The most common federal tax crime is tax evasion, which is specifically defined in 26 U.S.C. § 7201 as a failure to report taxes, reporting taxes inaccurately, or failing to pay taxes. To establish a case for tax evasion under section 7201 of the Internal Revenue Code (IRC), the government must prove each of the following beyond a reasonable doubt: that the taxpayer attempted to evade or defeat a tax or payment of a tax; an additional tax was due and owing; and the taxpayer acted willfully. If the IRS proves its case for tax evasion against a taxpayer, the penalty can be significant including monetary fines and jail time.
Who Can Be Prosecuted for Tax Evasion?
26 U.S.C. § 7201 states: “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony . . .” The definition of the crime contained in the tax evasion statute refers to “any person,” which gives the statute a broad scope. Due to its broad scope, the statute can apply to an individual taxpayer, as well as the taxpayer’s tax preparer, accountant, bookkeeper, or accountant (1). Tax evasion under 26 U.S.C. § 7201 can also be used to prosecute a corporate officer who attempts to evade their corporation’s corporate tax, or the administrator of an estate who attempts to evade the estate’s tax. The looseness of the “any person” language in the statute also means that a person other than the taxpayer can be prosecuted as a principal for the crime of tax evasion, even if the person aided and abetted the taxpayer in the evasion.
The statute’s language also makes use of the phrase “any manner,” which expands the scope of the crime to allow for any type of attempt to evade taxes to form the basis for prosecution. The crime can be committed when a substantial attempt to evade taxes is made in “any manner,” even if the attempt was ultimately unsuccessful. The statute also include broad language in the description of “any tax,” which means that tax evasion is not limited to income tax, but can include other forms of tax, including estate tax, excise tax, or employment taxes. The broad scope of possible offenses makes it critically important for anyone who may potentially be facing charges of tax crimes to seek the counsel of an experienced tax fraud attorney.
Understanding the Three Elements of the Tax Evasion Statute
The tax evasion statute can be found at 26 U.S.C. § 7201, which sets forth the three elements of the crime:
- the existence of an additional tax due and owing;
- an attempt by the taxpayer to evade or defeat the tax;
- willfulness on the part of the taxpayer (2).
In Sansone v. United States, the Supreme Court described the statute as follows: “[T]he elements of § 7201 are will-fullness; the existence of a tax deficiency; and an affirmative act constituting evasion or attempted evasion of the tax” (3).
Element 1: Additional Tax Due and Owing
Under the terms of the tax evasion statute, the government must prove the existence of an additional tax due and owing in order to prosecute the taxpayer. This generally requires that the government demonstrate that the taxpayer owed substantially more tax than was reported; but the government does not need to show the exact amount of tax evaded (4). Different courts have disagreed as to whether the government must truly prove that the amount of tax evaded was “substantial” – in some courts, the government might not even have to make such a showing. In that case, the government would have a much easier burden to prove its case for tax evasion against the taxpayer.
In tax evasion cases, this requirement typically falls into one of the following categories: (1) understatements or omissions of income; (2) claims of fictitious or improper deductions; (3) false allocations of income; or (4) improper claims of credit or exemption. To prove this element of the statute, the government can use direct evidence or indirect circumstantial evidence. Using direct evidence, the government will typically attempt to make its case against the taxpayer by presenting evidence of specific transactions affecting taxable income which the taxpayer did not accurately report on the tax return. Another method used by the government involves looking for unexplained increases in the taxpayer’s net worth or expenditures which are not reflected on the taxpayer’s tax return. Finally, the government also may look at a taxpayer’s bank deposits for evidence of taxable receipts that the taxpayer never reported to the IRS.
A future article on the topic of tax evasion will explain in detail the remaining two elements of the tax evasion statute: an attempt by the taxpayer to evade or defeat the tax; and willfulness on the part of the taxpayer.
Element 2: An Attempt by the Taxpayer to Evade or Defeat the Tax
The second element of the income tax evasion statute found at IRC § 7201 requires an attempt by the taxpayer to evade or defeat the tax. The statute also specifically states that the “attempt” required under the law can be made in “any manner.” The “attempt” language of IRC § 7201 distinguishes the tax evasion statute from a mere failure-to-file offense. While the failure-to-file penalty also involves non-payment of tax, it does not have the same requirement as tax evasion of an attempt by the taxpayer to not pay the tax. The Supreme Court has explained that a mere failure-to-file, without more, cannot form the basis for the charge of tax evasion. Instead, the failure-to-file must be coupled with some affirmative actions or conduct to be considered an “attempt” under the meaning of the tax evasion statute.
What Qualifies as an Attempt Under the Tax Evasion Statute?
As explained above, tax evasion requires an “attempt” which may be made “in any manner.” In Spies v. United States, the Supreme Court listed a number of different activities which may rise to the level of a willful attempt under the tax evasion statute:
- Keeping a double set of books;
- Making false entries or alterations to the books;
- Making false invoices or documents;
- Destroying books or records;
- Concealing assets or covering up sources of income;
- Handling one’s affairs to avoid the making of records usual in transactions of the kind; and
- “Conduct the likely effect of which would be to mislead or conceal.”
In past tax evasion cases, courts have found the following fact patterns to rise to the level of an attempt for the purposes of the criminal charge: Where a taxpayer failed to file a return, but filed a W-4 form with his employer, was considered to be an affirmative attempt in violation of the tax evasion statute.
The attempt to evade taxes does not have to occur before the taxpayer files his or her tax return. Instead, the conduct forming the basis for the “attempt” requirement of the tax evasion statute may take place after the filing takes place. Granted, the usual timing of a tax evasion attempt is before the filing of the tax return. For this reason, the most common allegation in a tax evasion indictment includes a charge that the taxpayer filed a false and fraudulent return. However, some conduct that takes place after the filing of a return can form the basis of an attempt to evade tax. For example, a statement made by a taxpayer after the filing of the tax return can count as an “attempt” under section 7201 if the statement is made for the purpose of concealing income which was not reported on the tax return. Other types of post-filing conduct can also be considered attempt for the purposes of tax evasion.
Element 3: Willful Conduct
The final component of the tax evasion statute requires willful conduct on the part of the taxpayer. This means that the attempt to evade or defeat tax must be willful. In United States v. Pomponio, the Supreme Court held that the definition of willful requires “a voluntary, intentional violation of a known legal duty.” Later cases expanded on this concept, setting forth the elements that the prosecution must show in order to prove the willfulness of the taxpayer’s conduct. In Cheek v. United States, the court stated that willfulness requires showing (1) voluntary action; (2) intentional conduct; and (3) knowledge of what the law requires. Thus, there can be no willfulness on the part of the taxpayer where his or her actions were taken through inadvertence, carelessness, or an honest mistake as to the law.
In proving the willfulness of the taxpayer’s conduct, the government will attempt to show the taxpayer’s intent through skillful presentation of all the facts and circumstances. The willfulness of the taxpayer’s tax evasion attempts may be inferred from wholly circumstantial evidence. In tax evasion cases, this proof usually comes in the form of evidence that the taxpayer used a mainly cashed-based business, failed to keep adequate records, or deliberately made false statements to agents. A pattern of underpayment by the taxpayer has been used by the government to show that the taxpayer’s behavior constituted a willful attempt to evade tax.
In attempting to rebut the government’s claims that conduct was willful, taxpayers may successfully argue that they relied on a competent tax preparer or adviser in reporting their income and filing tax returns. Other successful arguments may be that the taxpayer was ignorant of the law or made an honest mistake in understanding the law. However, any of these arguments will almost certainly fail if the government can show that the taxpayer was aware, at the time he or she signed the tax return, that the tax return did not accurately reflect the taxpayer’s income. Along a similar vein, willful conduct for the purposes of tax evasion can be found where taxpayer’s conduct amounts to “willful blindness.”