“Tax evasion” is a shorthand phrase often used to describe a wide variety of tax-related fraud. The crime under the federal tax laws, however, is a rather specific one, and requires that the government establish specific elements in order to sustain a conviction. This resource focuses on a particular strand of tax evasion: Attempting to evade the assessment of taxes.
The federal crime of tax evasion under section 7201 of the Internal Revenue Code is the cornerstone in the pantheon of federal tax crimes. Prosecutors contemplating charging a taxpayer with tax evasion often must consider other alternative charges that may be more appropriate. The manner in which a taxpayer’s representatives present the case to a government prosecutor often influences the prosecutor’s view of the appropriate charge–or, of course, whether to bring any charge at all.
Section 7201 provides as follows:
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 and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
Thus, in order for the government to obtain a conviction for tax evasion under section 7201, it must establish the following three elements:
In addition, the government must establish each of the foregoing elements beyond a reasonable doubt.
Attempt to Evade Assessment
The first element of the statutory crime of tax evasion requires that there be an attempt to evade or defeat a tax or the payment of a tax. This post focuses on one aspect of tax evasion: the attempt to evade or defeat the assessment of a tax. When it comes to an attempt to evade the assessment of a tax, this element requires that the taxpayer engage in an affirmative act for the purpose of attempting to evade the assessment of a tax. Thus, there must be more than passive neglect of a statutory duty. Indeed, even a willful omission may not satisfy the affirmative act requirement.
There are a number of potential affirmative acts that may, depending on the context, satisfy this element, including:
- filing a false tax return
- filing a false amended return
- failing to file a return, along with an affirmative act of evasion
- filing false W-4s along with a failure to file a tax return
- false statements to treasury agents
- diversion of corporate funds to pay personal expenses
- a consistent pattern of overstating deductions
- concealing bank accounts
- holding property in nominee names
- misrepresenting payments as gifts
- attempting to conceal income
- structuring cash transactions to evade the filing of Bank Secrecy Act reports
Additional Tax Due and Owing
The government is generally required to prove that a tax was actually due and owing–that is, that there is a tax deficiency–in order to establish the crime of tax evasion.
A tax deficiency is the amount by which the tax imposed by statute exceeds the sum of (1) the amount of tax shown on the return, (2) plus the amount of any previously assessed deficiency, (3) minus any rebate previously received. There are a number of items of taxable income that, when not included on a tax return, may satisfy this requirement, even though they are not expressly specified in the Internal Revenue Code, including:
- gambling income
- embezzlement proceeds
- extortion proceeds
- income from a fraud
- loans received with no intent to repay them
Of course, the additional tax can come from any source. It is not necessary that it have been from an illegal source.
Notably, while most circuit courts require that the government show that there was a substantial tax deficiency, not all courts require the showing, and the government maintains that it is not required to proved the precise amount of tax due and owing.
Willfulness is defined as the “voluntary, intentional violation of a known legal duty.” Thus, a good faith belief that one is not violating the tax laws is, as a general matter, a defense against a charge of tax evasion. A defendant’s erroneous belief that tax laws are unconstitutional, however, may not be a defense to tax evasion. Willfulness can be inferred from “any conduct, the likely effect of which would be to mislead or to conceal.” Spies v. United States, 317 U.S. 492, 499 (1943). Examples of conduct that has been found to support an inference of willfulness include:
- signing a tax return knowing that the return understates income
- a substantial understatement of income in following years
- a pattern of consistent acts in other years
- failing to supply an accountant with accurate and complete information
- making false statements to agents
- destroying or throwing away books and records
- making or using false documents or entries in the taxpayers books and records
- keeping a double set of books
- placing property or businesses in the name of another person
- extensive use of currency
- the use of large amounts of cash that cannot be accounted for
- holding bank accounts under false names
- structuring activities to avoid making records
- claiming that tax laws are not constitutional