When Is Failure to File a Tax Return Criminal under 26 USC 7203

When Is Failure to File a Tax Return Criminal

Is the Failure to File a Tax Return Criminal

When Is Failure to File a Tax Return Criminal under 26 USC 7203: Not all criminal tax violations involving willfulness and IRS tax filings reach the level of tax evasion (which is a felony)– and not all criminal tax violations are felonies. Some tax crimes may be pursued as either a felony or a misdemeanor — depending on the facts and circumstances. One common example of this distinction in the world of criminal tax law — is when there is a willful failure to file a tax return, supply information or pay tax. Unlike 26 USC 7201 — which refers to the attempt to evade or defeat tax (Assessment or Payment) — and is a felony — the failure to file a tax return is a bit different. That is because failing to file a tax return does not typically meet the requirements of an affirmative act — which is a requirement for the Government to provde (beyond a reasonable doubt) to convict on the charge of tax evasion. Thus, the mere failure to file the return — without another affirmative act — is not evasion. Let’s review the basics of When Is the Failure to File a Tax Return Criminal:

26 USC 7203 Failure to File a Return, Supply Information or Pay Tax

• • • • 7203

      • Willful failure to file return, supply information, or pay tax

      • Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined . . ., or imprisoned not more than 1 year, or both, together with the costs of prosecution.

      • In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.

      • In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year.”

What does this mean?

It means the most of the time, if a person is guilty of the criminal willful failure to file a return — then the charge will be a misdemeanor — if prosecution is brought against them. There are some limitations in which this code section will not apply (such as estimated tax scenarios) — and other situations in which they can be bumped up to a felony as with 26 USC 6050I.

*26 USC 6050I refers to Returns relating to cash received in trade or business and Form 8300.

Elements to a Failure to File Return Crime

As provided by the Criminal Tax Manual:

• • • To establish the offense of failure to make (file) a return, the government must prove three essential elements beyond a reasonable doubt

      • The defendant was a person required to file a return;

      • The defendant failed to file at the time required by law; and

      • The failure to file was willful.

      • United States v. Hassebrock, 663 F.3d 906, 919 (7th Cir. 2011); United States v. McKee, 506 F.3d 225, 244 (3d Cir. 2007); United States v. Clayton, 506 F.3d 405, 408 (5th Cir. 2007); United States v. Vroman, 975 F.2d 669, 671 (9th Cir. 1992); United States v. Harting, 879 F.2d 765, 766-67 (10th Cir. 1989); United States v. Williams, 875 F.2d 846, 849 (11th Cir. 1989); United States v. Foster, 789 F.2d 457, 460 (7th Cir. 1986); United States v. Ostendorff, 371 F.2d 729, 730 (4th Cir. 1967); cf. United States v. Doyle, 956 F.2d 73, 74-75 (5th Cir. 1992) (in case in which there was no issue about Last updated March 2015 whether defendant was a person required to file a return, Fifth Circuit listed elements of misdemeanor failure to make return as willfulness and failure to make a return when due).

IRM and Failure to File Returns

The IRM is the Internal Revenue Manual and a good resource guide to help assist with understanding the different roles the IRS agents play and how the IRS may examine certain matters, such as the failure to file a return — but it is not force of law.

IRM 25.1.7.1.2 Failure to File Returns

Authority

1. 1. • Willful failure to file a tax return is a misdemeanor pursuant to IRC 7203.

      • In cases where an overt act of evasion occurred, willful failure to file may be elevated to a felony under IRC 7201.

      • If failure to file a return is fraudulent, a civil penalty known as the “fraudulent failure to file (FFTF) penalty” may apply under IRC 6651(f). This penalty may apply to all returns due after 12/31/1989 (without regard to extensions).

      • Note: The civil fraud penalty under IRC 6663 may apply to all returns required to be filed after 12/31/1989.

      • IRM 20.1.2.3.7.5, Fraudulent Failure to File – IRC 6651(f), provides specific procedures for assertion of the FFTF penalty.

Most Common Charge under 7203 is Failure to File a Return

The most common charge under IRC 7203 is the failure to file a Return:

As further provided by the Criminal Tax Manual:

• • • The charge most often brought under Section 7203 is the failure to make (file) a return.

    • A number of cases are also brought under Section 7203 for failure to pay a tax.

    • Note that the attempt to evade or defeat the payment of a tax is a felony under Section 7201.

    • The difference in the offenses is that a failure to file or pay offense under Section 7203 involves a failure perform a specified act at the time required by law (an omission), whereas there must be an affirmative act or a “willful commission” to satisfy the requirements of a Section 7201 felony. Sansone v. United States, 380 U.S. 343, 351-52 (1965).

    • By its express terms, Section 7203 does not apply to a “failure to pay an estimated tax” if there is no “addition to tax” pursuant to the rules provided for in Section 6654 (Failure By Individuals To Pay Estimated Income Tax) and Section 6655 (Failure By Corporation To Pay Estimated Tax).

What does this mean?

It means that more often than not, the charge being brought under 7201 is for the failure to file a tax return. The key distinction between 7201 (failure-to-file) and 7203 (evasion) — which is reiterated throughout the Criminal Tax Manual and criminal tax law in general — is that in order for the Government to pursue a tax evasion charge, there must be an affirmative act — and generally the failure-to-file the return (which is an omission) does not qualify as the affirmative act.

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