Criminal Tax Defense – Ignorance of the Law and Cheek v. United States
Brian T. Hobson
In most areas of criminal law, ignorance of a legal mandate is not a defense to charges. The government does not have to prove a defendant was aware of the law as part of their burden of proof. For example, if a person moves from Colorado to Texas and believes marijuana is legal in all fifty states, he may still be prosecuted in Texas for possession of marijuana. It is no defense to claim ignorance of the law no matter how honest the belief.
This general rule does have exceptions. As statutes become more complex, federal courts have loosened the standard that ignorance is not a defense. The most important area is in the criminal tax code. In Cheek v. United States, the Supreme Court laid the groundwork for the ignorance defense in tax prosecutions.
In Cheek, the defendant was charged with six counts of willfully failing to file a federal income tax return in violation of the Internal Revenue Code (IRC) § 7203 and willfully evading income taxes in violation of IRC § 7201. The defendant admitted to not filing tax returns for the years alleged in the indictment. However, he claimed his actions were not willful because he sincerely believed, based on indoctrination by a group that believed the tax laws were unconstitutional, that the tax laws were unconstitutional as enforced. Thus, the defendant honestly believed his actions were lawful.
The trial court gave an instruction that “an honest but unreasonable belief does not negate the willfulness element” in tax prosecutions. An unreasonable understanding of the IRC does not negate willfulness in prosecutions for tax evasion or failure to file. The Federal Court of Appeals for the Seventh Circuit affirmed the conviction agreeing with the trial court’s instruction. The Supreme Court granted writ of certiorari and heard the case in 1991.
The Supreme Court ruled willfulness requires the government to prove the law imposed a duty on the defendant, the defendant knew of the duty, and the defendant voluntarily and intentionally violated the duty imposed. If a defendant honestly believes the law imposes a different duty, or none at all, he cannot willfully violate the criminal provisions of the IRC. Further, this belief does not need to be reasonable. It merely needs to be honestly held by the defendant. An entirely unreasonable belief, if honestly held, can negate the willfulness element. Whether the belief is honestly held is a question of fact for the jury. In making this ruling, the Supreme Court found error in the trial court’s decision to include the “unreasonable” language in the charge.
The Supreme Court found error in the trial court’s instruction, but noted the facts of the case did not appropriately fall under the Cheek defense. The defendant did not assert that he misunderstood the duty that was imposed. The defendant knew the duty imposed, and intentionally violated that duty based on his mistaken belief the tax laws were unconstitutional. Put differently, the law imposed a duty, the defendant knew the duty imposed, and the defendant intentionally and knowingly violated that duty. Under those facts, the elements of willfulness have been met. Though the defendant lost his case, the Cheek decision clarified a new line of defense in criminal tax cases.
The decision in Cheek comes from the Court’s understanding of the complex nature of the IRC. From capital gains, corporate income, deductions to foreign bank accounts, the IRC is one of the most difficult areas of criminal law for a layman to understand. Most non-specialists can comprehend the elements of murder, driving while intoxicated or possession of cocaine, however, the thousands of pages included in the IRC involve complex language that is subject to multiple interpretations. The federal courts have decided criminal prosecution is not appropriate for a tax payer who is trying to do things right, but due to the complexity of the statute, comes up short.
The Defense is in the Facts
The effectiveness of the ignorance/good-faith defense will turn on whether a jury finds the defendant honestly believed he was filing taxes in accordance with the law. In many federal criminal tax cases, this defense can be difficult to construct persuasively as only a handful of tax violators are indicted in a criminal prosecution.
There are multiple layers of government oversight that look at the willfulness element prior to charging. The Criminal Investigations Division at the Internal Revenue Service will comb through these issues during the investigation. The United States Attorney in the district court will go over the alleged violations, and an attorney with the Department of Justice will have a chance to flush out these issues prior to indictment. All three levels are unlikely to recommend criminal charges if it appears the defendant is mistaken about the requirements of the IRC. These investigative bodies are looking for a common scheme or course of conduct which shows an intent to circumvent the IRC.
For example, the law requires a person to hold an asset for longer than one year before it is subject to the reduced tax for long term capital gains. If a person holds a stock for three months, and sells for a profit, the profit is subject to short term capital gain taxation. Short term capital gains are taxed as regular income. If a defendant has a long history of asset investment, and has filed correctly in the past, it is unlikely he is unaware of the duty imposed by the IRC. If a defendant tells the IRS he has held an asset for thirteen months, when in reality it has been three months, it is likely he fully understands the duty imposed by the IRC and intentionally lied to gain access to the lower tax rate. The sophistication of the defendant, and actions to circumvent the IRC, will be central points in the government’s case when attempting to show willfulness.
This is a simple example, but it highlights an important point. Most people who make a simple mistake on their tax return will not be investigated for criminal charges. The IRS-Audit Division will clarify the mistake, and the person may be subject to additional taxes and penalties. Many of these mistakes are rectified altogether through the use of a CPA or programs like TurboTax.
When the world of potential defendants is reduced to those which follow a scheme of conduct or show a high level of sophistication, it becomes difficult to utilize the Cheek opinion to benefit the client. Many jurors will not find a belief is honestly held if the facts show a deliberate attempt to structure the return to lower the tax burden. A defendant must know the IRC, and understand the duty imposed, to take part in that scheme.
Having said that, it is important to fully understand a defendant’s understanding of the tax code. We have had multiple cases where a defendant appears to truly believe his actions were appropriate under the IRC and has explanations for the course of conduct that was taken. Insight obtained from the client can breathe new life into a defense the government believes is a dead end.
The Cheek Instruction
The defendant is entitled to a Cheek instruction when evidence is adduced at trial showing the defendant had a good faith belief his actions were not in violation of the IRC. Various Cheek instructions have been approved by the Federal Courts of Appeals:
“A defendant does not act willfully if he believes in good faith that he is acting within the law or that his actions comply with the law. This is so even if the defendant’s belief was not objectively reasonable as long as he held the belief in good faith. Nevertheless, you may consider whether the defendant’s belief about the tax statutes was actually reasonable as a factor in deciding whether he held that belief in good faith.” United States v. Dean, 487 F.3d 940 (11th Cir. 2007).
“If you find that the plaintiff believed in good faith that the tax returns he prepared were proper and lawful and not submitted in violation of any rule or regulation, then you must find that the plaintiff did not act willfully or negligently in preparing the tax returns, and your verdict will be for the plaintiff. Such a good faith belief need not be objectively reasonable. You must decide whether this plaintiff held such a good faith belief, irrespective of whether you or some other person would have held such a belief, and irrespective of whether you find such good faith belief was reasonable.” Richey v. United States, 9 F.3d 1407 (9th Cir. 1993).
The key to the instructions above are the presence of the “need not be objectively reasonable” language. In Montgomery, the Fifth Circuit ruled it is error for a trial court to not include the “objective” language in the instruction as it fails to give the entire law to the jury. Without this language, there is a risk the jury will find a defendant guilty because his belief is unreasonable even if it is sincerely held. Cheek overtly rejects this understanding of the good-faith defense.
This defense is unique to tax prosecutions and provides an opportunity to use the complexity of the IRC against the government in trial. Most jurors are astounded by the sheer volume of the IRC. When the physical code is stacked up in the court room, it stands over six feet tall. This is a lot of law for a lay person to follow each April, especially if their returns are complex. In Cheek, the Supreme Court outlined the elements the government must prove to show willfulness in criminal tax cases, notably a defendant cannot act willfully if he honestly believes his actions are not in violation of the IRC. Subsequent decisions have cemented the defense by finding error in trial court’s failure to include the “reasonable” language in the jury charge. Case law will continue to grow as litigators attempt to shape the outer bounds of the good-faith defense, but it is clear that ignorance of the law will continue to provide an affirmative defense in criminal tax cases.