A. Evasion of Tax Assessment or Tax Payment Statute – IRC 7201
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. 26 USC 7201.
B. Interpretation of IRC 7201
IRC section 7201 creates two types of criminal offenses for tax evasion: (1) the willful attempt to evade or tax assessment; and (2) the willful attempt to evade or defeat tax payment. This includes the willful evasion of another person’s tax. This crime carries the most severe punishment of all of the tax crimes.
1. Evasion of Assessment
a. Elements of Evasion of Assessment
The elements of evasion of assessment are:
- An attempt to evade or defeat a tax or the payment of a tax;
- An additional tax due and owing; and
b. Examples of Evasion of Assessment
Examples of evasion of assessment include:
- Transferring assets to prevent the IRS from determining the taxpayer’s true tax liability prior to time tax liability is due.
- Filing a false return which omits income or claims deductions to which the taxpayer is not entitled.
- Filing a false amended return.
- Failure to file plus affirmative act of evasion. Commonly referred to as a Spies evasion. Examples of affirmative acts of evasion include:
- Keeping a double set of books;
- Making false or altered entries;
- Making false invoices;
- Concealing sources of income;
- Handling transactions to avoid usual records;
- Any other conduct likely to conceal or mislead.
- Filing false W-4s plus failure to file.
- False statements to Treasury agents about the fraud.
- Corporate officer’s diversion of corporate funds to personal expenses.
- Sluicing off corporate income to principal shareholders in the guise of commissions or salaries out of proportion to the value of their services.
- Consistent pattern of overstating deductions.
- Concealment of bank accounts.
- Holding property in nominee names.
- Representing political gratuities as gifts.
- Doing business in many names and keeping a lot of cash safe deposit banks in several banks.
- Combination of failing to declare estimated tax, concealing true income, failing to pay income tax due, and filing frivolous returns.
- Structuring cash transactions to evade BSA reports (i.e., multiple bank transactions just under $10,000).
Willfulness is the “voluntary, intentional violation of a known legal duty.” Willfulness is a subjective test, and presents many of the best opportunities for mounting a defense to evasion charges. A taxpayer’s good faith belief that he is not violating the tax laws, no matter how objectively unreasonable, is a defense to tax prosecution. Absent admission by the taxpayer, willfulness or the lack thereof, must generally be inferred from the taxpayer’s conduct.
Examples of findings of a lack of willfulness (successful defenses) include:
- Vague or unsettled law as to whether transaction generates taxable income. However, taxpayer’s bad faith or lack of subjective uncertainty is not a defense.
Examples of findings of willfulness (unsuccessful defenses) and conduct that can allow an inference of willfulness include:
- Belief that tax laws are unconstitutional.
- When assets or sources of income are covered up.
- Willful blindness or deliberate indifference.
- Signing return knowing that the return understated income.
- Substantial understatement of income in successive years.
- Similar acts before and after the tax year(s) being prosecuted.
- Failure to supply accountant with accurate and complete information.
- Making false exculpatory statements to agents.
- Destroying or throwing away books or records.
- Making or using false accounting documents.
- Keeping double books.
- Placing property or business in another’s name.
- Using “too much” cash or cashier’s checks.
- Spending more cash than can be reconciled with income.
- Bank accounts under false names.
- Keeping your own books and avoiding making records.
- Educational background and experience indicating that taxpayer should know better.
- Taxpayer’s attitude toward reporting and paying taxes.
d. Other Defenses
Other defenses include:
- Income was not in fact taxable income.
- Insufficient E&P in the case of corporations making non-taxable distributions to shareholders.
- Reclassifying corporate business expenses as personal expenses.
- Government did not use taxpayer’s method of accounting.
- There’s a legitimate claim to a foreign tax credit.
- Outside the 6-year statute of limitations.
2. Evasion of Payment
The above subsections on willfulness and other defenses apply to evasion of payment, as well.
a. Elements of Evasion of Payment
The elements of evasion of payment are:
- An attempt to evade or defeat the payment of a tax;
- An additional tax due and owing; and
b. Examples of Evasion of Payment
Examples of evasion of payment include:
- Transferring assets after a tax liability is due to prevent the IRS from collecting the total amount it is due.
- Affirmative concealment of money or assets that could be used to pay a tax.
- Hiding assets in bank accounts of family and friends.
- Using credit cards of third parties and paying them in cash.
- False statements about assets.
- Maintaining a cash-based lifestyle.
- Bankruptcy fraud to prevent or delay IRS collection efforts.
3. Who Can Be Liable; Definition of Person
The statute states that a person can be criminally liable for violating section 7201. “Person” includes:
- Officers or employees of a corporation, or members or employees of a partnership who are under a duty to not evade assessment or payment. IRC 7343.
- Guardians and executors of estates.
- Return preparers.
CID investigations are very thorough and often take a year to complete. As should be assumed with all investigators, CID special agents often know the answers to the questions they are asking. Taxpayers who committed relatively minor crimes such as failure to file or failure to pay can find themselves charged with evasion if they make false statements to the investigators. It is very important to have representation to avoid missteps that could turn a misdemeanor into a federal felony. If you are or suspect you are being investigated for a tax crime, give us a call at (408) 459-8427.