The First Circuit Court of Appeals has affirmed the conviction of a CPA for fraud, conspiracy and assisting in the filing of false tax returns in the case of United States v. John H. Nardozzi.[1]

The CPA at trial had argued that he had relied upon information provided to him by his client’s bookkeepers or by the taxpayer directly and he was “out of the loop” and did not act with criminal intent.  However, the jury did not agree with that view, convicting the CPA on all counts.[2]

So what exactly went on in this situation?  The appellate panel described the items on which it was alleged the CPA had criminally assisted in the filing of false tax returns:

The government presented evidence that Nardozzi had prepared and filed tax returns on behalf of Joyce, Mary Joyce, and the Joyce law firm which defrauded the United States by misreporting income and mischaracterizing transactions, costing the government $598,362.80 in tax revenue.

The government presented evidence that Joyce used his law firm to pay personal expenses, such as tuition, credit card bills, vacations, car purchases, and shopping expenses, and Nardozzi then classified those payments as tax-deductible business expenses, reducing the Joyce law firm’s taxable income by approximately $2.2 million over a four-year period. IRS revenue agent James McCurdy testified that this defrauded the government out of $793,982 in corporate taxes.

The government presented evidence Nardozzi prepared and filed tax documents that assigned $390,000 of the Joyce law firm’s revenue to Mary Joyce — even though she performed no work for the firm — to inflate her allowable tax-deductible SEP-IRA contributions. By increasing the maximum tax-deductible contribution, the returns prepared and filed by Nardozzi allowed the Joyces to claim an additional $267,807 in deductions on their personal returns, impeding the IRS’s accurate assessment of taxes against them.

Nardozzi also prepared and filed a return on behalf of Joyce which improperly classified a $427,000 stock purchase as an IRA rollover. This fraudulently allowed Joyce to avoid paying any taxes or early withdrawal penalties on $217,500 withdrawn from Joyce’s SEP-IRA and $105,125 withdrawn from Mary Joyce’s SEP-IRA (with the remaining funds for the stock purchase coming from other sources).

Nardozzi failed to properly report on Joyce’s 2014 return — which he prepared and filed — Joyce’s use of approximately $150,000 of business funds to pay off a personal loan as taxable income. Nardozzi does not dispute on appeal that each of these instances “impede[d] the IRS.” Mubayyid, 658 F.3d at 57 (emphasis omitted) (quoting Adkinson, 158 F.3d at 1154).[3]

As well, the government introduced evidence to show that the CPA had expertise in the areas in question:

The government further introduced at trial evidence of Nardozzi’s awareness of the particular tax considerations for a C-corporation, such as the Joyce law firm. Nardozzi had, for example, discussed the problem of “double-taxation” between personal and corporate taxes for a C-corporation in a journal article and at seminars.[4]

The panel disagreed that no evidence had been submitted to show the CPA conspired with the client to have the client avoid taxes.  The court noted that such a conspiracy can be shown by the actions of the parties:

Nardozzi argues that “there was no evidence of [a] conspiratorial agreement between Joyce and Nardozzi” and that as to all counts there is insufficient evidence that Nardozzi acted either knowingly or willfully. We disagree. There is ample evidence in the record from which the jury could have concluded there was a conspiratorial agreement between Joyce and Nardozzi. “[I]t is a ‘well-established legal principle that a conspiracy may be based on a tacit agreement shown from an implicit working relationship.’” Mubayyid, 658 F.3d at 57 (quoting United States v. Patrick, 248 F.3d 11, 20 (1st Cir. 2001)).[5]

Specifically, the panel noted the following items:

Nardozzi was an experienced CPA, with particular knowledge of the tax consequences of a C-corporation such as the Joyce law firm. Nardozzi repeatedly mischaracterized personal expenses on Joyce’s returns as business expenses, allowing Joyce to claim millions of dollars in business tax deductions. In at least two instances — the early withdrawal of SEP-IRA funds for Joyce’s one-time $427,000 stock purchase and the use of business funds to pay off a personal loan — Nardozzi expressly informed Joyce that the transaction would have negative tax consequences. When Joyce objected to paying additional taxes, Nardozzi, knowing it was illegal to do so, followed Joyce’s wishes and reported these transactions in a way that avoided any increased taxes.[6]

The clear implication is that a CPA with this level of expertise and experience had to know there were issues here because of how often the situation arose.  And it also seems that when the client balked at paying the tax once the CPA informed the client about the bad tax consequences of a transaction, the CPA caved in and reported the transaction to get rid of the tax consequences.

The opinion notes:

A jury could easily conclude that Nardozzi knew that personal expenses could not be claimed as business deductions and knew the tax implications of Joyce’s financial dealings. A jury could also conclude that Nardozzi understood the consequences of Joyce’s dealings based on Nardozzi’s proposal to create backdated corporate minutes declaring a dividend that could be used to reduce or eliminate Joyce’s personal loan. The government’s case is made even stronger by the fact that Nardozzi expressly advised Joyce that certain transactions would have adverse tax consequences, but the return misrepresented those transactions to avoid increased tax liabilities. In these circumstances, the jury verdict is well supported by the record at trial.[7]

[1] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/first-circuit-affirms-cpa%e2%80%99s-tax-fraud-conviction%2c-sentence/76pq8 (retrieved June 27, 2021)

[2] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021

[3] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021

[4] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021

[5] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021

[6] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021

[7] United States v. John H. Nardozzi, Case No. 20-1093, CA1, June 24, 2021