The Trap

As it turned out, though, Howard Roofing was in a lot more than just operational trouble. In August 1997, the company had begun skipping payments on its payroll taxes, which companies are required to deduct from employee paychecks and send to the government. Precisely whose decision this was remains a matter of dispute, but it gave Howard Roofing some $15,000 to $20,000 a week in extra cash. The IRS can be slow to catch nonpayments, and for some time nothing happened. But the debt grew, peaking at some $650,000 in late 1998. That put Howard Roofing among the nearly two million businesses (most small and closely held) that owed a total of $49 billion in unpaid payroll taxes as of September 1998, according to a General Accounting Office report. Failing to pay employment taxes is considered more serious than not paying income taxes because the money has already been deducted from salaries and employees receive credit toward Social Security and Medicare regardless of whether that money is sent in; the multiple penalties and interest assessed on these delinquencies can quickly destroy a business. "Everybody knew that we were having financial problems," Bilger says, "but nobody knew that the company had done anything [wrong]."

In cases like this, people tend to point fingers, and that's exactly what happened at Howard Roofing. In Chuck Howard's version of the story, it was the fault of Karl Beyer, his young controller. Howard says Beyer stopped sending payments to the IRS without telling him, and then tried to fix the problem by forwarding handwritten checks to the IRS signed with a signature stamp kept in another executive's drawer. Eight handwritten checks totaling some $600,000 were sent to the IRS. Howard claims he was kept in the dark about the tax troubles. He says the financial statements showed the tax debt as part of the company's overall payables, and he couldn't read them well enough to see any discrepancies. "He'd give me this mumbo jumbo," Howard fumes. "He physically gave me fake statements for 18 months. I gave them to the banks and the bonding companies and didn't know anything was wrong at all.…It just makes me want to go outside and vomit."

By the spring of 1999--as Howard tells the story--with the company deep in its cash crunch, he was closing in on a deal to sell the company. Two roofing companies were interested. Then, in April, one would-be investor pulled out after signing a letter of intent, citing unexplained fluctuations in the financials. Within the hour the other nixed its deal too, saying it had seen Howard Roofing's name in a list of companies with federal tax liens.

As Howard tells the story, it was 4:15 p.m. when he went down the hall to his controller's office with a sinking feeling and closed the door. "I said, 'Can you tell me, did we pay our payroll taxes?'" Howard recalls. "He looked down. I knew that was bad. He said, 'Well, we owe a little bit.'" Then, in Howard's telling, Beyer crumpled to the floor and started shaking uncontrollably. "As God strike me dead, the man completely fell out of his chair and curled up in a fetal position and started shaking," Howard says. "I was worried about him. But I was also like, 'Tell me what's going on here. Is it $40,000, or what?' He says, 'It's $250,000 to $300,000.' I'm on the floor with him. He's crying. This is the first that I knew of it."

When Howard went home that night, he says he knew he had no choice but to declare bankruptcy. By the time he saw Beyer the next morning, he says, his controller had hired a lawyer and refused to speak with him further. "He attorneyed up real quickly," says Howard. "I said, 'You need to pack your sorry ass and get out of here.'" Then, Howard says, he called the IRS to find out if there was anything he could do. "In hindsight," he says, "the red flags should have gone up, but I was extremely busy."

Beyer tells it differently. He declined to comment for this story, but in a September 2003 bankruptcy court hearing about who was responsible for $355,008.23 in unpaid taxes, he testified that Howard not only knew the payroll taxes were unpaid but that he had directed that they not be paid and had dictated how to adjust the financial statements to disguise the tax deficiency. Bankruptcy Judge A. Thomas Small ruled that the tax debt was Howard's responsibility because he either knew or should have known about the nonpayment. "It was simply not credible that he [Howard] did not know that the payroll taxes were not being paid," the judge ruled. "At the very least, he recklessly disregarded whether the taxes were being paid."

Howard says he has refused to read the judge's opinion. "I was honest and I was true with the judge," says Howard, "and I cried on the stand because it was very emotional for me to be on the stand for hours telling this story. [Beyer] was on the stand for 15 to 20 minutes and said, 'This is the way it went: Mr. Howard told me to do this.' He swore in front of God that this was the truth. I know the truth, and he knows the truth."

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