As the saying goes, “Nothing is certain except death and taxes.” What's not always certain, however, is whether actions taken in relation to a taxpayer's filing constitute a tax crime.
So what actions constitute criminal behavior in relation to filing federal taxes?
Most people group crimes related to taxes under the umbrella of "tax fraud" even though the Internal Revenue Code, which outlines the rules for the federal tax system, outlines several distinct tax-related crimes. Fraud can be a tax crime in itself, however, it can also be a component showing that a crime did occur.
One of the more common violations of the Code is federal tax evasion under Internal Revenue Code section 7201 IRC, which outlines two distinct offenses: evasion of assessment and evasion of payment.
What is evasion of assessment in relation to tax evasion?
Evasion of assessment is probably the most common form of tax evasion. This involves the affirmative act of filing a false return that omits income and/or claims deductions that the taxpayer is not entitled to. This creates a deficiency in the taxes owed, known as “under reporting” of the filer’s tax liability.
What is evasion of payment in relation to tax evasion?
Evasion of payment generally occurs after someone’s tax liability has been determined, and they fail to make the payments owed to the federal government. The assessment of taxes owed can be through either the taxpayer’s own reporting or through the I.R.S.’s own assessment of what amount is due. This almost always involves the willful act of concealing money or assets that the taxes can be paid out of. Note that it’s not necessary for the I.R.S. to make a formal assessment of taxes owed or demand in order for tax evasion charges to be brought. Tax deficiency can actually arise by operation of law where the taxpayer failed to file his/her taxes, and the government later determines that the taxpayer was deficient in his/her tax liability.
What are the elements for evasion of assessment and evasion of payment?
Although they are two distinct violations, evasion of assessment and evasion of payment have the same elements that need to be met. Think of these elements as the puzzle pieces that need to be present and come together in order for the government to make a case against the taxpayer.
In looking at whether a taxpayer should be charged with evasion of assessment or evasion of payment, the government will look at whether the following three elements are met:
- An attempt to evade or defeat a tax or the payment of a tax;
- An additional tax due and owing; and,
What is the definition of attempt for tax evasion cases?
The element of attempt for federal tax evasion purposes requires more than the passive neglect of a taxpayer’s duty to pay taxes. According to federal tax case law, a mere act of willful omission does not satisfy the affirmative act requirement of the statute. The following have been found by the courts to be examples of affirmative actions to evade assessment and/or payment:
- Filing of a false return
- Filing of a false amended return
- Filing false W-4s and a failure to file a tax return
- False statements to treasury agents regarding the fraud
- Corporate officer's diversion of corporate funds to pay personal expenses
- Consistent pattern of overstating deductions
- Concealment of bank accounts
Even if there were other motives in addition to tax evasion for doing any affirmative act, a court can still find tax evasion.
How is the “additional tax due and owing” amount calculated?
The government determines the additional tax due and owing based on a taxpayer’s income for the filing year. However, in some instances, the Internal Revenue Code does not specify exactly what is taxable and what is not taxable income. Some examples of taxable income not explicitly outlined in the Code include:
- Funds gained from gambling
- Campaign contributions used for personal purposes
- Loans received with no intent to repay
What is the definition of "willful" conduct in tax evasion cases?
Willfulness is defined as the "voluntary, intentional violation of a known legal duty.” The keywords here are “voluntary” and “intentional”, which will be measured using a “subjective test.” Because there is a subjective test, if the taxpayer had a good faith belief that he/she was not violating any tax laws, no matter how unreasonable that belief may be, the taxpayer will have a defense on this element. The taxpayer is not protected if he/she believes that taxes are unconstitutional, however.
How would the government show willfulness on the part of the taxpayer? They could point out what to an outsider observer would look like the taxpayer’s attempt to cover up his/her tracks, or behavior and actions that show the taxpayer knew that his/her conduct was wrong. Willfulness has been inferred from a pattern of understating income, withholding information from an accountant, destroying or “losing” books and records, having two sets of record books, and holding bank accounts under fake names.
What defenses can I bring up to defend against a tax evasion charge?
As discussed in the previous paragraph, there is a “subjective test” for the willfulness of conduct where the taxpayer could defend a tax fraud charge by showing that he/she had a good faith belief that he/she was not violating a tax law.
It can be beneficial in arguing this particular element, as with the other two elements, to have a criminal defense attorney experienced in defending federal tax evasion charges because the elements can be subjective and open to judicial interpretation, and there can be numerous cases that the government can point to in supporting their interpretation of the law. A criminal defense attorney can argue against the points the government makes, and can choose the best strategy for arguing in favor of his client.