an agreement that imposed hefty fines and a permanent bar from the securities industry.

The firm founder was not the only one to face charges. A jury found a firm accountant guilty for his role in preparing false tax returns. A chief legal officer and a controller also paid penalties for their involvement and were subsequently barred from working in the securities industry as well.

Federal tax liens

When business falters, dipping into future fees or “borrowing” from payroll withholdings (trust fund accounts) may seem like the only way to stay afloat. If the IRS accuses a company of improperly failing to turn over payroll tax withholdings, it can assess a trust fund recovery penalty and issue a federal tax lien. As public documents, liens can quickly limit access to loans and working capital as the company credit rating drops.

When issues arise over payroll taxes – especially when a professional employer organization (PEO) or payroll company is involved – there are often solutions. The IRS may allow a company to extend payments over a manageable timeframe or work with a company on a plan where it can continue operations while paying down old tax debt.

Short cuts that involve borrowing from trust accounts do not end well. Blaming an economy downturn is also not a defense. Seeking advice from an experienced tax attorney is one way to return to compliance.

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