Tax Evasion - Elemental Breakdown | Criminal Tax Blog

Tax Evasion – Elemental Breakdown

Criminal Tax Evasion

Tax evasion is criminalized under 26 U.S.C. § 7201 of the Internal Revenue Code.  This section makes it a criminal act to:

Willfully attempt in any manner to evade or defeat any tax imposed by this title or the payment thereof.

Tax evasion is a felony offense that carries a maximum term of imprisonment of 5 years per count and a fine up to $250,000 for individuals and $500,000 for corporations.  These fines are in addition to any taxes owed for the taxable year.

The tax evasion statute outlines two separate avenues for prosecution: 1) attempting to evade the assessment of taxes and 2) attempting to evade the payment of a tax.  The difference in the two methods of prosecution comes down to timing.  Overt acts which occur before taxes have been assessed will fall under the “assessment” theory.  Overt acts which occur after taxes have been assessed will fall under the “payment” theory.

This concept is illustrated by the following example.  Let’s assume a taxpayer makes $1,000,000 in a business transaction.  Instead of placing that profit in his business account in the United States, the owner deposits the check in an account located in the Seychelles Islands.  If he does not declare that income to the IRS, he has committed two offenses – filing a false return and attempting to evade the assessment of his taxes.

Let’s change the facts slightly.  Instead of depositing the money in the Seychelles Islands, the taxpayer deposits the money into his United States account.  He then accurately declares the income to the IRS.  The IRS assesses his tax liability, but the owner fails to make payments to the government.  Knowing the IRS is going to come for their payments, the owner then moves the balance of his accounts to a bank account located in the Seychelles Islands.  Under this scenario, the owner has not filed a false return or attempted to evade the assessment of taxes.  He has attempted to evade the payment of a tax by moving the funds out of the IRS’ reach.

It is important to note that it is not required that the government prove the tax had been assessed prior to the overt act for attempted evasion of payment. If a defendant fails to file a tax return, the tax deficiency will occur by operation of law.

Below is an elemental breakdown of the two forms of tax evasion.

Tax Evasion of Assessment

The following elements outline what the government must prove to convict a taxpayer for attempting to evade the assessment of a tax:

  • An attempt to evade or defeat a tax or payment of tax;
  • Additional tax due and owing; and
  • Willfulness

Attempting to Evade Assessment Element

This element requires proof of an affirmative act by the taxpayer for the purpose of attempting to evade or defeat the assessment of a tax.  Passive neglect of a statutory duty is insufficient to meet this element.  The following are common examples of overt acts of evasion in federal prosecutions:

  • Filing a false return or false amended return
  • Failure to file a return plus an overt act of evasion

Prosecution under this prong is guided by the Supreme Court’s decision in Spies v. United States.  I have written an article dedicated to this subject that you can review here.  Generally speaking, failing to file a return alone cannot support a conviction for tax evasion under the assessment prong.  The government is required to show a failure to file plus a separate overt act of evasion.  Some examples of these overt acts include: keeping two sets of books, making false invoices, concealing sources of income, and making transactions outside the normal recording process.

  • False statements to federal agents relating to the tax fraud
  • Consistent pattern of overstating deductions
  • Structuring cash transactions to avoid reporting requirements

Structuring is its own separate offense under Title 31 of the United States Code.  Structuring involves breaking down a large transaction into parts that will not trigger the reporting requirements of the Bank Secrecy Act.  The main reporting requirement is triggered when a cash transaction has a total value of $10,000 or more.  If multiple transactions are found for $9,995, the government can use that evidence for criminal charges under either the structuring statute or as an overt act for evasion.

  • Concealing bank accounts offshore or otherwise

It is important to note that the language “for the purpose of evading” has been broadly construed by the Courts of Appeals.  A taxpayer cannot defend himself against tax evasion by merely showing a legitimate purpose for the overt act.  If attempting to evade government assessment plays any role in the motive, the government can meet this element of the offense.

Offshore Tax Evasion

Tax Due and Owing Element

The government must prove the existence of a tax deficiency.  This concept is probably best illustrated with an example.  If a taxpayer moves substantial money overseas in February, and then files a return disregarding those funds, it would appear the taxpayer attempted to evade the assessment of taxes.  If those funds were taxable income to the criminal tax defendant, it would be a clear case of tax evasion.  However, if the funds were a gift from the defendant’s father, prosecuting the defendant for evasion would be inappropriate.

Gifts are not taxable to the receiver.  The taxpayer may have moved the money to hide it from the IRS, but the overt act did not change the tax liability.  Including those monies in his tax return would not change the tax due and owing.  There would be no material loss to the government based on the taxpayer’s bank transfer.  In this instance, the government could not meet this element of tax evasion.

It is important to note that this element is met when the overt act takes place.  A criminal tax defendant cannot carry back net operating losses to eliminate the tax due and owing for a prior year.

Willfulness

This element is important in all criminal tax cases.  Willfulness is analyzed thoroughly in a prior article that can be found here.  In general, the government must prove the defendant knew of the legal duty required by the tax code and still chose to violate that duty.  Ignorance of the tax code provides fertile ground for defensive theories in all criminal tax cases.  This is true even if the defendant’s belief is entirely unreasonable.

Statute of Limitations

The tax evasion statute carries a six-year statute of limitations.  The statute of limitations begins to run from the date the last affirmative act took place or the statutory date of the return, whichever is later.

Tax Evasion of Payment

The following elements show what the government must prove to convict a taxpayer under the payment theory:

  • An attempt to evade or defeat the payment of the tax;
  • An additional tax due and owing; and,
  • Willfulness

The only element that separates tax evasion under the assessment and payment theories is the acts required to meet the “attempt to evade” element.  Thus, we will only discuss the attempt to evade payment element in this section.

Attempting to Evade Payment Element

An affirmative act under this prong of the tax evasion statute usually involves removing/concealing assets from the IRS.  Simply refusing to pay a tax debt is not an attempt to evade the payment of taxes.  An overt act must be taken with the purpose of thwarting the collection efforts of the IRS.

The following lists common courses of conduct that meet the attempting to evade payment element:

  • Concealing bank accounts in the name of others
  • Placing other assets in the name of others
  • False statements to agents relating to the payment
  • Conducting all personal expenses in cash

The statute of limitations is six years for all tax evasion theories.

Conclusion

Tax evasion is one of the more common tax crimes we encounter at our firm.  The tax evasion statute allows for a maximum of five years in prison.  This makes it the most serious criminal tax violation.  For this reason, the government will attempt to charge evasion whenever any facts support that allegation.

Each element of tax evasion comes with a large amount of case law and appellate interpretation that must be reviewed by a criminal tax attorney.  This post is only meant to provide the basics for understanding the government’s burden under 26 U.S.C. § 7201.