Establishing the 3 Elements of Tax Evasion, How to Avoid

How to Establish the 3 Elements of Tax Evasion, Avoiding Charges

How to Establish the 3 Elements of Tax Evasion 

While there are many different types of tax crimes, the crime of tax evasion is one of the most well-known criminal violations of tax law. That is because, unlike other types of commonly known criminal tax violations, tax evasion is a felony. And, since tax evasion is a felony and not a misdemeanor or a wobbler, taxpayers who were convicted of tax evasion may end up incarcerated for a significant amount of time – and this tends to pique people’s interest, especially when it includes celebrities and sports figures. In addition, when defendants are charged with the crime of tax evasion they may also be charged with other ‘sexier’ type crimes such as money laundering, structuring, smurfing, fraud, etc. When it comes to proving a tax crime, the government must establish the elements and prove their case ‘beyond reasonable doubt standard.’

To establish the crime of tax evasion, there are three (3) main elements that the government must prove:

• • • An affirmative act constituting an attempt to evade or defeat a tax or the payment thereof.

    • An additional tax due and owing.

    • Willfulness

Let’s take a look at the three elements involving tax evasion by referring to the DOJ tax manual.

Attempt to Evade or Defeat a Tax

• • • “The means by which defendants can attempt to evade are virtually unlimited. As noted above, Section 7201 expressly prohibits attempts to evade tax “in any manner.” In order to violate Section 7201, the taxpayer generally must take some affirmative action with an intent to evade tax. The general rule is that omissions to act will not satisfy the affirmative act requirement. For example, a mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes. See Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011) (“To be liable under § 7201, a defendant must do more than passively fail to file a tax return”); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986).

    • Generally, for tax evasion purposes, “any conduct, the likely effect of which would be to mislead or to conceal” constitutes an affirmative attempt to evade tax. Spies, 317 U.S. at 499; see, e.g., United States v. Bishop, 264 F.3d 535, 545 (5th Cir. 2001). Even an activity that would otherwise be legal can constitute an affirmative act supporting a Section 7201 conviction, so long as the defendant commits the act with the intent to evade tax. See United States v. Voigt, 89 F.3d 1050, 1090 (3d Cir. 1996); United States v. Jungles, 903 F.2d 468, 474 (7th Cir. 1990) (taxpayer’s entry into an “independent contractor agreement,” although a legal activity in and of itself, satisfied “affirmative act” element of Section 7201); United States v. Conley, 826 F.2d 551, 556- 57 (7th Cir. 1987) (use of nominees and cash with intent to evade payment of taxes).

    • Note that the government “need not prove each affirmative act alleged.” United States v. Mackey, 571 F.2d 376, 387 (7th Cir. 1978); Conley, 826 F.2d at 558-59; cf. United States v. Miller, 471 U.S. 130, 145 (1985) (government’s proof of only one of two fraudulent acts alleged in mail fraud indictment was not fatal variance since indictment would still make out crime of mail fraud even without the second alleged act); Turner v. United States, 396 U.S. 398, 420 (1970) (“[W]hen a jury returns a guilty verdict on an indictment charging several acts in the conjunctive, . . . the verdict stands if the evidence is sufficient with respect to any one of the acts charged”); Crain v. United States, 162 U.S. 625, 634-36 (1896) (indictment count that alleges in the conjunctive a number of means of committing a crime can support a conviction if any of the alleged means are proved).”

What Does ‘Attempt to Evade or Defeat a Tax’ Mean?

It is important to note, that tax evasion can be committed by either attempting to evade or defeat a tax. In other words, if the taxpayer intentionally files a tax return with missing income that he knows should be included in the tax return, this is a form of tax evasion — by seeking to evade the assessment of the tax. Likewise, if the taxpayer has already been assessed a tax and then tries to evade payment of that tax by committing an affirmative act such as fraudulently conveying assets to a third party so that the IRS is unable to collect from the taxpayer (or providing intentionally false information about the assets and investments that they have), this is also a form of tax evasion.

Affirmative Act

To establish the first element, it typically requires the government to show that the taxpayer committed an affirmative act. The most common example you will see is that the taxpayer typically has to file a false tax return. And, simply not filing a tax return in and of itself does not generally qualify as an affirmative act under most circumstances, but there is also Spies Evasion which helps the government to circumvent this requirement from a timing perspective.

Additional Tax Owing

• • • “A tax deficiency is an essential element of a tax evasion case. “The Courts of Appeals have divided over whether the Government must prove the tax deficiency is ‘substantial.”’ Boulware v. United States, 552 U.S. 421, 424 (2008) (citing United States v. Daniels, 387 F.3d 636, 640-41 & n.2 (7th Cir. 2004)) (collecting cases). A 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. 26 U.S.C. § 6211; United States v. Bishop, 264 F.3d 535 (5th Cir. 2001). The inability to prove a tax deficiency means that there may be a false return case, or some other kind of case, but not a tax evasion case.

    • The tax deficiency need not be for taxes due and owing by the defendant; the deficiency may be for taxes due and owing by another taxpayer. One may attempt to evade the assessment or payment of taxes of another. See United States v. Wilson, 118 F.3d 228, 231, 236 (4th Cir. 1997) (attorney convicted of attempting to evade a client’s taxes); United States v. Townsend, 31 F.3d 262, 264, 266-67 (5th Cir. 1994) (motor fuels excise tax owed by someone other than defendant). For purposes of trial preparation and the trial itself, tax computations prepared by the Internal Revenue Service are furnished to the prosecuting attorney. In addition, a revenue agent or special agent is assigned to the case to make any additional tax computations necessitated by changes during trial preparation and at the trial. In hardfought cases, trial developments frequently will necessitate changes in the figures originally calculated by the Service and set forth in the indictment. Although a tax deficiency must be established in all Section 7201 cases, the proof is often much simpler in an evasion of payment case.

    • For example, if the taxpayer has filed a return and not paid the tax reported as due and owing, the reporting of the tax is a self-assessment of the tax due and owing. The existence of a tax due and owing is established by the introduction of the return. Similarly, if the Service has assessed the tax, then the element of a tax due and owing may be satisfied…

    • The amount of tax deficiency in a particular case may include penalties and interest. 26 U.S.C. § 6671(a) (the phrase “‘tax’ imposed by this title” also refers to the penalties and liabilities imposed by this subchapter [Subtitle F, Chapter 68B]); 26 U.S.C. § 6665(a)(2) (the phrase “‘tax’ imposed by this title” also refers to the additions to the tax, additional amounts, and penalties provided by this chapter [Subtitle F, Chapter 68A]); 26 U.S.C. § 6601(e)(1) (the phrase “tax imposed by this title” also refers to interest imposed by that section on such tax); USSG §2T1.1, comment, (n.1) (tax loss includes interest and penalties in evasion of payment and willful failure to pay cases). But see United States v. Wright, 211 F.3d 233, 236 (5th Cir. 2000) (dictum) (“The IRC specifically excludes interest from being treated as tax for purposes of deficiency procedures. [Citing 26 U.S.C. § 6601.] The Sentencing Guidelines also exclude interest and penalties in assessing the penalty for tax evasion.”).

    • As a practical matter, the inclusion of penalties and interest as part of the tax deficiency will be relevant only in evasion of payment cases where it can be proved that the defendant was aware of the obligation for the additional amount of penalties and interest. The government may be able to show such knowledge by proving that, during the collection process, the IRS sent the defendant a notice and demand for payment setting forth the amount of tax, penalties, and interest for which the defendant was liable. As noted, it is not essential that the Service has made an assessment of taxes owed and a demand for payment in order for tax evasion charges to be brought.

    • And the government need not adjudicate a tax liability either civilly or administratively prior to bringing charges of evasion of payment of tax. See United States v. Ellett, 527 F.3d 38, 40 (2d Cir. 2008); United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992); United States v. Hogan, 861 F.2d 312, 315-16 (1st Cir. 1988) (no need to make a formal assessment of tax liability when government finds tax due and owing); United States v. Dack, 747 F.2d 1172, 1174-75 (7th Cir. 1984) (per curiam); Voorhies, 658 F.2d at 714- 15. In both Ellett and Daniel, the defendants argued that there was no tax deficiency  since no assessment or demand for payment had been made. The courts rejected this argument. Ellett,527 F.3d at 38; Daniel, 956 F.2d at 542. In Daniel, the court held that a tax deficiency arises by operation of law on the date that the return is due if the taxpayer fails to file a tax return and the government can show a tax liability. United States v. Voorhies, 658 F.2d at 714-15.”

What Does ‘Additional Tax Owing’ Tax Mean?

To establish a case for tax evasion, the government must show that there is an amount of tax due and owing. For example, if the taxpayer files a false tax return understating their income, then there is an amount of tax due and owing.  In addition, typically the tax the government will have to show that the amount that is due and owing is ‘substantial’ although circuits across the nation are split as to what qualifies as substantial. It should also be noted that in general, penalties and interest can be aggregated with the amount of tax to to reach the level of substantial deficiency that some courts require.

Willfulness

• • • Willfulness has been defined by the courts as a “voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 U.S. 192, 200-01 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973). Therefore, in order to establish willfulness, the government must establish that the defendant was aware of his or her obligations under the tax laws. See United States v. Bishop, 264 F.3d 535, 546 (5th Cir. 2001); United States v. Buford, 889 F.2d 1406, 1409 (5th Cir. 1989); United States v. Conforte, 624 F.2d 869, 875 (9th Cir. 1980); United States v. Peterson, 338 F.2d 595, 598 (7th Cir. 1964). As the Seventh Circuit Court of Appeals has stated, there must be “proof that appellant knew he was violating a ‘known legal duty.’” United States v. Fitzsimmons, 712 F.2d 1196, 1198 (7th Cir. 1983).

    • When determining whether a defendant has acted willfully, the jury must apply a subjective standard; thus a defendant asserting a good faith defense is not required to have been objectively reasonable in his misunderstanding of his legal duties or belief that he was in compliance with the law. Cheek v. United States, 498 U.S. 192, 202-03 (1991); United States v. Powell, 955 F.2d 1206, 1211-12 (9th Cir. 1992); United States v. Regan, 937 F.2d 823, 826 (2d Cir. 1991), amended by, 946 F.2d 188 (2d Cir. 1992); United States v. Whiteside, 810 F.2d 1306, 1311 (5th Cir. 1987). The jury must therefore focus its inquiry on the knowledge of the defendant, not on the knowledge of a reasonable person. The jury may, however, “consider the reasonableness of the defendant’s asserted beliefs in determining whether the belief was honestly or genuinely held.” United States v. Grunewald, 987 F.2d 531, 536 (8th Cir. 1993); United States v. Middleton, 246 F.3d 825, 837 (6th Cir. 2001).

    • Although ignorance and misunderstanding of the law may be asserted in an attempt to negate willfulness, disagreement with the constitutional validity of the law may not. Once it has been established that the defendant was aware of a legal duty and intentionally violated that duty, it is no defense that the defendant believed that the law imposing the duty was unconstitutional. Cheek, 498 U.S. at 204-06. The constitutionality of the tax laws is to be litigated by taxpayers in other ways established by Congress. Cheek, 498 U.S. at 206; see also United States v. Bonneau, 970 F.2d 929, 931-32 (1st Cir. 1992) (trial judge’s redaction of constitutionality arguments from defendant’s exhibits did not unfairly prejudice the defense). But see United States v. Gaumer, 972 F.2d 723, 725 (6th Cir. 1992) (defendant should have been allowed to present excerpts of court opinions upon which he relied in determining whether he was required to file tax returns to the jury). In some of its opinions prior to United States v. Pomponio, 429 U.S. 10 (1976), the Supreme Court spoke of willfulness in terms of “bad faith or evil intent” (United States v. Murdock, 290 U.S. 389, 398 (1933)), or “evil motive and want of justification in view of all the financial circumstances of the taxpayer” (Spies v. United States, 317 U.S. 492, 498 (1943)). This caused some confusion in the circuits, which was cleared up in United States v. Pomponio, 429 U.S. 10 (1976). In Pomponio, the Court stated that its prior references to bad faith or evil intent did not modify the definition of willfulness as a “voluntary, intentional violation of a known legal duty.” Id. at 12.

    • The clarification is important since it provides the answer to defense requests for an instruction that speaks in terms of a bad purpose or evil intent and which gives the defendant room to argue that he did not act willfully because he acted with a good purpose or motive. Such an instruction would impose an undue burden on the government and is not required. Id. The Supreme Court has made clear that “willfulness” connotes a “voluntary, intentional violation of a known legal duty,” and “[i]t does not require proof of any other motive.” United States v. Jerde, 841 F.2d 818, 821 (8th Cir. 1988) (citing United States v. Pomponio, 429 U.S. at 12); accord, United States v. Sato, 814 F.2d 449, 451 (7th Cir. 1987) (no need to prove “evil-meaning mind”); United States v. Schafer, 580 F.2d 774, 781 (5th Cir. 1978) (“Proof of evil motive or bad intent is not required”); United States v. Patrick, 542 F.2d 381, 388-89 (7th Cir. 1976) (“bad” before “purpose” may be omitted from willfulness instruction); United States v. Moylan, 417 F.2d 1002, 1004 (4th Cir. 1969) (“to require a bad purpose would be to confuse the concept of intent with that of motive”). Note that the Ninth Circuit has said that a showing of “bad purpose or evil motive” can substitute for a showing of intentional violation of a known legal duty as a means of establishing willfulness. Powell, 955 F.2d at 1211.

    • In Powell, the court stated that evidence of bad motive or evil purpose could be used by the government to establish that the defendants acted willfully but that such proof was not required. Rather, the government had the alternative of showing that the defendants had voluntarily and – 25 – intentionally violated a known legal duty, in which case, proof of evil motive or bad purpose would not be necessary. Powell, 955 F.2d at 1211. Notwithstanding the alternative methods of proving willfulness set forth in Powell, the fact remains that the Supreme Court has definitively and unequivocally defined willfulness as the “voluntary, intentional violation of a known legal duty.”

    • Thus, the government should never rely on any “alternative method” of proof that does not establish the defendant’s voluntary and intentional violation of a known legal duty. Similarly, juries should always be instructed that it is the government’s burden to prove that a defendant acted voluntarily and intentionally and violated a known legal duty. Good motive alone is not a defense to a finding of willfulness, and the Supreme Court has upheld as proper a jury instruction that instructed the jury that “‘[g]ood motive alone is never a defense where the act done or omitted is a crime,’ and that consequently motive was irrelevant except as it bore on intent.” Pomponio, 429 U.S. at 11; accord, United States v. Dillon, 566 F.2d 702, 704 (10th Cir. 1977). Note that, while some tax crimes are felonies (e.g., 26 U.S.C. § 7201, attempt to evade or defeat a tax), and others are misdemeanors (e.g., 26 U.S.C. § 7203, failure to file an income tax return), the word “willfully” has the same meaning for both misdemeanors and felonies. Pomponio, 429 U.S. at 12.

    • The Supreme Court, in United States v. Bishop, 412 U.S. 346 (1973), rejected its previous holdings that willfulness does not have the same meaning in felony and misdemeanor cases, holding that the willfulness requirement in either class of offense is the same – “a voluntary, intentional violation of a known legal duty.” Bishop, 412 U.S. at 356-6

What does ‘Willfulness’ Mean?

One of the most important elements that the government must establish is that the taxpayer acted willfully. If the government is unable to establish willfulness, then the government is unable to prove its case for tax evasion. In general, the phraseology used to define willfulness is a voluntary intentional violation of a known legal duty. In other words, the government must show that the taxpayer was aware that there was a legal duty (for example filing an accurate tax return) and then intentionally violated that duty. Whether or not the government is pursuing a misdemeanor or felony (tax evasion is always a felony), the definition of willfulness is the same and this was held by the Supreme Court in the case of US v. Bishop.

The DOJ’s Tax Manual summarizes what is required to prove willfulness:

• To prove willfulness, the third element, the government must show that:

  • • • (1) the law imposed a duty on the defendant;

      • (2) the defendant knew of that duty; and

      • (3) the defendant voluntarily and intentionally violated that duty. Cheek v. United States, 498 U.S. 192, 201 (1991); United States v. Miller, 588 F.3d 897, 907 (5th Cir. 2009); United States v. Beale, 574 F.3d 512, 517-18 (8th Cir. 2009). Once the evidence establishes that a tax evasion motive played any role in a taxpayer’s conduct, willfulness can be inferred from that conduct, even if the conduct also served another purpose, such as concealment of another crime or concealment of assets from, for example, one’s spouse, employer or creditors. See Spies v. United States, 317 U.S. 492, 499 (1943); Guidry, 199 F.3d at 1157; United States v. DeTar, 832 F.2d 1110, 1114 n.3 (9th Cir. 1987)

Can You Avoid Tax Evasion Charges?

For taxpayers who are under investigation and ultimately charged with tax evasion, it is important that they put on a defense sufficient for the government to not be able to establish one of these three elements. Note and comment that oftentimes the government only charges tax evasion cases they are almost sure they can win, which is why the U.S. government has a near-perfect record when it comes to tax evasion trials. To avoid a harsh outcome, taxpayers can try to negotiate a plea deal and plead the case down from a tax evasion to a misdemeanor — And then based on the facts and circumstances will help determine whether they will be subject to any incarceration or just monetary fines and penalties.

Late Filing Penalties May be Reduced or Avoided

Our team focuses exclusively on international tax matters. For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.