What is the Tax Evasion Federal Crime Definition?

What is the Tax Evasion Federal Crime Definition?

Evading Tax is a Crime

Tax Evasion Explained: Evading Taxes is one of the more serious types of criminal tax violations. Evading tax or being labeled a “tax evader,” means the US Government believes the Individual may have intentionally and willful sought to artificially reduce their tax liability — or evade payment of taxes. The definition of Tax Evasion is codified by Statute under Internal Revenue Code section 26 USC 7201. Since tax evasion is a crime, when a person is found guilty of evading taxes, they may be subject result to not only fines and penalties — but incarcertation as well. Generally, the average jail sentence for Tax Evasion is 3-5 years. It is not uncommon that when a US Taxpayer believes they have run afoul of the law on matters involving their US taxes — they automatically believe they are  guilty of the tax crime of tax evasion. But, more often than not a Taxpayer who may have violated the tax code is not at risk for a tax evasion criminal investigation. Taxpayers make mistakes with taxes all the time — and even if their noncompliance may be considered reckless — that does not mean they committed tax evasion. Everyone makes mistakes and has lapses in judgment — that is just how life goes. But, in order for a tax violation to reach the level of tax evasion — and investigated by the IRS and DOJ — there are several elements that must be first met — and most importantly, the taxpayer must have acted willfully — and committed an affirmative act. Unlike other types of tax violations, tax evasion is a crime — and it is a felony — so the ramifications can be bad when someone is found guilty. Let’s go through the basics about what is tax evasion. The criminal tax manual is a great reference for tax crimes, and is referred to throughout this article. 

Tax Evasion Defnition (26 USC 7201)

The statute for tax evasion (technically, attempt to evade or defeat tax) is founded in 26 USC section 7201.

26 USC 7201

The code provides the following definition of tax evasion:

      • 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.

How is Evading Tax Defined?

As provided in the Criminal Tax Manual (located on the Justice.gov website):

      • “Tax evasion” is a shorthand phrase that many people use for all manner of tax fraud.

      • But the charge of tax evasion, in violation of 26 U.S.C. § 7201, is not necessarily the best one to bring against individuals defrauding the IRS.

      • Defendants frequently seek to exploit the fact that, in order to establish the crime of tax evasion, the government must prove the existence of a tax due and owing and willfulness. Prosecutors therefore should consider other charges, such as conspiring to defraud the United States, 18 U.S.C. § 371; filing false returns, 26 U.S.C. § 7206; or endeavoring to obstruct the IRS, 26 U.S.C. § 7212(a), as alternatives or supplements to the charge of tax evasion. 

What does this Mean?

It means that while there is a general concept of the word tax evasion — that tends to encompass several different types of actual tax violations beyond just actual tax evasion — the actual code section for tax evasion is 26 USC 7201 — and not all tax crimes amount to tax evasion. Depending on the facts and circumstances, the US Government may want to consider alternatives to a tax evasion charge.

Willful Attempt to Evade or Defeat the Assessment of Tax

There are many different ways a Taxpayer may attempt to evade or defeat the assessment of tax. But, is the idea that there must be an affirmative act — therefore, merely not filing a tax return without any other action would generally not meet the requirement to pursue a tax evasion.

As provided by the Criminal Tax Manual:

  • 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).

Thus, in order for the government to prove Taxpayer willfully attempted to evade or defeat the assessment tax, there must be an affirmative act. The most common form of evasion is typically filing a false tax return and/or keeping a double set of books — the latter which can take the Taxpayer down the path of a Spies evasion investigation — which makes it easier for the government to bring a criminal indictment/complaint involving tax evasion.

Examples of a Willful Attempt to Evade or Defeat the Assessment of Tax:

      • Establishing stock accounts for his children into which [the defendant] had his investment banking income redirected). United States v. Beall, 970 F.2d 343, 346-47 (7th Cir. 1992)

      • Using a warehouse bank and instructing an employer to pay one’s income to a warehouse bank constitutes an affirmative act of evasion);6 United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000)

      • Opening and using bank accounts with false social security numbers and incorrect dates and places of birth could easily have misled or concealed information from the IRS); United States v. Valenti, 121 F.3d 327, 333 (7th Cir. 1997)

      • Use of cash, not keeping business records, paying employees in cash and not reporting their wages to the IRS, advising employees they did not have to pay taxes); United States v. Jungles, 903 F.2d 468, 472- 74 (7th Cir. 1990) (employee’s use of “independent contractor” agreement to eliminate withholding and warehouse bank to evade income tax were affirmative acts).

Attempt To Defeat or Evade Payment is Also Tax Evasion

Unlike a Taxpayer’ attempt to evade the Assessment of Tax, the attempt to evade Payment of Tax is different. Many cases have held that merely not paying taxes is insufficient to carry a charge for tax evasion. But, since the government typically only has to show a single affirmative act per count of tax evasion, Taxpayers need to be careful not to commit any affirmative act if they have already been assessed tax and are simply seeking to evade payment.

Examples of Willful Attempt to Evade or Defeat the Assessment of Tax

      • Examples of affirmative acts of evasion of payment include:

        • [P]lacing assets in the names of others, dealing in currency, using nominees to conduct business, buy and sell assets, or conduct other financial transactions, or providing false information about assets or income to the IRS. See Cohen v. United States, 297 F.2d 760, 762, 770 (9th Cir. 1962); see also United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000)

        • Opening and using bank accounts with false social security numbers, incorrect places of birth, and incorrect dates of birth could easily have misled or concealed information from the IRS); United States v. Gonzalez, 58 F.3d 506, 509 (10th Cir. 1995) (signing and submitting false financial statements to the IRS); United States v. Pollen, 978 F.2d 78, 88 (3d Cir. 1992);

        • Defendant placed assets out of the reach of the United States Government by maintaining more than $350,000.00 in gold bars and coins, platinum, jewelry, and gems in safety deposit boxes at bank, in a fictitious name); United States v. Beall, 970 F.2d 343, 345-47 (7th Cir. 1992)

        • Defendant instructed employer to pay income to a tax protest organization; United States v. McGill, 964 F.2d 222, 227-29, 232-33 (3d Cir. 1992)

        • Defendant concealed assets by using bank accounts in names of family members and coworkers; United States v. Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992)

        • Defendant falsely told IRS agent that she did not own real estate and that she had no other assets with which to pay tax); United States v. Daniel, 956 F.2d 540, 542-43 (6th Cir. 1992)

        • Defendant used other persons’ credit cards, used cash extensively, placed assets in other persons’ names); United States v. Conley, 826 F.2d 551, 553 (7th Cir. 1987)

        • Defendant concealed “nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record”); United States v. Shorter, 809 F.2d 54, 57 (D.C. Cir. 1987)

Proving Willfulness

When it comes to the US government seeking to pursue a tax evasion case, the quintessential requirement is that the government can show that there was an affirmative act — and that that act was made with the intent to evade tax.

As provided by the Criminal Tax Manual:

      • It is crucial that the affirmative act be committed with an intent to evade tax. The mere fact that there was a non-payment or understatement of taxes is insufficient; the government must prove that the defendant committed an affirmative act with the specific intent to evade tax. See United States v. Slutsky, 487 F.2d 832, 844 (2d Cir. 1973); United States v. Coblentz, 453 F.2d 503, 505 (2d Cir. 1972).

      • That said, “[i]f the tax evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime.” Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Voigt, 89 F.3d 1050, 1090 (3d Cir. 1996); United States v. Nolen, 472 F.3d 362, 379 (5th Cir. 2006); United States v. King, 126 F.3d 987, 989-90 (7th Cir. 1997).

      • Evidence proving that a defendant has engaged in “any conduct, the likely effect of which would be to mislead or to conceal,” including “keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind” (Spies, 317 U.S. at 499), can establish intent to evade assessment or payment of tax.

Tax Evasion is a Serious Tax Crime

Unlike other types of tax violations, the crime of tax evasion is a very serious tax crime that may result in significant incarceration and monetary fines. Tax evasion is a felony and when charges are brought against the Defendant, the Government must show as it all crimes that they are guilty — beyond a reasonable doubt. But, it is also important for Taxpayers who may have violated the Tax Code to take stock of the situation — and realize that oftentimes merely being out of compliance with the IRS is not tax evasion.

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